<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 June 30, 1998
Commission file number 1-12246
NATIONAL GOLF PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Maryland 95-4549193
(State of incorporation) (I.R.S. Employer Identification No.)
2951 28th Street, Suite 3001, Santa Monica, CA 90405
(Address of principal executive offices) (Zip Code)
</TABLE>
(310) 664-4100
(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:
12,509,895 shares of common stock, $.01 par value, as of July 31, 1998
Page 1 of 19
<PAGE>
NATIONAL GOLF PROPERTIES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
Part I. Financial Information
<C> <S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets of National Golf Properties,
Inc. as of June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations of National Golf
Properties, Inc. for the three months ended June 30,
1998 and 1997 4
Consolidated Statements of Operations of National Golf
Properties, Inc. for the six months ended June 30, 1998
and 1997 5
Consolidated Statements of Cash Flows of National Golf
Properties, Inc. for the six months ended June 30, 1998
and 1997 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 17
Exhibit Index 19
</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>
June 30, December 31,
1998 1997
---------- -------------
ASSETS
<S> <C> <C>
PROPERTY:
Land $ 72,477 $ 72,339
Buildings 182,312 181,571
Ground improvements 302,397 301,814
Furniture, fixtures and equipment 35,750 35,589
Construction in progress 22,352 10,569
--------- --------
615,288 601,882
Less: accumulated depreciation (107,517) (94,872)
--------- --------
Net property 507,771 507,010
Cash and cash equivalents 3,022 1,698
Investments 1,202 1,215
Mortgage note receivable 2,200 2,200
Investment in joint venture 7,804 8,004
Due from affiliate - 4,524
Other assets, net 12,585 10,663
--------- --------
Total assets $ 534,584 $535,314
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes Payable $ 223,288 $299,032
Accounts payable and other liabilities 6,845 5,385
Due to affiliate 4,092 -
--------- --------
Total liabilities 234,225 304,417
--------- --------
Minority Interest 167,292 96,007
--------- --------
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized - none issued - -
Common stock, $.01 par value, 40,000,000 shares authorized,
12,509,895 and 12,408,195 shares issued and outstanding at
June 30, 1998 and December 31, 1997, respectively 125 124
Additional paid in capital 137,971 139,222
Accumulated deficit (1,360) (1,360)
Unamortized restricted stock compensation (3,669) (3,096)
--------- --------
Total stockholders' equity 133,067 134,890
--------- --------
Total liabilities and
stockholders' equity $ 534,584 $535,314
========= ========
</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
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Revenues:
Rent from affiliates $17,873 $17,744
Rent 823 770
Equity in income from joint venture 101 -
Gain on sale of property - 217
------- -------
Total revenues 18,797 18,731
------- -------
Expenses:
General and administrative 1,134 1,285
Depreciation and amortization 6,502 5,967
------- -------
Total expenses 7,636 7,252
------- -------
Operating income 11,161 11,479
Other income (expense):
Interest income 105 85
Gain on property condemnation 993 -
Other income 1 407
Interest expense (4,531) (4,691)
------- -------
Income before provision for taxes and
minority interest 7,729 7,280
Provision for taxes (58) (59)
------- -------
Income before minority interest 7,671 7,221
Income applicable to minority interest (4,167) (3,134)
------- -------
Net income $ 3,504 $ 4,087
======= =======
Basic earnings per share $ 0.28 $ 0.33
Weighted average number of shares 12,504 12,356
Diluted earnings per share $ 0.28 $ 0.33
Weighted average number of shares 12,619 12,511
Distribution declared per common share outstanding
$ 0.43 $ 0.42
</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 six For the six
months ended months ended
June 30, 1998 June 30, 1997
-------------- -------------
<S> <C> <C>
Revenues:
Rent from affiliates $36,859 $34,420
Rent 1,646 1,543
Equity in income from joint venture 190 -
Gain on sale of property - 217
------- -------
Total revenues 38,695 36,180
------- -------
Expenses:
General and administrative 2,524 2,499
Depreciation and amortization 13,084 11,885
------- -------
Total expenses 15,608 14,384
------- -------
Operating income 23,087 21,796
Other income (expense):
Interest income 207 180
Gain on property condemnation 993 -
Other income 346 475
Interest expense (9,924) (9,263)
------- -------
Income before provision for taxes and
minority interest 14,709 13,188
Provision for taxes (116) (113)
------- -------
Income before minority interest 14,593 13,075
Income applicable to minority interest (7,378) (5,710)
------- -------
Net income $ 7,215 $ 7,365
======= =======
Basic earnings per share $ 0.58 $ 0.60
Weighted average number of shares 12,481 12,351
Diluted earnings per share $ 0.57 $ 0.59
Weighted average number of shares 12,597 12,506
Distribution declared per common share outstanding $ 0.86 $ 0.84
</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 six For the six
months ended months ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,215 $ 7,365
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 13,084 11,885
Amortization of restricted stock 942 764
Minority interest in earnings 7,378 5,710
Distributions from joint venture, net
of equity in income 198 -
Gain on sale of property - (217)
Gain on property condemnation (993) -
Other adjustments - 54
Changes in assets and liabilities:
Other assets (2,322) 2,960
Accounts payable and other
liabilities (117) 4,600
Due from/to affiliate 1,205 (616)
-------- --------
Net cash provided by
operating activities 26,590 32,505
-------- --------
Cash flows from investing activities:
Purchase of available-for-sale securities (2,709) (7)
Proceeds from sale of available-for-sale
securities 2,727 3
Investment in joint venture 2 -
Proceeds from short-term investment 366 -
Proceeds from mortgage loans - 732
Purchase of property and related assets (6,320) (30,595)
Proceeds from sale of property and
related assets 1,305 986
-------- --------
Net cash used by investing
activities (4,629) (28,881)
-------- --------
Cash flows from financing activities:
Principal payments on notes payable (96,498) (52,764)
Proceeds from notes payable 20,500 62,550
Loan costs (15) -
Proceeds from Preferred Units, net of
offering expenses 73,012 -
Proceeds from stock options exercised 1,053 695
Cash distributions (10,744) (10,385)
Limited partners' cash distributions (7,945) (7,426)
-------- --------
Net cash used by financing
activities (20,637) (7,330)
-------- --------
Net increase (decrease) in cash 1,324 (3,706)
Cash and cash equivalents
beginning of period 1,698 11,224
-------- --------
Cash and cash equivalents at end of period $ 3,022 $ 7,518
======== ========
Supplemental cash flow information:
Interest paid $ 10,440 $ 9,155
Taxes paid 132 172
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
NATIONAL GOLF PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
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"), pursuant to its
58.5% ownership of the common units of partnership interest in the
Operating Partnership ("Common Units"). 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 six
months ended June 30, 1998 and 1997 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, 1997 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 GAAP 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, 1997.
The computation of basic earnings per share is computed by dividing net
income by the weighted average number of outstanding common shares during
the period. The computation of diluted earnings per share is based on the
weighted average number of outstanding common shares during the period and
the incremental shares, using the treasury stock method, from stock
options. The incremental shares for the three months ended June 30, 1998
and 1997 were 114,635 and 155,257, respectively. The incremental shares
for the six months ended June 30, 1998 and 1997 were 116,015 and 155,286,
respectively.
7
<PAGE>
In March 1998, the Emerging Issues Task Force of the Financial Accounting
Standards Board (the "EITF") issued Issue No. 97-11, "Accounting for
Internal Costs Relating to Real Estate Property Acquisitions." This
statement provides that internal acquisition costs of identifying and
acquiring operating properties should be expensed as incurred. Prior to
this statement, the only internal acquisition costs capitalized by the
Company were acquisition bonuses. This statement applies to all internal
acquisition costs incurred after March 19, 1998. There is no material
impact anticipated by the adoption of this statement to the Company's
earnings per share, financial condition, or results of operations.
In May 1998, the EITF issued Issue No. 98-9, "Accounting for Contingent
Rent in Interim Financial Periods." This statement provides that
recognition of contingent rental income should be deferred until specified
targets that trigger the contingent rent are achieved. This statement
applies to all contingent rental income effective with the second quarter
of 1998. On a quarterly basis, there is a material impact anticipated to
the Company's earnings per share, financial condition, and results of
operations. Contingent rent not recorded in the first, second or third
quarters will be recognized in the fourth quarter. Therefore, on an annual
basis, there is no material impact anticipated to the Company's earnings
per share, financial condition, or results of operations.
The accompanying consolidated balance sheet has been restated to reflect an
accounting allocation for reporting purposes from additional paid in
capital to minority interest for the limited partners' interest in the net
assets of the Company after giving effect to their exchange rights of
Common Units into the Company's common stock. While the limited partners
have not indicated such a desire to convert their Common Units, GAAP
requires the reporting of such exchange rights "as if converted." This
reallocation had no effect on earnings per share or results of operations
or allocations of net income to the general and limited partners of the
Operating Partnership. The reallocation at June 30, 1998 and December 31,
1997 was approximately $78.4 million and $78.1 million, respectively.
(2) Property
--------
During the six months ended June 30, 1998, the Company purchased one golf
course for an initial investment of approximately $1.8 million. The
acquisition has been accounted for utilizing the purchase method of
accounting, and accordingly, the 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 course is leased to
American Golf Corporation ("AGC") pursuant to a long-term triple net lease.
8
<PAGE>
<TABLE>
<CAPTION>
Acquisition Initial
Date Course Name Location Investment
- ------------ ----------- -------- ----------
(In thousands)
<S> <C> <C> <C>
4/13/98 Ivy Hills Country Club Cincinnati,
Ohio $1,806
------
Total Initial Investment $1,806
======
</TABLE>
The Company recognized a gain on property condemnation of approximately $1
million due to the State of North Carolina condemning four golf holes at
one of the Company's golf courses for a state highway project. The State
has not taken physical possession of the property because the project has
not been started. The Company expects to purchase land adjacent to the
golf course sufficient to replace the condemned holes.
(3) Preferred Units
---------------
On March 4, 1998, the Operating Partnership completed the private placement
of 1,200,000 8% Series A Cumulative Redeemable Preferred Units ("Preferred
Units"), representing a limited partnership interest in the Operating
Partnership, to an institutional investor for a contribution to the
Operating Partnership of $60 million. The Preferred Units, which may be
called by the Operating Partnership at par on or after March 4, 2003, have
no stated maturity or mandatory redemption and pay a cumulative, quarterly
dividend at an annualized rate of 8%. The Preferred Units are not
convertible into common stock of the Company. The Operating Partnership
used $58 million of the approximately $58.5 million of net proceeds from
such private placement to reduce outstanding indebtedness under the
Operating Partnership's revolving credit facility.
Also, on April 20, 1998, the Operating Partnership completed the private
placement of an additional 300,000 Preferred Units to the same
institutional investor for a contribution to the Operating Partnership of
$15 million. The Operating Partnership used $14.5 million of the
approximately $14.6 million of net proceeds from such private placement to
reduce outstanding indebtedness under the Operating Partnership's revolving
credit facility.
(4) Pro Forma Finanicial Information
--------------------------------
The pro forma financial information set forth below is presented as if the
1998 acquisition (Note 2) had been consummated as of January 1, 1997.
The pro forma financial information is not necessarily indicative of what
actual results of operations of the Company would have been assuming the
acquisition had been consummated as of January 1, 1997, nor
9
<PAGE>
does it purport to represent the results of operations for future periods.
<TABLE>
<CAPTION>
For the six
(In thousands, except per share amounts) months ended June 30,
- ---------------------------------------- -----------------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Revenues from rental property $38,556 $36,053
Net income $ 7,216 $ 7,316
Basic earnings per share $ 0.58 $ 0.59
Diluted earnings per share $ 0.57 $ 0.58
</TABLE>
The pro forma financial information includes the following adjustments:
(i) an increase in depreciation and amortization expense and (ii) an
increase in interest expense.
(5) Statement of Cash Flows - Supplemental Disclosures
--------------------------------------------------
Non-cash transactions for the six months ended June 30, 1998 and 1997
include approximately $3.9 million and $1 million, respectively, in capital
improvements accrued but not paid.
(6) Other Data
----------
AGC is the lessee of all but five of the golf course properties in the
Company's portfolio at June 30, 1998. David G. Price, the Chairman of the
Board of Directors of the Company, owns approximately 2.7% of the Company's
outstanding common stock and approximately 19.2% of the Common Units of the
Operating Partnership and a controlling interest in AGC. 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. 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.
The following table sets forth certain condensed unaudited financial
information concerning AGC:
10
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
(In thousands)
<S> <C> <C>
Current assets $ 83,443 $ 79,692
Non-current assets 152,181 147,423
-------- --------
Total assets $235,624 $227,115
======== ========
Current liabilities $ 73,098 $ 59,670
Long-term liabilities 95,606 97,766
Minority interest 479 501
Shareholders' equity 66,441 69,178
-------- --------
Total liabilities and shareholders' equity $235,624 $227,115
======== ========
</TABLE>
<TABLE>
<CAPTION>
For the six months ended
June 30,
-----------------------------
1998 1997
--------- --------
<S> <C> <C>
(In thousands)
Total revenues $277,461 $255,869
======== ========
Net income $ 9,904 $ 20,597
======== ========
</TABLE>
Total revenues from golf course operations and management agreements for
AGC increased by $21.6 million, or 8.4%, to $277.5 million for the six
months ended June 30, 1998 compared to $255.9 million for the six months
ended June 30, 1997. The increase in revenues was primarily attributable
to the addition of nine leased courses and three management courses.
Net income decreased by $10.7 million to $9.9 million for the six months
ended June 30, 1998 compared to $20.6 million for the corresponding six
months of 1997. The decrease in net income was primarily due to the
reduction in same course revenue from the adverse weather caused by El Nino
in the sun belt states, where AGC has more mature properties with higher
operating margins. In addition, while the new acquisitions contributed
favorably to revenue, such properties historically operate at lower margins
in the first year of operation.
(7) Subsequent Events
-----------------
On July 8, 1998, the Company purchased Majestic Oaks Golf Club located in
Ham Lake, Minnesota and Woodland Creek Golf Course located in Andover,
Minnesota for approximately $12.4 million.
On July 9, 1998, the Board of Directors declared a distribution of $0.43
per share for the quarter ended June 30, 1998 to stockholders of record on
July 31, 1998, which distribution will be paid on August 14, 1998.
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 forward-looking
statements included in Management's Discussion and Analysis of Finanical
Condition and Results of Operations ("MD&A") relating to certain matters involve
risks and uncertainties, including anticipated financial performance, business
prospects, anticipated capital expenditures and other similar matters, which
reflect management's best judgement based on factors currently known. Actual
results and experience could differ materially from the anticipated results or
other expectations expressed in the Company's forward-looking statements as a
result of a number of factors, including but not limited to those discussed in
MD&A.
The discussion of the results of operations compares the three months ended June
30, 1998 with the three months ended June 30, 1997 and the six months ended June
30, 1998 with the six months ended June 30, 1997.
Results of Operations
- ---------------------
Comparison of the three months ended June 30, 1998 to the three months ended
June 30, 1997
Net income decreased by $583,000 to $3,504,000 for the three months ended June
30, 1998 compared to $4,087,000 for the three months ended June 30, 1997. The
net decrease was primarily attributable to: (i) an increase in rent revenue of
approximately $182,000; (ii) an increase in depreciation and amortization
expense of approximately $535,000; (iii) an increase in gain on property
condemnation of approximately $993,000; (iv) a decrease in other income of
approximately $406,000; (v) a decrease in interest expense of approximately
$160,000; and (vi) an increase in income applicable to minority interest of
approximately $1,033,000.
The increase in rent revenue was primarily attributable to: (i) the acquisition
of six golf course properties subsequent to June 30, 1997, which accounted for
approximately $1,250,000 of the increase; (ii) a full quarter of rent in 1998
on two golf course properties acquired in the second quarter of 1997, which
accounted for approximately $76,000 of the increase; and (iii) the increase in
base rents under the leases with respect to the golf course properties owned at
March 31, 1997, which accounted for approximately $524,000 of the increase,
which was offset by a decrease in percentage rents under the leases with respect
to the golf course properties owned at March 31, 1997 of approximately
$1,668,000.
As a result of EITF 98-9, no percentage rent was recognized in the second
quarter of 1998. Otherwise, the Company would have recorded percentage rent in
the second quarter of approximately $1,808,000.
The increase in depreciation and amortization expense was due to: (i) the
acquisition of six golf course properties subsequent to June 30, 1997 and (ii)
a full quarter of depreciation expense in 1998 on two golf course properties
acquired in the second quarter of 1997.
12
<PAGE>
The increase in gain on property condemnation was due to the State of North
Carolina condemning four golf holes at one of the Company's golf courses for a
state highway project. The State has not taken physical possession of the
property because the project has not been started. The Company expects to
purchase land adjacent to the golf course sufficient to replace the condemned
holes.
The decrease in other income was primarily due to the decrease in excess land
sales. The decrease in interest expense was primarily attributable to the
decrease in outstanding advances under the credit facility. Part of the
increase in income applicable to minority interest was due to income allocated
to holders of Preferred Units.
Comparison of the six months ended June 30, 1998 to the six months ended June
30, 1997
Net income decreased by $150,000 to $7,215,000 for the six months ended June 30,
1998 compared to $7,365,000 for the six months ended June 30, 1997. The net
decrease was primarily attributable to: (i) an increase in rent revenue of
approximately $2,542,000; (ii) an increase in depreciation and amortization
expense of approximately $1,199,000; (iii) an increase in gain on property
condemnation of approximately $993,000; (iv) an increase in interest expense of
approximately $661,000; and (v) an increase in income applicable to minority
interest of $1,668,000.
The increase in rent revenue was primarily attributable to: (i) the acquisition
of six golf course properties subsequent to June 30, 1997, which accounted for
approximately $2,484,000 of the increase; (ii) a full six months of rent in
1998 on four golf course properties acquired in the first six months of 1997,
which accounted for approximately $671,000 of the increase; and (iii) the
increase in base rents under the leases with respect to the golf course
properties owned at December 31, 1996, which accounted for approximately
$1,047,000 of the increase, which was offset by a decrease in percentage rents
under the leases with respect to the golf course properties owned at December
31, 1996 of approximately $1,660,000.
As a result of EITF 98-9, no percentage rent was recognized in the second
quarter of 1998. Otherwise, the Company would have recorded percentage rent in
the second quarter of approximately $1,808,000.
The increase in depreciation and amortization expense was due to: (i) the
acquisition of six golf course properties subsequent to June 30, 1997 and (ii)
a full six months of depreciation expense in 1998 on four golf course properties
acquired in the first six months of 1997.
The increase in gain on property condemnation was due to the State of North
Carolina condemning four golf holes at one of the Company's golf courses for a
state highway project. The State has not taken physical possession of the
property because the project has not been started. The Company expects to
purchase land adjacent to the golf course sufficient to replace the condemned
holes.
The increase in interest expense was primarily attributable to the increase in
outstanding advances under the credit facility. Part of the increase in income
13
<PAGE>
applicable to minority interest was due to income allocated to holders of
Preferred Units.
Liquidity and Capital Resources
- -------------------------------
At June 30, 1998, the Company had approximately $4.2 million in cash and
investments, a mortgage loan of $2.2 million, mortgage indebtedness of
approximately $30.2 million and unsecured indebtedness of approximately $193.1
million. The $223.3 million principal amount of mortgage and unsecured
indebtedness bears interest at a weighted average rate of 8.06%. Of the $223.3
million of debt, $206.8 million is fixed rate debt and is payable either
quarterly or semi-annually and matures between 1999 and 2008.
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; (iii) any payment to the
Company of percentage rent under the leases with respect to the golf courses;
and (iv) increase in preferred distributions resulting from the issuance of
Preferred Units. Although the Company receives most of its rental payments on a
monthly basis, it has and intends to continue to pay distributions quarterly.
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 through July 31, 1998, the Company is required under the leases or has
committed to pay for various remaining capital improvements totaling
approximately $20.3 million, of which approximately $17.7 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, 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
Common Units as consideration for such purchases. The Company currently has with
a group of four commercial banks a $100 million credit facility, which
terminates in April 2002. The Company has two interest rate options under the
credit facility depending upon the length of time the advances are outstanding.
For advances which will be outstanding for less than a month,
14
<PAGE>
the advances bear interest at prime. At June 30, 1998, such rate was 8.5%. For
advances which will be outstanding for one month or more, the advances bear
maximum interest at a floating rate equal to LIBOR plus a spread of 1.125%. The
spread will be reduced upon the Company's receipt of specified credit ratings.
There were outstanding advances of $27 million and $16.5 million under the
credit facility, bearing interest at a weighted average rate of 7.1% and 7.3%,
as of July 31, 1998 and June 30, 1998, respectively.
On March 4, 1998, the Operating Partnership completed the private placement of
1,200,000 Preferred Units, representing a limited partnership interest in the
Operating Partnership, to an institutional investor for a contribution to the
Operating Partnership of $60 million. The Operating Partnership used $58
million of the approximately $58.5 million of net proceeds from such private
placement to reduce outstanding indebtedness under the Operating Partnership's
revolving credit facility. Also, on April 20, 1998, the Operating Partnership
completed the private placement of an additional 300,000 Preferred Units,
representing a limited partnership interest in the Operating Partnership, to the
same institutional investor for a contribution to the Operating Partnership of
$15 million. The Operating Partnership used $14.5 million of the approximately
$14.6 million of net proceeds from such private placement to reduce outstanding
indebtedness under the Operating Partnership's revolving credit facility.
For the period January 1, 1998 through July 31, 1998 the Company purchased five
golf courses for an aggregate initial investment of approximately $14.2 million,
which investment was financed by $2.7 million of cash from operations and $11.5
million of advances under the Company's credit facility. In addition, the
Company has one golf course under purchase contract for an aggregate initial
investment of approximately $28.5 million and one golf course under a
participating mortgage loan commitment of approximately $13.3.
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 Common Units or
exchange up to the greater of 75,000 Common Units or one-third of their Common
Units to the Company. If the Common Units are sold for cash, the Company will
have the option to pay for such Common Units with available cash, borrowed funds
or from the proceeds of an offering of common stock. If the Common 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 Common 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,
15
<PAGE>
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 funds from operations presented may not be comparable to funds from
operations for other REITs. The following table summarizes the Company's funds
from operations for the six months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Six months ended
June 30,
--------
(In thousands)
1998 1997
------- --------
<S> <C> <C>
Net income $ 7,215 $ 7,365
Distributions - Preferred Units (1,797) -
Minority interest 7,378 5,710
Depreciation and amortization 13,282 11,885
Gain on property condemnation (993) -
Gain on sale of property - (217)
Excess land sales (342) (448)
Amortization - loan costs (119) (107)
Depreciation - corporate (33) (37)
------- -------
Funds from operations 24,591 24,151
Company's share of funds from operations 56.6% 56.3%
------- -------
Company's funds from operations $13,919 $13,597
======= =======
</TABLE>
As a result of EITF 98-9, no percentage rent was recognized in the second
quarter of 1998. Otherwise, the Company would have recorded percentage rent in
the second quarter of $1,808,000. The additional rent would have increased
funds from operations for the six months ended June 30, 1998 from $24,591,000 to
$26,399,000.
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>
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 May 5,
1998. The matter voted upon at the meeting was the election of two
directors to serve until the 2001 annual meeting of stockholders and
until their successors are elected and have qualified.
The results of the voting for election of Mr. Bruce Karatz and Mr.
James M. Stanich to the Board of Directors are as follows:
<TABLE>
<CAPTION>
Authority
Director Shares Cast for Withheld
-------- --------------- ----------
<S> <C> <C>
Mr. Bruce Karatz 11,033,796 128,974
Mr. James M. Stanich 11,032,088 130,682
</TABLE>
In addition to the above directors, the following directors will
continue in office:
<TABLE>
<CAPTION>
Term
Name Expires
---- -------
<S> <C>
Mr. Richard A. Archer 2000
Mr. John C. Cushman, III 1999
Mr. Charles S. Paul 1999
Mr. David G. Price 2000
Mr. Edward R. Sause 1999
</TABLE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a)27 Financial Data Schedule
(b) None
17
<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: July 31, 1998 By: /s/ William C. Regan
---------------------------
William C. Regan
Vice President - Controller
and Treasurer
18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- ------------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
19
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,022
<SECURITIES> 1,202
<RECEIVABLES> 2,200
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,224
<PP&E> 615,288
<DEPRECIATION> 107,517
<TOTAL-ASSETS> 534,584
<CURRENT-LIABILITIES> 10,937
<BONDS> 223,288
0
0
<COMMON> 125
<OTHER-SE> 132,942
<TOTAL-LIABILITY-AND-EQUITY> 534,584
<SALES> 0
<TOTAL-REVENUES> 38,695
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15,608
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,924
<INCOME-PRETAX> 14,709
<INCOME-TAX> 116
<INCOME-CONTINUING> 14,593
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,215
<EPS-PRIMARY> .58
<EPS-DILUTED> .57
</TABLE>
