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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, 1999 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
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 $2,567,339.
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 24, 2000, which was $4,356,912.
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, 2000
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Common Stock, $.01 par value 15,601,734
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DOCUMENTS INCORPORATED BY REFERENCE
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. In 1995 Mr. Balalis, the Company's largest
stockholder (see "Item 12. Certain Relationships and Related Transactions"),
acquired control of the inactive Company and changed its name to CEC Properties,
Inc. 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. The assets acquired consisted primarily of contracts and
proposals for future construction of golf courses. Construction is in progress
as to three of those contracts and has been completed as to three others.
Additionally, the Company assumed management of three 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. No additional
shares were issued in 1999. 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
managed 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 in October
1999, and subject to meeting certain revenue guarantees in October 1999 and
2000, deliver up to an additional 14,750 shares of Common Stock. 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. 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 one-half in October, 1998 and
subject to meeting certain revenue guarantees in October 1999 and October, 2000,
the balance. The Company also agreed, in both transactions, to pay the seller
any differential between the average publicly quoted price of the Common Stock
in November, 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 and $59,000 which was loaned to the Company by
Mr. Balalis (see "Item 12. Certain Relationships and Related Transactions").
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GOLF COURSE MANAGEMENT. The Company is engaged in the management of
golf courses with a current portfolio of two 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 which has a large golfing
population and an attractive climate. The clustering of two courses in the
Atlanta, Georgia area 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 has also
contracted, upon their completion, to manage an 18 hole course in Union, Oregon,
a 27 hole course in North Charleston, South Carolina and a 36 hole course in
Santa Fe, New Mexico, courses for which the Company is currently serving as the
construction manager.
The Company's golf course management 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 two courses and two pro shop facilities are leased
pursuant 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.
GOLF COURSE CONSTRUCTION MANAGEMENT. The Company is also engaged in
managing the construction of an 18 hole course in Union, Oregon, scheduled to
open in Spring, 2000, a 27 hole course in North Charleston, South Carolina,
scheduled to open in August, 2000 and a 36 hole course in Santa Fe, New Mexico,
with the first 18 holes scheduled to open in Fall 2000 and the remaining 18
holes scheduled to open in Spring 2001. The Company has agreed to manage the
construction of a new course in Hunterton, New Jersey, scheduled to begin in the
Spring of 2000. The Company also holds an option to construct the Hickory Stick
course in Cherokee County, Georgia and to manage the course pursuant to a
50-year lease upon its completion. 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, vice president of the Company, who will also be the supervisor
of construction and is scheduled for construction commencement as soon as
necessary government permits are received.
TURF AND SOD. In 1999, the Company became a 50% owner of Diamond Turf
LLC, located in Cordele, Georgia. The other 50% is owned by an unrelated third
party. Diamond Turf is currently growing 150 acres of TifEagle, a Burmuda grass
for greens and TifSport, a Burmuda grass for fairways. This grass is sold both
as sod and as bushels of stolens.
INDUSTRY OVERVIEW. The National Golf Foundation states that in 1998
total spending at golf courses in the United States generated in excess of $30
billion in annual revenue on all golf related items including playing fees,
practice range fees, equipment, clothing and miscellaneous items with growth
averaging 12% per year since 1994. 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.
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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.
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 528 million rounds
of golf during 1998. 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 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
managed 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 or have been built with the
Company managing construction. Key elements of the Company's operating strategy
include:
MANAGEMENT AND ACQUISITIONS. The Company initially intends to develop and expand
its operations through the management of construction of and development of new
golf courses. The Company intends to expand its operations in the United States
outside of Georgia through its management of golf courses under construction as
well as 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, South Carolina and New Mexico, which the Company will manage upon
their completion.
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.
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The following summarizes the primary components of the Company's strategy:
CLUSTERING OF COURSES. The Company will seek to develop or manage courses in or
near densely populated metropolitan markets. To the extent possible the Company
would like to manage more than one course in an area. This 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
attempts to focus 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 areas with extended good
weather conditions. 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 are substantially greater than in the
upper Midwest. 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, the 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.
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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.
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.
GREENTRAC.COM, INC. In or about December 1999, Paul Balalis, Donald
Norbury, Charles Packard and Timothy Carda (see "Item 9. Directors, Officers,
Promoters and Control Persons" and "Item 12. Certain Relationships and Related
Transactions"), together with others, contributed a portion of the initial
$4,000,000 capitalization and agreed to be involved with a new company to be
known as Greentrac.com, Inc. Greentrac was formed to establish an internet-based
business to business marketplace for the procurement of commercial
groundskeeping equipment and supplies. Greentrac is intended to bring together
buyers and sellers to select and purchase their groundskeeping supplies and
equipment related to golf courses, landscaping contractors, municipalities and
highway departments, among others. In exchange for the Company's agreement to
arrange for $30,000,000 of sales per year through Greentrac, the Company
received an approximate 14% interest in Greentrac.
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 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, 1999, the Company employed 104 persons
full time. Additionally, the Company contracts with an unrelated third party for
the services of up to 75 persons at any single time 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.
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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.
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 operator in connection with its
acquisition of Classic Golf. 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.
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ITEM 2. DESCRIPTION OF PROPERTY.
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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.
DATE TYPE OF TYPE OF
COURSE NAME ACQUIRED LOCATION OPERATION COURSE
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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
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.
The Company's leases are 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 pursuant to a lease expiring October 31, 2003. The Company
believes this rate is currently less than the fair market value. The Company
also retains offices in Georgia and Arizona which are leased on a month to month
basis at $2,038 and $1,950 per month, respectively.
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(1) Represents the date Classic Golf acquired or commenced management of
operations of the course.
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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
defendant it has no interest in the matter and has requested to be dismissed.
The Company and its subsidiary First Golf Corporation, a Nevada
corporation, have been named as defendants in that legal action entitled PUDDING
RIDGE LIMITED PARTNERSHIP V. FIRST GOLF CORPORATION OF SOUTH DAKOTA, ET AL.
pending in the United States District Court for the Middle District of North
Carolina bearing Civil Action No. 1:99 CV0060 filed in July 1999. The case
arises from a dispute between Pudding Ridge, First Golf Corporation, a South
Dakota corporation, and certain of its individually named stockholders over the
alleged breach of a lease and operation of a golf course in North Carolina.
Neither the Company nor its wholly-owned First Golf subsidiary were parties to
the lease or the operations of the golf course. The Company's wholly-owned First
Golf subsidiary purchased certain assets, excluding the North Caroling golf
course, from the South Dakota corporation in October 1998, approximately two
months after the South Dakota corporation had been ejected from the Pudding
Ridge golf course. Nevertheless, the Company and its wholly-owned subsidiary
were named in the complaint seeking damages in an unspecified amount for breach
of lease, breach of the covenant of good faith and fair dealing, breach of
fiduciary duty, negligent misrepresentation, fraudulent misrepresentation,
concealment and transfer, tortious interference with contract and unfair and
deceptive trade practices. The Company has a motion pending to be dismissed from
the action for lack of personal jurisdiction. Inasmuch as this action is at a
very preliminary stage, no discovery has been conducted, it is thereby
impossible to presently predict the outcome. The Company intends to vigorously
contest the claims against it and its wholly-owned subsidiary.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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Inapplicable
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PART II
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 1998 HIGH LOW HIGH LOW
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
Fiscal 1999
1st quarter .75 .31 .91 .34
2nd quarter .81 .38 .95 .72
3rd quarter .63 .44 .66 .58
4th quarter .63 .30 .66 .37
On January 24, 2000, the last reported bid and ask price of the Common Stock by
the National Quotation Bureau, Inc., was $.56 and $.62. As of January 24,2000,
there were approximately 4,476 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. Of the $24,017,833 of
accumulated deficit set forth in the Company's Consolidated Balance Sheet,
$23,565,786 relates to activities prior to November 1, 1998. The Company manages
and maintains golf courses and golf driving ranges through its wholly owned
subsidiary, Classic Golf Management. It currently is operating under two golf
management 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 on bidding and obtaining new management contracts and acquisition of
management companies.
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, 1998. Both properties were
sold during the Company's second fiscal quarter of 1998.
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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 had existing contracts for construction
management on three courses. The Company will manage the three courses which are
presently scheduled to open in 2000. Additionally, First Golf is in various
stages of discussions with respect to additional 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.
The Company presently retains the rights to the Hickory Stick golf
course to be built in Atlanta, Georgia. First Golf will be supervising the
construction and the awarding of any contracts.
In 1999, the Company became a 50% owner of Diamond Turf LLC, a company
located in Cordele, Georgia engaged in the growing and sale of grass for golf
course greens and fairways.
The Company has consolidated all of its accounting functions into its
Newport Beach headquarters. The program was implemented in the second quarter of
fiscal 1999.
RESULTS OF OPERATIONS - YEAR ENDED OCTOBER 31, 1999 COMPARED TO
YEAR ENDED OCTOBER 31, 1998
GOLF MANAGEMENT. Classic Golf Management manages two golf courses
located in the Atlanta, Georgia area. In 1999 revenues from golf course
operations increased six percent from $1,251,380 to $1,328,798. At the same time
its expenses associated with golf course management declined 15% from $1,020,040
in 1998 to $867,019 in 1999 mainly due to the Company's termination of
management at three courses during the year. Revenues and expenses are expected
to increase in the current year as construction of three courses are completed
for which the Company has management contracts.
MANAGEMENT OF GOLF COURSE CONSTRUCTION. First Golf Corporation is
currently managing the construction of three golf courses. Revenues from golf
course construction management increased 1141% from $99,809 in 1998 to
$1,238,541 in 1999 due to the fact that the Company only entered into this
business in the last month of fiscal 1998. Similarly, expenses associated with
golf course construction management increased 2971% from $12,916 in 1998 to
$396,631 in 1999. The Company continues to seek additional courses to manage
their construction and presently has one course slated to commence construction
in 2000.
GENERAL. The Company's General and Administrative expenses increased by
181% from $499,279 in 1998 to $1,403,343 in 1999. The majority of this increase
resulted from costs in connection with the expansion of the Company into other
areas of business as well as costs incurred in connection with its capital
raising activities.
The Company had a loss in 1998 of $99,431 and a profit in 1999 of
$1,961. The equivalent net loss per common share was $(0.03) in 1998 and $(0.01)
in 1999. The Company's revenue from all operations in 1998 was $1,351,189
compared to 1999 of $2,567,339, a 90% increase. The expenses from all operations
increased by 74% from $1,532,235 in 1998 to $2,666,993 in 1999.
The Company's overall improvement is largely the result of the
Company's construction management revenues and revenues from its 50% interest in
the new Diamond Turf operations.
LIQUIDITY AND CAPITAL
Cash decreased for the year ended October 31, 1999 by $123,714.
Accounts receivable increased by $128,598 reflecting the Company's utilization
of its cash in its construction management business and other business
activities. In connection therewith the Company's current liabilities increased
from $495,923 to $520,386.
11
<PAGE>
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 $706,000 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 its operations, should be sufficient to meet the Company's
contemplated cash requirements for its current business operations for at least
12 months. There can be no assurance, however, that the Company will not require
additional cash during or after such 12-month period for its current operations.
The Company estimates that any need for additional capital it may
experience during the next 12 months will be obtained 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.
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.
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.
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 and F-2
Consolidated Balance Sheet at October 31, 1999 F-3
Consolidated Statements of Operations for the
Years ended October 31, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity
for the years ended October 31, 1999 and 1998 F-5
Consolidated Statements of Cash Flows
for the years ended October 31, 1999 and 1998 F-7
Notes to Consolidated Financial Statements F-8
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
12
<PAGE>
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 six. During the year ended October 31, 1999, the Board of
Directors held one meeting and took action by unanimous written consent on three
occasions. Each director who served during 1999 attended all of the meetings of
the Board held during such fiscal year except Frank Barbaro who was absent at
the one meeting held. The following table sets forth certain information
concerning the directors and offers of the Company:
FIRST ELECTED
NAME AGE POSITION TO SERVE
Paul Balalis 60 President, Chief Executive Officer and 1995
Chairman of the Board of Directors
Donald Norbury 64 Vice President, Secretary and Chief 1995
Financial Officer
Thomas Quinn 58 Vice President, Operations 1997
Milton Abell 48 Vice President and President of 1997
Classic Golf
W. Samuel Gunderson 42 Vice President and President of 1998
First Golf Corporation
Frank P. Barbaro 56 Director 1995
Timothy Carda 46 Director 1999
Sanford Feld 71 Director 1998
Frederick Meyer 60 Director 1997
Charles E. Packard 56 Director 1995
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.
13
<PAGE>
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.
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.
FRANK BARBARO 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.
TIMOTHY CARDA was, in 1999, a founder of Medibuy.com, an internet commerce
company in the healthcare industry and Foodservicebuy.com, an internet commerce
company in the food service business. Between 1995 and 1999 he served as senior
vice president of Pacific Health Corporation and between 1987 and 1995 he was
the chief executive officer at Western Medical Center in Anaheim, California.
Mr. Carda is currently a director of Medibuy.com, Physiciansite.com, Living Well
Centers and University Clinical Investigators, Inc.
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. He has also served as a
bankruptcy trustee at various times between 1987 and 1999.
FREDERICK MEYER, a healthcare consultant, was, between 1993 and 1998, 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.
14
<PAGE>
CHARLES E. PACKARD, is currently vice president of Arnel Management Company, a
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.
AUDIT REVIEW COMMITTEE. The Board has recently established an Audit Review
Committee composed of Frederick Meyer, Timothy Carda and Paul Balalis. Mr. Meyer
was designated as the chairman. Its function is to recommend the appointment of
independent accountants; review the independence of the independent accountants;
consider the adequacy of the system of internal accounting controls and review
any proposed corrective actions; review and monitor the Company's policies
relating to ethics and conflicts of interests; discuss with management and the
independent accountants the Company's draft annual financial statements and key
accounting and/or reporting matters; and review the activities and
recommendations of the Company's management accounting personnel.
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 1999, except that Frank Barbaro
failed to timely report his acquisition of 900 shares in February 1999, Thomas
Quinn failed to timely report a gift of 1,000 shares in June 1999 and receipt of
an option for 40,000 shares in September 1999 and Milton Abell failed to timely
report receipt of an option for 40,000 shares in September 1999. The reports
covering such transactions have been filed.
ITEM 10. EXECUTIVE COMPENSATION.
- --------------------------------
SUMMARY COMPENSATION TABLE
- --------------------------
Set forth below is the cash compensation paid by the Company during
1999 to its president. No executive officer received during 1999 compensation
which exceeded, on an annualized basis, $100,000.
ANNUAL COMPENSATION
OTHER ANNUAL
FISCAL YEAR SALARY ($) BONUS ($) COMPENSATION
------------ ------------ ------------ ------------
Paul Balalis 1999 0 --- ---
1998 0 --- ---
1997 $6,000 --- ---
In January 1999, the Board authorized annual compensation to Mr. Balalis of
$120,000. To date this authorization has not been implemented.
15
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
---------------------------------
There were no options granted nor options held during the fiscal year
ended October 31, 1999, to or by Mr. Balalis.
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 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.
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, 1999, (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.
16
<PAGE>
NUMBER OF SHARES PERCENT OF
NAME/ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) COMMON STOCK(2)
- -------------------------------- --------------------- ---------------
Paul Balalis 7,106,996(3) 43.0%
1500 W. Balboa
Newport Beach, CA 92663
Balalis Corporation 2,378,544(4) 14.4%
1500 W. Balboa
Newport Beach, CA 92663
Don Norbury 310,000 1.9%
1500 W. Balboa
Newport Beach, CA 92663
Thomas Quinn 141,000(5) (6)
1500 W. Balboa
Newport Beach, CA 92663
W. Samuel Gunderson 445,440(7) 2.7%
4409 South Rural Blvd.
Tempe, AZ 85282
Milton Abell 115,000(8) (6)
510 Powder Spring Street
Marietta, GA 30064
Charles Packard 150,000 (6)
24 Charlotte
Irvine, CA
Frank Barbaro 27,402 (6)
31285 Camel Point
Laguna Beach, CA
Timothy Carda 2,000 (6)
260 S. Peralta Way
Anaheim, CA 92807
Frederick Meyer 39,600(9) (6)
1300 East Green Street
Pasadena, CA
Sanford Feld 436,500(10) 2.6%
60 Lake Road
Far Hills, MJ 07931
All officers and directors
as a group (nine persons) 8,770,038(5),(7),(8),(9),(10) 52.4%
17
<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 246,400 shares outstanding assuming conversion of
outstanding preferred stock, warrants to purchase 602,500 shares and options to
purchase 240,000 shares.
(3) Includes 2,378,544 shares owned by the Balalis Corporation.
(4) Also included with shares owned by Mr. Balalis.
(5) Includes 90,000 shares subject to five year option expiring (50,000) in
2002 and (40,000) in 2004, exercisable at $.40 per share.
(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 40,000 shares subject to a five year option expiring in 2004,
exercisable at $.40 per shares.
(9) Includes 25,000 shares subject to a five year option expiring in 2002,
exercisable at $.40 per share.
(10) Includes exercise of outstanding warrant to acquire 62,500 shares at
$3.125 per share, expiring in 2004.
18
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
GREENTRAC. In or about December 1999, Paul Balalis, Charles Packard,
Timothy Carda and Donald Norbury, directors and/or officers of the Company (see
"Item 9. Directors, Officers, Promoters and Control Persons") acquired ownership
interests in Greentrac.com, Inc. (see "Item 1. Greentrac.com, Inc."). Mssrs.
Balalis, Packard and Norbury agreed to serve as officers and directors of
Greentrac. Inasmuch as the Company did not have the capital resources required
to fully participate in Greentrac, the disinterested directors of the Company
authorized the participation of Mssrs. Balalis, Packard, Carda and Norbury. The
Company received an approximate 14% equity interest in Greentrac for its
participation.
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 $94,006 due by
October 31, 2000. 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.
The Company leases its Newport Beach offices from Paul Balalis (see
"Item 2. Description of Property Office Facilities").
In the fiscal year ended October 31, 1999, the Company loaned to W.
Samuel Gunderson, vice president of the Company, the sum of $79,133. The
obligation is due on demand, with no monthly payments and accrues interest at
the bank's prime rate (8.25% at October 31, 1999) plus 1%.
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 received $189,750 and 85,250 shares of the Company's Common
Stock in connection with the acquisition. The Company owes Milton Abell, vice
president of the Company, $25,000, in connection with the Company's purchase of
Classic Golf Management, Inc. The Company is currently in negotiations with Mr.
Abell with regard to payment of this obligation.
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.
19
<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, 1999-to be filed by amendment
*21 Subsidiaries of Company
*23 Consents of Independent Accountants
(b) No reports on Form 8-K were filed during the last
quarter of the fiscal year ended October 31, 1999.
- ---------------
*Exhibits filed herewith. Other exhibits are incorporated by reference
to the previous filings.
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
CEC Properties, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheet of CEC Properties,
Inc. and subsidiaries (the "Company") as of October 31, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
October 31, 1999, and the results of their operations and their cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
/s/ CORBIN & WERTZ
Irvine, California
January 21, 2000
F-1
<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-2
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1999
ASSETS
Current assets:
Cash $ 137,072
Accounts receivable 328,998
Inventory 99,450
Receivable from affiliate 52,259
Notes receivable 27,247
Related party note receivable 79,133
Other 33,211
--------------
Total current assets 757,370
--------------
Property and equipment, net 216,573
--------------
Other assets:
Goodwill, net of accumulated amortization of $80,938 583,807
Investment in affiliate 88,314
Other 42,400
--------------
Total other assets 714,521
--------------
$ 1,688,464
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 328,771
Current portion of capital lease obligations 11,249
Notes payable 57,322
Notes payable to related parties 123,044
--------------
Total current liabilities 520,386
Capital lease obligations, net of current portion 40,910
--------------
Total liabilities 561,296
--------------
Commitments and contingencies
Stockholders' equity:
Series A 5% preferred stock, 2,000,000 shares authorized,
$0.90 par value, 140,000 shares outstanding (liquidation
preference of $140,000) 126,000
Common stock, 30,000,000 shares authorized, $0.01 par
value, 15,594,098 shares outstanding (including 47,400
shares committed) 155,941
Additional paid-in capital 24,863,060
Accumulated deficit (24,017,833)
--------------
Total stockholders' equity 1,127,168
--------------
$ 1,688,464
==============
See independent auditors' report and
accompanying notes to consolidated financial statements
F-3
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
1999 1998
------------- -------------
Revenues:
Golf course revenue $ 1,328,798 $ 1,251,380
Construction management revenue 1,238,541 99,809
------------- -------------
Total revenue 2,567,339 1,351,189
------------- -------------
Cost of revenues:
Cost of golf course revenue 867,019 1,020,040
Cost of construction management revenue 396,631 12,916
------------- -------------
Total cost of revenues 1,263,650 1,032,956
------------- -------------
Gross profit 1,303,689 318,233
General and administrative expenses 1,403,343 499,279
------------- -------------
Operating loss (99,654) (181,046)
------------- -------------
Other income (expense):
Equity in income of affiliate 63,314 -
Interest income 3,043 6,524
Interest expense (13,209) (30,635)
Gain on sale of investments - 50,000
Other 50,067 -
------------- -------------
Total other income (expense) 103,215 25,889
------------- -------------
Income (loss) from continuing operations
before provision for income taxes 3,561 (155,157)
Provision for income taxes 1,600 1,600
------------- -------------
Income (loss) from continuing operations 1,961 (156,757)
Discontinued operations:
Loss from discontinued operations (less
applicable income taxes of $0) - (36,289)
Gain on disposal of discontinued operations
(less applicable income taxes of $0) - 93,615
------------- -------------
Income from discontinued operations - 57,326
------------- -------------
Net income (loss) $ 1,961 $ (99,431)
============= =============
Net loss available to common shareholders per
common share (as restated - see Note 2):
Loss from continuing operations
(as restated - see Note 2) $ (0.01) $ (0.03)
Income from discontinued operations
(as restated - see Note 2) - -
------------- -------------
$ (0.01) $ (0.03)
============= =============
Weighted average number of common shares
outstanding 14,916,746 12,911,898
============= =============
See independent auditors' report and
accompanying notes to consolidated financial statements
F-4
<PAGE>
<TABLE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
<CAPTION>
SERIES A CONVERTIBLE COMMON STOCK ADDITIONAL
-------------------------- -------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, November 1, 1997 - $ - 12,676,698 $ 126,767 $23,351,302 $(23,565,786) $ (87,717)
Issuance of Series A 5% convertible
preferred stock, net of issuance
costs of $298,768 1,005,000 904,500 - - (198,268) - 706,232
Issuance of detachable warrants
in connection with Series A
5% convertible preferred stock
(as restated - see Note 2) - - - - 284,307 (284,307) -
Common shares issued for services
rendered - - 312,500 3,125 67,952 - 71,077
Issuance of shares in exercise of
options - - 30,000 300 11,700 - 12,000
Issuance of shares pursuant to
Classic Golf Management, Inc.
purchase agreement - - 14,750 148 6,075 - 6,223
Issuance of shares pursuant to
Classic Golf Shop purchase
agreement - - 10,250 102 4,223 - 4,325
Shares issued in connection with
purchase of First Golf Corporation - - 640,000 6,400 382,400 - 388,800
Cancellation of shares related to
Worldwise Marketing and Graphics - - (10,000) (100) 100 - -
Net loss - - - - - (99,431) (99,431)
------------ ------------ ------------ ------------ ------------ ------------- ------------
Balance, October 31, 1998
(as restated - see Note 2) 1,005,000 904,500 13,674,198 136,742 23,909,791 (23,949,524) 1,001,509
</TABLE>
(CONTINUED)
F-5
<PAGE>
<TABLE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - CONTINUED
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
<CAPTION>
SERIES A CONVERTIBLE COMMON STOCK ADDITIONAL
-------------------------- -------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Estimated fair market value of
common stock dividend issued to
holders of Series A 5% convertible
preferred stock (including 22,400
shares committed) - - 160,800 1,608 68,662 (70,270) -
Series A 5% convertible preferred
stock converted to common shares (865,000) (778,500) 1,384,000 13,840 764,660 - -
Issuance of shares for services
rendered - - 330,100 3,301 78,397 - 81,698
Issuance of shares in exercise of
options (including 25,000
shares committed) - - 75,000 750 29,250 - 30,000
Intrinsic value of options issued
to employees - - - - 12,000 - 12,000
Cancellation of shares related to
Worldwise Marketing and Graphics - - (30,000) (300) 300 - -
Net income - - - - - 1,961 1,961
------------ ------------ ------------ ------------ ------------ ------------- ------------
Balance, October 31, 1999 140,000 $ 126,000 15,594,098 $ 155,941 $24,863,060 $(24,017,833) $ 1,127,168
============ ============ ============ ============ ============ ============= ============
</TABLE>
See independent auditors' report and
accompanying notes to consolidated financial statements
F-6
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
1999 1998
------------- -------------
Cash flows from operating activities:
Net income (loss) $ 1,961 $ (99,431)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 100,253 53,037
Estimated fair market value of common
stock issued for services rendered 81,698 71,077
Estimated intrinsic value of options
issued to employees 12,000 -
Equity in income of affiliates (63,314) -
Gain on sale of property - discontinued
operations - (93,615)
Gain on sale of investments - (50,000)
Changes in operating assets and liabilities
(net of effects of asset acquisition):
Accounts receivable (128,598) (150,400)
Inventory 7,138 20,700
Receivable from affiliate (52,259) -
Other assets (7,846) (41,582)
Accounts payable and accrued expenses 55,868 1,386
------------- -------------
Net cash provided by (used in) operating
activities 6,901 (288,828)
------------- -------------
Cash flows from investing activities:
Collection of notes receivable 401 1,452
Proceeds from sale of property -
discontinued operations - 78,388
Proceeds from sale of investments - 46,351
Issuance of notes receivable - (16,600)
Issuance of related party note receivable (79,133) -
Investment in affiliate (25,000) -
Asset acquisition of First Golf Corp. - (168,175)
Property and equipment purchases (20,813) (5,967)
------------- -------------
Net cash used in investing activities (124,545) (64,551)
------------- -------------
Cash flows from financing activities:
Principal payments on capital lease obligations (3,157) -
Proceeds from issuance of preferred stock, net - 706,232
Proceeds from exercise of stock options 30,000 12,000
Principal borrowing on notes payable 47,430
Principal payments on notes payable (31,590) (81,452)
Principal borrowings on note payable to
related parties 20,318 -
Principal payments on note payable to
related parties (21,641) (130,008)
------------- -------------
Net cash (used in) provided by financing
activities (6,070) 554,202
------------- -------------
Net change in cash (123,714) 200,823
Cash at beginning of year 260,786 59,963
------------- -------------
Cash at end of year $ 137,072 $ 260,786
============= =============
(CONTINUED)
F-7
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
1999 1998
------------- -------------
Supplemental disclosure of cash flow
information:
Cash paid during the year for interest $ 4,589 $ 76,105
============= =============
Cash paid during the year for income taxes $ 1,600 $ 1,600
============= =============
Supplemental disclosure of non-cash investing and financing activities:
See notes to consolidated financial statements for non-cash investing and
financing activities.
See independent auditors' report and
accompanying notes to consolidated financial statements
F-8
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
NOTE 1 - GENERAL
- ----------------
CEC Properties, Inc. ("CEC"), (a Delaware corporation), is in the business of
acquiring, developing and managing golf courses. Classic Golf Management, Inc.
("CGM"), a wholly owned subsidiary of CEC, owns a golf shop, a turf management
method, and a golf learning method. Worldwise Marketing and Graphics, Inc.
("WMG"), a wholly owned subsidiary of CEC, is an advertising company. First Golf
Acquisition Corporation ("FGAC"), a wholly owned subsidiary acquired during
1998, is a golf course construction management company.
NOTE 2 - BASIS OF PRESENTATION
- ------------------------------
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of CEC
Properties, Inc. and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in the consolidation. Investments
in affiliates are recorded on the equity method, either due to ownership
interest of 20% or more but less than 50%, or due to the Company's inability to
exercise effective control.
Investment in Affiliates
- ------------------------
At October 31, 1999, the Company's investments in affiliates consists of a 50%
interest in Diamond Turf, LLC and a 50% interest in Wildflower Golf Course, LLC.
Both investments are accounted for as an affiliate under the equity method
because the Company is not able to exercise effective control over the
operations. As of October 31, 1999, no investment has been made into Wildflower
Golf Course, LLC which has not commenced operations.
The investment in Diamond Turf, LLC is summarized as follows at October 31,
1999:
Initial cash investment $ 25,000
Equity in income of affiliate 63,314
--------------
$ 88,314
==============
A summarized balance sheet and statement of operations of Diamond Turf, LLC as
of October 31, 1999 is as follows:
Total assets $ 393,057
==============
Total liabilities $ 216,428
Total members' interest 176,629
--------------
Total liabilities and members' interest $ 393,057
==============
Sales $ 349,654
==============
Gross profit $ 198,061
==============
Net income $ 126,629
==============
F-9
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
NOTE 2 - BASIS OF PRESENTATION, CONTINUED
- -----------------------------------------
Restatement of 1998 Financial Statements
- ----------------------------------------
Subsequent to the issuance of its 1998 audited financial statements, the Company
determined that a transaction was incorrectly recorded on those financial
statements. As a result, the following restatement was made:
The estimated value of the Company's detachable warrants issued in
connection with the 1998 PPM (see Note 8) were incorrectly recorded at
$0. Based on updated information as to the estimated fair value of the
detachable warrants, the fair value of these warrants and related
preferred dividends have been recorded at $284,307. As a result of this
restatement, there was no change in the Company's loss for fiscal 1998,
however, the loss per share for fiscal 1998 was restated to $0.03 from
the previously recorded $0.01.
Acquisition of 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 fair value at the purchase date.
The Company paid cash of $125,000, issued a note payable in the amount of
$75,000 (see Note 4) 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. If these
revenue levels are achieved, the pledgeholder will release 176,000 and 160,000
shares on November 1, 1999 and November 1, 2000, respectively. Conversely, if
there is a revenue shortfall, the seller may be obligated to return shares
issuable or issued. As of the date of this report, the Company has not
authorized the release of any pledged shares due to revenue guarantees not being
met. In addition, the purchase contract contains certain share price levels at
October 1, 2000. 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. The agreement requires the Company to pay the seller an annual base
salary of $86,000 plus bonus incentives, as defined.
The following unaudited pro forma information has been prepared assuming 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.
F-10
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
NOTE 2 - BASIS OF PRESENTATION, CONTINUED
- -----------------------------------------
YEAR ENDED
OCTOBER 31,1998
(UNAUDITED)
----------------
Net sales $ 2,887,791
================
Net loss $ (261,888)
================
Loss per share $ (0.04)
================
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reported period. Actual
results could materially differ from those estimates.
Year 2000
- ---------
The Year 2000 issue relates to limitations in computer systems and applications
that may prevent proper recognition of the Year 2000. The potential effect of
the Year 2000 issue on the Company and its business partners will not be fully
determinable until the Year 2000 and thereafter. If Year 2000 modifications are
not properly completed either by the Company or entities with which the Company
conducts business, the Company's revenues and financial condition could be
adversely impacted.
Inventory
- ---------
Inventory consists of golf related equipment and apparel and is carried at the
lower of cost (first-in, first-out) or market value. Market is determined by
comparison with recent purchases or net realizable value.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from three to five years. Depreciation expense for the years ended
October 31, 1999 and 1998 was $42,938 and $29,414, respectively. Maintenance and
repairs are charged to expense as incurred. Significant renewals and betterments
are capitalized. At the time of retirement or other disposition of property and
equipment, the cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in operations.
F-11
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
NOTE 2 - BASIS OF PRESENTATION, CONTINUED
- -----------------------------------------
Computer Software
- -----------------
The Company has adopted Statement of Position 98-1 ("SOP 98-1"), "ACCOUNTING FOR
THE COST OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE." The
adoption of this statement of position did not have a material impact on the
Company's results of operation or financial position.
Goodwill
- --------
Goodwill attributable to business acquisitions is amortized using the
straight-line method over lives ranging from two to fifteen years. Amortization
expense for the years ended October 31, 1999 and 1998 totaled $57,315 and
$23,623, respectively.
Impairment of Long-Lived Assets
- -------------------------------
Management of the Company assesses the impairment of long-lived assets by
comparing the future undiscounted net cash flows (without interest charges) from
the use and ultimate disposition of such assets with their carrying amounts. The
amount of impairment, if any, is measured based on fair value and is charged to
operations in the period in which such impairment is determined by management.
As of October 31, 1999, the Company's management believes that no impairment of
the carrying value of its long-lived assets exists.
Organization Costs
- ------------------
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-5 ("SOP 98-5"), "REPORTING THE COSTS OF START-UP
ACTIVITIES." SOP 98-5 requires that all non-governmental entities expense the
costs of start-up activities, including organizational costs as those costs are
incurred. SOP 98-5 is effective for financial statements for the fiscal years
beginning after December 15, 1998. The Company has not yet adopted this SOP
98-5. If the Company had adopted SOP 98-5 for the year ended October 31, 1999,
the cumulative effect on earnings would be a charge of $7,375.
Accumulated Deficit (unaudited)
- -------------------------------
During fiscal 1997, the Company changed its business operations from rental of
residential properties to acquiring, developing and managing golf courses. Net
loss relating to the new operations included in accumulated deficit at October
31, 1999 totaled $97,470.
Income Taxes
- ------------
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "ACCOUNTING FOR INCOME TAXES." Under SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
provided for significant deferred tax assets when it is more likely than not
that such assets will not be recovered.
F-12
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
NOTE 2 - BASIS OF PRESENTATION, CONTINUED
- -----------------------------------------
Stock Based Compensation
- ------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "ACCOUNTING FOR STOCK BASED
COMPENSATION," which defines a fair value based method of accounting for stock
based compensation. However, SFAS 123 allows an entity to continue to measure
compensation cost related to stock and stock options issued to employees using
the intrinsic method of accounting prescribed by Accounting Principles Board
Opinion No. 25 ("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES." Entities
electing to remain with the accounting method of APB 25 must make pro forma
disclosures of net income (loss), as if the fair value method of accounting
defined in SFAS 123 had been applied. The Company has elected to account for its
stock-based compensation to employees under APB 25.
Revenue Recognition
- -------------------
Sales of goods and services and the related cost of sales are recognized when
orders are received and goods are shipped or services are delivered. For
management contracts, revenues are based on a predetermined schedule of each
contract, as defined. Under fixed-price construction management contracts,
unapproved construction cost overruns may be borne by the Company, as defined in
the contracts. When the revised estimate indicates a loss which will be borne by
the Company, a loss provision will be recorded. As of October 31, 1999, no such
provision is required. Accounts receivable are periodically reviewed by
management to assess collectibility. As of October 31, 1999 and 1998, the
Company has recorded no reserve against accounts receivable as a result of
management's review.
Advertising
- -----------
The Company expenses all advertising as incurred. Amounts incurred for
advertising expense for the years ended October 31, 1999 and 1998 were $30,535
and $13,336, respectively.
Earnings Per Share
- ------------------
The Company has adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "EARNINGS PER SHARE." Under SFAS 128, basic earnings per share is
computed by dividing income available to common stockholders by the
weighted-average number of common shares assumed to be outstanding during the
period of computation. Diluted earnings per share is computed similar to basic
earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares were
dilutive. Pro forma per share data has been computed using the weighted average
number of common shares outstanding during the period. Because the Company has
net losses available to common shareholders for 1999 and 1998, basic and diluted
loss per share are the same since additional potential common shares would be
anti-dilutive.
F-13
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
NOTE 2 - BASIS OF PRESENTATION, CONTINUED
- -----------------------------------------
Comprehensive Income
- --------------------
The Company has adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "REPORTING COMPREHENSIVE INCOME." SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements as is effective for fiscal years
beginning after December 15, 1997. SFAS 130 had no effect on the Company's
financial statements as it had no comprehensive income components.
Segment Information
- -------------------
The Company has adopted Statement of Financial Accounting Standards No. 131
("SFAS 131"), "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION." SFAS 131 changes the way public companies report information about
segments of their business in their annual financial statements and requires
them to report selected segment information in their quarterly reports issued to
stockholders. It also requires entity-wide disclosures about the products and
services an entity provides, the material countries in which it holds assets and
reports revenues and its major customers (see Note 12).
Fair Value of Financial Instruments
- -----------------------------------
The Company has adopted Statement of Financial Accounting Standards No. 107
("SFAS 107"), "DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS." SFAS 107
requires disclosure of fair value information about financial instruments when
it is practicable to estimate that value. The carrying amount of the Company's
cash, accounts receivable, accounts payable and accrued liabilities approximates
their estimated fair values due to the short-term maturities of those financial
instruments. The fair value of the related party payables, related party
receivables and notes payable to related parties are not determinable as these
transactions are with related parties.
Recent Accounting Pronouncements
- --------------------------------
The FASB issued Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities on the balance sheet at their fair value. This
statement, as amended by SFAS 137, is effective for financial statements for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The Company
does not expect the adoption of this standard to have a material impact on its
results of operations, financial position or cash flows as it currently does not
engage in any derivative or hedging activities.
Reclassifications
- -----------------
Certain amounts have been reclassified in the 1998 consolidated financial
statements to conform to the 1999 presentation.
F-14
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
NOTE 3 - PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment consist of the following at October 31, 1999:
Furniture and fixtures $ 194,233
Machinery and equipment 90,715
----------------
284,948
Less accumulated depreciation and amortization (68,375)
----------------
$ 216,573
================
NOTE 4 - NOTES PAYABLE
- ----------------------
Notes payable consists of the following at October 31, 1999:
Note payable to bank, secured by a vehicle, payable in
monthly installments of $475, including interest at 8.95%,
due March 2000. $ 2,322
Non-interest bearing note payable to a third party in
connection with the asset purchase of First Golf
Corporation, due on May 1, 1999. The company is in the
process of renegotiating the due date. 55,000
----------------
$ 57,322
================
NOTE 5 - CAPITAL LEASE OBLIGATIONS
- ----------------------------------
The Company is a lessee of certain equipment under capital leases that expire on
various dates through January 2004. Terms of the leases call for monthly
payments ranging from $365 to $535, at implicit rates ranging from 10% to 13.9%
per annum. The assets and liabilities under the capital lease are recorded at
the lower of the present value of the minimum lease payments or the fair market
value of the related assets. The assets are depreciated over their estimated
useful lives.
F-15
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
NOTE 5 - CAPITAL LEASE, CONTINUED
- ---------------------------------
Future minimum lease payments under the capital lease are as follows:
Years Ending
October 31,
----------------------------
2000 $ 16,700
2001 15,975
2002 12,350
2003 12,350
2004 5,760
----------------
63,135
Less amount representing interest (10,976)
----------------
52,159
Less current portion (11,249)
----------------
$ 40,910
================
The following is an analysis of the leased equipment under capital leases as of
October 31, 1999, which is included in property and equipment:
Computer equipment $ 58,053
Less accumulated depreciation (7,926)
----------------
$ 50,127
================
NOTE 6 - INCOME TAXES
- ---------------------
The tax effects of temporary differences that give rise to deferred taxes at
October 31, 1999 are as follows:
Deferred tax asset:
Net operating loss carryforward $ 35,865
Less valuation allowance (35,865)
----------------
Net deferred tax asset $ -
================
The valuation allowance increased by approximately $619 during the year ended
October 31, 1999.
F-16
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
NOTE 6 - INCOME TAXES, CONTINUED
- --------------------------------
No current provision for income taxes for the years ended October 31, 1999 and
1998 is required, except for minimum state taxes. The income tax provision
differs from the amount computed by applying the U.S. Federal income tax rate of
34% to income (loss) from continuing operations before income taxes as follows
for the years ended October 31:
1999 1998
------------- -------------
Computed tax expense (benefit) at
federal statutory rate $ 1,000 $ (54,000)
State income tax benefit, net of
federal effect 130 1,056
Increase in valuation allowance 619 35,246
Other (149) 19,298
------------- -------------
$ 1,600 $ 1,600
============= =============
As of October 31, 1999, the Company had net operating loss carryforwards of
approximately $99,000 and $25,000 for federal and state income tax reporting
purposes, expiring on various dates through 2018 and 2003, respectively.
NOTE 7 - STOCKHOLDERS' EQUITY
- -----------------------------
Preferred Stock
- ---------------
In fiscal 1998, the Company amended its Articles of Incorporation to authorize
up to 6,000,000 shares of $0.90 par value, preferred stock, of which 2,000,000
are designated as Series A 5% convertible preferred stock. If declared by the
Board of Directors, the Series A preferred stock will accrue dividends at 5% and
are payable each June and December, and unpaid 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 provides for each preferred stockholder
one-half of a vote per preferred share on all matters submitted to a vote of the
shareholders. At any time when dividends are in arrears, the preferred
stockholders, 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 stockholders.
As of October 31, 1999, no dividends have been declared.
The preferred stock is convertible to common shares at any time at the holder's
option. The conversion to common stock is at a price of $1.00 divided by 75% of
the average bid price during the three 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 accrued
dividends.
F-17
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
NOTE 7 - STOCKHOLDERS' EQUITY, CONTINUED
- ----------------------------------------
Equity Transactions
- -------------------
Effective May 1998, the Company completed a private placement offering of
502,500 units at $2.00 per unit (the "1998 PPM"). Each unit consisted of two
shares of Series A 5% convertible preferred stock (see above) and one warrant to
purchase one share of the Company's common stock at $3.125 per share, which was
valued at $284,307 (based on Black-Scholes computation under SFAS 123) and
recorded as a preferred dividend (see Note 2). Pursuant to the offering, the
Company received $706,232 (net of offering costs of $298,768).
Common shares issued for services during the years ended October 31, 1999 and
1998 totaled 330,100 and 312,500 at a value of $81,698 and $71,077 (based on the
value of services rendered), respectively.
Common shares issued in connection with exercise of stock options during the
years ended October 31, 1999 and 1998 totaled 75,000 (including 25,000 shares
not issued at October 31, 1999) and 30,000 for $30,000 and $12,000,
respectively.
Common shares issued in connection with the purchase of Classic Golf Management,
Inc., as amended (see Note 11), during the year ended October 31, 1998 totaled
14,750, at a value of $6,223 (based on the exchange price of $0.42 per share).
Common shares issued in connection with the purchase of Classic Golf Shops, as
amended (see Note 11), during the year ended October 31, 1998 totaled 10,250 at
a value of $4,325 (based on the exchange price of $0.42 per share).
Common shares issued in connection with the purchase of First Golf Corporation
during the year ended October 31, 1998 totaled 640,000 at a value of $388,800
(based on the exchange price of $0.61 per share).
Common shares redeemed in connection with the purchase of Worldwise Marketing
and Graphics during the years ended October 31, 1999 and 1998 totaled 30,000 and
10,000, respectively. No benefit was recorded pursuant to this redemption as all
assets related to the acquisition has been written-off.
The Company redeemed 865,000 shares of Series A 5% convertible preferred stock
during the year ended October 31, 1999 for 1,384,000 shares of common stock
according to the terms of the Company's preferred stock.
Common shares issued as a dividend to preferred stockholders during the year
ended October 31, 1999, pursuant to the terms of the 1998 PPM totaled 160,800
(including 22,400 shares not issued at October 31, 1999) at a value of $70,270
(based on the exchange price of $0.44 per share).
Stock Options
- -------------
During 1999, the Company issued options to purchase 190,000 shares of the
Company's common stock at an exercise price of $0.40 per share to Company
employees. The options vest immediately on the date of grant and are exercisable
through October 2009. Under APB 25, $12,000 of compensation expense was recorded
related to these options.
F-18
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
NOTE 7 - STOCKHOLDERS' EQUITY, CONTINUED
- ----------------------------------------
The following is a summary of the stock options activity for the years ended
October 31, 1999 and 1998:
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
------------- -------------
Balance, November 1, 1997 155,000 $0.40
Granted - -
Exercised (30,000) 0.40
Expired - -
------------- -------------
Balance October 31, 1998 125,000 0.40
Granted 190,000 0.40
Exercised (75,000) 0.40
Expired - -
------------- -------------
Balance, October 31, 1999 240,000 $ 0.40
============= =============
Exercisable, October 31, 1999 240,000 $ 0.40
============= =============
Weighted average fair value of options
granted in 1999 $ 0.42
=============
240,000 of the options outstanding at October 31, 1999 have an exercise price of
$0.40 with a weighted average exercise price of $0.40 and a weighted average
remaining contractual life of 4.5 years.
The fair value for each option granted in 1999 was estimated at the date of
grant using the Black-Scholes option pricing model with the following
assumptions: (i) fair value equal to the quoted exchange price on the date of
grant; (ii) risk-free interest rate of 6.26%; (iii) dividend yield of 0%; (iv)
expected life of the options of 3 years; and (v) average volatility of 150%.
Had compensation cost for the Company's 1999 options been determined consistent
with SFAS 123, the Company's net loss and net loss per share for the period
ended October 31, 1999 and 1998 would approximate the pro forma amounts below:
1999 1998
------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ----------- ----------- -----------
Net income (loss) $ 1,961 $ (77,839) $ (99,431) $ (99,431)
=========== =========== =========== ===========
Basic and diluted loss per
share $ (0.01) $ (0.01) $ (0.03) $ (0.03)
=========== =========== =========== ===========
F-19
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
NOTE 7 - STOCKHOLDERS' EQUITY, CONTINUED
- ----------------------------------------
Warrants
- --------
>From time to time, the Company issues warrants pursuant to various consulting
agreements. Under the terms of one of these agreements, the Company issued
warrants to purchase 100,000 shares of the Company's stock at exercise price of
$2.50 per share for services rendered in connection with the 1998 PPM. The
warrants vested on the date of grant and are exercisable through November 2000.
Under SFAS No. 123, no consulting expense was recognized. In addition, the
Company issued 502,500 detachable warrants to investors as part of the 1998 PPM
(see above).
The fair value of each warrant granted during 1998 is estimated using the
Black-Scholes warrant pricing model on the date of grant using the following
assumptions: (i) risk free interest rate of approximately 6.26%, (ii) dividend
yield of 0%; (iii) expected life of the warrants of 3 years; and (iv) average
volatility of 150%.
The following represents a summary of warrants outstanding for the period ended
October 31, 1999:
WEIGHTED
AVERAGE
EXERCISE
WARRANTS PRICE
------------- -------------
Balance, November 1, 1997 - $ -
Granted 602,500 3.02
Exercised - -
Expired - -
------------- -------------
Balance, October 31, 1998 and 1999 602,500 $ 3.02
============= =============
Exercisable, October 31, 1999 602,500 $ 3.02
============= =============
602,500 of the warrants outstanding at October 31, 1999 have an exercise price
ranging from $2.50 to $3.15 and a weighted average remaining contractual life of
3.2 years.
NOTE 8 - EARNINGS PER SHARE
- ---------------------------
Basic and diluted loss per common share is computed as follows:
1999 1998
------------- -------------
Numerator for basic and diluted earnings
(loss) per common share:
Income (loss) from continuing operations $ 1,961 $ (156,757)
Preferred dividends (70,270) (284,307)
------------- -------------
Loss from continuing operations available
to common stockholder (68,309) (441,064)
Discontinued operations - 57,236
------------- -------------
Net loss $ (68,309) $ (383,828)
=============== =============
F-20
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
NOTE 8 - EARNINGS PER SHARE, CONTINUED
- --------------------------------------
1999 1998
------------- -------------
Denominator for basic and diluted earnings
(loss) per common share:
Weighted average common shares outstanding 14,916,746 12,911,898
============= =============
Basic and diluted earnings (loss) available to
common stockholder per common share:
Loss from continuing operations available
to common stockholders $ (0.01) $ (0.03)
Discontinued operations - -
------------- -------------
Net loss per common share $ (0.01) $ (0.03)
============= =============
NOTE 9 - RELATED PARTY TRANSACTIONS
- -----------------------------------
Note Payable to Related Parties
- -------------------------------
During the prior fiscal years, the Company borrowed funds for working capital
purposes from its two major stockholders. As of October 31, 1998, the Company
owed the stockholders $43,367. During fiscal 1999, the Company borrowed $20,318
for working capital purposes and made principal payments of $11,641. The notes
bear interest at 8% and are due upon demand. As of October 31, 1999, the Company
owed the stockholders $52,044. Total interest expense incurred and accrued for
the year ended October 31, 1999 and 1998 was $4,639 and $0, respectively.
During the prior fiscal years, the Company borrowed funds for working capital
purposes from a trust owned by the principal stockholder. As of October 31,
1998, the Company owed the related party $46,000. During fiscal 1999, the
Company borrowed no amounts for working capital purposes and made no principal
payments. The note bears interest at 10% per annum and is due on demand. As of
October 31, 1999, the Company owed the related party $46,000. Total interest
expense incurred and accrued at October 31, 1999 and 1998, totaled $4,600 and
$0, respectively.
Also included in the notes payable to related parties at October 31, 1999 is a
$25,000 payable pursuant to the asset acquisition of Classic Golf Management,
Inc. as amended (see Note 11). During the current year, the Company has made
principal payments of $10,000 pursuant to the agreement. The note payable is
non-interest bearing and is due October 1999. The Company is currently in
negotiations with this related party regarding the payment schedule.
Related Party Note Receivable
- -----------------------------
In October 31, 1999, the Company advanced $79,133 to an officer of the Company.
The note accrues interest at the bank's prime rate (8.25% at October 31, 1999)
plus 1%. The note has no stipulated monthly payments and all unpaid principal
and interest is due on demand.
F-21
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
NOTE 9 - RELATED PARTY TRANSACTIONS, CONTINUED
- ----------------------------------------------
Operating Leases
- ----------------
Effective November 1, 1998, the Company leases its corporate offices from the
family trust of the majority stockholder. The lease expires on October 31, 2003
and provides for monthly payments of $2,600.
The future minimum aggregate lease payments under the operating lease as of
October 31, 1999 is as follows:
Years Ending
October 31,
------------
2000 $ 31,200
2001 31,200
2002 31,200
2003 31,200
----------------
$ 124,800
================
Total rent expense under this operating lease agreement for the year ended
October 31, 1999 was $31,200.
Receivable from Affiliate
- -------------------------
Receivable from affiliate represents working capital advances to Diamond Turf,
LLC (see Note 2). The advances are non-interest bearing and are due on demand.
As of October 31, 1999, the receivable from affiliate totaled $52,259.
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 are as
follows:
Rental income $ 20,709
Expenses:
Interest 36,492
Property operations 14,664
Depreciation 5,842
----------------
56,998
----------------
Net loss $ (36,289)
================
F-22
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
NOTE 10 - DISCONTINUED OPERATIONS, CONTINUED
- --------------------------------------------
The components of the discontinued operations are as follows:
Gain on sale of segment:
Sale proceeds $ 78,388
Less book value of assets at November 1, 1997 (749,764)
Add liabilities assumed by buyer 764,991
----------------
$ 93,615
================
NOTE 11 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
The Company leases space for its operations in Georgia and Arizona on a
month-to-month basis. Total rent expense for the years ended October 31, 1999
and 1998 was $24,458 and $23,403, respectively.
The Company leases equipment for use in its operations under non-cancelable
operating lease agreements. The leases expire on various dates through January
2002 and provide for monthly lease payments ranging from $317 to $4,048. 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, 1999 are as
follows:
Years Ending
October 31,
------------
2000 $ 76,467
2001 66,276
2002 12,144
----------------
$ 154,887
================
Total lease expense incurred under these lease agreements for the years ended
October 31, 1999 and 1998 totaled $45,544 and $36,848, respectively.
Litigation
- ----------
In the ordinary course of business, there are claims and lawsuits brought by or
against the Company. In the opinion of management, the ultimate outcome of these
matters will not materially affect the Company's operations or financial
position.
F-23
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
NOTE 11 - COMMITMENTS AND CONTINGENCIES, CONTINUED
- --------------------------------------------------
Consulting Agreements
- ---------------------
The Company entered into a financial services and consulting agreement with a
third party. In consideration for services rendered at an agreed upon value of
$71,077, the Company issued 312,500 shares of its common stock to the consulting
firm in fiscal 1998. The agreement provides for the issuance of an additional
312,500 shares of its common stock if certain financing arrangements are secured
by the consulting firm on behalf of the Company at an agreed upon value of
$71,077. In fiscal 1999, the Company issued an additional 312,500 shares of
common stock for services rendered (see Note 7).
Worldwise Marketing and Graphics
- --------------------------------
In fiscal 1997, the Company formed a wholly owned subsidiary, Worldwise
Marketing and Graphics, Inc., which acquired 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 contained certain revenue guarantees by the
seller, whereby the Company would issue additional common stock to the sellers
of 20,000 shares on each of the 13th month and 25th month following the date of
the transaction. 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. Due to certain guarantees not being realized, the
Company and the seller entered into a mutual release agreement whereby the
Company cancelled 30,000 and 10,000 shares of the previously issued common stock
during fiscal 1999 and 1998, respectively (see Note 7).
Classic Golf Management, Inc.
- -----------------------------
During the fiscal year 1998, the Company amended the purchase agreement of
Classic Golf Management, Inc. All terms remained the same except the dates
certain revenue guarantees by the seller were to be measured and the issuance of
additional shares. The amended terms are: 1) 14,750 shares will be issued to
seller on October 1998 (see Note 7); 2) on October 1999 and 2000, the Company
will review the revenue guarantees and will deliver, subject to the guarantees
being met, a maximum of 14,750 shares of common stock (the revenue guarantees
were not met as of October 31, 1999); 3) make final note payable payment of
$14,750 on October 31, 1999 (see Note 9); and 4) certain share price levels are
to be met by November 2000, and if not, the Company is to pay the seller the
difference in cash. The price level is personally guaranteed by the Company's
largest shareholder.
F-24
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
NOTE 11 - COMMITMENTS AND CONTINGENCIES, CONTINUED
- --------------------------------------------------
Classic Golf Shops, Hydroturf and Golf 101
- ------------------------------------------
During the fiscal year 1998, the Company amended the asset purchase agreement of
Classic Golf Shops, Hydroturf and Golf 101. All terms remained the same except
the dates certain revenue guarantees by the seller were to be measured and the
issuance of additional shares. The amended terms are: 1) 10,250 shares will be
issued to the seller on October 1998 (see Note 7); 2) on October 1999 and 2000
the Company will review the revenue guarantees and will deliver, subject to the
guarantees being met, a maximum of 10,250 shares of common stock (the revenue
guarantees were not met as of October 31, 1999) ; 3) make final note payable
payment of $10,250 on October 31, 1999 (see Note 9); and 4) certain share price
levels are to be met by November 2000, and if not, the Company is to pay the
seller the difference in cash. The price level is personally guaranteed by the
Company's largest shareholder.
Management Contracts
- --------------------
The Company operates various golf courses in Georgia under management
agreements. The Company receives a total monthly management fee of $6,700 plus
commissions ranging from 1% to 98% on all revenues earned, as defined. The
contracts mature at various dates from December 31, 2001 through March 13, 2002
with automatic one-year renewal options. Total revenues earned under these
agreements totaled $975,463 and $839,538 at October 31, 1999 and 1998,
respectively.
During fiscal year 1998, the Company entered into an agreement to build and then
manage a golf course located in Cherokee County, Georgia (the "County"). The
course will be constructed with the Company's funds. The land the course will be
built upon will be leased to the Company for a term of 50 years. The County is
currently working with federal and state agencies to remove environmental
restrictions on the land in order to begin construction. Management is hopeful
that construction will begin in fiscal year 2000. As of October 31, 1999, the
Company has invested approximately $42,000 into the project, comprised mainly of
architectural and design fees, which is included in other assets in the
accompanying consolidated balance sheet. The accompanying financial statements
do not include adjustments that may be necessary if this agreement cannot be
fulfilled by either party.
Construction Management Contracts
- ---------------------------------
The Company manages the construction of various golf courses under development
agreements. The Company is primarily responsible for hiring subcontractors to
complete the construction process. These contracts expire once the courses are
completed, which are estimated to be on various dates through July 2002. Total
revenues from these agreements was $1,131,650 and $88,309 for the years ended
October 31, 1999 and 1998, respectively.
F-25
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
NOTE 12 - BUSINESS SEGMENTS
- ---------------------------
Reportable business segments for the years ended October 31, 1999 and 1998 are
as follows:
1999 1998
------------- -------------
Net sales from continuing operations:
Golf course $ 1,328,798 $ 1,251,380
Construction management 1,238,541 99,809
------------- -------------
$ 2,567,339 $ 1,351,189
============= =============
Net sales from discontinued operations:
Rental Income $ - $ 20,709
============= =============
Operating profit (loss) from continuing
operations:
Golf course $ 44,385 $ (8,299)
Construction management 218,067 50,467
Corporate (362,106) (223,214)
------------- -------------
$ (99,654) $ (181,046)
============= =============
Operating profit from discontinued operations:
Rental Income $ - $ 203
============= =============
Depreciation and amortization - continuing
operations:
Golf course $ 22,563 $ 25,236
Construction management 57,415 4,669
Corporate 20,275 23,132
------------- -------------
$ 100,253 $ 53,037
============= =============
Identifiable assets - continuing operations:
Golf course $ 584,314
Construction management 967,409
Corporate 136,741
-------------
$ 1,688,464
=============
Capital expenditures:
Golf course $ 5,810 $ 5,967
Construction management 8,889 168,175
Corporate 6,114 -
------------- -------------
$ 20,813 $ 174,142
============= =============
F-26
<PAGE>
CEC PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
NOTE 13 - SUBSEQUENT EVENTS (UNAUDITED)
- ---------------------------------------
In December 1999, the Company entered into an agreement to arrange for annual
sales of $30,000,000 for Greentrac.com, Inc., a company organized by certain
stockholders and directors of the Company. In exchange, the Company received
approximately 14% interest in Greentrac.com, Inc., which was formed to establish
an internet-based business to business market place for the procurement of
commercial groundskeeping equipment and supplies.
F-27
<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.
Dated: February 15, 2000. 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: February 15, 2000
- --------------------------------
Paul Balalis, Director
/s/ Dated:
- --------------------------------
Frank P. Barbaro, Director
/s/ Timothy Carda Dated: February 15, 2000
- --------------------------------
Timothy Carda, Director
/s/ Sanford Feld Dated: February 15, 2000
- --------------------------------
Sanford Feld, Director
/s/ Frederick Meyer Dated: February 15, 2000
- --------------------------------
Frederick Meyer, Director
/s/ Charles Packard Dated: February 15, 2000
- --------------------------------
Charles Packard, Director
21
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
22
EXHIBIT 23
----------
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in this annual report on Form
10-KSB for the year ended October 31, 1999, of our report dated January 21,
2000, appearing in the Registration Statement on Form S-3 (File No. 333-98067)
of CEC Properties, Inc., filed with the Securities and Exchange Commission
pursuant to the Securities Act of 1933, which became effective on or about
December 17, 1998.
February 15, 2000
Irvine, California
/s/ CORBIN & WERTZ
23
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in this annual report on Form
10-KSB for the year ended October 31, 1999, of our report dated January 26,
1999, appearing in the Registration Statement on Form S-3 (File No. 333-98067)
of CEC Properties, Inc., filed with the Securities and Exchange Commission
pursuant to the Securities Act of 1933, which became effective on or about
December 17, 1998.
/s/ STARR and WALTERS
Accountancy Corporation
Santa Ana, California
February 14, 2000
24
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 137,072
<SECURITIES> 0
<RECEIVABLES> 328,998
<ALLOWANCES> 0
<INVENTORY> 99,450
<CURRENT-ASSETS> 757,370
<PP&E> 216,573
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,688,464
<CURRENT-LIABILITIES> 520,386
<BONDS> 0
0
126,000
<COMMON> 155,941
<OTHER-SE> 845,227
<TOTAL-LIABILITY-AND-EQUITY> 1,688,464
<SALES> 2,567,339
<TOTAL-REVENUES> 2,567,339
<CGS> 1,263,650
<TOTAL-COSTS> 2,666,993
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,209
<INCOME-PRETAX> 3,561
<INCOME-TAX> 1,600
<INCOME-CONTINUING> 1,961
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,961
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
