<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, 2000
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:
12,951,845 shares of common stock, $.01 par value, as of November 1, 2000
Page 1 of 20
<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, 2000 and December 31, 1999 3
Consolidated Statements of Operations of National Golf
Properties, Inc. for the three months ended September
30, 2000 and 1999 4
Consolidated Statements of Operations of National Golf
Properties, Inc. for the nine months ended September 30,
2000 and 1999 5
Consolidated Statements of Cash Flows of National Golf
Properties, Inc. for the nine months ended September 30,
2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 16
Part II. Other Information 18
Exhibit Index 20
</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,
2000 1999
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Property
Land $ 90,746 $ 98,918
Buildings 238,949 255,833
Ground improvements 450,648 417,941
Furniture, fixtures and equipment 49,462 49,893
Leasehold rights 32,663 31,543
Construction in progress 27,726 23,942
------------- ------------
890,194 878,070
Less: accumulated depreciation (177,899) (152,974)
------------- ------------
Net property 712,295 725,096
Cash and cash equivalents 2,393 2,491
Investments 200 200
Mortgage notes receivable 21,540 27,855
Investment in joint venture 7,025 7,286
Due from affiliate 7,334 -
Other assets, net 25,874 18,977
------------- ------------
Total assets $ 776,661 $ 781,905
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 455,019 $ 450,331
Accounts payable and other liabilities 28,936 9,632
Due to affiliate - 6,370
------------- ------------
Total liabilities 483,955 466,333
------------- ------------
Minority interest 173,720 194,071
------------- ------------
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized - none issued - -
Common stock, $.01 par value, 40,000,000 shares
authorized, 13,369,545 and 12,204,245 shares
issued and outstanding at September 30, 2000 and
December 31, 1999, respectively 134 122
Additional paid in capital 122,209 125,597
Unamortized restricted stock compensation (3,357) (4,218)
------------- ------------
Total stockholders' equity 118,986 121,501
------------- ------------
Total liabilities and stockholders' equity $ 776,661 $ 781,905
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated 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, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Revenues:
Rent from affiliates $ 28,062 $ 26,466
Rent 304 295
Equity in income from joint venture 123 108
Gain on sale of properties 2,763 832
-------------- --------------
Total revenues 31,252 27,701
-------------- --------------
Expenses:
General and administrative 1,273 1,213
Depreciation and amortization 9,771 9,330
-------------- --------------
Total expenses 11,044 10,543
-------------- --------------
Operating income 20,208 17,158
Other income (expense):
Interest income from affiliates 138 277
Interest income 373 479
Other income 501 15
Interest expense (10,286) (9,160)
-------------- --------------
Income before taxes and minority interest 10,934 8,769
Provision for taxes (9) (28)
-------------- --------------
Income before minority interest 10,925 8,741
Income applicable to minority interest (5,660) (5,006)
-------------- --------------
Net income $ 5,265 $ 3,735
============== ==============
Basic earnings per share $ 0.40 $ 0.30
Weighted average number of shares 13,130 12,599
Diluted earnings per share $ 0.39 $ 0.30
Weighted average number of shares 13,465 12,632
Distribution declared per common share outstanding $ 0.46 $ 0.45
</TABLE>
The accompanying notes are an integral part of these consolidated 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, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Revenues:
Rent from affiliates $ 82,051 $ 71,600
Rent 910 1,425
Equity in income from joint venture 345 321
Gain on sale of property 3,451 1,191
-------------- --------------
Total revenues 86,757 74,537
-------------- --------------
Expenses:
General and administrative 4,301 3,839
Depreciation and amortization 30,183 26,225
-------------- --------------
Total expenses 34,484 30,064
-------------- --------------
Operating income 52,273 44,473
Other income (expense):
Interest income from affiliates 403 557
Interest income 888 1,242
Other income 547 266
Treasury lock settlement - (2,016)
Interest expense (30,127) (24,481)
-------------- --------------
Income before provision for taxes and
minority interest 23,984 20,041
Provision for taxes (27) (143)
-------------- --------------
Income before minority interest 23,957 19,898
Income applicable to minority interest (13,882) (11,709)
-------------- --------------
Net income $ 10,075 $ 8,189
============== =============
Basic earnings per share $ 0.79 $ 0.65
Weighted average number of shares 12,806 12,619
Diluted earnings per share $ 0.77 $ 0.65
Weighted average number of shares 13,116 12,671
Distributions declared per common share outstanding $ 1.36 $ 1.33
</TABLE>
The accompanying notes are an integral part of these consolidated 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, 2000 September 30, 1999
------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,075 $ 8,189
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 30,183 26,225
Amortization of loan costs 1,065 786
Amortization of restricted stock 1,177 1,162
Minority interest in earnings 13,882 11,709
Distributions from joint venture, net
of equity in income 261 254
Gain on sale of property (3,451) (1,191)
Straight-line rents (2,726) (2,261)
Other 186 2,017
Changes in assets and liabilities:
Other assets (4,785) (3,836)
Accounts payable and other liabilities 9,716 8,630
Due from/to affiliate (1,906) (39)
-------- ---------
Net cash provided by operating activities 53,677 51,645
-------- ---------
Cash flows from investing activities:
Purchase of available-for-sale securities - (1,953)
Proceeds from sale of available-for-sale
securities - 3,049
Treasury lock settlement - (2,345)
Issuance of mortgage note receivable (465) (12,655)
Proceeds from mortgage notes receivable - 9,649
Loan costs on mortgage note issued - (68)
Purchase of property and related assets (32,800) (196,780)
Proceeds from sale of property and related assets 12,392 4,709
-------- ---------
Net cash used in investing activities (20,873) (196,394)
-------- ---------
Cash flows from financing activities:
Principal payments on notes payable (74,465) (405,682)
Proceeds from notes payable 79,000 558,350
Purchase of stock under repurchase plan (2,151) (4,767)
Loan costs (60) (4,659)
Proceeds from Preferred Units, net of offering expenses - 34,067
Proceeds from stock options exercised - 658
Cash distributions (17,405) (16,672)
Limited partners' cash distributions (17,821) (16,376)
-------- ---------
Net cash provided by (used in) financing activities (32,902) 144,919
-------- ---------
Net increase/(decrease) in cash and cash equivalents (98) 170
Cash and cash equivalents at beginning of period 2,491 1,711
-------- ---------
Cash and cash equivalents at end of period $ 2,393 $ 1,881
======== =========
Supplemental cash flow information:
Interest paid $ 25,708 $ 19,280
Taxes paid 45 133
</TABLE>
The accompanying notes are an integral part of these consolidated 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 64.1%
ownership of the common units of partnership interest in the Operating
Partnership ("Common Units"). In August 2000, the Company acquired the
remaining 11% interest in Royal Golf, L.P. II ("Royal Golf") from a limited
partner. The Company previously owned 89% of 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, 2000 and 1999 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
statement 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, 1999 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, 1999.
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
and unvested restricted stock. The incremental shares for the three months
ended September 30, 2000 and 1999 were 334,032 and 32,773, respectively.
The incremental shares for the nine months ended September 30, 2000 and
1999 were 310,373 and 51,860, respectively.
7
<PAGE>
(2) Property Acquisitions and Sales
-------------------------------
In August 2000, the Company acquired the remaining 11% interest in Royal
Golf from a limited partner, for approximately $1.9 million of cash.
During the nine months ended September 30, 2000, the Company purchased two
golf courses, described below, for an initial investment of approximately
$11 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.
Acquisition Initial
Date Course Name Location Investment
----------- ----------- -------- --------------
(In thousands)
2/24/00 Canoa Hills Golf Course Green Valley, $ 3,493
Arizona
3/7/00 Oyster Reef Golf Club Hilton Head Island, 7,462
South Carolina
--------
Total Initial Investment $ 10,955
========
In September 2000, the Company sold Shenandoah Country Club for
approximately $1.9 million. The Company recognized a gain of approximately
$661,000.
In July 2000, the Company sold Hickory Heights Golf Club and Westwinds
Country Club for a total amount of approximately $8.1 million. The Company
recognized a gain of approximately $2.2 million.
In February 2000, the Company sold Lake Houston Golf Club and Woodlake
Country Club for a total amount of approximately $3.2 million. The Company
recognized a gain of approximately $0.6 million.
(3) Cobblestone Acquisition
-----------------------
On March 31, 1999, the Company purchased fee interests in 15 golf courses,
long-term leasehold interests in two golf courses and leasehold rights in
three golf courses and made a participating mortgage loan collateralized by
an additional golf course (collectively, the "Acquired Cobblestone
Courses"). During the three months ended March 31, 2000, the Company
finalized the fair value allocation of purchase price among the Acquired
Cobblestone Courses.
8
<PAGE>
(4) Mortgage Notes Receivable
-------------------------
On March 13, 1995, the Company sold Hidden Hills Country Club in Stone
Mountain, Georgia for approximately $3.2 million. The Company provided
seller financing in the form of a mortgage loan in the amount of $2.2
million at an initial interest rate of 11% per annum and a maturity date of
March 2000 (the "Hidden Hills Mortgage"). In March 1998, the interest rate
was increased to 11.5% per annum, and in March 1999, the interest rate was
increased to 12% per annum.
On March 12, 2000, the Hidden Hills Mortgage matured but was not paid. The
borrower is in the process of refinancing the Hidden Hills Mortgage with a
third party lender. The Company extended the term of the Hidden Hills
Mortgage to June 30, 2000 and, subject to certain payment provisions, to
September 30, 2000, to facilitate such refinancing. The interest rate
remains at 12% per annum.
The borrower is continuing the process of refinancing the Hidden Hills
Mortgage, however, the borrower did not meet the payment provisions of the
extended note. The Company has declared the borrower in default and is
initiating foreclosure proceedings. At September 30, 2000 and December 31,
1999 the unpaid principal and interest balance was approximately $2.2
million and $2.4 million, respectively. Accrued but unpaid interest at
September 30, 2000 was approximately $333,000, and the Company has
established a reserve for this.
(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, 2000 and December 31, 1999, the
number of shares purchased under this authorization was 967,200 and 444,800
for a total cost of approximately $19.9 million and $9.1 million,
respectively, which includes an accrued liability of approximately $8.6
million for the purchase of 417,700 shares which had not settled and was
unpaid at September 30, 2000. The shares repurchased are considered
"authorized but unissued."
(6) 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 three months ended September 30, 2000 and 1999,
the straight-lining of rent resulted in additional rent revenue of
approximately $961,000 and $1,131,000, respectively. For the nine months
ended September 30, 2000 and 1999, the straight-lining of rent resulted in
additional rent revenue of approximately $2,726,000 and $2,261,000,
respectively.
(7) Pro Forma Financial Information
-------------------------------
The pro forma financial information set forth below is presented as if the
2000 acquisitions (Note 2) had been consummated as of January 1, 1999.
The pro forma financial information is not necessarily indicative of what
actual results of operations of the Company would have been assuming the
9
<PAGE>
acquisitions had been consummated as of January 1, 1999, nor does it
purport to represent the results of operations for future periods.
For the nine
(In thousands, except per share amounts) months ended September 30,
---------------------------------------- --------------------------
2000 1999
---- ----
Revenues from rental property $ 83,167 $ 73,929
Net income $ 10,097 $ 8,017
Basic earnings per share $ 0.79 $ 0.64
Diluted earnings per share $ 0.77 $ 0.63
The pro forma financial information includes the following adjustments:
(i) an increase in depreciation expense and (ii) an increase in interest
expense.
(8) Statement of Cash Flows - Supplemental Disclosures
--------------------------------------------------
On March 14, 2000, a limited partner exchanged all of its 1,250,000 Common
Units for 1,250,000 shares of common stock.
Non-cash transactions for the nine months ended September 30, 1999 include
approximately $5.6 million of assumed notes as partial consideration for
the Acquired Cobblestone Courses.
(9) Other Data
----------
AGC is the lessee of all but four of the golf courses in the Company's
portfolio at September 30, 2000. David G. Price, the Chairman of the Board
of Directors of the Company, owns approximately 2.6% 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.
10
<PAGE>
The following table sets forth certain condensed unaudited financial
information concerning AGC:
September 30, December 31,
2000 1999
------------- ------------
(In thousands)
Current assets $ 127,987 $ 99,292
Non-current assets 177,645 179,566
------------ ------------
Total assets $ 305,632 $ 278,858
============ ============
Current liabilities $ 130,220 $ 102,701
Long-term liabilities 146,918 161,204
Minority interest 1,227 760
Shareholders' equity 27,267 14,193
------------ ------------
Total liabilities and shareholders'
equity $ 305,632 $ 278,858
============ ============
For the nine months ended
September 30,
----------------------------------------
2000 1999
---- ----
(In thousands)
Total revenues $ 589,281 $ 533,054
========= =========
Net income $ 13,469 $ 21,008
========= =========
Total revenues from golf course operations and management agreements for
AGC increased by $56.2 million, or 10.5%, to $589.3 million for the nine
months ended September 30, 2000 compared to $533.1 million for the nine
months ended September 30, 1999. The increase in revenues was primarily
attributable to a full nine months of revenues in 2000 related to the
acquisition of 23 leased courses on March 31, 1999.
Net income decreased by $7.5 million to $13.5 million for the nine months
ended September 30, 2000 compared to $21 million for the corresponding nine
months of 1999. While the new acquisitions described above contributed
favorably to revenue, such properties historically operate at lower margins
in the first year of operation. Additionally, the current period was
adversely affected by foreign currency transaction losses due to weakening
foreign currencies in the U.K. and Australia, plus one-time restructuring
charges designed to lower operating costs and increase efficiencies.
(10) Subsequent Events
-----------------
On October 10, 2000, the Board of Directors declared a distribution of
$0.46 per share for the quarter ended September 30, 2000 to stockholders of
record on October 31, 2000, which distribution will be paid on November 15,
2000.
On October 12, 2000, the Company sold Royal Meadows Golf Course for
approximately $3 million and expects to recognize a gain of approximately
$2.1 million.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
--------
The following discussion should be read in conjunction with the accompanying
Consolidated Financial Statements and Notes thereto. The forward-looking
statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A") relating to certain matters that
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, 2000 with the three months ended September 30, 1999 and the nine
months ended September 30, 2000 with the nine months ended September 30, 1999.
Results of Operations
---------------------
Comparison of the three months ended September 30, 2000 to the three months
ended September 30, 1999
Net income increased by $1,530,000 to $5,265,000 for the three months ended
September 30, 2000 compared to $3,735,000 for the three months ended September
30, 1999. The net increase was primarily attributable to: (i) an increase in
rent revenue of approximately $1,605,000; (ii) an increase in gain on sale of
property of approximately $1,931,000; (iii) an increase in depreciation and
amortization expense of approximately $441,000; (iv) an increase in interest
expense of approximately $1,126,000; and (v) increases in interest and other
income of approximately $241,000.
The increase in rent revenue was primarily attributable to: (i) the acquisition
of four golf course properties subsequent to September 30, 1999, which accounted
for approximately $629,000 of the increase; (ii) a full three months of rent on
one golf course property acquired in the third quarter of 1999 which accounted
for approximately $84,000 of the increase; (iii) the increase in base rents
under the leases with respect to the golf course properties owned at June 30,
1999, which accounted for approximately $1,673,000 of the increase. These
increases were offset by: (i) a decrease in percentage rent of approximately
$412,000; and (ii) a decrease in base rents from seven golf course properties
sold after June 30, 1999 of approximately $369,000.
The increase in gain on sale of properties was primarily attributable to the
sale of three golf course properties in the three months ended September 30,
2000 compared to the sale of one golf course property in the three months ended
September 30, 1999.
The increase in depreciation and amortization expense was due to a decrease in
depreciation expense of approximately $149,000 and an increase in amortization
expense of approximately $590,000. The increase in amortization expense was
primarily due to the acquisition of two long-term leasehold interests and three
leasehold rights, which accounted for approximately $582,000 of the increase.
The decrease in depreciation expense was primarily due to: (i) reclassifications
among the components of property for the Acquired Cobblestone Courses, which
resulted in a decrease of approximately $168,000; (ii) the acquisition of four
golf course properties subsequent to September 30, 1999, which resulted in an
increase of approximately $255,000; (iii) a full three months of depreciation on
the acquisition of one golf course property subsequent to June 30, 1999 which
resulted in an increase of approximately $43,000; and (iv) the sale of seven
12
<PAGE>
golf course properties subsequent to June 30, 1999, which resulted in a decrease
of approximately $199,000.
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. The amended credit facility split the
$300 million revolving credit facility into (i) a $200 million revolver and (ii)
a $100 million term note.
Comparison of the nine months ended September 30, 2000 to the nine months ended
September 30, 1999
Net income increased by $1,886,000 to $10,075,000 for the nine months ended
September 30, 2000 compared to $8,189,000 for the nine months ended September
30, 1999. The net increase was primarily attributable to: (i) an increase in
rent revenue of approximately $9,936,000; (ii) an increase in gain on sale of
property of approximately $2,260,000; (iii) an increase in depreciation and
amortization expense of approximately $3,958,000; and (iv) an increase in
interest expense of approximately $5,646,000.
The increase in rent revenue was primarily attributable to: (i) the acquisition
of four golf course properties subsequent to September 30, 1999, which accounted
for approximately $1,670,000 of the increase; (ii) a full nine months of
rent on 17 golf course properties, two long-term leasehold interests and three
leasehold rights acquired in the first nine months of 1999, which accounted for
approximately $6,670,000 of the increase; and (iii) the increase in rents under
the leases with respect to the golf course properties owned at December 31,
1998, which accounted for approximately $2,903,000 of the increase. These
increases were offset by: (i) a decrease in base rents of approximately $895,000
from eight golf course properties sold after December 31, 1998; and (ii) a
decrease in percentage rents of approximately $412,000.
The increase in gain on sale of properties was primarily attributable to the
sale of five golf course properties in the nine months ended September 30, 2000
compared to the sale of two golf course properties in the nine months ended
September 30, 1999.
The increase in depreciation and amortization expense was due to an increase in
depreciation expense of approximately $2,240,000 and an increase in amortization
expense of approximately $1,718,000. The increase in depreciation expense was
primarily due to: (i) the acquisition of four golf course properties subsequent
to September 30, 1999, which accounted for approximately $663,000 of the
increase; (ii) a full nine months of depreciation expense on 17 golf course
properties acquired in the first nine months of 1999, which accounted for
approximately $1,760,000 of the increase; and (iii) a decrease of approximately
$470,000 due to the sale of eight golf course properties subsequent to December
31, 1998. The increase in amortization expense was primarily due to the
acquisition of two long-term leasehold interests and three leasehold rights,
which accounted for approximately $1,741,000 of the increase.
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. The amended credit facility split the
$300 million revolving credit facility into (i) a $200 million revolver and (ii)
a $100 million term note.
13
<PAGE>
Liquidity and Capital Resources
-------------------------------
At September 30, 2000, the Company had approximately $2.6 million in cash and
investments, mortgage notes receivable of approximately $21.5 million, mortgage
indebtedness of approximately $28.8 million and unsecured indebtedness of
approximately $426.2 million. The $455 million principal amount of mortgage and
unsecured indebtedness bears interest at a weighted average rate of 8.79%. Of
the $455 million of debt, $190.8 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.
The Company anticipates that its cash from operations and its bank line of
credit 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 November 1, 2000, the
Company is required under the leases to pay for various remaining capital
improvements totaling approximately $24.4 million, of which approximately $24
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.
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.
On March 31, 2000, the Independent Directors waived the requirement that AGC
post and maintain an irrevocable letter of credit in an amount equal to
approximately $13.6 million, representing six months of base rent under the
leases at the time of the initial public offering in 1993.
For the period January 1, 2000 through November 1, 2000, the Company purchased
interests in two golf courses for an aggregate initial investment of
approximately $11 million, which investments were financed by $1.6 million of
cash from operations, $4.7 million of advances under the Company's credit
facility, and $4.7 million of proceeds from sale of properties. The Company also
purchased the remaining 11% interest in Royal Golf from a limited partner for
approximately $1.9 million which was financed by proceeds from sale of
properties.
14
<PAGE>
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 November 1, 2000 and September 30, 2000, the number
of shares purchased under this authorization was 967,200 for a total cost of
approximately $19.9 million. The shares repurchased are considered "authorized
but unissued."
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. In addition, a certain
limited partner was required within a specific period of time to exchange all of
its Common Units into common stock. On March 14, 2000, such limited partner
exchanged all of its 1,250,000 Common Units for 1,250,000 shares of common
stock.
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.
15
<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, 2000 and 1999.
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------
(In thousands)
2000 1999
-------- --------
<S> <C> <C>
Net income $ 10,075 $ 8,189
Distributions - Preferred Units (6,941) (5,079)
Minority interest 13,882 11,709
Depreciation and amortization 30,444 26,495
Gain on sale of properties (3,451) (1,191)
Treasury lock - 2,016
Straight-line rents (2,726) (2,261)
Deferred compensation plan adjustment 138 -
Excess land sales (518) (260)
Depreciation - corporate (48) (55)
-------- --------
Funds from operations 40,855 39,563
Company's share of funds from operations 60.2% 56.2%
-------- --------
Company's funds from operations $ 24,595 $ 22,234
======== ========
</TABLE>
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.
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.
16
<PAGE>
The following table sets forth the Company's long-term debt obligations,
principal cash flows by scheduled maturity, and weighted average interest rates
at September 30, 2000 (dollars in thousands):
<TABLE>
<CAPTION>
For the Period Ending December 31,
------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt:
Fixed-rate............... $3,249 $26,047 $ 7,172 $7,744 $ 47,970 $ 98,610 $190,792
Average interest rate 8.16% 7.09% 8.39% 8.39% 8.58% 8.24% 8.14%
Variable-rate .......... 43 1,172 161,182 1,194 96,308 4,328 264,227
Average interest rate 10.29% 9.76% 8.80% 9.78% 9.66% 10.29% 9.15%
------ ------- -------- ------ -------- -------- --------
Total debt ............ $3,292 $27,219 $168,354 $8,938 $144,278 $102,938 $455,019
====== ======= ======== ====== ======== ======== ========
</TABLE>
In addition, the Company has assessed the market risk for its variable-rate debt
and believes that a 1% increase in interest rates would result in approximately
a $2.6 million increase in interest expense based on approximately $264.2
million outstanding at September 30, 2000.
17
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) 27 Financial Data Schedule
(b) None
18
<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 1, 2000 By: /s/ Neil M. Miller
-----------------------------------
Neil M. Miller
Chief Financial Officer
19
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description Page
------ ----------- ------------
27 Financial Data Schedule
20
