<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, 1998
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.)
2951 28th Street, Suite 3001, Santa Monica, CA 90405
(Address of principal executive offices) (Zip Code)
(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:
12,517,745 shares of common stock, $.01 par value, as of November 6, 1998
Page 1 of 22
<PAGE>
NATIONAL GOLF PROPERTIES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets of National Golf Properties,
Inc. as of September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations of National Golf
Properties, Inc. for the three months ended September
30, 1998 and 1997 4
Consolidated Statements of Operations of National Golf
Properties, Inc. for the nine months ended September 30,
1998 and 1997 5
Consolidated Statements of Cash Flows of National Golf
Properties, Inc. for the nine months ended September 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 13
Part II. Other Information 20
Exhibit Index 22
</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,
1998 1997
------------------ ------------------
<S> <C> <C>
ASSETS
Property:
Land $ 76,961 $ 72,339
Buildings 193,068 181,571
Ground improvements 324,675 301,814
Furniture, fixtures and equipment 39,268 35,589
Construction in progress 24,683 10,569
--------- --------
658,655 601,882
Less: accumulated depreciation (114,101) (94,872)
--------- --------
Net property 544,554 507,010
Cash and cash equivalents 4,602 1,698
Investments 1,273 1,215
Mortgage notes receivable 24,849 2,200
Investment in joint venture 7,728 8,004
Due from affiliate - 4,524
Other assets, net 19,588 10,663
--------- --------
Total assets $ 602,594 $535,314
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 283,330 $299,032
Accounts payable and other liabilities 20,513 5,385
Due to affiliate 1,790 -
--------- --------
Total liabilities 305,633 304,417
--------- --------
Minority interest 165,950 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
September 30, 1998 and December 31, 1997,
respectively 125 124
Additional paid in capital 135,564 139,222
Accumulated deficit (1,360) (1,360)
Unamortized restricted stock compensation (3,318) (3,096)
--------- --------
Total stockholders' equity 131,011 134,890
--------- --------
Total liabilities and
Stockholders' equity $ 602,594 $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
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
-------------------- --------------------
<S> <C> <C>
Revenues:
Rent from affiliates $18,716 $18,532
Rent 858 814
Equity in income from joint venture 97 48
------- -------
Total revenues 19,671 19,394
------- -------
Expenses:
General and administrative 1,236 1,535
Depreciation and amortization 6,777 6,306
Net loss on sale of properties - 59
------- -------
Total expenses 8,013 7,900
------- -------
Operating income 11,658 11,494
Other income (expense):
Interest income 342 88
Other income 2 44
Interest expense (4,998) (4,978)
------- -------
Income before provision for taxes and
minority interest 7,004 6,648
Provision for taxes (60) (52)
------- -------
Income before minority interest 6,944 6,596
Income applicable to minority interest (3,850) (2,844)
------- -------
Net income $ 3,094 $ 3,752
======= =======
Basic earnings per share $ 0.25 $ 0.30
Weighted average number of shares 12,510 12,375
Diluted earnings per share $ 0.25 $ 0.30
Weighted average number of shares 12,599 12,521
Distribution declared per common share
outstanding $ 0.44 $ 0.43
</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, 1998 SEPTEMBER 30, 1997
-------------------- --------------------
<S> <C> <C>
Revenues:
Rent from affiliates $ 55,575 $ 52,952
Rent 2,504 2,357
Equity in income from joint venture 287 48
Gain on sale of properties - 158
-------- --------
Total revenues 58,366 55,515
-------- --------
Expenses:
General and administrative 3,760 4,034
Depreciation and amortization 19,861 18,191
-------- --------
Total expenses 23,621 22,225
-------- --------
Operating income 34,745 33,290
Other income (expense):
Interest income 549 268
Gain on property condemnation 993 -
Other income 348 519
Interest expense (14,922) (14,241)
-------- --------
Income before provision for taxes and
minority interest 21,713 19,836
Provision for taxes (176) (165)
-------- --------
Income before minority interest 21,537 19,671
Income applicable to minority interest (11,228) (8,554)
-------- --------
NET INCOME $ 10,309 $ 11,117
======== ========
Basic earnings per share $ 0.83 $ 0.90
Weighted average number of shares 12,491 12,359
Diluted earnings per share $ 0.82 $ 0.89
Weighted average number of shares 12,598 12,505
Distribution declared per common share
outstanding $ 1.30 $ 1.27
</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, 1998 SEPTEMBER 30, 1997
-------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,309 $ 11,117
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 19,861 18,191
Amortization of restricted stock 1,294 1,135
Minority interest in earnings 11,228 8,554
Distributions from joint venture, net
of equity in income 295 2
Gain on sale of properties - (158)
Gain on property condemnation (993) -
Other adjustments 68
Changes in assets and liabilities:
Other assets (1,561) 2,568
Accounts payable and other
liabilities 5,812 4,256
Due from/to affiliate 472 (1,461)
--------- --------
Net cash provided by
operating activities 46,717 44,272
--------- --------
Cash flows from investing activities:
Purchase of available-for-sale securities (3,672) (4,714)
Proceeds from sale of available-for-sale
securities 3,627 4,695
Investment in joint venture (19) (8,036)
Proceeds from short-term investment 366 -
Issuance of mortgage note receivable (22,649) -
Loan costs on mortgage note issued (147) -
Proceeds from mortgage loans - 732
Purchase of property and related assets (51,272) (51,960)
Proceeds from sale of properties and
related assets 1,305 3,613
--------- --------
Net cash used by investing
activities (72,461) (55,670)
--------- --------
Cash flows from financing activities:
Principal payments on notes payable (101,074) (68,335)
Proceeds from notes payable 85,000 97,050
Loan costs (15) -
Proceeds from Preferred Units, net of
offering expenses 73,011 -
Proceeds from stock options exercised 1,053 1,174
Cash distributions (16,124) (15,581)
Limited partners' cash distributions (13,203) (11,130)
--------- --------
Net cash provided by
financing activities 28,648 3,178
--------- --------
Net increase (decrease) in cash 2,904 (8,220)
Cash and cash equivalents at beginning of
period 1,698 11,224
--------- --------
Cash and cash equivalents at end of period $ 4,602 $ 3,004
========= ========
Supplemental cash flow information:
Interest paid $ 11,279 $ 10,087
Taxes paid 145 188
</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 nine
months ended September 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 (the "SEC").
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/A 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 September 30,
1998 and 1997 were 88,831 and 145,984, respectively. The incremental
shares for the nine months ended September 30, 1998 and 1997 were 106,919
and 146,417, respectively.
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
7
<PAGE>
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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 will require the Company to
recognize all derivatives on the balance sheet at fair value. The
accounting for the changes in the fair values of such derivatives would
depend on the use of the derivative and whether it qualifies for hedge
accounting. SFAS 133 is effective for the Company's financial statements
issued for periods beginning January 1, 2000. The Company has not
determined when it will implement SFAS 133, however, there is no material
impact anticipated to the Company's financial condition or results of
operations. However, there could be a material impact on comprehensive
income.
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 September 30, 1998 and December
31, 1997 was approximately $78.6 million and $78.1 million, respectively.
(2) Property
--------
During the nine months ended September 30, 1998, the Company purchased
seven golf courses for an initial investment of approximately $42.8
million. The acquisitions have been accounted for utilizing the purchase
method of accounting, and accordingly, the acquired assets are 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 are
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
7/8/98 Majestic Oaks Golf Club Ham Lake,
Minnesota 11,907
Woodland Creek Golf Course Andover,
Minnesota 559
9/1/98 The Club at Sonterra San Antonio, Texas 28,553
-------
Total Initial Investment $42,825
=======
</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) Mortgage Notes Receivable
-------------------------
On August 20, 1998, the Company made a participating mortgage loan of
approximately $22.6 million to an unrelated entity that owns Badlands Golf
Course in Las Vegas, Nevada. On or before November 15, 1998, the borrower
may repay approximately $9.6 million of the principal amount. Thereafter,
the principal amount of the Company's participating mortgage loan will be
$13 million. As part of the loan agreement, the Company has agreed to loan
an additional $315,000 to the borrower to be used for capital improvements
at the golf course.
Under the terms of the participating mortgage loan, the Company will
receive minimum annual base interest equal to 8.75% of the principal
amount. The minimum interest will be increased during each of the first
five years of the 15-year term of the loan. In addition, a participating
interest feature will allow the Company to participate in growth in
revenues at the golf course and a portion of the appreciation in the fair
market value of the golf course.
(4) Treasury Lock Swap Transactions
-------------------------------
In anticipation of the Operating Partnership placing $100 million of fixed-
rate, ten-year notes, the Operating Partnership entered into a $100 million
treasury lock swap transaction with a financial institution. Under this
agreement, the Operating Partnership pays or receives an amount equal to
the difference between the treasury lock rate and the market rate on the
date of settlement, based on the principal of $100 million. At September
30, 1998, the treasury lock rate was higher than the market rate.
Therefore, the Operating Partnership owed approximately $8.2 million.
During 1998, the Operating Partnership entered into two other treasury lock
swap transactions, which resulted in approximately $215,000 and $151,000
being paid to the Operating Partnership.
9
<PAGE>
At September 30, 1998, the Company had recorded a net amount of
approximately $7.8 million in other assets resulting from the above
transactions. Approximately $366,000 is being amortized as a credit to
interest expense.
(5) 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 dividend attributable to such
Preferred Units has been reported as a component of minority interest, as
required accounting by the SEC, in the related financial statements. 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.
(6) Pro Forma Financial Information
-------------------------------
The pro forma financial information set forth below is presented as if the
1998 acquisitions (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
acquisitions had been consummated as of January 1, 1997, 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,
---------------------------------------- --------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues from rental property $60,626 $58,454
Net income $10,069 $10,210
Basic earnings per share $ 0.81 $ 0.83
Diluted earnings per share $ 0.80 $ 0.82
</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.
10
<PAGE>
(7) Statement of Cash Flows - Supplemental Disclosures
--------------------------------------------------
Non-cash transactions for the nine months ended September 30, 1998 include
approximately $2.3 million in capital improvements accrued but not paid.
Non-cash transactions for the nine months ended September 30, 1997 include
$1.5 million of a golf course acquisition which was financed by a note
payable.
(8) Other Data
----------
AGC is the lessee of all but five of the golf course properties in the
Company's portfolio at September 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 16.2% 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:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------------- ----------------
(In thousands)
<S> <C> <C>
Current assets $ 86,320 $ 79,692
Non-current assets 158,830 147,423
-------- --------
Total assets $245,150 $227,115
======== ========
Current liabilities $ 82,402 $ 59,670
Long-term liabilities 88,679 97,766
Minority interest 461 501
Shareholders' equity 73,608 69,178
-------- --------
Total liabilities and shareholders' equity $245,150 $227,115
======== ========
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended
September 30,
----------------------------------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Total revenues $453,945 $410,785
======== ========
Net income $ 17,882 $ 37,630
======== ========
</TABLE>
Total revenues from golf course operations and management agreements for
AGC increased by $43.1 million, or 10.5%, to $453.9 million for the nine
months ended September 30, 1998 compared to $410.8 million for the nine
months ended September 30, 1997. The increase in revenues was primarily
11
<PAGE>
attributable to the addition of 19 leased courses and four management
courses.
Net income decreased by $19.7 million to $17.9 million for the nine months
ended September 30, 1998 compared to $37.6 million for the corresponding
nine 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.
(9) Subsequent Events
-----------------
On October 15, 1998, the Board of Directors declared a distribution of
$0.44 per share for the quarter ended September 30, 1998 to stockholders of
record on October 30, 1998, which distribution will be paid on November 13,
1998.
12
<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 Financial
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
September 30, 1998 with the three months ended September 30, 1997 and the nine
months ended September 30, 1998 with the nine months ended September 30, 1997.
Results of Operations
- ---------------------
Comparison of the three months ended September 30, 1998 to the three months
ended September 30, 1997
Net income decreased by $658,000 to $3,094,000 for the three months ended
September 30, 1998 compared to $3,752,000 for the three months ended September
30, 1997. The net decrease was primarily attributable to: (i) an increase in
rent revenue of approximately $228,000; (ii) a decrease in general and
administrative expenses of approximately $299,000; (iii) an increase in
depreciation and amortization expense of approximately $471,000; (iv) an
increase in interest income of approximately $254,000; and (v) an increase in
income applicable to minority interest of approximately $1,006,000.
The increase in rent revenue was primarily attributable to: (i) the acquisition
of ten golf course properties subsequent to September 30, 1997, which accounted
for approximately $1,303,000 of the increase; (ii) a full quarter of rent in
1998 on two golf course properties acquired in the third quarter of 1997, which
accounted for approximately $192,000 of the increase; and (iii) the increase in
base rents under the leases with respect to the golf course properties owned at
June 30, 1997, which accounted for approximately $423,000 of the increase, which
was offset by a decrease in percentage rents under the leases with respect to
the golf course properties owned at June 30, 1997 of approximately $1,690,000.
As a result of EITF 98-9, only approximately $231,000 of percentage rent was
recognized in the third quarter of 1998. Otherwise, the Company would have
recorded percentage rent in the third quarter of approximately $1,981,000.
The decrease in general and administrative expenses was primarily due to: (i)
the decrease in restricted stock amortization resulting from restricted stock
fully vesting during the quarter and (ii) the timing of recurring expenses. The
increase in depreciation and amortization expense was due to: (i) the
acquisition of ten golf course properties subsequent to September 30, 1997 and
(ii) a full quarter of depreciation expense in 1998 on two golf course
properties acquired in the third quarter of 1997.
The increase in interest income was primarily due to the participating mortgage
loan of approximately $22.6 million made during the quarter. The increase in
income applicable to minority interest was primarily due to income allocated to
holders of Preferred Units.
13
<PAGE>
Comparison of the nine months ended September 30, 1998 to the nine months ended
September 30, 1997
Net income decreased by $808,000 to $10,309,000 for the nine months ended
September 30, 1998 compared to $11,117,000 for the nine months ended September
30, 1997. The net decrease was primarily attributable to: (i) an increase in
rent revenue of approximately $2,770,000; (ii) a decrease in general and
administrative expenses of approximately $274,000; (iii) an increase in
depreciation and amortization expense of approximately $1,670,000; (iv) an
increase in interest income of approximately $281,000; (v) an increase in gain
on property condemnation of approximately $993,000; (vi) an increase in
interest expense of approximately $681,000; and (vii) an increase in income
applicable to minority interest of $2,674,000.
The increase in rent revenue was primarily attributable to: (i) the acquisition
of ten golf course properties subsequent to September 30, 1997, which accounted
for approximately $2,820,000 of the increase; (ii) a full nine months of rent
in 1998 on six golf course properties acquired in the first nine months of 1997,
which accounted for approximately $1,628,000 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
$1,729,000 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 $3,407,000.
As a result of EITF 98-9, only approximately $231,000 of percentage rent was
recognized in the second and third quarters of 1998. Otherwise, the Company
would have recorded percentage rent in the second and third quarters of
approximately $3,789,000.
The decrease in general and administrative expenses was primarily due to: (i)
the decrease in restricted stock amortization resulting from restricted stock
fully vesting during the quarter and (ii) the timing of recurring expenses. The
increase in depreciation and amortization expense was due to: (i) the
acquisition of ten golf course properties subsequent to September 30, 1997 and
(ii) a full nine months of depreciation expense in 1998 on six golf course
properties acquired in the first nine months of 1997.
The increase in interest income was primarily due to the participating mortgage
loan of approximately $22.6 million made during the third quarter. 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. The increase in income
applicable to minority interest was primarily due to income allocated to holders
of Preferred Units.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1998, the Company had approximately $5.9 million in cash and
investments, mortgage loans of approximately $24.8 million, mortgage
indebtedness of approximately $30.2 million and unsecured indebtedness of
approximately $253.1 million. The $283.3 million principal amount of mortgage
and unsecured indebtedness bears interest at a weighted average rate of 7.77%.
Of the $283.3 million of debt, $206.8 million is fixed rate debt and is payable
either quarterly or semi-annually and matures between 1999 and 2008.
14
<PAGE>
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 November 6, 1998, the Company is required under the leases or
has committed to pay for various remaining capital improvements totaling
approximately $24.5 million, of which approximately $18.3 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, 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, the advances bear
interest at prime. At November 6, 1998 and September 30, 1998, such rate was 8%
and 8.25%, respectively. 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 $69.5 million
and $76.5 million under the credit facility, bearing interest at a weighted
average rate of 6.66% and 6.82%, as of November 6, 1998 and September 30, 1998,
respectively.
In anticipation of the Operating Partnership placing $100 million of fixed-rate,
ten-year notes, the Operating Partnership entered into a $100 million treasury
lock swap transaction with a financial institution. Under this agreement, the
Operating Partnership pays or receives an amount equal to the difference between
the treasury lock rate and the market rate on the date of settlement, based on
the principal of $100 million. At November 6, 1998 and September 30, 1998, the
treasury lock rate was higher than the market rate. Therefore, the Operating
Partnership owed approximately $4.2 million and $8.2 million, 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
15
<PAGE>
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 November 6, 1998 the Company purchased
seven golf courses for an aggregate initial investment of approximately $42.8
million and made one participating mortgage loan of approximately $22.6 million,
which investments were financed by $7.4 million of cash from operations and $58
million of advances under the Company's credit facility. In addition, the
Company has two golf courses under purchase contract for an aggregate initial
investment of approximately $11.8 million.
The limited partners of the Operating Partnership have the right, in each
twelve-month period ending on August 18, 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 limited partner will receive one
share of common stock for each Common Unit exchanged.
Year 2000
- ---------
The Year 2000 issue is the result of computer software and embedded chips using
two digits, instead of four digits, to identify the applicable year. Any of the
Company's computers, computer software and administration equipment that have
date-sensitive software may recognize a date using "00" as the year 1900 instead
of 2000. If any of the Company's systems or equipment that have date-sensitive
software use only two digits, system failures or miscalculations may result
causing disruptions of operations.
The Company has identified its Year 2000 risk in three categories: (i) internal
computers and equipment; (ii) tenants' compliance; and (iii) external
compliance.
The Company has replaced all its personal computers and most of its software
with computers and software that are Year 2000 compliant. The Company plans on
having the remaining software installed by the end of the second quarter in
1999. The Company has purchased new computer servers which will be installed by
the end of 1998. The software for the computer servers will be upgraded by the
end of the second quarter of 1999. The Company anticipates spending
approximately $ 100,000 for the above equipment and software. Most of the
administration equipment is Year 2000 compliant. This has been confirmed in
writing with third party vendors. The remaining equipment is under review.
The Company is closely monitoring its largest tenant, AGC. The Company has been
informed that AGC's Year 2000 project is progressing as planned and is expected
to be completed by September 1999. The Company has had preliminary discussions
with the other tenants. The Company plans on sending written requests to
determine their Year 2000 compliance during 1999.
The Company has had preliminary discussions with some of its service providers.
The Company plans on sending written requests to key service providers to
determine their Year 2000 compliance during 1999.
16
<PAGE>
The Company does not currently have a comprehensive contingency plan with
respect to the Year 2000 problem, but intends to establish such a plan during
1999 as part of its ongoing Year 2000 compliance effort.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain business operations. Such failures
could have a material adverse effect on the Company's financial condition and
results of operations. Due to the general uncertainty inherent in the Year 2000
problem, resulting in part from the uncertainty of the Year 2000 readiness of
third-party service providers and tenants, the Company is unable to determine at
this time whether the consequences of Year 2000 failures will have a material
impact on the Company's financial condition or results of operations. The
Company's review of the Year 2000 issue is expected to reduce the Company's
level of uncertainty about the Year 2000 issue and about the Year 2000
compliance of its third-party service providers and tenants.
The forward-looking statements regarding Year 2000 involve risks and
uncertainties, 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 above.
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.
17
<PAGE>
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 nine months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------
(In thousands)
1998 1997
----------------- -----------------
<S> <C> <C>
Net income $10,309 $11,117
Distributions - Preferred Units (3,297) -
Minority interest 11,228 8,554
Depreciation and amortization 20,156 18,194
Gain on property condemnation (993) -
Gain on sale of properties - (158)
Excess land sales (342) (448)
Amortization - loan costs (178) (165)
Depreciation corporate (52) (53)
------- -------
Funds from operations 36,831 37,041
Company's share of funds from operations 56.8% 56.51%
------- -------
Company's funds from operations $20,920 $20,932
======= =======
</TABLE>
As a result of EITF 98-9, only approximately $231,000 of percentage rent was
recognized in the second and third quarters of 1998. Otherwise, the Company
would have recorded percentage rent in the second and third quarters of
approximately $3,789,000. The additional rent would have increased funds from
operations for the nine months ended September 30, 1998 from $36,831,000 to
$40,389,000.
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.
New Pronouncements Issued But Not Yet Effective
- -----------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 will require the Company to
recognize all derivatives on the balance sheet at fair value. The accounting
for the changes in the fair values of such derivatives would depend on the use
of the derivative and whether it qualifies for hedge accounting. SFAS 133 is
effective for the Company's financial statements issued for periods beginning
January 1, 2000. The Company has not determined when it will implement SFAS
133, however, there is no material impact anticipated to the Company's financial
condition or
18
<PAGE>
results of operation. However, there could be a material impact on comprehensive
income.
19
<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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a)27 Financial Data Schedule
(b) None
20
<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: November 11, 1998 By: /s/ William C. Regan
------------------------
William C. Regan
Vice President - Controller
and Treasurer
21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- --------- ----------- ------------
<C> <S> <C>
27 Financial Data Schedule
</TABLE>
22
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,602
<SECURITIES> 1,273
<RECEIVABLES> 24,849
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,875
<PP&E> 658,655
<DEPRECIATION> 114,101
<TOTAL-ASSETS> 602,594
<CURRENT-LIABILITIES> 22,303
<BONDS> 283,330
0
0
<COMMON> 125
<OTHER-SE> 130,886
<TOTAL-LIABILITY-AND-EQUITY> 602,594
<SALES> 0
<TOTAL-REVENUES> 58,366
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 23,621
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,922
<INCOME-PRETAX> 21,713
<INCOME-TAX> 176
<INCOME-CONTINUING> 21,537
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,309
<EPS-PRIMARY> .83
<EPS-DILUTED> .82
</TABLE>
