UNITED STATES OF AMERICA
In the Matter of
Richard P. Bellinger, Jack P. Bates,
and Stephen S. Winslett
|ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER|
The Securities and Exchange Commission ("Commission") deems it appropriate to institute public administrative proceedings pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Richard P. Bellinger, Jack P. Bates and Stephen S. Winslett ("Respondents").
In anticipation of the institution of these administrative proceedings, Respondents have submitted Offers of Settlement ("Offers"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or in which the Commission is a party, and without admitting or denying the findings herein, except that the Respondents admit the Commission's jurisdiction over them and the subject matter of the proceedings, Respondents consent to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order ("Order").
Accordingly, IT IS ORDERED that proceedings pursuant to Section 21C of the Exchange Act be, and hereby are, instituted.
On the basis of this Order and Respondents' Offers, the Commission finds1 that:
A. Settling Respondents
1. Richard P. Bellinger, age 50, joined Golden Bear International, Inc. ("GBI"), a private company owned by the professional golfer Jack Nicklaus ("Nicklaus"), in 1979. Bellinger served as GBI's president from 1989 until he left GBI in January 1998. Bellinger became president and chief executive officer of Golden Bear Golf, Inc. ("Golden Bear" or "the Company") at the time of Golden Bear's initial public offering in August 1996 and served in those roles until he left Golden Bear in August 1998.
2. Jack P. Bates, age 42, joined GBI in 1984 and has served as GBI's Chief Financial Officer since before Golden Bear's August 1996 initial public offering. Bates was the chief financial officer of Golden Bear from August 1996 until he left Golden Bear on October 22, 1997. Bates was certified as a public accountant licensed to practice in Florida until he chose to move to inactive status in December 1996.
3. Stephen S. Winslett, age 50, joined Golden Bear as chief financial officer on October 22, 1997 and served in that role until he left Golden Bear in August 2000. Winslett is certified as a public accountant and is licensed to practice in Texas.
4. This action arises out of violations of the reporting provisions of Section 13 of the Exchange Act and rules thereunder, caused by Bellinger, Bates and Winslett, all in their capacity as officers of Golden Bear Golf, Inc.
5. Golden Bear is an international golf services company. Its common stock was, until the Company completed a going private transaction on June 20, 2000, registered with the Commission pursuant to Section 12(g) of the Exchange Act. Golden Bear's common stock traded in the National Market System of the Nasdaq Stock Market, Inc.
6. In 1996 GBI spun off several divisions into Golden Bear and on August 1, 1996, Golden Bear conducted an initial public offering of stock. After the initial public offering, Golden Bear's businesses included Golden Bear Golf Centers, Inc. ("Golf Centers"), which owned and operated golf practice facilities and Paragon Golf Construction, Inc.2 ("Paragon"), which provided golf course construction services. GBI continued other activities, including golf course design.
7. After the initial public offering, Golden Bear named GBI's management team to run the Company. Golden Bear's management team also continued to run GBI. On October 22, 1997, Winslett replaced Bates as Golden Bear's CFO. During their respective terms as officers of Golden Bear in 1996, 1997 and 1998, Bellinger, Bates and Winslett caused Golden Bear's omission of material information necessary to make the Company's required financial statements not misleading. More specifically, Bellinger and Bates caused the Company's failure to disclose that a change in the Company's revenue recognition method resulted in a material increase to the Company's reported revenue and gross margin, and all Respondents caused the Company's failure to disclose certain material terms of related-party transactions.
8. As a result Golden Bear's quarterly and annual reports for the periods ended September 30, 1996 through June 30, 1998 were not in conformity with Generally Accepted Accounting Principles ("GAAP") or the requirements of the federal securities laws and regulations.3
Accounting Change Results in Material Increase to Golden Bear's Results in 1997 and 1998 and is Not Disclosed
9. In the second quarter of 1997 Golden Bear changed the way it recognized revenue on construction contracts. As a result of the change, the Company experienced a material gain in revenue and gross margin. Golden Bear then failed to disclose the change and the effects of the change on reported earnings as required by GAAP.
10. Paragon measured its income earned on its golf course construction contracts pursuant to the percentage-of-completion method of contract accounting, which permits the proportionate recognition of total revenue, cost and gross margin based on the percentage of work estimated complete under a contract. Through the first quarter of 1997, Paragon developed its percentage-of-completion estimates under the "cost method", determining them solely with reference to costs incurred-to-date as a percentage of the project's estimated total costs.4
11. In the second quarter of 1997, Bates and Bellinger approved a change in the way Golden Bear estimated the percentage-of-completion of Paragon's construction jobs from the cost method to, what the Company called, the "earned value method." Under the earned value method, Golden Bear continued to recognize proportionate amounts of total revenue, cost and gross margin based on the percentage of work estimated complete under a contract. But in developing its percentage-of-completion estimates under the earned value method, Paragon relied not on objective criteria, such as costs incurred, but instead relied on management's subjective estimates as to its progress.5
12. Bates and Bellinger knew when they approved the change that the Company would record higher revenue and gross margin in connection with Paragon's contracts under the earned value method than it would have recorded under the cost method for the same period.
13. For each period following Golden Bear's adoption of the earned value method, it reported higher revenue and gross margin in connection with Paragon's contracts than it would have recorded under the cost method. GAAP required disclosure of the nature and effect of this accounting change in the financial statements because regardless of whether the adoption of the earned value method was considered a change in accounting principle or a change in accounting estimate, it was a change that had a material effect on the financial statements.
14. For example, in reporting its second quarter of 1997 results, Golden Bear failed to disclose that the change from the cost method to the earned value method resulted in an $800,000 increase in its reported gross margin for the period.6 This difference was material to Golden Bear's reported financial results for the quarter. But for the accounting change, instead of Golden Bear reporting net income of approximately $3,000, it would have reported a net loss.
15. In addition, in its Management's Discussion and Analysis Golden Bear favorably compared its second quarter of 1997 results to its results for the comparable period of the prior year but failed to disclose that those results were not comparable since it measured Paragon's second quarter of 1996 income under the cost method and it measured its second quarter of 1997 income under the earned value method.
16. Thus, in reporting its improved results for the second quarter of 1997 and subsequent periods, Golden Bear failed to disclose that the Company's accounting change from the cost method to the earned value method was a material element of those improved results, even though GAAP required such a disclosure.
Golden Bear Improperly Failed to Disclose Certain Terms of Related Party Transactions
17. Golden Bear also failed to disclose certain material terms of related party transactions it had with GBI and with Nicklaus personally. These were (a) an October 1996 GBI guarantee of an amount owed to Paragon by the owner of a specific golf course construction project ("Project A"), (b) Golden Bear's July 1998 forgiveness of GBI's $500,000 Project A guarantee in connection with the Company's July 1998 settlement of claims relating to a separate project ("Project B") in which Nicklaus loaned Paragon $2.4 million it used in the settlement and provided his personal design services through GBI to upgrade the course and (c) Project B's owners providing Nicklaus, in consideration of his payment of $100,000 in connection with the Project B settlement, a contingent right to recover up to $2.5 million from possible future Project B real estate profits in connection with which Nicklaus and Golden Bear agreed that any recovery under this profit participation agreement would be credited against Paragon's $2.4 million note payable to Nicklaus. GAAP requires disclosure of such material terms of related party transactions because they are necessary for a full understanding of the related party transactions.
i. Project A GBI Guarantee
18. A division of GBI had designed the Project A golf course pursuant to an agreement with the owner. This agreement called for GBI to receive cash compensation and a contingent fee based on a percentage of the proceeds of sales of future golf course memberships. Paragon had built the course under a separate agreement with the project's owner. In the fourth quarter of 1996, Paragon and the owner agreed to a change order to the original construction agreement that increased the cost of the project by $750,000. Under the terms of Project A's change order with Paragon, the owner was obligated to pay Paragon for the full amount of the $750,000 change order on or before December 31, 1997.
19. To induce the owner to agree to hire Paragon to do the additional work, GBI in a separate, but related, agreement between GBI and the owner guaranteed the owner's $750,000 payment to Paragon. Under this agreement, GBI permitted the owner to pay Paragon for the change order with membership sales compensation payable to GBI under the design agreement. GBI also agreed that if Project A's owner used membership sales compensation due GBI to pay Paragon under the change order, GBI would credit these payments against membership sales proceeds otherwise due GBI.
20. GBI and Project A's owners further agreed that if the project's membership sales did not generate sufficient compensation by December 31, 1997 to cover the entire $750,000 payable due Paragon, GBI would reimburse the owner for the balance due under the change order. In effect, GBI guaranteed the owner's obligation to Paragon and any outstanding balance due under the change order that was unpaid as of December 31, 1997.
21. At December 31, 1997 Project A owed Paragon a balance of $500,000 under the terms of the change order. Neither the project's owners nor GBI paid the balance at year-end 1997 when it became due and this balance remained outstanding until it was forgiven by Golden Bear, as discussed below. Both Bellinger and Winslett were aware of this.
ii. Project B Settlement and Forgiveness of GBI Guarantee
22. In July 1998 Nicklaus personally loaned Golden Bear $2.4 million in connection with the settlement of Project B's claims against Golden Bear, GBI and Nicklaus resulting from Paragon's failure to complete the project under the terms of its construction agreement with the owners. GBI had designed the Project B golf course pursuant to an agreement with the project's owners and Paragon had built the course under a separate agreement. Nicklaus also agreed in connection with the Project B settlement to provide his personal design services through GBI to upgrade the course.
23. In connection with Nicklaus' participation in the Project B settlement, Golden Bear forgave GBI's Project A guarantee of the unpaid $500,000 balance owed to the Company by the owner's of Project A.
24. Also, in connection with the Project B settlement, Nicklaus paid $100,000 to Project B's owners in exchange for Project B's owners providing Nicklaus a contingent right to participate in future real estate profits from Project B up to $2.5 million. This, in effect, gave Nicklaus the contingent right to recover the $2.4 million he loaned Paragon and the $100,000 he paid Project B's owners in consideration of the contingent right to participate in future real estate profits. Nicklaus and Golden Bear agreed that any recovery under this profit participation agreement would be credited against Paragon's $2.4 million note payable to Nicklaus.
iii. Project A GBI Guarantee, Golden Bear's Forgiveness of GBI Guarantee and Profit Participation Fee Not Disclosed
25. Golden Bear failed to properly disclose in its financial statements for the third quarter of 1996 and at year-end 1996 the existence of the GBI guarantee in connection with Project A. The Company did disclose the Project A change order, its amount and GBI's agreement to grant Project A's owner a credit of up to $750,000 for membership sales proceeds that the owner used to pay the Paragon change order but it failed to disclose the GBI guarantee. At year-end 1997, after Project A had defaulted on its obligation to pay the balance due pursuant to the change order, then $500,000, Golden Bear failed to disclose the default, and the fact that GBI had become the obligor due to its guarantee.
26. In addition, the Company disclosed the Project B settlement in its financial statements for the third quarter of 1998, but it failed to disclose Golden Bear's forgiveness of the GBI guarantee that was a material part of that transaction and which represented a $500,000 write-off of receivables due Golden Bear, or the upgrade of the Project B course.
27. The Company also failed to disclose Nicklaus' $100,000 payment to Project B's owners securing his contingent right to participate in possible future real estate profits up to $2.5 million and the right of Golden Bear to offset such participation payments, if any, against its obligation to repay the Nicklaus loan.
28. Section 13(a) of the Exchange Act requires issuers to file such annual and quarterly reports as the Commission may prescribe and in conformity with such rules as the Commission may promulgate. Rules 13a-1 and 13a-13 require the filing of annual and quarterly reports that comply with the Commission's Regulation S-X, which requires that financial statements be presented in conformity with GAAP.
29. As described above, the periodic reports filed by Golden Bear for the periods ended September 30, 1996 through December 31, 1998 were not in conformity with GAAP or the requirements of federal securities laws and regulations. Consequently, Golden Bear violated Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. Respondents had important roles in the company's financial reporting process. Bellinger and Bates knew or should have known that the Company's Form 10Q for the period ended September 30, 1996 and Form 10K for the period ended December 31, 1996 failed to disclose the GBI guarantee and that its Form 10Q for the period ended June 30, 1997, failed to disclose the accounting change and the effect of the change to the earned value method. Bellinger and Winslett knew or should have known the Company's Form 10K for the period ended December 31, 1997 failed to disclose Project A's default under its Paragon change order and that GBI had become the obligor due to its guarantee. And Winslett knew or should have known that the Company's Form 10Q for the period ended June 30, 1998 and the Form 10K for the period ended December 31, 1998 failed to disclose Golden Bear's forgiveness of the GBI guarantee in connection with the Project B settlement and failed to disclose the real estate profit participation agreement Nicklaus secured from Project B's owners. Thus, Respondents were a cause of Golden Bear's violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder.
In view of the foregoing, it is appropriate to impose the sanctions agreed to in the Offers submitted by Respondents. Accordingly,
IT IS ORDERED, pursuant to Section 21C of the Exchange Act, that Respondents cease and desist from causing any violation and any future violation of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder.
By the Commission.
Jonathan G. Katz
|1||The findings herein are made pursuant to Respondents' Offers of Settlement and are not binding on any other person or entity in this or any other proceeding|
|2||Paragon Golf Construction changed its name in 1997 to Paragon Construction International.|
|3||Golden Bear's fiscal year-end was December 31.|
|4||For example, $500,000 in costs-to-date on a project with $1,000,000 in estimated total costs at the completion of the contract indicated that the work under the contract was 50% complete. Under the cost method Paragon would recognize 50% of the project's estimated total revenue, cost and gross margin.|
|5||For example, in a case where Paragon management's earned value percentage of completion estimate was 50% complete, Paragon would recognize for financial statement purposes 50% of the project's estimated total revenue, cost and gross margin, even if the project had incurred substantially lower than 50% of the project's estimated total costs.|
|6||Golden Bear's change in the way it measured Paragon's revenue and gross margin from the cost method to the earned value method had a material effect in each period from the third quarter of 1997 through the first quarter of 1998.|
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