<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
[X] EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
[ ] EXCHANGE ACT OF 1934
For the transition period from __________to__________
Commission File Number: 0-25098
Family Golf Centers, Inc.
- - -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 11-3223246
- - -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
538 Broadhollow Road
Melville, New York 11747
- - -------------------------------------------------------------------------------
(Address of principal executive offices)
(516) 694-1666
----------------------------------------
(Registrant's telephone number)
- - -------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if changed since last Report)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such report(s), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of November 12, 1998
- - -------------------------------------- ------------------------------------
Common Stock, par value $.01 per share 25,836,152
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
<PAGE>
ITEM 1.
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTORY COMMENT
The condensed consolidated financial statements included herein have
been prepared by Family Golf Centers, Inc. (the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although management of the Company believes that the disclosures
are adequate to make the information presented not misleading. These condensed
consolidated financial statements should be read in conjunction with the notes
thereto. In the opinion of the management of the Company, the condensed
consolidated financial statements include all adjustments, consisting of only
normal recurring adjustments, necessary to fairly present the results for the
interim periods to which these financial statements relate.
The results of operations of the Company for the nine months ended September
30, 1998 are not necessarily indicative of the results to be expected for the
full year.
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<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
====== ---- ----
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 10,831,000 $ 6,042,000
Restricted cash 314,000 390,000
Short-term investments 40,706,000 55,846,000
Inventories 25,115,000 14,855,000
Prepaid expenses and other current assets 11,105,000 9,298,000
------------- --------------
Total current assets 88,071,000 86,431,000
Property, plant and equipment (net of accumulated depreciation) 383,284,000 235,875,000
Loan acquisition costs (net of accumulated amortization) 5,668,000 5,738,000
Other assets 7,110,000 9,279,000
Excess of cost over fair value of assets acquired
(net of accumulated amortization) 45,084,000 25,713,000
------------- --------------
TOTAL $ 529,217,000 $ 363,036,000
============= ==============
LIABILITIES
===========
Current liabilities:
Accounts payable, accrued expenses and other current liabilities $ 17,980,000 $ 11,247,000
Income taxes payable 3,550,000 2,626,000
Short term loan payable-bank -- 63,000
Current portion of long-term obligations 26,886,000 10,877,000
------------- --------------
Total current liabilities 48,416,000 24,813,000
Long-term obligations (less current portion) 70,516,000 32,110,000
Subordinated debentures -- 4,981,000
Convertible subordinated notes 115,000,000 115,000,000
Redeemable equity securities -- 2,805,000
Deferred tax liability 2,989,000 4,196,000
Other liabilities 4,051,000 858,000
------------- --------------
Total liabilities 240,972,000 184,763,000
------------- --------------
Minority interest 214,000 --
Commitments, contingencies and other matters
STOCKHOLDERS' EQUITY
Preferred stock - authorized 1,000,000 shares, none outstanding
Common stock - authorized 50,000,000 shares, $.01 par value;
25,824,000 and 20,500,000 shares outstanding at
September 30, 1998 and December 31, 1997, respectively 258,000 204,000
Additional paid-in capital 287,190,000 171,542,000
Retained earnings 785,000 6,549,000
Accumulated other comprehensive income:
Foreign currency translation adjustment 283,000 195,000
Unearned compensation (438,000) (170,000)
Treasury shares (47,000) (47,000)
------------- --------------
Total stockholders' equity 288,031,000 178,273,000
------------- --------------
TOTAL $ 529,217,000 $ 363,036,000
============= ==============
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
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<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues $72,592,000 $40,459,000 $29,541,000 $19,639,000
Merchandise sales 22,142,000 14,158,000 9,072,000 5,601,000
----------- ----------- ----------- -----------
Total revenue 94,734,000 54,617,000 38,613,000 25,240,000
Operating expenses 46,395,000 26,004,000 17,110,000 12,208,000
Cost of merchandise sold 15,089,000 9,423,000 6,180,000 3,731,000
Selling, general and administrative expenses 9,187,000 8,039,000 2,514,000 2,907,000
Merger, acquisition, integration and other related charges 7,752,000 -- -- --
----------- ----------- ----------- -----------
Income from operations 16,311,000 11,151,000 12,809,000 6,394,000
Interest expense 7,764,000 1,635,000 2,389,000 935,000
Other income 1,805,000 797,000 615,000 37,000
----------- ----------- ----------- -----------
Income before income taxes, extraordinary item and
cumulative effect of a change in accounting principle 10,352,000 10,313,000 11,035,000 5,496,000
Income tax expense 9,191,000 4,111,000 4,304,000 1,274,000
----------- ----------- ----------- -----------
Income before extraordinary items and cumulative
effect of a change in accounting principle 1,161,000 6,202,000 6,731,000 4,222,000
Extraordinary item:
Loss on extinguishment of debt 4,890,000 -- 4,890,000 --
Cumulative effect of a change in accounting principle:
Preopening expenses, net of tax effect 2,035,000 -- --
----------- ----------- ----------- -----------
Net income (loss) $(5,764,000) $6,202,000 $1,841,000 $4,222,000
=========== =========== =========== ===========
Basic earnings per share:
Income before extraordinary items and cumulative
effect of change in accounting principle 0.05 $0.32 $0.27 $0.22
Extraordinary item (0.22) -- (0.20) --
Cumulative effect of change in accounting principle (0.09) -- -- --
----------- ----------- ----------- -----------
Net income (loss) (0.26) 0.32 0.07 0.22
=========== =========== =========== ===========
Weighted-average shares outstanding 22,010,000 19,365,000 24,528,000 19,495,000
=========== =========== =========== ===========
Diluted earnings per share:
Income before extraordinary items and cumulative
Effect of change in accounting principle $0.05 $0.31 $0.27 $0.21
Extraordinary item (0.22) -- (0.20) --
Cumulative effect of change in accounting principle (0.09) -- --
----------- ----------- ----------- -----------
Net income (loss) $(0.26) $0.31 $0.07 $0.21
=========== =========== =========== ===========
Weighted - average shares outstanding - diluted 22,646,000 19,760,000 25,164,000 20,048,000
=========== =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
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<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($5,764,000) $6,202,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item - loss on extinguishment of debt 4,890,000
Cummulative effect of a change in accounting principle 2,035,000
Depreciation and amortization 8,298,000 4,418,000
Deferred tax expense 4,205,000
Non-cash merger, acquisition, integration and other related charges 2,969,000
Non-cash operating expenses 640,000 702,000
(Increase) in inventories (10,260,000) (5,789,000)
(Increase) in prepaid expenses and other current assets (6,333,000) (5,627,000)
(Decrease) in prepaid income taxes -- 600,000
(Increase) decrease in other assets 2,101,000 (2,773,000)
Increase in accounts payable and accrued expenses 3,386,000 4,196,000
Increase in other liabilities 3,193,000 278,000
Increase (decrease) in income taxes payable (283,000) 3,577,000
----------- ----------
Net cash provided by operating activities 4,872,000 9,989,000
----------- ----------
Cash flows from investing activities:
Acquisitions of property and equipment (140,757,000) (75,254,000)
Acquisitions of goodwill (15,994,000) (3,027,000)
Restricted cash deposits 76,000 (308,000)
Net proceeds from sale of short-term investments 15,140,000 33,838,000
----------- ----------
Net cash (used in) investing activities (141,535,000) (44,751,000)
----------- ----------
Cash flows from financing activities:
(Increase) in loan acquisition costs (1,248,000) (1,167,000)
Proceeds from subordinated debentures 6,500,000
Proceeds from loans, banks and others 73,359,000 27,878,000
Repayment of bank loans (37,129,000) (5,580,000)
Cost of Prepayment of Debt
(884,000)
Net proceeds from issuance of common stock 104,574,000 6,229,000
Proceeds from the exercise of options and warrants 2,780,000 363,000
----------- ----------
Net cash provided by financing activities 141,452,000 34,223,000
----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,789,000 (539,000)
Cash and cash equivalents - beginning of period 6,042,000 5,143,000
----------- ----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $10,831,000 $4,604,000
=========== ==========
Supplemental and noncash disclosures:
Acquisition of property in exchange for common stock $7,548,000 $17,620,000
Acquisition of goodwill in exchange for mortgages, notes, and common stock 3,953,000
Acquisition of property subject to mortgage and notes 6,642,000 10,981,000
Issuance of stock for repayment of debt 1,957,000
Issuance of stock for services rendered 53,000
Property additions accrued but not paid 431,000 4,008,000
Interest paid 8,278,000 980,000
Taxes paid 8,100,000 1,523,000
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
-5-
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(NOTE A) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
[1] THE COMPANY:
The Company (as defined below), designs, constructs, operates, and manages
golf centers. The golf centers offer golf lessons and a wide variety of
practice opportunities, including facilities for practicing driving,
pitching, putting, chipping and sand play. In addition, most centers have
a pro shop, miniature golf course, snack bar and electronic video games.
The Company also operates ice rinks and Family Sports Supercenters
consisting of ice rinks and other indoor recreational activities. The
Company intends to acquire or open additional golf facilities, ice rinks
and supercenters in the future.
On July 27, 1998, the Company completed a public offering of 4,600,000
shares of Common Stock. The net proceeds to the Company were approximately
$105.0 million.
Through an agreement with Golden Bear Golf, Inc. ("GBGI"), the Company is
licensed to use the name "Golden Bear" for certain of the Company's golf
centers. In July 1998, the Company acquired fourteen golf centers from
Golden Bear Golf, Inc. and the original license agreement was terminated
and replaced with a new license agreement pursuant to which the Company has
agreed to operate its seven existing "Golden Bear" Golf Centers and the 14
acquired golf centers under the name "Golden Bear" (See Note D).
On July 27, 1998, the Company completed a public offering of 4,600,000
shares of Common Stock. The net proceeds to the Company were approximately
$105.0 million.
[2] PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Family Golf
Centers, Inc. and its wholly owned and majority owned subsidiaries herein
referred to as "FGCI" and "Company". All significant intercompany
transactions and accounts have been eliminated. Minority interests in the
Company's operations were insignificant.
On June 30, 1998, FGCI issued 1,384,735 shares of its common stock in
exchange for all outstanding common stock, options and warrants of Eagle
Quest Golf Centers, Inc. ("Eagle Quest"). Eagle Quest, which was
incorporated in British Columbia, Canada on February 5, 1996, acquires,
develops and operates golf practice centers incorporating a driving range,
a retail golf shop, and a learning academy and, in some locations, a
short/executive course. This exchange, which qualified as a tax-free
reorganization for federal income tax purposes, has been accounted for as
a pooling-of-interests combination and, accordingly, the consolidated
financial statements for periods prior to the combination have been
restated to include the combined results of operations, financial position
and cash flows of Eagle Quest as though it had been a part of the Company
since inception. Under the pooling of interests method, the assets and
liabilities of Eagle Quest are carried at their historical amounts and the
historical operating results of Eagle Quest are combined with those of
Family Golf Centers, Inc. for all periods presented. The results of
operations, prior to the combination, previously reported by the separate
companies and the combined amounts presented in the consolidated financial
statements follow.
-6-
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Total revenues:
FGCI $50,090,000 $26,557,000
Eagle Quest 6,031,000 2,820,000
=========== ===========
Consolidated $56,121,000 $29,377,000
=========== ===========
Net income(loss):
FGCI $5,697,000 $4,630,000
Eagle Quest (11,267,000) (2,650,000)
=========== ===========
Consolidated $(5,570,000) $1,980,000
=========== ===========
</TABLE>
The consolidated financial statements include merger, acquisition,
integration and other related fees and expenses of $7.8 million, of which
$2.0 million is included in the FGCI net income and $5.8 million in the net
loss of Eagle Quest.
[3] STOCK SPLIT:
In May 1998, the Company effected a 3 for 2 stock split. The financial
statements give retroactive effect to this transaction.
[4] EARLY EXTINGUISHMENT OF DEBT
From the proceeds of the public offering of 4.6 million shares of common
stock in July 1998, the Company paid off approximately $26 million of debt
incurred through the acquisition of Eagle Quest. In connection with the
early extinguishment of debt the Company recorded extraordinary charges of
$4.9 million. The extraordinary charges consisted principally of the write
off of debt discounts, loan acquisition costs and prepayment penalties
incurred.
[5] CHANGE IN ACCOUNTING PRINCIPLE
On April 3, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities (SOP 98-5). In the third quarter of 1998, the Company adopted
SOP 98-5 effective as of January 1, 1998. The impact of this change in
accounting principle on the Company relates to the treatment of pre-opening
costs associated with newly developed facilities. SOP 98-5 requires that
these costs be expensed as incurred as compared to the Company's previous
policy to capitalize these costs and amortize them over a twelve month
period. The $2.0 million (net of tax effect) cumulative effect change on
prior year is included in the income for the nine months ended September
30, 1998. The effect of the change in accounting principle as of January 1,
1998 will be reported in the historical period ended March 31, 1998.
(NOTE B) INVENTORIES:
Inventory consists of merchandise for sale in the pro shop at each facility
and is valued at the lower of cost on a first-in, first-out basis or
market.
(NOTE C) ACQUISITIONS:
On July 20 and July 21, 1998, the Company acquired Golden Bear Golf
Centers, Inc. and a related subsidiary for $32.0 million, less certain
indebtedness, capital leases and other liabilities,
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<PAGE>
subject to certain post-closing adjustments (the "Golden Bear
Acquisition"). The Company believes that, prior to the acquisition, Golden
Bear was the third largest operator of golf driving ranges in North America
with 14 golf centers in California, Florida, Maryland, Michigan, New
Jersey, New York, Ohio, Oregon, Pennsylvania and Texas.
The Company entered into a new license agreement with respect to the
existing Golden Bear Golf Centers and the newly acquired centers. This
transaction has been accounted for as a purchase in accordance with APB No.
16.
In addition to the acquisition of Golden Bear Golf Centers, Inc., during
the third quarter of 1998, the Company also acquired a 9-hole golf course
in Kansas City, Missouri, leasehold interests in golf facilities in
Markham, Ontario, Sacramento, California and all of the outstanding stock
of Pinnacle Entertainment , Inc. an operator of coin operated amusement
machines.
On June 30, 1998, the Company completed the acquisition of Eagle Quest and
issued 1,384,735 shares of the Company's Common Stock in exchange for all
Eagle Quest's outstanding common stock, options and warrants. This
transaction was accounted for as a pooling-of-interests business
combination and, accordingly, the consolidated financial statements
(including those for prior periods) have been restated to include the
accounts of Eagle Quest for all periods presented. Eagle Quest was the
second largest operator of golf driving ranges in North America, with 20
golf centers in Texas, Washington and Canada. All amounts discussed herein,
except as otherwise specifically indicated, include the consolidated
results of the Company and its subsidiaries, including Eagle Quest.
In addition to the acquisition of Eagle Quest, during the second quarter of
1998, the Company also acquired a golf facility in Carlsbad, California and
the right to operate existing golf facilities in Overland Park and
Evergreen, Colorado under concession agreements with the City of Denver. In
addition, the Company entered into a concession license with the City of
New York to build a golf center in Brooklyn, New York, a long-term lease to
construct and operate a golf facility in Shelton, Connecticut and a
concession license to construct and operate a golf facility in Green Valley
Ranch, Colorado. In addition to golf facilities in the second quarter of
1998, the Company signed a long-term lease to construct and operate an ice
rink facility with two sheets of ice and a family entertainment center in
Woodbridge, New Jersey.
During the first quarter of 1998 the Company acquired: MetroGolf
Incorporated ("Metro"), the operator of eight golf facilities, through the
successful completion of a tender offer; Blue Eagle Golf Centers, Inc., the
operator of three golf facilities; an ice rink facility in Raleigh, North
Carolina; and a golf facility in Holbrook, Massachusetts. In addition, in
March 1998, the Company signed a long-term lease to construct and operate
an ice rink facility consisting of two NHL regulation-size ice rinks and
family entertainment center in New Rochelle, New York.
The acquisitions made during 1998, other than Eagle Quest, have been
accounted for under the purchase method of accounting and, accordingly, the
results of operations have been included from the date of acquisition.
The following unaudited pro forma information assumes that certain
acquisitions in 1998 had taken place at the beginning of 1998 and that
certain acquisitions in 1998 and 1997 had taken place at the beginning of
1997:
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<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1998 1997
------------- ------------
<S> <C> <C>
Total revenue $106,248,000 $110,283,000
Net (loss) (10,939,000) (6,113,000)
Net (loss) per share - basic $(.50) $(.29)
- diluted $(.48) $(.29)
</TABLE>
(NOTE D) INDEBTEDNESS:
On July 17, 1998 the Company increased its credit facility with the Chase
Manhattan Bank ("Chase") from $20 million to $44.3 million in order to fund
the acquisition of Golden Bear Golf Centers, Inc. The additional $24.3
million was due on October 12, 1998 and has been extended to November 30,
1998 and bears interest at LIBOR plus a margin of 1% per annum.
On July 20, 1998, the Company entered into a Term Loan Agreement with ORIX
USA Corporation ("ORIX") providing for a $10.0 million loan secured by a
mortgage on five of the Company's existing properties. The loan bears
interest at either (i) the Prime Rate or (ii) LIBOR plus a margin of 2.25%
per annum. The loan matures on July 19, 2003. As a condition to obtaining
this loan, ORIX required that the Company enter into an interest rate
protection agreement. Accordingly, the Company entered into a Swap
Transaction Agreement with Chase on July 20, 1998, which, in effect, fixes
the LIBOR rate under the Term Loan Agreement at 5.93%. In the event LIBOR
exceeds such fixed rate, Chase is required to pay such excess to the
Company, and in the event that LIBOR is less than such fixed rate, the
Company is required to pay Chase such difference. The Company has drawn
down the full $10.0 million under the ORIX Term Loan Agreement.
In August 1998, the Company obtained a commitment from Chase to replace the
existing $44.3 million credit facility with a syndicated $100,000,000
secured two (2) year revolving credit facility converting to a four (4)
year term loan. Chase has agreed to serve as the administrative agent for
this new credit facility and to lend up to $45,000,000 as a participant in
the Facility. As with the Company's current credit facility with Chase, the
new credit facility is to be secured by the pledge of the stock of most of
the Company's subsidiaries and such subsidiaries will also guarantee such
obligations. Interest under the new credit facility is to be either (i) the
greater of Chase's prime rate or the federal funds rate plus .5% per annum
plus a margin of .25% per annum or (ii) the LIBOR rate, plus between 1% and
2% per annum (depending on the Company's ratio of Consolidated Funded Debt
to Consolidated EBITDA (as such terms are defined in the commitment
letter). The full $100 million has been committed to by a syndicate of four
banks and is in the documentation phase.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
the Company's financial statements and the notes thereto appearing
elsewhere in the Report. This Report contains statements which constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear in a number of
places in the Report and include statements regarding the intent, belief
or current expectations of the Company with respect to (i) the Company's
acquisition and financing plans, (ii) trends affecting the Company's
financial condition or results of operations, (iii) the impact of
competition and (iv)
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<PAGE>
the expansion and integration of certain operations. The Company cautions
that forward-looking statements are not guarantees of future performance
and involve risks and uncertainties, and that actual results may differ
materially from those in the forward-looking statements as a result of
various factors. The information contained in this Report, including,
without limitation, the information under "Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations", and the
information contained in the Company's Annual Report on Form 10-K for the
year ended 1997 under "Risk Factors" and "Business" identifies important
factors that could cause or contribute to such differences.
GENERAL
The Company is the leading consolidator and operator of golf centers in
North America. The Company's strategy is to continue to build upon its
leadership position in the golf center industry and expand its concept of
family-oriented sports entertainment through: (i) consolidation within the
golf center industry, (ii) enhancement of facilities and customer service,
(iii) leveraging centralized operations and (iv) developing complementary
sports and family entertainment facilities. The Company's golf centers are
designed to provide a wide variety of practice opportunities, including
facilities for driving, chipping, putting, pitching and sand play. In
addition, the Company's golf centers typically offer full-line pro shops,
golf lessons instructed by PGA-certified golf professionals and other
amenities such as miniature golf and snack-bars to encourage family
participation. The Company has a proven track record of successfully
identifying, acquiring and integrating golf centers, having grown from one
golf facility in 1992 to 114 of which 10 are under construction as of
September 30, 1998.
The Company's golf facilities have opened at varying times over the past
several years. As a result of changes in the number of golf facilities open
from period to period, the seasonality of operations, the timing of
acquisitions, the completion of various debt and equity financings and the
expansion of the Company's business to include ice rinks and Family Sports
Supercenters, results of operations for any particular period may not be
indicative of the results of operations in the future.
Most of the Company's revenues from its golf centers are derived from
selling tokens and debit cards for use in automated range-ball dispensing
machines, pro shop merchandise sales, charging for rounds of miniature
golf, golf lessons and management fees. The Company also derives revenues
at its golf courses from golf club membership fees, fees for rounds of golf
and golf lessons. The Company derives revenues from its ice rink facilities
by renting rinks to hockey leagues, charging admissions to its skating
facilities for public skating, providing lessons through USFSA-certified
instructors, skate equipment rental, and from pro-shop merchandise, and
food and beverage sales and video games. The Company derives revenues from
its Family Sports Supercenters from substantially the same sources as
described above. As of September 30, 1998 the Company operates three Family
Sports Supercenters and two stand alone ice rinks.
-10-
<PAGE>
EAGLE QUEST MERGER
On June 30, 1998, the Company completed the acquisition of Eagle Quest for
1,384,735 shares of the Company's common stock for all of the outstanding
common stock, options and warrants of Eagle Quest. This transaction was
accounted for as a pooling-of-interests business combination. Eagle Quest was
the second largest operator of golf driving ranges in North America, with 18
golf centers in Texas, Washington and Canada. Accordingly, financial statements
for prior periods have been restated to include the accounts of Eagle Quest.
All amounts discussed herein, except as otherwise specifically indicated,
include the consolidated results of the Company and its subsidiaries, including
Eagle Quest.
The differences between the Company's previously reported historical results
and the restated results discussed below are due to the combination of Eagle
Quest's revenues, expenses and losses with the historical revenues, expenses
and income of the Company. The restated results of operations for the Company
are not necessarily indicative of the results of operations of the consolidated
entity in the future.
Eagle Quest began operations in February 1996 and opened or acquired its
facilities at varying times commencing in 1996. Eagle Quest's strategy was to
establish the infrastructure to manage and operate a large number of facilities
and then to open or acquire such facilities. The Company believes that the
expenses of establishing and maintaining the infrastructure to service the
planned increase in facilities owned, leased and managed by Eagle Quest
contributed to Eagle Quest's losses and the level of its expenses as a
percentage of revenues.
For the period from its inception to June 30, 1998, Eagle Quest generated net
losses of $13.6 million before one-time merger, acquisition, integration and
other related charges associated with Eagle Quest's acquisition by the Company.
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<PAGE>
GOLDEN BEAR ACQUISITION
As of September 30, 1998, 21 of the golf centers were operated under the name
"Golden Bear Golf Centers", licensed from Jack Nicklaus' licensing company,
Golden Bear Golf, Inc. In July 1998, the Company acquired 14 golf centers from
Golden Bear Golf, Inc. and the original license agreement was terminated and
replaced with a new license agreement pursuant to which the Company has agreed
to operate its seven existing "Golden Bear" Golf Centers and the 14 acquired
golf centers under the name "Golden Bear" (See Note D to the financial
statements).
RESULTS OF OPERATIONS
The following table sets forth selected operations data of the Company
expressed as a percentage of total revenue (except for operating expenses which
is expressed as a percentage of operating revenue and cost of merchandise sold
which is expressed as a percentage of merchandise sales) for the periods
indicated below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues 76.6% 74.1% 76.5% 77.8%
Merchandise sales 23.4 25.9 23.5 22.2
---- ---- ---- ----
Total revenue 100.0 100.0 100.0 100.0
Operating expenses 63.9 64.3 57.9 62.2
Cost of merchandise sold 68.1 66.6 68.1 66.6
Selling, general and admin. expenses 9.7 14.7 6.5 11.5
Merger, acquisition, integration and other
related charges 8.2 -- -- --
Income from operations 17.2 20.4 33.2 25.3
Interest expense 8.2 3.0 6.2 3.7
Other income 1.9 1.5 1.6 .1
Income (loss) before income taxes, extraordinary
item and cumulative effect of a change in
accounting principle 10.9 18.9 29.0 22.0
Income tax expense 9.7 7.5 11.1 5.0
Income before extraordinary items and
Cumulative effect of a change in
Accounting principle 1.0 11.0 17.4 16.7
Extraordinary item
Extinguishment of debt 5.0 -- 13.0 --
Cumulative effect of a change in
accounting principle
Preopening expenses (net of tax effect) 2.0 -- 5.0 --
Net income (loss) (6.0) 11.0 (1.0) 16.7
</TABLE>
-12-
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
The Company acquires golf centers, ice rinks and family entertainment centers
at varying times during the year. As a result of the change in the number of
golf centers open from period to period, the comparison between the 1998 and
1997 periods may not necessarily be meaningful.
Total revenue for the nine months ended September 30, 1998 was $94.7 million as
compared to $54.6 million for the same period in 1997, an increase of $40.1
million (73.5%). The overall increase in revenue was attributable to having
additional golf centers in operation during the 1998 period, as well as the
revenue generated by the Company's ice rinks and Family Sports Supercenters.
Total revenue for the 37 golf centers operating for the full nine months ended
September 30, 1998 and 1997 increased 7.0% to $39.4 million in the 1998 period
from $36.8 million in the 1997 period. The increase in revenue for these 37
golf centers was primarily due to stronger merchandise and golf instruction
sales and better winter weather conditions in the Northeast and Southeast
regions partially offset by adverse weather attributed to the El Nino effect on
the West Coast. Revenue for the four golf centers operated by Eagle Quest for
the full nine month period decreased by 26.7%, while revenue for the 33 golf
centers operated by Family Golf increased by 10.2%.
Operating revenue, consisting of all sales except merchandise sales, amounted
to $72.6 million for the nine months ended September 30, 1998, as compared to
$40.5 million for the comparable 1997 period, an increase of 32.1 million
(79.4%). The increase in operating revenue was primarily attributable to
having additional golf centers in operation during the 1998 period, as well as
the revenue generated by the Company's ice rinks and Family Sports
Supercenters. Total operating revenue for the 37 golf centers operating for
the full nine months ended September 30, 1998 and 1997 increased 4.7% to $25.4
million in the 1998 period from $24.3 million in the 1997 period. Operating
revenue for the four Eagle Quest golf centers decreased by 9.2% while
operating revenue for the 33 Family Golf centers increased by 5.7%. Non-golf
revenue from the Company's Sports Supercenters and ice rinks totaled $13.9
million for the nine months ended September 30, 1998 and $3.0 million in the
comparable 1997 period.
Merchandise sales, consisting of golf clubs, balls, bags, gloves, videos,
apparel and related accessories, amounted to $22.1 million for the nine months
ended September 30, 1998 as compared to $14.2 million for the comparable 1997
period, an increase of $7.9 million (56%). The increase in merchandise sales
was primarily due to the contribution of new locations. Total merchandise sales
for the 37 golf centers operating for the full nine months ended September 30,
1998 and 1997 increased 11.6% to $13.9 million in the 1998 period from $12.5
million in the 1997 period, due to the increased emphasis placed by the Company
on improving pro shop sales, improved purchasing procedures and increased
promotion. Merchandise sales for the four Eagle Quest golf centers decreased by
45.8% primarily due to lack of pro shop inventory as a result of Eagle Quest's
working capital shortage. Merchandise sales for the 33 Family Golf centers
increased by 19.5% for the nine month period.
Operating expenses, consisting of operating wages and employee costs, land
rent, depreciation of golf driving range facilities and equipment, utilities
and all facility operating costs, increased to $46.4 million (63.9% of
operating revenue) in the 1998 period from $26.0 million (64.3% of operating
revenue) in the
-13-
<PAGE>
1997 period, an increase of $20.4 million (78%). The increase in operating
expenses was primarily due to the operating costs of locations that were
operated by the Company during the 1998 period which were not owned in the 1997
period.
The cost of merchandise sold increased to $15.1 million (68.1% of merchandise
sales) in the 1998 period from $9.4 million (66.6% of merchandise sales) in the
comparable 1997 period. The overall increase in the cost of merchandise sold of
$5.7 million (60.1%) was primarily due to the higher level of merchandise
sales. The increase in cost of merchandise sold as a percentage of merchandise
sales is primarily due to the higher cost of goods sold at the Eagle Quest
locations.
Selling, general and administrative expenses for the nine months ended
September 30, 1998 amounted to $9.2 million (9.7% of total revenue) compared to
$8.0 million (14.7% of total revenue) in the comparable 1997 period, an
increase of $1.2 million (14.3%), primarily due to the expenses associated with
opening and operating additional golf centers. Selling, general and
administrative expenses declined to 9.7% of total revenue in 1998 from 14.7% in
1997 primarily due to the substantial increase in revenues and a relatively low
corresponding incremental increase in certain selling, general and
administrative costs.
The Company incurred $7.8 million (8.2% of total revenue) of merger,
acquisition, integration and other related charges relating to the acquisition
of Eagle Quest by the Company on June 30, 1998. Included in these costs were:
$3.7 million of fees and professional expenses, $1.4 million of severance and
compensation expenses and $2.7 million of other integration expenses and asset
write-offs.
Interest expense increased to $7.8 million for the nine months ended September
30, 1998 from $1.6 million in the comparable 1997 period. Other income,
primarily interest income, increased to $1.8 million in the 1998 period from
$797,000 in the 1997 period. The increase in interest expense was primarily
due to the increase in debt in 1998 from the sale of $115.0 million of
convertible notes in October 1997.
Excluding the one-time merger, acquisition, integration and other related
expenses, the Company had operating income of $24.1 million for the nine months
ended September 30, 1998, as compared to operating income of $11.2 million in
the comparable 1997 period. Inclusive of the one-time charges, income before
income taxes, extraordinary item and cumulative effect of a change in
accounting principle for the nine months ended September 30, 1998 was $10.4
million. Earnings before income taxes, extraordinary item and cumulative effect
of change in accounting principal, excluding one-time merger, acquisition,
integration and other related expenses, for the nine months ended September 30,
1998 amounted to $18.1 million, as compared to $10.3 million in the comparable
1997 period. Inclusive of the one-time charges, the Company had a net income
before extraordinary item and cumulative effect of a change in accounting
principle of $1.2 million for the nine months ended September 30, 1998.
The Company incurred a loss on the extinguishment of debt and recorded an
extraordinary item of $4.9 million. The extraordinary charge consisted
principally of the write off of debt discounts, loan acquisition costs and
prepayment penalties incurred.
In the third quarter of 1998, the Company adopted SOP 95-8 effective as of
January 1, 1998 and recorded a cumulative effect of a change in accounting
principle of $2.0 million (net of tax effect). The impact on the Company
relates to the treatment of pre-opening costs associated with newly
developed facilities.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
The Company acquires golf centers, ice rinks and family entertainment centers
at varying times during the year. As a result of the change in the number of
golf centers open from period to period, the comparison between the 1998 and
1997 periods may not necessarily be meaningful.
-14-
<PAGE>
Total revenue for the three months ended September 30, 1998 was $38.6 million
as compared to $25.2 million for the same period in 1997, an increase of $13.4
million (53.0%). The overall increase in revenue was primarily attributable to
having additional golf facilities in operation during the 1998 period as well
as the revenue generated by the Company's ice rinks and Family Sports
Supercenters. Total revenue for the 58 golf centers operating for the full
three months ended September 30, 1998 and 1997 increased 3.8% to $19.6 million
in the 1998 period from $18.9 million in the 1997 period. The increase in
revenues for these 58 golf centers was primarily due to stronger merchandise
and golf instruction sales, partially offset by adverse weather attributed to
the El Nino effect on the West Coast. Total revenue for the fourteen Eagle
Quest golf centers in operation for the full third quarter of 1997 and 1998
decreased by 17.9%, while total revenues for the 44 Family Golf centers in
operation for the full quarter of both years increased by 8.5%.
Operating revenue, consisting of all sales except merchandise sales, amounted
to $29.5 million for the three months ended September 30, 1998, as compared to
$19.6 million for the comparable 1997 period, an increase of $9.9 million
(50.4%). The increase in operating revenue was primarily attributable to having
additional golf facilities in operation during the 1998 period. Total operating
revenue for the 58 golf centers operating for the full three months ended
September 30, 1998 and 1997 increased 0.4% to $13.8 million in the 1998 period
from $13.7 million in the 1997 period. Operating revenue for the fourteen Eagle
Quest golf centers decreased by 14.9% while operating revenue for the 44 Family
Golf centers increased by 3.8%. Non-golf revenue from the Company's Family
Sports Supercenters and ice rink facilities totaled $4.5 million for the three
months ended September 30, 1998 and $3.0 million in the comparable 1997 period.
Merchandise sales, consisting of golf clubs, balls, bags, gloves, videos,
apparel and related accessories, amounted to $9.1 million for the three months
ended September 30, 1998 as compared to $5.6 million for the comparable 1997
period, an increase of $3.5 million (62.0%). The increase in merchandise sales
was primarily due to the contribution of new locations and the continuing
emphasis placed by the Company on improving pro shop sales, improved purchasing
procedures and increased promotion. Total merchandise sales for the 58 golf
centers operating for the full three months ended September 30, 1998 and 1997
increased 12.6% to $5.9 million in the 1998 period from $5.2 million in the
1997 period. Merchandise sales for the fourteen Eagle Quest golf centers
decreased by 26.5% due to a lack of pro shop inventory attributed to its
working capital deficiency. Merchandise sales for the 44 Family Golf centers
increased by 20.7% in the 1998 quarter compared to the 1997 quarter.
Operating expenses, consisting of operating wages and employee costs, land
rent, depreciation of golf driving range facilities and equipment, utilities
and all other facility operating costs, increased to $17.1 million (57.9% of
operating revenue) in the 1998 period from $12.2 million (62.2% of operating
revenue) in the 1997 period, an increase of $4.9 million (40.2%). The increase
in operating expenses was primarily due to the operating costs of the Eagle
Quest locations that were not managed by Family golf Centers, Inc. during the
1997 period.
The cost of merchandise sold increased to $6.2 million (68.1% of merchandise
sales) in the 1998 period from $3.7 million (66.6% of merchandise sales) in the
comparable 1997 period. The overall increase in this cost of $2.5 million (
65.6%) was primarily due to the higher level of merchandise sales. The increase
in cost of merchandise sold as a percentage of merchandise sales was primarily
due the higher cost of goods sold at the Eagle Quest locations.
Selling, general and administrative expenses for the three months ended
September 30, 1998 amounted to $2.5 million (6.5% of total revenue) compared to
$2.9 million (11.5% of total revenue) in the comparable 1997 period. The
decrease of $400,000 (13.5%) was primarily due to the reduction of expenses
incurred by Eagle Quest. Selling, general and administrative expenses declined
as a percentage of total revenue primarily due to the substantial increase in
revenue and a relatively low corresponding incremental increase in certain
selling, general and administrative costs as well as the reduction of expenses
incurred by Eagle Quest.
-15-
<PAGE>
Interest expense increased to $2.4 million for the three months ended September
30, 1998 from $935,000 in the comparable 1997 period. The increase in interest
expense was due primarily to the $115 million convertible debt outstanding in
the 1998 period and additional debt outstanding. Other income, primarily
interest income, increased to $615,000 in the 1998 period as compared to
$37,000 in the 1997 period.
The Company had income before income taxes and extraordinary item of $11.0
million for the three months ended September 30, 1998, as compared to income of
$5.5 million in the comparable 1997 period.
The Company incurred a loss on the extinguishment of debt and recorded an
extraordinary item of $4.9 million. The extraordinary charge consisted
principally of the write off of debt discounts, loan acquisition costs and
prepayment penalties incurred.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had working capital of $39.7 million
compared to $61.6 million at December 31, 1997. The decrease was principally
due to the acquisition of 51 facilities, including Metro, Eagle Quest and
Golden Bear and construction expenditures.
The cash requirements of funding the Company's expansion have historically
exceeded cash flow from operations. Accordingly, the Company has satisfied its
capital needs primarily through debt and equity financing. The Company
continually explores raising additional capital through such means. However,
there can be no assurance that such financing will be available in the future
on terms acceptable to the Company or at all.
The Company's outstanding indebtedness as of September 30, 1998 including the
Notes (defined below) and other indebtedness of $212.4 million bears interest
at fixed and variable rates currently ranging from 5.25% to 15.0%. On September
30, 1997, the Company entered into a Credit Agreement (the "Agreement") with
The Chase Manhattan Bank (the "Bank") providing for a two-year $20 million
revolving credit facility converting to a four-year term loan at the end of two
years (the "Credit Facility"). On July 17, 1998, Chase increased the Credit
Facility by, and the Company borrowed an additional $24.3 million to fund the
Golden Bear Acquisition. The additional $24.3 million was due on October 12,
1998 and has been extended to November 30, 1998 and bears interest at LIBOR
plus a margin of 1% per annum. As of September 30, 1998, outstanding borrowings
under the Credit Facility were $44.3 million.
In August 1998, the Company obtained a commitment from Chase to replace the
existing $44.3 Credit Facility with a syndicated $100 million secured two (2)
year revolving credit facility converting to a four (4) year term loan. Chase
has agreed to serve as the administrative agent for this new credit facility
and to lend up to $45,000,000 as a participant in the new credit facility. As
with the Company's current credit facility with Chase, the new credit facility
is to be secured by the pledge of the stock of most of the Company's
subsidiaries and such subsidiaries will also guarantee such obligations.
Interest under the new credit facility is to be either (i) the greater of
Chase's prime rate or the federal funds rate plus .5% per annum plus a margin
of .25% per annum or (ii) the LIBOR rate, plus between 1% and 2% per annum
(depending on the Company's ratio of Consolidated Funded Debt to Consolidated
EBITDA (as such terms are defined in the commitment letter). The full $100
million has been committed to by a syndiate of four banks and is in the
documentation phase.
On July 20, 1998, the Company entered into a Term Loan Agreement with ORIX USA
Corporation ("ORIX") providing for a $10.0 million loan secured by a mortgage
on five of the Company's existing properties. The loan bears interest at either
(i) the prime rate or (ii) LIBOR plus a margin of 2.25% per annum. The loan
matures on July 19, 2003. As a condition to obtaining this loan, ORIX required
that the Company enter into an interest rate protection agreement. Accordingly,
the Company entered into a Swap Transaction Agreement with Chase, on July 20,
1998, which, in effect, fixes the LIBOR rate under
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<PAGE>
the Term Loan Agreement at 5.93%. In the event LIBOR exceeds such fixed rate,
Chase is required to pay such excess to the Company, and in the event that
LIBOR is less than such fixed rate, the Company is required to pay Chase such
difference. The Company has drawn down the full $10.0 million under the ORIX
Term Loan Agreement.
In connection with the acquisition of Eagle Quest on June 30, 1998, the Company
incurred additional outstanding indebtedness of $23.2 million interest at fixed
and variable rates ranging from 6% to 42%. In the third quarter of 1998 the
Company paid down substantially all of these loans with the proceeds from the
public offering.
In connection with the Golden Bear Acquisition, the Company incurred additional
outstanding indebtedness of approximately $9.0 million which bears interest at
fixed and variable rates currently ranging from 8% to 9.8%.
On July 23, 1998, the Company completed a public offering of 4,600,000 shares
of common stock. The net proceeds to the Company were approximately $105.0
million.
During the fourth quarter of 1997, Family Golf completed a $115 million Note
Offering ("the Notes"). The Notes mature on October 15 2004 and bear interest
at the rate of 5 3/4 % per annum, payable semi-annually. The Notes are
unsecured and subordinate to all present and future Senior Indebtedness (as
defined in the Indenture) of the Company. The notes are redeemable at the
option of the Company at any time after October 15, 2000, in whole or in part,
at declining premiums together with accrued and unpaid interest. The Notes are
convertible at the option of the holder into Common Stock at any time prior to
maturity, unless previously redeemed or repurchased, at a conversion price of
$24.83 per share, subject to adjustment under certain circumstances. Upon a
Change of Control (as defined in the Indenture), each holder of Notes shall
have the right, at the holder's option, to require the Company to repurchase
such holder's Notes at a purchase price equal to 101% of the principal amount
thereof plus accrued and unpaid interest to the Repurchase Date (as defined in
the Indenture), if any.
The Company anticipates making substantial additional expenditures in
connection with the acquisition and operation of new facilities and capital
improvements to existing facilities. Facility opening expenditures primarily
relate to projected facility construction and opening costs, associated
marketing activities and the addition of personnel. In many cases, the Company
acquires, rather than leases, the land on which its facilities are located,
which entails additional expenditures. Based on the Company's experience with
its existing golf centers, the Company believes that the cost of opening or
acquiring a golf center generally ranges from approximately $1.0 million to
$4.0 million (exclusive of land costs). The Company also intends to acquire or
construct additional ice rink facilities and Family Sports Supercenters which,
on a per facility basis, are expected to cost more than the Company's golf
centers. The Company believes that the cost of opening or acquiring ice rink
facilities will range from approximately $2.0 million to $4.0 million and the
cost of opening or acquiring a Family Sports Supercenter to range from $8.0
million to $12.0 million. However, there can be no assurance that facility
opening or acquisition costs will not exceed the amounts estimated above.
Facility opening and acquisition costs vary substantially depending on the
location and status of the acquired property (i.e. whether significant
improvements are necessary) and whether the Company acquires or leases the
related land. Land acquisition costs vary substantially depending on a number
of factors, including principally location.
TRENDS
The Company plans to open or acquire additional golf centers. As the additional
golf centers acquired by the Company commence operations, total revenue should
continue to increase. In addition, the Company
-17-
<PAGE>
believes that as its currently opened golf centers mature, revenue and
operating income from its centers should increase due to customer awareness,
programs marketing the golf centers to various special interest groups,
expanding ties to the local business and golfing community, marketing programs,
and the growing popularity of golf. Any increases may be partially offset by
initial losses from pre-opening costs and initial operating losses associated
with new or newly acquired golf centers.
The Company has identified the ice rink industry as having a number of industry
and operational dynamics similar to those of the golf center industry. The
Company is applying the skills and resources it has used in the golf center
industry to capitalize on such similarities by selectively constructing, or
acquiring and enhancing, ice rinks. In addition, the Company expects to
selectively augment certain of its existing golf centers with sports and
entertainment amenities including ice rinks, video and virtual reality games,
children's rides, batting cages and other entertainment activities to create
Family Sports Supercenters. The Company believes that the addition of these
facilities expands on the Company's concept of family-oriented sports
entertainment, improves utilization by adding additional sources of revenues,
attracts a more diversified base of customers, increases visitation and per
capital spending and has the added benefit of being counter-seasonal to the
Company's core golf business. The additional revenue attributed to these Family
Sports Supercenters will be partially offset by initial losses from
acquisition, construction and other pre-opening costs and initial operating
losses associated with new supercenters.
SEASONALITY
Historically, the second and third quarters have accounted for a greater
portion of the Company's revenues than have the first and fourth quarters of
the year. This is primarily due to an outdoor playing season limited by
inclement weather. Although most of the Company's facilities are designed to be
all-weather, portions of the facilities, such as driving ranges, miniature golf
courses which are outdoors, tend to be vulnerable to weather conditions. One of
the Company's golf centers and one golf course are closed during a portion of
the winter. Also, golfers are less inclined to practice when weather conditions
limit their ability to play golf on outdoor courses. Since August 1995, the
Company has acquired golf centers in various locations (Arizona, California,
Florida, Georgia, North Carolina, South Carolina, Texas and Virginia) where
inclement weather may not limit the outdoor season as much as weather limits
the outdoor playing season at the Company's golf facilities in Northern
states. In addition, the ice rink facilities and the Family Sports Supercenters
are expected to generate a greater portion of their revenues in the first and
fourth quarters of the years and accordingly, may partially offset such
seasonality. The timing of new facility acquisitions and openings may cause the
Company's results of operations to vary significantly from quarter to quarter.
Accordingly, period-to-period comparisons are not necessarily meaningful and
should not be relied on as indicative of future results.
INFLATION
There was no significant impact on the Company's operations as a result of
inflation during the nine months ended September 30, 1998.
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<PAGE>
YEAR 2000 ISSUES
In accordance with the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, the Company notes that certain
statements contained in the following discussion concerning the changeover to
the year 2000 are forward-looking in nature and are subject to many risks and
uncertainties. These forward-looking statements include such matters as the
Company's projected state of readiness, the Company's projected cost of
remediation, the expected date of completion of each program or phase and the
expected contingency plans associated with any worst case scenarios. Such
statements also constitute "year 2000 readiness disclosure" within the meaning
of the Year 2000 Information and Readiness Disclosure Act.
The year 2000 issue is the result of computer programs using two
digits rather than four to define the applicable year. Such software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations leading to disruptions in
the Company's activities and operations.
The Company has formed a project team, comprised of the Company's
management information services staff, to identify and correct Year 2000
compliance issues for the Company's information technology ("IT") systems as
well as the non-IT systems such as fire and burglar alarms, irrigation systems
and time clocks. The project team has been charged with the responsibility of
investigating and remediating any and all problems associated with the
millenium bug. All systems that are not compliant will be either modified or
replaced as is necessary, although since a majority of the Company's systems
are industry standard software systems which are year 2000 compliant, the
Company does not expect that significant modification or replacement will be
necessary.
Although there can be no assurance, the total projected cost
associated with the Company's year 2000 program is not expected to be material
to the Company's financial position, results of operations or cash flows. The
total cost for the project (excluding internal payroll costs) is currently
expected to approximate $100,000 to $175,000, which is being funded with the
Company's working capital. As of September 30, 1998, the Company had incurred
approximately $15,000 relating to its year 2000 compliance project.
The project team has defined a four-phase approach to determining the
year 2000 readiness of the Company's systems, software and equipment. Phase I,
Inventory Assessment, involves the inventory of all systems, software and
equipment and the identification of any year 2000 issues. This phase is
underway. Phase II, Remediation, involves repairing, upgrading and/or replacing
any non-compliant equipment and systems. The Company has already begun
replacing its older IBM systems to a year 2000 compliant windows based system
as part of the Company's plans to upgrade its point-of-sales merchandise
control systems. The Company expects to adjust rather than replace its non-IT
systems to perform properly in the year 2000 and thereafter. Phase III,
Testing, involves testing the Company's systems, software, and equipment for
year 2000 readiness, or in certain cases, relying on test results provided to
the Company from suppliers. The project team has commenced testing of the
Company's most critical software programs to ensure year 2000 compliance and
has begun contacting all major suppliers to review year 2000 compliance issues
of their products. Toward the end of the first quarter of 1999, the Company
intends to engage an independent consultant to verify and validate the state of
readiness of the Company's systems. Phase IV, Implementation and Completion,
involves placing compliant systems, software and equipment into production or
service and implementing all necessary contingency plans, if necessary. In the
event that any program or system fails system readiness testing, the Company
will rely on its contingency plans to alleviate the year 2000 issues. These
contingency plans, will include, but will not be limited to, development of
backup and recovery procedures, remediation of existing systems in parallel
with the installation of new systems, replacement with temporary manual
processes and identification of alternative suppliers.
-19-
<PAGE>
As of September 30, 1998, the Company's overall progress by phase for
all IT and non-IT systems was as follows:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------
PHASE PERCENT COMPLETE TARGET COMPLETION DATE
- - -------------------------------------------------------------------------------
<S> <C> <C>
Phase I - Inventory Assessment 70% December 31, 1998
- - -------------------------------------------------------------------------------
Phase II - Remediation 20% April 15, 1999
- - -------------------------------------------------------------------------------
Phase III - Testing 10% May 15, 1999
- - -------------------------------------------------------------------------------
Phase IV- Implementation and 5% June 30, 1999
Completion
- - -------------------------------------------------------------------------------
</TABLE>
The completion dates set forth above are based on the Company's current
expectations. However, due to the uncertainties inherent in year 2000
remediation, no assurances can be given as to whether such projects will be
completed on such dates.
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations. The failure
of the Company's point-of sales systems and billing systems could result in the
Company's inability to timely post and record sales revenue and expenses. In
addition, the aging of the Company's accounts payable would be inaccurate. In
this unlikely event, the Company would manually record sales and expenses until
a year 2000 compliant system is applied.
The financial impact of any or all of the above worst-case scenarios
has not been and cannot be estimated by the Company due to the numerous
uncertainties and variables associated with such scenarios. Management
believes, however, that its year 2000 program will significantly reduce the
Company's risks associated with the changeover to the year 2000.
At the present time the Company has not deferred any IT projects nor
does it anticipate that such a deferral will be necessary as a result of its
year 2000 efforts.
-20-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS NONE
ITEM 2. CHANGE IN SECURITIES
During the quarter ended September 30, 1998, the Company issued an aggregate of
100,250 shares of common stock as part of the consideration for three separate
acquisitions, consisting of the acquisition of golf centers in Kansas City,
Missouri and Voorhees, New Jersey and the acquisition of all of the stock of
Pinnacle Entertainment, Inc., a company which operates coin operated machines,
from the owners, lessees or stockholders of such assets, properties or
entities. Such shares were issued in the amounts, on the dates and for the
securities or assets listed below: (i) September 8, 1998, 40,000 shares, the
acquisition of certain assets of Chillicothe Properties, Inc., including a golf
center in Kansas City, Missouri; (ii) September 22, 1998, 36,250 shares, the
acquisition of all of the outstanding stock of Pinnacle Entertainment, Inc.
from the former stockholders of such company; and (iii) October 13, 1998,
24,000 shares, the acquisition of certain assets of Stafford FamilyPark
Partners I, LP, including a golf center in Voorhees, New Jersey. Such issuances
were not registered under the Securities Act of 1933 (the "Act") in reliance on
the exemption provided by Section 4(2) of the Act. None of such issuances
involved any general solicitation and each of the recipients of the common
stock has represented that such recipient understands that the common stock may
not be sold or otherwise transferred absent registration under the Act or an
exemption therefrom and each certificate representing shares of such common
stock, bears a restrictive legend to such effect.
ITEM 3. DEFAULT 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) EXHIBITS
EXHIBIT 27 FINANCIAL DATA SCHEDULE
(B) REPORTS ON FORM 8-K
1. CURRENT REPORT ON FORM 8-K, DATED JULY 20, 1998 AND FILED
JULY 31, 1998.
2. CURRENT REPORT ON FORM 8-K/A, DATED JUNE 30, 1998 AND FILED
SEPTEMBER 11, 1998.
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<PAGE>
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: , 1998
------------------
Melville, NY
FAMILY GOLF CENTERS, INC.
(Registrant)
By:
-----------------------------
KRISHNAN P. THAMPI
President,
Chief Operating Officer,
Assistant Secretary,
and Treasurer
By:
-----------------------------
JEFFREY C. KEY
Chief Financial Officer
-22-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE
PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,831,000
<SECURITIES> 40,706,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 25,115,000
<CURRENT-ASSETS> 88,071,000
<PP&E> 383,284,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 529,217,000
<CURRENT-LIABILITIES> 48,416,000
<BONDS> 0
0
0
<COMMON> 258,000
<OTHER-SE> 287,773,000
<TOTAL-LIABILITY-AND-EQUITY> 288,031,000
<SALES> 94,734,000
<TOTAL-REVENUES> 94,734,000
<CGS> 15,089,000
<TOTAL-COSTS> 78,423,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,764,000
<INCOME-PRETAX> 10,352,000
<INCOME-TAX> 9,191,000
<INCOME-CONTINUING> 1,161,000
<DISCONTINUED> 0
<EXTRAORDINARY> 4,890,000
<CHANGES> 2,035,000
<NET-INCOME> (5,764,000)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
