<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission file number 1-12246
NATIONAL GOLF PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Maryland 95-4549193
(State of incorporation) (I.R.S. Employer Identification No.)
1448 15th Street, #200, Santa Monica, CA 90404
(Address of principal executive offices) (Zip Code)
(310) 260-5500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X___ No___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
12,291,720 shares of common stock, $.01 par value, as of October 25, 1996
Page 1 of 21
<PAGE>
NATIONAL GOLF PROPERTIES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets of National
Golf Properties, Inc. as of September 30,
1996 and December 31, 1995 3
Consolidated Statements of Operations of
National Golf Properties, Inc. for the
three months ended September 30, 1996 and
1995 4
Consolidated Statements of Operations of
National Golf Properties, Inc. for the
nine months ended September 30, 1996 and
1995 5
Consolidated Statements of Cash Flows of
National Golf Properties, Inc. for the
nine months ended September 30, 1996 and
1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II. Other Information 18
Exhibit Index 21
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL GOLF PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
---------------- ----------------
<S> <C> <C>
ASSETS
PROPERTY
LAND $ 62,876 $ 51,909
BUILDINGS 142,713 108,120
GROUND IMPROVEMENTS 253,863 168,872
FURNITURE, FIXTURES AND EQUIPMENT 28,338 26,646
CONSTRUCTION IN PROGRESS 11,274 6,521
-------- -------
499,064 362,068
LESS: ACCUMULATED DEPRECIATION (71,243) (58,787)
-------- --------
NET PROPERTY 427,821 303,281
CASH AND CASH EQUIVALENTS 9,775 7,089
INVESTMENTS 481 809
MORTGAGE NOTES RECEIVABLE 2,983 27,441
DUE FROM AFFILIATES 610 -
OTHER ASSETS 9,329 9,347
-------- --------
TOTAL ASSETS $450,999 $347,967
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE $207,329 $143,176
ACCOUNTS PAYABLE AND OTHER LIABILITIES 5,343 2,077
DUE TO AFFILIATES - 1,807
------- --------
TOTAL LIABILITIES 212,672 147,060
------- --------
MINORITY INTEREST 21,752 23,000
------- --------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $.01 PAR VALUE,
5,000,000 SHARES AUTHORIZED -
NONE ISSUED - -
COMMON STOCK, $.01 PAR VALUE,
40,000,000 SHARES AUTHORIZED,
12,250,820 AND 10,621,975 SHARES
ISSUED AND OUTSTANDING AT SEPTEMBER
30, 1996 AND DECEMBER 31, 1995,
RESPECTIVELY 123 106
ADDITIONAL PAID IN CAPITAL 220,350 181,730
ACCUMULATED DEFICIT (1,360) (1,360)
UNAMORTIZED RESTRICTED STOCK
COMPENSATION (2,538) (2,569)
------- ------
TOTAL STOCKHOLDERS' EQUITY 216,575 177,907
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $450,999 $347,967
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
<PAGE>
NATIONAL GOLF PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------- -------------------
<S> <C> <C>
REVENUES:
RENT FROM AFFILIATES $15,448 $11,659
RENT 586 183
------- -------
TOTAL REVENUES 16,034 11,842
------- -------
EXPENSES:
GENERAL AND ADMINISTRATIVE 1,062 1,268
DEPRECIATION AND AMORTIZATION 5,154 3,558
------- -------
TOTAL EXPENSES 6,216 4,826
------- -------
OPERATING INCOME 9,818 7,016
OTHER INCOME (EXPENSE):
INTEREST INCOME FROM AFFILIATES - 866
INTEREST INCOME 141 492
OTHER INCOME 59 -
INTEREST EXPENSE (3,900) (2,708)
------- -------
INCOME BEFORE PROVISION FOR TAXES AND
MINORITY INTEREST 6,118 5,666
PROVISION FOR TAXES (92) (88)
------- -------
INCOME BEFORE MINORITY INTEREST 6,026 5,578
INCOME APPLICABLE TO MINORITY INTEREST (2,625) (2,585)
------- -------
NET INCOME $ 3,401 $ 2,993
======= =======
NET INCOME PER COMMON SHARE $ 0.29 $ 0.28
======= =======
WEIGHTED AVERAGE NUMBER OF COMMON STOCK
AND COMMON STOCK EQUIVALENTS 11,829 10,647
======= =======
DISTRIBUTION DECLARED PER COMMON SHARE $ 0.42 $ 0.41
OUTSTANDING (NOTE 9) ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE>
NATIONAL GOLF PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
--------------------- --------------------------
<S> <C> <C>
REVENUES:
RENT FROM AFFILIATES $42,006 $33,436
RENT 961 409
GAIN ON SALE OF PROPERTY 25 1,936
------- -------
TOTAL REVENUES 42,992 35,781
------- -------
EXPENSES:
GENERAL AND ADMINISTRATIVE 3,676 3,329
DEPRECIATION AND AMORTIZATION 13,452 9,995
------- -------
TOTAL EXPENSES 17,128 13,324
------- -------
OPERATING INCOME 25,864 22,457
OTHER INCOME (EXPENSE):
INTEREST INCOME FROM AFFILIATES 1,682 2,299
INTEREST INCOME 316 975
OTHER INCOME 164 103
INTEREST EXPENSE (9,973) (6,178)
------- -------
INCOME BEFORE PROVISION FOR TAXES AND
MINORITY INTEREST 18,053 19,656
PROVISION FOR TAXES (203) (227)
------- -------
INCOME BEFORE MINORITY INTEREST 17,850 19,429
INCOME APPLICABLE TO MINORITY INTEREST (8,076) (8,973)
------- -------
NET INCOME $ 9,774 $10,456
======= =======
NET INCOME PER COMMON SHARE $ 0.88 $ 0.98
======= =======
WEIGHTED AVERAGE NUMBER OF COMMON STOCK
AND COMMON STOCK EQUIVALENTS 11,072 10,634
======= =======
DISTRIBUTION DECLARED PER COMMON SHARE
OUTSTANDING (NOTE 9) $ 1.24 $1.1975
======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
<PAGE>
NATIONAL GOLF PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 9,774 $ 10,456
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 13,452 9,995
AMORTIZATION OF RESTRICTED STOCK 768 707
MINORITY INTEREST IN EARNINGS 8,076 8,973
GAIN ON SALE OF PROPERTY (25) (1,936)
OTHER ADJUSTMENTS 84 (101)
CHANGES IN ASSETS AND LIABILITIES:
OTHER ASSETS (324) (586)
ACCOUNTS PAYABLE AND OTHER
LIABILITIES 3,330 1,407
DUE FROM/TO AFFILIATES (2,112) (1,382)
-------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 33,023 27,533
======== =========
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASE OF HELD-TO-MATURITY
SECURITIES - (315,775)
PROCEEDS FROM HELD-TO-MATURITY
SECURITIES - 305,213
PURCHASE OF AVAILABLE-FOR-SALE
SECURITIES (5,344) (5,491)
PROCEEDS FROM SALE OF AVAILABLE-FOR-
SALE SECURITIES 5,672 5,491
PROCEEDS FROM MORTGAGE LOANS 25,395 -
PURCHASE OF PROPERTY AND RELATED
ASSETS (71,931) (52,031)
PROCEEDS FROM SALE OF PROPERTY
AND RELATED ASSETS 1,078 -
PAYMENTS FOR COVENANTS NOT TO COMPETE - (5)
-------- ---------
NET CASH USED BY INVESTING
ACTIVITIES (45,130) (62,598)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
PRINCIPAL PAYMENTS ON NOTES PAYABLE (60,983) (14,095)
PROCEEDS FROM NOTES PAYABLE 99,759 76,500
LOAN COSTS (406) (905)
REPURCHASE OF OP UNITS (116) -
PROCEEDS FROM STOCK OPTIONS EXERCISED 428 -
CASH DISTRIBUTIONS (13,090) (12,547)
LIMITED PARTNERS' CASH DISTRIBUTIONS (10,799) (10,276)
-------- ---------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 14,793 38,677
-------- ---------
NET INCREASE IN CASH 2,686 3,612
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 7,089 4,086
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 9,775 $ 7,698
======== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
INTEREST PAID $ 7,008 $ 3,757
TAXES PAID 242 374
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
<PAGE>
NATIONAL GOLF PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
------------------------------------------
Organization
------------
National Golf Properties, Inc. (the "Company") owns substantially all of
the golf courses through its general partner interest in National Golf
Operating Partnership, L.P. (the "Operating Partnership"). The Operating
Partnership has an 89% general partner interest in Royal Golf, L.P. II
("Royal Golf"). Unless the context otherwise requires, all references to
the Company's business and properties include the business and properties
of the Operating Partnership and Royal Golf.
The consolidated financial statements include the accounts of the Company,
the Operating Partnership and Royal Golf. All significant intercompany
transactions and balances have been eliminated.
The accompanying consolidated financial statements for the three and nine
months ended September 30, 1996 and 1995 have been prepared in accordance
with generally accepted accounting principles ("GAAP") and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. These
financial statements have not been audited by independent public
accountants, but include all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial condition, results of operations and cash
flows for such periods. However, these results are not necessarily
indicative of results for any other interim period or for the full year.
The accompanying consolidated balance sheet as of December 31, 1995 has
been derived from the audited financial statements, but does not include
all disclosures required by GAAP.
Certain information and footnote disclosures normally included in financial
statements in accordance with generally accepted accounting principles have
been omitted pursuant to requirements of the Securities and Exchange
Commission. Management believes that the disclosures included in the
accompanying interim financial statements and footnotes are adequate to
make the information not misleading, but should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1995.
(2) Property
--------
During the nine months ended September 30, 1996, the Company purchased 31
golf courses for an aggregate initial investment of approximately $133.4
million (including the $59.9 million purchase of 20 golf courses from Golf
Enterprises, Inc. ("GEI") and the $31.6 million purchase of four golf
courses upon which the Company previously held participating mortgages).
All but four golf courses were purchased from unaffiliated third parties.
Each of the acquisitions has been accounted for utilizing the purchase
method of accounting, and accordingly, the
7
<PAGE>
acquired asset is included in the statement of operations from the date of
acquisition. Initial investment amount includes purchase price, closing
costs and other direct costs associated with the purchase. The
aforementioned golf courses, except for Sweetwater Country Club and
Colonial Charters Golf Course, are leased to American Golf Corporation
("AGC") pursuant to long-term triple net leases. Sweetwater is leased to
Cobblestone Golf Group, Inc. pursuant to a long-term triple net lease.
Colonial Charters Golf Course is leased to The Links Group, Inc. pursuant
to a long-term triple net lease. Prior to the acquisition of 20 golf
courses from GEI, Paradise Hills Golf Course was leased to GEI pursuant to
a long-term triple net lease. As of the closing of the transaction with
GEI, the lease was terminated and a new lease was entered with AGC.
<TABLE>
<CAPTION>
Acquisition Initial
Date Course Name Location Investment
- ------------- ----------- ------------------- ------------------------
(In thousands)
<S> <C> <C> <C>
1/11/96 Golden Oaks Fleetwood,
Country Club Pennsylvania $ 5,665
4/9/96 Paradise Hills Albuquerque,
Golf Course New Mexico 5,530
4/30/96 Chesapeake Golf Chesapeake,
Club Virginia 3,811
5/9/96 SeaCliff Country Huntington Beach,
Club California 10,032
7/1/96 Ancala Country Scottsdale,
Club Arizona 8,526
Arrowhead Country Glendale,
Club Arizona 6,001
Black Lake Nipomo,
Golf Course California 11,043
Painted Desert Las Vegas,
Golf Course Nevada 6,096
Sweetwater Sugarland,
Country Club Texas 11,990
7/10/96 Colonial Charters Longs,
Golf Course South Carolina 4,792
7/31/96 GEI Courses 59,899
-------------
Total Initial Investment $ 133,385
=============
</TABLE>
8
<PAGE>
(3) Investments
-----------
<TABLE>
<CAPTION>
September 30, 1996
------------------
Cost Market Maturity
____ ______ ________
(In thousands)
<S> <C> <C> <C>
Available-for-sale
securities:
Commercial Paper $ 481 $ 481 10/1996
</TABLE>
During the nine months ended September 30, 1996 and 1995, available-for-
sale securities were sold resulting in proceeds of approximately $5.7
million and $5.5 million, respectively.
(4) Notes Payable
-------------
The Operating Partnership placed $75 million of fixed rate, uncollaterized
notes due 2006 with a group of institutional investors. The notes will be
issued in two series. The first note series in the amount of $40 million
was issued with a fixed interest rate of 7.9%, and the second note series
in the amount of $35 million will be issued, at the Company's option within
eight months of the first note series, with a fixed interest rate of 8%.
The Operating Partnership received the $40 million first note series on
July 1, 1996. The Operating Partnership applied the net proceeds from the
$40 million notes to repay bank debt of $37.5 million and to partially
finance the acquisition of Sweetwater Country Club.
The Company has a $40 million credit facility, which terminates on December
1, 1996, bearing interest at a floating rate, from a commercial bank that
may be used to finance working capital, acquisitions and capital
improvements. There were outstanding advances of approximately $37.3
million under this credit facility as of September 30, 1996, representing
an increase of approximately $25.3 million from December 31, 1995.
(5) Lease Rental Agreements
-----------------------
The minimum rent for the first year for each golf course under the leases
is initially set at a fixed amount. Thereafter, with respect to the leases
for the initial portfolio of golf courses at the time of the completion of
the Company's initial public stock offering on August 18, 1993 (the
"Offering"), minimum rent will be increased each year by 4% or, if lower,
150% of the annual percentage increase in the Consumer Price Index ("CPI")
(the "Base Rent Escalation"). For these leases, percentage rent will be
paid to the Company each year in the amount, if any, by which the sum of
35% of course revenue in excess of a baseline amount plus 5% of other
revenue in excess of a baseline amount exceeds the cumulative Base Rent
Escalation since the commencement date of such leases. Generally, for the
leases entered into subsequent to the Offering, the rent is based upon the
greater of (a) the minimum base rent or (b) a specified percentage of
course revenue and other revenue. The minimum base rent under these leases
will be increased for specified years during the lease term based upon
increases in the CPI, provided that each such annual CPI increase shall not
exceed five percent. On an
9
<PAGE>
interim basis, percentage rent is recognized taking into consideration the
seasonality of the golf courses. Such percentage rent income for the nine
months ended September 30, 1996 and 1995 was approximately $3,886,000 and
$2,864,000, respectively.
(6) Pro Forma Financial Information
-------------------------------
The pro forma financial information set forth below is presented as if the
1996 acquisitions (Note 2) had been consummated as of January 1, 1996 and
1995.
The pro forma financial information is not necessarily indicative of what
actual results of operations of the Company would have been assuming the
acquisitions had been consummated as of January 1, 1996 and 1995, nor does
it purport to represent the results of operations for future periods.
<TABLE>
<CAPTION>
For the nine
(In thousands, except per share amounts) months ended September 30,
- ---------------------------------------- --------------------------
1996 1995
------------ -----------
<S> <C> <C>
Total revenues $49,619 $45,868
Net income $10,100 $10,581
Net income per weighted average common $ 0.82 $ 0.87
share
Weighted average number of common stock
and common stock equivalents 12,300 12,212
</TABLE>
(7) Statement of Cash Flows - Supplemental Disclosures
--------------------------------------------------
Non-cash transactions for the nine months ended September 30, 1996 include
(i) approximately $40.8 million of golf course acquisitions which were
financed by the issuance of 1,577,820 shares of Company common stock; (ii)
the refinancing of approximately $25.2 million in assumed debt; (iii)
approximately $1.9 million in capital improvements accrued but not paid;
(iv) approximately $1.5 million of golf course acquisitions which were
financed by the issuance of 61,339 OP Units; and (v) approximately $900,000
in seller financing related to the sale of Wootton Bassett Golf Club by the
Company.
(8) Other Data
----------
AGC is the lessee of all but four of the golf course properties in the
Company's portfolio at September 30, 1996. AGC is a golf course management
company that operates a diverse portfolio of golf courses for a variety of
golf course owners including municipalities, counties and others. AGC does
not own any golf courses, but rather manages and operates golf courses
either as a lessee under leases, generally triple net, or pursuant to
management agreements with golf course owners. AGC derives revenues from
the operation of golf courses principally through receipt of green fees,
membership initiation fees, membership dues, golf cart rentals, driving
range charges and sales of food, beverages and merchandise.
10
<PAGE>
The following table sets forth certain condensed unaudited financial
information concerning AGC:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---------------- ----------------
(In thousands)
<S> <C> <C>
Current assets $ 73,300 $ 47,384
Non-current assets 128,442 96,771
-------- --------
Total assets $201,742 $144,155
======== ========
Current liabilities $ 51,109 $ 36,478
Long-term liabilities 69,441 42,394
Minority interest 633 681
Stockholders' equity 80,559 64,602
-------- --------
Total liabilities and stockholders'
equity $201,742 $144,155
======== ========
For the nine months ended
September 30,
------------------------------
1996 1995
-------- --------
(In thousands)
Total revenues $339,069 $278,907
======== ========
Net income $ 21,945 $ 14,353
======== ========
</TABLE>
Total revenues from golf course operations and management agreements for
AGC increased by $60.2 million, or 21.6%, to $339.1 million for the nine
months ended September 30, 1996 compared to $278.9 million for the nine
months ended September 30, 1995. The increase in revenues was primarily
attributable to the addition of 33 new lease agreements and three
management agreements.
Net income increased by $7.5 million, to $21.9 million for the nine months
ended September 30, 1996 compared to $14.4 million for the corresponding
nine months of 1995. The increase in net income was primarily due to
favorable weather conditions during the nine months ended September 30,
1996 compared to poor weather conditions, particularly the southwestern
United States, during the corresponding months in 1995.
(9) Subsequent Events
-----------------
On October 8, 1996, the Board of Directors declared a distribution of $.42
per share for the quarter ended September 30, 1996 to stockholders of
record on October 31, 1996, which distribution will be paid on November 15,
1996.
11
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
- --------
The following discussion should be read in conjunction with the accompanying
Consolidated Financial Statements and Notes thereto. The discussion of the
results of operations compares the three months ended September 30, 1996 with
the three months ended September 30, 1995 and the nine months ended September
30, 1996 with the nine months ended September 30, 1995.
Results of Operations
- ---------------------
Comparison of the three months ended September 30, 1996 to the three months
ended September 30, 1995
Net income increased by $408,000 to $3,401,000 for the three months ended
September 30, 1996 compared to $2,993,000 for the three months ended September
30, 1995. The net increase was primarily attributable to: (i) an increase in
rent revenue of approximately $4,192,000; (ii) an increase in depreciation and
amortization expense of approximately $1,596,000; (iii) a decrease in interest
income from affiliates of approximately $866,000; and (iv) an increase in
interest expense of approximately $1,192,000.
The increase in rent revenue was primarily attributable to: (i) the acquisition
of 34 golf course properties subsequent to September 30, 1995, which accounted
for approximately $3,634,000 of the increase; (ii) a full quarter of rent in
1996 on three golf course properties acquired in the third quarter of 1995,
which accounted for approximately $164,000 of the increase; (iii) the increase
in percentage rents under the leases with respect to the golf course properties
owned at June 30, 1995, which accounted for approximately $184,000 of the
increase; and (iv) the increase in base rents under the leases with respect to
the golf course properties owned at June 30, 1995, which accounted for
approximately $210,000 of the increase.
The increase in depreciation and amortization expense was due to: (i) the
acquisition of 34 golf course properties subsequent to September 30, 1995 and
(ii) a full quarter of depreciation expense in 1996 on three golf course
properties acquired in the third quarter of 1995.
The rent revenue from the third quarter acquisitions of 27 golf course
properties represented approximately $2,353,000 of the total rent revenue of $16
million. The depreciation and amortization expense for these acquisitions
represented approximately $961,000 of the total depreciation and amortization
expense of $5.2 million.
The decrease in interest income from affiliates was due to the retirement of the
participating mortgages. The increase in interest expense was primarily
attributable to: (i) the $40 million fixed rate, unsecured notes issued in July
1996 and (ii) the increase in outstanding advances under the $40 million credit
facility.
12
<PAGE>
Comparison of the nine months ended September 30, 1996 to the nine months ended
September 30, 1995
Net income decreased by $682,000 to $9,774,000 for the nine months ended
September 30, 1996 compared to $10,456,000 for the nine months ended September
30, 1995. The net decrease was primarily attributable to: (i) an increase in
rent revenue of approximately $9,122,000; (ii) a decrease in gain on sale of
property of approximately $1,911,000; (iii) an increase in depreciation and
amortization expense of approximately $3,457,000; (iv) a decrease in interest
income from affiliates of approximately $617,000; and (v) an increase in
interest expense of approximately $3,795,000.
The increase in rent revenue was primarily attributable to: (i) the acquisition
of 34 golf course properties subsequent to September 30, 1995, which accounted
for approximately $6,106,000 of the increase; (ii) a full nine months of rent
in 1996 on eight golf course properties acquired in the first nine months of
1995, which accounted for approximately $1,943,000 of the increase; (iii) the
increase in percentage rents under the leases with respect to the golf course
properties owned at December 31, 1994, which accounted for approximately
$636,000 of the increase; and (iv) the increase in base rents under the leases
with respect to the golf course properties owned at December 31, 1994, which
accounted for approximately $437,000 of the increase.
For the nine months ended September 30, 1995, the Company recognized a gain of
approximately $1.9 million on the sale of Hidden Hills Country Club. During the
nine months ended September 30, 1996, the Company recognized a gain of $25,000
on the sale of Wootton Bassett Golf Club.
Wootton Bassett Golf Club was sold for approximately $2 million. The Company
provided seller financing in the form of a mortgage loan in the amount of
approximately $900,000 at an interest rate of 6% per annum.
The increase in depreciation and amortization expense was due to: (i) the
acquisition of 34 golf course properties subsequent to September 30, 1995 and
(ii) a full nine months of depreciation expense in 1996 on eight golf course
properties acquired in the first nine months of 1995.
The rent revenue from the 1996 acquisitions of 31 golf course properties
represented approximately $3,814,000 of the total rent revenue of $43 million.
The depreciation and amortization expense for these acquisitions represented
approximately $1.5 million of the total depreciation and amortization expense of
$13.5 million.
The decrease in interest income from affiliates was due to the retirement of the
participating mortgages. The increase in interest expense was primarily
attributable to: (i) the $50 million fixed rate, unsecured notes issued in June
1995; (ii) the $40 million fixed rate, unsecured notes issued in July 1996; and
(iii) the increase in outstanding advances under the $40 million credit
facility.
13
<PAGE>
Liquidity and Capital Resources
- -------------------------------
At September 30, 1996, the Company had approximately $10.3 million in cash and
investments, mortgage loans of approximately $3 million, mortgage indebtedness
of approximately $25.4 million and unsecured indebtedness of approximately
$181.9 million. The $207.3 million principal amount of mortgage and unsecured
indebtedness bears interest at a weighted average rate of 8.03%, is payable
either quarterly or semi-annually and matures between 1996 and 2008. Of the
$207.3 million of debt, $167.5 million is fixed rate debt.
In order to maintain its qualification as a real estate investment trust
("REIT") for federal income tax purposes, the Company is required to make
substantial distributions to its stockholders. The following factors, among
others, will affect funds from operations and will influence the decisions of
the Board of Directors regarding distributions: (i) increase in debt service
resulting from additional indebtedness; (ii) scheduled increases in base rent
under the leases with respect to the golf courses; and (iii) any payment to the
Company of percentage rent under the leases with respect to the golf courses.
Although the Company receives most of its rental payments on a monthly basis, it
has and intends to continue to pay distributions quarterly. Amounts accumulated
for distribution will be invested by the Company in short-term money market
instruments and marketable securities.
The Company anticipates that its cash from operations and its bank line of
credit, described below, will provide adequate liquidity to conduct its
operations, fund administrative and operating costs, interest payments, capital
improvements and acquisitions and allow distributions to the Company's
stockholders in accordance with the Code's requirements for qualification as a
REIT and to avoid any corporate level federal income or excise tax. Capital
improvements for which the Company is responsible would be limited to mandated
projects or projects intended to add value to the property. For golf courses
acquired subsequent to the Offering through October 25, 1996, the Company is
required under the leases to make various remaining capital improvements
totaling approximately $15 million, of which approximately $10.3 million will be
paid during the next two years. The Company believes these improvements will
add value to the golf courses and bring the quality of the golf courses up to
the Company's expected standards. Any subsequent capital improvements are the
responsibility of the lessees. Upon completion of the capital improvements, the
base rent payable under the leases with respect to these golf courses will be
adjusted to reflect, over the initial term of the leases (15 to 20 years), the
Company's investment in such improvements.
Future acquisitions will be made subject to the Company's investment objectives
and policies established to maximize both current income and long-term growth in
income. The Company's liquidity requirements with respect to future
acquisitions may be reduced to the extent the Company uses common stock or OP
Units as consideration for such purchases. The Operating Partnership placed $75
million of fixed rate, uncollaterized notes due 2006 with a group of
institutional investors. The notes will be issued in two series. The first
note series in the amount of $40 million was issued with a fixed interest rate
of 7.9%, and the second note series in the amount of $35 million will be issued,
at the Company's option within eight months of the first note series, with a
fixed interest rate of 8%. The Operating Partnership received the $40 million
first note series on July 1, 1996. The Operating Partnership applied the net
proceeds from the $40 million notes to repay bank debt of
14
<PAGE>
$37.5 million and to partially finance the acquisition of Sweetwater Country
Club. The Company currently has a $40 million credit facility, which terminates
on December 1, 1996, bearing interest at a floating rate, from a commercial bank
that may be used to finance working capital, acquisitions and capital
improvements. There were outstanding advances of approximately $25.3 million and
$37.3 million under this credit facility, bearing interest at a weighted average
rate of 7.24% and 7.44%, as of October 25, 1996 and September 30, 1996,
respectively.
For the period January 1, 1996 through October 25, 1996 the Company purchased 31
golf courses for an aggregate initial investment of approximately $133.4 million
(including the $59.9 million purchase of 20 golf courses from GEI and the $31.6
million purchase of four golf courses upon which the Company previously held
participating mortgages), which investment was financed by $22.6 million of cash
from operations; $40.8 million of advances under the Company's credit facility;
$2.5 million of the $40 million first note series issued in July 1996; the
issuance of $1.5 million (61,339) OP Units; the refinancing of approximately
$25.2 million in assumed debt; and the issuance of $40.8 million (1,577,820
shares) of Company common stock. In addition, the Company has three golf
courses under purchase contracts for an aggregate initial investment of
approximately $15 million and one golf course under sale contract.
The limited partners of the Operating Partnership have the right, exercisable
once in any 12 month period, to sell up to one-third of their OP Units or
exchange up to the greater of 75,000 OP Units or one-third of their OP Units to
the Company. If the OP Units are sold for cash, the Company will have the
option to pay for such OP Units with available cash, borrowed funds or from the
proceeds of an offering of common stock. If the OP Units are exchanged for
shares of common stock, the Operating Partnership limited partner will receive
the number of shares of common stock having a market value at the time of
exercise equal to the fair market value of the OP Units being exchanged.
Other Data
- ----------
The Company believes that to facilitate a clear understanding of the historical
consolidated operating results, funds from operations should be examined in
conjunction with net income as presented in the Consolidated Financial
Statements. Funds from operations is considered by management as an appropriate
measure of the performance of an equity REIT because it is predicated on cash
flow analyses, which management believes is more reflective of the value of real
estate companies such as the Company rather than a measure predicated on
generally accepted accounting principles which gives effect to non-cash
expenditures such as depreciation. Funds from operations is generally defined as
net income (loss) plus certain non-cash items, primarily depreciation and
amortization. Funds from operations should not be considered as an alternative
to net income as an indication of the Company's performance or as an alternative
to cash flow as a measure of liquidity.
The National Association of Real Estate Investment Trusts, Inc. ("NAREIT")
adopted revisions to the definition of funds from operations. The Company has
also adopted the new definition of funds from operations. It intends to present
both the old and new definitions of funds from operations to help comparisons
with prior periods of the Company. The funds from operations
15
<PAGE>
presented may not be comparable to funds from operations for other REITs. The
following table summarizes the Company's funds from operations, based on the old
and new definitions, for the nine months ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------
(In thousands)
1996 1995
------------ -----------
<S> <C> <C>
Net income $ 9,774 $10,456
Minority interest 8,076 8,973
Depreciation and amortization 13,452 9,995
Amortization - restricted stock 768 707
Gain on sale of property (25) (1,936)
Write off of option payable - (100)
------- -------
Funds from operations - old definition 32,045 28,095
Amortization - restricted stock (768) (707)
Amortization - loan costs (103) (165)
Depreciation - corporate (36) (32)
------- -------
Funds from operations - new definition 31,138 27,191
Company's share of funds from operations 54.75% 53.81%
------- -------
Company's funds from operations - new
definition $17,048 $14,631
======= =======
</TABLE>
The primary difference between the old and new definitions of funds from
operations is the exclusion from funds from operations of amortization of assets
that are not uniquely significant to the real estate industry.
In order to maintain its qualification as a REIT for federal income tax
purposes, the Company is required to make distributions to its stockholders.
The Company's distributions to stockholders have been less than the total funds
from operations because the Company is obligated to make certain payments with
respect to principal debt and capital improvements. Management believes that to
continue the Company's growth, funds in excess of distributions, principal
reductions and capital improvement expenditures should be invested in assets
expected to generate returns on investment to the Company commensurate with the
Company's investment objectives and policies.
Inflation
- ---------
All the leases of the golf courses provide for base and participating rent
features. All of such leases are triple net leases requiring the lessees to pay
for all maintenance and repair, insurance, utilities and services, and, subject
to certain limited exceptions, all real estate taxes, thereby minimizing the
Company's exposure to increases in costs and operating expenses resulting from
inflation.
16
<PAGE>
Seasonality
- -----------
Although the results of operations of the Company have not been significantly
impacted by seasonality, the Company generally expects that its results of
operations may be adversely affected as a function of reduced payments of
percentage rent in the first and fourth quarters of each year due to adverse
weather conditions and the scheduled closure of golf courses located in harsh
winter climates.
17
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of the Company was held on July 25,
1996. The matters voted upon at the meeting were: (i) the approval
to issue up to a maximum of 2,128,000 shares of Company common stock
as partial consideration for the Company's purchase of 20 golf courses
and related assets owned by Golf Enterprises, Inc. ("GEI") pursuant to
an Asset Purchase Agreement and Agreement and Plan of Merger dated as
of February 2, 1996, as amended, among the Company, GEI Acquisition
Corporation and GEI; and (ii) the election of three directors to
serve until the 1999 annual meeting of stockholders and until their
successors are elected and have qualified.
The result of the voting for approval of the issuance of up to a
maximum of 2,128,000 shares of Company common stock is as follows:
<TABLE>
<S> <C>
For: 7,434,192
Against: 33,563
Abstain: 49,500
Broker No Vote: 2,170,957
</TABLE>
The results of the voting for election of Mr. John C. Cushman, III,
Mr. Charles S. Paul and Mr. Edward R. Sause to the Board of Directors
are as follows:
<TABLE>
<CAPTION>
Authority
Director Shares Cast for Withheld
--------------------------- --------------- -----------------
<S> <C> <C>
Mr. John C. Cushman, III 9,579,270 108,942
Mr. Charles S. Paul 9,579,338 108,874
Mr. Edward R. Sause 9,579,138 109,074
</TABLE>
In addition to the above directors, the following directors will
continue in office:
<TABLE>
<CAPTION>
Name Term Expires
--------------------------- -----------------
<S> <C>
Mr. Richard A. Archer 1997
Mr. Bruce Karatz 1998
Mr. David G. Price 1997
Mr. Richard C. Price 1998
</TABLE>
Item 5. Other Information
None
18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a)10.1 Form of Lease Agreement between the Company and AGC with respect to
the following golf courses: Southwyck, Dub's Dread, Kokopelli,
Summitpointe, Lake Wilderness, Links at Northfork, Hershey, Hershey
South, Canyon Oaks, Capitol City, Binks Forest, Port Royal, Shipyard,
Sugar Ridge, Wildhorse, Goshen Plantation, Hickory Heights, River's
Edge, Berry Creek, Creekside, Honey Bee, Wood Ranch, Monterey, Palm
Valley, Ruffled Feathers, Upland Hills, Oregon Golf, Golden Oaks,
Chesapeake, SeaCliff, Ancala, Arrowhead, Black Lake and Painted
Desert; and Form of Lease Agreement between the Company and
Cobblestone Golf Group, Inc. with respect to the Carmel Mountain golf
course and the Sweetwater golf course (incorporated by reference to
Exhibit 10.3 to the Company's Annual Report on Form 10-K dated
February 29, 1996).
11.1 Statement regarding computation of per share earnings
27 Financial Data Schedule
(b) During the quarter a report on Form 8-K was filed by the Company. The
report dated August 13, 1996 reported that the Company completed the
purchase of 20 golf courses and related assets from Golf Enterprises,
Inc. for a purchase price of $58 million. The consideration consisted
of approximately $17.2 million in cash and $40.8 million (1,577,820
shares) of common stock of the Company.
19
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Golf Properties, Inc.
Date: October 25, 1996 By: /s/ Edward R. Sause
___________________
Edward R. Sause
Executive Vice President
& Chief Financial Officer
20
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- -------- ----------- -----------------------------
<S> <C> <C>
10.1 Form of Lease Agreement between
the Company and AGC with respect
to the following golf courses:
Southwyck, Dub's Dread,
Kokopelli, Summitpointe, Lake
Wilderness, Links at Northfork,
Hershey, Hershey South, Canyon
Oaks, Capitol City, Binks
Forest, Port Royal, Shipyard,
Sugar Ridge, Wildhorse, Goshen
Plantation, Hickory Heights,
River's Edge, Berry Creek,
Creekside, Honey Bee, Wood
Ranch, Monterey, Palm Valley,
Ruffled Feathers, Upland Hills,
Oregon Golf, Golden Oaks,
Chesapeake, SeaCliff, Ancala,
Arrowhead, Black Lake and
Painted Desert; and Form of
Lease Agreement between the
Company and Cobblestone Golf
Group, Inc. with respect to the
Carmel Mountain golf course and
the Sweetwater golf course
(incorporated by reference to
Exhibit 10.3 to the Company's
Annual Report on Form 10-K dated
February 29, 1996)
11.1 Statement regarding computation
of per share earnings
27 Financial Data Schedule
</TABLE>
21
<PAGE>
Exhibit 11.1
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
----------------------- ------------------------- ------------------------ -----------------------
<S> <C> <C> <C> <C>
PRIMARY:
NET INCOME................... $ 3,401 $ 2,993 $ 9,774 $ 10,456
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING.......... 11,714,255 10,621,975 10,992,757 10,621,975
INCREMENTAL SHARES RESULTING
FROM STOCK OPTIONS.......... 114,348 25,467 79,625 12,121
----------- ----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK AND COMMON
STOCK EQUIVALENTS 11,828,603 10,647,442 11,072,382 10,634,096
=========== =========== =========== ===========
PRIMARY EARNINGS PER SHARE*.. $ 0.29 $ 0.28 $ 0.88 $ 0.98
=========== ========== =========== ===========
FULLY DILUTED:
NET INCOME................... $ 3,401 $ 2,993 $ 9,774 $ 10,456
=========== ========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING.......... 11,714,255 10,621,975 10,992,757 10,621,975
INCREMENTAL SHARES RESULTING
FROM STOCK OPTIONS.......... 129,744 35,754 79,625 35,754
----------- ---------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK AND COMMON
STOCK EQUIVALENTS 11,843,999 10,657,729 11,072,382 10,657,729
----------- ----------- ----------- -----------
FULLY DILUTED EARNINGS PER
SHARE* $ 0.29 $ 0.28 $ 0.88 $ 0.98
=========== =========== =========== ===========
</TABLE>
* MANAGEMENT BELIEVES THE INCREMENTAL SHARES HAVE AN INSIGNIFICANT IMPACT ON
PRIMARY AND FULLY DILUTED EARNINGS PER SHARE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONAL
GOLF PROPERTIES, INC. FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 9,775
<SECURITIES> 481
<RECEIVABLES> 3,593
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,866
<PP&E> 499,064
<DEPRECIATION> 71,243
<TOTAL-ASSETS> 450,999
<CURRENT-LIABILITIES> 5,343
<BONDS> 207,329
0
0
<COMMON> 123
<OTHER-SE> 216,452
<TOTAL-LIABILITY-AND-EQUITY> 450,999
<SALES> 0
<TOTAL-REVENUES> 42,992
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 17,128
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,973
<INCOME-PRETAX> 18,053
<INCOME-TAX> 203
<INCOME-CONTINUING> 17,850
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,774
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.88
</TABLE>
