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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1998 Commission File No.
CEC PROPERTIES, INC. 0-188
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(Name of small business issuer in its charter)
DELAWARE 13-1919940
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1500 W. BALBOA BLVD., SUITE 201, NEWPORT BEACH, CA 92663
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(Mailing address) (Zip Code)
(949)673-2282
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(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE
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(Title of Class)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the 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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|
State issuer's revenues for its most recent fiscal year $1,377,078.00.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock as of January 25, 1999, which was
$3,497,520.00.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS JANUARY 25, 1999
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Common Stock, $.01 par value 12,911,848
DOCUMENTS INCORPORATED BY REFERENCE
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None.
Transitional Small Business Disclosure Format:
Yes No X
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS.
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BUSINESS
BACKGROUND. CEC Properties, Inc., a Delaware corporation (the
"Company") was incorporated in 1960. For many years prior to 1995, the Company
was inactive. In 1995, Paul Balalis, the Company's largest stockholder (see
"Item 12. Certain Relationships and Related Transactions") acquired control of
the Company. Shortly thereafter Mr. Balalis contributed three small
multi-family-type commercial residential real estate parcels to the Company.
On October 1, 1998, the Company acquired substantially all of the
assets of First Golf Corporation, a South Dakota corporation located in Tempe,
Arizona. First Golf manages the construction of golf courses and has built 25
courses since 1987, most recently having completed Harbor Links in Nassau
County, Long Island, New York. The assets acquired consist primarily of nine
contracts and proposals for future construction of golf courses. Construction is
in progress as to three of those contracts. Additionally, the Company assumed
management of four courses then being managed by First Golf. The Company paid
$125,000 in cash and agreed to pay an additional $75,000 on May 1, 1999. The
Company also issued 640,000 of its shares of Common Stock of which 336,000 were
pledged to be delivered over the next two years based upon the financial
performance of the First Golf assets. The Company may be required to issue
additional shares depending upon the price of the Company's stock on or about
October 31, 2000. As a result of these contingencies the amount of shares
ultimately delivered may be reduced by up to 336,000 shares or increased by as
much as an additional 445,440 shares.
In October, 1997 the Company acquired all of the outstanding stock of
Classic Golf Management, Inc., a privately held Georgia corporation, which
manages two golf courses in Georgia. The Company paid $103,250 cash down and
delivered 29,500 shares of Common Stock to Milton Abell (see "Item 12. Certain
Relationships and Related Transactions"). Additionally, the Company agreed,
subject to certain conditions, to pay up to an additional $14,750 and deliver an
additional 14,750 shares of Common Stock in November 1998 and October 1999. The
November 1998 delivery of cash and stock was completed. Concurrently, the
Company also acquired certain assets of Classic Golf Shops, Inc., an entity
owned by Mr. Abell. Classic Golf Shops is a golf apparel and accessory shop
located adjacent to the managed golf courses. The Company also acquired certain
assets owned by Mr. Abell as follows: equipment and trade name of "Golf 101 for
a golf teaching method and equipment and a tradename of "Hydroturf" for a golf
greens maintenance program. The assets and tradenames were not providing revenue
or part of a business activity. They were acquired in exchange for $71,750 cash
and 20,500 shares of Common Stock. Additionally, the Company agreed, subject to
certain conditions, to deliver up to an additional 20,500 shares of Common Stock
in two equal annual installments to be delivered in November, 1998 and October,
1999. The November 1998 delivery was completed. The Company also agreed, in both
transactions, to pay the seller any differential between the average publicly
quoted price of the Common Stock in October, 2000 and $3.00 per share. Mr.
Balalis personally guaranteed payment to Mr. Abell pursuant to these
transactions (See "Item 12. Certain Relationships and Related Transactions").
Funds necessary for the transactions came from the Company's general working
capital except as to $59,000 which was loaned to the Company by Mr. Balalis (see
"Item 12. Certain Relationships and Related Transactions").
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GENERAL. The Company is currently engaged in the management of golf
courses with a current portfolio of six (four as of January 1, 1999) golf
properties consisting of public (or daily fee) courses (see "Item 2. Description
of Property"). The Company's courses are in the Atlanta, Georgia area, northern
Arizona and Las Vegas, Nevada area, each of, which have large golfing
populations and an attractive climate. Additionally, the Company has an option
for a 50 year lease to construct an 18 hole golf course in the Hickory Stick
area of Atlanta, Georgia. The clustering of two courses each in the Atlanta,
Georgia, northern Arizona, and Las Vegas, Nevada areas enables the Company to
efficiently manage its courses and improve profitability by sharing many
administrative functions and capitalizing on joint marketing opportunities and
economies of scale.
The Company's business consists primarily of operating golf courses and
related facilities, which include greens fees, food and beverage concessions,
golf cart rentals, retail merchandise sales and teaching. The Company's six
courses and four pro shop facilities are leased (subject to short-term leases of
up to three years). While the leases are short-term historical pattern is to
renew the leases so long as the Company performs in a satisfactory manner. The
Company has no reason to believe any of its present leases will not be renewed,
however, there is always the possibility that a lease will not be renewed, which
could have a significant negative impact on the Company.
The Company manages its courses on various bases ranging from fixed
annual fees with incentive bonuses with the landlord municipality paying all
expenses to the Company receiving a percentage of revenues. The Company
generally retains its revenues and is responsible for its expenses in connection
with any of its adjacent pro shop operations, teaching centers, golf cart
rentals or other related enterprises operated by the Company at its managed
courses.
The proposed Hickory Stick course in Cherokee County Georgia, which the
Company intends to construct, will be subject to a 50-year lease. The Hickory
Stick agreement provides that it may be terminated by the county, without cause,
subject to payment of termination fees. The Hickory Stick course, near Atlanta,
Georgia, was designed by Milton Abell (see "Item 11. Security Ownership of
Certain Beneficial Owners and Management"), who will also be the supervisor of
construction.
The National Golf Foundation states that golf courses in the United
States generated in excess of $1.5 billion in annual revenue on all golf related
items. The ownership and operation of golf courses in the United States is
highly fragmented, with less than five percent of golf courses owned and
operated by multi-course management companies. The Company believes that the
majority of golf course operators, including real estate developers and
municipalities, are generally involved in golf course management because the
golf course is an important component of their development or community, but
that such operators do not have professional golf course management experience.
As a result, owners are often interested in selling or leasing the golf
facilities to third-party operators such as the Company. These owners frequently
place significant emphasis on experience and reputation for quality management
in selecting an owner or an operator, and the Company believes that through its
acquisition of Classic Golf and First Golf and employment of its management (see
"Item 11. Security Ownership of Certain Beneficial Owners and Management') its
reputation in these areas will provide it with opportunities.
INDUSTRY OVERVIEW. There are three general types of golf courses: daily
fee courses, private county clubs and resort courses. Public courses derive
revenue primarily from greens fees, golf cart rentals, retail (pro shop) sales
and food and beverage sales. Because the majority of golf course operating costs
is fixed, revenue and operating profit are generally maximized at public courses
by generating the maximum number of golf rounds played. Private courses derive
revenue primarily from initiation fees, monthly membership dues, guest greens
fees and food and beverage sales. Maximizing the number of membership sales and
the associated monthly dues cash flow stream maximizes revenue and operating
profit at private courses. In addition, certain semi-private courses offer
limited access to the golf facilities to the public in order to maximize
revenue.
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The Company believes certain demographic characteristics will increase
the demand for golf in the future, thereby benefiting golf course operators.
Accordingly, the Company believes that total rounds played will increase as the
golfing population ages. The Company believes that the highest golf
participation rates are found among individuals aged 18 to 49. However,
individuals over 50 played a substantially greater number of rounds of golf per
year relative to individuals in other age brackets. Accordingly, assuming that
golf participation rates of 18 to 49 year old golfers remain at current levels,
the Company believes that those 18 to 49 year old golfers will increase the
number of rounds played per year as they age.
Based upon reports from the National Golf Foundation there were 25.0
million golfers in the United States who played approximately 477 million rounds
of golf during 1996. The Company believes that core golfers (those that play
more than eight rounds per year) played a substantial majority of these rounds.
The Company targets these core golfers by holding special golf events and
improving reservation systems.
The Company believes that golf course construction in its markets
generally has been constrained as a result of several factors. Included are the
difficulty in obtaining capital for real estate development, the significant
land required to build a golf course and related facilities (approximately 150
acres) and increasing environmental regulation, particularly with regard to the
availability of water in dry climate areas.
BUSINESS STRATEGY. The Company's strategy is to grow its revenue and
cash flow by improving operations and financial performance of its existing
portfolio of golf courses primarily by selectively upgrading the facilities and
identifying and entering into management arrangements or acquiring courses which
will benefit from the Company's management expertise. Key elements of the
Company's operating strategy include:
MANAGEMENT AND ACQUISITIONS. The Company initially intends to develop and expand
its operations in the Atlanta, Georgia area through the development of a new
18-hole golf course. The Company intends to further expand its operations
elsewhere in the United States through acquisitions or other arrangements with
companies involved in the golf industry. In this regard, the projects undertaken
by First Golf afford the Company with the opportunity to obtain a management
relationship with respect to the courses for which the Company is performing
construction management. Currently, the Company is in the process of
Construction Management for courses in Oregon, New Jersey and South Carolina.
During the evaluation of a potential location for development or acquisition,
the Company considers carefully a number of important issues. The ease of access
to the course, the conditions and appeal of the immediately surrounding land,
the proximity of the competition and the climatic conditions which affect both
potential revenue as well as the cost of maintaining the course. The population
base of the surrounding metropolitan area must be large enough to support both
the potential acquisition as well as its competition. If the proposed
acquisition is a resort-oriented course, the Company also evaluates the size of
and trends in the tourist population. The demographic make-up of the population
must be such that a sufficient number and density of golfers are present. In its
evaluation of the operating potential of an existing course, the Company looks
for correctable operational deficiencies and potential facility improvements
which can be made with a moderate amount of capital investment. These
improvements must have a high likelihood of enhancing revenue and reducing
costs, as well as deficiencies in the course's position and reputation in the
market that can benefit from a cohesive marketing program. The competition is
evaluated by examining the condition and appeal of the local courses, the
position and reputation in the local market and the likely potential clientele,
and finally, the price points at which the competition operates.
The following summarizes the primary components of the Company's strategy:
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CLUSTERING OF COURSES. The Company will seek to develop or acquire courses in
geographic clusters near densely populated metropolitan markets. The clustering
strategy is designed to facilitate management and marketing and improve the
profitability of each course because of the ability to share administrative and
operating expenses. In addition, clustering allows the Company to operate
facilities with fewer on-site management personnel by consolidating several
course-level management jobs or eliminating them altogether in favor of a single
regional or headquarters position. For example, a cluster provides
cross-marketing opportunities such as exchanging play privileges, advertising
multiple properties in a single campaign and promoting tournament play at a
course within the cluster.
FOCUS ON FAVORABLE GOLF MARKETS. The Company targets golf courses in markets
with characteristics, which it believes are favorable to golf course ownership
and management. For example, the Company concentrates on courses convenient to
metropolitan areas with dense populations but relatively few golf courses in
relation to the size of the golfing population. In addition, the Company focuses
on markets with a high number of playable days per year, enabling the Company to
maximize revenue and course utilization and thereby capitalize on the operating
leverage inherent in golf course management.
To date, the Company primarily has targeted courses in Arizona, Georgia and
Nevada. Maximizing revenue is an important component of profitability due to the
high fixed cost nature of golf course operation, and these markets typically
have minimal weather risks and a high number of playable days per year (i.e.
high capacity). For instance, because of better weather conditions the number of
playable days in Arizona and Nevada is substantially greater than in the upper
Midwest. Thus, the Company believes that average rounds played per course on
Arizona and Nevada golf courses are greater than the national average.
Additionally, greens fee pricing in these markets tends to be higher than the
national average because of shortages of supply relative to demand and the
impact of tourists on pricing. Seasonal tourists have fairly inelastic demand
because greens fees represent only a relatively small portion of overall
vacation expenses. Furthermore, in Arizona, Nevada and Georgia age demographics
in these markets and the abundance of retirees with ample leisure time
contribute to a high demand for golf.
MARKET POSITIONING. The Company intends to identify poorly managed but
well-located golf courses that have the potential to generate substantial
revenues under professional management. The Company undertakes a comprehensive
review of local competition, identifying greens fees, cart fees, private cart
policies, and other key revenue generators. In such cases, the Company may be
able to increase revenue merely by raising prices to reflect market conditions
and the course improvements implemented by the Company's management. The Company
intends to follow this marketing program.
APPEAL TO CORE GOLFING POPULATION. The Company targets core golfers in its
markets (defined by the Company to be golfers who play more than eight rounds
per year). The Company believes that these golfers represent approximately
one-half of the golfers in the United States but play more than three-fourths of
the rounds. The Company believes that core golfers represent a stable demand for
golf and are generally more willing to pay higher greens fees than the golfing
population as a whole. These golfers also tend to spend more time at a golf
facility and therefore generate higher ancillary revenues.
FACILITIES UPGRADES. Following its entry into a management agreement or
acquisition of an existing golf course, the Company will evaluate the option to
upgrade or improve the facility to significantly improve its appeal to
customers. Where appropriate, the Company may add additional courses (including
nine-hole additions) to existing facilities to increase course capacity and
utilization and invest in major clubhouse renovations to support increased fees.
These expenditures are generally non-recurring.
REDUCING ADMINISTRATIVE OVERHEAD. The Company continually seeks opportunities to
improve its margins by consolidating administrative functions and eliminating
duplicative personnel at its courses in order to reduce operating costs.
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ECONOMIES OF SCALE. As a multi-course operator, the Company is able to achieve
overhead and operating savings not available to owners of individual properties.
The Company's volume purchasing ability should also enable it to achieve savings
not available to smaller buyers in the purchase of almost all retail merchandise
and maintenance equipment. When the Company expands to a location not adjacent
to another location it is anticipated that certain economies will be lost,
however, the Company plans to locate additional locations in that same region in
order to again be able to achieve economies associated with regional management.
EQUIPMENT UPGRADES. The Company attempts to identify strategic opportunities for
investment which require relatively small amounts of capital in purchasing or
leasing maintenance equipment in order to improve the facility and
simultaneously reduce labor or other operating expenses.
MANAGING WATER COSTS. At its Arizona and Nevada courses, water is a significant
component of operating costs. The Company ensures that its irrigation systems
are as efficient as possible, and explores alternatives to reduce the cost of
water. For example, where possible, the Company will uses treated effluent water
or constructs wells, rather than utilize more expensive municipal water for
course irrigation.
MARKETING. The Company's marketing programs are designed to capitalize
on the economies of scale provided by its strategy. Marketing efforts primarily
consist of advertising directed at maximizing tee-time utilization. Special
promotions such as men's and women's programs and special event sales are geared
toward attracting new customers and maximizing utilization at off-peak hours.
The Company maintains a website which can be reached at www.cecgolf.com.
COMPETITION. The Company competes for players with existing golf
courses. The Company believes that it competes on the basis of overall quality
of its facilities, which is a function of customer service, the quality and the
state of maintenance of the facilities as well as available amenities.
The management believes that as a result of the completed acquisitions
of Classic Golf and First Golf it enjoys a favorable reputation in the industry.
The Company principally competes for the management of golf courses with a small
number of national golf course management companies. Included are the
Cobblestone Golf Group, Inc., American Golf Corporation, National Golf
Properties, Inc. (a publicly traded real estate investment trust) and Club
Corporation International as well as numerous smaller, regional companies, many
of whom have more assets than the Company.
EMPLOYEES. As of October 31, 1998, the Company employed 103 persons
full time. Additionally, the Company contracts with an unrelated third party for
the services of 65 persons at its Georgia golf course operations. Two full-time
professional instructors are employed at each course. The Company believes that
its employee relations are good. None of the Company's employees are represented
by a labor union.
GOVERNMENTAL REGULATION.
ENVIRONMENTAL MATTERS. Operations at the Company's golf courses involve the use
and storage of various hazardous materials such as herbicides, pesticides,
fertilizers, motor oil and gasoline. Under various federal, state and local
laws, ordinances and regulations, an owner or operator of real property may
become liable for the costs of removing such hazardous substances that are
released on or in its property and for remediation of its property. Such laws
often impose liability regardless of whether a property owner or operator knew
of, or was responsible for, the release of hazardous materials. In addition, the
presence of such hazardous substances, or the failure to remediate the
surrounding soil when such substances are released, may adversely affect the
ability of a property owner to sell such real estate or to pledge such property
as collateral for a loan. Prior to acquiring golf courses, the Company intends
to commission preliminary environmental assessments ("Phase I assessments") to
evaluate the environmental condition of, and potential environmental liabilities
associated with, such properties. Phase I assessments generally consist of an
investigation of environmental conditions at the subject property (not including
soil or groundwater sampling or analysis), as well as a review of available
information regarding the site and conditions at other sites in the vicinity.
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The Company's management does not believe its present properties have problems
which would have a material adverse effect on the Company's business, assets or
results of operation, and the Company believes that it is in material compliance
with all environmental laws, ordinances and regulations applicable to its
properties and operations. However, the Company did not obtain a Phase I study
with respect to its present properties, although it did receive certain
representations and warranties from the prior owner in connection with its
acquisition of Classic Golf and the assets of First Golf Corporation. In any
event, assurance cannot be given that the Phase I assessments reveal all
potential environmental liabilities, whether or not material, and whether such
issues may not arise in the future.
GENERAL. The Company is subject to the Fair Labor Standards Act and various
state laws governing such matters as minimum wage requirements, overtime and
other working conditions and citizenship requirements. A significant number of
the Company's golf course personnel receive the federal minimum wage, and
increases in the minimum wage would increase the Company's labor costs. In
addition, the Company is subject to certain "dram-shop" laws, which provide a
person injured by an intoxicated individual the right to recover damages from an
establishment that wrongfully served alcoholic beverages to the intoxicated
individual. The Company is also subject to the Americans with Disabilities Act
of 1990, as to which the Company believes it is in compliance. The Company
believes it is operating in substantial compliance with applicable laws and
regulations governing its operations.
INSURANCE. The Company carries property and casualty insurance under
umbrella policies in such amounts and with such coverage as the Company believes
to be adequate.
ITEM 2. DESCRIPTION OF PROPERTY.
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<TABLE>
GOLF COURSE PORTFOLIO. MARKET AND DESIGN DATA. MARKET AND DESIGN DATA.
The following tables set forth certain information regarding the Company's golf
course properties, including a description of each course and a summary of the
facilities and services available.
<CAPTION>
COURSE NAME DATE ACQUIRED LOCATION TYPE OF OPERATION TYPE OF COURSE
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<S> <C> <C> <C> <C>
City Club Marietta 11/01/91(1) Marietta, Georgia Management 18 Hole public
Sugar Creek 11/01/93(1) DeKalb County, Georgia Leased 18 Hole public
Lake Powell 7/01/95(2) Page, Arizona Management 27 Hole public
Santa Fe Station 1/9/96(2) Winslow, Arizona Management 9 Hole public
Calvada Valley Country Club 2/1/96(2) Pahrump, Nevada Management (2) 18 Hole public
</TABLE>
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1 Represents the date Classic Golf acquired or commenced management of
operations of the course.
2 Represents the date First Golf acquired or commenced management of
operations of the course.
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CITY CLUB MARIETTA is an upscale public course associated with a 250-room hotel
and conference center. It offers a full range of amenities including a driving
range, a pro shop offering merchandise, a teaching center and a snack bar. The
staff includes regionally known and active members of the PGA and the LPGA.
SUGAR CREEK is an 18-hole public course and tennis center leased from DeKalb
County offering a full range of amenities. Among the amenities are a driving
range, pro shop offering merchandise, tennis courts, a snack bar and golf and
tennis lessons.
CALVADA VALLEY COUNTRY CLUB consists of two 18 hole public courses located just
outside of Las Vegas, Nevada. Among the amenities are a pro shop, driving range
and snack bar. As of January 1, 1999, the lessor terminated the contract
whereupon a termination fee to the Company of $50,000 became due and payable.
The owner's inability to make the termination payment has permitted the Company
to commence discussions with the owner to enter into a new lease with an option
to acquire the property. However, there can be no assurance that an acceptable
arrangement for the Company to continue to operate the golf courses will be
reached.
LAKE POWELL is a 27 hole public course located in Page, Arizona. Among the
amenities are a driving range, golf cart rentals, pro shop and food and
beverage. The course overlooks scenic Lake Powell and has beautiful vistas of
the lake and surrounding area.
SANTA FE STATION is a nine hole public course located in Winslow, Arizona. Among
the amenities are a pro shop and snack bar.
The Company's leases are all short-term (up to three years). Historically, such
leases are renewed on substantially the same basis so long as the Company's
performance is satisfactory. While renewal discussions are almost always in
progress the Company has no information which would indicate the leases will not
continue to be renewed on the same or substantially similar basis as exists.
However, there can not be a guaranty of such renewal and the loss of any lease
could be a significantly material adverse event.
OFFICE FACILITIES. The Company's present corporate offices are in
Newport Beach, California and are owned by Paul Balalis, president, chief
executive officer and principal stockholder of the Company. The Company pays
$2600 per month on a month to month basis. The Company believes this rate is
currently less than the fair market value. Mr. Balalis is under no obligation to
continue to provide the premises to the Company, although he has not indicated a
present intention to change the terms of the arrangement. The Company also
retains an office in Tempe, Arizona which is leased on a month to month basis at
$1500 per month.
ITEM 3. LEGAL PROCEEDINGS.
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There are no legal proceedings pending, except that the Company
continues to be named in an action filed by the California Native Plant Society
and the Environmental Defense Center in the California Superior Court in Ventura
County Case No. 176509 which seeks to stop the development of a golf course for
which the Company at one time held an option to develop but has transferred that
option to an unrelated third party. While the Company continues to be named as a
defendant it has no interest in the matter and has requested to be dismissed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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Inapplicable
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PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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The Company's Common Stock is traded in the over-the-counter market on
the OTC Electronic Bulletin Board under the symbol "CECI". The following table
sets forth, for the period indicated, the high and low bid and ask prices for
the Common Stock, as reported by the National Quotation Bureau, Inc. Such
quotations reflect the inter-dealer prices without adjustment for retail
mark-up, mark down or commission, and may not necessarily represent actual
transactions.
BID ASK
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Fiscal 1997 HIGH LOW HIGH LOW
1st quarter .31 .13 .63 .44
2nd quarter .56 .25 1.06 .44
3rd quarter .50 .38 .75 .38
4th quarter .69 .34 .84 .47
Fiscal 1998
1st quarter .68 .48 .87 .53
2nd quarter 2.50 .53 3.00 .81
3rd quarter 2.00 .53 2.09 .87
4th quarter .93 .46 1.12 .68
On January 25, 1999, the last reported bid and ask price of the Common Stock by
the National Quotation Bureau, Inc., was $0.59 and $0.75. As of January 25,
1999, there were approximately 4,500 holders of record of the Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
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BACKGROUND.
The Company was substantially reorganized in 1995. In November 1997,
the Company adopted a plan to dispose of its remaining rental properties and
concentrate on the Company's primary focus, the golf industry. In fiscal 1998,
the remaining rental properties were sold. The Company manages and maintains
golf courses and golf driving ranges through its wholly owned subsidiary,
Classic Golf Management. It currently has six management contracts which may be
operating contracts where the Company owns the pro shop, and the teaching
center, or pays a fee to a municipality landlord in a transaction which is
similar to a triple net lease. The Company generally receives substantially all
of the revenue from the carts, pro shop, driving range and lessons and pays
substantially all expenses associated with those operations. The Company is
focusing its efforts on bidding and obtaining new management contracts and
acquisition of management companies.
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The Company presently retains the rights to the Hickory Stick golf
course to be built in Atlanta, Georgia. Milton Abell, president of the Company's
subsidiary, Classic Golf Management will be supervising the construction and the
awarding of any contracts.
In October 1998, the Company acquired the assets of First Golf
Corporation, a company primarily engaged in the management of construction of
golf courses. In this regard First Golf has existing contracts for construction
management on three courses to be built over the next two years. Additionally,
First Golf is in various stages of discussions with respect to an additional
eight courses. However, the results of such discussions can not be predicted at
this time and there is no guarantee that any of such discussions will result in
a contractual management arrangement.
In October 1997, the Company acquired Classic Golf Management and
purchased the assets of Classic Golf Shops. Prior to October 1997 the Company's
primary income was from rental properties. The Company divested itself of all of
those properties in order to focus on its golf operations. As such, the revenues
and expense from investment properties are disclosed as income from discontinued
operations in the income statement ended October 31, 1997. Both properties were
sold during Company's second fiscal quarter of 1998.
The Company is in the process of consolidating its accounting functions
into its Newport Beach headquarters. The proposed program is currently being
tested and should be implemented by the second quarter of fiscal 1999.
RESULTS OF OPERATIONS - YEAR ENDED OCTOBER 31, 1998 COMPARED TO YEAR ENDED
OCTOBER 31, 1997
The Company had a loss in 1997 of $94,724 and a loss of $99,431 in
1998. The equivalent net loss per common share was $(0.01) in 1997 and $(0.01)
in 1998. The 1997 loss was attributed to the Company's discontinued rental
property business whereas 1998 represents its focus in the golf business.
The Company's revenue in 1998 was $1,377,078 compared to no revenue in
1997 from its discontinued rental property business. The expenses increased by
1048% from $146,189 in 1997 to $1,532,235 in 1998.
The largest increase in expense was in General and Administrative of
342% to $499,229 from $146,189. The majority of this increase resulted from the
costs in connection with the newly acquired golf businesses.
LIQUIDITY AND CAPITAL
Historically the Company has been undercapitalized. The Company has
financed itself from the cash flow of operations, the sales of its properties
and loans from the principal stockholder. In May 1998, the Company raised
approximately $725,000 after commissions and expenses in connection with its
private placement of convertible preferred stock. The Company anticipates, based
on current plans and assumptions relating to its operations, that the cash
generated from the Company's private placement and its existing operations,
should be sufficient to meet the Company's contemplated cash requirements for
its current business operations 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 for its current operations.
An anticipated positive cash flow from Classic Golf Management of
approximately $200,000 and approximately $1,300,000 from First Golf in fiscal
1999 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.
10
<PAGE>
The Company estimates that it will incur additional capital
expenditures of approximately $4,400,000 during the next twelve months in
connection with the acquisition and construction of golf courses. The Company
intends to obtain this capital through third party lending arrangements.
However, no such arrangements have yet been completed and there can be no
assurance that they will be completed or will be available on terms acceptable
to the Company.
SEASONALITY. 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 late 1997 and early 1998
in the Atlanta, Georgia area which resulted in estimated lost revenue of
approximately $190,000.
INFLATION
To date, inflation has not had a material effect on the Company's
operations.
FORWARD-LOOKING STATEMENTS
Certain information in this Memorandum may contain "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. All statements other than statements of historical fact are
"forward-looking statements" for purposes of these provisions, including any
projections of earnings, revenues or other financial items, any statements of
the plans and objectives of management for future operations, its ability to
successfully renegotiate leases, obtain new management contracts, any statements
concerning proposed new products or services, its ability to successfully obtain
financing as needed, any statements regarding future economic conditions or
performance and any statement of assumptions underlying any of the foregoing. In
some cases, forward-looking statements can be identified by the use of
terminology such as "may," "will," "expects," "plans," "anticipates,"
"estimates," "potential" or "continue," or the negative thereof or other
comparable terminology. Although the Company believes that the expectations
reflected in its forward-looking statements are reasonable, it can give no
assurance that such expectations or any of its forward-looking statements will
prove to be correct, and actual results could differ materially from those
projected or assumed in the Company's forward-looking statements.
Forward-looking statements are subject to inherent risks and uncertainties, some
of which are summarized in this section.
ITEM 7. FINANCIAL STATEMENTS.
- ------- ---------------------
The Financial Statements are attached hereto and begin at page F-1.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------------------------------------------------------------------
PAGE NO.
--------
Report of Independent Accountants F-1
Consolidated Balance Sheets at October 31, 1998 F-2
Consolidated Statements of Income for the
Years ended October 31, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity
for the years ended October 31, 1998 and 1997 F-5
Consolidated Statements of Cash Flows
for the years ended October 31, 1998 and 1997 F-6
11
<PAGE>
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
- ------- -----------------------------------------------------------
Not applicable.
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTER AND CONTROL PERSON;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
- ------- --------------------------------------------------------------
Directors serve a term of one year and then continue until their
successors are duly elected and qualified. The Company's Bylaws currently
provide for a Board of five. During the year ended October 31, 1998, the Board
of Directors held one meeting and took action by unanimous written consent on
one occasion. Each director who served during 1998 attended all of the meetings
of the Board held during such fiscal year. The following table sets forth
certain information concerning the directors and offers of the Company:
<TABLE>
<CAPTION>
FIRST ELECTED
NAME AGE POSITION TO SERVE
- ------------------------------- --------- ------------------------------------------------ ----------------
<S> <C> <C> <C>
Paul Balalis 59 Chairman of the Board of Directors, President 1995
and Chief Executive Officer
Donald Norbury 63 Vice President, Secretary and Chief Financial 1995
Officer
Thomas Quinn 57 Vice President, Operations 1997
Milton Abell 47 Vice President and President of Classic Golf 1997
W. Samuel Gunderson 41 Vice President and President of First Golf 1998
Corporation
Charles Packard 55 Director 1995
Frank P. Barbaro 55 Director 1995
Frederick Meyer 59 Director 1997
Sanford Feld 70 Director 1998
</TABLE>
PAUL BALALIS, has been the Chairman of the Board, president and principal
stockholder since April 1995. He is also, and since 1980 has been the chief
executive officer of Balalis Corporation, a Southern California real estate
development company. Between 1970 and 1971, Mr. Balalis served as executive vice
president and as a member of the Board of Directors of Elpac, a publicly traded
company involved in various lines of business including electronics, services to
the oil and gas industry, equipment leasing and tug boat operations. He has
served on the Board of Directors of Newport Harbor National Bank, Chairman of
the Newport Beach Planning Commission and the Orange County Lung Association.
Mr. Balalis holds a BSIM degree from Georgia Institute of Technology and an MBA
from Emory University.
DONALD NORBURY, has served as chief financial officer of the Company since 1995.
For the previous 27 years Mr. Norbury was engaged in private accounting. Mr.
Norbury holds a BBA and an MBA in finance.
12
<PAGE>
THOMAS QUINN, was appointed as an officer of the Company in 1997, and has over
30 years experience in electrical engineering and sales and marketing. During
1995 and 1996, Mr. Quinn owned a computer maintenance and sales company. For the
two prior years Mr. Quinn was an independent consultant. Between 1966 and 1985
he was project director for the first domestic satellite service and vice
president of sales and marketing for the computer service division at Western
Union. Between 1985 and 1990, he was vice president of sales and marketing and
for the last two years, general manager of First Data Resources. He also held a
general manager position at Decision Data Corp. between 1990 and 1991.
MILTON ABELL, has over 20 years experience in the Golf Industry. He has been
president of Classic Golf since 1986 and was appointed an officer of the Company
in connection with the acquisition of Classic Golf by the Company in 1997. Mr.
Abell is a member of the Professional Golfers of America and was elected three
times, the Association Director of the Golf Course Superintendents Association,
Georgia Chapter. Mr. Abell has been associated with many golf courses and clubs
in the Georgia area, both as a club professional and as the course
superintendent.
W. SAMUEL GUNDERSON, has more than 20 years experience in construction
operations for major landscaping, golf course construction, turn-key, design
build projects. He has overseen more than 60 golf course construction projects.
In, 1987, Mr. Gunderson founded First Golf Corporation with Wallace A. Gunderson
to specialize in turnkey development of golf courses. All of First Golf projects
have been developed, built and managed under Mr. Gunderson's direction. Prior to
establishing First Golf, Mr. Gunderson was founder and President of Golf, Inc. a
golf course construction firm. Mr. Gunderson has a B. S. degree in Business
Administration from Arizona State University.
CHARLES E. PACKARD, was appointed to the Board in 1995 as an independent
director, is currently executive vice president and chief financial officer of
Arnel and Affiliates. Mr. Packard has overview responsibility for Arnel
Management Company and Arnel's property management company and has been
associated with that company since 1977. He is a member of the Board of
Directors of Kaiser Resources, Inc., a Southern California based company with
financial interest in water distribution, real estate and solid waste landfill
sites. Mr. Packard holds a BBA and an MBA from the University of Toledo. He is a
member of the Orange County Metropolitan Board of the YMCA; member of the
Advisory Board, Chapman University School of Business and Economics; Trustee,
The Argyros Foundation, and a member of President Clinton's Advisory Council.
FRANK BARBARO, was appointed to the Board in 1995 as an independent director. He
is an attorney at law and a senior partner with the law firm of Horton, Barbaro
and Reilly since 1977. Mr. Barbaro graduated Cum Laude from the University of
Southern California and received the Legion Lex Scholarship to attend USC Law
School. Mr. Barbaro is presently chief executive officer of the Committee to
Preserve a Responsible Judiciary, which represents all sixty-four seated
Superior Court Judges in Orange County. In addition, he served as Chairman of
the Orange County Democratic Party.
SANFORD FELD, is President of Leafland Associates, Inc., incorporated in 1981 as
an affiliate of F.I.R.M. (Feld Investment and Realty Management). These
companies have engaged in syndication, development, management, acquisition,
financing and sales of multi-family, commercial and industrial real estate
throughout the United States and Puerto Rico. Mr. Feld is a founder, major
stockholder and serves on the Board of Directors of Flavor & Food Ingredients,
Inc. Mr. Feld is Chairman of the Far Hills, New Jersey Planning Board. He is a
major stockholder in 4 Front Technology and Romtech, Inc. He serves on the Board
of Directors of Stratus Corporation, a technical employment placement company
and Specialty Mortgage Corp. of Albuquerque, New Mexico.
FREDERICK MEYER, a consultant, was appointed to the Board in 1997. Previously he
has been the president and chief executive officer of Southern California
Healthcare Systems. He serves on the Boards of Directors of the Healthcare
Association of Southern California, California Healthcare Association, Blue
Cross of California, PrimeHealth of Southern California and has served on the
board of MetLife of California. He has been a director of Cohr, Inc., a publicly
traded company since January, 1996. Mr. Meyer received his BA and MBA from San
Jose State University. Mr. Meyer is the brother-in-law of Mr. Balalis.
13
<PAGE>
COMPLIANCE WITH THE SECURITIES EXCHANGE ACT OF 1934. Section 16(a) of the
Securities Exchange Act of 1934 requires the Registrant's directors and officers
and persons who own more than 10% of a registered class of the Registrant's
equity securities to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("SEC"). Directors and officers and greater
than ten percent stockholders are required by SEC regulation to furnish the
Registrant with copies of the reports they file. Based solely upon a review of
the copies of such reports and the written representations from certain persons
that certain reports were not required to be filed by such persons, the
Registrant believes that all its directors, officers and greater than ten
percent beneficial owners complied with all filing requirements applicable to
them with respect to transactions during fiscal 1998, except that Milton Abell
failed to report his acquisition of 75,000 shares in connection with the sale of
Classic Golf in October 1997, Frank Barbaro failed to report an acquisition of
1502 shares in April 1997, Frederick Meyer failed to report his acquisition of
14,600 shares acquired in 1968 and Thomas Quinn failed to report his initial
acquisition of 35,000 shares. All reports covering such shares have been filed.
ITEM 10. EXECUTIVE COMPENSATION.
- -------- -----------------------
SUMMARY COMPENSATION TABLE
--------------------------
Set forth below is the cash compensation paid by the Company during
1998 to its president. No other executive officer received during 1998
compensation which exceeded, on an annualized basis, $100,000.
ANNUAL COMPENSATION
-------------------
Other Annual
FISCAL YEAR SALARY ($) BONUS($) COMPENSATION
----------- ---------- -------- ------------
Paul Balalis 1998 0 ----- -----
1997 $6,000 ----- -----
OPTION GRANTS IN LAST FISCAL YEAR
---------------------------------
There were no options granted nor options held during the fiscal year
ended October 31, 1998, to or by the executive officer named in the Summary
Compensation Table hereinabove.
COMPENSATION OF DIRECTORS
-------------------------
The Company does not pay fees or remuneration to its directors for services on
its board of directors or any board committee, but the Company reimburses
directors for their out-of-pocket expenses incurred in connection with attending
meetings of the board.
EMPLOYMENT CONTRACTS
--------------------
In connection with the Company's subsidiary Classic Golf Management,
Inc. ("Classic Golf"). Classic Golf entered into a five-year employment
agreement expiring in 2002 with Milton Abell whereby he serves as president of
Classic Golf and receives base annual compensation of $80,000 and an annual
stock option bonus based upon the performance of Classic Golf.
In connection with the acquisition of the assets of First Golf
Corporation the Company's subsidiary First Golf Acquisition Corporation entered
into a five year employment agreement expiring in 2003 with W. Samuel Gunderson
whereby he serves as president of the Company's First Golf subsidiary and
receives base annual compensation of $168,000 and an annual bonus of cash or
stock options, at the Company's option, based upon the performance of the
subsidiary.
14
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------- ---------------------------------------------------------------
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as reported to the Company as of October
31, 1998, (i) by each person who is known to the Company to own beneficially
more than five percent of the outstanding shares of Common Stock, (ii) by each
director of the Company and (iii) by all officers and directors of the Company
as a group. Except as otherwise indicated, the Company believes the beneficial
owners of the Common Stock listed below, based on information furnished by such
owners, have sole investment and voting power with respect to such shares,
subject to community property laws where applicable.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME/ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENT OF COMMON STOCK(2)
- -------------------------------- -------------------------- --------------------------
<S> <C> <C>
Paul Balalis
1500 W. Balboa
Newport Beach, CA 92663 7,106,996(3) 51.9%
Balalis Corporation
1500 W. Balboa
Newport Beach, CA 92663 2,378,544(4) 17.3%
Donald Norbury
1500 W. Balboa
Newport Beach, CA 92663 310,000 2.2%
Thomas Quinn
1500 W. Balboa
Newport Beach, CA 92663 85,000(5) (6)
W. Samuel Gunderson
4409 South Rural Blvd.
Tempe, AZ 85282 445,440(7) 3.3%
Milton Abell
510 Powder Spring Street
Marietta, GA 30064 75,000 (6)
Charles Packard
24 Charlotte
Irvine, CA 150,000 1.0%
Frank Barbaro
31285 Camel Point
Laguna Beach, CA 26,502 (6)
Frederick Meyer
1300 East Green Street
Pasadena, CA 49,600(8) (6)
Sanford Feld
60 Lake Road
Far Hills, NJ 07931 220,000(9) (6)
All officers and directors as a
group (nine persons) 8,406,038(5,7,8,9) 61.1%
</TABLE>
15
<PAGE>
1 For purpose of the above table, a person or group of persons is deemed
to have "beneficial ownership" of any shares that such person or group
has the right to acquire within 60 days after such date; and, for
purposes of computing the percentage of outstanding shares held by each
person or group on a given date, such shares are deemed to be
outstanding, but are not deemed to be outstanding for the purposes of
computing the percentage ownership of any other person.
2 Includes 1,005,000 shares outstanding assuming conversion of
outstanding preferred stock on the basis of one share of Common Stock
for each two shares of preferred.
3 Includes 2,378,544 shares owned by the Balalis Corporation.
4 Also included with shares owned by Mr. Balalis.
5 Includes 50,000 shares subject to a five year option expiring in 2002
exercisable at $.40 per share and 25,000 shares held in spouse's IRA.
6 Less than one percent.
7 Includes 336,000 shares subject to an earnings formula (see "Item 12.
Certain Relationships and Related Transactions").
8 Includes 25,000 shares subject to a five year option expiring in 2002,
exercisable at $.40 per share.
9 Assumes conversion of preferred stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
LOAN. In the fiscal year ended October 31, 1997, Paul L. Balalis and
the Balalis Corporation advanced funds to the Company, aggregating $118,600. The
principal amount bears interest at rates ranging between 8% and 10%. The 1997
advances when aggregated with previous advances by Mr. Balalis utilized by the
Company for general working capital as well as in connection with its
acquisition of Classic Golf (see "Item 1. Description of Business") totaled
$204,375 as of October 31, 1997. One Hundred and Fifteen thousand dollars of the
obligation were paid off in fiscal 1998 with the balance of $89,367 due by
October 31, 1999. Additionally, Mr. Balalis has personally guaranteed the
Company's obligations to Mr. Abell in connection with the purchase of Classic
Golf and has guaranteed a $30,000 Company line of credit.
TRANSFER OF CLASSIC GOLF AND RELATED MATTERS. In connection with the
acquisition of Classic Golf and related assets from Milton Abell in exchange for
cash and Common Stock (see "Item 1. Description of Business"), the Company's
subsidiary entered into a five year employment agreement with Mr. Abell pursuant
to which the Company's subsidiary agreed to pay Mr. Abell $80,000 per year. Mr.
Balalis personally guaranteed payment pursuant to Mr. Abell's employment
agreement. Mr. Abell has received $189,750 and 85,250 shares of the Company's
Common Stock in connection with the acquisition.
TRANSFER OF FIRST GOLF CORPORATION ASSETS. In connection with the
acquisition of the First Golf Corporation assets W. Samuel Gunderson received
cash and Common Stock (see "Item 1. Description of Business") and the Company
entered into a five year employment agreement with Mr. Gunderson pursuant to
which the Company's subsidiary agreed to pay to Mr. Gunderson $168,000 per year.
Mr. Gunderson received 445,440 shares of the Company's Common Stock of which
336,000 is subject to the future earnings of the Company's subsidiary.
16
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
- -------- ---------------------------------
(a) EXHIBITS
--------
EXHIBIT DESCRIPTION
------- ------------
2.1 Stock Purchase Agreement as to acquisition of Classic
Golf Management, Inc. and Asset Purchase Agreement as
to certain related assets (incorporated by reference
to the Company's Form 8-K for event reported October
31, 1997)
2.2 Asset Purchase Agreement as to the assets acquired
from First Golf Corporation (incorporated by
referenced to the Company's Form 8-K for event
reported October 1, 1998)
13 Annual Report to Shareholders for the year ended
October 31, 1998-to be filed by amendment
*21 Subsidiaries of Company
*23 Consent of Independent Accountants
(b) Reports on Form 8-K.
A report on Form 8-K was filed for the event of
October 1, 1998, on or about October 8, 1998, and
pursuant to Item 2 of such form disclosed the
acquisition by the Company of the assets of First
Golf Corporation.
- ----------
*Exhibits filed herewith. Other exhibits are incorporated by reference
to the previous filings.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CEC PROPERTIES, INC.
By: /s/ Paul Balalis
-----------------------------------
Paul Balalis, President and
Chief Executive Officer
By: /s/ Donald Norbury
-----------------------------------
Donald Norbury,
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
/s/ Paul Balalis Dated: January 29, 1999
- -----------------------------
Paul Balalis, Director
/s/ Charles Packard Dated: January 29, 1999
- -----------------------------
Charles Packard, Director
/s/ Frank P. Barbaro Dated: January 29, 1999
- -----------------------------
Frank P. Barbaro, Director
/s/ Frederick Meyer Dated: January 29, 1999
- -----------------------------
Frederick Meyer, Director
/s/ Sanford Feld Dated: January 29, 1999
- -----------------------------
Sanford Feld, Director
18
<PAGE>
CEC PROPERTIES, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
October 31, 1998 and 1997
<PAGE>
CEC PROPERTIES, INC.
AND SUBSIDIARIES
Table of Contents
REPORT OF INDEPENDENT ACCOUNTANTS ...........................................F-1
FINANCIAL STATEMENTS:
Balance Sheets............................................................F-2
Statements of Income......................................................F-4
Statements of Stockholders' Equity........................................F-5
Statements of Cash Flows..................................................F-6
NOTES TO FINANCIAL STATEMENTS................................................F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
CEC Properties, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of CEC Properties,
Inc. and Subsidiaries as of October 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CEC Properties,
Inc. and Subsidiaries as of October 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Starr and Walters
STARR AND WALTERS
ACCOUNTANCY CORPORATION
Santa Ana, California
January 26, 1999
F-1
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, 1998 and 1997
ASSETS
1998 1997
------------ ------------
Current Assets:
Cash $ 260,786 $ 59,963
Accounts receivable, net (Note 1) 200,400 -
Inventory (Note 1) 106,588 105,363
Notes receivable (Note 2) 5,524 5,452
Other 50,765 26,183
------------ ------------
Total Current Assets 624,063 196,961
------------ ------------
Property and Equipment, net of depreciation (Note 3): 193,124 916,621
------------ ------------
Other Assets:
Goodwill, net (Note 1) 641,121 93,979
Long-term portion of notes receivable (Note 2) 22,124 7,048
Other 17,000 -
------------ ------------
Total Other Assets 680,245 101,027
------------ ------------
$ 1,497,432 $ 1,214,609
============ ============
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
<TABLE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, 1998 and 1997
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
------------- -------------
<S> <C> <C>
Current Liabilities:
Current portion long-term debt (Note 4) $ 121,769 $ 20,051
Accounts payable and accrued expenses 272,903 163,729
Loans from stockholder (Note 6) 89,367 279,375
------------- -------------
Total Current Liabilities 484,039 463,155
Notes payable, net of current portion (Note 4) 11,884 839,171
------------- -------------
Total Liabilities 495,923 1,302,326
------------- -------------
Stockholders' Equity:
Preferred stock, $0.90 par value; 2,000,000
shares authorized, 1,005,000 shares issued
and outstanding in 1998 (liquidation
preference $1,005,000) 706,232 -
Common stock, $0.01 par value; 30,000,000 shares
authorized, 13,674,198 and 12,676,698 shares
issued and outstanding in 1998 and 1997 136,742 126,767
Additional paid-in capital 23,823,752 23,351,302
Accumulated deficit (23,665,217) (23,565,786)
------------- -------------
Total Stockholders' Equity 1,001,509 (87,717)
------------- -------------
$ 1,497,432 $ 1,214,609
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended October 31, 1998 and 1997
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Revenue:
Golf course revenue $ 1,251,380 $ -
Construction management revenue 99,809 -
------------- -------------
Total Revenue 1,351,189 -
Cost and Expenses:
Cost of golf course revenue 1,020,040 -
Cost of construction management revenue 12,916 -
General and administrative expenses 499,279 146,189
------------- -------------
Total Costs and Expenses 1,532,235 146,189
------------- -------------
Operating Loss (181,046) (146,189)
------------- -------------
Other Income (Expense):
Interest income 6,524 600
Interest expense (30,635) (7,385)
Other income - 1,480
Gain on sale of investments 50,000 58,175
------------- -------------
Total Other Income 25,889 52,870
------------- -------------
Loss from Continuing Operations before
Provision for Income Taxes (155,157) (93,319)
Provision for income taxes (Note 5) 1,600 800
------------- -------------
Loss from Continuing Operations (156,757) (94,119)
Discontinued Operations: (Note 10)
Loss from discontinued operations
(less applicable income taxes of $0) (36,289) (14,798)
Gain on disposal of assets in discontinued operations
(less applicable income taxes of $0) 93,615 14,193
------------- -------------
Income (Loss) from Discontinued Operations 57,326 (605)
------------- -------------
Net Income (Loss) $ (99,431) $ (94,724)
============= =============
Net Loss per Common Share - Continuing Operations $ (0.01) $ (0.01)
Net Income (Loss) per Common Share - Discontinued Op 0.00 (0.00)
------------- -------------
Net Loss per Common Share (Note 12) $ (0.01) $ (0.01)
============= =============
Weighted average shares outstanding 12,911,898 12,566,698
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements .
F-4
<PAGE>
<TABLE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended October 31, 1998 and 1997
<CAPTION>
Preferred Stock Common Stock
----------------------------- -----------------------------
Additional
Number Number Paid-in Accumulated
of shares Amount of shares Amount Capital Deficit
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1996 - $ - 12,566,698 $ 125,667 $ 23,297,402 $(23,471,062)
Purchase of Classic Golf
Management, Inc. (Note 9) - - 29,500 295 14,455 -
Purchase of assets of Classic
Golf Shops, Hydro Turf and
Golf 101 (Note 9) - - 20,500 205 10,045 -
Purchase of assets of Worldwise
Marketing and Graphics (Note 9) - - 60,000 600 29,400 -
Net Loss - - - - - (94,724)
------------- ------------- ------------- ------------- ------------- -------------
Balance, October 31, 1997 - $ - 12,676,698 $ 126,767 $ 23,351,302 $(23,565,786)
Issuance of Series A convertible
preferred shares (Note 7) 1,005,000 706,232 - - - -
Issuance of shares for consulting
services - - 312,500 3,125 67,952 -
Exercise of stock option (Note 7) - - 30,000 300 11,700 -
Issuance per purchase agreement
of Classic Golf Management,
Inc. (Note 9) - - 14,750 148 6,075 -
Issuance per purchase agreement
of Classic Golf Shops (Note 9) - - 10,250 102 4,223 -
Purchase of assets of First Golf
Corporation (Note 9) 640,000 6,400 382,400 -
Cancellation of shares related
to Worldwise Marketing (Note 9) - - (10,000) (100) 100 -
Net Loss - - - - - (99,431)
------------- ------------- ------------- ------------- ------------- -------------
Balance, October 31, 1998 1,005,000 $ 706,232 13,674,198 $ 136,742 $ 23,823,752 $(23,665,217)
============= ============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended October 31, 1998 and 1997
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (99,431) $ (94,724)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 29,414 17,532
Amortization 23,623 -
Gain on sale of property - discontinued operations (93,615) (14,193)
Gain on sale of investments (50,000) (58,175)
(Increase) decrease (net of effects of
acquisitions - see Note 9) in:
Accounts receivable, net (150,400) -
Inventory 20,700 -
Other assets (41,582) 2,054
Increase in accounts payable
and accrued expenses 61,385 73,879
------------ ------------
Net cash used by operations (299,906) (73,627)
------------ ------------
Cash flows from investing activities:
Collection of note receivable 1,452 7,000
Proceeds from sale of property - discontinued operations 78,388 3,000
Proceeds from sale of investments, net 46,351 61,864
Issuance of note receivable (16,600) -
Asset acquisition of First Golf Corp. (168,175) -
Acquisition of Classic Golf Management, Inc.,
(net of cash) - (57,015)
Asset acquisition of Classic Golf Shops,
Hydroturf and Golf 101 - (71,750)
Property and equipment purchases (5,967) (1,760)
------------ ------------
Net cash used by investing activities (64,551) (58,661)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net 727,310 -
Proceeds from exercise of stock options 2,000 -
New borrowing on notes payable 47,430 -
Principal payments on notes payable (81,452) (3,667)
Loans from shareholders, net (130,008) 193,600
------------ ------------
Net cash provided by financing activities 565,280 189,933
------------ ------------
Net increase in cash 200,823 57,645
Cash at beginning of year 59,963 2,318
------------ ------------
Cash at end of year (Notes 1 and 8) $ 260,786 $ 59,963
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENT
October 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ---------------------------------------------------------------------
Organization
- ------------
Prior to 1995, CEC Properties, Inc., a Delaware corporation, formerly known as
Ben-Wa International, Inc., ("Ben-Wa") had been inactive for several years. On
November 1, 1994, Ben-Wa's largest shareholder and only preferred shareholder
converted all outstanding preferred shares into common shares at a 1 for 2 ratio
and on May 1, 1995 sold his controlling interest to Paul Balalis and the Balalis
Corporation. The new controlling shareholders changed Ben-Wa's name to CEC
Properties, Inc. (the Company).
The Company is in the business of acquiring, developing and managing golf
courses. During the year ended October 31, 1997, the Company acquired two
wholly-owned subsidiaries: Classic Golf Management, Inc. which owns a golf shop,
a turf management method, and a golf learning method; and Worldwise Marketing
and Graphics, Inc., an advertising company. During the year ended October 31,
1998, the Company incorporated a wholly-owned subsidiary First Golf Acquisition
Corporation which acquired the assets of First Golf Corporation, a golf course
construction management company.
Consolidation
- -------------
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, CEC Properties, Corp., a Nevada
corporation, Classic Golf Management, Inc., a Georgia Corporation, Worldwise
Marketing and Graphics, Inc., a California corporation and First Golf
Acquisition Corporation, a Nevada corporation. All significant intercompany
transactions and balances have been eliminated in consolidation.
Basis Of Accounting
- -------------------
The Company reports on the accrual basis of accounting whereby revenues are
recognized when earned and expenses recorded when incurred.
For long-term construction management contracts, the Company recognizes revenues
on the percentage-of-completion method, whereby costs and estimated gross margin
are recorded as the work is performed. Costs consist mostly of direct labor.
Under fixed-price contracts, the Company may encounter cost overruns caused by
increased labor costs or design or technical difficulties which must be borne by
the Company. Adjustments are made to contract cost estimates in the periods in
which the facts requiring such revisions become known. When the revised estimate
indicates a loss, such loss is provided for in its entirety.
See accompanying accountants' report.
F-7
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued):
- --------------------------------------------------------------------
Use Of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Reclassifications
- -----------------
Certain prior-year amounts have been reclassified to conform with the current
year presentation.
Cash And Equivalents
- --------------------
The Company considers all highly liquid investments with maturity of three
months or less to be cash equivalents for the purpose of determining cash flows.
Accounts Receivable
- -------------------
Management considers accounts receivable to be fully collectible; accordingly,
no allowance for doubtful accounts has been provided.
Inventory
- ---------
Inventory consists of golf related equipment and apparel and is carried at the
lower of cost (first-in, first-out) or market value.
Depreciation
- ------------
Property and equipment are stated at cost and are depreciated on a straight-line
basis over the estimated useful lives of the assets. Improvements are
capitalized, and repairs and maintenance are charged to property operations as
incurred.
Amortization
- ------------
Goodwill, related to the September 1, 1997, October 31, 1997 and October 1, 1998
acquisitions by the Company, is amortizable on a straight-line basis over
periods from two to fifteen years.
Compensated Absences
- --------------------
The Company does not accrue compensated absences as management considers the
amounts to be immaterial.
See accompanying accountants' report.
F-8
<PAGE>
CEC PROPERTIES, AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
NOTE 2 - NOTES RECEIVABLE:
- --------------------------
1998 1997
--------- ---------
Note receivable, dated October 1, 1995,
original amount $16,500, interest at 9%,
due on October 1, 2000. $ 11,048 $ 12,500
Note receivable, dated March 25, 1998,
original amount $16,600, monthly payments of
interest only at 8%, remaining principal and
interest due March 25, 2003. 16,600 -
--------- ---------
27,648 12,500
Current Portion (5,524) (5,452)
--------- ---------
Long-term Portion $ 22,124 $ 7,048
========= =========
NOTE 3 - PROPERTY AND EQUIPMENT:
- --------------------------------
Investment properties, which consist of land, buildings and improvements were
sold during the year ended October 31, 1998. See Note 10. Machinery and
Equipment includes office equipment, golf related equipment and automobiles.
Cost and accumulated depreciation is as follows:
1998 1997
--------- ---------
Buildings and Improvements $ - $425,457
Land - 364,000
Acquisition Costs - 46,351
Machinery and Equipment 218,561 116,831
--------- ---------
218,561 952,639
Accumulated Depreciation (25,437) (36,018)
--------- ---------
Net Property and Equipment $193,124 $916,621
========= =========
Depreciation expense for the years ended October 31, 1998 and 1997 was $29,414
and $17,532 respectively.
Acquisition costs are related to an option agreement for a 40-year lease with
options awarded to the Company and partners by the County of Ventura, California
to build an 18-hole golf course. The Company sold the option at a gain during
the year ended October 31, 1998.
See accompanying accountants' report.
F-9
<PAGE>
CEC PROPERTIES, AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
<TABLE>
NOTE 4 - NOTES PAYABLE:
- -----------------------
<CAPTION>
A summary of the notes payable at October 31, 1998 and 1997 follows:
1998 1997
--------- ---------
<S> <C> <C>
First trust deed secured by 209 34th Street, Newport Beach;
interest at 7.54 percent, payable in monthly installments of
$2,620 through June 2021. The property was sold and the
note paid in full in April 1998 $ - $404,887
First trust deed secured by 208 33rd Street, Newport Beach;
interest at 7.33 percent, payable in monthly installments of
$1,875 through December 2024. The property was sold and
the note paid in full in March 1998 - 322,660
Second trust deed secured by 208 33rd Street, Newport Beach;
interest at 10 percent, payable interest only, due December 12,
1999. The property was sold and the note paid in full in
March 1998 - 39,000
Two bank notes payable, secured by automobiles. The
notes were assumed through the Company's acquisitions
Monthly payments of $475.48 and $372.23, principal
and interest, due March and July, 2000 13,912 25,895
Capital lease obligation for computer equipment; payable
in 48 monthly installments of $362.73 beginning
November, 1997 9,741 16,780
Non-interest bearing amount payable to seller of acquired
company and acquired assets; payable in two installments
on the 13th and 25th month after acquisition. (See Note 9) 35,000 50,000
Non-interest bearing amount payable to seller of acquired
assets payable in March, 1999. (See Note 9) 75,000 -
--------- ---------
133,653 859,222
Less: Current portion 121,769 20,051
--------- ---------
Long-term Portion of Notes Payable $ 11,884 $839,171
========= =========
</TABLE>
See accompanying accountants' report.
F-10
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
NOTE 4 - NOTES PAYABLE (continued):
- -----------------------------------
The scheduled annual principal maturities of notes payable are as follows:
Year Ended
October 31
-----------
1999 $ 121,769
2000 7,971
2001 3,913
2002 -
2003 -
Thereafter -
---------
$ 133,653
=========
NOTE 5 - INCOME TAXES
- ---------------------
The Company recognizes deferred tax assets and liabilities for temporary
differences between the financial and tax reporting bases of its assets and
liabilities. Deferred tax assets are reduced by a valuation allowance when
deemed appropriate. The effects of future changes in tax laws or rates are not
anticipated. Measurement is computed using applicable current tax rates. The
Company has no material temporary differences. The tax provisions are as
follows:
1998 1997
--------- ---------
California minimum franchise tax $ 1,600 $ 800
========= =========
NOTE 6 - RELATED PARTY TRANSACTIONS
- -----------------------------------
During the years ended October 31, 1998 and 1997, the Company's largest
shareholders, Paul L. Balalis and the Balalis Corporation advanced funds to the
Company totaling $10,000 and $118,600. These advances were converted to notes
payable. Interest accrues at rates from 8.0% to 10.0% until the notes are
repaid. During 1998, principal payments of approximately $125,000 were repaid to
the shareholders. Total amounts owed to these shareholders are $89,367 and
$204,375 at October 31, 1998 and 1997 respectively.
Certain other related parties advanced funds to the Company at September 30 and
October 28, 1997 in the total amount of $75,000. All of these notes were repaid
during the year ended October 31, 1998 with interest at 10% to date of
repayment.
The Company leases office space from Paul Balalis on at month-to-month basis at
a rate of $2,600 per month.
The Chairman, Chief Financial Officer and Vice-President of Operations provide
services to the Company without compensation.
See accompanying accountants' report.
F-11
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
NOTE 7 - STOCKHOLDERS' EQUITY:
- ------------------------------
Redeemable Preferred Stock
- --------------------------
The Company issued 1,005,000 shares of Series A preferred stock. The Company is
also required to issue additional shares of 100,500 to the preferred
shareholders as the initial preferred shares were not registered within six
months of the issue date, as outlined in the preferred stock agreement. The
preferred stock accrues dividends at the rate of $0.05 per share per annum. The
cumulative dividends are payable each June and December. These dividends must be
paid before any common stock dividends can be declared or paid. The preferred
stock has a liquidation value of $1.00 per share plus all accumulated and unpaid
dividends. Terms of the preferred stock agreement provide that at any time, when
dividends are in arrears, the preferred shareholders, voting as a separate
class, will have the right to elect one person for each omission of dividend
payment date to serve as a director of the corporation, in addition to other
directors elected by the common shareholders. Special voting rights will
continue until the dividend payments are made.
The preferred stock is convertible to common shares at any time beginning June
6, 1998 at the holders option. The conversion to common stock is at a price of
$1.00 divided by seventy-five percent (75%) of the average bid price for the
common stock during the three (3) trading days prior to the date of conversion.
However, the conversion price cannot be less than $0.625 per share of
common stock.
The preferred stockholders have the right, after three years, to require the
corporation to redeem their shares at the liquidation preference plus unpaid
dividends.
Common Stock Options
- --------------------
On October 30, 1997, the Company issued 155,000 stock options at $0.40 per share
to key personnel, excluding the Chairman and Chief Financial Officer. 30,000
stock options were exercised
on June 29, 1998.
Common Stock Warrants
- ---------------------
At October 31, 1998, warrants to purchase 602,500 common shares are outstanding.
502,500 warrants are exercisable through December 31, 2003 at a strike price of
$3.125 per share; 100,000 warrants are exercisable through December 31, 1999 at
a strike price of $2.50 per share.
See accompanying accountants' report.
F-12
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
NOTE 8 - CASH FLOWS:
- --------------------
Supplemental cash flow information:
1998 1997
--------- ---------
Cash paid for interest $ 76,105 $ 64,127
Cash paid for income taxes 1,600 6,356
A summary of the Company's non-cash investing and financing activities are as
follows:
In connection with the October 1, 1998 acquisition referenced in Note
9, the Company issued notes payable and common stock as part of the
purchase price.
In connection with the September 1, 1997 and October 31, 1997
acquisitions referenced in Note 9, the Company issued notes payable and
common stock as part of the purchase price.
In October 1997, the Company entered into a capital lease obligation
for computer equipment in the amount of $11,890. The asset is included
in machinery and equipment and the related liability is included in
notes payable.
NOTE 9 - ACQUISITIONS:
- ----------------------
First Golf Corporation
- ----------------------
On October 1, 1998, the Company's wholly-owned subsidiary, First Golf
Acquisition Corporation acquired certain assets of First Golf Corporation. The
acquisition was recorded as a purchase and accordingly, the purchase price was
allocated to the assets acquired based on their estimated fair value at the
purchase date. The company paid cash of $125,000, issued a note payable in the
amount of $75,000 and issued 640,000 shares of its common stock to the seller,
336,000 of which are held by a mutually agreed upon pledgeholder. The purchase
contract contains certain revenue guarantees by the seller, that if met, the
pledgeholder will release 176,000 and 160,000 shares on each the 14th month and
26th month anniversary date of the transaction. Any remaining undelivered shares
will be released on the 38th month anniversary date of the transaction.
Conversely, if there is a revenue shortfall, the seller may be obligated to
return shares issuable or issued. In addition, the purchase contract contains
certain share price levels at the 25th month anniversary date of the
transaction. If the share price does not meet the specified price level, the
Company will deliver to seller additional shares so that the average price of
all shares delivered to seller will aggregate no less than $2,000,000, but the
number of additional shares delivered shall not exceed 445,440 shares. On
October 1, 1998, the Company entered into a five-year employment agreement with
the seller, whereby the seller will oversee the operations of this subsidiary
corporation.
Results of operations of the subsidiary have been included in the accompanying
statement of income from the acquisition date forward.
See accompanying accountants' report.
F-13
<PAGE>
CEC PROPERTIES AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
NOTE 9 - ACQUISITIONS (continued):
- ----------------------------------
Classic Golf Management, Inc.
- -----------------------------
On October 31, 1997, the Company acquired 100% of the common stock of Classic
Golf Management, Inc. The acquisition was recorded as a purchase and
accordingly, the purchase price was allocated to the assets acquired and the
liabilities assumed based on their estimated fair value at the purchase date.
The Company paid cash (net of cash acquired) of $57,015, issued a note payable
in the amount of $29,500 and issued 29,500 shares of its common stock to the
seller. The purchase contract contains certain revenue guarantees by the seller,
whereby the Company will issue additional common stock to the seller of 14,750
shares on each the 13th month and 25th month anniversary date of the
transaction. Conversely, if there is a revenue shortfall, the seller may be
obligated to return shares issuable or issued. In addition, the purchase
contract contains certain share price levels at 24th month anniversary date of
the transaction. If the share price does not meet the specified price level, the
Company will pay the seller the difference in cash. The price level is
personally guaranteed by the Company's largest shareholder. On November 1, 1997,
the Company entered into a five-year employment agreement with the seller,
whereby the seller will oversee the operations of this subsidiary corporation.
On October 30, 1998, the Company issued 25,000 shares pursuant the purchase
agreement.
As the acquisition was completed on the last day of the Company's fiscal year,
no results of operations of the acquired company are included in the
accompanying statement of income for the year ended October 31, 1997.
Classic Golf Shops, Hydroturf and Golf 101
- ------------------------------------------
In conjunction with the above stock purchase, the Company's wholly owned
subsidiary Classic Golf Management, Inc. purchased certain assets of Classic
Golf Shops, and assets and business names "Hydroturf" and "Golf 101." The
acquisition was recorded as a purchase and accordingly, the purchase price was
allocated to the assets acquired based on their estimated fair value at the
purchase date. No liabilities were assumed. The Company paid cash of $71,750,
issued a note payable in the amount of $20,500 and issued 20,500 shares of its
common stock to the seller. The purchase contract contains certain revenue
guarantees by the seller, whereby the Company will issue additional common stock
to the seller of 10,250 shares on each the 13th month and 25th month anniversary
date of the transaction. Conversely, if there is a revenue shortfall, the seller
may be obligated to return shares issuable or issued. In addition, the purchase
contract contains certain share price levels at 24th month anniversary date of
the transaction. If the share price does not meet the specified price level, the
Company will pay the seller the difference in cash. The price level is
personally guaranteed by the Company's largest shareholder.
As the acquisition was completed on the last day of the Company's fiscal year,
no results of operations of the acquired company are included in the
accompanying statements of income for the year ended October 31, 1997.
See accompanying accountants' report.
F-14
<PAGE>
CEC PROPERTIES AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
NOTE 9 - ACQUISITIONS (continued):
- ----------------------------------
Worldwise Marketing and Graphics
- --------------------------------
On or about September 1, 1997, the Company formed a wholly-subsidiary Worldwise
Marketing and Graphics, Inc., which acquired the assets from two individuals
doing business as Worldwise Marketing and Graphics. The acquisition was recorded
as a purchase and accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair value at the
purchase date. The Company issued 60,000 shares of its common stock to the
seller. The purchase contract contains certain revenue guarantees by the seller,
whereby the Company will issue additional common stock to the sellers of 20,000
shares on each the 13th month and 25th month anniversary date of the
transaction. Conversely, if there is a revenue shortfall, the sellers may be
obligated to return shares issuable or issued. In connection with the asset
purchase, the Company entered into two-year employment contracts with each of
the two individual owners. As an incentive to these individuals, the employment
contracts contain a provision allowing them to purchase options of the Company's
common stock if certain income levels are exceeded.
Results of operations of the subsidiary have been included in the accompanying
statement of income from the date of acquisition forward.
The Company and the two sellers entered into separate Mutual Release and
Settlement Agreements dated September 1, 1998 and January 4, 1999. The
agreements release all parties from both the asset purchase agreement and the
employment contracts, with the sellers returning 10,000 and 30,000
common shares respectively.
The following unaudited pro forma information has been prepared assuming Classic
Golf Management, Inc., and the assets of Classic Golf Shops, Hydroturf, Golf
101, Worldwise Marketing and Graphics and the assets of First Golf Corporation
had been acquired at the beginning of the earliest period presented. The pro
forma consolidated results are presented for information purposes only and are
not necessarily indicative of what would have occurred if the acquisition had
been made as of that date. In addition, pro forma information does not purport
to be indicative of the results that will be obtained in the future.
Year Ended October 31,
(unaudited)
---------------------------
1998 1997
----------- -----------
Net Sales $2,887,791 $4,327,432
=========== ===========
Net Loss $ (261,888) $ (376,773)
=========== ===========
Loss per share $ (0.02) $ (0.03)
=========== ===========
See accompanying accountants' report.
F-15
<PAGE>
CEC PROPERTIES AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
NOTE 10 - DISCONTINUED OPERATIONS:
- ----------------------------------
During November, 1997, the Company adopted a plan to sell its two remaining
rental properties and free management to concentrate on the Company's primary
focus, the golf industry. Both properties were sold and the mortgages were paid
in full during the year ended October 31, 1998. As a result, rental operations
have been shown in the accompanying financial statement as a discontinued
operation. Revenue and expense from discontinued operations during 1998 and 1997
are as follows:
1998 1997
--------- ---------
Rental Income $ 20,709 $ 74,137
Expenses:
Interest 36,492 64,147
Property operations 14,664 6,830
Depreciation 5,842 17,958
--------- ---------
56,998 88,935
--------- ---------
Net Loss $(36,289) $(14,798)
========= =========
NOTE 11 - COMMITMENTS:
- ----------------------
Beginning in 1998, the Company leases space for its operations in California
(see Note 6), Georgia and Arizona on a month-to-month basis. Total rent expense
for the year ended October 31, 1998 was $23,403.
Beginning in 1998, the Company leases equipment for use in its operations.
Leases vary in terms from three years to five years. Total equipment rental
expense under these leases was $36,848. Future minimum lease payments under
operating leases that have an initial or remaining non-cancelable lease terms in
excess of one year as of October 31, 1998 are as follows:
Year ending October 31:
------------------------
1999 $ 108,344
2000 83,622
2001 73,878
2002 12,144
2003 -
Thereafter -
----------
Total future minimum lease payments $ 277,988
==========
See accompanying accountants' report.
F-16
<PAGE>
CEC PROPERTIES AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
NOTE 12 - EARNINGS PER SHARE:
- -----------------------------
Basic earnings per share are computed by dividing the earnings available to
common stockholders by the weighted average number of common shares outstanding
during the period. Fully diluted earnings per share reflect per share amounts
that would have resulted if dilutive potential common stock had been converted
to common stock. Fully diluted per-common-share amounts are not applicable for
loss periods.
NOTE 13 - CONCENTRATIONS:
- -------------------------
Substantially all of the Company's operating income through October 1, 1998 was
generated by the management of two golf courses, recently acquired October 31,
1997. Four new golf course management contracts were acquired on October 1,
1998.
The responsibility of the Company's golf course management and construction
management activities lies with two key persons.
NOTE 14 - SUBSEQUENT EVENTS:
- ----------------------------
The Company entered into a financial services and consulting agreement with a
vendor who has in the past provided advice and counsel in the areas of finance,
investment banking corporate restructuring and review of business plans. In
consideration for services previously rendered and for future services, the
Company issued 312,500 shares of its common stock to the consulting firm. The
agreement provides for the issuance of an additional 312,500 shares of the
Company's common stock if certain financing arrangements are secured by the
consulting firm on behalf of the Company. This was accomplished and the
additional 312,500 shares have been authorized for issuance in January, 1999.
During November and December 1998, the Company was notified that all preferred
shareholders will convert their shares to common shares according to the terms
of the preferred stock agreement, see Note 7.
See accompanying accountants' report.
F-17
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
---------------------------
CEC Properties, Corp., a Nevada corporation
Classic Golf Management, Inc., a Georgia corporation
Worldwise Marketing and Graphics, Inc., a California corporation
First Golf Corporation, a Nevada corporation
<PAGE>
EXHIBIT 23
----------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
------------------------------------------
As independent public accountants, we hereby consent to the use of our report
dated January 26, 1999, included in and made part of the Form 10-KSB of CEC
Properties, Inc., for the year ended October 31, 1998.
STARR AND WALTERS
ACCOUNTANCY CORPORATION
Santa Ana, California
January 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 260,786
<SECURITIES> 0
<RECEIVABLES> 200,400
<ALLOWANCES> 0
<INVENTORY> 106,588
<CURRENT-ASSETS> 624,063
<PP&E> 193,124
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,497,432
<CURRENT-LIABILITIES> 484,039
<BONDS> 0
0
706,232
<COMMON> 136,742
<OTHER-SE> 158,535
<TOTAL-LIABILITY-AND-EQUITY> 1,497,432
<SALES> 1,351,189
<TOTAL-REVENUES> 1,377,078
<CGS> 0
<TOTAL-COSTS> 1,532,205
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,635
<INCOME-PRETAX> (155,157)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (156,757)
<DISCONTINUED> 57,326
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (99,431)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
