UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended November 30, 2008
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 000-50643
GLOBAL ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 86-0933274
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 N Desert Drive, Suite 301, Tempe, AZ 85281
(Address of principal executive offices) (Zip Code)
(480) 994-0772
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark if the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act during the past
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 whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.): Yes [ ] No [X]
At December 31, 2008, 6,627,112 shares of Global Entertainment Corporation
common stock were outstanding.
GLOBAL ENTERTAINMENT CORPORATION
INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 30, 2008
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets - As of November 30, 2008
(Unaudited) and May 31, 2008 3
Condensed Consolidated Statements of Operations (Unaudited) -
Three and Six Months Ended November 30, 2008 and 2007 4
Condensed Consolidated Statements of Changes in Stockholders'
Equity - Year Ended May 31, 2008 and Six Months Ended
November 30, 2008 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended November 30, 2008 and 2007 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4T. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 1A. Risk Factors 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 3. Defaults upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits 27
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GLOBAL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF NOVEMBER 30, 2008 (UNAUDITED) AND MAY 31, 2008
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
November 30, May 31,
2008 2008
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 664 $ 443
Restricted cash 1,250 --
Accounts receivable, net of $49 and $2 allowance
November 30, 2008 and May 31, 2008 1,135 1,111
Prepaid expenses and other assets 259 239
Investment in Wenatchee project 52,399 34,473
Assets to be disposed -- 2,167
-------- --------
TOTAL CURRENT ASSETS 55,707 38,433
Property and equipment, net 863 266
Goodwill 519 519
Deferred income tax asset 112 --
Other assets 323 108
Minority interests 43 38
-------- --------
TOTAL ASSETS $ 57,567 $ 39,364
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,018 $ 7,718
Accrued liabilities 1,140 750
Deferred revenues 470 24
Notes payable - current portion 48,975 27,220
Liabilities related to assets to be disposed -- 233
-------- --------
TOTAL CURRENT LIABILITIES 54,603 35,945
Deferred income tax liability 117 117
Notes payable - long-term portion 125 180
-------- --------
TOTAL LIABILITIES 54,845 36,242
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value; 10,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock - $.001 par value; 50,000,000 shares authorized;
6,627,112 and 6,625,114 shares issued and outstanding as of
as of November 30, 2008 and May 31, 2008 7 7
Paid-in capital 10,946 10,930
Accumulated deficit (8,231) (7,815)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 2,722 3,122
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 57,567 $ 39,364
======== ========
The accompanying notes are an integral part of
the condensed consolidated financial statements.
3
GLOBAL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2008 AND 2007
(UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Three Months Ended Six Months Ended
November 30, November 30,
--------------------------- ---------------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
REVENUES:
Project management fees $ 761 $ 119 $ 1,226 $ 244
Facility management fees 728 735 1,173 1,699
License fees 515 535 890 1,452
Ticket service fees 695 1,175 1,315 1,954
Project development fees 269 25 478 206
Advertising sales commissions 133 224 378 479
Concession revenue 130 -- 130 --
Other revenue -- 12 -- 15
---------- ---------- ---------- ----------
TOTAL REVENUES 3,231 2,825 5,590 6,049
---------- ---------- ---------- ----------
OPERATING COSTS:
Cost of revenues 1,419 1,572 2,398 3,272
General and administrative costs 1,720 1,777 3,216 4,790
---------- ---------- ---------- ----------
TOTAL OPERATING COSTS 3,139 3,349 5,614 8,062
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS 92 (524) (24) (2,013)
OTHER INCOME (EXPENSE):
Interest income 9 31 12 76
Interest expense (354) -- (361) (8)
Minority interests (3) (22) 5 (20)
---------- ---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) (348) 9 (344) 48
---------- ---------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (256) (515) (368) (1,965)
INCOME TAX BENEFIT -- -- -- --
---------- ---------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS (256) (515) (368) (1,965)
LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES -- (78) (48) (146)
---------- ---------- ---------- ----------
NET LOSS $ (256) $ (593) $ (416) $ (2,111)
========== ========== ========== ==========
LOSS PER SHARE:
Basic-
Loss from continuing operations $ (0.04) $ (0.08) $ (0.06) $ (0.30)
Loss from discontinued operations -- (0.01) -- (0.02)
---------- ---------- ---------- ----------
Net loss $ (0.04) $ (0.09) $ (0.06) $ (0.32)
========== ========== ========== ==========
Diluted-
Loss from continuing operations $ (0.04) $ (0.08) $ (0.06) $ (0.30)
Loss from discontinued operations -- (0.01) -- (0.02)
---------- ---------- ---------- ----------
Net loss $ (0.04) $ (0.09) $ (0.06) $ (0.32)
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 6,626,015 6,521,117 6,625,562 6,518,604
========== ========== ========== ==========
Diluted 6,626,015 6,521,117 6,625,562 6,518,604
========== ========== ========== ==========
The accompanying notes are an integral part of
the condensed consolidated financial statements.
4
GLOBAL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED MAY 31, 2008 AND THE SIX MONTHS ENDED NOVEMBER 30, 2008
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Common Stock
------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
BALANCE AT MAY 31, 2007 6,508,173 $ 7 $ 10,731 $ (3,784) $ 6,954
Exercise of options 13,941 -- -- -- --
Issuance of restricted stock 3,000 -- 36 -- 36
Issuance of stock 100,000 -- 163 -- 163
Net loss for the fiscal year
ended May 31, 2008 -- -- -- (4,031) (4,031)
--------- ----- -------- -------- -------
BALANCE AT MAY 31, 2008 6,625,114 7 10,930 (7,815) 3,122
Issuance of restricted stock 1,998 -- 16 -- 16
Net loss for the six months
ended November 30, 2008 -- -- -- (416) (416)
--------- ----- -------- -------- -------
BALANCE AT NOVEMBER 30, 2008 6,627,112 $ 7 $ 10,946 $ (8,231) $ 2,722
========= ===== ======== ======== =======
The accompanying notes are an integral part of
the condensed consolidated financial statements.
5
GLOBAL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2008 AND 2007
(UNAUDITED) (IN THOUSANDS)
Six Months Ended
November 30,
---------------------------
2008 2007
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (416) $ (2,111)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities-
Depreciation 81 67
Unbilled earnings on Wenatchee project (639) (291)
Other non-cash items 36 60
Discontinued operations and related impairment charges 5 (82)
Changes in assets and liabilities, net of businesses
acquired and disposed-
Accounts receivable (19) 1,084
Prepaid expenses and other assets (235) (41)
Accounts payable 355 (871)
Accrued liabilities 390 72
Deferred revenues 446 449
-------- --------
Net cash (used in) provided by operating activities 4 (1,664)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (681) (90)
Investment in Wenatchee project (21,342) (12,985)
Deposit of restricted cash (1,250) --
Proceeds from disposition of Cragar, net of expenses 1,790 --
-------- --------
Net cash used in investing activites (21,483) (13,075)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable proceeds 21,992 12,184
Notes payable payments (292) --
-------- --------
Net cash provided by financing activities 21,700 12,184
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 221 (2,555)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 443 4,252
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 664 $ 1,697
======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 11 $ 8
======== ========
Income taxes paid (received) $ -- $ --
======== ========
The accompanying notes are an integral part of
the condensed consolidated financial statements.
6
GLOBAL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
BASIS OF PRESENTATION AND USE OF ESTIMATES
- --------------------------------------------------------------------------------
DESCRIPTION OF THE COMPANY
Global Entertainment Corporation (referred to in this report as "we," "us,"
"Global,", "Company" or "GEC") is an integrated event and entertainment company
that is engaged, through its wholly owned subsidiaries, in sports management,
multipurpose events center and related real estate development, facility and
venue management and marketing, and venue ticketing. We are primarily focused on
projects located in mid-size communities in the United States.
Our current operating subsidiaries are Western Professional Hockey League, Inc.,
Global Properties I, International Coliseums Company, Inc., Global Entertainment
Marketing Systems, Inc., Global Entertainment Ticketing, and Encore Facility
Management.
We, through our wholly owned subsidiary, Western Professional Hockey League,
Inc., are the operator of the Western Professional Hockey League (WPHL), a minor
league professional hockey organization, and are the licensor of the
independently owned hockey teams which participate in the league. WPHL has
entered into a joint operating agreement with the Central Hockey League, Inc.
(CHL Inc.). The effect of the joint operating agreement is that the two leagues
had their respective teams join together and operate under the Central Hockey
League name (as the League). The terms of the joint operating agreement define
how the League will operate.
The League is a structured licensed sports league, which includes competing
teams located in various states, including Texas, Colorado, Kansas, Louisiana,
Mississippi, South Dakota, New Mexico, Oklahoma, and Arizona. There are 17 teams
in the 2008-09 season and there were 17 teams in the 2007-08 season. In each
season 13 teams were licensed by WPHL. In each season, 4 teams, each of which
was an original CHL, Inc. team, continue to operate under a sanction agreement
that requires direct payments to the League pursuant to the terms and conditions
of the original CHL, Inc. agreements.
Global Properties I (GPI) provides services in targeted mid-sized communities
across the United States related to the development of multipurpose events
centers and surrounding multi-use real estate development.
GPI, along with International Coliseums Company, Inc. (ICC), develops
multipurpose events centers in mid-market communities. ICC's development of
multipurpose events centers promotes the development of the League by assisting
potential licensees in securing quality venues in which to play minor
professional hockey league games. The inter-relationship between GPI, ICC and
WPHL is a key factor in the viability of a managed multipurpose entertainment
facility.
Global Entertainment Marketing Systems, Inc. (GEMS), promotes, markets, and
sells various services related to multipurpose entertainment facilities,
including all contractually obligated income (COI) sources such as facility
naming rights, luxury suite sales, club seat license sales, and facility
sponsorship agreements.
Global Entertainment Ticketing (GetTix) provides ticketing services for the
multipurpose event centers developed by GPI and ICC, existing League licensees,
and various other entertainment venues, theaters, concert halls, and other
facilities and event coordinators. GetTix provides a full ticketing solution by
way of box office, phone, internet and print-at-home service that utilizes
distribution outlets in each market. GetTix uses third-party, state-of-the-art
software to deliver ticketing capabilities that include database flexibility,
easy season and group options, financial reporting and marketing resources.
Encore Facility Management (Encore) provides a full complement of multipurpose
events center operational services. These services provide administrative
oversight in the areas of facility/property management and finance, event
7
bookings, and food and beverage. Encore is currently involved with facility
management of multipurpose events centers developed by GPI and ICC. Facility
management operations are conducted under separate limited liability companies.
On August 1, 2008, we closed a transaction pursuant to which we sold
substantially all of the assets of our subsidiary Cragar Industries, Inc.
(Cragar), a licensor of an automotive aftermarket wheel trademark and brand -
CRAGAR(R). The assets consisted primarily of intangible property, including
trademarks, service marks and domain names. The purchase price was approximately
$1.9 million in cash. Of the cash proceeds, $0.1 million was used for
transaction-related costs and $1.25 million has been set aside in a restricted
account as security for a letter of credit. The remainder of the funds was made
available for working capital and general corporate purposes.
BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of Global
Entertainment Corporation and its wholly owned subsidiaries, WPHL, GPI, ICC,
GEMS, Encore, GetTix and Cragar, as well as the limited liability companies
formed for facility management. Intercompany balances and transactions have been
eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q. Accordingly, they
do not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for fair presentation have been included.
Operating results for the three and six month periods ended November 30, 2008,
are not necessarily indicative of the results that may be expected for the year
ending May 31, 2009, or for any other period.
For further information, refer to the financial statements and footnotes
included in our report on Form 10-K for the year ended May 31, 2008.
Certain reclassifications are reflected in prior periods for the purpose of
consistent presentation.
USE OF ESTIMATES
Management uses estimates and assumptions in preparing financial statements in
accordance with accounting principles generally accepted in the United States.
Those estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results may vary from the estimates that
were assumed in preparing the condensed consolidated financial statements.
Significant accounting policies are described in the audited consolidated
financial statements and notes thereto included in our Report on Form 10-K for
the year ended May 31, 2008. We believe our critical accounting policies and
material estimates include, but are not limited to, revenue recognition, the
allowance for doubtful accounts, arena guarantees, the carrying value of
goodwill, the realization of deferred income tax assets, the fair value of
liability related to the secondary guarantee related to a worker's compensation
program, and the allocation of expenses, division of profit or loss relating to
the joint operating agreement, and the application of the
percentage-of-completion method. Due to the uncertainties inherent in the
estimation process and the significance of these items, it is at least
reasonably possible that the estimates in connection with these items could be
materially revised within the next year.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued FASB Interpretation No. 48 (FIN No. 48), "An
Interpretation of FASB Statement No. 109," which clarifies the accounting for
uncertainty in income taxes recognized in a company's financial statements in
accordance with FASB Statement No. 109, "Accounting for Income Taxes". This
interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. It reflects the benefit recognition
8
approach, where a tax benefit is recognized when it is more likely than not to
be sustained based on the technical merits of the position. We adopted the
interpretation on June 1, 2007, and there was no impact on our financial
position or results of operations. We have not been examined by any major tax
jurisdictions.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". The
statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. We adopted this statement prospectively effective
June 1, 2008, and there was no impact on our financial position or results of
operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". This statement permits entities to
choose to measure many financial instruments and certain other items at fair
value. An entity shall report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each subsequent reporting
date. We adopted this statement prospectively effective June 1, 2008 and there
was no impact on our financial position or results of operations. We have not
elected the fair value option for any eligible items.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51". This statement
establishes accounting and reporting standards for noncontrolling interests in a
subsidiary and for the deconsolidation of a subsidiary. The statement also
provides consolidated income statement presentation guidance and requires
expanded disclosures. This statement is effective for our fiscal year beginning
June 1, 2009, and interim periods within that year. The statement will be
applied prospectively, except for the presentation and disclosure requirements,
which will be applied retrospectively for all periods presented. We have not yet
evaluated the effect this statement will have on our financial position or
results of operations.
In November 2007 the EITF issued EITF 07-01 "Accounting for Collaborative
Agreements". This consensus prohibits application of the equity method of
accounting to activities performed outside of a separate legal entity and
requires revenues and costs incurred with third parties in connection with
collaborative agreements be presented gross or net based on other applicable
accounting literature. Payments to or from collaborators should be presented in
the income statement based on the nature of the arrangement, whether the
payments are within the scope of other accounting literature, and certain other
criteria. The consensus is required for our fiscal year beginning June 1, 2009.
We have not yet evaluated the effect this statement will have on our financial
position or results of operations.
- --------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE (EPS)
- --------------------------------------------------------------------------------
Basic earnings (loss) per share of common stock is computed by dividing the net
income (loss) by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings (loss) per share is computed by
dividing net income (loss) by the weighted average number of shares of common
stock and dilutive securities outstanding during the period. Dilutive securities
are not included in the weighted average number of shares when inclusion would
increase the income per share or decrease the loss per share. The computation of
diluted EPS equals the basic calculation in each period presented because common
stock equivalents were antidilutive due to losses from continuing operations for
each of the periods presented.
9
Reconciliations of the numerators and denominators in the EPS computations for
loss from continuing operations follow:
Three Months Ended Six Months Ended
November 30, November 30,
------------------------ ------------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
NUMERATOR (in thousands):
Basic and diluted - loss from continuing operations $ (256) $ (515) $ (368) $ (1,965)
========== ========== ========== ==========
DENOMINATOR:
Basic EPS - weighted average shares outstanding 6,626,015 6,521,117 6,625,562 6,518,604
Effect of dilutive securities -- -- -- --
---------- ---------- ---------- ----------
Diluted EPS - weighted average shares outstanding 6,626,015 6,521,117 6,625,562 6,518,604
========== ========== ========== ==========
Number of shares of common stock which could be purchased
with average outstanding securities not included in diluted
EPS because effect would be antidilutive-
Stock options (average price of $4.97 and $4.93 for 338,304 502,217 364,368 535,015
for the three and six months ended November 30, 2008)
Warrants (average price of $6.63 and $6.47 for 248,095 275,760 262,003 275,760
for the three and six months ended November 30, 2008)
Restricted stock 25,511 12,577 22,992 12,757
The impacts of all outstanding options, warrants and restricted stock
outstanding at November 30, 2008, were not included in the calculation of
diluted EPS for the three and six months ended November 30, 2008, because to do
so would be antidilutive. Outstanding options, warrants and restricted stock
could potentially dilute EPS in the future.
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INVESTMENT IN WENATCHEE PROJECT
- --------------------------------------------------------------------------------
We provided construction management services under an agreement with the City of
Wenatchee, Washington, related to a multi-purpose events center in that city.
Investment in Wenatchee project of $52.4 million on the condensed consolidated
balance sheets represents costs and estimated earnings in excess of billings on
this construction project, which we owned until the facility was sold to the
Greater Wenatchee Regional Events Center Public Facilities District (PFD) in
December 2008. Costs associated with the project, including all direct and
indirect costs, including contract supervision and interest during the
construction period, were being recorded as investment in Wenatchee project
until the facility was completed in the first week of October 2008. Accumulated
capitalized interest as of November 30, 2008, totals $1.6 million.
Revenues earned on this project were recorded based on the ratio of costs
incurred to the total costs expected to be incurred. For this purpose, only
costs related to performance under the contract were considered. This
cost-to-cost method was used because management believed costs were the best
available measure of our progress on the fixed-price contract, which could have
been modified by incentive and penalty provisions. As of November 30, 2008,
investment in Wenatchee project consisted of costs incurred of $50.6 million and
estimated earnings of $1.8 million. Estimated earnings of $1.6 million have been
included in project management fees and $0.2 million in project development fees
in the condensed consolidated statements of operations from the start of the
project through November 30, 2008. Under the terms of our construction
management agreement, we were not able to bill the City for our services and
received our revenue out of the proceeds from the sale of the facility.
Although construction of the facility was substantially completed in the first
week of October 2008, we have not yet made final payment to certain construction
vendors. We are negotiating final payment of certain constructions costs.
Resolution of these negotiations may result in a revision of the revenue on this
project in the second half of fiscal 2009.
10
At November 30, 2008 and May 31, 2008, approximately $2.7 million and $5.9
million of payables related to expenditures on the project were included in
accounts payable.
- --------------------------------------------------------------------------------
NOTES PAYABLE
- --------------------------------------------------------------------------------
In August 2007, we entered into an agreement with Marshall Financial Group, LLC
(Marshall) to borrow up to $52.0 million for the construction of a multi-purpose
events center in Wenatchee, Washington. The outstanding principal balance of the
note bore interest at a rate of prime plus 0.25% (4.25% at November 30, 2008).
The note was paid in full when the PFD purchased the facility in December 2008.
Financial covenants of the Marshall note required that we maintain a level of
stockholders' equity of not less than $9.0 million and unrestricted cash, cash
equivalents, time deposits and marketable securities of not less than $3.5
million. As of November 30, 2008, we were not in compliance with these financial
covenants, however the note was subsequently paid in full. As of November 30,
2008, the $48.9 million outstanding balance on the construction loan was
classified as short-term notes payable in the condensed consolidated balance
sheet. Interest on the Marshall note accumulated monthly and increased both
notes payable and investment in Wenatchee project in the condensed consolidated
balance sheet until construction concluded in October 2008. After construction,
during the quarter ended November 30, 2008, we expensed $0.3 million of interest
on the note.
We had a $1.75 million line of credit that matured on November 1, 2008. The line
of credit was amended and now matures October 1, 2009. The line of credit bears
interest at a daily adjusting LIBOR rate plus 2%, subject to certain
adjustments. As of November 30, 2008, and through the date of this filing, we
have received no cash advances on this credit facility. Effective June 2008, we
are required to deposit cash in the amount of any requested cash advances. At
November 30, 2008, we had a maximum borrowing capacity of $0.5 million, as a
result of a $1.25 million letter of credit in favor of Marshall, which reduced
our available line of credit. We deposited $1.25 million of the proceeds from
the disposition of Cragar with the bank in August 2008, as additional security
for the letter of credit. These funds were restricted, and unavailable to us,
while the letter of credit was outstanding. The letter of credit was surrendered
by Marshall when we repaid our construction loan with proceeds from the sale of
the events center in Wenatchee, Washington in December 2008. As amended, the
line of credit is available to support up to $1.25 million in letters of credit.
The credit facility has been secured by substantially all of our tangible and
intangible assets. In order to borrow, we must meet certain financial covenants,
including maintaining a minimum current ratio (current assets compared to
current liabilities) of 1.05 as of the end of each fiscal quarter, a minimum
consolidated tangible net worth of $1.75 million as of the date of the
amendment, November 1, 2008, and an increase in tangible net worth of at least
75% of consolidated net income plus 100% of all increases of equity (including
the amount of any stock offering or issuance) on each anniversary date after May
31, 2009. We must maintain a zero balance for a consecutive 30 day period during
the term of the facility. As of November 30, 2008, we were not in compliance
with the minimum current ratio covenant, but the bank has waived this violation.
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
PURCHASE COMMITMENTS
We have open purchase commitments for services, furniture and fixtures totaling
less than $0.1 million at November 30, 2008, primarily related to construction
projects under management.
LITIGATION
As with all entertainment facilities there exists a degree of risk that the
general public may be accidentally injured. As of November 30, 2008, there were
various claims outstanding in this regard that management does not believe will
have a material effect on our financial condition or results of operations. To
11
mitigate this risk, we maintain insurance coverage, which we believe effectively
covers any reasonably foreseeable potential liability. There is no assurance
that our insurance coverage will adequately cover all liabilities to which we
may be exposed.
We are a plaintiff and a counter-defendant in a lawsuit involving our
franchisee, Blue Line Hockey, LLC (Blue Line), which operates the Youngstown
Steelhounds. Our claim is for approximately $0.1 million in unpaid franchise and
assessment fees owed by Blue Line, plus our attorneys' fees. Blue Line's
counterclaim alleges that the WPHL fraudulently induced Blue Line's principal to
enter the license agreement by failing to comply with franchise disclosure
requirements, and that the WPHL made fraudulent representations to induce Blue
Line into signing the franchise agreement. Blue Line seeks rescission of the
license agreement, reimbursement of its franchise fee, $0.5 million of lease
payments, and reimbursement of travel expenses for the 2005-2006 season.
Although the outcome of this matter cannot be predicted with certainty, we
believe that we have both valid claims and valid defenses to the counterclaims.
Thus, we intend to vigorously prosecute our claims and defend the counterclaims.
No liability has been established at November 30, 2008, related to this matter.
CONTINGENCIES
We enter into indemnification provisions under our agreements with other
companies in our ordinary course of business, typically with business partners
and customers. Under these provisions we generally indemnify and hold harmless
the indemnified party for losses suffered or incurred by the indemnified party
as a result of our activities. The maximum potential amount of future payments
we could be required to make under these indemnification provisions is
unlimited. We have not incurred material costs to defend lawsuits or settle
claims related to these indemnification agreements. As a result, we believe the
estimated fair value of these agreements is minimal. Accordingly, we have no
liabilities recorded for these agreements as of November 30, 2008.
As of November 30, 2008, we have entered into various employment contracts with
key employees. Under certain circumstances we may be liable to pay amounts based
on the related contract terms.
GUARANTEES
We have entered into a contract with the entertainment facility in Rio Rancho,
New Mexico which guarantees certain economic performance standards. The term of
this contract is for a period of 10 years and expires in December 2014. In the
event these economic performance standards are not reached, we are obligated to
subsidize the difference between the actual performance and the guaranteed
performance. There are no recourse provisions under this agreement. The maximum
amount of future payments we could be required to make under the performance
guarantee is theoretical due to various unknown factors. However, the subsidy
would be limited to the cumulative operating losses of the facility for each
year of the guarantee. We have never made a material subsidy from this guarantee
and do not believe that any potential subsidy would be material.
In February 2008, we entered into a management agreement with the City of Allen,
Texas relative to a multi-purpose event center to be constructed in that city.
The initial term of this agreement is fifteen years, with an option by the city
to renew for an additional five years under certain conditions. This agreement
includes a guarantee that the event center will operate at a break-even point
and without cost to the city, not including any capital reserves and any other
off-sets described in the agreement. This guarantee requires that all amounts
reasonably required for the operation and maintenance of the event center will
be generated by the operation of the event center, or otherwise paid by us.
Should we be obligated to fund any operational shortfalls, the agreement
provides for reimbursement to us from future profits from the event center. The
maximum amount of future payments we could be required to make under this
operational guarantee is theoretical due to various unknown factors. However,
the guarantee would be limited to the operational loss from the facility for
each year of the guarantee, less any reimbursements from the facility. We do not
believe that any potential guarantee payments would be material based on the
operating results of similar facilities. The facility is expected to open in the
fall of 2009.
In May 2008, we entered into a management agreement with the City of
Independence, Missouri relative to a multi-purpose event center to be
constructed in that city. The initial term of this agreement ends fifteen years
from facility opening. The city may renew the agreement for an additional five
years under the same terms. The facility is expected to open in the fall of 2009
and has an operating year ended June 30. Our compensation under the agreement
12
may only come from the facility operating account, which is to be funded by
facility operations, as defined in the agreement. The management agreement
includes a guarantee that we will subsidize the operations of the facility to
the extent that funds in the facility operating account and a temporary
operating account are not adequate. Under the terms of the agreement the city
shall advance $0.5 million to fund a temporary operating reserve account, which
may be used to fund shortfalls in the facility operations account. Excess funds
in the facility operating account each operating year, after paying operating
expenses, our base Encore fee and GEMS commission, are to be used in the
following priority: 1) to reimburse us for any subsidy payments we have made, 2)
to replenish the temporary operating reserve account, 3) to fund the capital
reserve account and 4) to pay on a co-equal basis our incentive fee and deposits
to three additional reserve accounts. The maximum amount of future payments we
could be required to make under the guarantee is theoretical due to various
unknown factors. However, once the temporary operating reserve account is
depleted, the guarantee subsidy payments would be limited to the operational
loss each operating year, plus the amount of our Encore and GEMS fees. We do not
expect to make guarantee subsidy payments based on operating results of similar
facilities, however, no assurance can be made that a payment pursuant to this
guarantee would not be paid in the future and that such payment would not be
material.
In addition, under the terms of the management agreement with the City of
Independence, an amount not to exceed $0.50 per ticket, and excess operating
funds, are to be used to fund a capital reserve account up to $150 thousand in
each of the first five operating years and up to $250 thousand thereafter.
Should the capital reserve account not be fully funded for two consecutive
years, the management agreement terminates, unless the city elects to renew the
agreement.
As of November 30, 2008, we provide a secondary guarantee on a standby letter of
credit in favor of Ace American Insurance Company for $1.5 million related to a
guarantee under a workers compensation program. This letter of credit is fully
collateralized by a third party and our secondary guarantee of this letter of
credit does not affect our borrowing capacity under our line of credit. No
amounts have been drawn on this letter of credit as of November 30, 2008. We
believe the amount of payments under this guarantee is negligible, and as such,
have assigned no value to this guarantee at November 30, 2008.
In addition to our commitments and guarantees described above we also have the
commitments and guarantees described in the PVEC, LLC Joint Venture Note.
- --------------------------------------------------------------------------------
PVEC, LLC JOINT VENTURE
- --------------------------------------------------------------------------------
During fiscal year 2006, we entered into a joint venture partnership agreement
with Prescott Valley Signature Entertainment, LLC to form Prescott Valley Events
Center, LLC (PVEC, LLC) to engage in the business of developing, managing, and
leasing the Prescott Valley Events Center in Prescott Valley, Arizona. We are
the managing member of PVEC, LLC. Construction of the center, which opened in
November 2006, was funded by proceeds from the issuance of $35 million in
Industrial Development Authority of the County of Yavapai Convention Center
Facilities Excise Tax Revenue Bonds, Series 2005 (the Bonds).
We account for our investment in PVEC, LLC under the equity method. Our interest
in this entity is not a controlling one, as we do not own a majority voting
interest and our ability to affect the business operations is significantly
limited by the partnership operating agreement. The PVEC, LLC operating
agreement also provides that a majority-in-interest of the members may replace
the managing member, or if the managing member is in default, a
majority-in-interest of the remaining members may replace the managing member.
Each member must contribute $1 thousand for a 50% interest in the joint venture.
We contributed $250 thousand as preferred capital while Prescott Valley
Signature Entertainment, LLC contributed land with an approximate value of $1.5
million as preferred capital. Because we had committed to pay our initial
capital contributions, these amounts were recorded in accounts payable in our
condensed consolidated balance sheets as of May 31, 2008 and November 30, 2008.
Payment was made in December 2008. Further, because PVEC, LLC is sustaining
losses, and profitable future operation is not assured, we recorded losses on
our investment, in the amount of $251 thousand, to bring our investment to zero.
Our investment was zero at May 31, 2008, and remains zero at November 30, 2008.
13
Each member will receive a 5% return on preferred capital contributions and will
share equally in the gain or loss of PVEC, LLC. If funds available to PVEC, LLC
are insufficient to fund operations, the members agree to contribute 100% of the
cash needed until each member's preferred capital account balances are equal and
50% of the cash needed if its preferred capital contribution balances are equal.
PVEC, LLC is obligated to make lease payments equal to debt service payments on
the Bonds. In the event of any shortfalls in debt service payments, amounts will
first be paid by escrow accounts funded by 2% of the transaction privilege tax
(TPT) collected from the surrounding project area and from a lockbox account
containing 1) our initial contribution to PVEC of $250 thousand, 2) $100
thousand per year (increasing annually by inflation) from the Town of Prescott
Valley and 3) earnings from the events center.
We have a limited guarantee of the cash flow of PVEC, LLC as cash flows from
operations of the center are used to pay first operating expenses, second our
base management fee (4% of the center's operating revenue), third debt service
and then other items. The maximum losses under this guarantee are limited to our
management fee. We do not believe any potential payments under this guarantee
would be material.
Our consolidated financial statements reflect the following related to
transactions between us and PVEC, LLC (in thousands).
Three Months Ended Six Months Ended
November 30, November 30,
------------------ ------------------
2008 2007 2008 2007
---- ---- ---- ----
Facility management fees, exclusive of payroll (Encore) $ 12 $ 1 $ 29 $ 2
Facility management fees, payroll related (Encore) 171 208 326 462
Advertising sales commission (GEMS) 19 62 86 130
Ticket service fees (GetTix) 31 56 72 103
Cost of revenues, facility payroll (Encore) 171 208 326 462
November 30, May 31,
2008 2008
---- ----
Accounts payable $532 $502
Accrued liabilities 2 --
Accounts receivable -- 101
- --------------------------------------------------------------------------------
DISCONTINUED OPERATIONS
- --------------------------------------------------------------------------------
On August 1, 2008, we closed a transaction under which we sold substantially all
of the assets of Cragar Industries, Inc. (Cragar), a licensor of an automotive
aftermarket wheel trademark and brand name - CRAGAR(R). The assets consisted
primarily of intangibles, including trademarks, service marks and domain names.
The net cash purchase price of $1.8 million was allocated primarily to the
trademarks, with the remainder to tooling, inventory and other assets.
14
The assets and liabilities of Cragar, included in our condensed consolidated
balance sheets in assets to be disposed and liabilities related to assets to be
disposed are as follows (in thousands):
May 31,
2008
------
Receivables $ 116
Prepaid expenses and other assets 154
Deferred income tax asset 134
Trademarks 1,763
------
Assets to be disposed $2,167
======
Accounts payable $ 37
Accrued liabilities 120
Deferred income tax liabiliy 22
Deferred revenues 54
------
Liabilities related to assets to be disposed $ 233
======
We expect other cash flows from Cragar in fiscal 2009 to consist primarily of
the collection of receivables and payment of liabilities existing as of the
August 1, 2008, date of sale, which were largely unchanged from those existing
at May 31, 2008.
The following table presents selected operating data for Cragar (in thousands):
Three Months Ended Six Months Ended
November 30, November 30,
--------------- ---------------
2008 2007 2008 2007
---- ---- ---- ----
Revenues $ -- $ 219 $ 60 $ 466
Loss on disposal -- -- (51) --
Loss before income taxes -- (78) (48) (146)
Loss from discontinued operations, net
of income tax -- (78) (48) (146)
- --------------------------------------------------------------------------------
CREDIT RISK
- --------------------------------------------------------------------------------
The current general unfavorable economic environment may have a significant
impact on our operating results.
The League operates primarily in mid-sized communities in the Central, Western
and Southern regions of the United States, including Texas, Colorado, Kansas,
Mississippi, Louisiana, New Mexico, Oklahoma, South Dakota and Arizona. Our
facility management fees are derived from events centers operating in Arizona,
New Mexico and Washington. These geographic areas are generally in an economic
downturn that could have a significant negative impact on our operating results.
We depend on contracts with cities or related governmental entities to design,
develop, and manage new multipurpose facilities and adjacent real estate.
Typically we must expend 20-30 months of effort to obtain such contracts. We
depend on these contracts for the revenue they generate and the facilities
resulting from these contracts are potential facilities in which our licensees
may operate. Failure to timely secure these contracts may negatively impact our
results. Many governments are struggling to raise capital in the current
economic environment and may have less interest in developing new multipurpose
facilities. Our revenues, project development and project management revenue in
particular, could be negatively impacted.
Purchasing a license requires significant capital and commencing operation is a
significant expense which limits the pool of potential licensees. We depend on a
critical mass of licensees to capture the economies of scale inherent in the
15
League's operations and to facilitate intra-league play. There can be no
assurance that we will be able to attract qualified candidates for licenses. We
anticipate that expansion of the League will be difficult because of the high
capital costs of licenses, competitive pressures from sports leagues and
entertainment providers both within and outside of the markets where we
currently operate, and the lack of arenas for new licensees.
The minor league hockey industry in which we conduct business is subject to
significant competition from other sports and entertainment alternatives as well
as both the National Hockey League and its minor league hockey system, the
American Hockey League, and other independent minor hockey leagues. Even teams
of the National Hockey League, which is the largest professional hockey league
with the greatest attendance, have struggled to remain financially viable. A
significant portion of our revenues result from payments made by our licensees.
There can be no assurance that licensees will not default under their license
agreements.
The League may be unable to attract new licensees and existing licensees may not
be able to make the continuing payments required by their license agreements in
the current economic environment. There can be no assurance that any payments
will be made by new or current licensees.
- --------------------------------------------------------------------------------
SEGMENT INFORMATION
- --------------------------------------------------------------------------------
Each of our subsidiaries is a separate legal entity with a separate management
structure. Our corporate operations exist solely to support our subsidiary
segments. As such, certain corporate overhead costs are allocated to the
operating segments. There are no differences in accounting principles between
the operations.
At November 30, 2008 and May 31, 2008, goodwill relates to our ICC segment.
16
Six Months Ended
---------------------------
Income (Loss)
Gross Before Income Identifiable
Revenues Taxes Assets
-------- ----- ------
NOVEMBER 30, 2008
Global Entertainment Corporate Operations $ 101 $(1,178) $55,387 (a)
Global Entertainment Concessions 131 (d) (103) (d) 698 (d)
Central Hockey League/WPHL 788 42 503
Global Properties I 478 131 199
International Coliseums 1,226 (e) 890 74
Encore Facility Management 1,173 (b) (78) 180
Global Entertainment Marketing Systems 378 116 178
Global Entertainment Ticketing 1,315 (188) 348
Discontinued Operations -- (48) --
------- ------- -------
Global Entertainment Coporation Consolidated $ 5,590 $ (416) $57,567
======= ======= =======
NOVEMBER 30, 2007
Global Entertainment Corporate Operations $ 166 $(1,949) $ 17,631 (a)
Central Hockey League/WPHL 1,300 (c) 503 795
Global Properties I 56 (321) 365
International Coliseums 395 (121) 667
Encore Facility Management 1,699 (b) (453) 289
Global Entertainment Marketing Systems 479 -- 105
Global Entertainment Ticketing 1,954 376 687
Discontinued Operations -- (146) 3,082
------- ------- -------
Global Entertainment Coporation Consolidated $ 6,049 $(2,111) $23,621
======= ======= =======
- ----------
(a) Global Entertainment Corporate Operations assets include the investment in
Wenatchee project of $52.4 million at November 30, 2008 and $14.9 million
at November 30, 2007. Global Entertainment Corporate Operations assets
include cash and cash equivalents and restricted cash of $1.9 million at
November 30, 2008, and $1.7 million at November 30, 2007.
(b) Encore facility management fees for the six months ended November 30, 2008,
include $0.3 million in revenues from the contract to manage the Town
Toyota Center in Wenatchee, Washington, opened in October 2008. Encore
facility management fees for the six months ended November 30, 2007,
include $0.5 million in revenues from the management contract with the
Chevrolet Center in Youngstown, Ohio, cancelled in September 2007.
(c) Central Hockey League/WPHL operations for the six months ended November 30,
2007 include $0.4 million in franchise transfer fees.
(d) Global Entertainment Concessions began operations October 2008 in
Wenatchee, Washington.
(e) International Coliseums revenues for the six months ended November 30,
2008, includes $0.6 million of fees on the project in Independence,
Missouri, which began in February 2008 and the project in Allen, Texas,
which began in June 2008. Each project is anticipated to have a
twenty-month duration. In addition to the projects in Independence,
Missouri and Allen, Texas, ICC was also managing the construction project
in Wenatchee, Washington until completion in October 2008. Revenues related
to Wenatchee were $0.3 million higher for the six months ended November 30,
2008, than the prior year period.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING DISCLOSURE
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Safe Harbor provision of the Private Securities Litigation
Reform Act of 1995 regarding future events, including statements concerning our
future operating results and financial condition and our future capital needs
and sources. These statements are based on current expectations, estimates,
forecasts, and projections as well as our beliefs and assumptions. Words such as
"outlook", "believes", "expects", "appears", "may", "will", "should",
"anticipates" or the negatives thereof or comparable terminology, are intended
to identify such forward-looking statements. These forward-looking statements
are only predictions and are subject to risks, uncertainties and assumptions
that are difficult to predict. Therefore, actual results may differ materially
and adversely from those expressed in any forward-looking statements. Factors
that might cause or contribute to such differences include, but are not limited
to those discussed in our report on Form 10-K for the fiscal year ended May 31,
2008, under the section entitled "Risk Factors." You should not place undue
reliance on these forward-looking statements, which speak only as of the date of
this Quarterly Report. We undertake no obligation to revise or update publicly
any forward-looking statements for any reason, unless otherwise required by law.
GENERAL
The following is management's discussion and analysis of certain significant
factors affecting our financial position and operating results during the
periods included in the accompanying condensed consolidated financial
statements.
DESCRIPTION OF THE COMPANY
Global Entertainment Corporation (referred to in this report as "we," "us,"
"Global,", "Company" or "GEC") is an integrated event and entertainment company
that is engaged, through its wholly owned subsidiaries, in sports management,
multipurpose events center and related real estate development, facility and
venue management and marketing, and venue ticketing. We are primarily focused on
projects located in mid-size communities in the United States.
Our current operating subsidiaries are Western Professional Hockey League, Inc.,
Global Properties I, International Coliseums Company, Inc., Global Entertainment
Marketing Systems, Inc., Global Entertainment Ticketing, and Encore Facility
Management.
We, through our wholly owned subsidiary, Western Professional Hockey League,
Inc., are the operator of the Western Professional Hockey League (WPHL), a minor
league professional hockey organization, and are the licensor of the
independently owned hockey teams which participate in the league. WPHL has
entered into a joint operating agreement with the Central Hockey League, Inc.
(CHL Inc.). The effect of the joint operating agreement is that the two leagues
had their respective teams join together and operate under the Central Hockey
League name (as the League). The terms of the joint operating agreement define
how the League will operate.
The League is a structured licensed sports league, which includes competing
teams located in various states, including Texas, Colorado, Kansas, Louisiana,
Mississippi, New Mexico, South Dakota, Oklahoma, and Arizona. There are 17 teams
in the 2008-2009 season and there were 17 teams in the 2007-08 season. In each
season 13 teams were licensed by WPHL. In each season, 4 teams, each of which
was an original CHL, Inc. team, continue to operate under a sanction agreement
that requires direct payments to the League pursuant to the terms and conditions
of the original CHL, Inc. agreements.
Global Properties I (GPI) provides services in targeted mid-sized communities
across the United States related to the development of multipurpose events
centers and surrounding multi-use real estate development.
GPI, along with International Coliseums Company, Inc. (ICC), develops
multipurpose events centers in mid-market communities. ICC's development of
multipurpose events centers promotes the development of the League by assisting
18
potential licensees in securing quality venues in which to play minor
professional hockey league games. The inter-relationship between GPI, ICC and
WPHL is a key factor in the viability of a managed multipurpose entertainment
facility.
Global Entertainment Marketing Systems, Inc. (GEMS), promotes, markets, and
sells various services related to multipurpose entertainment facilities,
including all contractually obligated income (COI) sources such as facility
naming rights, luxury suite sales, club seat license sales, and facility
sponsorship agreements.
Global Entertainment Ticketing (GetTix) provides ticketing services for the
multipurpose event centers developed by GPI and ICC, existing League licensees,
and various other entertainment venues, theaters, concert halls, and other
facilities and event coordinators. GetTix provides a full ticketing solution by
way of box office, phone, internet and print-at-home service that utilizes
distribution outlets in each market. GetTix uses third-party, state-of-the-art
software to deliver ticketing capabilities that include database flexibility,
easy season and group options, financial reporting and marketing resources.
Encore Facility Management (Encore) provides a full complement of multipurpose
events center operational services. These services provide administrative
oversight in the areas of facility/property management and finance, event
bookings, and food and beverage. Encore is currently involved with facility
management of multipurpose events centers developed by GPI and ICC. Facility
management operations are conducted under separate limited liability companies.
On August 1, 2008, we closed a transaction pursuant to which we sold
substantially all of the assets of our subsidiary Cragar Industries, Inc.
(Cragar), a licensor of an automotive aftermarket wheel trademark and brand -
CRAGAR(R). The assets consisted primarily of intangible property, including
trademarks, service marks and domain names. The purchase price was approximately
$1.9 million in cash. Of the cash proceeds, $0.1 million was used for
transaction-related costs and $1.25 million has been set aside in a restricted
account as security for a letter of credit. The remainder of the funds was made
available for working capital and general corporate purposes.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
Significant accounting policies are described in the audited consolidated
financial statements and notes thereto included in our Report on Form 10-K for
the year ended May 31, 2008. We believe our most critical accounting policies
and estimates relate to revenue recognition, the allowance for doubtful
accounts, arena guarantees, the carrying value of goodwill, the realization of
deferred income tax assets, the fair value of liability related to the secondary
guarantee related to a worker's compensation program, and the allocation of
expenses, division of profit or loss relating to the joint operating agreement,
and the application of the percentage-of-completion method. Due to the
uncertainties inherent in the estimation process and the significance of these
items, it is at least reasonably possible that the estimates in connection with
these items could be materially revised within the next year.
OVERVIEW AND FORWARD LOOKING INFORMATION
During fiscal year 2008 we decided to divest of Cragar. As a result, the
operations of Cragar have been classified as loss from discontinued operations
in the condensed consolidated statements of operations for all periods
presented. Revenues and operating costs in the condensed consolidated statements
of operations now exclude all accounts of Cragar.
19
THREE MONTHS ENDED NOVEMBER 30, 2008, COMPARED TO THREE MONTHS ENDED NOVEMBER
30, 2007
REVENUES (in thousands):
Three Months Ended November 30,
----------------------------------------
% of % of %
2008 Revenue 2007 Revenue Change Change
---- ------- ---- ------- ------ ------
Project management fees $ 761 23.6 $ 119 4.2 $ 642 539.5
Facility management fees 728 22.5 735 26.0 (7) (1.0)
License fees 515 15.9 535 18.9 (20) (3.7)
Ticket service fees 695 21.5 1,175 41.6 (480) (40.9)
Project development fees 269 8.3 25 0.9 244 976.0
Advertising sales commissions 133 4.1 224 7.9 (91) (40.6)
Concession revenue 130 4.0 -- -- 130 NM
Other revenue -- -- 12 0.4 (12) (100.0)
------ ----- ------ ----- ------ -----
Gross Revenues $3,231 100.0 $2,825 100.0 $ 406 14.4
====== ===== ====== ===== ====== =====
Total revenues increased $0.4 million, or 14.4%, to $3.2 million for the three
months ended November 30, 2008 compared to $2.8 million for the three months
ended November 30, 2007. The project management fees increase of $0.6 million
and project development fee increase of $0.2 million and concession revenue
increase of $0.1 were offset by the decrease in ticket service fees of $0.5
million and decrease in advertising sales commissions of $0.1 million.
Project management revenues increased $0.6 million to $0.8 million for the
quarter ended November 30, 2008, from $0.1 million in the prior year quarter.
Project management fees for the quarter ended November 30, 2008, includes $0.3
million of fees on the project in Independence, Missouri, which began in
February 2008, and the project in Allen, Texas, which began in June 2008. Each
project is anticipated to have a twenty-month duration. In addition to the
projects in Independence, Missouri and Allen, Texas, ICC also managed the
construction project in Wenatchee, Washington through the first week of October
2008. Project management fees related to Wenatchee, recognized on a percentage
of completion basis, were $0.3 million higher for the quarter ended November 30,
2008 than the prior year quarter.
Facility management fees were $0.7 million for the three months ended November
30, 2008 and 2007. Encore's current facility management contracts include the
facilities in Rio Rancho, New Mexico, Prescott Valley, Arizona, and Wenatchee,
Washington, which opened in October 2008. The $0.2 million year-over-year
increase in fees resulting from the opening of the Wenatchee, Washington
facility in October 2008, was offset by a decline in fees from management of the
Rio Rancho, New Mexico and Prescott Valley, Arizona centers, which were under
management in both quarters. The facilities in Rio Rancho, New Mexico and
Prescott Valley, Arizona, each experienced a decline in the number of events
held and a decline in attendance. Encore manages employees under each of its
current facility management contracts and, therefore, payroll costs from such
employees are recognized by Encore as facility management fee revenue and are
also included in cost of revenues.
License fees remained largely unchanged at $0.5 million for the quarters ended
November 30, 2008 and 2007.
Ticket service fees decreased $0.5 million, or 40.9%, to $0.7 million for the
three months ended November 30, 2008, from $1.2 million for the prior year
quarter. This decrease in ticket service fees reflects 1) the $0.3 million
reduction in fees due to the discontinuance of services to the Chevrolet Center
in Youngstown, Ohio, in the spring of 2008 and 2) decreased sales with the
decline in the number of events held, attendance at events and venues under
contract.
Project development fees increased $0.2 million to $0.3 million in the quarter
ended November 30, 2008. Project development fees in the quarter ended November
30, 2008, include the final fee installment from the project development
agreement with the City of Independence, signed in 2008.
20
Advertising sales commissions decreased $0.1 million, or 40.6%, to $0.1 million
for the three months ended November 30, 2008, from $0.2 million for the three
months ended November 30, 2007. The decrease is the result of decreased sales of
contractually obligated income in all facilities under contract throughout both
quarters in the current unfavorable economic environment. The increase in
commissions from the opening of the facility in Wenatchee, Washington in October
2008 offset the decrease in commissions from cancellation of the GEMS contract
with the facility in Youngstown, Ohio in October 2007.
Concession revenue was $0.1 million for the quarter ended November 30, 2008. We
derive revenue from concession operations at the Wenatchee, Washington facility
which opened in October 2008.
OPERATING COSTS (in thousands):
Three Months Ended November 30,
----------------------------------------
% of % of %
2008 Revenue 2007 Revenue Change Change
---- ------- ---- ------- ------ ------
Cost of revenues $1,419 43.9 $1,572 55.7 $ (153) (9.7)
General and administrative costs 1,720 53.2 1,777 62.9 (57) (3.2)
------ ---- ------ ----- ------ -----
Total Operating Costs $3,139 97.2 $3,349 118.6 $ (210) (6.3)
====== ==== ====== ===== ====== =====
Total operating costs decreased by $0.2 million, or 6.3%, to $3.1 million for
the quarter ended November 30, 2008, from $3.3 million in the prior year
quarter.
Cost of revenues decreased by $0.2 million, or 9.7%, to $1.4 million for the
quarter ended November 30, 2008, from $1.6 million for the prior year quarter.
The $0.1 million decrease in facility management payroll associated with the
decline in the number of events held and attendance in facilities in Rio Rancho,
New Mexico and Prescott Valley, Arizona and $0.1 million decrease in ticket
service costs associated with the decline in ticket service revenue were offset
by an increase in costs of $0.2 million related to concession services.
General and administrative expenses decreased $0.1 million, or 3.2%, to $1.7
million for the quarter ended November 30, 2008, from $1.8 million in the prior
year quarter. Commission expense decreased $0.1 million between quarters.
LOSS FROM CONTINUING OPERATIONS (in thousands):
Three Months Ended November 30,
----------------------------------------
% of % of %
2008 Revenue 2007 Revenue Change Change
---- ------- ---- ------- ------ ------
Loss from Continuing Operations $(256) (7.9) $(515) (18.2) $259 (50.3)
===== ==== ===== ===== ==== =====
Loss from continuing operations was $0.3 million for the three months ended
November 30, 2008, compared to a loss from continuing operations of $0.5 million
for the three months ended November 30, 2007. Income from operations of 0.1
million in the quarter ended November 30, 2008 was an improvement from the $0.5
million loss from operations in the prior year quarter. The quarter ended
November 30, 2008, however, includes $0.4 million of interest expense incurred
on the construction note after construction of the Wenatchee, Washington
facility concluded in October 2008.
21
SIX MONTHS ENDED NOVEMBER 30, 2008, COMPARED TO SIX MONTHS ENDED NOVEMBER 30,
2007
REVENUES (in thousands):
Six Months Ended November 30,
----------------------------------------
% of % of %
2008 Revenue 2007 Revenue Change Change
---- ------- ---- ------- ------ ------
Project management fees $1,226 21.9 $ 244 4.0 $ 982 402.5
Facility management fees 1,173 21.0 1,699 28.1 (526) (31.0)
License fees 890 15.9 1,452 24.0 (562) (38.7)
Ticket service fees 1,315 23.5 1,954 32.3 (639) (32.7)
Project development fees 478 8.6 206 3.4 272 132.0
Advertising sales commissions 378 6.8 479 7.9 (101) (21.1)
Concession revenue 130 2.3 -- -- 130 NM
Other revenue -- -- 15 0.3 (15) (100.0)
------ ----- ------ ----- ------ -----
Gross Revenues $5,590 100.0 $6,049 100.0 $ (459) (7.6)
====== ===== ====== ===== ====== =====
Total revenues decreased $0.5 million, or 7.6%, to $5.6 million for the six
months ended November 30, 2008, from $6.0 million for the six months ended
November 30, 2007. The project management fees increase of $1.0 million and
project development fee increase of $0.3 million were offset by the decrease in
facility management revenues of $0.5 million, the decrease in license fees of
$0.6 million and the decrease in ticket service fees of $0.6 million.
ICC project management revenues increased $1.0 million to $1.2 million for the
six months ended November 30, 2008, from $0.2 million in the prior year six
months. Project management fees for the six months ended November 30, 2008,
includes $0.6 million of fees on the project in Independence, Missouri, which
began in February 2008 and the project in Allen, Texas, which began in June
2008. Each project is anticipated to have a twenty-month duration. In addition
to the projects in Independence, Missouri and Allen, Texas, ICC was also
managing the construction project in Wenatchee, Washington until completion in
October 2008. Project management fees related to Wenatchee were $0.3 million
higher for the six months ended November 30, 2008 than the prior year period.
Facility management fees decreased $0.5 million, or 31.0%, to $1.2 million for
the six months ended November 30, 2008, from $1.7 million in the prior year six
months. The cancellation of the management contract with the Chevrolet Center in
Youngstown, Ohio, effective September 2007 contributed $0.5 million of the
decrease. The $0.2 million year-over-year increase in fees resulting from the
opening of the Wenatchee, Washington facility in October 2008, was offset by a
decline in fees from management of the Rio Rancho, New Mexico and Prescott
Valley, Arizona centers, which were under management in both periods. The
facilities in Rio Rancho, New Mexico and Prescott Valley, Arizona, each
experienced a decline in the number of events held and a decline in attendance.
Encore manages employees under each of its current facility management contracts
and, therefore, payroll costs from such employees are recognized by Encore as
facility management fee revenue and are also included in cost of revenues.
License fees decreased $0.6 million, or 38.7%, to $0.9 million for the six
months ended November 30, 2008, from $1.5 million for the six months ended
November 30, 2007. The prior year period included $0.4 million of license
transfer fees. Since license transfer fees are not regularly recurring and are
difficult to predict, there is no assurance that we will be able to increase or
sustain our operating capital through this source. In addition, corporate
sponsorship revenue decreased $0.1 million.
Ticket service fees decreased $0.6 million, or 32.7%, to $1.3 million for the
six months ended November 30, 2008, from $2.0 million for the prior year six
months. This decrease in ticket service fees reflects 1) the $0.3 million
reduction in fees due to the discontinuance of services to Chevrolet Center in
Youngstown, Ohio, in the spring of 2008 and 2) decreased sales due to the
decline in the number of events held, attendance at events and venues under
contract.
22
Project development fees increased $0.3 million, to $0.5 million in the six
months ended November 30, 2008, from $0.2 million in the six months ended
November 30, 2007. Project development fees in the six months ended November 30,
2008, include the final development fee installments from the project
development agreements with the City of Allen, Texas and the City of
Independence, Missouri, signed in 2008. Project development fees in the six
months ended November 30, 2007 related to the project in Wenatchee, Washington.
Advertising sales commissions decreased $0.1 million, or 21.1%, to $0.4 million
for the six months ended November 30, 2008, from $0.5 million for the six months
ended November 30, 2007. Contractually obligated income was flat or lower in all
facilities under contract throughout both periods as a result of the current
unfavorable economic environment. The increase in commissions from the opening
of the facility in Wenatchee, Washington in October 2008 offset the decrease in
commissions from cancellation of the GEMS contact with the facility in
Youngstown, Ohio in October 2007.
Concession revenue was $0.1 million for the six months ended November 30, 2008.
We derive revenue from concession operations at the Wenatchee, Washington
facility which opened in October 2008.
OPERATING COSTS (in thousands):
Six Months Ended November 30,
----------------------------------------
% of % of %
2008 Revenue 2007 Revenue Change Change
---- ------- ---- ------- ------ ------
Cost of revenues $2,398 42.9 $3,272 54.1 $ (874) (26.7)
General and administrative costs 3,216 57.5 4,790 79.2 (1,574) (32.9)
------ ----- ------ ----- ------- ----
Total Operating Costs $5,614 100.4 $8,062 133.3 $(2,448) (30.4)
====== ===== ====== ===== ======= ====
Total operating costs decreased by $2.4 million, or 30.4%, to $5.6 million for
the six months ended November 30, 2008, from $8.1 million in the prior year six
months.
Cost of revenues decreased by $0.9 million, or 26.7%, to $2.4 million for the
six months ended November 30, 2008, from $3.3 million for the prior year six
months. This decrease resulted primarily from 1) a $0.3 million decrease in
facility management payroll associated with the decline in the number of events
held and attendance at facilities in Rio Rancho, New Mexico and Prescott Valley,
Arizona and 2) a $0.5 million decrease in facility management payroll associated
with the facility in Youngstown, Ohio, due to cancellation of the management
agreement.
General and administrative expenses decreased $1.6 million, or 32.9%, to $3.2
million for the six months ended November 30, 2008, from $4.8 million in the
prior year six months. The decrease in general and administrative expenses is
comprised of 1) a $1.3 million decrease in legal and settlement costs due to a
reduction in legal defense costs with the settlement of several matters since
November 30, 2007, 2) a $0.2 million reduction in severance expenses and 3) a
$0.1 million reduction in commission expenses.
LOSS FROM CONTINUING OPERATIONS (in thousands):
Six Months Ended November 30,
----------------------------------------
% of % of %
2008 Revenue 2007 Revenue Change Change
---- ------- ---- ------- ------ ------
Loss from Continuing Operations $(368) (6.6) $(1,965) (32.5) $1,597 (81.3)
===== ==== ======= ===== ====== =====
Loss from continuing operations was $0.4 million for the six months ended
November 30, 2008, compared to a loss from continuing operations of $2.0 million
for the six months ended November 30, 2007. Operating losses improved to
approximately zero in the six months ended November 30, 2008 from $2.0 million
in the prior year six months. The six months ended November 30, 2008, however,
includes $0.4 million of interest expense incurred on the construction note
after construction of the Wenatchee, Washington concluded in October 2008. The
23
improvement in operating losses of $2.0 million is primarily attributable to the
$1.2 million decrease in legal and settlement costs and the $0.2 million
reduction in severance expense.
LIQUIDITY AND CAPITAL RESOURCES
As of November 30, 2008, we have $0.7 million in cash and cash equivalents,
including cash collected for GetTix tickets of approximately $0.2 million for
events scheduled to occur in the future, and we have $1.25 million in restricted
cash.
In August 2007, we entered into an agreement with Marshall Financial Group, LLC
(Marshall) to borrow up to $52.0 million for the construction of a multi-purpose
events center in Wenatchee, Washington. The outstanding principal balance of the
note bore interest at a rate of prime plus 0.25% (4.25% at November 30, 2008).
Construction completed in October 2008. In December 2008, we sold the events
center to the Greater Wenatchee Regional Events Center Public Facilities
District (PFD). The $52.4 million proceeds from the sale of the events center
were distributed as follows: $48.9 million to repay the Marshall construction
loan in full, $1.9 million for construction vendors, $0.4 million to escrow
accounts as holdbacks pending open items and $1.2 million was made available for
working capital and general corporate purposes.
On August 1, 2008, we closed a transaction under which we sold substantially all
of the assets of Cragar. The assets consisted primarily of intangible property,
including trademarks, service marks and domain names. The purchase price was
approximately $1.8 million net of transaction-related costs and, as discussed in
greater detail below, $1.25 million of the cash received was set aside in a
restricted account as security for a letter of credit until December 2008. The
remainder of the funds was available for working capital and general corporate
purposes.
Cash provided by operating activities in the first half of fiscal 2009, was
approximately zero, an improvement over cash used by operating activities of
$1.7 million in the first half of fiscal 2008, as operating losses decreased.
Cash used in investing activities was $21.5 million in the first half of fiscal
2009 compared to cash used in investing activities of $13.1 million in first
half of fiscal 2008. Construction costs for the events center in Wenatchee,
Washington increased $8.4 million. The construction costs were funded primarily
with a construction loan with Marshall, as reflected as a source of funds in the
financing section. In addition, during the first half of fiscal 2009, we
invested $0.7 million in concession equipment for the Wenatchee, Washington
facility. The concession operation began when the facility opened in October
2008. Offsetting the increased construction costs and concession equipment
purchases were the $1.8 million proceeds from the disposition of Cragar, net of
transaction-related costs. We were also required to set aside $1.25 million in a
restricted account as security for a letter of credit in the favor of Marshall,
which was subsequently surrendered, in December 2008 when we repaid the Marshall
note.
Cash provided by financing activities totaled $21.7 million for the first half
of fiscal 2009, compared to cash provided by financing activities of $12.2
million in the first half of fiscal 2008. During the first half of 2009 we
received $22.0 million in proceeds from the construction loan with Marshall
Financial Group, LLC.
We had a $1.75 million line of credit that matured on November 1, 2008. The line
of credit was amended and now matures October 1, 2009. The line of credit bears
interest at a daily adjusting LIBOR rate plus 2%, subject to certain
adjustments. As of November 30, 2008, and through the date of this filing, we
have received no cash advances on this credit facility. Effective June 2008, we
are required to deposit cash in the amount of any requested cash advances. At
November 30, 2008, and as of the date of this filing, we had a maximum borrowing
capacity of $0.5 million, as a result of a $1.25 million letter of credit in
favor of Marshall, which reduced our available line of credit. We deposited
$1.25 million of the proceeds from the disposition of Cragar with the bank in
August 2008, as additional security for the letter of credit. These funds were
restricted, and unavailable to us, as long as the letter of credit was
outstanding. The letter of credit was surrendered by Marshall when we repaid our
construction loan with proceeds from the sale of the events center in Wenatchee,
Washington in December 2008. As amended, the line of credit is available to
support up to $1.25 million in letters of credit.
The credit facility has been secured by substantially all of our tangible and
intangible assets. In order to borrow, we must meet certain financial covenants,
including maintaining a minimum current ratio (current assets compared to
current liabilities) of 1.05 as of the end of each fiscal quarter, a minimum
consolidated tangible net worth of $1.75 million as of the date of the
24
amendment, November 1, 2008, and an increase in tangible net worth of at least
75% of consolidated net income plus 100% of all increases of equity (including
the amount of any stock offering or issuance) on each anniversary after May 31,
2009. We must maintain a zero balance for a consecutive 30 day period during the
term of the facility.
We continue to evaluate the profitability of, and synergies among, our various
subsidiaries and may determine to dispose of one or more of them, as we move
forward with our business plan. Based on our current forecast and historical
results, we expect to have adequate cash flow from available sources to fund our
operating needs through November 30, 2009. We do not expect to borrow under the
line of credit, since any advances will require us to deposit cash in the amount
of the requested advance. If we continue to not comply with contractually
obligated financial covenants, our business or profitability deteriorates or we
incur unexpected expenses or asset impairments, it could have a material adverse
effect on our liquidity and financial resources. We may be required to refinance
all or part of our existing debt. We cannot guarantee that we would be able to
do so on terms acceptable to us, if at all.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued FASB Interpretation No. 48, "An Interpretation of
FASB Statement No. 109," which clarifies the accounting for uncertainty in
income taxes. This interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The interpretation
reflects the benefit recognition approach, where a tax benefit is recognized
when it is more likely than not to be sustained based on the technical merits of
the position. We adopted this interpretation effective June 1, 2007, and there
was no impact on our financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements". The
statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. We adopted this statement prospectively effective
June 1, 2008, and there was no impact on our financial position or results of
operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". This statement permits entities to
choose to measure many financial instruments and certain other items at fair
value. An entity shall report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each subsequent reporting
date. We adopted this statement prospectively effective June 1, 2008, and there
was no impact on our financial position or results of operations. We have not
elected the fair value option for any eligible items.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51". This statement
establishes accounting and reporting standards for noncontrolling interests in a
subsidiary and for the deconsolidation of a subsidiary. The statement also
provides consolidated income statement presentation guidance and requires
expanded disclosures. This statement is effective for our fiscal year beginning
June 1, 2009, and interim periods within that year. The statement will be
applied prospectively, except for the presentation and disclosure requirements,
which will be applied retrospectively for all periods presented. We have not yet
evaluated the effect the statement will have on our financial position or
results of operations.
In November 2007 the EITF issued EITF 07-01 "Accounting for Collaborative
Agreements". This consensus prohibits application of the equity method of
accounting to activities performed outside of a separate legal entity and
requires revenues and costs incurred with third parties in connection with
collaborative agreements be presented gross or net based on other applicable
accounting literature. Payments to or from collaborators should be presented in
the income statement based on the nature of the arrangement, whether the
payments are within the scope of other accounting literature, and certain other
criteria. The consensus is required for our fiscal year beginning July 1, 2009.
We have not yet evaluated the effect this statement will have on our financial
position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
25
ITEM 4T. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Under the supervision and with the participation of our management, including
the Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15 as of November 30, 2008. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective. There
were no changes in our internal control over financial reporting during the
period covered by this report that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
Our management, including its principal executive officer and the principal
financial officer, do not expect that our disclosure controls and procedures
will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and may not be detected. We
monitor our disclosure controls and procedures and internal controls and makes
modifications as necessary; our intent in this regard is that the disclosure
controls and procedures will be maintained as dynamic systems that change
(including with improvements and corrections) as conditions warrant.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
There have not been changes in our internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the second quarter of fiscal 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As with all entertainment facilities there exists a degree of risk that the
general public may be accidentally injured at one of the facilities we develop,
design or manage. As of November 30, 2008, there were various claims outstanding
in this regard that management does not believe will have a material effect on
our financial condition or results of operations. To mitigate this risk, we
maintain insurance coverage, which we believe effectively covers any reasonably
foreseeable potential liability. There is no assurance, however, that our
insurance coverage will adequately cover all liabilities to which we may be
exposed.
We are a plaintiff and a counter-defendant in a lawsuit involving a former
licensee, Blue Line Hockey, LLC (Blue Line), which operates the Youngstown
Steelhounds. This suit was filed in Maricopa County Superior Court of Arizona on
November 7, 2006. Our claim is for approximately $0.1 million in unpaid license
and assessment fees owed by Blue Line, plus our attorneys' fees. Blue Line's
counterclaim alleges that WPHL fraudulently induced Blue Line's principal to
enter the license agreement by failing to comply with franchise disclosure
requirements, and that WPHL made fraudulent representations to induce Blue Line
into signing the license agreement. Blue Line seeks rescission of the license
agreement, $0.5 million of lease payments, reimbursement of its franchise fee,
and reimbursement of travel expenses for the 2005-2006 season. Although the
outcome of this matter cannot be predicted with certainty, we believe that we
26
have both valid claims and valid defenses to the counterclaims. Thus, we intend
to vigorously prosecute our claims and defend the counterclaims. No liability
has been established at November 30, 2008, related to this matter.
We were a defendant in a lawsuit filed by Nustadia Developments Inc. and PBK
Architects. The suit arose out of certain contracts between us and the
plaintiffs, pursuant to which we agreed to use architectural design and
development management services of the plaintiffs with respect to certain arena
development projects. The suit sought direct damages of $4.5 million and other
unspecified damages for alleged breach of contract, tortious interference with
business expectancy, and breach of implied covenant of good faith and fair
dealing. This suit was filed in December 2005, in the Maricopa County Superior
Court of Arizona. We settled the matter in the third quarter of fiscal year 2008
and the case has been dismissed.
ITEM 1A. RISK FACTORS
Refer to our report on Form 10-K for the fiscal year ended May 31, 2008, under
Item 1A. "Risk Factors."
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held October 17, 2008. The following
nominees were elected to the board of directors to serve as directors until
their successors are elected and qualified: W. James Treliving, Richard
Kozuback, Michael L. Bowlin, Terry S. Jacobs, Stephen A McConnell, George
Melville, Mark Schwartz. Each director was elected by the following vote:
For Withheld
--------- --------
W. James Treliving 5,066,384 4,076
Richard Kozuback 5,066,342 4,118
Michael L. Bowlin 5,066,418 4,042
Terry S. Jacobs 5,017,939 52,521
Stephen A McConnell 5,066,418 4,042
George Melville 5,017,939 52,521
Mark Schwartz 5,066,418 4,042
The shareholders also ratified the appointment of Semple, Marchal & Cooper, LLP
as our independent registered public accounting firm for fiscal 2009, by the
following vote: 5,067,295 for, 739 against and 2,430 abstaining.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
See Exhibit Index attached.
27
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Global Entertainment Corporation
(Registrant)
January 14, 2009 By /s/ Richard Kozuback
-----------------------------------------------
Richard Kozuback
President & Chief Executive Officer
January 14, 2009 By /s/ James Yeager
-----------------------------------------------
James Yeager
Senior Vice President & Chief Financial Officer
28
EXHIBIT INDEX
The following exhibits are filed herewith or incorporated herein pursuant to
Regulation S-K, Item 601:
Exhibit
- -------
31.1 Certifications Pursuant to 18 U.S.C. Section 1350-Section 302,
signed by Richard Kozuback, Chief Executive Officer.*
31.2 Certifications Pursuant to 18 U.S.C. Section 1350-Section 302,
signed by James Yeager, Chief Financial Officer.*
32 Certification Pursuant to 18 U.S.C. Section 1350-Section 906, signed
by Richard Kozuback, Chief Executive Officer and James Yeager, Chief
Financial Officer.*
- ----------
* Filed herewith.