<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the quarterly period ended: April 30, 1998
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OR
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
[ ] For the transition period from to
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Commission file number: 0-188
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CEC Properties, Inc.
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(exact name of registrant as specified in its charter)
Delaware 13-1919940
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(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
1500 W. Balboa Blvd. Suite 201, Newport Beach, CA 92663
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(Address of principal executive offices) (Zip Code)
(714) 673-2282
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(Registrant's Telephone Number, including area code)
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(Former name, former address and former
fiscal year, if changed since last report)
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 reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 12,989,226 shares of common
stock as of 5/31/98
<PAGE>
CEC PROPERTIES
(A DELAWARE CORPORATION)
Part I - Financial Information
The condensed consolidated financial statements included herein have been
prepared by the Registrant without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations. However, the Registrant believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these consolidated financial statements be read in conjunction
with the financial statements and the notes thereto included in the Registrant's
latest Annual Report on Form 10-KSB.
In the opinion of the Registrant, all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial position of the
Registrant as of April 30,1998, and the results of its operations and changes in
its cash flows for the three and six months periods ended April 30, 1998 and
1997, have been made. The results of operations for such interim periods are not
necessarily indicative of the results to be expected for the entire year.
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<PAGE>
<TABLE>
CEC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
Apr 30, 1998 Oct 31,1997
------------ -----------
Unaudited Audited
ASSETS
------
<S> <C> <C>
Investment - Real Estate (net) $ 46,351 $ 801,957
Cash in the Bank 21,336 59,963
Other 455,842 352,689
------------- -------------
TOTAL ASSETS $ 523,529 $ 1,214,609
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
Trust Deeds Payable $ 0 $ 766,548
Due to Stockholders 275,810 279,375
Other 194,938 256,403
------------- -------------
TOTAL LIABILITIES $ 470,748 $ 1,302,326
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STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------
Common Stock $ .01 Par Value, Shares Authorized;
12,989,226 and 12,676,698 outstanding
at Apr 30, 1998 and Oct 31, 1997,
respectively $ 129,892 $ 126,767
Additional Paid In Capital $ 23,504,427 $ 23,351,302
Accumulated Deficit $(23,565,788) $(23,471,062)
Current Loss (15,750) $ (94,724)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY(DEFICIT) 52,781 (87,717)
------------- -------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY ( DEFICIT) $ 523,529 $ 1,214,609
============= =============
</TABLE>
See Notes to the Consolidated Financial Statements:
<PAGE>
<TABLE>
CEC PROPERTIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Apr 30
-------------------------
1998 1997
<S> <C> <C>
REVENUE
CONTINUING OPERATIONS:
REVENUE $ 282,691 $ 0
OPERATING EXPENSES 339,563 0
INTEREST 0 0
DEPRECIATION 0 0
------------- -------------
TOTAL EXPENSES $ 339,563 $ 0
------------- -------------
LOSS FROM CONTINUING
OPERATIONS $ (56,872) $ 0
DISCONTINUED OPERATIONS:
INCOME 8,039 30,377
GAIN ON SALE OF ASSETS 95,473 14,193
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103,512 44,570
OPERATING EXPENSE 0 14,096
INTEREST 39,383 13,581
DEPRECIATION 2,489 3,732
------------- -------------
41,872 31,409
INCOME (LOSS) FROM
DISCONTINUED OPERATIONS 61,640 13,161
============= =============
NET INCOME (LOSS) $ 4,768 $ 13,161
============= =============
Net Income (Loss) From Continuing
Operations Per Common Share (0.0044) 0
============= =============
Net Income From Discontinued
Operations Per Common Share 0.0047 0.0010
============= =============
Weighted Average Shares Outstanding 12,989,226 12,676,698
</TABLE>
See Notes to the Consolidated Financial Statements
<PAGE>
CEC PROPERTIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Six Months Ended Apr 30
-----------------------
1998 1997
REVENUE
CONTINUING OPERATIONS:
REVENUE $ 631,505 $ 0
OPERATING EXPENSES 753,285 0
INTEREST 0 0
DEPRECIATION 0 0
------------- -------------
TOTAL EXPENSES $ 753,285 $ 0
------------- -------------
LOSS FROM CONTINUING
OPERATIONS $ (121,780) $ 0
============= =============
DISCONTINUED OPERATIONS:
INCOME 68,889 48,112
GAIN ON SALE OF ASSETS 95,473 14,193
------------- -------------
164,362 62,305
OPERATING EXPENSE 0 33,282
INTEREST 52,188 32,108
DEPRECIATION 6,144 9,112
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58,332 74,502
INCOME (LOSS) FROM
DISCONTINUED OPERATIONS 106,030 (12,197)
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NET LOSS $ (15,750) $ (12,197)
============= =============
Net Loss From Continuing
Operations Per Common Share (0.0094) 0
============= =============
Net Income From Discontinued
Operations Per Common Share 0.0082 (0.0009)
============= =============
Weighted Average Shares Outstanding 12,989,226 12,676,698
See Notes to the Consolidated Financial Statements
<PAGE>
<TABLE>
CEC PROPERTIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended Apr 30
-----------------------
1998 1997
<S> <C> <C>
Cash Flow From Operating Activities:
Net Loss $ (15,750) $ (12,197)
Adjustment to reconcile net income
to net cash provided by operating activities
Depreciation 6,144 9,112
Gain on Sale of Assets (95,473) (14,193)
(Increase) Decrease in other Assets (17,981) 11,495
Increase (Decrease) in Other Liabilities 9,611 (6,494)
---------- ----------
Net Cash Used by Operations (113,449) (12,277)
Cash Flows from Investing Activities 0 0
Proceeds from Sale of
Rental Property 844,935 280,473
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Net Cash Provided by Investing Activities 844,935 280,473
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Cash Flows from Financing Activities
Stockholder Loan Advance (Repayment) (3,565) 19,600
Long-term Debt Reduction (766,548) (278,256)
---------- ----------
Net Cash Provided (Used) in Financing Activities (770,113) (258,656)
---------- ----------
Net Increase (Decrease) in Cash (38,627) 9,540
Cash at Beginning of Period 59,963 2,318
---------- ----------
Cash at end of Period $ 21,336 $ 11,858
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements:
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<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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(1) Summary of Significant Accounting Policies
The financial statements are reported on a consolidated basis with the Company's
wholly owned subsidiary CEC Properties, Corp and Classic Golf Management. All
material intercompany transactions have been eliminated.
The Company reports on the accrual basis of accounting whereby revenues are
recognized when earned and expenses are recorded when incurred.
All adjustments made to the financial statements are of a normal recurring
nature necessary to present fairly the financial condition of the Company.
(2) Discontinued Operations: Investment Properties
The Company adopted a plan to sell its two remaining rental properties in order
to focus on its golf management operations. As such, the revenue and expense
from the rental operations are disclosed as discontinued operations in the
income statement for quarters ended April 30, 1998 and January 31, 1998. Both
properties were sold during the Company's second quarter for net gains of
$59,898 and $37,575. The related trust deeds payable were paid full as a result
of these transactions.
For comparability, the presentation of the prior year periods has been changed
to conform with the presentation in the current year.
(3) Statement of Cash Flows
The Company considers only cash in the bank to be cash or cash equivalents for
purposes of the statement of cash flows.
Non cash investing and financing activities:
During the quarter ended April 30, 1998, the Company's Board of Directors
authorized and issued 312,500 shares of its common stock to Equisource. Inc.
(formerly PJM Trading Company) as payment for financial consulting fees of
approximately $156,000. Of these fees, approximately $71,000 was accrued
expenses for the services rendered at October 31, 1997. The remaining $85,000 of
fees are consulting with respect to the private placement of the Company's
securities in May, 1998. These fees will be deducted from the proceeds of the
private placement, which was finalized in May, 1998, during the Company's third
fiscal quarter.
<PAGE>
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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The Company was substantially reorganized in 1995. The Company
manages, constructs and maintains golf courses and golf driving ranges through
its wholly owned subsidiary, Classic Golf Management. It currently has two
management contracts: (A) an operating contract for the City Club golf course in
Marietta, Georgia, which pays the Company $50,000 per year plus a performance
bonus of two percent (2%) of revenues. Additionally, the Company owns the pro
shop, and the teaching center, and (B) At Sugar Creek in DeKalb County, Georgia,
the Company pays a fee to the county which is a percentage of the green fees
which is similar to a triple net lease. The Company is responsible for the snack
bar, carts, driving range, tennis and employees, with the Company retaining the
revenues from those operations. The Company's employees are obtained from a
third party who, effectively, leases the Company its employees. The Company also
has a contract for the maintenance of the Heritage Hills driving range, which
pays the Company approximately $2,000 per month. The Company is focusing its
efforts on bidding and obtaining new management contracts and acquisition of
additional management companies.
The Company entered into negotiations in 1996 to purchase Blue T, a
golf course construction and management company. In early 1997 the negotiations
were terminated. Paul Balalis, the chief executive officer and principal
stockholder of the Company personally guaranteed a loan to Blue T for a third
party that went into default. The Company had loaned Blue T funds for an option
to develop the Camarillo golf course. When Blue Tee could not repay the loan,
the Company acquired the option for Camarillo, together with a former Blue T
employee, who owns 20% of the option.
The Company presently retains 80% of the rights to Camarillo Creek in
Ventura County, California and 100% to the Hickory Stick golf course to be built
in Atlanta, Georgia. The Camarillo Creek course was designed by Charles Howard,
a golf course designer from Austin, Texas. As stipulated in his agreement Mr.
Howard did the complete design of the grading, irrigation and finishing and will
oversee the awarding of the construction contract. Milton Abell, president of
the Company's subsidiary, Classic Golf Management, designed the Hickory Stick
Project and will be supervising the construction and the awarding of any
contract. The Environmental Impact Report and Specific Plan for Camarillo Creek
was approved by the Ventura County Board of Supervisors in October, 1997. An
environmental group's litigation against the Company, Ventura County and CAMP (a
partnership which intends to build a 16,000-seat amphitheater adjacent to the
golf course) has delayed this project. The result of this suit will determine
when the Army Corps of Engineers issues the final wetlands permit, which will
allow construction to proceed.
In October, 1997 the Company completed its acquisition of Classic Golf
Management and purchased the assets of Classic Golf Shops. Prior to November
1997 the Company's primary income was from rental properties. The Company
divested itself of all of those properties by April 1, 1998 in order to focus on
its golf management business.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1998 COMPARED TO THREE MONTHS ENDED APRIL 30, 1997
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The majority of the increase in total revenues for the second quarter
from $44,570 in 1997 to $386,203 in 1998, was generated from revenues related to
the acquisition of Classic Golf Management and the sale of two rental
properties. The unusual severity of the weather in the Atlanta, Georgia area
impacted and reduced the expected revenues from Classic Golf Management.
The Company's expenses were $381,435 in the second quarter of 1998, up
from $31,409 in 1997. Most of the increase was attributable to the recently
acquired operations of Classic Golf Management. Operating expenses were $14,096
in 1997 and $339,563 in 1998. General and administrative expenses of $10,987 in
1997 were 25% of revenue and 35% of total expenses and in 1998 expenses of
$41,872 were 11% of revenue and 11% of total expense.
The resulting net profit for the three-month period was down from
$13,161 in 1997 to $4,768 in 1998.
RESULTS OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1998 COMPARED TO SIX MONTHS ENDED APRIL 30, 1997
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The primary increase in revenues, for the first six months of 1998 from
the first six months in 1997, was generated from the acquisition of Classic Golf
Management and the sale of two rental properties. The revenues in 1998 were
$795,867 and $62,305 in 1997. The revenues in 1998 were lower than expected by
approximately $90,000 because of the severe weather in the Atlanta, Ga. area
caused by "El Nino".
The Company's expenses for the first six months of 1998 were $811,617,
up from $74,502 in 1997. Most of this increase was attributed to the acquisition
of Classic Golf Management.
The resulting loss in 1998 increased $3,553 to ($15,750) from ($12,197)
in 1997.
CAPITAL AND LIQUIDITY RESOURCES
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Historically the Company has been undercapitalized. The Company has
financed itself from the cash flow of operations, the sales of two of its
properties and loans from the principal stockholder. The Company anticipates,
based on current plans and assumptions relating to its operations, that the
proceeds of the privately raised capital, together with the Company's existing
business and cash generated from operations, should be sufficient to satisfy the
Company's contemplated cash requirements for at least 18 months. There can be no
assurance, however, that the Company will not require additional cash during or
after such 18-month period.
An anticipated positive cash flow from Classic Golf Management of
approximately $200,000 in 1998 should eliminate the need to further borrow from
the principal stockholder. The long-term debt of $767,000 incurred from the two
rental properties was eliminated by their sale in the second fiscal quarter of
1998.
The Company estimates that it will incur additional capital
expenditures of approximately $9,500,000 during the next fifteen months in
connection with the acquisition and construction of golf courses. $8,000,000 is
to be provided by construction loans from third party lenders, of which none
have yet been obtained. In connection with the raising of this needed capital
the Company entered into a financial consulting agreement with Equisource, Inc.
formerly known as PJM Trading Company to provide financial, management and
consulting services to the Company for a period of five years. Pursuant to that
agreement the Company will issue 625,000 shares of its common stock as payment
for the services to be rendered.
<PAGE>
SEASONALITY
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The golf industry is seasonal in nature because of weather. This is the reason
the Company has thus far concentrated on those parts of the country that do not
experience a severe winter. The continuation of play through the winter months
allows for continuity in financial performance. Unfortunately, the "El Nino"
storms produced unusual weather conditions in 1997 and 1998 in the Atlanta,
Georgia area, which resulted in, estimated lost net income of approximately
$70,000.
FORWARD-LOOKING STATEMENTS
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The forward-looking statements herein are based on current expectations that
involve a number of risks and uncertainties. Such forward-looking statements are
based on assumptions that the Company will have adequate financial resources to
fund the development and operation of its business, and there will be no
material adverse change in the Company's operations or business. The foregoing
assumptions are based on judgments with respect to, among other things,
information available to the Company, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the Company's
control. Accordingly, although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any such assumption
could prove to be inaccurate and therefore there can be no assurance that the
results contemplated in the forward-looking statements will be realized. There
are a number of other risks presented by the Company's business and operations
which could cause the Company's financial performance to vary markedly from
prior results or results contemplated by the forward-looking statements.
Management decisions, including budgeting, are subjective in many respects and
periodic revisions must be made to reflect actual conditions and business
developments, the impact of which may cause the Company to alter its capital
investment and other expenditures, which may also adversely affect the Company's
results of operations. In light of significant uncertainties inherent in
forward-looking information included in this quarterly Report on Form 10QSB, the
inclusion of such information should not be regarded as a representation by the
Company or any person that the Company's objectives or plans will be achieved.
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
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(a) On or about May 30, 1998, the Company sold 502,500
units. Each unit consisted of two shares of
Convertible Preferred Stock, $.90 par value and One
Five Year Warrant to Purchase One Share of Common
Stock.
(b) The units were sold to 12 Accredited Investors.
(c) The units were sold for $2 per unit. The aggregate
offering price received was $1,005,000. Commissions
of $80,400 were paid in connection with the sale.
(d) The securities sold were exempt under Section 4(2) of
the Securities Act in that they were sold to 12
Accredited Investors each of whom represented they
were purchasing for their own account, for investment
only and not with a view toward the resale or
distribution thereof.
(e) The units sold consisted of the following convertible
securities:
PREFERRED STOCK. Each share of Preferred Stock sold receives a five percent (5%)
dividend, is entitled to one-half vote with the Common Stock on any matters
submitted to the stockholders generally; is redeemable after the third
anniversary of its issuance at one dollar per share plus any accrued and unpaid
dividends, has a liquidation preference of one dollar per share; is convertible
at the option of the holder of such shares into Common Stock on the basis of
each share of Preferred Stock shall be convertible into that number of shares of
Common Stock as shall equal an amount equal to $1.00 divided by 75% of the
average bid price for the Common Stock in the public market in which it trades
for the three (3) days prior to the date of conversion (but in no event less
than 0.625 per share of Common Stock) (the "Conversion Price"), subject to
certain adjustments. No more than 400,000 shares of Preferred Stock (i.e. one
dollar per Preferred Share) may be converted in any one-week period (on a first
come, first served basis). In the event the underlying Common Stock has not been
registered with the SEC by December 30, 1998, then the Company will issue an
additional ten percent (10%) of shares of Common Stock to each then holder of
the Preferred Stock, or if previously converted, to the holder of the underlying
Common Stock.
WARRANTS. Each Warrant entitles the registered holder to purchase
from the Company one Common Share of the Company at $3.125 per share for a
period of five years from May 30, 1998.
The exercise price and the number of Common Shares or other securities
purchasable upon exercise of any Warrants and the number of Warrants are subject
to adjustment upon the occurrence of certain events, including the issuance of
Common Stock for a consideration of less than the Market Price (as defined in
the Warrant Agreement) of the shares of Common Stock or as a dividend to the
holders of all outstanding Common Stock; or subdivide, combine, the Common
Stock. No adjustment in the exercise price will be required to be made with
respect to the Warrants until cumulative adjustments amount to $0.01 or more;
however, any such adjustment not required to be made will be carried forward and
taken into account in any subsequent adjustment.
In the event of any reclassification, capital reorganization, or other similar
change of outstanding Common Stock, any consolidation or merger involving the
Company (other than a consolidation or merger which does not result in any
reclassification, capital reorganization or other similar change in the
outstanding Common Stock), or a sale or conveyance to another corporation of the
property of the Company, as or substantially as, an entirety, each Warrant will
thereupon become exercisable only for the kind and number of shares of stock or
other securities, assets, or cash to which a holder of the number of shares
Common Stock purchasable (at the time of such reclassification, reorganization,
consolidation, merger or sale) upon exercise of such Warrant would have been
entitled upon such reclassification, reorganization, consolidation, merger or
sale. In the case of a cash merger of the Company into another corporation or
any other cash transaction of the type mentioned above, the effect of these
provisions would be in that the holder of a Warrant would thereafter be limited
to exercising such Warrant at the exercise price in effect at such time for the
amount of cash per share that a Warrant holder would have received had such
holder exercised such Warrant and received Common Stock immediately prior to the
effective date of such cash merger or transaction. Depending upon the terms of
such cash merger or transaction, the aggregate amount of cash so received could
be more or less than the exercise price of the Warrant.
<PAGE>
The Warrant Agreement contains provisions permitting the Company without the
consent of any Warrant holder to supplement the Warrant Agreement in order to
cure any ambiguity, to correct any provision contained therein which may be
defective or inconsistent with any other provisions therein, or to make any
other provisions which the Company may deem necessary or desirable and which
does not adversely affect the interests of the Warrant holders.
REGISTRATION RIGHTS. The shares of Common Stock into which the Preferred Stock
and Warrants will be convertible or exercisable have certain registration rights
under the Securities Act. The Company has agreed to promptly take steps to
register the Common Stock into which the Preferred Stock offered hereby is
convertible and the Warrant Shares are exercisable. All such shares of Common
Stock will be included in the registration at no cost, except standard broker
commissions or discounts. In the event said registration is not effective within
six (6) months of the date hereof then the Company will issue to each then
holder of the Preferred Stock, or if previously converted, to the holder of the
underlying Common Stock acquired hereby an additional ten percent of shares of
Common Stock.
<PAGE>
SIGNATURES
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Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned hereto
duly authorized.
CEC Properties, Inc.
By: /s/ Paul Balalis
-----------------------
Paul Balalis
President
By: /s/ Don Norbury
-----------------------
Don Norbury
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> APR-30-1998
<CASH> 21,336
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 523,529
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 523,529
<CURRENT-LIABILITIES> 470,749
<BONDS> 0
0
0
<COMMON> 129,892
<OTHER-SE> (77,111)
<TOTAL-LIABILITY-AND-EQUITY> 523,529
<SALES> 631,505
<TOTAL-REVENUES> 631,505
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 753,285
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (121,780)
<INCOME-TAX> 0
<INCOME-CONTINUING> (121,780)
<DISCONTINUED> 106,030
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,750)
<EPS-PRIMARY> (0.009)
<EPS-DILUTED> 0.008
</TABLE>
