<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, 1999
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:
12,420,945 shares of common stock, $.01 par value, as of October 29, 1999
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, 1999 and December 31, 1998 3
Consolidated Statements of Operations of National Golf
Properties, Inc. for the three months ended September
30, 1999 and 1998 4
Consolidated Statements of Operations of National Golf
Properties, Inc. for the nine months ended September 30,
1999 and 1998 5
Consolidated Statements of Cash Flows of National Golf
Properties, Inc. for the nine months ended September 30,
1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 19
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
(Unaudited, in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------------- ----------------
<S> <C> <C>
ASSETS
Property:
Land $ 99,294 $ 77,317
Buildings 262,741 202,920
Ground improvements 432,300 332,066
Furniture, fixtures and equipment 50,817 39,341
Construction in progress 13,134 11,374
--------- ---------
858,286 663,018
Less: accumulated depreciation (145,936) (121,095)
--------- ---------
Net property 712,350 541,923
Cash and cash equivalents 1,881 1,711
Investments 200 1,295
Mortgage notes receivable 27,855 24,849
Investment in joint venture 7,376 7,630
Due from affiliate 3,601 958
Other assets, net 24,713 18,929
--------- ---------
Total assets $ 777,976 $ 597,295
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 441,926 $ 283,405
Accounts payable and other liabilities 19,630 15,011
--------- ---------
Total liabilities 461,556 298,416
--------- ---------
Minority interest 193,550 166,655
--------- ---------
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized - none issued - -
Common stock, $.01 par value, 40,000,000
shares authorized, 12,416,445 and
12,519,745 shares issued and outstanding at
September 30, 1999 and December 31, 1998,
respectively 124 125
Additional paid in capital 127,294 135,205
Unamortized restricted stock compensation (4,548) (3,106)
--------- ---------
Total stockholders' equity 122,870 132,224
--------- ---------
Total liabilities and
stockholders' equity $ 777,976 $ 597,295
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
NATIONAL GOLF PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the three For the three
months ended months ended
September 30, 1999 September 30, 1998
--------------------- ---------------------
<S> <C> <C>
Revenues:
Rent from affiliates $ 26,466 $ 18,716
Rent 295 858
Equity in income from joint venture 108 97
Gain on sale of property 832 -
----------- -----------
Total revenues 27,701 19,671
----------- -----------
Expenses:
General and administrative 1,213 1,236
Depreciation and amortization 9,330 6,777
----------- -----------
Total expenses 10,543 8,013
----------- -----------
Operating income 17,158 11,658
Other income (expense):
Interest income from affiliates 277 -
Interest income 479 342
Other income 15 2
Interest expense (9,160) (4,998)
----------- -----------
Income before provision for taxes and
minority interest 8,769 7,004
Provision for taxes (28) (60)
----------- -----------
Income before minority interest 8,741 6,944
Income applicable to minority interest (5,006) (3,850)
----------- -----------
Net income $ 3,735 $ 3,094
=========== ===========
Basic earnings per share $ 0.30 $ 0.25
Weighted average number of shares 12,599 12,510
Diluted earnings per share $ 0.30 $ 0.25
Weighted average number of shares 12,632 12,599
Distribution declared per common share
outstanding $ 0.45 $ 0.44
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
NATIONAL GOLF PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the nine For the nine
months ended months ended
September 30, 1999 September 30, 1998
--------------------- ---------------------
<S> <C> <C>
Revenues:
Rent from affiliates $ 71,600 $ 55,575
Rent 1,425 2,504
Equity in income from joint venture 321 287
Gain on sale of property 1,191 -
------------- -------------
Total revenues 74,537 58,366
------------- -------------
Expenses:
General and administrative 3,839 3,760
Depreciation and amortization 26,225 19,861
------------- -------------
Total expenses 30,064 23,621
------------- -------------
Operating income 44,473 34,745
Other income (expense):
Interest income from affiliates 557 -
Interest income 1,242 549
Gain on property condemnation - 993
Other income 266 348
Treasury lock settlement (2,016) -
Interest expense (24,481) (14,922)
------------- -------------
Income before provision for taxes and
minority interest 20,041 21,713
Provision for taxes (143) (176)
------------- -------------
Income before minority interest 19,898 21,537
Income applicable to minority interest (11,709) (11,228)
------------- -------------
Net income $ 8,189 $ 10,309
============= =============
Basic earnings per share $ 0.65 $ 0.83
Weighted average number of shares 12,619 12,491
Diluted earnings per share $ 0.65 $ 0.82
Weighted average number of shares 12,671 12,598
Distribution declared per common share
outstanding $ 1.33 $ 1.30
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
NATIONAL GOLF PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
For the nine For the nine
months ended months ended
September 30, 1999 September 30, 1998
---------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,189 $ 10,309
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 26,225 19,861
Amortization of loan costs 786 -
Amortization of restricted stock 1,162 1,294
Minority interest in earnings 11,709 11,228
Distributions from joint venture, net
of equity in income 254 295
Gain on property condemnation - (993)
Gain on sale of property (1,191) -
Straight-line rents (2,261) -
Other 2,017 -
Changes in assets and liabilities:
Other assets (3,836) (1,561)
Accounts payable and other
liabilities 8,630 5,812
Due from/to affiliate (39) 472
--------- ---------
Net cash provided by
operating activities 51,645 46,717
--------- ---------
Cash flows from investing activities:
Purchase of available-for-sale securities (1,953) (3,672)
Proceeds from sale of available-for-sale
securities 3,049 3,627
Investment in joint venture - (19)
Proceeds from short-term investment - 366
Treasury lock settlement (2,345) -
Issuance of mortgage note receivable (12,655) (22,649)
Proceeds from mortgage notes receivable 9,649 -
Loan costs on mortgage note issued (68) (147)
Purchase of property and related assets (196,780) (51,272)
Proceeds from sale of property and related
assets 4,709 1,305
--------- ---------
Net cash used by investing
activities (196,394) (72,461)
--------- ---------
Cash flows from financing activities:
Principal payments on notes payable (405,682) (101,074)
Proceeds from notes payable 558,350 85,000
Purchase of stock under repurchase plan (4,767) -
Loan costs (4,659) (15)
Proceeds from Preferred Units, net of
offering expenses 34,067 73,011
Proceeds from stock options exercised 658 1,053
Cash distributions (16,672) (16,124)
Limited partners' cash distributions (16,376) (13,203)
--------- ---------
Net cash provided by financing
activities 144,919 28,648
--------- ---------
Net increase in cash and cash equivalents 170 2,904
Cash and cash equivalents at beginning of
period 1,711 1,698
--------- ---------
Cash and cash equivalents at end of period $ 1,881 $ 4,602
========= =========
Supplemental cash flow information:
Interest paid $ 19,280 $ 11,279
Taxes paid 133 145
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
NATIONAL GOLF PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
National Golf Properties, Inc. (the "Company") owns all of the golf courses
through its general partner interest in National Golf Operating
Partnership, L.P. (the "Operating Partnership"), pursuant to its 58.7%
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, 1999 and 1998 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, 1998 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 for the year ended December 31, 1998.
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,
1999 and 1998 were 32,773 and 88,831, respectively. The incremental shares
for the nine months ended September 30, 1999 and 1998 were 51,860 and
106,919, respectively.
The accompanying consolidated balance sheets 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. GAAP requires the reporting of such
7
<PAGE>
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, 1999 and December 31, 1998 was approximately
$76.5 million and $78.6 million, respectively.
In May 1998, the Emerging Issues Task Force (the "EITF") of the Financial
Accounting Standards Board 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 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 will be no impact to the Company's earnings per share,
financial condition, or results of operations. In November 1998, Issue No.
98-9 was withdrawn by the EITF. However, the Company has continued to
account for contingent rent in accordance with Issue No. 98-9.
(2) Property Acquisitions and Sales
-------------------------------
During the nine months ended September 30, 1999, the Company purchased
three golf courses, excluding the Acquired Cobblestone Courses, described
below, for an initial investment of approximately $14.6 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"), a related party, pursuant to long-
term triple net leases.
<TABLE>
<CAPTION>
Acquisition Initial
Date Course Name Location Investment
----------- ----------- -------- ----------
(In thousands)
<S> <C> <C> <C>
1/6/99 Beaver Brook Country Club Clinton,
New Jersey $ 8,183
1/6/99 The Classic Golf Club Spanaway,
Washington 2,475
9/15/99 Coyote Lakes Golf Club Surprise,
Arizona 3,975
-------
Total Initial Investment $14,633
=======
</TABLE>
On March 31, 1999, the Company purchased fee interests in 15 golf courses
and long-term leasehold interests in five golf courses and made a
participating mortgage loan collateralized by an additional golf course
(collectively, the "Acquired Cobblestone Courses") previously owned by
subsidiaries of Meditrust Corporation and Meditrust Operating Company
8
<PAGE>
(collectively, "Meditrust") comprising the "Cobblestone Golf Group" for an
aggregate initial investment of approximately $185 million, which
investment was financed by approximately $179.3 million of cash and
approximately $5.7 million of assumed notes. The Company's acquisition of
interests in these golf courses was part of a larger transaction in which
a subsidiary of AGC and a subsidiary of ClubCorp International ("ClubCorp")
formed Golf Acquisitions, L.L.C., a new limited liability company ("Golf
Acquisitions"), to purchase from Meditrust the subsidiaries comprising the
Cobblestone Golf Group. Golf Acquisitions closed this purchase on March
31, 1999, and immediately thereafter sold interests in 23 golf courses to
subsidiaries of ClubCorp, sold interests in the Acquired Cobblestone
Courses to the Company and sold to AGC short-term interests in three golf
course facilities and a portion of the personal property assets related to
the Acquired Cobblestone Courses. Three of the Acquired Cobblestone
Courses are leasehold interests in the golf courses at Carmel Mountain
Ranch Country Club and Sweetwater Country Club, in which the Company
already owned the fee interest and had previously leased such properties to
a subsidiary of Meditrust.
Concurrently with closing its purchase of the Acquired Cobblestone Courses,
the Company entered into agreements to lease or sublease 18 of the Acquired
Cobblestone Courses to AGC and two of the Acquired Cobblestone Courses to
Golf Enterprises, Inc. AGC also entered into a separate agreement to lease
the golf course which collateralizes the Company's participating mortgage
loan to a subsidiary of Golf Acquisitions.
On September 7, 1999, the Company sold Crescent Oaks Country Club in
Clearwater, Florida for approximately $1.5 million. The Company recognized
a gain of approximately $587,000.
On May 25, 1999, the Company sold Sugar Ridge Golf Course in Lawrenceburg,
Indiana for approximately $3 million. The Company recognized a gain of
approximately $357,000.
(3) Treasury Lock Swap Transactions
-------------------------------
On June 15, 1998, in anticipation of the Operating Partnership placing $100
million of fixed-rate, ten-year notes or some similar security, the
Operating Partnership entered into a $100 million treasury lock swap
transaction with a financial institution in order to hedge its exposure to
interest rate fluctuations. 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 April 30, 1999, the Operating
Partnership settled its treasury lock swap transaction, resulting in a loss
of approximately $2,345,000. Such loss was netted with a gain of
approximately $329,000 from two other treasury lock swap transactions,
resulting in a net loss of approximately $2,016,000 which was recorded in
the statement of operations.
(4) Notes Payable
-------------
On July 30, 1999, the Company amended its $300 million unsecured revolving
credit facility with a group of lenders led by The First National Bank of
Chicago, as Administrative Agent. The amended credit facility splits the
$300 million revolving credit facility into (i) a $200 million revolver
(the "Revolver") and (ii) a $100 million term note (the "Term Note")
9
<PAGE>
(collectively, the "New Credit Facility"). Advances under the New Credit
Facility bear interest at the Administrative Agent's alternate base rate
plus the then-applicable base rate margin or, at the option of the Company,
LIBOR plus the then-applicable LIBOR rate margin. The Administrative
Agent's alternate base rate for any day means the greater of (i) a rate per
annum equal to the corporate base rate of interest announced by the
Administrative Agent from time to time, and (ii) the federal funds rate as
published by the Federal Reserve Bank plus one-half percent (0.50%) per
annum. With respect to advances under the Revolver, the amount of the base
rate margin and LIBOR rate margin vary depending upon the amount of the
Company's outstanding indebtedness compared to its capitalization. The
initial rate of interest for borrowings made under the Revolver will be
equal to LIBOR plus a margin of 2.25% or the alternate base rate plus
1.00%. The Revolver terminates on March 29, 2002, but may be extended by
the Company for an additional year if approved by a specified number of the
lenders under the New Credit Facility. The rate of interest for the Term
Note will be equal to LIBOR plus a margin of 3.00% or the alternate base
rate plus 1.75%. The Term Note terminates on March 29, 2004. The New
Credit Facility eliminates the requirement under the old facility for the
Company to obtain certain modifications of the covenants applicable to its
$175 million fixed-rate unsecured senior notes. There were outstanding
advances of $238 million under the New Credit Facility as of September 30,
1999.
(5) Stock Repurchase Plan
---------------------
In September 1999, the Board of Directors authorized, subject to certain
business and market conditions, the purchase of up to $20 million of the
Company's common stock. At September 30, 1999, the number of shares
purchased under this authorization was 226,100 for a total cost of
approximately $4.8 million. The shares repurchased are considered
"authorized but unissued."
(6) Preferred Units
---------------
On July 28, 1999, the Operating Partnership completed the private placement
of 1,400,000 9.3% Series B Cumulative Redeemable Preferred Units ("Series B
Preferred Units"), representing limited partnership interests in the
Operating Partnership, to institutional investors in exchange for a
contribution to the Operating Partnership of $35 million. The Operating
Partnership used the proceeds from such private placement to reduce
outstanding indebtedness under the Operating Partnership's revolving credit
facility.
(7) Lease Rental Agreements
-----------------------
For the leases of the Acquired Cobblestone Courses, the base rent generates
an initial return on the Operating Partnership's investment of 8.75% and
will step-up on a sequential basis each year to 9.25%, 9.75%, 10.25%,
10.75%, 11.25%, and finally to 11.75% in 2005. GAAP requires, for leases
with fixed increases in rent, the total rent revenue over the lease period
be straight-lined. For the six months ended September 30, 1999, the
straight-lining of rent resulted in additional rent revenue of
approximately $2,261,000.
10
<PAGE>
(8) Pro Forma Financial Information
-------------------------------
The pro forma financial information set forth below is presented as if the
1999 acquisitions (Note 2) had been consummated as of January 1, 1998.
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, 1998, 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,
---------------------------------------- --------------------------
1999 1998
---- ----
<S> <C> <C>
Revenues from rental property $ 74,630 $ 70,612
Net income $ 8,007 $ 7,245
Basic earnings per share $ 0.63 $ 0.58
Diluted earnings per share $ 0.63 $ 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 income and expense.
(9) Statement of Cash Flows - Supplemental Disclosures
--------------------------------------------------
Non-cash transactions for the nine months ended September 30, 1999 include
approximately $5.7 million of assumed notes as partial consideration for
the Acquired Cobblestone Courses.
Non-cash transactions for the nine months ended September 30, 1998 include
approximately $2.3 million in capital improvements accrued but not paid.
(10) Other Data
----------
AGC is the lessee of all but four of the golf courses in the Company's
portfolio at September 30, 1999. David G. Price, the Chairman of the Board
of Directors of the Company, owns approximately 2.8% of the Company's
outstanding common stock and approximately 16% 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:
11
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------ ------------------
(In thousands)
<S> <C> <C>
Current assets $ 108,992 $ 82,809
Non-current assets 181,128 163,629
---------- ----------
Total assets $ 290,120 $ 246,438
========== ==========
Current liabilities $ 122,333 $ 84,893
Long-term liabilities 131,983 147,667
Minority interest 1,137 503
Shareholders' equity 34,667 13,375
---------- ----------
Total liabilities and shareholders' equity $ 290,120 $ 246,438
========== ==========
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended
September 30,
---------------------------------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Total revenues $ 533,054 $ 446,129
============ ==========
Net income $ 21,008 $ 11,298
============ ==========
</TABLE>
Total revenues from golf course operations and management agreements for
AGC increased by $87 million, or 19.5%, to $533.1 million for the nine
months ended September 30, 1999 compared to $446.1 million for the nine
months ended September 30, 1998. The increase in revenues was primarily
attributable to the addition of 38 leased courses and one management
course.
Net income increased by $9.7 million to $21 million for the nine months
ended September 30, 1999 compared to $11.3 million for the corresponding
nine months of 1998. The increase in net income was primarily due to
favorable weather conditions in the sun belt states during the first nine
months of 1999 compared to the first nine months of 1998 and the addition
of the above acquisitions.
(11) Subsequent Events
-----------------
On October 5, 1999, the Company purchased Casta del Sol Golf Course located
in Mission Viejo, California for approximately $8.1 million.
On October 18, 1999, the Board of Directors declared a distribution of
$0.45 per share for the quarter ended September 30, 1999 to stockholders of
record on October 29, 1999, which distribution will be paid on November 15,
1999.
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, 1999 with the three months ended September 30, 1998 and the nine
months ended September 30, 1999 with the nine months ended September 30, 1998.
Results of Operations
- ---------------------
Comparison of the three months ended September 30, 1999 to the three months
ended September 30, 1998
Net income increased by $641,000 to $3,735,000 for the three months ended
September 30, 1999 compared to $3,094,000 for the three months ended September
30, 1998. The increase was primarily attributable to an increase in rent
revenue of approximately $7,187,000, which was offset by: (i) an increase in
depreciation and amortization expense of approximately $2,553,000; and (ii) an
increase in interest expense of approximately $4,162,000.
The increase in rent revenue was primarily attributable to: (i) the acquisition
of 23 golf course properties subsequent to September 30, 1998, which accounted
for approximately $5,329,000 of the increase; and (ii) a full three months of
rent on six golf course properties acquired in the third quarter of 1998 which
accounted for approximately $508,000 of the increase; and (iii) the increase in
base rents under the leases with respect to the golf course properties owned at
June 30, 1998, which accounted for approximately $597,000 of the increase. As a
result of EITF 98-9, only approximately $1,068,000 and $231,000 of percentage
rent was recognized in the third quarter of 1999 and 1998, respectively.
The increase in depreciation and amortization expense was primarily due to the
acquisition of 23 golf course properties subsequent to September 30, 1998.
The increase in interest expense was primarily due to the increase in
outstanding advances and LIBOR rate margin under the Company's credit facility.
On March 31, 1999, the Company's $100 million credit facility was terminated and
replaced with a $300 million credit facility. On July 30, 1999, the Company
amended its $300 million credit facility.
Comparison of the nine months ended September 30, 1999 to the nine months ended
September 30, 1998
Net income decreased by $2,120,000 to $8,189,000 for the nine months ended
September 30, 1999 compared to $10,309,000 for the nine months ended September
30, 1998. The decrease was primarily attributable to: (i) an increase in
13
<PAGE>
depreciation and amortization expense of approximately $6,364,000; (ii) an
increase in treasury lock settlement of approximately $2,016,000; and (iii) an
increase in interest expense of approximately $9,559,000, which was offset by an
increase in rent revenue of approximately $14,946,000.
The increase in rent revenue was primarily attributable to: (i) the acquisition
of 23 golf course properties subsequent to September 30, 1998, which accounted
for approximately $10,927,000 of the increase; (ii) a full nine months of rent
on seven golf course properties acquired in the first nine months of 1998 which
accounted for approximately $2,591,000 of the increase; and (iii) the increase
in base rents under the leases with respect to the golf course properties owned
at December 31, 1997, which accounted for approximately $1,927,000 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, 1997 of
approximately $387,000 due to EITF 98-9. As a result of EITF 98-9, only
approximately $1,068,000 and $1,455,000 of percentage rent was recognized in the
first nine months of 1999 and 1998, respectively. Otherwise, the Company would
have recorded percentage rent in the first nine months of 1999 and 1998 of
approximately $7,024,000 and $5,013,000, respectively.
The increase in depreciation and amortization expense was primarily due to the
acquisition of 23 golf course properties subsequent to September 30, 1998.
At April 30, 1999, the Operating Partnership settled its treasury lock swap
transaction, resulting in a loss of approximately $2,345,000. Such loss was
netted with a gain of approximately $329,000 from two other treasury lock swap
transactions, resulting in a net loss of approximately $2,016,000 which was
recorded in the statement of operations. The increase in interest expense was
primarily due to the increase in outstanding advances and LIBOR rate margin
under the Company's credit facility. On March 31, 1999, the Company's $100
million credit facility was terminated and replaced with a $300 million credit
facility. On July 30, 1999, the Company amended its $300 million credit
facility.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1999, the Company had approximately $2.1 million in cash and
investments, mortgage notes receivable of approximately $27.9 million, mortgage
indebtedness of approximately $31 million and unsecured indebtedness of
approximately $410.9 million. The $441.9 million principal amount of mortgage
and unsecured indebtedness bears interest at a weighted average rate of 8.1%.
Of the $441.9 million of debt, $198.5 million is fixed rate debt and is payable
either monthly, quarterly, semi-annually, or annually and matures between 2000
and 2008.
In order to maintain its qualification as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"), 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 cumulative redeemable preferred units, representing a limited
partnership interest in the Operating Partnership. Although the Company
receives most of its rental payments on a monthly basis, it has and intends to
continue to pay distributions quarterly.
14
<PAGE>
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 are limited to projects that
the Company agreed to fund at the time a property was acquired or projects
subsequently identified by the Company or its operators that enhance the revenue
potential and long-term value of a property. For golf courses acquired through
October 29, 1999, the Company is required under the leases to pay for various
remaining capital improvements totaling approximately $30.8 million, of which
approximately $23.9 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 in order to
enhance revenue growth. Upon the Company's funding of the capital improvements,
the base rent payable under the leases with respect to these golf courses will
be adjusted to reflect, over the term of the leases, the Company's investment in
such improvements. Any subsequent capital improvements are the responsibility
of the lessees.
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.
In September 1999, the Board of Directors authorized, subject to certain
business and market conditions, the purchase of up to $20 million of the
Company's common stock. At October 29, 1999, the number of shares purchased
under this authorization was 226,100 for a total cost of approximately $4.8
million. The shares repurchased are considered "authorized but unissued."
On July 30, 1999, the Company amended its $300 million unsecured revolving
credit facility with a group of lenders led by The First National Bank of
Chicago, as Administrative Agent. The amended credit facility splits the $300
million revolving credit facility into (i) a $200 million revolver (the
"Revolver") and (ii) a $100 million term note (the "Term Note") (collectively,
the "New Credit Facility"). Advances under the New Credit Facility bear
interest at the Administrative Agent's alternate base rate plus the then-
applicable base rate margin or, at the option of the Company, LIBOR plus the
then-applicable LIBOR rate margin. The Administrative Agent's alternate base
rate for any day means the greater of (i) a rate per annum equal to the
corporate base rate of interest announced by the Administrative Agent from time
to time, and (ii) the federal funds rate as published by the Federal Reserve
Bank plus one-half percent (0.50%) per annum. With respect to advances under
the Revolver, the amount of the base rate margin and LIBOR rate margin vary
depending upon the amount of the Company's outstanding indebtedness compared to
its capitalization. The initial rate of interest for borrowings made under the
Revolver will be equal to LIBOR plus a margin of 2.25% or the alternate base
rate plus 1.00%. The Revolver terminates on March 29, 2002, but may be extended
by the Company for an additional year if approved by a specified number of the
lenders under the New Credit Facility. The rate of interest for the Term Note
will be equal to LIBOR plus a margin of 3.00% or the alternate base rate plus
1.75%. The Term Note terminates on March 29, 2004. The New Credit Facility
eliminates the requirement under the old facility for the Company to obtain
certain modifications of the covenants applicable to its $175 million fixed-rate
unsecured senior notes.
15
<PAGE>
On July 28, 1999, the Operating Partnership completed a private placement of
1,400,000 Series B Preferred Units to institutional investors in exchange for a
contribution to the Operating Partnership of $35 million. The Series B
Preferred Units, which may be called by the Operating Partnership at par on or
after July 28, 2004, have no stated maturity or mandatory redemption and pay a
cumulative, quarterly dividend at an annualized rate of 9.3%. The Series B
Preferred Units are not convertible into common stock, but are convertible into
preferred stock of the Company under certain circumstances. The Operating
Partnership used the proceeds from such private placement to reduce outstanding
indebtedness under the Operating Partnership's revolving credit facility.
For the period January 1, 1999 through October 29, 1999, the Company purchased
interests in 24 golf courses for an aggregate initial investment of
approximately $195.1 million and made one participating mortgage loan of
approximately $12.7 million, which investments were financed by $16.7 million of
cash from operations, $181.2 million of advances under the Company's credit
facility, $4.2 million of proceeds from sale of properties, and approximately
$5.7 million of assumed notes. In addition, the Company has one golf course
under purchase contract for an initial investment of approximately $4.2 million.
Also, the Company has three golf courses under sale contract for an aggregate
price of approximately $9.3 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 other 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 software with computers
and software that are Year 2000 compliant. The Company also has replaced its
computer servers and all its critical software. The Company plans to upgrade
its remaining non-critical software by the end of 1999. The Company has spent
approximately $71,000 to replace such computer equipment and software through
October 29, 1999 and anticipates spending an additional $15,000 before the end
of 1999 on additional software upgrades. The Company has determined that most
of the other office equipment that the Company uses also is Year 2000 compliant.
This has been confirmed in writing with third party vendors. The Company will
continue to conduct ongoing testing of its software and other equipment which
has not yet been tested or replaced to ensure Year 2000 compliance.
16
<PAGE>
The Company has sent written requests to all its tenants to determine their Year
2000 compliance. AGC has informed the Company that its Year 2000 compliance
project is progressing as planned. It has replaced or upgraded its critical
software and plans to upgrade its remaining non-critical software by the end of
1999. The Company will continue to monitor its largest tenant, AGC, to ensure
their Year 2000 compliance.
The Company has sent written requests to its key service providers to determine
their Year 2000 compliance. The Company will continue to follow up with those
key service providers who have not returned the Year 2000 questionnaires or who
are still working on their Year 2000 compliance.
The Company does not currently have a comprehensive contingency plan with
respect to the Year 2000 problem. However, the Company intends to establish
such a plan before the end of 1999 as part of its ongoing Year 2000 compliance
effort.
Despite the Company's efforts to identify and resolve Year 2000 compliance
problems, the Company cannot guarantee that all of the Company's systems will be
Year 2000 compliant or that other companies on which the Company relies will be
timely converted. As a result, the Company's operations could be interrupted or
otherwise adversely affected. 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. However, the Company believes
that, at worst, it might cease receiving percentage rents on a temporary basis.
This would result from the Company's tenants having to use a manual system to
prepare their accounting records and, as a consequence, it would take additional
time for the Company's tenants to gather financial performance information from
its golf courses and calculate the percentage rent amounts. This temporary
reduction in percentage rent could cause price fluctuations in the Company's
common stock.
The forward-looking statements regarding Year 2000 involve risks and
uncertainties, which reflect the Company's 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 GAAP
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 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, 1999 and 1998.
17
<PAGE>
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------
(In thousands)
1999 1998
------------------- -------------------
<S> <C> <C>
Net income $ 8,189 $ 10,309
Distributions - Preferred Units (5,079) (3,297)
Minority interest 11,709 11,228
Depreciation and amortization 26,495 20,156
Gain on property condemnation - (993)
Gain on sale of property (1,191) -
Treasury lock 2,016 -
Straight-line rents (2,261) -
Excess land sales (260) (342)
Amortization - loan costs - (178)
Depreciation - corporate (55) (52)
--------- ---------
Funds from operations 39,563 36,831
Company's share of funds from operations 56.2% 56.8%
--------- ---------
Company's funds from operations $ 22,234 $ 20,920
========= =========
</TABLE>
As a result of EITF 98-9, only approximately $1,068,000 and $1,455,000 of
percentage rent was recognized in the first nine months of 1999 and 1998,
respectively. Otherwise, the Company would have recorded percentage rent in the
first nine months of 1999 and 1998 of approximately $7,024,000 and $5,013,000,
respectively. The additional rent would have increased funds from operations
for the nine months ended September 30, 1999 and 1998 from approximately
$39,563,000 to approximately $45,519,000 and from approximately $36,831,000 to
approximately $40,389,000, respectively.
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.
18
<PAGE>
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk. The Company
has and will continue to manage interest rate risk by (1) maintaining a
conservative ratio of fixed rate, long-term debt to total debt such that
variable rate exposure is kept at an acceptable level, (2) using interest rate
fixing strategies where appropriate to fix rates on anticipated debt
transactions, and (3) taking advantage of favorable market conditions for long-
term debt and/or equity.
The following table sets forth the Company's long-term debt obligations,
principal cash flows by scheduled maturity, weighted average interest rates and
estimated fair value ("FV") at September 30, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total FV
------ ------ ------- -------- ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long term debt:
Fixed rate................ $2,674 $8,561 $26,037 $ 7,172 $7,743 $146,353 $198,540 $199,586
Average interest rate 8.24% 7.72% 7.09% 8.39% 8.39% 8.35% 8.13%
Variable rate............. 25 159 177 238,197(1) 219 4,609 243,386 243,386
Average interest rate 10.74% 10.74% 10.74% 8.03% 10.74% 10.74% 8.09%
------ ------ ------- --------- ------ -------- -------- --------
Total debt................ $2,699 $8,720 $26,214 $ 245,369 $7,962 $150,962 $441,926 $442,972
====== ====== ======= ========= ====== ======== ======== ========
</TABLE>
(1)At September 30, 1999, there were outstanding advances of $238 million under
the credit facility.
In addition, the Company has assessed the market risk for its variable rate
debt and believes that a 1% increase in interest rates would have an approximate
$2.4 million increase in interest expense based on approximately $243.4 million
outstanding at September 30, 1999.
The estimated fair value of the Company's long-term debt is estimated based on
discounted cash flows at interest rates that the Company's management believes
reflects the risks associated with long-term debt of similar risk and duration.
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: October 29, 1999 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
- -------- ----------- ---------------
<S> <C> <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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,881
<SECURITIES> 200
<RECEIVABLES> 31,456
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,482
<PP&E> 858,286
<DEPRECIATION> 145,936
<TOTAL-ASSETS> 777,976
<CURRENT-LIABILITIES> 19,630
<BONDS> 441,926
0
0
<COMMON> 124
<OTHER-SE> 122,746
<TOTAL-LIABILITY-AND-EQUITY> 777,976
<SALES> 0
<TOTAL-REVENUES> 74,537
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 30,064
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,481
<INCOME-PRETAX> 20,041
<INCOME-TAX> 143
<INCOME-CONTINUING> 19,898
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,189
<EPS-BASIC> .65
<EPS-DILUTED> .65
</TABLE>
