<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1998
REGISTRATION NO. 333-53503
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
REGISTRATION STATEMENT
ON
FORM S-3
UNDER
THE SECURITIES ACT OF 1933
------------------
FAMILY GOLF CENTERS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 11-3223246
(STATE OR JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
FAMILY GOLF CENTERS, INC.
538 BROADHOLLOW ROAD
MELVILLE, NEW YORK 11747
(516) 694-1666
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DOMINIC CHANG, CHIEF EXECUTIVE OFFICER
FAMILY GOLF CENTERS, INC.
538 BROADHOLLOW ROAD
MELVILLE, NEW YORK 11747
(516) 694-1666 / (516) 694-0918 (FAX)
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
Copies to:
KENNETH R. KOCH, ESQ. PAUL JACOBS, ESQ.
SQUADRON, ELLENOFF, PLESENT & SHEINFELD, LLP FULBRIGHT & JAWORSKI L.L.P.
551 FIFTH AVENUE 666 FIFTH AVENUE
NEW YORK, NEW YORK 10176 NEW YORK, NEW YORK 10003
(212) 661-6500 / (212) 697-6686 (FAX) 212) 318-3000 / (212) 752-5958 (FAX)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: FROM TIME TO TIME AFTER THE
EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
IF THE ONLY SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED PURSUANT
TO DIVIDEND OR INTEREST REINVESTMENT PLANS, PLEASE CHECK THE FOLLOWING BOX. [ ]
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON A
DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, OTHER THAN SECURITIES OFFERED ONLY IN CONNECTION WITH DIVIDEND OR
INTEREST REINVESTMENT PLANS, CHECK THE FOLLOWING BOX. [ ]
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING
BOX AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. [ ]
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C) UNDER
THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. [ ]
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. [ ]
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
SUBJECT TO COMPLETION, DATED JULY 2, 1998
[FAMILY GOLF CENTERS, INC. LOGO]
3,500,000 SHARES
FAMILY GOLF CENTERS, INC.
COMMON STOCK
----------------
All of the 3,500,000 shares of common stock, par value $0.01 per share
(the "Common Stock"), offered hereby (the "Offering") are being sold by Family
Golf Centers, Inc., a Delaware corporation (the "Company"). The Common Stock is
quoted on the Nasdaq National Market under the symbol "FGCI." On July 1, 1998,
the closing price of the Common Stock as reported by the Nasdaq National Market
was $25.50. See "Price Range of Common Stock."
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 5 HEREIN FOR A DISCUSSION OF
CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
------------ ---------------- --------------
<S> <C> <C> <C>
Per Share ......... $ $ $
Total (3) ......... $ $ $
</TABLE>
- ----------
(1) The Company has agreed to indemnify the several underwriters identified
elsewhere herein (the "Underwriters") against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Underwriting."
(2) Before deducting expenses and other fees payable by the Company estimated
at $500,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up
to 525,000 additional shares of Common Stock on the same terms and
conditions as set forth above, solely to cover over-allotments, if any.
If the Underwriters exercise this option in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
----------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if issued to and accepted by the Underwriters and
subject to approval of certain legal matters by counsel for the Underwriters.
It is expected that delivery of the Common Stock will be made against payment
therefor on or about , 1998 in New York, New York.
----------------
JEFFERIES & COMPANY, INC.
BANCAMERICA ROBERTSON STEPHENS
CIBC OPPENHEIMER
EVEREN SECURITIES, INC.
PRUDENTIAL SECURITIES INCORPORATED
, 1998
<PAGE>
[THE NARRATIVE AND/OR TABULAR INFORMATION BELOW IS A FAIR AND ACCURATE
DESCRIPTION OF GRAPHIC OR IMAGE MATERIAL OMITTED FOR THE
PURPOSE OF EDGAR FILING.]
[MAP OF COMPANY'S LOCATIONS IN THE UNITED STATES]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF
1934. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and the notes thereto contained or
incorporated by reference herein. Unless the context otherwise requires,
references to "Family Golf" and the "Company" are to Family Golf Centers, Inc.
together with its subsidiaries. Unless otherwise indicated, the information in
this Prospectus (i) describing the Company's business does not refer to the
business of Golden Bear Golf Centers, Inc. ("Golden Bear"), a pending Company
acquisition, or any of the facilities owned or operated by Golden Bear, (ii)
assumes that the Underwriters' over-allotment option is not exercised and (iii)
has been adjusted to give effect to a three-for-two stock split in the form of
a stock dividend (the "Stock Split") distributed on May 4, 1998. Each
prospective investor is urged to read this Prospectus in its entirety. This
Prospectus contains "forward-looking statements" which involve certain unknown
risks and uncertainties which may cause actual results to differ materially
from those in the forward-looking statements.
THE COMPANY
Family Golf is the leading consolidator and operator of golf centers in
North America. The Company's golf centers provide a wide variety of practice
and play opportunities, including facilities for driving, chipping, putting,
pitching and sand play. 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 97 as of July 1, 1998, including 11 facilities under
construction. The consummation of the pending acquisition of Golden Bear,
of which there can be no assurance, would add 14 golf facilities. In addition,
the Company has increased total revenue from $6.4 million in 1994 to $75.0
million for the twelve months ended March 31, 1998.
According to the National Golf Foundation (the "NGF"), there were
approximately 27 million golfers in the United States in 1997, an increase of
7% from 1996. This growth was primarily attributable to a 51% increase in the
number of beginning golfers to an estimated 3.0 million, as well as a 34%
increase in the number of junior golfers to an estimated 2.4 million. In
addition, the Golf Range & Recreation Association of America (the "GRRAA")
estimates that in 1997 there were approximately 2,200 stand-alone driving
ranges in the United States, of which 83% were independently owned and
operated. The Company believes that the large size and highly fragmented nature
of the golf center industry, combined with the lack of experience, expertise
and financial resources of the existing owner-operators, present significant
opportunities for the Company to continue acquiring, upgrading and renovating
golf centers.
The Company's golf centers are typically larger, more attractive and offer
more amenities than the average golf center. The Company believes that it
attracts customers to its golf centers due to the quality, convenience and
comfort of its facilities and their appeal to the whole family. The Company's
golf centers are designed around a driving range with target greens, bunkers
and sand traps to simulate golf course conditions. Generally, the Company's
ranges are lighted to permit night play and the hitting tees are enclosed or
sheltered in a climate-controlled environment. In certain cases, all or a
portion of the range is enclosed under an air inflated dome to permit
all-weather play. In addition to a driving range, the Company's golf centers
typically include a number of amenities designed to appeal to golfers and their
families. Typical amenities include a 4,000-6,000 square foot clubhouse, a
full-line pro shop stocked with golf merchandise from leading brand-name
manufacturers and the Company's private label products, PGA-certified golf
instructors, landscaped miniature golf courses and a short game practice area
(including a putting green and sand traps). A number of the Company's golf
centers also include golf courses, consisting primarily of executive and par-3
courses.
In order to generate additional sources of revenue, attract a more diverse
customer base and offset the seasonality of its core golf business, the Company
has acquired and begun operating complementary sports and family entertainment
facilities, including ice rinks and "Family Sports Supercenters." Family
1
<PAGE>
Sports Supercenters have two or more sports-related attractions (including at
least one of the Company's core sports-related attractions: golf centers and
ice rinks), and may include other sports-related attractions, such as bowling
centers, soccer facilities and batting cages, as well as a variety of family
entertainment activities. The Company is applying the strategy, skills and
resources it has used in the golf center industry by selectively acquiring and
enhancing, or constructing, such facilities. The Company currently operates two
stand-alone ice rink facilities and two Family Sports Supercenters, and is
converting a golf center in Denver, Colorado into a Family Sports Supercenter
by adding two ice rinks and other family entertainment amenities.
BUSINESS STRATEGY
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 as follows:
o Consolidation of Golf Centers. The Company intends to continue to
consolidate the golf center industry by (i) identifying and acquiring
well-located, underperforming ranges that have the potential for
improvement through better management and facility enhancements and (ii)
building new centers in demographically attractive locations where
suitable acquisition opportunities are not available. The Company
currently operates in 24 of the top 30 metropolitan statistical areas
("MSAs") in the United States and intends to focus its consolidation
efforts on extending its operations into the top 30 MSAs in which it
currently does not operate. The consummation of the pending acquisition
of Golden Bear, of which there can be no assurance, would add an
additional three of the top 30 MSAs in which the Company currently does
not operate.
o Facility and Service Enhancement. The Company typically initiates a
capital improvement plan after each acquisition to broaden the scope of
services and products offered. Such improvements have historically
increased revenues and improved operating performance at the golf
centers. Improvements may include enclosing, heating or lighting play
areas to lengthen the season and hours of operation, adding tiers of
hitting tees, offering lessons from PGA-certified golf professionals and
adding amenities, such as batting cages, miniature golf, restaurants,
snack bars and video games, designed to appeal to the whole family,
generate additional revenue and increase the frequency and duration of
facility visitation. The Company believes that the quality of its
facilities and its emphasis on customer service differentiate the Company
from its competitors.
o Development of Complementary Sports and Family Entertainment Facilities.
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 strategy, skills and resources it
has used in the golf center industry to capitalize on such similarities
by selectively acquiring and enhancing, or constructing, ice rinks. In
addition, the Company expects to 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 the
Company's concept of family-oriented sports entertainment, adds
additional sources of revenue, attracts a more diverse customer base,
increases visitation and per capita spending and has the added benefit of
being counterseasonal to the Company's core golf business.
o Leverage Centralized Operations. All purchasing, accounting, insurance,
cash management, finance and human resource functions are managed
centrally at the Company's headquarters. Centralization improves facility
performance by reducing expenses and administrative burdens, allowing
management to focus on customer service and facility operations. In
addition, each facility receives the benefits of the Company's purchasing
power, enabling it to take advantage of quantity discounts on merchandise
sold through its pro shops and equipment used at its facilities.
2
<PAGE>
RECENT DEVELOPMENTS
Eagle Quest Acquisition. On June 30, 1998, the Company acquired Eagle
Quest Golf Centers, Inc. ("Eagle Quest") for 1,384,735 shares of the Company's
Common Stock, subject to certain post-closing adjustments (the "Eagle Quest
Acquisition"). The Company believes that Eagle Quest is the second largest
operator of golf driving ranges in North America, with 20 golf centers
(including two under construction) in Texas, Washington and Canada.
Golden Bear Acquisition. On June 16, 1998, the Company entered into an
agreement to acquire Golden Bear, a wholly-owned subsidiary of Golden Bear Golf
Inc. ("GBGI"), for $32.0 million, minus certain indebtedness, capital leases
and other liabilities (currently estimated at $9.0 million), subject to certain
post-closing adjustments (the "Golden Bear Acquisition"). The Company believes
that Golden Bear is 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 transaction is
subject to a number of conditions, including receipt of certain regulatory
approvals and consents. See "Business -- Golden Bear."
MetroGolf Acquisition. In February 1998, the Company acquired MetroGolf
Incorporated ("MetroGolf") pursuant to a cash tender followed by a merger (the
"MetroGolf Acquisition"). MetroGolf is the operator of eight golf facilities in
California, Colorado, Illinois, New York and Virginia.
Other. Since January 1, 1998, the Company also (i) acquired Blue Eagle
Golf Centers, Inc. ("Blue Eagle"), the operator of three golf facilities in
Kansas and Florida; (ii) acquired an ice rink facility in Raleigh, North
Carolina; (iii) acquired golf facilities in Holbrook, Massachusetts and
Carlsbad, California; (iv) signed a long-term lease to construct and operate
two NHL regulation-size ice rinks and a family entertainment center in New
Rochelle, New York; and (v) entered into an agreement with the Township of
Woodbridge, New Jersey to lease, construct and operate an ice rink facility
with two sheets of ice and a family entertainment center.
The Company's principal executive offices are located at 538 Broadhollow
Road, Melville, New York 11747 and its telephone number is (516) 694-1666. The
Company's World Wide Web address is http://www.familygolf.com. The contents of
the Company's web-site are not part of this Prospectus.
THE OFFERING
Common Stock offered by the Company....... 3,500,000 shares
Common Stock to be outstanding after
the Offering.............................. 24,609,279 shares (1)(2)
Use of proceeds........................... To repay approximately $26.5
million of indebtedness of Eagle
Quest and related prepayment
penalties and for general corporate
purposes, including the
acquisition, leasing, development
and improvement of golf and
complementary sports and family
entertainment facilities. See "Use
of Proceeds."
Nasdaq National Market symbol............. FGCI
- ----------
(1) Includes 1,384,735 shares issued in connection with the Eagle Quest
Acquisition, subject to post-closing adjustments. In addition, 75,666 of
such shares have been placed in escrow and are subject to potential claims
by the Company for indemnification.
(2) Excludes (i) 2,007,780 shares of Common Stock reserved for issuance upon
exercise of outstanding options and warrants, and (ii) 4,630,872 shares of
Common Stock issuable upon conversion of the $115.0 million aggregate
principal amount of Convertible Subordinated Notes due 2004 (the "Notes").
See "Management -- Stock Option and Award Plans" and "Description of
Capital Stock -- Outstanding Options and Warrants."
3
<PAGE>
SUMMARY FINANCIAL AND OTHER DATA(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
HISTORICAL SUPPLEMENTAL(2)
-------------------------------------- -------------------------
PRO FORMA
1995 1996 1997 1996 1997 1997(3)
------------ ------------ ------------ ------------ ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue ...................... $ 12,432 $ 27,904 $ 64,825 $ 28,052 $ 72,997 $107,457
Operating expenses ................. 6,614 13,268 31,563 13,335 37,386 76,127
Cost of merchandise sold ........... 1,779 4,458 10,467 4,540 12,366 13,543
Selling, general and
administrative expenses ........... 1,242 3,580 5,132 4,760 12,630 17,038
-------- -------- -------- -------- -------- --------
Operating income ................... 2,797 6,598 17,663 5,417 10,615 749
Net income (loss) .................. $ 1,074 $ 5,208 $ 10,524 $ 4,322 $ 3,269 $ (3,619)
Net income (loss) per share:
Basic ............................. $ 0.14 $ 0.35 $ 0.57 $ 0.28 $ 0.17 $ (0.17)
Diluted (5) ....................... 0.14 0.34 0.56 0.27 0.16 (0.17)
Weighted average shares
outstanding (000s):
Basic ............................. 7,676 15,003 18,368 15,473 19,344 21,130
Diluted (5) ....................... 7,907 15,435 18,799 15,905 19,814 21,130
GOLF FACILITY DATA:
Facilities open at beginning of
period ............................ 5 14 35 14 39 39
Facilities built during period ..... 1 1 1 1 1 1
Facilities acquired during
period (6) ........................ 8 20 17 24 30 53
-------- -------- -------- -------- --------
Facilities open at end of
period ............................ 14 35 53 39 70 93
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------
HISTORICAL SUPPLEMENTAL(2)
------------------------ ------------------------
PRO FORMA
1997 1998 1997 1998 1998(4)
----------- ------------ ----------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue ...................... $ 9,015 $ 19,170 $ 9,701 $ 21,497 $ 25,090
Operating expenses ................. 5,618 11,781 6,030 13,751 18,913
Cost of merchandise sold ........... 1,679 2,816 1,932 3,240 3,240
Selling, general and
administrative expenses ........... 1,086 1,524 2,339 3,662 4,495
-------- -------- -------- --------
Operating income ................... 632 3,049 (600) 844 (1,558)
Net income (loss) .................. $ 562 $ 1,346 $ (787) $ (1,689) $ (2,750)
Net income (loss) per share:
Basic ............................. $ 0.03 $ 0.07 $ (0.04) $ (0.08) $ (0.13)
Diluted (5) ....................... 0.03 0.07 (0.04) (0.08) (0.13)
Weighted average shares
outstanding (000s):
Basic ............................. 17,803 19,445 18,618 20,599 21,711
Diluted (5) ....................... 18,125 20,196 18,618 20,599 21,711
GOLF FACILITY DATA:
Facilities open at beginning of
period ............................ 35 53 39 70 70
Facilities built during period ..... -- -- -- -- --
Facilities acquired during
period (6) ........................ 6 12 6 13 27
-------- -------- -------- --------
Facilities open at end of
period ............................ 41 65 45 83 97
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1998
------------------------------------------------------
HISTORICAL SUPPLEMENTAL(2) PRO FORMA(7)
------------ ----------------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments ......... $ 9,721 $ 10,334 $ 68,146
Working capital ........................................... 18,194 10,738 68,361
Total assets .............................................. 338,979 378,907 471,043
Total debt (including current portion) .................... 147,862 171,369 179,862
Total stockholders' equity ................................ 172,742 180,369 260,577
</TABLE>
- ---------
(1) This information should be read in conjunction with "Use of Proceeds,"
"Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the pro forma financial
information and the notes thereto, the supplemental financial statements
and the notes thereto and the financial statements and the notes thereto
of the Company, Eagle Quest, Golden Bear, MetroGolf and Leisure
Complexes, Inc. ("LCI"), each included elsewhere herein.
(2) Restated to reflect the results of Eagle Quest and its subsidiaries,
which began operations in February 1996 and which was acquired on June
30, 1998 in a pooling-of-interests transaction.
(3) Restated to reflect the Eagle Quest Acquisition and pro forma for the
acquisitions of Carolina Capital Ventures, Ltd. ("Raleigh"), Darlington
Driving Range ("Darlington" or "Mahwah"), Randall's Island Practice
Center ("Randall's Island"), Green Oaks Practice Center, Inc. ("Green
Oaks"), San Bruno Practice Center ("San Bruno"), Southhampton Family Golf
Centers, Inc. and Pinely Enterprises ("Southhampton"), Divot City ("Divot
City" or "Milpitas"), Carver Golf Enterprises, Inc. ("Carver"), Palm
Royale Country Club ("Palm Royale"), Active Sports Marketing LLC ("Golden
Spikes"), Commack Golf Center ("Commack"), Golf Academy of Hilton Head
Island, Inc. ("Hilton Head") and Confidence Golf, Inc. (collectively, the
"1997 Acquisitions"), the acquisition of LCI (the "LCI Acquisition"), the
MetroGolf Acquisition, the pending Golden Bear Acquisition, and the
assumed repayment of certain outstanding indebtedness of Eagle Quest from
a portion of the estimated net proceeds from the sale of shares of Common
Stock offered hereby, as if they had occurred on January 1, 1997. See
"Use of Proceeds."
(4) Restated to reflect the Eagle Quest Acquisition and pro forma for the
Metro Golf Acquisition, the pending Golden Bear Acquisition and the
assumed repayment of certain outstanding indebtedness of Eagle Quest
from a portion of the estimated net proceeds from the sale of shares of
Common Stock offered hereby, as if they had occurred on January 1, 1998.
See "Use of Proceeds."
(5) Dilutive information repeats basic information whenever the effect is
anti-dilutive.
(6) Includes the facilities managed by the Company pursuant to concession
licenses, which are Douglaston, New York; El Segundo, California; Denver,
Colorado; Mahwah, New Jersey and Randall's Island, New York.
(7) Restated to reflect the Eagle Quest Acquisition and pro forma for the
pending Golden Bear Acquisition and the Offering (assuming an offering
price of $25.50 per share) and the application of the estimated net
proceeds therefrom, as if they had occurred on March 31, 1998.
See "Use of Proceeds."
4
<PAGE>
RISK FACTORS
In addition to the other information set forth in this Prospectus,
prospective investors should carefully review the following risk factors in
evaluating an investment in the shares of Common Stock offered hereby. This
Prospectus contains statements which constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended
(the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). These statements appear in a number of places
in this Prospectus and include statements regarding the intent, belief or
current expectations of the Company with respect to (i) the use of proceeds of
the Offering, (ii) the Company's acquisition and financing plans, (iii) trends
affecting the Company's financial condition or results of operations, (iv) the
impact of competition and (v) the expansion of certain operations. Prospective
investors are cautioned that any such 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
Prospectus, including, without limitation, the information under "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" identifies important factors that could
cause or contribute to such differences.
ACQUISITION AND GROWTH STRATEGY; RISKS ASSOCIATED WITH INTEGRATING NEW
FACILITIES
The Company's ability to significantly increase revenues, operating cash
flow and net income over time depends in large part upon its success in
acquiring and enhancing, or constructing, additional facilities at suitable
locations upon satisfactory terms. There can be no assurance that suitable
facility acquisitions or lease opportunities will be available or that the
Company will be able to consummate acquisitions or leasing transactions on
satisfactory terms. In addition, the acquisition of facilities may become more
expensive in the future if demand and competition increase. The likelihood of
the continued success of the Company must be considered in light of the
problems, expenses, difficulties, complications and delays frequently
encountered in connection with the improvement of existing and acquired
facilities and the construction and opening of new facilities, including delays
in obtaining required permits.
To implement its expansion strategy successfully, the Company must
integrate acquired or newly opened facilities into its existing operations,
which may necessitate the implementation of enhanced operational and financial
systems and may require additional employees and management, operational,
financial and other resources. As part of its strategy, the Company has
recently entered the ice rink and family entertainment industries, in which the
Company has only limited experience and which involve all the risks commonly
associated with the establishment of new lines of business. As the Company
grows, there can be no assurance that additional facilities, including Eagle
Quest's and Golden Bear's facilities, can be readily integrated into the
Company's operating structure. The Company's inability to efficiently integrate
facilities or to successfully operate within the ice rink and family
entertainment industries could have a material adverse effect on the Company's
financial condition and results of operations. In addition, a number of the
facilities which the Company has acquired have, and facilities it may acquire
in the future may have, experienced losses. Restated to reflect the Eagle Quest
Acquisition, and after giving effect on a pro forma basis to the pending Golden
Bear Acquisition and certain acquisitions consummated after January 1, 1997 as
if they had occurred on January 1, 1997, the Company had a net loss of $5.2
million (as compared to net income of $10.5 million on a historical basis and
net income of $3.3 million on a supplemental restated basis to include the
operations of Eagle Quest) for the year ended December 31, 1997 and a net loss
of $3.6 million (as compared to net income of $1.3 million on a historical
basis and a net loss of $1.7 million on such supplemental restated basis) for
the three months ended March 31, 1998. As a result of the timing of the
Company's acquisitions, the seasonality of the acquired businesses, the
expansion of the Company's business to include ice rinks and Family Sports
Supercenters and other factors, the Company's historical and pro forma results
of operations referred to herein are not necessarily indicative of future
results. There can be no assurance that facilities recently acquired by the
Company or those that the Company may acquire in the future, including those of
Golden Bear, will operate profitably and will not materially adversely affect
the Company's financial condition and results of operations.
5
<PAGE>
CERTAIN FACTORS RELATED TO EAGLE QUEST
The Eagle Quest Acquisition will be accounted for as a
pooling-of-interests. Accordingly, the historical results of operations of the
Company will be restated for financial accounting purposes. Eagle Quest's
revenues as reported for the year ended December 31, 1997 and for the period
from inception (February 5, 1996) to December 31, 1996 were $8.2 million and
$149,000, respectively, and Eagle Quest's net losses for such periods were $7.3
million and $885,000, respectively. Eagle Quest's revenues and net loss for the
three months ended March 31, 1998 were $2.3 million and $3.0 million,
respectively, and Eagle Quest also experienced losses in the second quarter of
1998. Restated to reflect the Eagle Quest Acquisition, the Company had net
income of $3.3 million (as compared to net income of $10.5 million on a
historical basis) for the year ended December 31, 1997 and a net loss of
$1.7 million (as compared to net income of $1.3 million on a historical basis)
for the three months ended March 31, 1998. After giving effect to the Eagle
Quest Acquisition as of March 31, 1998, the Company would have had
approximately $25.8 million of additional indebtedness (the "Eagle Quest
Debt"), and other obligations of approximately $5.0 million. In addition,
the Company anticipates that its results for the second and third quarters
of 1998 will reflect significant cash and non-cash charges in connection with
the Eagle Quest Acquisition relating to, among other things, the anticipated
retirement of certain Eagle Quest Debt, fees and expenses and severance
charges. The precise amount of such charges is not currently ascertainable;
however, the Company currently estimates that they will aggregate
approximately $12.0 million. Such pooling restatements and charges relating
to the Eagle Quest Acquisition will adversely impact the Company's net income
and could affect the perception of the Company and the market value of the
Common Stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Eagle Quest is a Canadian-based company with five Canadian-based
properties. Accordingly, the Eagle Quest Acquisition subjects the Company to
certain of the risks associated with properties or businesses in a foreign
country, including risks related to currency exchange rates, foreign taxation
issues and other matters.
CERTAIN FACTORS RELATED TO GOLDEN BEAR
The consummation of the Golden Bear Acquisition is subject to a number of
conditions, including the receipt of certain regulatory approvals and consents.
Many of such conditions are outside of the control of the Company and there can
be no assurance that the Golden Bear Acquisition will be consummated. See
"Business -- Golden Bear."
Golden Bear's revenues (including revenues associated with certain assets
not being acquired by the Company) as reported for the years ended December 31,
1997 and 1996 and the three months ended March 31, 1998 were $16.0 million,
$3.0 million and $3.7 million, respectively, and Golden Bear's net losses for
such periods were $5.9 million, $1.4 million and $1.7 million, respectively.
Restated to reflect the Eagle Quest Acquisition, and after giving effect on
a pro forma basis to certain other acquisitions consummated after January 1,
1997 as if they had occurred on January 1, 1997, the Company had net income of
$445,000 (as compared to net income of $3.3 million on a supplemental restated
basis to include the operations of Eagle Quest) for the year ended December 31,
1997 and a net loss of $2.2 million (as compared to a net loss of $1.7 million
on such supplemental restated basis) for the three months ended March 31, 1998.
Restated to reflect the Eagle Quest Acquisition, and after giving effect on a
pro forma basis to the pending Golden Bear Acquisition (and the acquisitions
consummated after January 1, 1997) as if they had occurred on January 1, 1997,
the Company had a net loss of $5.2 million (as compared to net income of $10.5
million on a historical basis and net income of $3.3 million on a supplemental
restated basis to include the operations of Eagle Quest) for the year ended
December 31, 1997 and a net loss of $3.6 million (as compared to net income of
$1.3 million on a historical basis and a net loss of $1.7 million on such
supplemental restated basis) for the three months ended March 31, 1998. After
giving effect to the Golden Bear Acquisition, as of March 31, 1998, the Company
would have had approximately $9.0 million of additional indebtedness (the
"Golden Bear Debt"), and other obligations of approximately $2.3 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
6
<PAGE>
DEPENDENCE ON THE GOLF INDUSTRY AND DISCRETIONARY CONSUMER SPENDING
Although the Company has expanded its business outside the golf industry,
the Company is highly dependent on the golf industry, and the public's interest
in utilizing golf practice centers, for the generation of its revenues and
earnings. Activities such as golf have, in the past, been susceptible to
increases and decreases in popularity that have materially affected the
financial condition and results of operations of companies dependent on such
activities, and there can be no assurance that the golf industry will not
suffer a material decrease in popularity, which would result in a material
adverse effect on the Company's financial condition and results of operations.
The amount spent by consumers on discretionary items, such as the family
entertainment activities offered by the Company, have historically been
dependent upon levels of discretionary income, which may be adversely affected
by general economic conditions. A decrease in consumer spending on golf and
other family entertainment activities could have a material adverse effect on
the Company's financial condition and results of operations.
ADDITIONAL FINANCING REQUIREMENTS
The Company anticipates, based on its currently proposed expansion plans
and assumptions relating to its operations, that the net proceeds of the
Offering, together with availability under its revolving credit facilities and
cash flow from operations, will be sufficient to permit the Company to conduct
its operations and to carry on its contemplated expansion through at least the
next 12 months. Although the Company intends to repay $25.8 million of the
Eagle Quest Debt and $0.7 million of related prepayment penalties with the net
proceeds from the Offering, it anticipates increasing its leverage over time as
it continues its expansion. The Company also anticipates that it will need to
raise substantial additional capital in the future to continue its longer term
expansion plans. There can be no assurance that the Company will be able to
obtain additional financing on favorable terms or at all. See "Use of
Proceeds," "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
FLUCTUATING OPERATING RESULTS; VULNERABILITY TO WEATHER CONDITIONS AND
SEASONALITY
Historically, the second and third quarters of the calendar year 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 weather. Although most of the Company's driving ranges are
designed to be all-weather facilities, portions of the Company's facilities,
including the miniature golf courses, are outdoors and vulnerable to weather
conditions. In addition, golfers are less inclined to practice when weather
conditions limit their ability to play golf on outdoor courses. The Company
expects its expansion into ice rink facilities and Family Sports Supercenters
to partially offset such seasonality. The timing of new center openings and
acquisitions may also 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. In addition, variability in the Company's results
of operations could cause the price of the Company's securities to fluctuate
following the release of interim results of operations or other information and
may have a material adverse effect on the price of the Company's securities.
COMPETITION
The golf center, ice rink and family entertainment industries are each
highly competitive and include competition from other golf centers, golf
courses, other ice rinks and family entertainment outlets and other
recreational pursuits. In addition, the Company's pro shop business faces
competition from other pro shops, specialty retailers and department stores.
The Company may face imitation and other forms of competition and the Company
cannot prevent others from utilizing a similar operational strategy. Many of
the Company's competitors and potential competitors may have considerably
greater financial and other resources, experience and customer recognition than
does the Company. The Company operates seven of its golf centers under the name
"Golden Bear" pursuant to a non-exclusive license agreement (the "License
Agreement") with a subsidiary of GBGI (the "Licensor"). Golden Bear, a
subsidiary of GBGI, is a competitor of the Company. The Licensor is permitted
to establish, or license others to establish, Golden Bear golf centers that
compete with the Company's golf centers, including the Company's Golden Bear
golf centers. However, if the Golden Bear Acquisition is consummated, the
7
<PAGE>
Company will acquire Golden Bear and will enter into a new license agreement
(the "New License Agreement") which will provide that the Company will have the
exclusive right to operate Golden Bear golf centers within a 10-mile radius of
the Company's Golden Bear golf centers. There can be no assurance that
competition will not adversely affect the Company's business or ability to
acquire additional properties.
DEPENDENCE ON CERTAIN AGREEMENTS
The future success of the business and operations of the Company is
dependent, in part, upon certain key operating agreements, including its real
property leases, management agreements with respect to certain municipal
facilities and the License Agreement. The termination of any of these
agreements may have a material adverse effect on the Company.
After giving effect to renewal options, none of the Company's leases, as
of July 1, 1998, are scheduled to expire until June 28, 2002. However, the
leases may be terminated prior to their scheduled expiration should the Company
default in its obligations thereunder. The Company has received a letter from
counsel to the landlord of one of its properties alleging that the Company is
in breach of its lease for such property. The Company is in the process of
investigating such allegations and will respond in due course. The termination
of any of the Company's leases could have an adverse effect on the Company. If
any of the Company's leases were to be terminated, there can be no assurance
that the Company would be able to enter into leases for comparable properties
on favorable terms or at all.
The Company manages several facilities for municipalities pursuant to
concession licenses, four of which are terminable at will by the licensor. The
Company's concession license with the City of New York (the "City") for the
Douglaston, New York golf center, which was entered into in 1994 and which
expires on December 31, 2006, the concession license with the City for the
Randall's Island, New York golf center, which was entered into in 1992 and
which expires on March 1, 2007, the concession license with the City for the
Dreier-Offerman Park, Brooklyn, New York golf center, which was entered into in
April 1998 and which expires on March 30, 2019 and the concession license with
the Metropolitan Transportation Authority for the Bronx, New York golf center,
currently under construction, which was entered into in 1997 and which expires
on December 31, 2009 (respectively, the "Douglaston License," the "Randall's
Island License," the "Brooklyn License" and the "Bronx License"), are
terminable at will. Pursuant to the Douglaston License and the Randall's Island
License, the Company has made $3.1 million and $774,000, respectively, of
capital improvements. Pursuant to the Brooklyn License, the Company is
obligated to make $4.0 million of capital improvements prior to March 1, 1999.
Pursuant to the Bronx License, the Company is obligated to make a minimum of
$3.0 million of capital improvements prior to July 1, 2000. If any of these
concession licenses are terminated, other than a termination of the Bronx
License during the first eight years of such license, the licensor may retain,
and is not obligated to pay the Company for the value of, such capital
improvements. Unless reimbursed, the Company would immediately have to
write-off, for accounting purposes, the undepreciated value of these capital
improvements and the goodwill related to its purchase of the limited partners'
minority interest in the partnership which was party to the Douglaston License,
which are currently being depreciated and amortized over the life of the
relevant concession license.
The Company operates seven of its golf centers under the name "Golden
Bear" pursuant to the License Agreement, expiring August 2002, with the
Licensor. The License Agreement is terminable by the Licensor prior to August
2002 under certain circumstances. Termination of the License Agreement could
adversely affect the Company's Golden Bear golf centers and, possibly, the
Company. If the Golden Bear Acquisition is consummated, the Company will
acquire 14 additional golf centers to be operated under the name "Golden Bear"
and the 21 Golden Bear golf centers then owned by the Company would be subject
to the New License Agreement, expiring December 31, 2008, subject to
termination of the New License Agreement by the Company effective on December
31, 2000. The New License Agreement is also subject to termination by the
Company or the Licensor under certain other circumstances. The value of the
"Golden Bear" name is dependent, in part, upon the continued popularity of Jack
Nicklaus. Accordingly, the occurrence of any event which diminishes the
reputation of Mr. Nicklaus and the related "Golden Bear" symbol could adversely
affect the Company's Golden Bear golf centers.
8
<PAGE>
LEVERAGE, DEBT SERVICE AND COVENANTS
Pro forma for the Offering (at an assumed offering price of $25.50 per
share) and the application of the estimated net proceeds therefrom, as of March
31, 1998, the Company had approximately $147.9 million aggregate principal
amount of indebtedness outstanding, including $115.0 million aggregate
principal amount of the Notes, but excluding approximately $9.0 million of
indebtedness of Golden Bear. The Company's level of indebtedness requires that
a significant amount of its cash flow from operations be applied to debt
service, and there can be no assurance that the Company's operations will
generate sufficient cash flow to service this indebtedness.
Certain of the instruments governing the Company's indebtedness include
covenants that restrict the operational and financial flexibility of the
Company, including a limit on the number of facilities that the Company may
construct in any rolling twelve month period and restrictions on indebtedness,
liens, acquisitions, dividends and other significant actions. Failure to comply
with certain covenants would, among other things, permit the Company's lenders
to accelerate the maturity of the obligations thereunder and could result in
cross-defaults permitting the acceleration of debt under other Company
agreements. In addition, the Company is required to maintain certain financial
ratios.
ENVIRONMENTAL REGULATION
Operations at the Company's facilities involve the use and limited storage
of various hazardous materials such as pesticides, herbicides, motor oil,
gasoline, heating oil and paint, as well as various chemicals used to create,
refrigerate and maintain the ice at its ice rinks. Under various federal, state
and local laws, ordinances and regulations, an owner or operator of real
property is generally liable for the costs of removal or remediation of
hazardous substances that are released on or in its property regardless of
whether the property owner or operator knew of, or was responsible for, the
release of hazardous materials. The Company has not been informed by any
governmental authority of any non-compliance or violation of any environmental
laws, ordinances or regulations and the Company believes that it is in
substantial compliance with all such laws, ordinances and regulations
applicable to its properties or operations. However, the Company is aware of
one notice of violation issued by the New York State Department of
Environmental Conservation against the owner of the land leased by the Company
in Elmsford, New York alleging that certain hazardous materials were placed on
the site. The owner has taken remedial action and the Company does not believe
it will be affected by the alleged violation. As of the date hereof, the
Company has not incurred material costs of remediation and the Company knows of
no material environmental liability to which it may become subject. Although
the Company usually hires environmental consultants to conduct environmental
studies, including invasive procedures such as soil sampling or ground water
analysis on facilities it owns, operates or intends to acquire, in some cases
only limited invasive procedures are conducted on such properties and in a
limited number of instances no environmental studies are conducted.
Accordingly, there may be potential environmental liabilities or conditions of
which the Company is not aware.
DEPENDENCE UPON KEY EMPLOYEE; RECRUITMENT OF ADDITIONAL PERSONNEL
The Company is heavily dependent on the services of Dominic Chang, its
Chairman of the Board and Chief Executive Officer. The loss of the services of
Mr. Chang could materially adversely affect the Company. Mr. Chang has entered
into an employment agreement with the Company which terminates on December 31,
1999. The Company owns key person life insurance in the amount of $5.0 million
on the life of Mr. Chang. In addition, it is an event of default under the
Company's Credit Facility (as defined herein) and Term Debt (as defined herein)
if Mr. Chang is not the Chairman of the Board and Chief Executive Officer of
the Company and if he does not own at least 5% of the Company's outstanding
Common Stock. The Company will also be required to hire additional personnel
and professionals to staff the additional facilities it intends to acquire,
lease or construct. There can be no assurance that the Company will be able to
attract and retain qualified personnel.
DILUTION
Assuming an offering price of $25.50 per share of Common Stock, purchasers
in the Offering will experience immediate and substantial dilution of $16.44 in
the supplemental restated net tangible book value per share of the Common
Stock.
9
<PAGE>
SIGNIFICANT STOCKHOLDER
Following completion of the Offering, Dominic Chang will beneficially own
3,749,001 shares of Common Stock, constituting approximately 15.2% of
outstanding shares. Mr. Chang will, therefore, be able to exercise significant
influence with respect to the election of the directors of the Company and all
matters submitted to a vote of the stockholders of the Company, including the
acquisition or disposition of material assets. See "Management" and "Principal
Stockholders."
VOLATILITY OF PRICE OF COMMON STOCK
The trading price of the Company's Common Stock could be subject to
fluctuations in response to variations in quarterly operating results, the gain
or loss of significant contracts, changes in management, future announcements
concerning the Company, general trends in the industry and other events or
factors. See "Price Range of Common Stock."
PREFERRED STOCK; POSSIBLE ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER, BY-LAW AND
CONTRACTUAL PROVISIONS
The Company's Certificate of Incorporation authorizes the Board of
Directors to issue up to 2,000,000 shares of preferred stock, $0.10 par value
per share. The preferred stock may be issued in one or more series, the terms
of which may be determined at the time of issuance by the Board of Directors,
without further action by stockholders. Although no preferred stock is
currently outstanding and the Company currently has no plans for the issuance
of any preferred stock, there can be no assurance that the Company will not do
so in the future. The ability of the Board of Directors to issue preferred
stock could have the effect of delaying, deferring or preventing a change of
control of the Company or the removal of existing management and, as a result,
could prevent the stockholders of the Company from being paid a premium over
the market value for their shares of Common Stock. The Company's By-Laws
contain provisions requiring advance notice of stockholder proposals and
imposing certain procedural restrictions on stockholders wishing to call a
special meeting of stockholders. Under the Credit Facility and the Term Debt,
it is an event of default if Mr. Chang is not the Chairman of the Board, Chief
Executive Officer and beneficial owner of at least 5% of the outstanding Common
Stock. In addition, the indenture with respect to the Notes (the "Indenture")
gives the holders of the Notes the right to have such Notes redeemed if there
is a Change of Control (as defined in the Indenture). The License Agreement may
be terminated by the Licensor if members of the Company's Board of Directors,
as of September 1995 (each of whom is still a director of the Company), at any
time do not constitute at least 50% of the Company's Board of Directors
(although such provision is not in the New License Agreement which will replace
the License Agreement if the Golden Bear Acquisition is consummated).
Accordingly, such provisions could discourage possible future attempts to gain
control of the Company (which attempts, if stockholders were offered a premium
over the market value of their Common Stock, might be viewed as beneficial to
stockholders).
10
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the Offering are
estimated to be approximately $84.8 million, after deducting underwriting
discounts and estimated offering expenses payable by the Company ($97.5 million
if the Underwriters' over-allotment option is exercised in full), based upon an
assumed offering price of $25.50 per share. The following table sets forth the
estimated sources and uses of the proceeds of the Offering:
<TABLE>
<CAPTION>
SOURCES OF FUNDS USES OF FUNDS
---------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Common Stock offered hereby ............................ $ 89.3 Repayment of Eagle Quest Debt (1) .............. $ 26.5
Capital improvements and construction (2) ...... 44.3
General corporate purposes, including other
acquisitions .................................. 14.0
Fees and expenses .............................. 4.5
-------
Total sources of funds .............................. $ 89.3 Total uses of funds .......................... $ 89.3
====== =======
</TABLE>
- ----------
(1) Includes the repayment of (i) a $10.8 million loan bearing interest at
LIBOR plus 4.0% per annum, payable in monthly installments through
September 2002, plus a prepayment penalty of $545,000, (ii) a $2.3
million loan bearing interest at 3.5% per month and payable on demand,
(iii) a $1.7 million loan bearing interest at 6.5% during the first year,
7.5% during the second year and 8.5% during the third year and due
September 2000, (iv) a $1.5 million first and second mortgage bearing
interest at 9.0% and 17.8% per annum, respectively, payable in monthly
installments through April 2000, (v) $2.5 million of redeemable
debentures due May 2002 bearing interest at 12.5% per annum, plus a
prepayment penalty of $100,000, (vi) $4.0 million of redeemable
debentures due June 2002 bearing interest at 13.5% per annum, (vii) a
$670,000 mortgage payable in monthly installments through February 2011
bearing interest at 6.8% per annum, (viii) loans aggregating $677,000
from related parties bearing interest at 15.0% per annum and due April
1998, (ix) a $408,000 mortgage bearing interest at 13.0% per annum,
increasing 1.0% per month to 25.0% per annum and due July 1998, (x) a
$275,000 mortgage bearing interest at 7.0%, payable in monthly
installments through April 2011 and (xi) $920,000 of other notes and
liabilities acquired in connection with the Eagle Quest Acquisition. Such
indebtedness was incurred primarily to consummate acquisitions and to
refinance other indebtedness.
(2) Includes (i) approximately $14.5 million for budgeted capital
improvements at numerous existing golf centers and the construction of
new golf centers and (ii) approximately $29.8 million for the
construction of new facilities.
The Company's principal lender has agreed, subject to certain conditions,
to lend the Company $25.0 million to fund the Golden Bear Acquisition. There
can be no assurance that such loan will be made, in which event the Company
would use the proceeds of the Offering currently allocated to general corporate
purposes and available cash for the Golden Bear Acquisition.
Management will retain a significant amount of discretion over the
application of the net proceeds. There can be no assurance that applications
will not vary substantially from the Company's current intentions. Pending
utilization, the Company intends to invest the net proceeds of the Offering in
short-term, investment grade, interest-bearing securities.
11
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "FGCI." The following table sets forth, for the periods indicated,
the high and low last sales price for the Common Stock as reported by the
Nasdaq National Market.
<TABLE>
<CAPTION>
STOCK PRICE
---------------------------
HIGH LOW
------------ ------------
<S> <C> <C>
CALENDAR YEAR 1996:
First Quarter .......... $ 18.50 $ 11.42
Second Quarter ......... 20.17 15.24
Third Quarter .......... 24.33 14.50
Fourth Quarter ......... 22.83 15.00
CALENDAR YEAR 1997:
First Quarter .......... $ 21.42 $ 11.50
Second Quarter ......... 19.58 11.17
Third Quarter .......... 19.17 14.67
Fourth Quarter ......... 22.17 16.50
CALENDAR YEAR 1998:
First Quarter .......... $ 27.75 $ 19.17
Second Quarter ......... 31.00 24.06
</TABLE>
On July 1, 1998, the last reported sale price for the Company's Common
Stock on the Nasdaq National Market was $25.50 per share. As of July 1, 1998,
there were approximately 220 stockholders of record of the Common Stock.
DIVIDEND POLICY
The Company has neither declared nor paid cash dividends on its Common
Stock and does not intend to declare or pay any cash dividends in the
foreseeable future. The Company currently intends to retain earnings, if any,
for the development and expansion of its business. Moreover, certain of the
Company's debt instruments limit the ability of the Company to pay cash
dividends. The declaration of dividends in the future will be at the election
of the Board of Directors and will depend upon the earnings, capital
requirements and financial disposition of the Company, general economic
conditions and other pertinent factors.
12
<PAGE>
CAPITALIZATION
The following table sets forth at March 31, 1998, on an unaudited basis,
the actual capitalization of the Company, the supplemental restated
capitalization of the Company to give effect to the Eagle Quest Acquisition and
pro forma giving effect to the restatement for the Eagle Quest Acquisition and
pro forma for, the pending Golden Bear Acquisition and the Offering (assuming
an offering price of $25.50 per share) and the application of the estimated
net proceeds therefrom as described under "Use of Proceeds." This table should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the pro forma unaudited condensed balance
sheet and the notes thereto, the supplemental financial statements and the
notes thereto and the Company's financial statements and the notes thereto,
each included elsewhere herein.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
--------------------------------------------
ACTUAL SUPPLEMENTAL PRO FORMA
------------ -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments ......... $ 9,721 $ 10,334 $ 68,146
======== ======== ========
Total debt (including current portion):
Credit Facility (1) ...................................... -- -- --
Other debt ............................................... 32,862 56,369 64,862
Convertible subordinated notes ........................... 115,000 115,000 115,000
-------- -------- --------
Total debt (including current portion) ................. 147,862 171,369 179,862
Minority interest ......................................... 214 214 214
Redeemable equity securities .............................. -- 2,829 2,829
Stockholders' equity:
Preferred Stock $0.10 par value, 2,000,000 shares
authorized, none outstanding ........................... -- -- --
Common Stock $0.01 par value, 50,000,000 shares
authorized, 19,594,000 shares issued and outstanding,
20,753,751 shares supplemental and 24,253,751 shares
pro forma (2) .......................................... 196 207 242
Additional paid-in capital ............................... 157,084 175,817 260,513
Retained earnings ........................................ 16,036 4,860 337
Foreign currency translation adjustment .................. -- 214 214
Unearned compensation .................................... (527) (682) (682)
Treasury stock ........................................... (47) (47) (47)
-------- -------- --------
Total stockholders' equity ............................. 172,742 180,369 260,577
-------- -------- --------
Total capitalization ................................... $320,818 $354,781 $443,482
======== ======== ========
</TABLE>
- ----------
(1) The Company is currently negotiating to replace its existing Credit
Facility with a new credit facility which is expected to have
substantially increased borrowing capacity, although there can be no
assurance that such credit facility can be obtained.
(2) Excludes (i) 2,007,780 shares of Common Stock reserved for issuance upon
exercise of outstanding options and warrants, and (ii) 4,630,872 shares
of Common Stock issuable upon conversion of the Notes. See "Management --
Stock Option and Award Plans," and "Description of Capital Stock --
Outstanding Options and Warrants."
13
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical, supplemental restated
and pro forma financial and other data of the Company. The supplemental
restated financial and other data give effect to the Eagle Quest Acquisition
as if it had occurred at the beginning of the stated periods. In addition to
the restatement for the Eagle Quest Acquisition, the pro forma financial data
for the year ended December 31, 1997 gives effect to (i) the pending Golden
Bear Acquisition, (ii) the 1997 Acquisitions, (iii) the LCI Acquisition,
(iv) the MetroGolf Acquisition and (v) the assumed repayment of certain
outstanding indebtedness of Eagle Quest from a portion of the estimated net
proceeds from the sale of shares of Common Stock offered hereby, as if they
had occurred on January 1, 1997. In addition to the restatement for the
Eagle Quest Acquisition, the pro forma financial data for the three months
ended March 31, 1998 gives effect to (i) the pending Golden Bear Acquisition,
(ii) the MetroGolf Acquisition and (iii) the assumed repayment of certain
outstanding indebtedness of Eagle Quest from a portion of the estimated net
proceeds from the sale of shares of Common Stock offered hereby, as if they
had occurred on January 1, 1998. The supplemental restated balance sheet data
gives effect to the Eagle Quest Acquisition and the pro forma balance sheet
data gives effect to the restatement for the Eagle Quest Acquisition, and pro
forma for the pending Golden Bear Acquisition and the Offering (assuming an
offering price of $25.50 per share) and the application of the estimated net
proceeds therefrom, as if they had occurred on March 31, 1998. The
supplemental restated and pro forma financial data are not necessarily
indicative of the results that would have been obtained had the
transactions reflected therein been consummated on the dates indicated, nor do
they purport to indicate the results of future operations. This information
should be read in conjunction with "Use of Proceeds," "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the pro forma financial information and the notes thereto, the
supplemental financial statements and the notes thereto and the financial
statements and the notes thereto of the Company, Eagle Quest, Golden Bear,
MetroGolf and LCI, each included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
HISTORICAL SUPPLEMENTAL(1)
------------------------------------------------------ ---------------------
1993 1994 1995 1996 1997 1996 1997
----------- --------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue ..................... $ 2,632 $6,362 $12,432 $27,904 $ 64,825 $28,052 $ 72,997
Operating expenses ................ 2,247 4,215 6,614 13,268 31,563 13,335 37,386
Cost of merchandise sold .......... 459 750 1,779 4,458 10,467 4,540 12,366
Selling, general and
administrative expenses .......... 615 548 1,242 3,580 5,132 4,760 12,630
------- ------ ------- ------- -------- ------- --------
Operating income (loss) ........... (689) 849 2,797 6,598 17,663 5,417 10,615
Interest expense .................. (192) (313) (939) (370) (2,261) (383) (3,863)
Other income (expense) ............ 106 16 66 2,172 1,659 2,172 1,659
------- ------ ------- ------- -------- ------- --------
Income before income taxes,
minority interest and
extraordinary item ............... (775) 552 1,924 8,400 17,061 7,206 8,411
Income tax expenses (benefit) ..... -- (65) 669 3,192 6,537 2,884 5,142
------- ------ ------- ------- -------- ------- --------
Income (loss) before minority
interest and extraordinary
Item ............................. (775) 617 1,255 5,208 10,524 4,322 3,269
Minority interest in (income)
loss ............................. 12 (129) -- -- -- -- --
Extraordinary item (net of tax
effect) .......................... -- -- (181) -- -- -- --
------- ------ ------- ------- -------- ------- --------
Net income (loss) ................. $ (763) $ 488 $ 1,074 $ 5,208 $ 10,524 $ 4,322 $ 3,269
======= ====== ======= ======= ======== ======= ========
Net income per share, basic:
Income (loss) before
extraordinary item ............... $ (0.16) $ 0.09 $ 0.16 $ 0.35 $ 0.57 $ 0.28 $ 0.17
Extraordinary item ................ -- -- (0.02) -- -- -- --
------- ------ ------- ------- -------- ------- --------
Net income (loss) ................. $ (0.16) $ 0.09 $ 0.14 $ 0.35 $ 0.57 $ 0.28 $ 0.17
======= ====== ======= ======= ======== ======= ========
Net income per share,
diluted(4):
Income (loss) before
extraordinary item ............... $ (0.15) $ 0.09 $ 0.16 $ 0.34 $ 0.56 $ 0.27 $ 0.16
Extraordinary item ................ -- -- (0.02) -- -- -- --
------- ------ ------- ------- -------- ------- --------
Net income (loss) ................. $ (0.15) $ 0.09 $ 0.14 $ 0.34 $ 0.56 $ 0.27 $ 0.16
======= ====== ======= ======= ======== ======= ========
Weighted average shares
outstanding (000's):
Basic ............................. 4,830 5,379 7,676 15,003 18,368 15,473 19,344
Diluted(4) ........................ 4,911 5,454 7,907 15,435 18,799 15,905 19,814
<CAPTION>
YEAR ENDED
DECEMBER
31, THREE MONTHS ENDED MARCH 31,
----------- ----------------------------------------------------------
HISTORICAL SUPPLEMENTAL(1)
PRO FORMA -------------------- ------------------------ PRO FORMA
1997(2) 1997 1998 1997 1998 1998(3)
----------- --------- ---------- ----------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue ..................... $107,457 $ 9,015 $ 19,170 $ 9,701 $ 21,497 $ 25,090
Operating expenses ................ 76,127 5,618 11,781 6,030 13,751 18,913
Cost of merchandise sold .......... 13,543 1,679 2,816 1,932 3,240 3,240
Selling, general and
administrative expenses .......... 17,038 1,086 1,524 2,339 3,662 4,495
-------- ------- -------- ------- -------- --------
Operating income (loss) ........... 749 632 3,049 (600) 844 (1,558)
Interest expense .................. (5,174) (191) (1,799) (308) (2,629) (2,159)
Other income (expense) ............ (85) 466 956 466 956 523
-------- ------- -------- ------- -------- --------
Income before income taxes,
minority interest and
extraordinary item ............... (4,510) 907 2,206 (442) (829) (3,194)
Income tax expenses (benefit) ..... (791) 345 860 345 860 (426)
-------- ------- -------- ------- -------- --------
Income (loss) before minority
interest and extraordinary
Item ............................. (3,719) 562 1,346 (787) (1,689) (2,768)
Minority interest in (income)
loss ............................. 100 -- -- -- -- 18
Extraordinary item (net of tax
effect) .......................... -- -- -- -- -- --
-------- ------- -------- ------- -------- --------
Net income (loss) ................. $ (3,619) $ 562 $ 1,346 $ (787) $ (1,689) $ (2,750)
======== ======= ======== ======= ======== ========
Net income per share, basic:
Income (loss) before
extraordinary item ............... $ (0.17) $ 0.03 $ 0.07 $ (0.04) $ (0.08) $ (0.13)
Extraordinary item ................ -- -- -- -- -- --
-------- ------- -------- ------- -------- --------
Net income (loss) ................. $ (0.17) $ 0.03 $ 0.07 $ (0.04) $ (0.08) $ (0.13)
======== ======= ======== ======= ======== ========
Net income per share,
diluted(4):
Income (loss) before
extraordinary item ............... $ (0.17) $ 0.03 $ 0.07 $ (0.04) $ (0.08) $ (0.13)
Extraordinary item ................ -- -- -- -- -- --
-------- ------- -------- ------- -------- --------
Net income (loss) ................. $ (0.17) $ 0.03 $ 0.07 $ (0.04) $ (0.08) $ (0.13)
======== ======= ======== ======= ======== ========
Weighted average shares
outstanding (000's):
Basic ............................. 21,130 17,803 19,445 18,618 20,599 21,711
Diluted(4) ........................ 21,130 18,125 20,196 18,618 20,599 21,711
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
HISTORICAL SUPPLEMENTAL(1) HISTORICAL SUPPLEMENTAL(1)
---------------------------------- ------------- PRO FORMA ------------- -------------
1993 1994 1995 1996 1997 1996 1997 1997(2) 1997 1998 1997 1998
------ ------ ------ ------ ------ ------ ------ ----------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GOLF FACILITY DATA:
Facilities open at beginning of
period .......................... 1 2 5 14 35 14 39 39 35 53 39 70
Facilities built during period ... 1 2 1 1 1 1 1 1 -- -- -- --
Facilities acquired during the
period(5) ....................... -- 1 8 20 17 24 30 53 6 12 6 13
-- ------ - -- -- -- -- -- -- -- -- --
Facilities open at end of period 2 5 14 35 53 39 70 93 41 65 45 83
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------
PRO FORMA
1998(3)
----------
<S> <C>
GOLF FACILITY DATA:
Facilities open at beginning of
period .......................... 70
Facilities built during period ... --
Facilities acquired during the
period(5) ....................... 27
--
Facilities open at end of period 97
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------
1993 1994 1995 1996 1997
----------- --------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents (7) ... $ 403 $ 2,296 $23,121 $ 38,394 $ 61,848
Working capital ................. (1,798) (204) 20,598 36,675 65,894
Total assets .................... 7,693 16,077 61,582 158,293 325,507
Total debt ...................... 4,034 6,328 8,193 17,056 141,819
Total stockholders' equity ...... 1,866 7,234 49,388 136,944 168,412
<CAPTION>
AT MARCH 31, 1998
--------------------------------------------
HISTORICAL SUPPLEMENTAL(1) PRO FORMA(6)
------------ ----------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents (7) ... $ 9,721 $ 10,334 $ 68,146
Working capital ................. 18,194 10,738 68,361
Total assets .................... 338,979 378,907 471,043
Total debt ...................... 147,862 171,369 179,862
Total stockholders' equity ...... 172,742 180,369 260,577
</TABLE>
- ---------
(1) Restated to reflect the results of Eagle Quest and its subsidiaries,
which began operations in February 1996 and which was acquired on June
30, 1998 in a pooling-of-interests transaction.
(2) Restated to reflect the Eagle Quest Acquisition and pro forma for the
1997 Acquisitions, the LCI Acquisition, the MetroGolf Acquisition, the
pending Golden Bear Acquisition and the assumed repayment of outstanding
indebtedness from a portion of the net proceeds from the sale of shares
of Common Stock offered hereby as if they had occurred on January 1,
1997. See "Use of Proceeds."
(3) Restated to reflect the Eagle Quest Acquisition and pro forma for the
MetroGolf Acquisition, the pending Golden Bear Acquisition and the
assumed repayment of certain outstanding indebtedness of Eagle Quest
from a portion of the estimated net proceeds from the sale of shares of
Common Stock offered hereby as if they had occurred on January 1, 1998.
See "Use of Proceeds."
(4) Dilutive information repeats basic information wherever the effect is
anti-dilutive.
(5) Includes the facilities managed by the Company pursuant to concession
licenses, which are Douglaston, New York; El Segundo, California; Denver,
Colorado; Mahwah, New Jersey and Randall's Island, New York.
(6) Restated to reflect the Eagle Quest Acquisition and pro forma for the
pending Golden Bear Acquisition and the Offering (assuming an offering
price of $25.50 per share) and the application of the estimated net
proceeds therefrom as if they had occurred on March 31, 1998. See "Use of
Proceeds."
(7) Includes short-term investments and restricted cash.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's financial statements and the notes thereto appearing elsewhere in
this document. Unless otherwise noted, the information in this section does not
give effect to the consummation of the Eagle Quest Acquisition.
GENERAL
Family Golf 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) consolidating the golf center
industry, (ii) enhancing facilities and customer service, (iii) developing
complementary sports and family entertainment facilities and (iv) leveraging
centralized operations. The Company's golf centers are designed to provide a
wide variety of practice and play 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 97 (including 20 acquired from
Eagle Quest on June 30, 1998) as of July 1, 1998, including 11 facilities under
construction. In addition, the consummation of the pending Golden Bear
Acquisition, of which there can be no assurance, would add 14 golf facilities.
On a historical basis without giving effect to the restatement for the Eagle
Quest Acquisition, the Company has increased total revenue from $6.4 million in
1994 to $75.0 million for the twelve months ended March 31, 1998, and increased
diluted earnings per share from $0.09 in 1994 to $0.59 for the twelve months
ended March 31, 1998.
The Company has opened or acquired facilities at varying times over the
past several years. As a result of changes in the number of facilities open
from period to period, the seasonality of operations, the timing of
acquisitions, the completion of the Company's initial public offering in
November 1994 (the "IPO"), the public offering in December 1995 (the "1995
Public Offering"), the public offering in July 1996 (the "1996 Offering"), the
private placement of $115.0 million aggregate principal amount of the Notes in
the fourth quarter of 1997 (the "1997 Note Offering") 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 revenue 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 revenue at its golf
centers from food and beverage sales, video games and batting cages. The
Company derives revenue from its golf courses from golf club membership fees,
fees for rounds of golf and golf lessons, pro shop merchandise sales and from
food and beverage sales at the clubhouse. The Company derives revenue from its
ice rinks by renting the rinks to hockey leagues and teams and figure skaters,
charging admission to its skating facilities for public skating, providing
lessons through USFSA-certified instructors, skate equipment rentals and pro
shop merchandise sales, as well as from food and beverage sales and video
games. The Company derives revenue from its Family Sports Supercenters from
substantially the same sources as described above. As a result of their greater
size and number of attractions, the Company's Family Sports Supercenters are
expected to generate significantly more revenue than individual golf centers,
and are expected to generate a majority of their revenue in the first and
fourth quarters of each calendar year. The Company currently operates two
stand-alone ice rink facilities and two Family Sports Supercenters, and is
converting a golf center in Denver, Colorado into a Family Sports Supercenter
by adding two ice rinks and other family entertainment amenities. See "Business
- -- The Golf Facilities" and "-- Complementary Sports and Family Entertainment
Facilities."
16
<PAGE>
HISTORICAL RESULTS OF OPERATIONS
The following table sets forth selected operations data of the Company on
a historical basis 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>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenues ................................... 78.8% 76.6% 75.8% 72.3% 78.1%
Merchandise sales .................................... 21.2 23.4 24.2 27.7 21.9
Total revenue ........................................ 100.0 100.0 100.0 100.0 100.0
Operating expenses ................................... 67.5 62.1 64.3 86.1 78.7
Cost of merchandise sold ............................. 67.5 68.2 66.6 67.4 67.0
Selling, general and administrative expenses ......... 10.0 12.8 7.9 12.0 8.0
Income from operations ............................... 22.5 23.6 27.2 7.0 15.9
Interest expense ..................................... ( 7.6) ( 1.3) ( 3.5) ( 2.1) ( 9.4)
Other income ......................................... 0.5 7.8 2.6 5.2 5.0
Income before income taxes ........................... 15.5 30.1 26.3 10.1 11.5
Income tax expense ................................... 5.4 11.4 10.1 3.8 4.5
Income before extraordinary item ..................... 10.1 18.7 16.2 6.2 7.0
Extraordinary item (net of tax effect) ............... 1.5 -- -- -- --
Net income ........................................... 8.6% 18.7% 16.2% 6.2% 7.0%
</TABLE>
Three Months Ended March 31, 1998 Compared To Three Months Ended March 31, 1997
Results for the three months ended March 31, 1998 reflect the operations
of 53 golf centers for the full period and 12 golf centers for two months or
less and also include the results of four complementary sports and
entertainment facilities for three months or less. Results for the period ended
March 31, 1997 reflect the operations of 35 golf centers for the full period,
one golf center for two months and operations of five golf centers for one
month or less. As a result of the change in the number of golf centers open
from period to period, as well as the commencement of operations of
complementary sports and family entertainment facilities, the comparison
between the 1998 and 1997 periods may not necessarily be meaningful.
Total revenue for the three months ended March 31, 1998 was $19.2 million
as compared to $9.0 million for the same period in 1997, an increase of $10.2
million (113%). 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 Family Sports Supercenters. Total
revenue for the 35 golf centers operating for the full three months ended March
31, 1998 and 1997 increased 18% to $9.5 million in the 1998 period from $8.1
million in the 1997 period. The increase in revenues for these 35 golf centers
was primarily due to stronger merchandise and golf instruction sales and a mild
winter season on the east coast, partially offset by adverse weather attributed
to the El Nino effect on the west coast.
Operating revenues, consisting of all sales except merchandise sales,
amounted to $15.0 million for the three months ended March 31, 1998, as
compared to $6.5 million for the comparable 1997 period, an increase of $8.5
million (130%). The increase in operating revenues was primarily attributable
to having additional golf facilities, the Family Sports Supercenters and the
ice rinks in operation during the 1998 period. Total operating revenue for the
35 golf centers operating for the full three months ended March 31, 1998 and
1997 increased 7% to $5.9 million in the 1998 period from $5.6 million in the
1997 period. Non-golf revenue from the Family Sports Supercenters and ice rink
facilities totaled $4.9 million for the three months ended March 31, 1998. The
Company did not have non-golf revenues in the comparable 1997 period.
17
<PAGE>
Merchandise sales, consisting of golf clubs, balls, bags, gloves, videos,
apparel and related accessories, were $4.2 million for the three months ended
March 31, 1998, as compared to $2.5 million for the comparable 1997 period, an
increase of $1.7 million (69%). 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 35 golf centers operating
for the full three months ended March 31, 1998 and 1997 increased 43% to $3.6
million in the 1998 period from $2.5 million in the 1997 period.
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 $11.8 million (79% of
operating revenues) in the 1998 period from $5.6 million (86% of operating
revenues) in the 1997 period, an increase of $6.2 million (110%). The increase
in operating expenses was primarily due to the operating costs of locations
that were not operated by the Company during the 1997 period. The decrease as a
percentage of sales was due to the counterseasonal impact of the Family Sports
Supercenters and ice rink facilities.
The cost of merchandise sold increased to $2.8 million (67% of merchandise
sales) in the 1998 period from $1.7 million (67% of merchandise sales) in the
comparable 1997 period. The overall increase in this cost of $1.1 million (68%)
was primarily due to the higher level of merchandise sales.
Selling, general and administrative expenses for the three months ended
March 31, 1998 were $1.5 million (8% of total revenue) compared to $1.1 million
(12% of total revenue) in the comparable 1997 period. The increase of $400,000
(40%) was primarily due to expenses associated with opening and operating
additional facilities. Selling, general and administrative expense declined as
a percentage of total revenue primarily due to the substantial increase in
revenue and relatively low corresponding incremental increase in certain
selling, general and administrative costs.
Interest expense increased to $1.8 million for the three months ended
March 31, 1998 from $191,000 in the comparable 1997 period. The increase in
interest expense was due to the interest expense associated with the Notes.
Other income, primarily interest income, increased to $956,000 in the 1998
period as compared to $466,000 in the 1997 period.
The Company had income before income taxes for the three months ended
March 31, 1998 of $2.2 million as compared to income of $907,000 in the
comparable 1997 period. Net income for the three months ended March 31, 1998
was $1.3 million as compared to $562,000 for the comparable 1997 period.
Twelve Months Ended December 31, 1997 Compared To Twelve Months Ended December
31, 1996
Results for the twelve months ended December 31, 1997 reflect the
operations of 27 golf centers for the full period. Eight additional golf
centers underwent significant renovation during 1997. The December 31, 1997
results also reflect the operation of 18 golf centers built or acquired during
the course of 1997. Results for the year ended December 31, 1996 reflect the
operations of 11 golf centers for the full period. Two golf centers underwent
renovation for approximately one month and one golf center underwent renovation
for approximately two months of 1996. The December 31, 1996 results also
reflect the operation of 21 golf centers built or acquired during 1996. As a
result of the change in the number of golf centers open from period to period,
the comparison between 1997 and 1996 may not necessarily be meaningful.
Total revenue for the twelve months ended December 31, 1997 was $64.8
million as compared to $27.9 million for the same period in 1996, an increase
of $36.9 million (132%). Total revenue for the 11 golf centers operating for
the full December 31, 1997 and 1996 periods increased to $20.7 million from
$15.8 million, an increase of $4.9 million (31%).
Operating revenues were $49.1 million for 1997 as compared to $21.4
million for 1996, an increase of $27.7 million (129%). The overall increase in
revenue was primarily attributable to having additional golf centers in
operation during the 1997 period, as well as revenues from non-golf operations.
Revenues from non-golf operations were $8.3 million during 1997. There were no
revenues from non-golf operations in 1996.
18
<PAGE>
Merchandise sales were $15.7 million for 1997 as compared to $6.5 million
for 1996. The increase in merchandise sales of $9.2 million (141%) was due to
the contribution of new locations to the 1997 period and the continuing
emphasis placed by the Company on improving pro shop sales, improved purchasing
procedures and increased promotion.
Operating expenses increased to $31.6 million (64% of operating revenues)
in 1997 from $13.3 million (62% of operating revenues) in 1996. The overall
increase of $18.3 million (138%) was primarily due to the operating costs of
locations that were not open for all or part of 1996. The increase as a
percentage of sales was due to a higher percentage of leased, as compared to
owned, facilities during the 1997 period.
The cost of merchandise sold increased to $10.5 million (67% of
merchandise sales) in 1997 from $4.5 million (68% of merchandise sales) in
1996. The overall increase in this cost of $6.0 million (133%) was primarily
due to the higher level of merchandise sales.
Selling, general and administrative expenses in 1997 were $5.1 million (8%
of total revenue) as compared to $3.6 million (13% of total revenue) in 1996,
an increase of $1.5 million (42%). This increase was primarily due to an
increase in corporate staff, advertising and other expenses resulting from the
increased number of golf centers operating during 1997. Selling, general and
administrative expenses declined to 8% of total revenue in 1997 from 13% of
total revenue in the 1996 period primarily due to the substantial increase in
revenues and relatively low corresponding incremental increase in certain
selling, general and administrative costs.
Interest expense increased to $2.3 million in 1997 from $370,000 million
in 1996 primarily due to the debt associated with the LCI acquisition in July
and the 1997 Note Offering in the fourth quarter of 1997. Other income,
primarily interest income, decreased to $1.7 million in 1997 from $2.2 million
in 1996. The decrease in other income is attributable to lower amounts of cash
invested in short-term investments in 1997 as compared with 1996.
The Company had income before income taxes of $17.1 million for 1997 as
compared to $8.4 million in 1996. Net income after income taxes increased to
$10.5 million in 1997 as compared to $5.2 million in 1996.
Twelve Months Ended December 31, 1996 Compared To Twelve Months Ended December
31, 1995
Results for the twelve months ended December 31, 1996 reflect the
operation of 11 golf centers for the full period. Two golf centers underwent
renovation for approximately one month and one golf center underwent renovation
for approximately two months of 1996. The December 31, 1996 results also
reflect the operation of 21 golf centers built or acquired during 1996. Results
for the year ended December 31, 1995 reflect the operations of four golf
centers for the full period, although one such golf center was undergoing
renovation for approximately four months. The December 31, 1995 results also
reflect the operations of 10 additional centers built or acquired during the
year. As a result of the change in the number of golf centers open from period
to period, the comparison between 1996 and 1995 may not necessarily be
meaningful.
Total revenue for the twelve months ended December 31, 1996 was $27.9
million as compared to $12.4 million for the same period in 1995, an increase
of $15.5 million (125%). Total revenue for the four golf centers operating for
the full December 31, 1996 and 1995 periods increased to $9.1 million from $8.0
million, an increase of 14% for the twelve months ended December 31, 1996.
Operating revenues were $21.4 million for 1996 as compared to $9.8 million
for 1995 period, an increase of $11.6 million (118%). The overall increase in
revenue was primarily attributable to having additional golf centers in
operation during the 1996 period.
Merchandise sales were $6.5 million for 1996 as compared to $2.6 million
for 1995. The increase in merchandise sales of $3.9 million (150%) was due to
the contribution of new locations to the 1996 period and the increased emphasis
placed by the Company on improving pro shop sales in the 1996 period, improved
purchasing procedures and increased promotion.
19
<PAGE>
Operating expenses increased to $13.3 million (62% of operating revenues)
in 1996 from $6.6 million (68% of operating revenues) in 1995. The overall
increase of $6.7 million (102%) was primarily due to the operating costs of
locations that were not open for all or part of 1995.
The cost of merchandise sold increased to $4.5 million (68% of merchandise
sales) in 1996 from $1.8 million (67% of merchandise sales) in 1995. The
overall increase in this cost of $2.7 million (150%) was primarily due to the
higher level of merchandise sales.
Selling, general and administrative expenses in 1996 were $3.6 million
(13% of total revenue) as compared to $1.2 million (10% of total revenue) in
1995, an increase of $2.4 million (200%), primarily due to an increase in
corporate staff, advertising and other expenses resulting from the increase in
the number of golf centers operating during 1996.
Interest expense decreased to $370,000 in 1996 from $939,000 in
1995. Other income, primarily interest income, increased to $2.2 million in
1996 from $66,000 in 1995. The increase in interest income is attributable
to the investment of proceeds from the public offerings in December 1995 and
July 1996. Also reflected in other income in 1996 is the sale of approximately
43 acres of land in Queensbury, New York for a net gain of $374,000.
The Company had income before income taxes and extraordinary items of $8.4
million for 1996 as compared to $1.9 million in 1995. The Company recognized an
extraordinary charge of $181,000 (net of taxes) in the fourth quarter of 1995.
This extraordinary item reflects the write-off of debt acquisition costs, net
of income taxes, arising from the repayment of certain bank debt using the
proceeds of the 1995 Public Offering. Net income after income taxes and
extraordinary items, increased to $5.2 million in 1996 as compared to $1.1
million in 1995.
SUPPLEMENTAL RESTATED RESULTS OF OPERATIONS
Basis of Presentation
The Company's financial statements will be restated to reflect the
accounting for the Eagle Quest Acquisition as a pooling-of-interests. The
following supplemental restated discussion and analysis compares, on a combined
basis as if the Company and Eagle Quest were one entity, the three months ended
March 31, 1998 to the three months ended March 31, 1997, the twelve months
ended December 31, 1997 to the twelve months ended December 31, 1996 and the
twelve months ended December 31, 1996 to the twelve months ended December 31,
1995.
The differences between the Company's historical results discussed above
and the supplemental 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 supplemental restated results
of operations for the Company are not necessarily indicative of the results of
operations of the combined entity in the future.
Eagle Quest began operations in February 1996 and, accordingly, the Eagle
Quest Acquisition has no impact on the results of operations for 1995. Eagle
Quest opened or acquired its facilities at varying times commencing in 1996 and
generated net losses of $885,000, $7.3 million and $3.0 million, respectively,
for the period ended December 31, 1996 and the twelve months ended December 31,
1997 and the three months ended March 31, 1998. 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.
The following discussion and analysis should be read in conjunction with
the supplemental financial statements and the notes thereto and Eagle
Quest's financial statements and the notes thereto, each appearing elsewhere in
this Prospectus.
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Three Months Ended March 31, 1998 Compared To Three Months Ended March 31, 1997
Results for the three months ended March 31, 1998 reflect the operations
of 70 golf centers for the full period and 13 golf centers for two months or
less and also include the results of four complementary sports and family
entertainment facilities for three months or less. Results for the three months
ended March 31, 1997 reflect the operations of 39 golf centers for the full
period, one golf center for two months and operations of five golf centers for
one month or less. As a result of the change in the number of golf centers open
from period to period, as well as the commencement of operations of
complementary sports and family entertainment facilities, the comparison
between the 1998 and 1997 periods may not necessarily be meaningful.
Total revenue for the three months ended March 31, 1998 was $21.5 million
as compared to $9.7 million for the same period in 1997, an increase of $11.8
million (122%). 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 Family Sports Supercenters. The
increase in revenue was also due to stronger merchandise and golf instruction
sales and a mild winter season on the east coast, partially offset by adverse
weather attributed to the El Nino effect on the west coast.
Operating revenues, consisting of all sales except merchandise sales,
amounted to $16.7 million for the three months ended March 31, 1998, as
compared to $6.9 million for the comparable 1997 period, an increase of $9.9
million (143%). The increase in operating revenues was primarily attributable
to having additional golf facilities, the Family Sports Supercenters and the
ice rinks in operation during the 1998 period. Non-golf revenue from the Family
Sports Supercenters and ice rink facilities totaled $4.9 million for the three
months ended March 31, 1998. The Company did not have non-golf revenues in the
comparable 1997 period.
Merchandise sales, consisting of golf clubs, balls, bags, gloves, videos,
apparel and related accessories, were $4.8 million for the three months ended
March 31, 1998, as compared to $2.8 million for the comparable 1997 period, an
increase of $1.9 million (68%). 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.
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 $13.8 million (82% of
operating revenues) in the 1998 period from $6.0 million (88% of operating
revenues) in the 1997 period, an increase of $7.7 million (128%). The increase
in operating expenses was primarily due to the operating costs of locations
that were not operated by the Company during the 1997 period. The decrease as a
percentage of sales was due to the counterseasonal impact of the Family Sports
Supercenters and ice rink facilities.
The cost of merchandise sold increased to $3.2 million (68% of merchandise
sales) in the 1998 period from $1.9 million (68% of merchandise sales) in the
comparable 1997 period. The overall increase in this cost of $1.3 million (68%)
was primarily due to the higher level of merchandise sales.
Selling, general and administrative expenses for the three months ended
March 31, 1998 were $3.7 million (17% of total revenue) compared to $2.3
million (24% of total revenue) in the comparable 1997 period. The increase of
$1.3 million (57%) was primarily due to expenses associated with opening and
operating additional facilities. Selling, general and administrative expenses
declined as a percentage of total revenue primarily due to the substantial
increase in revenue and relatively low corresponding incremental increase in
certain selling, general and administrative costs.
Interest expense increased to $2.6 million for the three months ended
March 31, 1998 from $308,000 in the comparable 1997 period. The increase in
interest expense was due to the interest expense associated with the Notes and
the Eagle Quest Debt. Other income, primarily interest income, increased to
$956,000 in the 1998 period as compared to $466,000 in the 1997 period.
The Company had a loss before income taxes for the three months ended
March 31, 1998 of $829,000 as compared to a loss of $442,000 in the comparable
1997 period. Net loss for the three months ended March 31, 1998 was $1.7
million as compared to a net loss of $787,000 for the comparable 1997 period.
Twelve Months Ended December 31, 1997 Compared To Twelve Months Ended December
31, 1996
Results for the twelve months ended December 31, 1997 reflect the
operations of 31 golf centers for the full period and eight golf centers that
underwent significant renovation during 1997. The Decem-
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ber 31, 1997 results also reflect the operation of an additional 31 golf
centers built or acquired during the course of 1997. Results for the year ended
December 31, 1996 reflect the operations of 14 golf centers for the full
period, two of which underwent renovation for approximately one month and one
of which underwent renovation for approximately two months of 1996. The
December 31, 1996 results also reflect the operation of 25 golf centers built
or acquired during 1996. As a result of the change in the number of golf
centers open from period to period, the comparison between 1997 and 1996 may
not necessarily be meaningful.
Total revenue for the twelve months ended December 31, 1997 was $73.0
million as compared to $28.1 million for the same period in 1996, an increase
of $44.9 million (160%).
Operating revenues were $54.6 million for 1997 as compared to $21.4
million for 1996, an increase of $33.2 million (155%). The overall increase in
revenues was primarily attributable to having additional golf centers in
operation during the 1997 period, as well as revenues from non-golf operations.
Revenues from non-golf operations were $8.3 million during 1997. There were no
revenues from non-golf operations in 1996.
Merchandise sales were $18.4 million for 1997 as compared to $6.7 million
for 1996. The increase in merchandise sales of $11.7 million (176%) was due to
the contribution of new locations to the 1997 period and the continuing
emphasis placed by the Company on improving pro shop sales, improved purchasing
procedures and increased promotion.
Operating expenses increased to $37.4 million (68% of operating revenues)
in 1997 from $13.3 million (62% of operating revenues) in 1996. The overall
increase of $24.1 million (180%) was primarily due to the operating costs of
locations that were not open for all or part of 1996. The increase as a
percentage of sales was due to a higher percentage of leased, as compared to
owned, facilities during the 1997 period.
The cost of merchandise sold increased to $12.4 million (67% of
merchandise sales) in 1997 from $4.5 million (68% of merchandise sales) in
1996. The overall increase in this cost of $7.8 million (172%) was primarily
due to the higher level of merchandise sales.
Selling, general and administrative expenses in 1997 were $12.6 million
(17% of total revenue) as compared to $4.8 million (17% of total revenue) in
1996, an increase of $7.9 million (165%). This increase was primarily due to an
increase in corporate staff, advertising and other expenses resulting from the
increased number of golf centers operating during 1997, as well as Eagle
Quest's strategy of establishing an infrastructure to operate and manage sites
in advance of the acquisition of such sites.
Interest expense increased to $3.9 million in 1997 from $383,000 in
1996 primarily due to the debt associated with the LCI acquisition in July
1997, the 1997 Note Offering in the fourth quarter of 1997 and a substantial
increase in Eagle Quest's indebtedness. Other income, primarily interest
income, decreased to $1.7 million in 1997 from $2.2 million in 1996. The
decrease in other income is attributable to lower amounts of cash invested in
short-term investments in 1997 as compared with 1996.
The Company had income before income taxes of $8.4 million for 1997 as
compared to $7.2 million in 1996. Net income after income taxes decreased to
$3.3 million in 1997 as compared to $4.3 million in 1996. Effective income tax
rates in both periods were high due to the inability to apply all of Eagle
Quest's losses for such periods to offset taxable income.
Twelve Months Ended December 31, 1996 Compared To Twelve Months Ended December
31, 1995
Results for the twelve months ended December 31, 1996 reflect the
operation of 14 golf centers for the full period, two of which underwent
renovation for approximately one month and one of which underwent renovation
for approximately two months of 1996. The December 31, 1996 results also
reflect the operation of 25 golf centers built or acquired during 1996. Results
for the year ended December 31, 1995 reflect the operations of four golf
centers for the full period, although one such golf center was undergoing
renovation for approximately four months. The December 31, 1995 results also
reflect the operations of 10 additional centers built or acquired during the
year. As a result of the change in the number of golf centers open from period
to period, the comparison between 1996 and 1995 may not necessarily be
meaningful.
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Total revenue for the twelve months ended December 31, 1996 was $28.1
million as compared to $12.4 million for the same period in 1995, an increase
of $15.6 million (126%).
Operating revenues were $21.4 million for 1996 as compared to $9.8 million
for the 1995 period, an increase of $11.6 million (118%). The overall increase
in revenues was primarily attributable to having additional golf centers in
operation during the 1996 period.
Merchandise sales were $6.7 million for 1996 as compared to $2.6 million
for 1995. The increase in merchandise sales of $4.0 million (152%) was due to
the contribution of new locations to the 1996 period and the increased emphasis
placed by the Company on improving pro shop sales in the 1996 period, improved
purchasing procedures and increased promotion.
Operating expenses increased to $13.3 million (62% of operating revenues)
in 1996 from $6.6 million (68% of operating revenues) in 1995. The overall
increase of $6.7 million (102%) was primarily due to the operating costs of
locations that were not open for all or part of 1995.
The cost of merchandise sold increased to $4.5 million (68% of merchandise
sales) in 1996 from $1.8 million (67% of merchandise sales) in 1995. The
overall increase in this cost of $2.8 million (155%) was primarily due to the
higher level of merchandise sales.
Selling, general and administrative expenses in 1996 were $4.8 million
(17% of total revenue) as compared to $1.2 million (10% of total revenue) in
1995, an increase of $3.5 million (283%), primarily due to an increase in
corporate staff, advertising and other expenses resulting from the increase in
the number of golf centers operating during 1996.
Interest expense decreased to $383,000 in 1996 from $939,000 in
1995. Other income, primarily interest income, increased to $2.2 million in
1996 from $66,000 in 1995. The increase in interest income is attributable
to the investment of proceeds from the public offerings in December 1995 and
July 1996. Also reflected in other income in 1996 is the sale of approximately
43 acres of land in Queensbury, New York for a net gain of $374,000.
The Company had income before income taxes and extraordinary items of $7.2
million for 1996 as compared to $1.9 million in 1995. The Company recognized an
extraordinary charge of $181,000 (net of taxes) in the fourth quarter of 1995.
This extraordinary item reflects the write-off of debt acquisition costs, net
of income taxes, arising from the repayment of certain bank debt using the
proceeds of the 1995 Public Offering. Net income after income taxes and
extraordinary items, increased to $4.3 million in 1996 as compared to $1.1
million in 1995.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, on a historical basis, the Company had cash, cash
equivalents and short-term investments of $9.7 million compared to $61.8
million at December 31, 1997. On a supplemental restated basis, the Company had
cash, cash equivalents and short-term investments of $10.3 million at March 31,
1998 compared to $62.3 million at December 31, 1997. The decrease was due
principally to the acquisitions of 13 facilities, including MetroGolf, since
October 31, 1997. 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 financings, as
well as cash flow from operations.
Family Golf's outstanding indebtedness as of March 31, 1998 of $147.9
million bears interest at fixed and variable rates currently ranging from 5.3%
to 15.0% per annum. During the fourth quarter of 1997, Family Golf completed
the 1997 Note Offering. 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. 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.
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On June 30, 1997, Family Golf entered into a two-year $20.0 million
secured revolving credit facility with The Chase Manhattan Bank ("Chase") which
converts to a four-year term loan in June 1999 (the "Credit Facility"). After
conversion to the term loan, the loan is to be repaid in 16 substantially equal
quarterly installments. The Company's obligations under the Credit Facility are
secured by the pledge of the stock of most of the Company's subsidiaries and
such subsidiaries have also guaranteed such obligations. At the time of each
loan under the Credit Facility, the Company may choose between an interest rate
based on the greater of (i) Chase's prime rate or the federal funds rate plus
0.5% per annum (the "Base Rate") plus 0.25% per annum or (ii) the London
Interbank Offered Rate ("LIBOR"), plus between 1.0% and 2.0% per annum
(depending on the Company's ratio of Consolidated Funded Debt to Consolidated
EBITDA (as such terms are defined in the Credit Facility)). During the term
loan, the interest rate will be increased by 0.5% per annum in the case of Base
Rate loans and 0.25% per annum in the case of LIBOR loans. The Credit Facility
contains certain restrictive covenants, including, among others, covenants
limiting liens, indebtedness, acquisitions, asset sales and investments and
covenants requiring continued compliance with certain financial tests,
including, among others, a net worth test and several financial ratios. The
Company may pay dividends as long as no event of default has occurred and is
continuing. Included among the events of default are any change of control of
the Company or if Dominic Chang should cease to be the Company's Chairman of
the Board and Chief Executive Officer or cease to own at least 5.0% of the
Company's Common Stock. As of March 31, 1998, the Company had no outstanding
borrowings under the Credit Facility and, as of June 30, 1998, outstanding
borrowings under the Credit Facility were $18.7 million. Chase has agreed that
it will lend the Company an additional $25.0 million, subject to execution of
definitive agreements, to fund the Golden Bear Acquisition. The Company is also
currently negotiating to replace the Credit Facility with a new credit facility
to increase its borrowing capacity. There can be no assurance that either the
$25.0 million loan or the new credit facility will be obtained.
In connection with the acquisition of LCI, Family Golf incurred term debt
(the "Term Debt") to refinance LCI's existing indebtedness. The principal
amount of the Term Debt ($16.4 million as of March 31, 1998) is being paid in
monthly installments through August 2002. The Company has the same interest
rate choices with respect to the Term Debt as it does with respect to the term
debt under the Credit Facility and is subject to the same operational financial
requirements. The indebtedness is secured by a mortgage lien upon the three
parcels of real property leased by LCI.
In March 1998, Family Golf entered into a loan agreement with Chinatrust
Bank providing for a $10.0 million term loan secured by a mortgage on five of
the Company's existing properties. During the drawdown period, loan proceeds
are advanced to the Company upon its request. The loan matures in April 2003
and bears interest at the prime rate less 1.0% during the drawdown period and
at the prime rate during the paydown period. As of June 30, 1998, the Company
had drawn down the full $10.0 million. The Company also obtained, in March
1998, a commitment from ORIX USA Corporation ("Orix") to provide a $10.0
million term loan secured by a mortgage on five of the Company's existing
properties. To date, the Company has not entered into a definitive loan
agreement with respect to such commitment.
The balance of Family Golf's outstanding debt of $16.5 million aggregate
principal amount as of March 31, 1998 is represented by a variety of different
debt instruments bearing interest at fixed and variable rates ranging from 5.3%
to 15.0% per annum and includes a loan in the principal amount of $2.8 million
made by Orix in May 1995, which is secured by a mortgage on certain real
estate, matures in May 2000 and bears interest at LIBOR plus 3.5% per annum, a
mortgage payable in the principal amount of $1.7 million, bearing interest at
5.3% per annum and maturing in March 2001, a Small Business term loan in the
principal amount of $720,000, bearing interest at 7.3% per annum and payable in
monthly installments through August 2016 and a mortgage payable in the
principal amount of $3.7 million, bearing interest at 9.9% per annum and
payable in monthly installments through November 2009.
Subsequent to March 31, 1998, Family Golf's indebtedness has not changed
substantially other than to reflect the borrowings under the Credit Facility
and from Chinatrust Bank, the amortization of indebtedness in accordance with
its terms and the consummation of the Eagle Quest Acquisition.
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If the Eagle Quest Acquisition had been consummated as of March 31, 1998,
Family Golf's indebtedness would have increased by approximately $26.3 million
(all of which the Company currently plans to repay with a portion of the net
proceeds of the Offering) and its contingent obligations would have increased
by approximately $1.3 million. Such indebtedness is represented by a variety of
different debt instruments bearing interest at fixed and variable rates ranging
from 6.0% to 42.0% per annum and includes a loan in the principal amount of
approximately $10.9 million made by NationsCredit Commercial Corporation in
August 1997, which matures in September 2002 and bears interest at LIBOR plus
4.0% per annum, LIBOR plus 3.75% per annum, or the Commercial Paper Rate plus
4.0% per annum, as applicable from time to time, under the terms of the loan.
See "Use of Proceeds" for a description of the balance of the Eagle Quest Debt.
If the Golden Bear Acquisition had been consummated as of March 31, 1998,
the Company's indebtedness and capital lease obligations would have increased
by approximately $11.7 million, approximately $2.7 million of which is to be
paid prior to or at the closing of the Golden Bear Acquisition. The remaining
$9.0 million of such indebtedness and capital lease obligations are represented
by a variety of different debt instruments and leases bearing interest or with
imputed interest at fixed and variable rates and includes (i) a $1.6 million
note payable to financial institution due in monthly principal installments of
$10,000 plus interest at prime plus 0.8%, with a balloon payment due August
2003, (ii) $3.7 million of notes payable to sellers of golf centers bearing
interest ranging from 8% to prime plus 1.3% maturing through June 2004, (iii)
$3.3 million of capital lease obligations secured by certain golf center
facility assets maturing through April 2025, (iv) a $392,000 deferred profit
participation obligation discounted at an effective rate of 9.0% maturing
December, 2006, and (v) a $2.7 million revolving credit facility with a bank,
payable quarterly, bearing interest at prime due August 26, 1998 and to be paid
by GBGI prior to or at the consummation of the Golden Bear Acquisition.
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. The
Company currently plans to spend an aggregate $16.0 million over the next 18
months to convert one of its existing golf centers to a Family Sports
Supercenter and to construct one additional Family Sports Supercenter. 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, principally location. To the extent that the
Company acquires any golf courses, the Company may be required to make capital
improvements to these courses, depending upon the location and status of the
acquired property. The cost of facility acquisition depends, to a large extent,
upon the price of the land and may substantially exceed the anticipated cost of
facility acquisitions.
EFFECT OF RECENTLY ACQUIRED FACILITIES AND EFFECT OF PENDING GOLDEN BEAR
ACQUISITION
Restated to reflect the Eagle Quest Acquisition, and after giving effect on
a pro forma basis to certain other acquisitions consummated after January 1,
1997 (collectively, the "1997 - 1998 Acquisitions") as if they had occurred on
January 1, 1997, the Company had net income of $445,000 (as compared to net
income of $3.3 million on a supplemental restated basis to include the
operations of Eagle Quest) for the year ended December 31, 1997 and a net loss
of $2.2 million (as compared to a net loss of $1.7 million on such supplemental
restated basis) for the three months ended March 31, 1998. Restated to reflect
the Eagle Quest Acquisition and after giving effect on a pro forma basis to the
1997 - 1998 Acquisitions and
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the pending Golden Bear Acquisition as if they had occurred on January 1,
1997, the Company had a net loss of $5.2 million (as compared to net income of
$3.3 million on a supplemental restated basis to include the operations of
Eagle Quest) for the year ended December 31, 1997 and a net loss of $3.6
million (as compared to a net loss of $1.7 million on such supplemental
restated basis) for the three months ended March 31, 1998. Although newly
acquired facilities have adversely affected income on a pro forma basis in the
past and may adversely affect income on a pro forma basis in the future and
although consummation of the pending Golden Bear Acquisition will adversely
affect income on a pro forma basis, the Company believes that it will be able
to enhance the performance of such facilities by adding amenities and other
improvements and centralizing key functions as described in "Business --
Business Strategy." There can be no assurance, however, that the Company will
be able to improve the performance of newly-acquired facilities. See "Risk
Factors -- Acquisition and Growth Strategy; Risks Associated With Integrating
New Facilities," "-- Certain Factors Related to Eagle Quest" and "-- Certain
Factors Related to Golden Bear."
SEASONALITY
Historically, the second and third quarters of the calendar year have
accounted for a greater portion of the Company's operating income 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
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, South Carolina, Texas and Virginia)
where inclement weather may not limit the outdoor playing season as much as
such weather limits the outdoor playing season at the Company's golf facilities
in less temperate climates. In addition, the ice rink facilities and the Family
Sports Supercenters are expected to generate a substantial portion of their
revenues in the first and fourth quarters of the calendar year 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for separating and
displaying comprehensive income and its components (revenue, expenses, gains
and losses) in a full set of general-purpose financial statements. SFAS No. 131
establishes standards for separating selected segment information quarterly and
to report entity-wide disclosures about products and services, geographic areas
and major customers. In February 1998, the Financial Accounting Standards Board
issued SFAS No. 132, "Employer's Disclosures about Pensions and Other Post
Retirement Benefits." These statements are effective for fiscal years beginning
after December 15, 1997. The Company believes that SFAS Nos. 130, 131 and 132
will not have a significant effect on the information presented in the
financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" ("SOP"). The SOP is effective for financial statements for fiscal
years beginning after December 15, 1998 with earlier application allowable in
fiscal years for which annual statements have not been issued. The effects of
the initial application of this SOP will be reported as the cumulative effect
of a change in accounting principles. If this SOP had been adopted effective
January 1, 1998, the cumulative effect of the change would result in a charge
for the year ending December 31, 1998 of $1.7 million, net of related tax
benefit.
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INFLATION
There was no significant impact on the Company's operations as a result of
inflation during 1995, 1996, 1997 or the three months ended March 31, 1998.
YEAR 2000 ISSUES
Certain of the Company's computer systems and software interpret the year
2000 as the year 1980 or some other date. The operating systems generally
employed by the Company include Windows 95, Windows NT and Novell NetWare, all
of which are Year 2000 compliant. The networking, general ledger and accounts
payable, facility point-of-sale and pro shop software programs require software
updates or modifications to address the Year 2000 problem. DMS, Inc., which
provides certain of the Company's software and systems under contract,
particularly the general ledger and accounts payable software programs, will be
installing modifications to address the Year 2000 issue at no charge to the
Company. The Company is further addressing the matter by replacing certain
older computers and installing off-the-shelf and other third-party software
that is Year 2000 compliant, at an estimated cost of less than $50,000. The
Company anticipates that installation of Year 2000 compliant software and
hardware will be completed by the end of 1998. The Company does not believe
that the Year 2000 problem will have a material adverse effect on the Company's
operations, however, no assurance can be given that the software updates and
new computers will resolve the problem on the contemplated schedule or at all.
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BUSINESS
Family Golf is the leading consolidator and operator of golf centers in
North America. The Company's golf centers provide a wide variety of practice
and play opportunities, including facilities for driving, chipping, putting,
pitching and sand play. 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 97 as of July 1, 1998, including 11 facilities under
construction. The consummation of the pending Golden Bear Aquisition, of which
there can be no assurance, would add 14 golf facilities In addition, the
Company has increased total revenue from $6.4 million in 1994 to $75.0 million
for the twelve months ended March 31, 1998.
BUSINESS STRATEGY
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 as follows:
o Consolidation of Golf Centers. The Company intends to continue to
consolidate the golf center industry by (i) identifying and acquiring
well-located, underperforming ranges that have the potential for
improvement through better management and facility enhancements and (ii)
building new centers in demographically attractive locations where
suitable acquisition opportunities are not available. The Company
currently operates in 24 of the top 30 MSAs in the United States and
intends to focus its consolidation efforts on extending its operations
into the top 30 MSAs in which it currently does not operate. The
consummation of the pending Golden Bear Aquisition, would add an
additional three of the top 30 MSAs in which the Company currently does
not operate.
o Facility and Service Enhancement. The Company typically initiates a
capital improvement plan after each acquisition to broaden the scope of
services and products offered. Such improvements have historically
increased revenues and improved operating performance at the golf
centers. Improvements may include enclosing, heating or lighting play
areas to lengthen the season and hours of operation, adding tiers of
hitting tees, offering lessons from PGA-certified golf professionals and
adding amenities, such as batting cages, miniature golf, restaurants,
snack bars and video games, designed to appeal to the whole family,
generate additional revenue and increase the frequency and duration of
facility visitation. The Company believes that the quality of its
facilities and its emphasis on customer service differentiate the Company
from its competitors.
o Development of Complementary Sports and Family Entertainment Facilities.
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 strategy, skills and resources it
has used in the golf center industry to capitalize on such similarities
by selectively acquiring and enhancing, or constructing, ice rinks. In
addition, the Company expects to 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 the
Company's concept of family-oriented sports entertainment, adds
additional sources of revenue, attracts a more diverse customer base,
increases visitation and per capita spending and has the added benefit of
being counterseasonal to the Company's core golf business.
o Leverage Centralized Operations. All purchasing, accounting, insurance,
cash management, finance and human resource functions are managed
centrally at the Company's headquarters. Centralization improves facility
performance by reducing expenses and administrative burdens,
28
<PAGE>
allowing management to focus on customer service and facility operations.
In addition, each facility receives the benefits of the Company's
purchasing power, enabling it to take advantage of quantity discounts on
merchandise sold through its pro shops and equipment used at its
facilities.
RECENT DEVELOPMENTS
Eagle Quest Acquisition. On June 30, 1998, the Company acquired Eagle
Quest for 1,384,735 shares of the Company's Common Stock, subject to certain
post-closing adjustments. The Company believes that Eagle Quest, is the second
largest operator of golf driving ranges in North America, with 20 golf centers
(including two under construction) in Texas, Washington and Canada.
Golden Bear Acquisition. On June 16, 1998, the Company entered into an
agreement to acquire Golden Bear. The Company believes that Golden Bear is the
third largest operator of golf driving ranges in North America with 14 golf
centers. The transaction is subject to a number of conditions, including
receipt of certain regulatory approvals and consents. See "-- Golden Bear."
MetroGolf Acquisition. In February 1998, the Company acquired MetroGolf
pursuant to a cash tender followed by a merger. MetroGolf is the operator of
eight golf facilities in California, Colorado, Illinois, New York and Virginia.
Other. Since January 1, 1998, the Company also (i) acquired Blue Eagle,
the operator of three golf facilities in Kansas and Florida; (ii) acquired an
ice rink facility in Raleigh, North Carolina; (iii) acquired golf facilities in
Holbrook, Massachusetts and Carlsbad, California; (iv) signed a long-term lease
to construct and operate two NHL regulation-size ice rinks and a family
entertainment center in New Rochelle, New York and (v) entered into an
agreement with the Township of Woodbridge, New Jersey to lease, construct and
operate an ice rink facility with two sheets of ice and a family entertainment
center.
THE GOLF FACILITIES
According to the NGF, there were approximately 27 million golfers in the
United States in 1997, an increase of 7% from 1996. This growth was primarily
attributable to a 51% increase in the number of beginning golfers to an
estimated 3.0 million, as well as a 34% increase in the number of junior
golfers to an estimated 2.4 million. In addition, the GRRAA estimates that in
1997 there were approximately 2,200 stand-alone driving ranges in the United
States, of which 83% were independently owned and operated. The Company
believes that the large size and highly fragmented nature of the golf center
industry, combined with the lack of experience, expertise and financial
resources of the existing owner-operators, present significant opportunities
for the Company to continue acquiring, upgrading and renovating golf centers.
The Company's golf centers are typically larger, more attractive and offer
more amenities than the average golf center. The Company believes that it
attracts customers to its golf centers due to the quality, convenience and
comfort of its facilities and their appeal to the whole family. The golf
centers are designed to provide a wide variety of practice opportunities,
including facilities for driving, chipping, putting, pitching and sand play,
and typically offer full-line pro shops, golf lessons instructed by
PGA-certified golf professionals and other amenities to encourage family
participation. They are designed around a driving range with target greens,
bunkers and sand traps to simulate golf course conditions. Generally, the
Company's ranges are lighted to permit night play and the hitting tees are
enclosed or sheltered from above and from the rear in a climate-controlled
environment. In certain cases, all or a portion of the range is enclosed under
an air inflated dome to permit all-weather play. There are approximately 80 to
100 hitting tees in facilities with the two-tier design and approximately 30 to
60 hitting tees at smaller golf centers. In addition to a driving range, the
Company's golf centers typically include a number of amenities designed to
appeal to golfers and their families, such as a 4,000-6,000 square foot
clubhouse (including a full-line pro shop, locker facilities, a restaurant or
snack bar and video games), PGA-certified golf instructors, landscaped 18-hole
miniature golf courses and a short game practice area
29
<PAGE>
(including putting green and sand traps). The Company's instructional
facilities include the Colbert-Ballard Golf School and the Golf Academy of
Hilton Head, Inc., which operates a golf school and designs and manages
corporate golf events. The Company's pro shops are stocked with clubs, bags,
shoes, apparel and videos and related accessories from a number of suppliers,
including brand-name manufacturers such as Nike Corporation, Callaway Golf
Company, Karsten Manufacturing Corporation (Ping), Tommy Armour Golf, Wilson
Golf Company, Mizuno Golf Company, Spalding Sports Worldwide, Titleist and
Footjoy Worldwide (Divisions of Fortune Brand, Inc.), Ashworth Clothing Company
and Nicklaus Golf Equipment Company. The Company also sells private label
products at its pro shops, including balls, gloves and other merchandise
bearing the Company's logo. In December 1997, the Company acquired Confidence
Golf, Inc., a designer and assembler of premium-grade golf clubs. Confidence
golf clubs are sold at the Company's golf facilities as well as independent pro
shops and retailers. In some limited instances, as with certain plastic golf
shoe spikes, the Company acts as a distributor of golf merchandise both to its
facilities and to non-affiliated third parties.
As of July 1, 1998, the Company operated four regulation 18-hole golf
courses and 25 par-3 or executive golf courses (excluding one golf course
operated by Golden Bear). The Company is also currently constructing one 9-hole
executive golf course. Most of the courses have a clubhouse, a pro shop, a
driving range and PGA-certified golf instructors on site and banquet facilities
or a restaurant.
As of July 1, 1998, the Company owned, leased or managed 97 golf
facilities in 21 states, 11 of which are under construction. Set forth below is
information concerning each of the Company's locations in operation:
<TABLE>
<CAPTION>
SIZE OF
NO. OF PROPERTY
HITTING (APPROXIMATE PGA-CERTIFIED PRO
LOCATION OF FACILITY TEES ACRES) INSTRUCTORS SHOP
- ------------------------ --------- -------------- --------------- ------
<S> <C> <C> <C> <C>
Farmingdale, NY(2) ..... 80 13 [X] [X]
Wayne, NJ(2) ........... 80 16 [X] [X]
Douglaston, NY(2) ...... 70 12 [X] [X]
Elmsford, NY(2) ........ 80 27 [X] [X]
Utica, NY .............. 60 18 [X] [X]
Clay, NY(2) ............ 132 23 [X] [X]
Queensbury, NY ......... 40 200 [X] [X]
Greenville, SC ......... 100 24 [X] [X]
Glen Allen, VA ......... 50 10 [X] [X]
Duluth, GA ............. 60 56 [X] [X]
Alpharetta GA .......... 60 26 [X] [X]
El Segundo, CA(2) ...... 58 28 [X] [X]
Gilroy, CA ............. 20 36 [X] [X]
Valley View, OH ........ 130 19 [X] [X]
Henrietta, NY(2) ....... 132 28 [X] [X]
Mesa, AZ ............... 80 39 [X] [X]
Virginia Beach, VA ..... 36 81 [X] [X]
Flemington, NJ ......... 67 17 [X] [X]
Yorktown Heights, NY 54 14 [X] [X]
Indian River, VA ....... 60 14 [X] [X]
Tucson, AZ ............. 50 18 [X] [X]
Fairfield, OH .......... 68 24 [X] [X]
St. Louis, MO .......... 100 42 [X] [X]
West Palm Beach, FL .... 40 32 [X] [X]
Alviso, CA ............. 100 25 [X] [X]
Westminster, CA ........ 71 17 [X] [X]
Denver, CO ............. 65 20 [X] [X]
Englewood, CO .......... 100 36 [X] [X]
Fountain Inn, SC ....... 20 283 [X] [X]
Flanders, NJ ........... 80 25 [X] [X]
Glen Burnie, MD ........ 50 38 [X] [X]
South Easton, MA ....... 50 70 [X] [X]
Margate, FL ............ 80 14 [X] [X]
Milwaukee, WI .......... 114 65 [X] [X]
Mainville, OH .......... 140 32 [X] [X]
Palm Desert, CA ........ 100 17 [X] [X]
Raleigh, NC ............ 86 20 [X] [X]
Mahwah, NJ ............. 35 14 [X] [X]
Randall's Island, NY ... 106 20 [X] [X]
<CAPTION>
OWNED, DATE
GOLF MINIATURE LEASED OPENED
LOCATION OF FACILITY COURSE GOLF COURSES OR MANAGED OR ACQUIRED(1)
- ------------------------ --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Farmingdale, NY(2) ..... -- one Leased March 1992
Wayne, NJ(2) ........... -- two Leased July 1993
Douglaston, NY(2) ...... -- two Managed(3) Dec. 1993
Elmsford, NY(2) ........ -- two Leased July 1994
Utica, NY .............. -- one Leased Dec. 1994
Clay, NY(2) ............ -- one Leased Jan. 1995
Queensbury, NY ......... 18-hole -- Owned May 1995
Greenville, SC ......... -- one Owned May 1995
Glen Allen, VA ......... -- one Owned Aug. 1995
Duluth, GA ............. 18-hole par-3 one Owned Aug. 1995
Alpharetta GA .......... -- two Owned Aug. 1995
El Segundo, CA(2) ...... 9-hole par-3 -- Managed(5) Nov. 1995
Gilroy, CA ............. 9-hole par-3 -- Leased Nov. 1995
Valley View, OH ........ -- one Owned/Leased Nov. 1995
Henrietta, NY(2) ....... -- one Owned/Leased Jan. 1996
Mesa, AZ ............... 9-hole par-3 -- Owned Feb. 1996
Virginia Beach, VA ..... 18-hole exec. -- Leased March 1996
Flemington, NJ ......... -- two Owned March 1996
Yorktown Heights, NY -- one Owned April 1996
Indian River, VA ....... -- one Leased May 1996
Tucson, AZ ............. -- one Owned June 1996
Fairfield, OH .......... -- one Leased June 1996
St. Louis, MO .......... 9-hole par-3 one Leased June 1996
West Palm Beach, FL .... 9-hole par-3 one Owned June 1996
Alviso, CA ............. -- one Leased July 1996
Westminster, CA ........ -- one Leased July 1996
Denver, CO ............. -- three Managed(6) July 1996
Englewood, CO .......... 9-hole exec. two Leased Aug. 1996
Fountain Inn, SC ....... 27-hole exec. -- Owned Aug. 1996
Flanders, NJ ........... -- two Owned Aug. 1996
Glen Burnie, MD ........ -- two Leased Sept. 1996
South Easton, MA ....... -- one Owned Sept. 1996
Margate, FL ............ -- one Owned Oct. 1996
Milwaukee, WI .......... -- one Owned Nov. 1996
Mainville, OH .......... -- two Owned Dec. 1996
Palm Desert, CA ........ -- -- Leased Feb. 1997
Raleigh, NC ............ -- one Leased March 1997
Mahwah, NJ ............. -- -- Managed(7) March 1997
Randall's Island, NY ... -- one Managed(8) March 1997
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
SIZE OF
NO. OF PROPERTY
HITTING (APPROXIMATE PGA-CERTIFIED PRO
LOCATION OF FACILITY TEES ACRES) INSTRUCTORS SHOP
- -------------------------- --------- -------------- --------------- ------
<S> <C> <C> <C> <C>
Olney, MD ................ 20 150 [X] [X]
Green Oaks, TX ........... 45 29 [X] [X]
Rio Salado, AZ ........... 50 70 [X] [X]
San Bruno, CA ............ 74 15 [X] [X]
Southampton, PA .......... 50 12 [X] [X]
Milpitas, CA ............. 46 16 [X] [X]
Carver, MA ............... 36 19 [X] [X]
Palm Royale, CA .......... -- 25 [X] [X]
Lake Grove, NY ........... 40 54 [X] [X]
Commack, NY .............. 120 18 [X] [X]
Seattle, WA .............. 80 40 [X] [X]
Greenville, SC ........... -- 29 [X] [X]
Warrenville, IL .......... 140 59 [X] [X]
Elk Grove, CA ............ 46 20 [X] [X]
Kansas City, KS .......... 80 25 [X] [X]
Wichita, KS .............. 80 25 [X] [X]
Stuart, FL ............... 50 26 [X] [X]
Colorado Springs, CO ..... 70 24 [X] --
Chicago, IL .............. 92 23 [X] [X]
Fremont, CA .............. 36 50 [X] [X]
Palms, CA ................ 42 13 [X] [X]
Leesburg, VA ............. -- 150 [X] [X]
Rocky Point, NY .......... 70 17 [X] [X]
San Diego, CA ............ 80 5 [X] [X]
Suisun, CA ............... 40 20 [X] [X]
Holbrook, MA ............. 80 77 -- --
Carlsbad, CA ............. 57 12 [X] [X]
Overland Park, CO ........ 40 150 [X] [X]
Evergreen, CO ............ -- 93 [X] [X]
Nanaimo, BC(13) .......... 22 35 [X] [X]
Kelowna, BC(13) .......... 40 13 [X] [X]
Kent, WA(13) ............. 91 13 [X] [X]
Tacoma, WA(13) ........... 55 15 [X] [X]
Vancouver, BC(13) ........ 80 57 [X] [X]
Austin, TX(13) ........... 75 25 [X] [X]
Dallas, TX(13) ........... 55 27 [X] [X]
Houston, TX(13) .......... 121 25 [X] [X]
Kingwood, TX(13) ......... 50 65 [X] [X]
San Antonio, TX(13) ...... 50 25 [X] [X]
Olympia, WA(13) .......... 90 35 [X] [X]
Tumwater, WA(13) ......... 28 36 [X] [X]
San Antonio, TX(13) ...... 100 12 [X] [X]
Fort Worth, TX(13) ....... 70 52 [X] [X]
Calgary, AB(13) .......... 50 2 [X] --
Fort Worth, TX(13) ....... 35 23 -- --
Houston, TX(13) .......... 44 20 [X] [X]
Calgary, AB(13) .......... 30 96 [X] [X]
<CAPTION>
OWNED, DATE
GOLF MINIATURE LEASED OPENED
LOCATION OF FACILITY COURSE GOLF COURSES OR MANAGED OR ACQUIRED(1)
- -------------------------- ----------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Olney, MD ................ 18-hole -- Leased March 1997
Green Oaks, TX ........... -- one Leased March 1997
Rio Salado, AZ ........... 9-hole exec. -- Leased April 1997
San Bruno, CA ............ -- -- Leased April 1997
Southampton, PA .......... -- one Owned June 1997
Milpitas, CA ............. -- one Leased June 1997
Carver, MA ............... -- one Leased June 1997
Palm Royale, CA .......... 18-hole par-3 -- Owned June 1997
Lake Grove, NY ........... 18-hole exec. -- Leased July 1997
Commack, NY .............. -- one(4) Leased Sept. 1997
Seattle, WA .............. 9-hole par-3 one Managed(9) Oct. 1997
Greenville, SC ........... 18-hole par-3 -- Leased Oct. 1997
Warrenville, IL .......... -- -- Leased Dec. 1997
Elk Grove, CA ............ -- -- Owned (10) Dec. 1997
Kansas City, KS .......... -- two Owned Feb. 1998
Wichita, KS .............. -- one Owned Feb. 1998
Stuart, FL ............... 9-hole par-3 one Leased Feb. 1998
Colorado Springs, CO ..... -- one Owned Feb. 1998
Chicago, IL .............. 9-hole par-3 -- Leased Feb. 1998
Fremont, CA .............. 9-hole exec.(4) -- Leased Feb. 1998
Palms, CA ................ -- -- Leased Feb. 1998
Leesburg, VA ............. 18-hole -- Owned Feb. 1998
Rocky Point, NY .......... -- -- Leased Feb. 1998
San Diego, CA ............ -- -- Leased Feb. 1998
Suisun, CA ............... -- -- Owned Feb. 1998
Holbrook, MA ............. -- -- Owned Feb. 1998
Carlsbad, CA ............. -- -- Owned April 1998
Overland Park, CO ........ 18-hole one Leased(11) May 1998
Evergreen, CO ............ 18-hole exec. one Leased(12) May 1998
Nanaimo, BC(13) .......... 9-hole par 3 -- Owned Oct. 1996
Kelowna, BC(13) .......... -- -- Leased Nov. 1996
Kent, WA(13) ............. -- -- Owned Jan. 1997
Tacoma, WA(13) ........... -- -- Owned Jan. 1997
Vancouver, BC(13) ........ 18-hole exec -- Leased May 1997
Austin, TX(13) ........... -- -- Leased June 1997
Dallas, TX(13) ........... 4-hole par-3 [X] Leased June 1997
Houston, TX(13) .......... -- -- Leased June 1997
Kingwood, TX(13) ......... 9-hole par-3 -- Leased June 1997
San Antonio, TX(13) ...... -- -- Leased June 1997
Olympia, WA(13) .......... 3-hole -- Leased June 1997
practice
Tumwater, WA(13) ......... 9-hole exec. -- Leased June 1997
San Antonio, TX(13) ...... -- -- Leased Aug. 1997
Fort Worth, TX(13) ....... -- -- Owned Sept. 1997
Calgary, AB(13) .......... -- -- Leased Nov. 1997
Fort Worth, TX(13) ....... -- -- Leased Dec. 1997
Houston, TX(13) .......... -- -- Leased Dec. 1997
Calgary, AB(13) .......... 18-hole exec. -- Owned March 1998
</TABLE>
- ----------
(1) Represents the first month that the facility generated revenue for the
Company.
(2) Facility is operated under the name "Golden Bear" pursuant to a
non-exclusive license agreement with Golden Bear Golf Centers, Inc. See
"-- Golden Bear."
(3) The Company operates the facility pursuant to a concession license with
the City of New York. The concession license terminates on December 31,
2006, but is terminable by the City of New York at will.
(4) Under development.
(5) The Company manages the facility pursuant to a management agreement with
the City of El Segundo, California. This management agreement terminates
on February 14, 1999.
(6) The Company operates the facility pursuant to a concession license with
the City and County of Denver. This concession license terminates on
December 31, 2009.
(7) The Company operates the facility pursuant to a concession license with
the County of Bergen. This concession license terminates on November 21,
2009.
(8) The Company operates the facility pursuant to a concession license with
the City of New York. This concession license terminates on March 1,
2007, but is terminable by the City of New York at will.
31
<PAGE>
(9) The Company operates the facility pursuant to an operating agreement with
the City of Seattle. This operating agreement terminates on December 31,
2021 with a five-year option to extend exercisable by either party.
(10) The Company purchased the land from its previous lessor in February 1998.
(11) The Company leases the facility pursuant to a concession license with the
County of Denver. This concession license terminates on April 30, 2013.
(12) The Company leases the facility pursuant to a concession license with the
County of Denver. This concession license terminates on December 31,
2008.
(13) The Company acquired such facility on June 30, 1998 as part of the Eagle
Quest Acquisition. Information as to the date opened or acquired
indicates the date on which such facility was opened or acquired by Eagle
Quest. Instructors at Eagle Quest's facilities in Canada may be certified
by the Canadian Professional Golf Association rather than the PGA.
Seven of the facilities referred to above are operated under the name
"Golden Bear" pursuant to the License Agreement with the Licensor. Under the
License Agreement, the Company is licensed to use the trademark "Golden Bear"
and related trademarks and trade names in the operation of certain of its golf
facilities. The License Agreement is non-exclusive and the Company does not
have the right to open additional Golden Bear golf centers. The License
Agreement expires in August 2002, subject to earlier termination under certain
circumstances. Unless terminated by written notice 90 days prior to the end of
its initial term or renewal term, as the case may be, it will be automatically
extended for additional five-year periods. The License Agreement is also
terminable if the directors of the Company as of September 1995 (each of whom
is still a director of the Company), at any time constitute less than 50% of
the Company's directors. The Company pays the Licensor an ongoing royalty fee
or a flat fee, subject to a minimum guaranteed royalty of at least $50,000 per
year per site. For two of the sites, the Company pays a fixed annual fee
ranging between $35,000 and $45,000, however, at one of such sites this amount
is subject to increase for increases in the consumer price index. If the Golden
Bear Acquisition is consummated, of which there can be no assurance, the
License Agreement will be terminated and replaced by the New License Agreement.
For a description of the New License Agreement, see "Golden Bear" below.
The Company currently has 11 golf centers under development. These
facilities are located in Bronx, New York; Brooklyn, New York; New York City,
New York; Federal Way, Washington; Columbus, Ohio; Shelton, Connecticut; County
Line, Colorado, Green Valley Ranch, Colorado, Broward County, Florida, Tacoma,
Washington, and Coquitlan, British Columbia. The Company expects to have all of
these facilities operational by the end of 1998, except for the New York City
facility which is to be located on top of the Port Authority Bus Terminal and
is expected to be operational by June 1999, the Tacoma, Washington and
Coquitlan, British Columbia facilities which are expected to be operational by
March 31, 1999, and the Green Valley Ranch facility which is expected to be
operational by December 31, 1999.
32
<PAGE>
In addition, Golden Bear, which will become a wholly-owned subsidiary of
the Company upon consummation of the Golden Bear Acquisition, currently owns or
leases 14 golf centers in the United States. Set forth below is information
concerning each of the locations operated by Golden Bear.
<TABLE>
<CAPTION>
SIZE OF
NO. OF PROPERTY
HITTING (APPROXIMATE PGA-CERTIFIED PRO
LOCATION OF FACILITY TEES ACRES) INSTRUCTORS(1) SHOP
- -------------------------- --------- -------------- ---------------- ------------
<S> <C> <C> <C> <C>
Monroeville, PA .......... 107 27 [X] [X]
Bethel Park, PA .......... 110 27 [X] [X]
Toms River, NJ ........... 48 7 [X] [X]
Dayton, OH ............... 70 48 [X] [X]
Columbus, OH ............. 130 33 [X] [X]
N Lauderdale, FL ......... 40 18 [X] [X]
Carrollton, TX ........... 65 22 [X] [X]
Moreno Valley, CA ........ 60 17 [X] [X]
Portland, OR ............. 60 20 [X] [X]
Lake Park, FL ............ 55 28 [X] [X]
Royal Oak, MI ............ 74 13 [X] leased to
third party
College Park, MD ......... 70 21 [X] [X]
Plymouth, MI ............. 115 42 [X] --
Williamsville, NY ........ 60 16 [X] --
<CAPTION>
MINIATURE DATE
GOLF GOLF OWNED OR OPENED
LOCATION OF FACILITY COURSE COURSES LEASED OR ACQUIRED(1)
- -------------------------- ----------------- ----------- ---------- ---------------
<S> <C> <C> <C> <C>
Monroeville, PA .......... -- one Leased April 1996
Bethel Park, PA .......... -- one Owned June 1996
Toms River, NJ ........... -- -- Leased May 1996
Dayton, OH ............... 18-hole exec. one Leased Sept. 1996
Columbus, OH ............. -- one Leased Sept. 1996
N Lauderdale, FL ......... -- one Leased Nov. 1996
Carrollton, TX ........... -- one Leased Sept. 1996
Moreno Valley, CA ........ -- -- Leased Sept. 1996
Portland, OR ............. -- one Leased Jan. 1997
Lake Park, FL ............ 18-hole putting one Leased Jan. 1997
course
Royal Oak, MI ............ -- one Leased Jan. 1997
College Park, MD ......... -- two Leased July 1997
Plymouth, MI ............. 18-hole exec. two Leased Feb. 1997
Williamsville, NY ........ -- -- Leased March 1997
</TABLE>
- ----------
(1) Represents the first month such facility generated revenue for Golden
Bear.
COMPLEMENTARY SPORTS AND FAMILY ENTERTAINMENT FACILITIES
In order to generate additional sources of revenue, attract a more diverse
customer base and offset the seasonality of its core golf business, the Company
has acquired and begun operating complementary sports and family entertainment
facilities, including ice rinks and Family Sports Supercenters. The Company is
applying the strategy, skills and resources it has used in the golf center
industry by selectively acquiring and enhancing, or constructing, such
facilities. The Company currently operates two stand-alone ice rink facilities
and two Family Sports Supercenters and is converting a golf center in Denver,
Colorado into a Family Sports Supercenter by adding two ice rinks and other
family entertainment amenities.
According to the NHL, there are approximately 2,200 ice facilities in the
United States and approximately 5,500 in Canada. In addition, according to the
National Sporting Goods Association, there are 7.4 million ice skaters in the
United States. Furthermore, USA Hockey, a national hockey association,
registered 384,779 hockey players in the 1996-97 season, a 97.2% increase over
the 1990-1991 season. The Company believes that the relatively small number of
ice rinks in the United States and increasing interest in ice-related sports
will create a need for additional facilities. The Company also believes that
interest in hockey is increasing as a result of recent NHL expansion.
The Company anticipates that its ice rink facilities will typically be
designed with the rinks as the main attraction, but with amenities at the
facility to provide family entertainment and generate additional revenues. Such
amenities include a pro shop, video games, a supervised play area for young
children, restaurants and snack bars. The pro shops are stocked with skates,
hockey sticks, jerseys, protective equipment such as helmets and pads and other
skating, hockey and figure skating-related items. The Company generates
revenues at its ice rink facilities by renting the rinks to hockey leagues,
teams and figure skaters, charging admission to its skating facilities for
public skating, providing lessons through USFSA-certified instructors, skate
and equipment rentals and pro shop sales. The Company also generates revenues
from food and beverage sales, video games and birthday and private party
rentals.
In addition to making capital improvements designed to add
revenue-generating amenities, the Company may also make capital expenditures to
improve overall attractiveness of its ice rink facilities and upgrade equipment
to improve efficiency and reduce operating expenses, such as utility costs. In
those instances where the land available to the Company permits and the
demographics are favorable, the Company may add ice rinks and other amenities
to existing golf centers (or vice versa) and make additional improvements to
convert such facilities to Family Sports Supercenters.
33
<PAGE>
As of July 1, 1998, the Company owned or leased four complementary sports
and family entertainment facilities in three states. Set forth below is
information concerning each of them:
<TABLE>
<CAPTION>
SIZE OF
NO. OF FAMILY FACILITY DATE
LOCATION OF GOLF SHEETS ENTERTAINMENT (SQUARE PRO CERTIFIED OWNED OR OPENED OR
FACILITY FACILITIES OF ICE CENTER FOOTAGE) SHOP INSTRUCTORS OTHER LEASED ACQUIRED(1)
- ------------- --------------- -------- --------------- ---------- -------- ------------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lake Grove,
NY (2) ..... Golf center 1 [X] 170,000 [X](3) [X](3) Bowling and Leased July 1997
and executive Banquet
golf course Facilities
Syosset, NY.. -- 2 -- 47,000 [X] [X] -- Leased Sept. 1997
Evendale,
OH (2) ..... -- 2 [X] 160,000 [X] [X] Soccer and Owned Nov. 1997
Banquet
Facilities
Raleigh, NC.. -- 1 [X] 38,000 [X] [X] -- Leased Feb. 1998
</TABLE>
- ----------
(1) Represents the first month that the facility generated revenue for the
Company.
(2) Constitutes a Family Sports Supercenter.
(3) The facility includes certified instructors and pro shops for both golf
and ice. See chart under "-- The Golf Facilities."
The Company acquired its first ice rink in July 1997 as part of its
acquisition of LCI. In September 1997, the Company acquired a 47,000 square
foot skating facility in Syosset, New York, which has a NHL regulation-size ice
rink and an additional half rink, as well as a pro shop and snack bar. It is
used as a practice facility by the NHL's New York Islanders. In December 1997,
the Company acquired an indoor family sports and entertainment center, located
in Evendale, Ohio, which includes two regulation-sized ice rinks, two soccer
fields and additional family amusements. In February 1998, the Company acquired
an ice rink facility and family entertainment center in Raleigh, North
Carolina.
In addition to the Denver facility previously referred to, the Company
currently has two ice rink facilities under development. In March 1998, the
Company signed a lease to construct and operate a facility consisting of two
NHL regulation-size ice rinks and a family entertainment center in New
Rochelle, New York. The Company expects to commence operating this facility by
the end of 1999. In addition, in April 1998 the Company entered into an
agreement with the Township of Woodbridge, New Jersey to lease, construct and
operate an ice rink facility with two sheets of ice and a family entertainment
center.
OPERATIONS
The Company has facilities in six regions (the New York City region, the
Mid-Atlantic region, the Northern region, the Southeast region, the Midwest
region and the Western region), each of which is managed by a regional manager,
who reports to one of the two divisional managers (East and West Coast). Each
golf facility has a general manager who reports to a regional or divisional
manager, one to two assistant managers, a head golf professional, up to four
PGA-certified professionals who instruct golfers, approximately five full-time
staff members and approximately 13 to 20 part-time employees, depending on the
season. Each ice rink facility has a general manager, one assistant manager, a
hockey director, a figure skating director, approximately four to six other
full-time employees and approximately 25 to 35 part-time employees, depending
on the season. Currently, the Company's Family Sports Supercenters employ
approximately 280 to 350 people, depending on the season, of which
approximately 75 are full-time and the balance of which are part-time or
seasonal.
The Company places great importance on recruiting and training skilled
personnel. A majority of the golf instructors are PGA-certified and the skating
instructors are USFSA-certified. In addition, a majority of the general
managers have managed or were assistant managers at other golf centers, golf
courses, ice rinks or Family Sports Supercenters, as the case may be, prior to
being hired by the Company. Regional managers and general managers, as well as
other management personnel, are provided performance incentives such as stock
options and bonuses.
By virtue of operating a number of facilities, the Company believes it
achieves economies of scale not available to smaller operators. Typically, the
Company can acquire artificial turf, range balls, pro shop
34
<PAGE>
merchandise and other facility supplies and equipment at lower prices than
could an individual operator. Although the suppliers of many of the items sold
at the ice rink pro shops are different from the golf pro shop suppliers, the
Company believes that it will achieve similar economies of scale as it expands
in this area. The Company can also purchase insurance coverage at a lower
premium rate than would be charged for an individual facility.
The Company's corporate policies relating to personnel, labor, cash
management and budgets are formulated at the Company's headquarters and
provided to each of the Company's facilities. All purchasing, accounting,
insurance, cash management, finance and human resource functions are managed
centrally at the Company's headquarters. Centralization improves facility
performance by reducing expenses and administrative burdens, allowing
management to focus on customer service and facility operations. In addition,
each facility receives the benefits of the Company's purchasing power, allowing
it to take advantage of quantity discounts on merchandise sold through its pro
shops and equipment used at its facilities.
GOLDEN BEAR
On June 16, 1998, the Company entered into a Stock Purchase Agreement
pursuant to which Golden Bear will become a wholly-owned subsidiary of the
Company (the "Purchase Agreement"). The Company believes that Golden Bear is
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.
Pursuant to the terms of the Purchase Agreement, the Company will acquire
Golden Bear for a cash amount equal to $32.0 million, minus the amount of
Golden Bear's indebtedness, capital leases and certain other liabilities as of
the closing date, and subject to certain post-closing adjustments, and will
enter into the New License Agreement. The consummation of the transaction is
subject to a number of conditions, including receipt of certain regulatory
approvals (including approval under the Hart-Scott-Rodino Antitrust Improvement
Act of 1976) and receipt of certain consents (including landlord's consents).
If the agreement is terminated due to GBGI's acceptance of an Alternative
Proposal (as defined in the Purchase Agreement), the Company will be entitled
to liquidated damages in the amount of $2.0 million plus reimbursement
of certain expenses.
If the Golden Bear Acquisition is consummated, the Company will operate
its seven existing Golden Bear golf centers, as well as the 14 acquired
pursuant to the Purchase Agreement, pursuant to the New License Agreement. The
New License Agreement will expire on December 31, 2008, except that the Company
has the right to terminate the agreement effective December 31, 2000. The New
License Agreement is also subject to termination by the Licensor or the Company
under certain other circumstances. Pursuant to the New License Agreement, the
Company will pay the Licensor $795,000 per year (based on 21 Golden Bear golf
centers in operation), plus incentive compensation ranging from 1% to 3% of
Adjusted Gross Revenues (as defined in the New License Agreement) generated by
the 21 centers in excess of $30.0 million a year. During the term of the New
License Agreement, the Company will have the exclusive right to operate golf
centers under the name "Golden Bear" within a 10-mile radius of the Company's
Golden Bear golf centers.
MARKETING AND ADVERTISING
The Company has a focused marketing and advertising strategy designed to
increase consumer awareness of its facilities. The Company utilizes traditional
media, including newspaper, radio, television and direct mailings as well as
targeted special promotions throughout the year, such as charitable events,
contests, free clinics, and equipment demonstrations.
The Company is also exploring strategic marketing relationships. In
connection with this strategy, the Company recently entered into a cooperative
marketing relationship with American Express Travel Related Services pursuant
to which holders of American Express cards may redeem their accumulated
membership points to earn gifts, practice privileges and golf instruction at
the Company's facilities nationwide. More than three million participants in
the American Express Awards Program will receive
35
<PAGE>
information on the Company's special offers. Additionally, the Company is the
1997-1998 title sponsor for the International Junior Golf Tour, a
not-for-profit tour that hosts 13 events at nationally recognized golf courses
around the nation. The purpose of this tour is to offer talented juniors a
chance to develop their skills and learn about competition in a tournament
setting. Furthermore, the Company has been requested by Nike Junior Camps to
hold their programs at 20 of the Company's sites.
Pursuant to the License Agreement, the Licensor retains the right to
approve advertising and other material using the "Golden Bear" name and logo.
If the Golden Bear Acquisition is consummated, such right will continue under
the New License Agreement.
LICENSING AND FRANCHISING
The Company has granted, for $250,000, a non-exclusive license to open up
to ten golf centers under the name "Family Golf" in China to Asia Golf Centers
International, Inc., a non-affiliated entity. Pursuant to the license, the
Company will receive royalties equal to the greater of $15,000 or 3% of the
gross revenues of each such golf center. The Company believes that the growing
recognition of the Family Golf name and the economies of scale it realizes in
purchasing may make it attractive to further license or franchise the Family
Golf concept in the future.
COMPETITION
The golf center, ice rink and family entertainment industries are each
highly competitive and include competition from other golf centers, golf
courses, other ice rinks and family entertainment outlets and other
recreational pursuits. In addition, the Company's pro shop business faces
competition from other pro shops, specialty retailers and department stores.
The Company may face imitation and other forms of competition and the Company
cannot prevent others from utilizing a similar operational strategy. Many of
the Company's competitors and potential competitors may have considerably
greater financial and other resources, experience and customer recognition than
does the Company. The Company operates seven of its golf centers under the name
"Golden Bear" pursuant to the License Agreement with the Licensor. GBGI, the
parent of the Licensor, is a competitor of the Company. The Licensor is
permitted to establish, or license others to establish, Golden Bear golf
centers that compete with the Company's golf centers, including the Company's
Golden Bear golf centers. There can be no assurance that competition will not
adversely affect the Company's business or ability to acquire additional
properties. However, if the Golden Bear Acquisition is consummated, the Company
will acquire Golden Bear and will enter into the New License Agreement pursuant
to which the Company will have the exclusive right to operate Golden Bear golf
centers within a 10-mile radius of the Company's Golden Bear golf centers.
EMPLOYEES
The Company had, as of June 30, 1998, approximately 2,640 employees, of
which 950 were full-time employees and 1,690 were part-time employees. None of
the employees are represented by a collective bargaining agreement. The Company
has never experienced a strike or work stoppage. The Company believes that its
relationship with its employees is good.
GOVERNMENTAL REGULATION
Operations at the Company's golf facilities involve the use and limited
storage of various hazardous materials such as pesticides, herbicides, motor
oil, gasoline, heating oil and paint as well as various chemicals used to
create, refrigerate and maintain the ice at its ice rinks. Under various
federal, state and local laws, ordinances and regulations (which are
administered, in the case of federal laws and regulations, primarily by the
United States Environmental Protection Agency), an owner or operator of real
property is generally liable for the costs of removal or remediation of
hazardous substances that are released on or in its property regardless of
whether the property owner or operator knew of, or was responsible for, the
release of hazardous materials. The Company has not been informed by any
governmental authority or instrumentality of any non-compliance or violation of
any environmental laws, ordinances or regulations. However, the Company is
aware of one notice of violation issued by the New York State Department of
36
<PAGE>
Environmental Conservation (the "DEC") against the owner of the land leased by
the Company in Elmsford, New York alleging that certain hazardous materials
were placed on the site. The owner has taken remedial action and the Company
does not believe it will be affected by the alleged violation. Although the
Company usually hires environmental consultants to conduct environmental
studies, including invasive procedures such as soil sampling or ground water
analysis, on golf facilities it owns, operates or intends to acquire, in some
cases only limited invasive procedures are conducted on such properties and in
a limited number of instances no environmental studies are conducted. Even when
invasive procedures are used, environmental studies may fail to discover all
potential environmental problems. Accordingly, there may be potential
liabilities or conditions of which the Company is not aware.
The Company is subject to the Fair Labor Standards Act and various state
laws governing such matters as minimum wage requirements, overtime and other
working conditions and citizenship requirements. Restaurants at certain of the
Company's facilities serve alcoholic beverages and are subject to certain state
"dram-shop" laws, which provide a person injured by an intoxicated individual
the right to recover damages from an establishment that wrongfully served such
beverages to the intoxicated individual.
LEGAL PROCEEDINGS
The Company knows of no material litigation or proceeding pending,
threatened or contemplated to which the Company is or may become a party.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ ----- --------------------------------------------------
<S> <C> <C>
Dominic Chang ...................... 48 Chairman of the Board and Chief Executive Officer
James Ganley ....................... 61 Director
Jimmy C.M. Hsu ..................... 48 Director
Krishnan P. Thampi ................. 49 President, Chief Operating Officer, Assistant
Secretary, Treasurer and Director
Yupin Wang ......................... 65 Director
Jeffrey C. Key ..................... 32 Chief Financial Officer
Richard W. Hasslinger .............. 48 Senior Vice President -- Regional Manager
Robert J. Krause ................... 52 Senior Vice President -- Strategic Planning and
Development
William A. Schickler, III .......... 49 Senior Vice President -- Regional Manager
Pamela S. Charles .................. 36 Vice President, Secretary and General Counsel
Garrett J. Kelleher ................ 61 Vice President -- Finance
Rodger P. Potocki .................. 54 Vice President -- Regional Manager
Margaret M. Santorufo .............. 32 Controller
</TABLE>
Dominic Chang has been the Chairman of the Board and Chief Executive
Officer of the Company and its predecessors since 1991. Prior to March 1998,
Mr. Chang also held the title of President. From 1989 to 1992, Mr. Chang was a
Senior Vice President and Sector Executive for Corporate Real Estate and
General Services for The Bank of New York. He was responsible for the
acquisition, management and disposition of the Bank of New York's properties
worldwide, facilities design and construction, security and centralized
administrative services. Mr. Chang previously had over 15 years banking
experience with Bankers Trust and Irving Trust Company. He has a Masters Degree
in Industrial Engineering from New York University and a Bachelors Degree from
the State University of New York at Stony Brook.
James Ganley has been a director of the Company since 1994. From October
1988 until his retirement in 1990, Mr. Ganley was a Senior Executive Vice
President of The Bank of New York. Mr. Ganley was a member of the Senior
Management Steering Committee at The Bank of New York and was directly
responsible for the mergers of the systems, products and operations of The Bank
of New York with Irving Trust Company. Prior to 1988, Mr. Ganley had held
various executive positions at Irving Trust Company and was Group Executive
responsible for Banking Operations activities, which comprised 13 divisions. He
was also a member of Irving Trust Company's Senior Executive Management
Committee. Mr. Ganley received a Bachelors Degree in Economics from New York
University and was a participant in Harvard University's program for management
development.
Jimmy C.M. Hsu has been a director of the Company since 1994. From 1995
until 1996, Mr. Hsu was the Vice Chairman of Russ Berrie and Company, Inc.
("Russ Berrie"), a New York Stock Exchange listed company which manufactures
and distributes toys and gifts to retail stores. Mr. Hsu joined Russ Berrie in
1979 as Vice President, Far East Operations. In 1987, he was appointed Senior
Vice President and Director of World-Wide Marketing of Russ Berrie. In 1991, he
was elected to the board of Russ Berrie and was appointed to the position of
Executive Vice President. In 1995, Mr. Hsu became Vice Chairman of Russ Berrie.
Mr. Hsu is currently an independent investor.
Krishnan P. Thampi has been the President, Chief Operating Officer,
Assistant Secretary, and Treasurer of the Company since March 1998 and from
1992 through February 1998, Mr. Thampi was the
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<PAGE>
Chief Financial Officer, Chief Operating Officer, Executive Vice President,
Assistant Secretary and Treasurer of the Company and its predecessors. He
became a director of the Company in 1994. From 1989 to 1992, he was a Senior
Vice President for Administrative Services at The Bank of New York. From 1988
to 1989, he was a Senior Vice President for Systems Services at Irving Trust
Company. He also performed controller and personnel management functions while
at Irving Trust Company. Mr. Thampi has a Masters Degree in Business
Administration from Columbia University and a Bachelors Degree in Engineering
from McGill University.
Yupin Wang has been a director of the Company since 1994. Mr. Wang is
currently the President of W W International, a worldwide management consulting
firm. Prior to establishing W W International in 1992, Mr. Wang was a member of
the executive management team of International Business Machines Corp. ("IBM")
from 1962 to 1992. He had held various positions at IBM, including Director of
Marketing Operations, Director of Marketing Strategy and Director of Customer
Satisfaction. As Director of Customer Satisfaction, he established IBM's
Customer Satisfaction Management System, which contributed to IBM Rochester
winning the Malcolm Baldrige Award. Mr. Wang received a Bachelors Degree in
Economics from National Taiwan University and Masters Degrees from Oklahoma
State University and New York University.
Jeffrey C. Key joined the Company as Chief Financial Officer in March
1998. From July 1995 to March 1998, Mr. Key worked in the investment banking
department of Jefferies & Company, Inc., most recently as senior vice
president, corporate finance. Prior to joining Jefferies & Company, Inc., Mr.
Key was with Fahnestock & Co. Inc. between January 1993 and July 1995 in
investment banking and with Security Pacific National Bank between June 1989
and January 1993 in its credit analysis department. During his employment as an
investment banker, Mr. Key concentrated on working with rapidly growing middle
market companies. Mr. Key holds a Bachelors Degree in Business Administration
from the University of Colorado, where he concentrated in finance and
accounting.
Richard W. Hasslinger joined the Company's predecessor in November 1992 as
a Site Manager and has been Senior Vice President -- Regional Manager of the
Company since January 1995. From May 1992 to November 1992, he served as a
consultant to the Company. From May 1988 until May 1992, he was Vice President
and Division Head for Facilities Management at The Bank of New York. His
responsibilities there included leasing and acquisitions, design and
construction, and property management. From 1973 to 1988, he managed several
operational activities at Irving Trust Company. Mr. Hasslinger has a Bachelors
Degree in Business Administration from Hope College.
Robert J. Krause joined the Company's predecessor in June 1993 and served
as a Site Manager until January 1995, when he became a Senior Vice President --
Strategic Planning and Development of the Company. From 1983 to 1993, Mr.
Krause was Vice President of Administrative Services for The Bank of New York.
From 1978 to 1983, he held product development, marketing and strategic
planning responsibilities at Irving Trust Company. Mr. Krause has a Bachelors
Degree in Electrical Engineering from the University of Oklahoma.
William A. Schickler, III is a Senior Vice President of the Company and
President of The Practice Tee, Inc. ("TPT"), a subsidiary of the Company. Mr.
Schickler is responsible for the Company's operations in the West Coast Region.
Prior to joining TPT in 1992, Mr. Schickler was a founding general partner with
The Waterford Group, a partnership involved in the development and marketing of
golf course related real estate projects. Mr. Schickler is a certified public
accountant and holds a Bachelors Degree in Business Administration.
Pamela S. Charles joined the Company as Vice President, Secretary and
General Counsel in January 1997. From February 1994 until January 1997, she was
an associate at the law firm of Squadron, Ellenoff, Plesent & Sheinfeld, LLP
where she specialized in federal securities law and mergers and acquisitions.
From 1987 to 1994, Ms. Charles was an associate at the law firm of Schulte,
Roth & Zabel. Ms. Charles has a law degree from Hofstra University School of
Law and has a B.A. from the State University of New York at Binghamton.
Garrett J. Kelleher, a certified public accountant, joined the Company's
predecessor in July 1993 as a Site Manager and served as Controller from
January 1994 to June 1995. He has been the Vice President
39
<PAGE>
- -- Finance since July 1995. From 1980 to September 1990, Mr. Kelleher was Group
Controller for Bank Operations at The Bank of New York. He has held a variety
of accounting and financial management positions at The Bank of New York, and
previously in public accounting. Mr. Kelleher acted as an independent
consultant from September 1990 to July 1993. Mr. Kelleher has a Masters Degree
in Finance from St. John's University and a Bachelors Degree in Business
Administration from Manhattan College.
Rodger P. Potocki was the Northern District Director for the Company from
September 1994 until he was appointed Vice President -- Regional Manager,
Northern Region, in February 1995. From October 1979 to September 1994, he was
Executive Vice President of Oneida County Industrial Development Corporation, a
non-profit development corporation ("Oneida Industrial"). At Oneida Industrial,
Mr. Potocki was responsible for new investment and job creation projects in
Oneida County, New York, and implemented New York State's first direct loan
fund for new businesses. Previously, he served as Director of Planning and
Development for the City of Rome, New York. Mr. Potocki has a Masters Degree in
Political Science from the Graduate School of Public Affairs in Albany, New
York and a Bachelors Degree from Syracuse University.
Margaret M. Santorufo joined the Company as Controller in June 1995. From
January 1990, until she joined the Company in 1995, she was an audit supervisor
with Richard A. Eisner & Company, LLP. Ms. Santorufo received a Bachelors
Degree in Accounting from St. John's University.
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation for
services in all capacities paid to Dominic Chang ("Mr. Chang"), the Company's
Chairman of the Board and Chief Executive Officer, and Krishnan P. Thampi ("Mr.
Thampi"), the Company's President, Chief Operating Officer, Assistant
Secretary, Treasurer and a director (the "Named Executives"), during 1995, 1996
and 1997. Other than the Named Executives, no other executive officer received
compensation exceeding $100,000 during 1995, 1996 or 1997. The chart below
reflects the positions held by Messrs. Chang and Thampi during the relevant
periods.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------
NAME AND
PRINCIPAL OTHER ANNUAL
POSITION YEAR SALARY BONUS COMPENSATION
- ---------------------------- ------ ----------- ------- ---------------------
<S> <C> <C> <C> <C>
Dominic Chang .............. 1997 $140,000 -- --
Chairman of the Board, 1996 $120,000 -- $ 9,000(1)(2)
President and Chief 1995 $ 65,000 -- $ 9,000(1)
Executive Officer
Krishnan P. Thampi ......... 1997 $120,000 -- --
Chief Financial Officer, 1996 $100,000 -- $ 7,200(1)(7)
Chief Operating Officer, 1995 $ 60,000 -- $ 7,200(1)
Executive Vice
President, Assistant
Secretary, Treasurer
and a director
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------------------
LONG-TERM
NAME AND RESTRICTED SECURITIES INCENTIVE
PRINCIPAL STOCK UNDERLYING PLAN ALL OTHER
POSITION AWARD(S) OPTIONS PAYOUTS COMPENSATION
- ---------------------------- ------------ --------------------- ---------- -------------
<S> <C> <C> <C> <C>
Dominic Chang .............. -- -- -- --
Chairman of the Board, -- -- -- --
President and Chief -- 15,000(3) -- --
Executive Officer
Krishnan P. Thampi ......... -- 90,132(7)(8) -- --
Chief Financial Officer, -- 127,500(4)(5) -- --
Chief Operating Officer, -- 45,000(3)(6) -- --
Executive Vice
President, Assistant
Secretary, Treasurer
and a director
</TABLE>
- ----------
(1) Includes amounts paid to lease a car.
(2) Does not include $650,000 earned by Mr. Chang as a contingent purchase
price relating to the purchase by the Company in November 1995 of The
Practice Tee, Inc.
(3) Stock options to purchase 15,000 shares of Common Stock were granted in
March 1995 at $4.50 per share (the fair market value of the Common Stock
on the date of such grant); these options became exercisable in March
1996.
(4) Stock options to purchase 52,500 shares of Common Stock were granted in
July 1996 at $15.167 per share (the fair market value of the Common Stock
on the date of such grant); 17,450 of these options are exercisable as of
Deceember 31, 1997.
(5) Stock options to purchase 75,000 shares of Common Stock were granted in
December 1996 at $15.167 per share (the fair market value of the Common
Stock on the date of such grant); 25,000 of these options are exercisable
as of December 31, 1997.
40
<PAGE>
(6) Stock options to purchase 30,000 shares of Common Stock were granted in
November 1995 at $9.92 per share (the fair market value of the Common
Stock on the date of such grant); 20,000 of these options are exercisable
as of December 31, 1997.
(7) Stock options to purchase 37,632 shares of common stock were granted in
March 1997 at $11.583 per share (the fair market value of the Common
Stock on the date of such grant); 12,544 of these options are exercisable
as of December 31, 1997.
(8) Stock options to purchase 52,500 shares of Common Stock were granted in
November 1997 at $17.709 per share (the fair market value of the Common
Stock on the date of such grant); none of these options are exercisable
as of December 31, 1997.
No options were granted to Mr. Chang during the fiscal year ended December
31, 1997. The following table sets forth certain information concerning options
granted to Mr. Thampi during the fiscal year ended December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
----------------------------------------------------------------- --------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE
NAME GRANTED(1) FISCAL YEAR ($/SHARE) EXPIRATION DATE 5%($) 10%($)
- ---------------------------- ------------ -------------- ------------ ------------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Krishnan P. Thampi ......... 37,632 7.6% $ 11.583 March 20, 2007 $274,138 $ 694,719
52,500 10.5 17.709 November 3, 2007 584,686 1,481,710
</TABLE>
- ----------
(1) All options were granted pursuant to the 1997 Stock Incentive Plan.
AGGREGATED OPTION EXERCISES DURING THE FISCAL YEAR ENDED DECEMBER 31, 1997 AND
FISCAL YEAR END OPTION VALUES
The following table sets forth certain information concerning the number
and value of securities underlying exercisable and unexercisable stock options
as of the fiscal year ended December 31, 1997 by the Named Executives. No
options were exercised by the Named Executives during the fiscal year ended
December 31, 1997.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
------------------------------- ---------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ------------- --------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Dominic Chang .............. 15,000 -- $ 246,250(1) --
Krishnan P. Thampi ......... 130,001 185,132 1,686,250(1) $ 1,118,402(1)
</TABLE>
- ----------
(1) The value of unexercised options is determined by multiplying the number
of options held by the difference between the closing price of the Common
Stock of $20.92 at December 31, 1997 as reported by the Nasdaq National
Market and the exercise price of the options.
STOCK OPTION AND AWARD PLANS
On July 19, 1994, the Board of Directors of the Company and stockholders
of the Company adopted the Company's 1994 Stock Option Plan (the "1994 Plan").
The 1994 Plan provides for the grant of options to purchase up to 450,000
shares of Common Stock to employees, officers, directors and consultants of the
Company. Options may be either "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
non-qualified options. Incentive stock options may be granted only to employees
of the Company, while non-qualified options may be issued to
41
<PAGE>
non-employee directors, consultants and others, as well as to employees of the
Company. On March 6, 1996 the Board of Directors of the Company adopted, and on
June 7, 1996, the stockholders approved, the Company's 1996 Stock Incentive
Plan (the "1996 Plan"). The 1996 Plan is identical to the 1994 Plan, except
that the 1996 Plan provides (i) for the grant of options to purchase up to
750,000 shares of Common Stock and (ii) an automatic grant of non-qualified
stock options to purchase 15,000 shares to each non-employee director upon his
election or appointment to the Board of Directors and annual grants (commencing
on the date the 1996 Plan was approved by stockholders) to each non-employee
director of non-qualified stock options to purchase 15,000 shares of Common
Stock at the fair market value of the Common Stock on the date of the grant. On
April 25, 1997, the Board of Directors of the Company adopted, and on June 24,
1997 the stockholders approved, the Company's 1997 Stock Incentive Plan (the
"1997 Plan"). The 1997 Plan is identical to the 1996 Plan. On April 23, 1998,
the Board of Directors of the Company adopted, and on June 26, 1998, the
stockholders approved the Company's 1998 Stock Option and Award Plan (the "1998
Plan"). The 1998 Plan is identical to the 1997 Plan except that (i) it provides
for the grant of stock awards (either outright or for a price to be determined)
as well as options, (ii) it provides for grants of stock awards and options for
up to 1,500,000 shares of Common Stock to those employees, officers, directors,
consultants or other individuals or entities eligible under the Plans (as
defined) to receive stock awards or options (each, a "Plan Participant") and
(iii) no Plan Participant may receive more than an aggregate of 500,000 shares
of Common Stock by grant of options and/or stock awards during the term of the
1998 Plan.
The 1994 Plan, the 1996 Plan, the 1997 Plan and the 1998 Plan
(collectively, the "Plans") are administered by the Stock Option and Award
Committee, which determines, among other things, those individuals who receive
options, the time period during which the options may be partially or fully
exercised, the number of shares of Common Stock issuable upon the exercise of
each option and the option exercise price. The 1994 Plan also provided for an
automatic grant of non-qualified stock options to purchase 7,500 shares of
Common Stock to each non-employee director upon his election or appointment to
the Board of Directors and annual grants of non-qualified stock options to
purchase 3,000 shares of Common Stock at the fair market value of the Common
Stock on the date of such grant. Effective on June 7, 1996, such automatic
grants ceased and were replaced by the automatic grants under the 1996 Plan
consisting of an automatic grant of non-qualified stock options to purchase
15,000 shares of Common Stock to each non-employee director upon his or her
election or appointment to the Board of Directors and annual grants of
non-qualified stock options to purchase 15,000 shares of Common Stock at the
fair market value on the date of such grant. Effective upon the exhaustion of
all options authorized under the 1996 Plan, such automatic grants ceased and
were replaced by the automatic grants under the 1997 Plan consisting of an
automatic grant of non-qualified stock options to purchase 15,000 shares of
Common Stock to each non-employee director upon his or her election or
appointment to the Board of Directors and annual grants of non-qualified stock
options to purchase 15,000 shares of Common Stock at the fair market value on
the date of such grant. Effective upon the exhaustion of all options authorized
under the 1997 Plan, such automatic grants will cease and will be replaced by
automatic grants under the 1998 Plan (subject to stockholder approval thereof)
consisting of an automatic grant of non-qualified stock options to purchase
15,000 shares of Common Stock to each non-employee director upon his or her
election or appointment to the Board of Directors and annual grants of
non-qualified stock options to purchase 15,000 shares of Common Stock at the
fair market value on the date of such grant.
The exercise price per share of Common Stock subject to an incentive stock
option may not be less than the fair market value per share of Common Stock on
the date the option is granted. The per share exercise price of the Common
Stock subject to a non-qualified option may be established by the Board of
Directors. The aggregate fair market value (determined as of the date the
option is granted) of Common Stock for which any person may be granted
incentive stock options which first become exercisable in any calendar year may
not exceed $100,000. No person who owns, directly or indirectly, at the time of
the granting of an incentive stock option to such person, 10% or more of the
total combined voting power of all classes of stock of the Company (a "10%
Stockholder") shall be eligible to receive any incentive stock options under
the Plans, unless the exercise price is at least 110% of the fair market value
of the shares of Common Stock subject to the option, determined on the date of
grant. Non-qualified options are not subject to such limitation.
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<PAGE>
No stock option may be transferred by a Plan Participant other than by
will or the laws of descent and distribution, and, during the lifetime of a
Plan Participant, the option will be exercisable only by the Plan Participant.
In the event of termination of employment other than by death or disability,
the Plan Participant will have no more than three months after such termination
during which the Plan Participant shall be entitled to exercise the option,
unless otherwise determined by the Stock Option and Award Committee. Upon
termination of employment of a Plan Participant by reason of death or permanent
disability, such Plan Participant's options remain exercisable for one year
thereafter to the extent such options were exercisable on the date of such
termination.
Options under the Plans must be issued within 10 years from their
respective effective dates which is July 19, 1994 in the case of the 1994 Plan,
June 7, 1996 in the case of the 1996 Plan, April 25, 1997 in the case of the
1997 Plan, and April 23, 1998 in the case of the 1998 Plan, subject to
stockholder approval thereof. Incentive stock options granted under the Plans,
cannot be exercised more than 10 years from the date of grant. Incentive stock
options issued to a 10% Stockholder are limited to five-year terms. All options
granted under the Plans provide for the payment of the exercise price in cash
or by delivery to the Company of shares of Common Stock having a fair market
value equal to the exercise price of the options being exercised, or by a
combination of such methods. Therefore, a Plan Participant may be able to
tender shares of Common Stock to purchase additional shares of Common Stock and
may theoretically exercise all of such Plan Participant's stock options with no
investment.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by the Company become available again for issuance under
the 1994 Plan, the 1996 Plan, the 1997 Plan or the 1998 Plan, as the case may
be.
As of June 30, 1998, options to purchase 1,683,376 shares of Common Stock
have been granted under the Plans, of which options to purchase 262,184 shares
have been exercised. In addition, on March 8, 1995, Messrs. Chang and Thampi
were each granted options outside of the Plans to purchase 15,000 shares of
Common Stock at $4.50 per share (the fair market value of the Common Stock on
the date of such grant) in connection with an amendment to their respective
employment agreements. These options became exercisable in March 1996 and are
still outstanding. In addition, on March 7, 1996, various employees of the
Company were granted options outside of the Plans to purchase an aggregate of
80,250 shares of Common Stock at $13.25 (the fair market value of the Common
Stock on the date of such grant), which options vest ratably over three years.
On September 22, 1997, 18,750 options were granted outside of the Plans to a
consultant at an exercise price of $15.083. No options or stock awards have yet
been granted under the 1998 Plan. On March 16, 1998, the Company did make an
award outside the 1998 Plan of 22,500 shares of restricted stock to Jeffrey
Key. Such award vests over three years and is not subject to stockholder
approval.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements, each expiring on
December 31, 1999, with each of Mr. Chang and Mr. Thampi, pursuant to which
each will devote at least 95% of his business time to the affairs of the
Company. Pursuant to his employment agreement, Mr. Chang received a base salary
of $120,000 in 1996, a base salary of $140,000 in 1997 and will receive a base
salary of $140,000 and $160,000 in 1998 and 1999, respectively. Such base
salaries are subject to additional increase within the discretion of the Board
of Directors which will take into account, among other things, the performance
of the Company and the performance, duties and responsibilities of Mr. Chang.
Mr. Chang also receives use of a Company-leased automobile and will receive
such bonuses as may be determined by the Board of Directors throughout the term
of his employment agreement. The employment agreement also provides that Mr.
Chang will not compete with the Company for two years after the termination of
his employment.
Pursuant to his employment agreement, Mr. Thampi received a base salary of
$100,000 in 1996, a base salary of $120,000 in 1997 and will receive a base
salary of $120,000 and $140,000 in 1998 and 1999, respectively. Such base
salaries are subject to additional increase within the discretion of the Board
of Directors which will take into account, among other things, the performance
of the Company and the performance, duties and responsibilities of Mr. Thampi.
Mr. Thampi also receives use of a Company-
43
<PAGE>
leased automobile and will receive such bonuses as may be determined by the
Board of Directors throughout the term of his employment agreement. The
employment agreement also provides that Mr. Thampi will not compete with the
Company for two years after the termination of his employment.
In March 1998, the Company entered into a three-year employment agreement
with Jeffrey C. Key pursuant to which Mr. Key will serve as Chief Financial
Officer of the Company and will receive an annual base salary of $130,000,
$140,000 and $150,000 during each year of the three-year term, respectively.
Such base salary is subject to additional increase within the discretion of the
Board of Directors which will take into account, among other things, the
performance of the Company and the performance, duties and responsibilities of
Mr. Key. Mr. Key also received 90,000 stock options under the Company's 1997
Plan and 22,500 restricted shares of the Company's Common Stock, all of which
are subject to a three-year vesting schedule. Such restricted shares are
forfeited if Mr. Key is not employed by the Company on the date such shares are
scheduled to vest. The employment agreement also provides that Mr. Key will not
compete with the Company for one year after the termination of his employment.
In addition, the employment agreement provides that if following a change in
control of the Company (as defined in the employment agreement), Mr. Key
terminates his employment for good reason, he will be entitled to receive a
lump sum payment equal to his base salary for the remaining term of the
employment agreement, all previously earned and accrued benefits, continued
full benefit coverage under all of the Company's benefit plans and fully vested
benefits under all plans, including stock option plans.
The Company does not have written employment agreements with Messrs.
Hasslinger, Kelleher, Krause, Schickler or Potocki or with Ms. Charles or Ms.
Santorufo.
DIRECTOR'S COMPENSATION
The Company's employee directors do not receive any additional
compensation for their services as directors. Non-employee directors do not
receive a fee for serving as such, but are reimbursed for expenses. In
addition, non-employee directors participate in the Company's Plans. The 1994
Plan provided for an automatic grant of non-qualified stock options to purchase
7,500 shares of Common Stock to each non-employee director upon his or her
election or appointment to the Board of Directors and annual grants of
non-qualified stock options to purchase 3,000 shares of Common Stock at the
fair market value on the date of such grant. Effective on June 7, 1996, such
automatic grants ceased and were replaced by the automatic grants under the
1996 Plan consisting of an automatic grant of non-qualified stock options to
purchase 15,000 shares of Common Stock to each non-employee director upon his
or her election or appointment to the Board of Directors and annual grants of
non-qualified stock options to purchase 15,000 shares of Common Stock at the
fair market value on the date of such grant. Effective July 1, 1997, automatic
grants under the 1996 Plan were terminated and were replaced by automatic
grants under the 1997 Plan consisting of an automatic grant of non-qualified
stock options to purchase 15,000 shares of Common Stock to each non-employee
director upon his or her election or appointment to the Board of Directors and
annual grants of non-qualified stock options to purchase 15,000 shares of
Common Stock at the fair market value on the date of such grant. Upon
stockholder approval of the 1998 Plan, non-employee directors will be entitled
to receive such automatic grants, which will continue once the 1997 Plan is
exhausted.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of July 1, 1998
regarding the beneficial ownership of the Company's Common Stock by (i) each
person known by the Company to own beneficially more than 5% of the Company's
Common Stock, (ii) each director of the Company, including Messrs. Chang and
Thampi, and (iii) all directors and executive officers of the Company as a
group. Except as otherwise indicated and subject to community property laws
where applicable, the persons named in the table above have sole voting and
dispositive power with respect to the shares of Common Stock shown as
beneficially owned by them. Information as to The TCW Group, Inc., SAFECO
Corporation, Scudder Kemper Investments, Inc., Wells Fargo Bank, N.A. and ICM
Asset Management Inc. was derived from the Schedule 13G filed by each such
stockholder, and, except for the percentage of ownership, reflects the
information contained in the Schedule 13G as of the date such Schedule 13G was
filed.
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
OUTSTANDING OUTSTANDING
NAME AND ADDRESS NUMBER OF SHARES SHARES BEFORE SHARES AFTER
OF BENEFICIAL OWNER BENEFICIALLY OWNED THE OFFERING THE OFFERING
- -------------------------------------------- ---------------------------------------- --------------- -------------
<S> <C> <C> <C>
Dominic Chang (1) .......................... 3,749,001(2)(3) 17.7% 15.2%
SAFECO Corporation (4) ..................... 2,430,300 11.5% 9.9%
The TCW Group, Inc. (5) .................... 1,817,700 8.6% 7.4%
Scudder Kemper Investments, Inc.(6) 1,555,620 7.4% 6.3%
Fred Alger Management, Inc. (7) ............ 1,341,600 6.4% 5.5%
Wells Fargo Bank, N.A.(8) .................. 1,294,830 6.1% 5.3%
ICM Asset Management, Inc.(9) .............. 1,156,650 5.5% 4.7%
Krishnan P. Thampi (1) ..................... 297,969(10) 1.4% 1.2%
Jimmy C.M. Hsu (1) ......................... 204,375(11)(12) * *
James Ganley (1) ........................... 83,250(13) * *
Yupin Wang (1) ............................. 45,000(14) * *
All directors and executive officers of
the Company as a group (thirteen
persons) .................................. 4,556,063(2)(3)(10)(11)
(12)(13)(14)(15) 21.6% 18.5%
</TABLE>
- ----------
* Less than 1%.
(1) The address of such stockholder is: c/o Family Golf Centers, Inc., 538
Broadhollow Road, Melville, New York 11747.
(2) Includes 1,500 shares of Common Stock owned by Mr. Chang's children.
Includes 15,000 shares of Common Stock issuable upon exercise of options
which are currently exercisable.
(3) Includes an aggregate of 800,000 shares pledged to banks to secure
personal loans to Mr. Chang.
(4) The address of SAFECO Corporation ("SAFECO") is: SAFECO Plaza, Seattle,
Washington 98185. Includes an aggregate of 1,455,500 shares of Common
Stock beneficially owned by registered investment companies for which a
subsidiary of SAFECO serves as an adviser and by employee benefit plans
for which SAFECO is a plan sponsor. SAFECO disclaims beneficial ownership
of these shares.
(5) The address of The TCW Group, Inc. is: 865 Figueroa Street, Los Angeles,
California 90017.
(6) The address of Scudder Kemper Investments, Inc. ("SKI") is: 345 Park
Avenue, New York, NY 10154. SKI is an Investment Advisor registered under
Section 208 of the Investment Advisors Act of 1940. SKI provides
investment advice to individuals, institutional clients and investment
companies registered under Section 8 of the Investment Company Act of
1940 ("Managed Portfolios"). As a result of its role of advisor to such
entities, SKI may be deemed to be the beneficial owner of the 1,555,620
shares of Common Stock in the Company, and has neither the
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<PAGE>
right to receive dividends from nor the proceeds from the sale of any
such shares by the Managed Portfolios. SKI Managed Portfolios have the
right to receive all dividends and proceeds from the sale of such shares
of Common Stock. SKI disclaims beneficial ownership of such shares.
(7) The address of Fred Alger Management, Inc. is: 75 Maiden Lane, New York,
NY 10038.
(8) The address of the Wells Fargo Bank, N.A. is: 343 Sansome Street, 3rd
Fl., San Francisco, CA 94163.
(9) The address of the ICM Asset Management, Inc. is: 601 W. Main Avenue,
Suite 600, Spokane, WA 99201.
(10) Includes 160,044 shares of Common Stock issuable upon exercise of options
which are currently exercisable.
(11) Does not include 99,375 shares of Common Stock beneficially owned by Mr.
Hsu's brother. Mr. Hsu disclaims beneficial ownership of his brother's
shares.
(12) Includes 48,000 shares of Common Stock issuable upon exercise of options
which are currently exercisable.
(13) Includes 55,500 shares of Common Stock issuable upon exercise of options
which are currently exercisable.
(14) Includes 45,000 shares of Common Stock issuable upon exercise of options
which are currently exercisable.
(15) Includes 138,967 shares of Common Stock in addition to those referred to
in notes (2) (3), (10), (11), (12), (13) and (14) above, issuable upon
exercise of options which are currently exercisable.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock and selected
provisions of its Certificate of Incorporation and By-Laws is a summary and is
qualified in its entirety by reference to the Company's Certificate of
Incorporation and By-Laws, copies of which are filed or incorporated by
reference as exhibits to the Registration Statement of which this Prospectus is
a part.
COMMON STOCK
The Company is authorized to issue up to 50,000,000 shares of Common
Stock, par value $.01 per share, of which 21,109,279 shares are outstanding as
of the date hereof. Holders of Common Stock are entitled to one vote for each
share held of record on each matter submitted to a vote of stockholders. There
is no cumulative voting for election of directors. Subject to the prior rights
of any series of preferred stock which may from time to time be outstanding, if
any, holders of Common Stock are entitled to receive ratably, dividends when,
as, and if declared by the Board of Directors out of funds legally available
therefor and, upon the liquidation, dissolution or winding up of the Company,
are entitled to share ratably in all assets remaining after payment of
liabilities and payment of accrued dividends and liquidation preferences on the
preferred stock, if any. Holders of Common Stock have no preemptive rights and
have no rights to convert their Common Stock into any other securities. The
outstanding Common Stock is validly authorized and issued, fully paid and
nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 2,000,000 shares of preferred
stock, par value $.10 per share. The preferred stock may be issued in one or
more series, the terms of which may be determined at the time of issuance by
the Board of Directors, without further action by stockholders, and may include
voting rights (including the right to vote as a series on particular matters),
preferences as to dividends and liquidation, conversion rights, redemption
rights and sinking fund provisions. The issuance of any such preferred stock
could adversely affect the rights of the holders of Common Stock and,
therefore, reduce the value of the Common Stock. The ability of the Board of
Directors to issue preferred stock could discourage, delay or prevent a
takeover of the Company. See "Risk Factors -- Preferred Stock; Possible
Anti-Takeover Effects of Certain Charter, By-Law and Contractual Provisions."
DELAWARE ANTI-TAKEOVER LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"), an anti-takeover law. In general,
Section 203 prohibits a Delaware corporation, the stock of which generally is
publicly traded or held of record by more than 2,000 stockholders, from
engaging, in certain circumstances, in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of
Section 203, a "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder, and
an "interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock. Section 203 could prohibit or delay a merger,
takeover or other change in control of the Company and therefore could
discourage attempts to acquire the Company.
CERTAIN BY-LAW PROVISIONS
The Company's By-Laws provide that special meetings of the stockholders
may only be called by the Chairman of the Board of Directors, if any, the Chief
Executive Officer, the Secretary of the Company or a majority of the Board of
Directors or by stockholders who own in the aggregate 66 2/3% of the
outstanding stock of all classes entitled to vote at such meeting. The By-Laws
also provide that stockholder action can be taken only at an annual or special
meeting of stockholders, prohibit stockholder action by written consent in lieu
of a meeting and require an advance notice procedure for stockholders to make
nominations of candidates for election as directors. The foregoing provisions
could have the
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<PAGE>
effect of delaying until the next stockholders' meeting stockholder actions
which are favored by the holders of a majority of the outstanding voting
securities of the Company. The By-Laws require the affirmative vote of 80% of
the Board of Directors to amend or repeal any of the provisions described in
paragraph.
OUTSTANDING OPTIONS AND WARRANTS
The Company has outstanding options to purchase up to an aggregate of
1,529,312 shares of Common Stock at prices ranging from $2.33 to $68.00 per
share, with a weighted average price per share of $14.54.
Of such options, options to purchase 1,199,180 shares of Common Stock
expire on various dates in 2004 through 2008 subject to earlier expiration if
the Company's employment of the optionee terminates and options to purchase
64,920 shares of Common Stock issued in connection with the acquisition of
various golf facilities expire in 2006. In addition, options to purchase
330,132 shares of Common Stock have been issued to certain executive officers,
which expire on various dates in 2004 through 2007. See "Management -- Stock
Option and Award Plans." The Company has outstanding warrants issued to the
representatives of the underwriters of the 1995 Public Offering at the closing
thereof, expiring on December 18, 2000, to purchase 330,242 shares of Common
Stock at $13.50 per share. In connection with the purchase of LCI in July 1997,
the Company issued to the sellers warrants to purchase an aggregate of 83,306
shares of Common Stock at $18.33 per share, exercisable through July 2000.
TRANSFER AGENT
Continental Stock Transfer & Trust Company, New York, New York is the
Transfer Agent for the Company's Common Stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law
provides that directors of a company will not be personally able for monetary
damages for breach of their fiduciary duties as directors, except for liability
for (i) any reach of their duty of loyalty to the company or its stockholders,
(ii) acts or omissions not in good faith or involving intentional misconduct or
a knowing violation of law, (iii) unlawful payment of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law or (iv) any transaction from which the director derived
an improper personal benefit.
The Company's Certificate of Incorporation provides that the Company shall
indemnify its officers, directors, employees and other agents to the fullest
extent permitted by Delaware law.
The Company maintains a policy of insurance under which the directors and
officers of the Company are insured, subject to the limits of the policy,
against certain losses arising from claims made against such directors and
officers by reason of any acts or omissions covered under such policy in their
respective capacities as directors or officers, including liabilities under the
Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
(the "Commission") such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
48
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company agreed to sell an aggregate of 3,500,000 shares of
Common Stock to Jefferies & Company, Inc., BancAmerica Robertson Stephens, CIBC
Oppenheimer Corp., EVEREN Securities, Inc. and Prudential Securities
Incorporated (the "Underwriters"), and the Underwriters have severally agreed
to purchase, the number of shares of Common Stock set forth opposite their
respective names in the table below at the price set forth on the cover page of
this Prospectus.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- -------------------------------------------- ----------
<S> <C>
Jefferies & Company, Inc. ..................
BancAmerica Robertson Stephens .............
CIBC Oppenheimer Corp. .....................
EVEREN Securities, Inc. ....................
Prudential Securities Incorporated .........
---------
Total .................................... 3,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligation of the
Underwriters to purchase the shares of Common Stock is subject to certain
conditions. The Underwriters are committed to purchase all of the shares of the
Common Stock (other than those covered by the over-allotment option described
below), if any are purchased.
The Underwriters propose to offer the Common Stock to the public initially
at the public offering price set forth on the cover page of this Prospectus,
and to certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a discount not
in excess of $ per share to certain other dealers. After the Offering, the
public offering price, the concession to selected dealers and the reallowance
to other dealers may be changed by the Underwriters.
The Company has agreed with the Underwriters not to offer, issue or sell
any shares of Common Stock or securities exercisable for or convertible into
shares of Common Stock ("Securities") for a period of 90 days from the date of
the Prospectus, subject to certain exceptions, without the prior written
consent of Jefferies & Company, Inc. ("Jefferies").
The directors and officers of the Company have agreed with the
Underwriters not to sell or otherwise dispose of any of their Securities for a
period of 90 days from the date of this Prospectus without the prior written
consent of Jefferies.
The Company has also granted to the Underwriters an option, exercisable
for 30 days from the date of this Prospectus, to purchase up to 525,000
additional shares of Common Stock at the public offering price, less the
underwriting discount. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase additional
shares of Common Stock proportionate to such Underwriters' initial commitment
as indicated in the preceding table. The Underwriters may exercise such right
of purchase only for the purpose of covering over-allotments, if any, made in
connection with the sale of the shares of Common Stock.
The Company has agreed to indemnify the Underwriters against certain
liabilities including civil liabilities under the Securities Act, or will
contribute to payments the Underwriters may be required to make in respect
thereof.
The Underwriters have advised the Company that, in connection with the
Offering, certain persons participating in the Offering may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales of Common Stock in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the Common Stock so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of Common Stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
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<PAGE>
Penalty bids permit the Underwriters to reclaim a selling concession from a
syndicate member when the Common Stock originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Any of the transactions described in this paragraph may cause the
price of the Common Stock to be higher than it would otherwise be in the
absence of such transactions. None of the transactions described in this
paragraph are required, and, if they are undertaken, they may be discontinued
at any time.
In connection with the Offering, certain Underwriters and selling group
members (if any) who are qualified market makers on The Nasdaq Stock Market may
engage in passive market making transactions in the Common Stock on The Nasdaq
Stock Market in accordance with Rule 103 of Regulation M under the Exchange
Act, during the business day prior to the pricing of the Offering before the
commencement of offers or sales of the Common Stock. Passive market makers must
comply with applicable volume and price limitations and must be identified as
such. In general, a passive market maker must display its bid at a price not in
excess of the higher independent bid for such security; if all independent bids
are lowered below the market maker's bid, however, such bid must then be
lowered when certain purchase limits are exceeded.
In October 1997, Jefferies, Oppenheimer & Co., Inc., Prudential Securities
Incorporated and BancAmerica Robertson Stephens ("BARS") acted as the initial
purchasers of $115.0 million principal amount of 5 3/4% Convertible
Subordinated Notes due 2004 issued by the Company in a private placement
transaction pursuant to Rule 144A under the Securities Act, for which they
received customary compensation.
In February 1998, Jefferies acted as the Company's financial advisor and
dealer manager in connection with the Company's acquisition of MetroGolf, for
which Jefferies received customary compensation upon the consummation of the
transaction.
On February 20, 1998, BARS was retained by Eagle Quest to act as its
exclusive financial advisor in connection with a possible sale or business
combination involving Eagle Quest. Upon consummation of the Eagle Quest
Acquisition, Eagle Quest became obligated to pay to BARS certain fees, as well
as reimburse BARS for its out-of-pocket expenses.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby has been passed
upon for the Company by Squadron, Ellenoff, Plesent & Sheinfeld, LLP, 551 Fifth
Avenue, New York, New York 10176. Kenneth R. Koch, Esq., a partner of Squadron,
Ellenoff, Plesent & Sheinfeld, LLP, holds options to purchase shares of the
Company's Common Stock. Certain legal matters in connection with the Offering
will be passed upon for the Underwriters by Fulbright & Jaworski L.L.P., New
York, New York.
EXPERTS
The consolidated financial statements of the Company as at December 31,
1997 and December 31, 1996 and for each of the years in the three-year period
ended December 31, 1997, have been audited by Richard A. Eisner and Company,
LLP, independent auditors, as indicated in their report with respect thereto
and are included herein in reliance upon such report given upon authority of
said firm as experts in accounting and auditing. The supplemental consolidated
financial statements of Family Golf Centers, Inc. and subsidiaries (reflecting
the consolidation of Family Golf Centers, Inc. and Eagle Quest Golf Centers,
Inc.) as at December 31, 1997 and December 31, 1996 and for each of the years
in the three-year period ended December 31, 1997, have been audited by Richard
A. Eisner and Company, LLP, independent auditors, as indicated in their report
therein which, is based in part on the report of other auditors and are
included herein in reliance upon such reports given upon authority of said
firms as experts in accounting and auditing. The consolidated financial
statements of MetroGolf Incorporated as at December 31, 1997 and for the year
then ended have been audited by Richard A. Eisner and Company, LLP, independent
auditors, as indicated in their report with respect thereto and are included
herein in reliance upon such report given upon the authority of said firm as
experts in accounting and auditing. The consolidated financial statements of
Eagle Quest Golf Centers
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<PAGE>
Inc. as at December 31, 1997 and 1996 and for the year ended December 31, 1997
and for the period from incorporation on February 5, 1996 to December 31, 1996
have been included herein and in the registration statement in reliance upon
the report of KPMG, independent chartered accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing. The consolidated financial statements of Golden Bear Golf Centers,
Inc. at December 31, 1997 and 1996 and for the years ended December 31, 1997
and 1996 have been included herein in reliance on the report of Arthur Andersen
LLP, independent auditors, as indicated in the report with respect thereto and
are included with reliance upon such reports upon the authority of such firm as
experts in accounting and auditing. The financial statements of Leisure
Complexes, Inc. at and for the year ended December 1, 1996 are included herein
in reliance on the report of Feldman, Gutterman, Meinberg & Co., independent
auditors, given upon the authority of said firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement (the "Registration Statement")
under the Securities Act with respect to the Offering. This Prospectus does not
contain all the information set forth in the Registration Statement and the
exhibits thereto, as permitted by the rules and regulations of the Commission.
For further information, reference is made to the Registration Statement and to
the exhibits filed therewith. Statements contained in this Prospectus as to the
contents of any contract or other document which has been filed or incorporated
by reference as an exhibit to the Registration Statement are qualified in their
entirety by reference to such exhibits for a complete statement of their terms
and conditions. Additionally, the Company is subject to the informational
requirements of the Exchange Act, and, in accordance therewith, files reports,
proxy statements, and other information statements with the Commission. Copies
of such materials may be inspected without charge at the offices of the
Commission, and copies of all or any part thereof may be obtained from the
Commission's public reference facilities at 450 Fifth Street, N.W., Washington
D.C. 20549 or at the regional offices of the Commission located at 7 World
Trade Center, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, upon payment of the fees prescribed by the Commission.
In addition, the Commission maintains a web-site that contains reports, proxy
and information statements and other information regarding the Company (http://
www.sec.gov). The Common Stock is quoted on the Nasdaq National Market under
the symbol "FGCI." Reports and other information concerning the Company may be
inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Incorporated herein by reference and made a part of this Prospectus are
the following: (1) the Company's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1997; (2) the Company's Current Report on Form 8-K/A,
dated January 30, 1998; (3) the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998; (4) the Company's Current Report on Form 8-K,
dated April 6, 1998; and (5) the Company's Proxy Statement on Schedule 14A,
dated May 15, 1998 and (6) the description of the Common Stock which is
registered under Section 12 of the Exchange Act, contained in the Company's
Registration Statement on Form 8-A dated November 8, 1994. All documents
subsequently filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14, or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the Offering will be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from the
respective dates of filing of such documents. Any statement contained in any
document incorporated by reference shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus. All
information appearing in this Prospectus is qualified in its entirety by the
information and financial statements (including notes thereto) appearing in the
documents incorporated herein by reference, except to the extent set forth in
the immediately preceding statement.
51
<PAGE>
The Company will provide without charge to each person who receives a
Prospectus, upon written or oral request of such person, a copy of the
information that is incorporated by reference herein (not including exhibits to
the information that is incorporated by reference herein). Requests for such
information should be directed to: Family Golf Centers, Inc., 538 Broadhollow
Road, Melville, New York 11747; Attention: Chief Financial Officer. The
Company's telephone number is (516) 694-1666.
52
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
INDEX TO PRO FORMA FINANCIAL INFORMATION
<TABLE>
<S> <C>
Pro forma unaudited condensed balance sheet at March 31, 1998 ........................... P-2
Notes to pro forma unaudited condensed balance sheet .................................... P-4
Pro forma and pro forma as adjusted unaudited condensed statements of operations for the
years ended December 31, 1996 and December 31, 1997 and for the three months ended
March 31, 1997 and March 31, 1998 ...................................................... P-5
Pro forma and pro forma as adjusted unaudited condensed statements of operations for the
year ended December 31, 1997 ........................................................... P-6
Notes to pro forma and pro forma as adjusted unaudited condensed statement of operations
for the year ended December 31, 1997 ................................................... P-7
Pro forma and pro forma as adjusted unaudited condensed statement of operations for the
three months ended March 31, 1998 ...................................................... P-8
Notes to the pro forma and pro forma as adjusted unaudited condensed statement of
operations for the three months ended March 31, 1998 ................................... P-9
</TABLE>
P-1
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
PRO FORMA UNAUDITED
CONDENSED BALANCE SHEET
AT MARCH 31, 1998
The following pro forma condensed balance sheet reflects the June 30, 1998
acquisition of Eagle Quest Golf Centers, Inc. and subsidiaries ("Eagle Quest"),
accounted for on a pooling-of-interests basis, and the transactions indicated
below as if they had occurred on March 31, 1998: (1) the assumed acquisition of
certain assets and liabilities of Golden Bear Golf Centers, Inc. (the "Golden
Bear Acquisition"), using the assumed additional borrowings of $22,954,000, and
accounted for as a purchase in accordance with Accounting Principles Board
Opinion No. 16 and (2) the Golden Bear Acquisition and the assumed repayment of
outstanding indebtedness from the net proceeds from the sale of 1,112,000
shares of Common Stock of the Company, all at an assumed offering price of
$25.50 per share. In the opinion of management of the Company, all adjustments
necessary to present fairly such pro forma condensed balance sheet have been
made.
The pro forma unaudited condensed balance sheet should be read in
conjunction with the notes thereto, the supplemental financial statements and
the financial statements of the Company, Eagle Quest and Golden Bear, and the
notes thereto, and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," each included elsewhere in this
Prospectus. The pro forma unaudited condensed balance sheet is not necessarily
indicative of what the actual financial position would have been had the
transactions occurred on March 31, 1998, nor does it purport to represent the
future financial position of the Company.
P-2
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
PRO FORMA UNAUDITED CONDENSED BALANCE SHEET
AT MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY GOLDEN BEAR
SUPPLEMENTAL (1) ACQUISITION
------------------ -------------
<S> <C> <C>
ASSETS
- ------
Cash and cash equivalents ............. $ 2,211 $ 1,203
Restricted cash deposits .............. 324
Short-term investments ................ 7,799
Inventories ........................... 18,636 2,363
Prepaid expenses and other current
assets ............................... 9,837 599
Prepaid income taxes .................. 1,907
-------- --------
Total current assets .................. 40,714 4,165
Property, plant and equipment ......... 284,215 23,411
Investment in JNAI .................... 148
Loan acquisition costs ................ 6,009
Other assets .......................... 8,561
Excess of cost over fair value ........ 39,408 6,691
-------- --------
Total assets ........................ $378,907 $ 34,415
======== ========
LIABILITIES AND
- --------------
STOCKHOLDERS' EQUITY
- ---------------------
Accounts payable, accrued expenses
and other current liabilities ........ $ 18,627 $ 2,765
Due to affiliates ..................... 720
Deferred revenue ...................... 30
Current portion long-term
obligations .......................... 11,349 3,482
-------- --------
Total current liabilities ........... 29,976 6,997
Convertible subordinated notes ........ 115,000
Long-term obligations (less current
portion) ............................. 39,849 8,281
Subordinated debentures ............... 5,065
Redeemable equity securities .......... 2,829
Deferred rent ......................... 709
Deferred tax liability ................ 4,196
Other liabilities ..................... 700
-------- --------
Total liabilities ................... 198,324 15,278
Minority interest ..................... 214
Common stock .......................... 207 4
Additional paid in capital ............ 175,817 28,361
Retained earnings ..................... 4,860 (9,228)
Foreign currency translation
adjustment ........................... 214
Unearned compensation ................. (682)
Treasury stock ........................ (47)
-------- --------
Total stockholders' equity .......... 180,369 19,137
-------- --------
Total liabilities and
stockholders' equity ............... $378,907 $ 34,415
======== ========
<CAPTION>
PRO FORMA
REFLECTING THE
PRO FORMA GOLDEN BEAR
REFLECTING THE ACQUISITION AND
PRO FORMA GOLDEN BEAR PRO FORMA REPAYMENT OF
ADJUSTMENTS ACQUISITION ADJUSTMENTS DEBT
--------------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C>
ASSETS
- ------
Cash and cash equivalents ............. $ (1,203)(A) $ 2,211 -- $ 2,211
Restricted cash deposits .............. 324 -- 324
Short-term investments ................ 7,799 -- 7,799
Inventories ........................... 20,999 -- 20,999
Prepaid expenses and other current
assets ............................... (62)(A) 10,374 -- 10,374
Prepaid income taxes .................. 1,907 -- 1,907
----------- -------- ---------- --------
Total current assets .................. (1,265) 43,614 -- 43,614
Property, plant and equipment ......... (366)(A) 307,260 307,260
Investment in JNAI .................... (148)(A)
Loan acquisition costs ................ 6,009 $ (1,002)(D) 5,007
Other assets .......................... 8,561 -- 8,561
Excess of cost over fair value ........ 1,691 (B) 47,787 -- 47,787
----------- -------- ---------- --------
(3)(A)
Total assets ........................ $ (91) $413,231 $ (1,002) $412,229
============= ======== ========== ========
LIABILITIES AND
- ---------------
STOCKHOLDERS' EQUITY
- ---------------------
Accounts payable, accrued expenses
and other current liabilities ........ $ (441)(A) $ 20,951 -- $ 20,951
Due to affiliates ..................... (720)(A)
Deferred revenue ...................... (30)(A)
Current portion long-term
obligations .......................... (2,717)(A) 12,114 $ (4,835)(C) 7,279
------------- -------- ---------- --------
Total current liabilities ........... (3,908) 33,065 (4,835) 28,230
Convertible subordinated notes ........ 115,000 -- 115,000
Long-term obligations (less current
portion) ............................. 22,954(B) 71,084 (13,501)(C) 57,583
Subordinated debentures ............... 5,065 (5,065)(C) --
Redeemable equity securities .......... 2,829 -- 2,829
Deferred rent ......................... 709 -- 709
Deferred tax liability ................ 4,196 -- 4,196
Other liabilities ..................... 700 -- 700
------------- -------- ---------- --------
Total liabilities ................... 19,046 232,648 (23,401) 209,247
Minority interest ..................... 214 -- 214
Common stock .......................... (4) (B) 209 11 (C) 220
Additional paid in capital ............ (28,361) (B) 175,815 26,911 (C) 202,726
Retained earnings ..................... 7,102 (B) 4,860 (1,002)(D) 337
2,126 (A) (3,521)(E)
Foreign currency translation
adjustment ........................... 214 -- 214
Unearned compensation ................. (682) -- (682)
Treasury stock ........................ (47) -- (47)
------------- -------- ---------- --------
Total stockholders' equity .......... (19,137) 180,369 22,399 202,768
------------- -------- ---------- --------
Total liabilities and
stockholders' equity ............... $ (91) $413,231 $ (1,002) $412,229
============= ======== ========== ========
</TABLE>
- ----------
(1) Restated giving effect to the acquisition of Eagle Quest on June 30, 1998
and accounted for as a pooling-of-interests.
P-3
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA UNAUDITED CONDENSED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(A) Golden Bear assets and liabilities not acquired.
(B) To reflect the assumed acquisition of Golden Bear as follows:
<TABLE>
<CAPTION>
PAID IN
TOTAL COMMON STOCK CAPITAL DEFICIT GOODWILL
---------- -------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Purchase Price:
Golden Bear stockholders' equity ......... $21,263 $ (4) $ (28,361) $7,102
Excess of cost over fair value of assets
acquired ................................ $ 1,691 $1,691
------- ---- --------- ------ ------
Amount borrowed ......................... $22,954 $ (4) $ (28,361) $7,102 $1,691
======= ==== ========= ====== ======
</TABLE>
(C) Reflects the sale of 1,112,000 shares of Common Stock of the Company at an
assumed offering price of $25.50 per share, the net proceeds of which will
be used to repay indebtedness of $26,922, including $645 of prepayment
penalties and $2,876 of debt discounts.
(D) To write-off loan acquisition costs relating to the repayment of debt.
(E) To record prepayment penalty on the repayment of debt of $645 and to record
the write-off of debt discounts of $2,876.
P-4
<PAGE>
FAMILY GOLF CENTERS AND SUBSIDIARIES
PRO FORMA AND PRO FORMA AS ADJUSTED UNAUDITED CONDENSED
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1997 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1998
The following pro forma unaudited condensed statement of operations for
the year ended December 31, 1997 reflects the results of operations of Eagle
Quest acquired on June 30, 1998 on a pooling-of-interests basis, and the LCI
Acquisition and the MetroGolf Acquisition (together, the "Acquired Companies"),
the 1997 Acquisitions (as defined), and further reflects the assumed Golden
Bear Acquisition as if such transactions had occurred on January 1, 1997. The
pro forma as adjusted unaudited condensed statement of operations for the year
ended December 31, 1997 assumes the consummation of the aforementioned
transactions and the assumed repayment of outstanding indebtedness from the net
proceeds of the sale of 454,000 shares of Common Stock of the Company all at an
assumed offering price of $25.50 per share. The acquisition of the Acquired
Companies, the 1997 Acquisitions and the assumed Golden Bear Acquisition have
been accounted for as purchases in accordance with Accounting Principles Board
Opinion No. 16. In the opinion of management of the Company, all adjustments
necessary to present fairly such pro forma statements of operations have been
made.
The following pro forma unaudited condensed statement of operations for
the three months ended March 31, 1998 reflects the results of operations of
Eagle Quest acquired on June 30, 1998 on a pooling-of-interests basis and the
MetroGolf Acquisition and further reflects the assumed Golden Bear Acquisition
as if such transactions had occurred on January 1, 1998. The pro forma as
adjusted unaudited statement of operations for the three months ended March 31,
1998 assumes the consummation of the aforementioned transactions and the
repayment of outstanding indebtedness from the net proceeds of the sale of
1,112,000 shares of Common Stock of the Company, all at an assumed offering
price of $25.50 per share.
These pro forma and pro forma as adjusted unaudited condensed statements
of operations should be read in conjunction with the notes thereto, the
supplemental financial statements and the financial statements of the Company,
Eagle Quest, the Acquired Companies and Golden Bear, and the notes thereto, and
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations," each included elsewhere in this Prospectus. The pro forma and
pro forma as adjusted condensed statements of operations are not necessarily
indicative of what the actual results of operations would have been had the
transactions occurred on January 1, 1997 or January 1, 1998, nor do they
purport to indicate the results of future operations.
In addition, as a result of the timing of the Company's acquisitions, the
seasonality of the Company's business, the expansion of the Company's business
to include complementary sports and family entertainment facilities and other
factors, the pro forma and pro forma as adjusted results of operations are not
necessarily indicative of future results. See "Risk Factors."
P-5
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
PRO FORMA AND PRO FORMA AS ADJUSTED
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THE COMPANY THE 1997 LCI
SUPPLEMENTAL(1) ACQUISITIONS(2) ACQUISITION (2)
----------------- ----------------- -----------------
<S> <C> <C> <C>
Operating revenues ............................ $ 54,599 $4,368 $ 10,763
Merchandise sales ............................. 18,398 36 --
-------- ------ --------
Total revenue ................................. 72,997 4,404 10,763
Operating expenses ............................ 37,386 3,309 8,209
Cost of merchandise sold ...................... 12,366 1,177
Selling, general, and administrative expense .. 12,630 92 1,051
-------- ------ --------
Operating income (loss) ....................... 10,615 (174) 1,503
Interest expense .............................. (3,863) (184) (1,406)
Other income (expense) ........................ 1,659 13 --
-------- ------ --------
Income (loss) before income taxes ............. 8,411 (345) 97
Income tax expense (benefit) .................. 5,142 1 33
Minority interest in loss ..................... -- -- --
-------- ------ --------
Net income (loss) ............................. $ 3,269 $ (346) $ 64
======== ====== ========
Net income per share:
Basic ......................................... $ 0.17
Diluted ....................................... 0.16
Weighted average shares outstanding (000's):
Basic ......................................... 19,344
Diluted ....................................... 19,814
<CAPTION>
PRO FORMA
REFLECTING
METROGOLF PRO FORMA THE ACQUIRED GOLDEN BEAR
ACQUISITION(3) ADJUSTMENTS COMPANIES(4) ACQUISITION(3)
---------------- ----------------- -------------- ----------------
<S> <C> <C> <C> <C>
Operating revenues ............................ $ 4,178 -- $ 73,908 $ 15,995
Merchandise sales ............................. -- -- 18,434 --
-------- ---------- -------- --------
Total revenue ................................. 4,178 -- 92,342 15,995
Operating expenses ............................ 8,485 $ 216 (A) 56,813 19,895
(792)(A)
Cost of merchandise sold ...................... -- -- 13,543 --
Selling, general, and administrative expense .. -- -- 13,773 3,180
-------- ---------- -------- --------
Operating income (loss) ....................... (4,307) 576 8,213 (7,080)
Interest expense .............................. (2,323) 980 (A) (6,007) (769)
789 (A)
Other income (expense) ........................ 28 (575)(A) 1,125 108
-------- ---------- -------- --------
Income (loss) before income taxes ............. (6,602) 1,770 3,331 (7,741)
Income tax expense (benefit) .................. -- (2,190)(C) 2,986 (795)
Minority interest in loss ..................... 100 -- 100 --
-------- ---------- -------- --------
Net income (loss) ............................. $ (6,502) $ 3,960 $ 445 $ (6,946)
======== ========== ======== ========
Net income per share:
Basic ......................................... $ 0.02
Diluted ....................................... 0.02
Weighted average shares outstanding (000's):
Basic ......................................... 1,332 (E) 20,676
Diluted ....................................... 1,332 (E) 21,146
<CAPTION>
PRO FORMA
REFLECTING
THE ACQUIRED
COMPANIES AND
PRO FORMA THE GOLDEN BEAR OFFERING PRO FORMA
ADJUSTMENTS ACQUISITION(5) ADJUSTMENTS AS ADJUSTED(6)
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Operating revenues ............................ $ (880)(B) $ 89,023 -- $ 89,023
Merchandise sales ............................. -- 18,434 -- 18,434
---------- -------- --------- ---------
Total revenue ................................. (880) 107,457 -- 107,457
Operating expenses ............................ (581)(B) 76,127 -- 76,127
Cost of merchandise sold ...................... -- 13,543 -- 13,543
Selling, general, and administrative expense .. 85 (B) 17,038 -- 17,038
---------- -------- --------- ---------
Operating income (loss) ....................... (384) 749 -- 749
Interest expense .............................. -- (6,776) 1,602 (F) (5,174)
Other income (expense) ........................ (1,318)(B) (85) (85)
---------- -------- --------- ---------
Income (loss) before income taxes ............. (1,702) (6,112) 1,602 (4,510)
Income tax expense (benefit) .................. (2,982)(D) (791) -- (791)
Minority interest in loss ..................... -- 100 -- 100
---------- -------- --------- ---------
Net income (loss) ............................. $ 1,280 $ (5,221) $ 1,602 $ (3,619)
========== ======== ========= =========
Net income per share:
Basic ......................................... $ (0.17)
Diluted .......................................
Weighted average shares outstanding (000's):
Basic ......................................... 454 (F) 21,130 (7)
Diluted .......................................
</TABLE>
- -------
(1) Restated to give effect to the acquisition of Eagle Quest and
subsidiaries on June 30, 1998 and accounted for as a pooling-of-interests.
(2) Represents operations from January 1, 1997 through date of acquisition.
(3) Represents operations for the year ended December 31, 1997.
(4) Pro forma for the MetroGolf Acquisition, the LCI Acquisition and the 1997
Acquisitions as if they had been consummated on January 1, 1997.
(5) Pro forma for the MetroGolf Acquisition, the LCI Acquisition, the 1997
Acquisitions and the Golden Bear Acquisition as if they had been
consummated on January 1, 1997.
(6) Pro forma for the MetroGolf Acquisition, the LCI Acquisition, the 1997
Acquisitions and the Golden Bear Acquisition as if they had been
consummated on January 1, 1997 and the assumed repayment of outstanding
indebtedness with a portion of the net proceeds of the Offering.
(7) On a pro forma basis, the effect of dilutive securities is anti-dilutive
and therefore is not shown.
P-6
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA AND PRO FORMA AS ADJUSTED
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(A) Expense adjustments for the period ended December 31, 1997 to
reflect the acquisition of the Acquired Companies as if the
acquisitions had taken place at the beginning of the year:
<TABLE>
<CAPTION>
OTHER
OTHER FINANCING
INTEREST DEPRECIATION OPERATING (INCOME) CHARGE
ADJUSTMENT ADJUSTMENT EXPENSES EXPENSE ADJUSTMENT
---------------- -------------- ----------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
1997 Acquisitions ............. $ (213)(1) $ 240 $ (367) -- --
MetroGolf Acquisition ......... (767)(2) (24) (425) $ 575 (3) $ (789) (4)
------- ----- ------ ------ --------
$ (980) $ 216 $ (792) $ 575 $ (789)
======= ===== ====== ====== ========
</TABLE>
(B) Adjustments for the year ended December 31, 1997 to reflect the
assumed acquisition of Golden Bear as if the acquisition had taken
place at the beginning of the year:
<TABLE>
<CAPTION>
OTHER
DEPRECIATION OPERATING (INCOME) OPERATING
ADJUSTMENT EXPENSES EXPENSE REVENUE
-------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Golden Bear Acquisition ......... $85 $ 494 (7) $ 168 (5) $ (880)(6)
(1,075)(8) 1,150 (9)
--- --------- -------- --------
$85 $ (581) $ 1,318 $ (880)
=== ========= ======== =======
</TABLE>
------------
(1) Assumes average borrowing at interest rates of 8.00% per annum.
(2) Assumes reduction of borrowings at interest rates of 5.75% per
annum.
(3) Assumes interest earned at the rate of 5.00% per annum.
(4) Assumes the elimination of the financing charge incurred in
connection with the issuance of debt with below market conversion
features.
(5) Elimination of Golden Bear's interest income.
(6) Elimination of franchise and royalty fee income.
(7) To reflect the terms of the new license agreement with Golden Bear.
(8) Elimination of corporate overhead allocation.
(9) Assumes reduction of interest income upon acquisition of Golden Bear
at the rate of 5.00% per annum.
(C) To reflect the income tax effect arising from the losses of
MetroGolf, LCI and the 1997 Acquisitions.
(D) To reflect the income tax effect arising from the losses of Golden
Bear.
(E) To reflect the issuance of Common Stock for the 1997 Acquisitions.
(F) To reflect the reduction of interest expense assuming that the net
proceeds from the sale of 454,000 shares of Common Stock of the
Company at an assumed offering price of $25.50 per share had been
applied to the repayment of indebtedness outstanding at the
beginning of the year or from the date incurred during the year.
The pro forma and pro forma as adjusted unaudited condensed statement of
operations for the year ended December 31, 1997 does not reflect an adjustment
for costs in connection with the Eagle Quest Acquisition which will be expensed
as incurred, and extraordinary charges in connection with the assumed
prepayment of indebtedness, severance and other charges related to the Eagle
Quest Acquisition.
P-7
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
PRO FORMA AND PRO FORMA AS ADJUSTED
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
REFLECTING
THE COMPANY METROGOLF PRO FORMA THE METROGOLF
SUPPLEMENTAL(2) ACQUISITION(3) ADJUSTMENTS ACQUISITION (4)
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Operating revenues ............................... $ 16,737 $ 109 -- $ 16,846
Merchandise sales ................................ 4,760 18 -- 4,778
-------- ------ -------- --------
Total revenue .................................... 21,497 127 -- 21,624
Operating expenses ............................... 13,751 845 $ (35) (A) 14,563
2 (A)
Cost of merchandise sold ......................... 3,240 -- -- 3,240
Selling, general, and administrative expense ..... 3,662 -- 3,662
-------- ------ -------- --------
Operating income (loss) .......................... 844 (718) 33 159
Interest expense ................................. (2,629) (182) 91 (2,720)
Other income (expense) ........................... 956 -- (48) (A) 908
-------- ------ -------- --------
Income (loss) before income taxes ................ (829) (900) 76 (1,653)
Income tax expense ............................... 860 -- (338) (C) 522
Minority interest in loss ........................ -- 18 -- 18
-------- ------ -------- --------
Net income (loss) ................................ $ (1,689) $ (882) $ 414 $ (2,157)
======== ====== ======== ========
Net income (loss) per share
Basic and diluted(1) ............................ $ (0.08) $ (0.10)
Weighted average shares outstanding (000's)
Basic and diluted(1) ............................ 20,599 20,599
<CAPTION>
PRO FORMA
REFLECTING
THE ACQUIRED
COMPANIES AND THE
GOLDEN BEAR PRO FORMA GOLDEN BEAR OFFERING
ACQUISITION(5) ADJUSTMENTS ACQUISITION(6) ADJUSTMENTS
---------------- ---------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Operating revenues ............................... $ 3,686 $ (220)(B) $ 20,312
Merchandise sales ................................ 4,778
-------- ------- -------- ---------
Total revenue .................................... 3,686 (220) 25,090
Operating expenses ............................... 4,398 (48)(B) 18,913
Cost of merchandise sold ......................... 3,240
Selling, general, and administrative expense ..... 812 21 (B) 4,495
-------- ------- -------- ---------
Operating income (loss) .......................... (1,524) (193) (1,558) --
Interest expense ................................. (269) (2,989) $ 830 (F)
Other income (expense) ........................... (385)(B) 523
-------- ------- -------- ---------
Income (loss) before income taxes ................ (1,793) (578) (4,024) 830
Income tax expense ............................... 4 952 (D) (426)
Minority interest in loss ........................ 18
-------- ------- -------- ---------
Net income (loss) ................................ $ (1,797) $ 374 $ (3,580) $ 830
======== ======= ======== =========
Net income (loss) per share
Basic and diluted(1) ............................
Weighted average shares outstanding (000's)
Basic and diluted(1) ............................ 1,112 (F)
<CAPTION>
PRO FORMA
AS ADJUSTED(7)
---------------
<S> <C>
Operating revenues ............................... $ 20,312
Merchandise sales ................................ 4,778
--------
Total revenue .................................... 25,090
Operating expenses ............................... 18,913
Cost of merchandise sold ......................... 3,240
Selling, general, and administrative expense ..... 4,495
--------
Operating income (loss) .......................... (1,558)
Interest expense ................................. (2,159)
Other income (expense) ........................... 523
--------
Income (loss) before income taxes ................ (3,194)
Income tax expense ............................... (426)
Minority interest in loss ........................ 18
--------
Net income (loss) ................................ $ (2,750)
========
Net income (loss) per share
Basic and diluted(1) ............................ $ (0.13)
Weighted average shares outstanding (000's)
Basic and diluted(1) ............................ 21,711
</TABLE>
- -------
(1) On a pro forma basis, the effect of dilutive securities is anti-dilutive
and therefore is not shown.
(2) Restated to give effect to the acquisition of Eagle Quest and
subsidiaries on June 30, 1998 and accounted for as a pooling-of-interests.
(3) Represents operations of MetroGolf from January 1, 1998 through date of
acquisition.
(4) Pro forma for the MetroGolf Acquisition as if it had been consummated on
January 1, 1998.
(5) Represents operations for the three months ended March 31, 1998.
(6) Pro forma for the MetroGolf Acquisition and the Golden Bear Acquisition
as if they had been consummated on January 1, 1998.
(7) Pro forma for the MetroGolf Acquisition and the Golden Bear Acquisition
as if they had been consummated on January 1, 1998 and the assumed
repayment of outstanding indebtedness with a portion of the net proceeds
of the Offering.
P-8
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA AND PRO FORMA AS ADJUSTED
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
(A) Adjustments for the period ended March 31, 1998 to reflect the
MetroGolf Acquisition as if the acquisition had taken place at the
beginning of the period:
<TABLE>
<CAPTION>
OTHER
INTEREST OPERATING DEPRECIATION (INCOME)
ADJUSTMENT EXPENSES ADJUSTMENT EXPENSE
----------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
MetroGolf Acquisition ......... $ (91) (1) $ (35) $2 $ 48(2)
------- ----- -- -------
$ (91) $ (35) $2 $ 48
======= ===== == =======
</TABLE>
------------
(1) Assumes reduction of borrowings at interest rates of 5.75% per
annum.
(2) Assumes interest earned at the rate of 5.00% per annum.
B) Adjustments for the period ended March 31, 1998 to reflect the assumed
acquisition of Golden Bear as if the acquisition had taken place at the
beginning of the period:
<TABLE>
<CAPTION>
OTHER
DEPRECIATION OPERATING OPERATING (INCOME)
ADJUSTMENT EXPENSES REVENUE EXPENSE
-------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Golden Bear Acquisition ......... $21 $ 127(2) $ 220(1) $ 125(4)
(175)(3) 260(5)
--- --------- -------- --------
$21 $ (48) $ 220 $ 385
=== ========= ======== ========
</TABLE>
(1) Elimination of franchise and royalty fee income.
(2) To reflect the terms of the new license agreement with Golden Bear.
(3) Elimination of corporate overhead allocation.
(4) Assumes reduction of interest income upon acquisition of Golden Bear
at the rate of 5.00% per annum.
(5) Assumes average borrowing at interest rates of 8.00% per annum.
(C) To reflect the income tax effect arising from the losses from the
MetroGolf Acquisition.
(D) To reflect the income tax effect arising from the losses from the
Golden Bear Acquisition.
(E) To reflect the reduction of interest expense assuming that the net
proceeds from the sale of 1,112,000 shares of Common Stock of the
Company at an assumed offering price of $25.50 per share had been
applied to the repayment of indebtedness outstanding at the
beginning of the period or from the date incurred during the period.
The pro forma and pro forma as adjusted unaudited condensed statement of
operations for the three months ended March 31, 1998 does not reflect an
adjustment for costs in connection with the Eagle Quest Acquisition which will
be expensed as incurred, and extraordinary charges in connection with the
assumed prepayment of indebtedness, severance and other charges related to the
Eagle Quest Acquisition.
P-9
<PAGE>
INDEX TO SUPPLEMENTAL FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
Independent auditors' report .......................................................... S-2
Consolidated supplemental balance sheets as at December 31, 1996, December 31, 1997 and
March 31, 1998 (unaudited) .......................................................... S-3
Consolidated supplemental statements of operations for the years ended December 31,
1995, December 31, 1996, December 31, 1997 and for the three months ended March 31,
1997 (unaudited) and March 31, 1998 (unaudited) ..................................... S-4
Consolidated supplemental statements of changes in stockholders' equity for the years
ended December 31, 1995, December 31, 1996, December 31, 1997 and for the three
months ended March 31, 1998 (unaudited) ............................................. S-5
Consolidated supplemental statements of cash flows for the years ended December 31,
1995, December 31, 1996, December 31, 1997 and for the three months ended March 31,
1997 (unaudited) and March 31, 1998 (unaudited) ..................................... S-6
Notes to financial statements ......................................................... S-7
</TABLE>
S-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Family Golf Centers, Inc.
Melville, New York
We have audited the accompanying supplemental consolidated balance sheets
of Family Golf Centers, Inc. and subsidiaries (reflecting the consolidation of
Family Golf Centers, Inc. and Eagle Quest Golf Centers, Inc.) as of December
31, 1997 and 1996 and the related supplemental consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1997. These supplemental
consolidated financial statements are the responsibility of the management of
Family Golf Centers, Inc. Our responsibility is to express an opinion on these
supplemental consolidated financial statements based on our audits. We did not
audit the consolidated financial statements of Eagle Quest Golf Centers, Inc.
and subsidiaries which statements reflect total assets of $37,528,000 for 1997
and $13,405,000 for 1996 of the related supplemental consolidated financial
statement totals, and which reflect net losses of $7,255,000 for 1997 and
$1,349,000 for 1996 included in the related supplemental consolidated financial
statement totals. These statements were audited by other auditors, whose report
has been furnished to us, and our opinion insofar as its relates to data
included for Eagle Quest Golf Centers, Inc. and subsidiaries, is based solely
on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect
to the acquisition of Eagle Quest Golf Centers, Inc. on June 30, 1998, which
has been accounted for as a pooling-of-interests as described in Note B to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that
do not include the date of consummation. These financial statements do not
extend through the date of consummation. However, they will become the
historical consolidated financial statements of Family Golf Centers, Inc. and
subsidiaries after financial statements covering the date of consummation of
the business combination are issued.
In our opinion, based on our audit and the report of other auditors, the
supplemental consolidated financial statements enumerated above present fairly,
in all material respects, the consolidated financial position of Family Golf
Centers, Inc. and subsidiaries at December 31, 1997 and 1996 and the
consolidated results of their operations and their consolidated cash flows for
each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles applicable after
financial statements are issued for a period which includes the date of
consummation of the business combination.
Richard A. Eisner & Company, LLP
New York, New York
March 26, 1998, except as to Notes
B and P as to which the dates are
June 30, 1998 and June 16, 1998, respectively.
S-2
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIAIRES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1996 1997 1998
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 5,143 $ 6,042 $ 2,211
Restricted cash deposits ........................................... 332 390 324
Short-term investments ............................................. 33,838 55,846 7,799
Inventories ........................................................ 6,823 14,855 18,636
Prepaid expenses and other current assets .......................... 4,052 9,298 9,837
Prepaid income taxes ............................................... 600 1,907
-------- -------- --------
Total current assets ............................................. 50,788 86,431 40,714
Property, plant and equipment net .................................. 112,296 235,875 284,215
Loan acquisition costs (net of accumulated amortization of
$61, $305 and $536 at December 31, 1996, December 31,
1997 and March 31, 1998, respectively) ........................... 185 5,738 6,009
Other assets ....................................................... 3,152 9,279 8,561
Excess of cost over fair value of assets acquired (net of
accumulated amortization of $108, $626, and $971 at
December 31, 1996, December 31, 1997 and March 31, 1998,
respectively) .................................................... 5,277 25,713 39,408
-------- -------- --------
$171,698 $363,036 $378,907
======== ======== ========
LIABILITIES
Current liabilities:
Accounts payable, accrued expenses and other current
liabilities ...................................................... $ 4,725 $ 11,247 $ 18,521
Income taxes payable ............................................... 2,626
Short-term loan payable -- bank .................................... 5,000 63 106
Current portion of long-term obligations ........................... 4,420 10,877 11,349
-------- -------- --------
Total current liabilities ........................................ 14,145 24,813 29,976
Convertible subordinated notes ...................................... 115,000 115,000
Long-term obligations (less current portion) ........................ 12,563 32,110 39,849
Subordinated debenture .............................................. 4,981 5,065
Redeemable equity securities ........................................ 2,805 2,829
Deferred rent ....................................................... 233 650 709
Deferred tax liability .............................................. 254 4,196 4,196
Other liabilities ................................................... 147 208 700
-------- -------- --------
Total liabilities ................................................ 27,342 184,763 198,324
-------- -------- --------
Minority interest ................................................... 214
--------
Commitments, contingencies and other matters
STOCKHOLDERS' EQUITY
Preferred stock -- authorized 2,000,000 shares, none outstanding.....
Common stock -- authorized 50,000,000 shares, $.01 par value;
18,589,246, 20,500,448 and 20,753,751 shares outstanding at
December 31, 1996, December 31, 1997 and March 31, 1998,
respectively ....................................................... 186 204 207
Additional paid-in capital .......................................... 140,428 171,542 175,817
Retained earnings ................................................... 4,280 6,549 4,860
Accumulated other comprehensive income:
Foreign currency translation adjustment .......................... 195 214
Subscriptions receivable ............................................ (491)
Unearned compensation ............................................... (170) (682)
Treasury shares ..................................................... (47) (47) (47)
-------- -------- --------
Total stockholders' equity ....................................... 144,356 178,273 180,369
-------- -------- --------
$171,698 $363,036 $378,907
======== ======== ========
</TABLE>
See notes to financial statements.
S-3
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenues ............................... $ 9,795 $21,395 $ 54,599 $ 6,874 $ 16,737
Merchandise sales ................................ 2,637 6,657 18,398 2,827 4,760
------- ------- -------- ------- --------
Total revenues ................................ 12,432 28,052 72,997 9,701 21,497
------- ------- -------- ------- --------
Operating expenses ............................... 6,614 13,335 37,386 6,030 13,751
Cost of merchandise sold ......................... 1,779 4,540 12,366 1,932 3,240
Selling, general and administrative expenses ..... 1,242 4,760 12,630 2,339 3,662
------- ------- -------- ------- --------
Total expenses ................................ 9,635 22,635 62,382 10,301 20,653
------- ------- -------- ------- --------
Operating income (loss) .......................... 2,797 5,417 10,615 (600) 844
Interest expense ................................. (939) (383) (3,863) (308) (2,629)
Other income -- net (includes interest income
of $1,755 and $1,570 for the years ended
December 31, 1996 and December 31, 1997,
respectively, and $466 and $528 for the
three months ended March 31, 1997 and
March 31, 1998, respectively) ................... 66 2,172 1,659 466 956
------- ------- -------- ------- --------
Income (loss) before income taxes and
extraordinary items ............................. 1,924 7,206 8,411 (442) (829)
Income tax expense ............................... 669 2,884 5,142 345 860
------- ------- -------- ------- --------
Income (loss) before extraordinary item .......... 1,255 4,322 3,269 (787) (1,689)
Extraordinary charge -- early extinguishment
of debt (net of tax benefit of $121) ............ (181)
------- ------- -------- ------- --------
Net income (loss) ................................ $ 1,074 $ 4,322 $ 3,269 $ (787) $ (1,689)
======= ======= ======== ======= ========
Basic earnings (loss) per share:
Income (loss) before extraordinary item ......... $ .16 $ .28 $ .17 $ (.04) $ (.08)
Extraordinary item .............................. (.02)
------- ------- -------- ------- --------
Net income (loss) ............................... $ .14 $ .28 $ .17 $ (.04) $ (.08)
------- ------- -------- ------- --------
Diluted earnings (loss) per share:
Income (loss) before extraordinary item ......... $ .16 $ .27 $ .16 $ (.04) $ (.08)
Extraordinary item .............................. (.02)
------- ------- --------
Net income (loss) ............................... $ .14 $ .27 $ .16 $ (.04) $ (.08)
======= ======= ======== ======= ========
Weighted average shares outstanding --
basic (000s).................................... 7,676 15,473 19,344 18,618 20,599
Effect of dilutive securities (000s) ............. 231 432 470
------- ------- -------- ------- --------
Weighted average shares outstanding --
diluted (000s) .................................. 7,907 15,905 19,814 18,618 20,599
======= ======= ======== ======= ========
</TABLE>
See notes to financial statements.
S-4
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
(COMMON STOCK - COMPREHENSIVE
PAR VALUE $.01) INCOME
---------------------- --------------
NUMBER OF FOREIGN
SHARES ADDITIONAL RETAINED CURRENCY
ISSUED AND PAID-IN EARNINGS TRANSACTION
OUTSTANDING AMOUNT CAPITAL (DEFICIT) ADJUSTMENT
------------- -------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance -- December 31, 1994 ............ 7,245,000 $ 72 $ 7,278 $ (116)
Issuance of stock ....................... 426,450 4 2,731
Net proceeds from public offering ....... 4,702,500 47 43,686
Public offering expenses ................ (1,317)
Exercise of warrants .................... 97,425 1 307
Exercise of options ..................... 5,692 1 12
Preferential distribution to stock-
holders of The Practice Tee, Inc. (4,392)
Net income and comprehensive
income for the year .................... 1,074
---------- --- ------ ------ -------
Balance -- December 31, 1995 ............ 12,477,067 125 48,305 958
Issuance of stock for cash notes and
in connection with acquisitions ........ 1,329,043 13 14,905
Issuance of warrants .................... 69
Net proceeds from public offering ....... 4,500,000 45 75,285
Public offering expenses ................ (1,064)
Exercise of warrants .................... 225,000 2 1,830
Exercise of employee options ............ 58,136 1 212
Preferential distribution to stock-
holders of The Practice Tee, Inc. (1,000)
Treasury stock received in exchange
for note receivables (2,700 shares).....
Issuance of stock for services
rendered ............................... 386
Income tax benefit upon exercise of
stock options .......................... 500
Net income and comprehensive
income for the year .................... 4,322
---------- --- ------ ------ -------
Balance -- December 31, 1996 ............ 18,589,246 186 140,428 4,280
Issuance of stock and warrants for
cash and in connection with
acquisitions ........................... 1,657,111 16 26,752
Exercise of warrants .................... 3,324 127
Exercise of employee options ............ 90,047 1 502
Issuance of stock in connection with
repayment of debt ...................... 133,764 1 2,029
Exercise of options issued in
connection with acquisitions ........... 15,000 250
Preferential distribution to stock-
holders of The Practice Tee, Inc. (1,000)
Issuance of stock for services
rendered ............................... 11,956 419
Income tax benefit upon exercise of
stock options .......................... 355
Deferred stock compensation due to
options granted ........................ 680
Unearned compensation (net) of
amortization ...........................
Net income for the year ................. 3,269
Translation adjustment .................. 195
Comprehensive income ....................
---------- --- ------ ------ -------
Balance -- December 31, 1997 ............ 20,500,448 204 171,542 6,549 195
Issuance of stock ....................... 8,711 134
Issuance of stock in connection with
acquisitions ........................... 60,399 1 1,116
On issuance of stock for debt
(warrants) ............................. 700
Exercise of warrants in connection
with acquisition ....................... 6,788 92
Exercise of warrants .................... 74,484 1 1,005
Exercise of employee options ............ 76,758 1 640
Issuance of stock for compensation ...... 26,163 588
Unearned compensation (net) .............
Net (loss) for the period ............... (1,689)
Translation adjustment .................. 19
Comprehensive loss ......................
---------- --- ------ ------ -------
Balance -- March 31, 1998
(unaudited) ............................ 20,753,751 $207 $175,817 $ 4,860 214
========== ==== ======== ========= ===
<CAPTION>
COMPREHENSIVE
SUBSCRIPTION UNEARNED TREASURY INCOME
RECEIVABLE COMPENSATION SHARES (LOSS) TOTAL
-------------- -------------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Balance -- December 31, 1994 ............ $ 7,234
Issuance of stock ....................... 2,735
Net proceeds from public offering ....... 43,733
Public offering expenses ................ (1,317)
Exercise of warrants .................... 308
Exercise of options ..................... 13
Preferential distribution to stock-
holders of The Practice Tee, Inc. (4,392)
Net income and comprehensive
income for the year .................... 1,074 1,074
=====
---------- --- ------ -------
Balance -- December 31, 1995 ............ 49,388
Issuance of stock for cash notes and
in connection with acquisitions ........ (491) 14,427
Issuance of warrants .................... 69
Net proceeds from public offering ....... 75,330
Public offering expenses ................ (1,064)
Exercise of warrants .................... 1,832
Exercise of employee options ............ 213
Preferential distribution to stock-
holders of The Practice Tee, Inc. (1,000)
Treasury stock received in exchange
for note receivables (2,700 shares)..... $ (47) (47)
Issuance of stock for services
rendered ............................... 386
Income tax benefit upon exercise of
stock options .......................... 500
Net income and comprehensive
income for the year .................... 4,322 4,322
=====
---------- --- ------ -------
Balance -- December 31, 1996 ............ (491) (47) 144,356
Issuance of stock and warrants for
cash and in connection with
acquisitions ........................... 491 27,259
Exercise of warrants .................... 127
Exercise of employee options ............ 503
Issuance of stock in connection with
repayment of debt ...................... 2,030
Exercise of options issued in
connection with acquisitions ........... 250
Preferential distribution to stock-
holders of The Practice Tee, Inc. (1,000)
Issuance of stock for services
rendered ............................... 419
Income tax benefit upon exercise of
stock options .......................... 355
Deferred stock compensation due to
options granted ........................ 680
Unearned compensation (net) of
amortization ........................... (170) (170)
Net income for the year ................. 3,269 3,269
Translation adjustment .................. 195 195
Comprehensive income .................... 3,464
=====
---------- --- ------ -------
Balance -- December 31, 1997 ............ -- (170) (47) 178,273
Issuance of stock ....................... 134
Issuance of stock in connection with
acquisitions ........................... 1,117
On issuance of stock for debt
(warrants) ............................. 700
Exercise of warrants in connection
with acquisition ....................... -- 92
Exercise of warrants .................... 1,006
Exercise of employee options ............ 641
Issuance of stock for compensation ...... 588
Unearned compensation (net) ............. (512) (512)
Net (loss) for the period ............... (1,689) (1,689)
Translation adjustment .................. 19 19
Comprehensive loss ...................... (1,670)
======
---------- --- ------ -------
Balance -- March 31, 1998
(unaudited) ............................ $ (682) $ (47) $180,369
====== ====== ====== ========
</TABLE>
See notes to financial statements.
S-5
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .............................................. $ 1,074 $ 4,323 $ 3,269 $ (787) $ (1,690)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ................................. 739 2,202 7,101 1,161 2,562
Deferred tax expense (benefit) ................................ (51) 62 (153)
Noncash operating expenses .................................... 386 929 460 15
Issuance of warrants for consulting services .................. 69 80
Extraordinary charge -- early extinguishment of debt
-- loan acquisition cost write-off ........................... 302
Changes in:
Inventories .................................................. (1,478) (4,360) (7,643) (3,061) (3,763)
Prepaid expenses and other current assets .................... (778) (3,711) (6,614) (965) (1,240)
Prepaid income taxes ......................................... 600
Other assets ................................................. (749) (1,645) (6,094) (2,071) 722
Accounts payable, accrued expenses andother current
liabilities ................................................ 655 34 4,703 1,602 5,876
Deferred rent ................................................ (71) 117 417 128 59
Other liabilities ............................................ 119 (125) 61 (26) 706
Income taxes payable ......................................... 569 (669) 2,626 (4,533)
--------- --------- ---------- --------- ---------
Net cash provided by (used in) operating activities ........... 331 (3,317) (718) (3,559) (1,286)
--------- --------- ---------- --------- ---------
Cash flows from investing activities:
Acquisitions of property and equipment ......................... (15,213) (61,929) (82,731) (11,664) (43,329)
Increase in security deposits .................................. (230)
Acquisition of goodwill ........................................ (259) (2,117) (15,768) (9,773)
Restricted cash deposits ....................................... (332) (58)
Net (purchase) sales of short-term investments ................. (33,838) (22,008) 21,948 48,113
--------- --------- ---------- --------- ---------
Net cash provided by (used in) investing activities ........... (15,472) (98,446) (120,565) 10,284 (4,989)
--------- --------- ---------- --------- ---------
Cash flows from financing activities:
Loan acquisition costs ......................................... (246) (1,346) (344)
Decrease in due to officers .................................... (455)
Proceeds from convertible subordinated notes net of
expenses ...................................................... 110,550
Proceeds from subordinated debentures .......................... 6,500
Proceeds from loans, bank and others ........................... 17,916 7,594 44,295 160 5,205
Repayment of loans, bank and others ............................ (19,594) (4,584) (44,709) (386) (4,102)
Net proceeds from issuance of common stock ..................... 42,416 78,730 6,092 898 38
Preferential distribution to stockholders of
The Practice Tee, Inc. ........................................ (4,392)
Proceeds from the exercise of warrants and options ............. 321 2,045 800 198 1,647
--------- --------- ---------- --------- ---------
Net cash provided by (used in) financing activities ........... 35,966 83,785 122,182 870 2,444
--------- --------- ---------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............ 20,825 (17,978) 899 7,595 (3,831)
Cash and cash equivalents -- beginning of period ................ 2,296 23,121 5,143 5,143 6,042
--------- --------- ---------- --------- ---------
Cash and cash equivalents -- end of period ...................... $ 23,121 $ 5,143 $ 6,042 $ 12,738 $ 2,211
========= ========= ========== ========= =========
Supplemental and noncash disclosures:
Acquisition of property in exchange for common stock
and warrants .................................................. $ 2,734 $ 9,963 $ 21,167 $ 1,017
Acquisition of property in exchange for redeemable
equity securities ............................................. 514
Acquisition of property subject to loans payable ............... 10,778 22,285 4,058
Issuance of stock in connection with repayment of debt ......... 2,030
Issuance of stock for services rendered ........................ 386 419 53
Acquisition of treasury stock in exchange for payment of
a note receivable ............................................. 47
Acquisition of property in exchange for loans from
selling stockholder ........................................... 3,102 2,053
Income tax benefit from exercise of stock options .............. 500 355
Accrued for preferential distribution to stockholders
of The Practice Tee, Inc. ..................................... 1,000 1,000
Property additions accrued but not paid ........................ $ 669 89 254 $ 105 1,010
Interest paid .................................................. $ 1,296 984 4,303 292 1,578
Taxes paid ..................................................... $ 53 3,069 6,774 1,172 4,980
Acquisition of goodwill in exchange for mortgages
and notes ..................................................... 305 3,742
</TABLE>
S-6
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] THE COMPANY:
Family Golf Centers, Inc. and its wholly-owned subsidiaries ("FGC")
operate golf centers designed to provide a wide variety of practice
opportunities, including facilities for driving, chipping, putting, pitching
and sand play. In addition, FGC's golf centers typically offer golf lessons
instructed by PGA-certified golf professionals, full-line pro shops and other
amenities to encourage family participation. As of December 31, 1997, FGC
owned, leased or managed 60 golf facilities comprised of 46 golf centers and 14
combination golf center and golf course facilities located in 17 states. Of the
golf centers, seven are currently operated under the name "Golden Bear"
pursuant to a nonexclusive license agreement, expiring August 2002, with Golden
Bear Golf Centers, Inc. ("GBGC"). The license agreement is terminable by GBGC
under certain conditions (see Note P). Of the 14 combination golf center and
golf course facilities, 12 include par-3 or 9-hole golf courses, generally
designed to facilitate the practice of golf, and two include regulation 18-hole
golf courses.
In July 1997, FGC acquired Leisure Complexes, Inc. ("LCI"), the operator
of a family sports and entertainment supercenter which includes a golf center,
an 18-hole executive golf course, an ice rink, additional family amusements and
an 18,000 square foot conference center. Also in 1997, FGC acquired an ice rink
facility and another indoor family sports and entertainment supercenter which
includes two ice rinks, two soccer fields and additional family amusements.
On June 30, 1998, FGC acquired Eagle Quest Golf Centers, Inc. which
together with its wholly-owned subsidiaries ("Eagle Quest") operates 18 golf
practice centers, of which five are in British Columbia and Alberta, Canada and
13 are in the states of Texas and Washington in the United States.
[2] PRINCIPLES OF CONSOLIDATION:
The supplemental consolidated financial statements include the accounts of
FGC and Eagle Quest (collectively the "Company"). All significant intercompany
transactions and accounts have been eliminated. These statements give
retroactive effect to the acquisition of Eagle Quest on June 30, 1998, which
has been accounted for as a pooling-of-interests. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that
do not include the date of consummation. These financial statements do not
extend through the date of consummation. However, they will become the
historical consolidated financial statements of the Company after financial
statements covering the date of consummation of the business combination are
issued.
[3] FOREIGN CURRENCY TRANSLATION:
The functional currency of Eagle Quest's Canadian operations is the
Canadian dollar. Assets and liabilities are translated into United States
dollars at the rates of exchange in effect at the balance sheet date and
revenues and expenses are translated at the average rates of exchange for the
period. Translation adjustments are included in the foreign currency
translation adjustment section of shareholders' equity.
Eagle Quest will periodically undertake transactions in a currency other
than its specific functional currency. Such transactions are translated into
the functional currency using exchange rates at the date of the transaction.
Gains and losses arising on settlement of foreign currency denominated
transactions or balances are included in the determination of income. Eagle
Quest does not enter into derivative instruments to offset the impact of
foreign exchange fluctuations. Foreign exchange gains and losses included in
the determination of operations are not significant for any period presented.
S-7
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
[4] CASH EQUIVALENTS:
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.
[5] SHORT-TERM INVESTMENTS:
Short-term investments are classified as "held to maturity" and are
reported at cost plus accrued income which approximates market value.
[6] INVENTORIES:
Inventory consists of merchandise for sale in the pro shop at each
facility and food and beverage in the restaurants and is valued at the lower of
cost, principally determined on a first-in, first-out basis, or market.
[7] PROPERTY, EQUIPMENT AND OTHER LONG LIVED ASSETS:
Property, equipment and other long lived assets are stated at cost.
Depreciation and amortization of the respective assets is computed using the
straight-line method over their estimated lives or the term of the lease,
including expected renewal options, if shorter. Leasehold improvements are
amortized using the straight-line method over the remaining life of the lease,
including expected renewal options.
Excess of cost over fair value of assets acquired ("goodwill") arising on
the acquisition of businesses is amortized on a straight-line basis over its
estimated useful life of 20 years. The Company reviews and assesses the
recoverability of the carrying amount of goodwill, substantially all of which
relates to specific property, together with the related property to determine
potential impairment.
The carrying amount of all long lived assets is evaluated periodically to
determine if adjustment to the useful life or to the unamortized balance is
warranted. Such evaluation is based principally on the expected utilization of
the long lived assets and the projected undiscounted cash flows of the
operations in which the long lived assets are used.
Capitalized costs of long term improvements to existing sites, newly
acquired sites and newly constructed sites include certain internally generated
costs.
[8] PRE-OPENING COSTS:
Currently, costs associated with the opening of a new location are
deferred and amortized over one year following the opening of a site.
Pre-opening costs primarily consist of employee recruitment and training costs
as well as pre-opening marketing expenditures (see Note A[15]).
[9] LOAN ACQUISITION COSTS:
Loan acquisition costs incurred in connection with debt financing are
amortized over the life of the applicable loan weighted in accordance with the
amount of debt outstanding.
[10] INCOME TAXES:
The Company accounts for income taxes utilizing the asset and liability
approach requiring the recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary
S-8
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
differences between the bases of assets and liabilities for financial reporting
purposes and tax purposes and operating loss carryforwards. FGC files a
consolidated federal income tax return with its eligible domestic subsidiaries.
[11] NET INCOME PER SHARE:
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 requires
the reporting of earnings per basic share and earnings per diluted share.
Earnings per basic share are calculated by dividing net income by the weighted
average outstanding shares during the period. Earnings per diluted share are
calculated by dividing net income by the basic shares and all dilutive
securities including options. Earnings per diluted share does not include the
impact of potential common shares which would be antidilutive based on market
prices. Dilutive earnings per share is not presented where the effect of
dilutive securities is anti-dilutive.
[12] USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
[13] CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents and
short-term investments. The Company places its temporary cash investments in
short-term, investment grade, interest bearing securities and, by policy,
limits the amount of credit exposure in any one investment.
[14] STOCK BASED COMPENSATION:
During 1996, the Company implemented Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
The provisions of SFAS No. 123 allow companies to either expense the estimated
fair value of stock options or to continue to follow the intrinsic value method
set forth in APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") but disclose the pro forma effects on net income (loss) had the fair
value of the options been expensed. The Company has elected to continue to
apply APB 25 in accounting for its stock option incentive plans.
[15] RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 1997, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure" and No. 131, "Disclosure about Segments of an Enterprise and
Related Information". These statements are effective for the fiscal years
beginning after December 15, 1997. The Company believes that the above
pronouncements will not have a significant effect on the information presented
in the financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" ("SOP"). The SOP is effective for financial
S-9
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
statements for fiscal years beginning after December 15, 1998 with earlier
application allowable in fiscal years for which annual financial statements
have not been issued. The effects of the initial application of this SOP will
be reported as the cumulative effect of a change in accounting principles. Had
this SOP been adopted effective January 1, 1998, the cumulative effect of the
change would result in a charge for the year ending December 31, 1998 of $1,651
net of related tax benefit.
The supplemental financial statements reflects the adoption of Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
which is effective January 1, 1998 and requires application of the provisions
of the statement to comparative financial statements for earlier periods.
Comprehensive income (loss), which represents all changes in equity that result
from reorganized trnasactions and other economic events of the period other
than transactions with owners in their capacity as owners, is being reported in
the Statement of Changes in Stockholders' Equity.
[16] UNAUDITED FINANCIAL STATEMENTS:
The financial statements as of March 31, 1998 and for the three months
ended March 31, 1998 and March 31, 1997 are unaudited and are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. In the opinion of management, the financial statements include all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the Company's financial position and results of operations.
[17] INTERIM FINANCIAL REPORTING:
Pursuant to APB Opinion No. 28, "Interim Financial Reporting," certain
accounting principles and practices followed for annual reporting are modified
for interim reporting purposes, so that the reported results for these interim
periods better relate to the results of operations for the annual periods.
Therefore, certain costs and expenses other than merchandise cost are allocated
among interim periods based on an estimate of benefit received or activity
associated with the periods.
[18] RECLASSIFICATIONS:
Certain items have been reclassified to conform with the current
year/period presentation.
NOTE B -- COMBINATION WITH EAGLE QUEST GOLF CENTERS, INC.
On June 30, 1998, FGC issued 1,384,735 shares of its common stock in
exchange for all outstanding common stock, options and warrants of 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 always been a part of FGC. The results of
operations previously reported by the separate companies and the combined
amounts presented in the consolidated financial statements follow.
S-10
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE B -- COMBINATION WITH EAGLE QUEST GOLF CENTERS, INC. (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ --------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Total revenues:
FGC ................. $12,432 $27,904 $ 64,825 $ 9,015 $ 19,170
Eagle Quest ......... -- 148 8,172 686 2,327
------- ------- -------- -------- --------
Combined ............ $12,432 $28,052 $ 72,997 $ 9,701 $ 21,497
======= ======= ======== ======== ========
Net Income (Loss):
FGC ................. $ 1,074 $ 5,208 $ 10,524 $ 562 $ 1,346
Eagle Quest ......... -- (886) (7,255) (1,349) (3,035)
------- ------- -------- -------- --------
Combined ............ $ 1,074 $ 4,322 $ 3,269 (787) $ (1,689)
======= ======= ======== ======== ========
</TABLE>
In April 1998, FGC agreed to loan Eagle Quest up to $2,225, of which Eagle
Quest borrowed approximately $1,900 bearing interest at a rate of 15% per annum
during the first three months of its term and 20% per annum during the second
three months of its term and payable in October 1998.
NOTE C -- ACQUISITION OF GOLF FACILITIES
FAMILY GOLF ACQUISITIONS:
In 1996, FGC acquired, (i) golf recreational facilities, in Flemington,
New Jersey; Mohegan Lake, New York; Fairfield, Ohio; Tucson, Arizona; Easton,
Massachusetts; Flanders, New Jersey; Margate, Florida; Maineville, Ohio and
Milwaukee, Wisconsin; (ii) two combination golf center and 9-hole golf courses
in Mesa, Arizona and Virginia Beach, Virginia; (iii) a golf recreational
facility on which there is a 27-hole golf course in Fountain Inn, South
Carolina; and (iv) a par-3 golf course in West Palm Beach, Florida. In 1996,
the Company also acquired leasehold interests and the related existing golf
recreational facilities in Indian River, Virginia; San Jose, California;
Denver, Colorado; Westminster, California; Glen Burnie, Maryland and St. Louis,
Missouri which includes a par-3 golf course. In 1996, FGC also acquired a
concession license with the City of Denver to manage an existing golf
recreational facility and restaurant.
In 1997, FGC acquired a golf recreational facility in Philadelphia,
Pennsylvania and a combination golf center and 18-hole golf course in Palm
Royale, California. In 1997, FGC also acquired leasehold interests and (i) the
related existing golf recreational facilities in Palm Desert, California;
Carver, Massachusetts; Raleigh, North Carolina; Arlington, Texas; San Bruno,
California; Milpitas, California; Warrenville, Illinois; Elk Grove, California;
Columbus, Ohio; Commack, New York and Lake Grove, New York; (ii) the existing
18-hole golf courses in Olney, Maryland and Greenville, South Carolina; and
(iii) an existing golf recreational facility on which there is a 9-hole
executive course in Rio Salado, Arizona. FGC also acquired a concession license
with the City of New York to operate an existing golf recreational facility in
Randalls Island, New York and a management contract from Bergen County, New
Jersey to operate an existing golf-recreational facility.
In addition to the golf facilities, FGC acquired LCI, a New York
corporation that owns and operates a new 170,000 square-foot family sports
supercenter including a golf center, an 18-hole executive golf course, an ice
rink, additional family amusements such as video and virtual reality games and
conference
S-11
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE C -- ACQUISITION OF GOLF FACILITIES (CONTINUED)
center, in Lake Grove, New York; the Golf Academy of Hilton Head, Inc. which
operates a golf school and designs and manages corporate golf events located in
Hilton Head, South Carolina; Long Island Skating Academy located in Syosset,
New York; a family sports and entertainment supercenter with two ice rinks, two
soccer fields and additional family amusements located in Cincinnati, Ohio and
a designer and assembler of premium grade golf clubs located in Palm Desert,
California. LCI also owned and operated seven stand-alone bowling centers, six
of which were sold shortly after FGC acquired them at FGC's cost.
During the three months ended March 31, 1998, FGC 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 ("1998 Acquisitions").
In addition, in March 1998, FGC signed a long-term lease to construct and
operate an ice rink and family entertainment center in New Rochelle, New York
and in April 1998 FGC entered into a concession license with the City of New
York to build a golf center and an in-line skating arena.
EAGLE QUEST ACQUISITIONS:
In 1996 Eagle Quest acquired four golf centers comprised of four driving
ranges and one executive course. In 1997 Eagle Quest acquired thirteen golf
centers comprised of thirteen driving ranges and four executive courses. In the
three months ended March 31, 1998, Eagle Quest acquired one additional golf
center.
These acquisitions of FGC and Eagle Quest were accounted for using the
purchase method of accounting. The purchase prices paid for the various
facilities consisted of cash, common stock warrants, notes or assumption of
liabilities or a combination thereof. Assets acquired and liabilities assumed
and the consideration paid is summarized as follows:
<TABLE>
<CAPTION>
FACILITIES ACQUIRED
----------------------------------------
THREE
YEAR ENDED MONTHS
DECEMBER 31, ENDED
------------------------- MARCH 31,
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
Property, plant, equipment and leasehold interests ......... $ 56,366 $ 72,558 $ 34,413
Other current assets ....................................... 870 3,788 18
Excess of cost over fair value ............................. 2,648 20,939 13,515
-------- --------- ---------
Total assets ............................................. 59,884 97,285 47,946
Assumption of mortgage payable ............................. (5,875) (22,285) (16,087)
Assumption of other liabilities ............................ (964) (9,648) (7,737)
-------- --------- ---------
Net assets acquired ........................................ $ 53,045 $ 65,352 $ 24,122
======== ========= =========
Cash ....................................................... $ 38,478 $ 41,617 $ 23,105
Fair value of common stock and warrants issued ............. 9,811 21,168 1,017
Redeemable equity securities ............................... 514
Loan from selling stockholder .............................. 3,102 2,053
Mortgage ................................................... 1,654
-------- --------- ---------
$ 53,045 $ 65,352 $ 24,122
======== ========= =========
</TABLE>
S-12
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE C -- ACQUISITION OF GOLF FACILITIES (CONTINUED)
In connection with the acquisition of a business by Eagle Quest in 1996, a
principal shareholder of Eagle Quest transferred common shares to the vendor
for nominal consideration. This transfer has been accounted for as a
contribution of capital to the Company of approximately $3,190 and included in
the purchase price and the values assigned to the assets acquired.
In November 1995, FGC acquired The Practice Tee, Inc. ("TPT"). TPT
operates a combination Golden Bear golf center and golf course facility in El
Segundo, California and a combination golf center and par-3 golf course
facility in Gilroy, California. The purchase price consisted of $6,000 which
included $2,000 for the achievement of certain operating targets.
The operating results of companies acquired are included in the Company's
results of operations from dates of acquisition.
The following unaudited pro forma information assumes that the
acquisitions in 1997 had taken place at the beginning of 1996 and that the
acquisitions in 1996 and 1995 had taken place at the beginning of 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ---------- ------------
<S> <C> <C> <C>
Total revenue .................................. $25,855 $ 64,826 $ 90,883
Net income (loss) .............................. (490) (2,890) 1,514
Net income (loss) per share -- basic ........... $ (.06) $ (.17) $ .07
Net income (loss) per share -- diluted ......... $ (.06) $ (.17) $ .07
</TABLE>
The following unaudited pro forma information for the year ended December
31, 1997 and for the three months ended March 31, 1998 assumes that, in
addition to the acquisitions in 1997 noted above, the 1998 Acquisitions had
taken place at the beginning of 1997.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
-------------- -------------
<S> <C> <C>
Total revenue ............................ $ 95,061 $ 21,624
Net (loss) ............................... (1,354) (2,157)
Net (loss) per share -- basic ............ $ (.07) $ (.10)
Net (loss) per share -- dilutive ......... $ (.07) $ (.10)
</TABLE>
Unaudited pro forma results do not include acquisitions which were not
material to the operations of the Company.
In addition, FGC purchased land and in certain locations was awarded
municipal contracts, to construct and operate golf facilities in Norwalk,
California; Bronx, New York; Brooklyn, New York; Broward County, Florida;
Seattle, Washington and Denver, Colorado.
Under certain purchase agreements entered into by Eagle Quest, the selling
parties are entitled to additional consideration based on the achievement of
certain profitability or performance targets. Upon achievement of the
contingency target, the obligations are accrued with an offsetting increase to
the purchase price (generally by an increase to goodwill). In the aggregate,
Eagle Quest has agreed to a
S-13
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE C -- ACQUISITION OF GOLF FACILITIES (CONTINUED)
maximum additional contingent consideration in the next four calendar years
which has not been recognized in the consolidated financial statements at March
31, 1998 as follows:
<TABLE>
<S> <C>
1999 ................... $525
2000 ................... 300
2001 ................... 250
2002 ................... 250
</TABLE>
NOTE D -- SHORT-TERM INVESTMENTS
Short-term investments including accrued interest, were as follows:
<TABLE>
<CAPTION>
AT
COST PLUS
ACCRUED FAIR UNREALIZED
HELD TO MATURITY INTEREST VALUE GAIN
- ----------------------------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
December 31, 1996:
U.S. Treasury and agencies ................... $33,838 $34,008 $170
======= ======= =======
December 31, 1997:
Commercial paper and corporate bonds ......... $55,846 $55,846 $ --
======= ======= =======
March 31, 1998:
Commercial paper and corporate bonds ......... $ 7,799 $ 7,799 $ --
======= ======= =======
</TABLE>
NOTE E -- RESTRICTED CASH DEPOSITS
Restricted cash deposits represent short-term investments pledged as
collateral primarily for letters of credit on certain properties. The pledges
expire in 1998.
NOTE F -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1996 1997 1998
---------- ----------- ----------
<S> <C> <C> <C>
Golf driving range facilities ..................... $ 63,891 $124,431 $153,227
Leasehold interest and improvements ............... 33,111 78,784 88,585
Machinery and equipment ........................... 3,950 14,964 17,915
Furniture and fixtures ............................ 2,291 5,061 5,831
Construction in progress .......................... 11,891 19,392 27,039
-------- -------- --------
115,134 242,632 292,597
Accumulated depreciation and amortization ......... 2,838 6,757 8,382
-------- -------- --------
$112,296 $235,875 $284,215
======== ======== ========
</TABLE>
Net book value of the Company's property, plant and equipment pledged as
collateral for various loans aggregated $68,397 and $78,884 at December 31,
1997 and March 31, 1998, respectively. Interest of $778, $942, and $413 has
been capitalized during the years ended December 31, 1996 and 1997 and the
three months ended March 31, 1998, respectively, which amounts are included in
property, plant and equipment. Included in property, plant and equipment at
December 31, 1997 and March 31, 1998 are $2,107 and $2,520, respectively, of
accumulated capitalized interest.
S-14
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE G -- PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1996 1997 1998
---------- -------- ----------
<S> <C> <C> <C>
Prepaid insurance ................................... $ 290 $ 566 $ 516
Prepaid taxes ....................................... 90 251
Pre-opening expenses ................................ 1,036 2,752 2,773
Accounts receivable and interest receivable ......... 766 2,769 2,029
Accounts receivable -- employees .................... 114 297 506
Other receivable and prepaids ....................... 1,756 2,663 4,013
------- ------ -------
$ 4,052 $9,298 $ 9,837
======= ====== =======
</TABLE>
NOTE H -- LEASING ARRANGEMENTS
Operating leases, which expire at various dates through 2042, are for land
at the facilities and for office space and, in some cases provide for the
payment of real estate taxes and other operating costs and are subject to
annual increases based on changes in the Consumer Price Index. Certain leases
require contingent rent payments based on a percentage of revenues.
Future annual minimum lease payments, including expected renewal options,
under operating lease agreements that have initial annual or remaining
noncancellable lease terms in excess of one year are as follows:
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, MARCH 31,
1997 1998
-------------- ----------
<S> <C> <C>
1998 ................................. $ 6,757
1999 ................................. 7,612 $ 7,171
2000 ................................. 7,889 7,914
2001 ................................. 8,024 8,147
2002 ................................. 8,019 8,231
2003 ................................. 8,209
Thereafter ........................... 160,287 173,376
-------- --------
Total minimum lease payments ......... $198,588 $213,048
======== ========
</TABLE>
Operating lease rent expense for the years ended December 31, 1995, 1996
and 1997, was $1,527, $2,616 and $4,569, respectively, and for the three months
ended March 31, 1997 and 1998 was $627 and $1,655, respectively.
Pursuant to certain of the Company's land leases, rent expense charged to
operations differs from rent paid because of the effect of free rent periods
and scheduled rent increases. Accordingly, the Company has recorded deferred
rent payable of $233, $650, and $709 at December 31, 1996, December 31, 1997
and March 31, 1998, respectively. Rent expense is calculated by allocating
total rental payments, including those attributable to scheduled rent
increases, on a straight-line basis, over the lease term.
S-15
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE I -- DEBT
[1] SHORT-TERM AND CERTAIN OTHER BORROWING AGREEMENTS:
FGC:
At December 31, 1996, FGC had borrowings under a revolving line of credit
of $5,000, providing for interest at the bank's prime rate.
On June 30, 1997, FGC entered into a two-year collateralized revolving
credit facility of up to $20.0 million with a bank convertible into a four year
term loan at the end of the first two years. After conversion to a term loan,
the loan is payable in 16 substantially equal quarterly installments.
Borrowings are at variable rates of interest. The loan is collateralized by the
pledge of the stock of most of FGC's subsidiaries and such subsidiaries have
also guaranteed the obligations. The agreement includes certain convenants
covering operational and financial requirements. At December 31, 1997 and March
31, 1998, there were no amounts outstanding under this facility.
In March 1998, FGC entered into a loan agreement with a bank providing for
a $10.0 million term loan collateralized by a mortgage on certain properties.
Borrowings under the loan mature in April 2003 and bear interest at the prime
rate less 1% during the drawdown period and at the prime rate during the
paydown period. FGC also obtained, in March 1998, a commitment from a financial
institution to provide a $10.0 million term loan collateralized by a mortgage
on certain properties. At March 31, 1998, there were no amounts outstanding
under these loan agreements.
Eagle Quest:
Eagle Quest's bank indebtedness is comprised of:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
-------------- ----------
<S> <C> <C>
Amount drawn under operating lines of credit (Cdn. $150; December 31, 1997 -
Cdn. $90) ................................................................. $63 $106
</TABLE>
At March 31, 1998, Eagle Quest has available operating lines of credit
aggregating Cdn. $150 (U.S. $106 at March 31, 1998) that bear interest at bank
prime (6.5% at March 31, 1998) plus 0.5% and are secured by the assets of Eagle
Quest's Canadian subsidiaries.
S-16
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE I -- DEBT (CONTINUED)
[2] LONG-TERM OBLIGATIONS:
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1996 1997 1998
--------- --------- ----------
<S> <C> <C> <C>
FGC:
Mortgage payable bearing interest at LIBOR plus 3.5% (capped at 10.5%), payable in
monthly installments through May 2000 (the loan is personally guaranteed by the
Chairman of the Board) .................................................................. $ 2,946 $ 2,874 $ 2,838
Mortgage payable bearing interest payable monthly at bank's prime rate (8.5% at
December 31, 1996) ...................................................................... 1,600
Mortgage payable due March 7, 2001 bearing interest at 5.25% ............................. 1,700 1,700 1,700
Promissory notes (four notes of $480, $480, $250 and $250) payable on or after January 1,
1997 and not later than July 1, 1997 bearing interest payable monthly at 8%. The payee
has an option to require payment with common stock of the Company at $18.00 a share...... 1,460
Promissory note bearing interest at prime with interest only for the first year, and
thereafter, payable in monthly installments ............................................. 1,710
Mortgage note payable due August 1, 2002 bearing interest at LIBOR as adjusted, payable
in monthly installments and an additional payment of $5,000 due on or before May 1,
1998 (6.97% at December 31, 1997 and 6.69% at March 31, 1998). The loan includes
certain covenants covering operational and financial requirements ....................... 16,625 16,413
Promissory note payable due January 2, 1998 bearing interest at 5.5% per annum ........... 1,150
Mortgage note payable due November 1, 2009 bearing interest at 9.875%, payable in
monthly installments. The mortgage is based upon a ten year amortization payout with a
balloon payment that calls for the entire principal balance to be due and payable on
November 1, 2009 ........................................................................ 3,745 3,737
Mortgage note payable in monthly installments with a balloon payment on July 1, 2006
bearing interest at 8.5% ................................................................ 2,325
Mortgage note payable in monthly installments with a balloon payment on June 13, 2001
bearing interest at 8% .................................................................. 1,726
Note payable due June 1, 2005 bearing interest at 6% ..................................... 1,688
Other debts bearing interest at rates varying from 6% to 15% ............................. 2,640 725 2,435
Eagle Quest:
Bank loan payable of up to $16 million bearing interest at LIBOR (5.969% at
December 31, 1997) plus 4% per annum on its principal, repayable in monthly
installments plus interest to September 2002, and secured by the assets of specific U.S.
subsidiaries, net of unamortized discount of $504 and $476 .............................. 10,452 10,420
Convertible promissory note payable bearing interest at 6.5% per annum during the first
year, 7.5% during the second year, and 8.5% during the third year on its principal,
repayable in installments of $699 (Cdn. $1.0 million) on February 28, 1998 (paid) and
$1,750 (Cdn. $2.5 million) on September 19, 2000. ....................................... 2,447 1,765
Bank loan payable bearing interest at Canadian bank prime plus 0.5% per annum (6% at
December 31, 1997), repayable in monthly installments plus interest to February 2008
subject to the ability of the lender to demand repayment at any time, and secured by the
assets of a subsidiary (repayable as Cdn. $2,233)........................................ 1,561
Bank loan payable bearing interest at U.S. prime plus 3% per annum, repayable to
February 2000, and secured by the assets of a subsidiary, repaid in 1997 ................ 3,498
Mortgage payable bearing interest at 3.5% per month on its principal, repayable in
monthly installments to August 1998 subject to the ability of the lender to demand
repayment at any time (repayable as Cdn. $3,400), net of unamortized discount of $550)... 1,700
Other debt bearing interest at rates varying from 6% to 18% .............................. 1,429 1,708 4,451
------- ------- -------
16,983 42,987 51,198
Less current portion ..................................................................... 4,420 10,877 11,349
------- ------- -------
Noncurrent portion ....................................................................... $12,563 $32,110 $39,849
======= ======= =======
</TABLE>
S-17
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE I -- DEBT (CONTINUED)
The long-term portion of the FGC's debt at December 31, 1997 and March 31,
1998 are payable as follows:
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, MARCH 31,
1997 1998
-------------- ----------
<S> <C> <C>
1999 ............... $ 1,501 $ --
2000 ............... 3,237 3,358
2001 ............... 3,294 7,848
2002 ............... 17,781 3,206
2003 ............... 406 17,890
2004 ............... 346
Thereafter ......... 6,395 8,370
-------- --------
$ 32,614 $41,018
======== ========
</TABLE>
[3] CONVERTIBLE SUBORDINATED NOTES:
In the fourth quarter of 1997, the Company issued 5 3/4% Convertible
Subordinated Notes (the "Notes") due October 2004 in the aggregate principal
amount of $115,000. Interest on the Notes is payable semi-annually on April 15
and October 15 of each year. The Notes are convertible at the option of the
holder into shares of common stock of the FGC at any time after 60 days of
original issuance and prior to maturity, unless previously redeemed, at a
conversion price of $24.83 per share subject to adjustment in certain events as
defined. The Notes are subordinated in right of payment to certain other
obligations of the FGC including all existing and future Senior Indebtedness
(as defined in the indenture). Net proceeds of the offering, after discount to
the initial purchasers and offering costs, were approximately $110,550.
[4] SUBORDINATED DEBENTURES:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
-------------- ----------
<S> <C> <C>
Redeemable subordinated debenture (the "Redeemable Debenture") due on May 16, 2002, bearing
interest at 12.5% per annum payable quarterly, and secured by a subordinate lien on Eagle Quest's
assets located in Canada, net of unamortized debt discount of $621 and $587 ............ $1,879 $1,913
Subordinated debentures (the "Subordinated Debentures") due on June 21, 2002, bearing interest at
13.5% per annum payable monthly, and secured by a subordinate lien on Eagle Quest's assets
located in Canada, net of unamortized discount of $898 and $848 ........................ 3,102 3,152
------ ------
$4,981 $5,065
====== ======
</TABLE>
S-18
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE J -- REDEEMABLE EQUITY SECURITIES
The following equity securities are redeemable for cash at the holder's
option:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
-------------- ----------
<S> <C> <C>
10,259 common shares issued in connection with an acquisition, redeemable to
December 10, 1998 at Cdn $49 per share ............................................ $ 359 $ 359
2,872 common shares issued in connection with an acquisition, redeemable during the
60 days ending August 29, 1999 at $122 per share, net of discount of $138
(December 31, 1997 -- $162) being amortized as interest expense over the
redemption period. ................................................................ 188 212
51,293 warrants issued in connection with the Redeemable Debentures, redeemable at
the redemption date, which is any date during the 180 day period following
May 2002 at a price to be determined on the redemption date ....................... 690 690
41,766 warrants issued in connection with the Subordinated Debentures, redeemable
during the 30 day period ending June 13, 2005 at their fair value at the redemption
date .............................................................................. 1,008 1,008
41,034 warrants issued in connection with a bank loan, redeemable at any time within
60 days of the first to occur of the prepayment of the related loan or its stated
maturity date of September 2002 at their fair value at the redemption date ........ 560 560
------ ------
$2,805 $2,829
====== ======
</TABLE>
NOTE K -- COMMITMENTS AND CONTINGENCIES
[1] EMPLOYMENT AGREEMENTS:
The Company has employment agreements, as amended, expiring in March 2001
with three of its officers, who are also stockholders of the Company, which
provide for aggregate annual base salaries of $260 in 1997, $363 in 1998, $438
in 1999 and $148 in 2000.
[2] CONCESSION LICENSES:
The Company manages several facilities for municipalities pursuant to
concession licenses, four of which are terminable at will by the licensor. The
Company's concession license with the City of New York (the "City") for the
Douglaston, New York golf center, which was entered into in 1994 and which
expires on December 31, 2006, the concession license with the City for the
Randall's Island, New York golf center, which was assumed in 1997 and which
expires on March 1, 2007, the concession license with the City for the
Dreier-Offerman Park, Brooklyn, New York golf center, which was entered into in
April 1998 and which expires on March 30, 2019 and the concession license with
the Metropolitan Transportation Authority for the Bronx, New York golf center,
currently under construction, which was entered into in 1997 and which expires
on December 31, 2009 (respectively, the "Douglaston License," the "Randall's
Island License," the "Brooklyn License" and the "Bronx License"), are
terminable at will. Pursuant to the Douglaston License and the Randall's Island
License, the Company has made approximately $3,100 and $774, respectively, of
capital improvements. Pursuant to the Brooklyn License, the Company is
obligated to make $4.0 million of capital improvements prior to March 1, 1999.
Pursuant to the Bronx License, the Company is obligated to make a minimum of
$3,000 of capital improvements. If any of these concession licenses are
terminated, the licensor may retain, except within the first eight years of the
Bronx License, and is not obligated to pay the Company, for the value of such
capital improvements.
The Douglaston License provides for payment of fees to New York City of
the greater of $900 or up to 50% of gross revenues (as defined) on an annual
basis. The Randall's Island license requires a fee of
S-19
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE K -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
the greater of $500 or a percentage of revenue as defined in the agreement on
an annual basis. The Bronx License provides for annual minimum payments ranging
from $500 in 1999 to $990 in 2009, or a percentage of gross revenue (as
defined) whichever is greater.
[3] LICENSE AGREEMENT:
Pursuant to its license agreement with GBGC, the Company paid a one-time
facility development fee for each Golden Bear golf center. In addition, the
Company is required to pay annual royalty fees for each Golden Bear golf center
it operates based on Adjusted Gross Revenues ("AGR") as defined, equal to 3% of
AGR less than $2,000 plus 4% of AGR between $2,000 and $3,000, plus 5% of AGR
over $3,000. The minimum royalty fee for each Golden Bear golf center ranges up
to $50 per year. (see Note O)
On September 13, 1995, the Company's exclusive rights to open Golden Bear
Golf Centers in defined territories were terminated and the restrictions on the
Company's right to develop golf centers under its own name in such territories
were removed.
Royalty fees incurred for the years ended December 31, 1995, 1996 and 1997
amounted to $184, $299, and $301, respectively. Such fees for the three months
ended March 31, 1997 and 1998 were $65 and $72, respectively. All such fees
have been charged to operations.
[4] PURCHASE OF TPT AND RELATED PARTY TRANSACTIONS:
In November 1995, the Company acquired TPT. Prior to the acquisition, two
of the officers of the Company individually owned, in aggregate, 70% of the
shares of TPT. The excess of cost over fair value of assets acquired of $4,392
was considered a preferential distribution to certain stockholders. The
purchase price included a contingent payment up to $2,000, payable upon the
achievement of certain operating income targets which were achieved in 1996 and
1997. The contingent purchase price in respect of the years ended December 31,
1996 and 1997 of $1,000 for each of the years payable to the former TPT
shareholders has been reflected as an additional preferential distribution.
Under an existing agreement with TPT, the Company had an option to acquire
TPT (the "TPT Option") for a price equal to 12.5 times the net after tax income
of TPT during the full 12 months immediately preceding the exercise of such
option. Such price was payable in shares of the Company's common stock. The TPT
Option may have been exercised at any time commencing on the earlier of (i)
January 1, 1998 or (ii) the date on which TPT has after-tax income of at least
$1,000 over a twelve-month period until the expiration date of such option on
December 31, 2003.
[5] OTHER COMMITMENTS:
At December 31, 1997 and March 31, 1998, the Company had commitments for
various construction projects, aggregating $46,500 and $54,500, respectively,
to be completed within 12 to 24 months.
[6] CONTINGENCIES:
(i) Eagle Quest has suspended construction activity on a leased property.
Pursuant to the terms of the lease, the landlord has the right to
cancel the lease if construction is not completed on or before July 31,
1998. The carrying value at March 31, 1998 of costs capitalized to the
project under construction is approximately $800.
(ii) Eagle Quest has received a demand for payment of approximately $360 as
a reimbursement of expenses incurred in connection with an aborted
transaction to purchase securities of Eagle
S-20
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE K -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
Quest. Eagle Quest disputes both the amount of the expenses and its legal
obligation to reimburse the claimant. However, the ultimate outcome of
this claim is not known. Any costs associated with the resolution of the
claim will be recorded as determinable.
NOTE L -- BUSINESS SEGMENT INFORMATION
Information concerning operations by industry segment is as follows:
<TABLE>
<CAPTION>
GOLF NON-GOLF
OPERATIONS OPERATIONS CONSOLIDATED
------------ ------------ -------------
<S> <C> <C> <C>
Year ended December 31, 1997:
Total revenue ......................... $ 64,688 $ 8,309 $ 72,997
Operating earnings .................... 8,213 2,402 10,615
Depreciation and amortization ......... 6,569 532 7,101
Identifiable assets ................... 337,556 25,480 363,036
Capital expenditures .................. 21,956 580 22,536
Three months ended March 31, 1998:
Total revenue ......................... $ 16,592 $ 4,905 $ 21,497
Operating earnings (loss) ............. (55) 899 844
Depreciation and amortization ......... 1,973 589 2,562
Identifiable assets ................... 336,728 42,179 378,907
Capital expenditures .................. 12,787 645 13,432
</TABLE>
Non-golf operations relate to complementary sports and family
entertainment facilities which includes ice rink facilities, soccer fields and
other indoor family sports and amusements.
There were no non-golf operations for the years ended December 31, 1995
and 1996 and for the three months ended March 31, 1997.
NOTE M -- STOCKHOLDERS' EQUITY
[1] STOCK SPLIT:
The Board of Directors approved a three for two stock split which was
distributed in May 1998. Stockholder's equity has been restated to give
retroactive recognition to the stock split for all the periods presented by
reclassifying from additional paid in capital to common stock, the par value of
additional shares arising from the split. In addition, all references to number
of shares and per share amounts have been restated to reflect the stock split.
[2] STOCK OPTION PLANS:
The Company applies APB 25 and related interpretations in accounting for
its employee stock options. Under APB 25, where the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation is recognized.
S-21
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE M -- STOCKHOLDERS' EQUITY (CONTINUED)
If compensation expense for the Company's stock-based compensation plans
had been determined consistent with SFAS No. 123, the Company's net income
(loss) and net income (loss) per share on a pro forma basis would have been the
amounts indicated below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------- -------------------------
1995 1996 1997 1997 1998
--------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss):
As reported .............. $1,074 $4,322 $ 3,269 $ (787) $ (1,689)
Pro forma ................ 960 3,661 (1,074) (1,938) (3,519)
Net income (loss) per share:
As reported:
Basic ................... .14 .28 .17 (.04) (.08)
Diluted ................. .14 .27 .16 (.04) (.08)
Pro forma:
Basic ................... .13 .24 (.06) (.10) (.17)
Diluted ................. .12 .23 (.06) (.10) (.17)
</TABLE>
The Company has not included potential common shares in the diluted loss
per share computation, as the result would be antidilutive.
The pro forma effect on net income for the years ended December 31, 1995,
1996 and 1997 and for the three months ended March 31, 1997 and 1998 may not be
representative of the pro forma effect on net income of future years due to,
among other things: (i) the vesting period of the stock options, (ii) the fair
value of additional stock options in future years and (iii) options granted in
1995 and prior thereto are not included.
For the purpose of the above table, the fair value of each option grant is
estimated as of the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- --------------- -------- ---------
<S> <C> <C> <C> <C> <C>
Dividend yield .................. 0% 0% 0% 0% 0%
Expected volatility ............. 0.69 0.73 0.76 - 0.82 0.82 0.73
Risk-free interest rate ......... 6% 6% 5.60% - 6.58% 6.58% 5.52%
Expected life in years .......... 5 5 5 5 5
</TABLE>
The weighted average fair value at date of grant for options granted
during the years 1995, 1996 and 1997 were $3.55, $9.85 and $10.33,
respectively, using the above assumptions. The weighted average fair value at
the date of grant for options granted during the three months ended March 31,
1997 and March 31, 1998 were $12.10 and $15.40, respectively.
FGC Stock Option Plans:
The FGC's 1994 Stock Option Plan (the "Plan") provides for the grant of
options to purchase up to 450,000 shares of common stock to employees,
officers, directors and consultants of the FGC's. Options
S-22
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE M -- STOCKHOLDERS' EQUITY (CONTINUED)
may be either "incentive stock options" within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), or nonqualified
options. Incentive stock options may be granted only to employees of the
Company, while nonqualified options may be issued to nonemployee directors,
consultants and others, as well as to employees of the Company. The Company's
1996 Stock Incentive Plan (the "New Plan") is identical to the Plan, except
that the New Plan provides (i) for the grant of options to purchase up to
750,000 shares of common stock, (ii) an automatic grant of nonqualified stock
options to purchase 15,000 shares to each nonemployee director upon his
election or appointment to the Board of Directors and (iii) annual grants
(commencing on the date the New Plan was approved by stockholders) to each
nonemployee director of nonqualified stock options to purchase 15,000 shares of
common stock at the fair market value of the common stock on the date of the
grant.
FGC's 1997 Stock Incentive Plan (the "1997 Plan"), which provides for
the grant of options to purchase up to 750,000 shares of common stock, is
identical to the New Plan. FGC will grant options under the 1997 Plan, once no
more options are available under the New Plan.
The exercise price per share of common stock subject to an incentive
option may not be less than the fair market value per share of common stock on
the date the option is granted. The per share exercise price of common stock
subject to a nonqualified option may be established by the Board of Directors.
Incentive stock options granted under the Plan cannot be exercised more
than 10 years from the date of grant.
Additional information with respect to stock option activity for the years
ended December 31, 1995, 1996 and 1997 and three months ended March 31, 1998,
is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1995 1996 1997
---------------------- ------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ---------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year ......... 231,000 $ 2.333 435,308 $ 5.687 1,018,290 $ 11.737
Options granted ............ 210,000 9.285 641,118 15.131 498,185 15.399
Options exercised .......... (5,692) 2.333 (58,136) ( 3.720) (87,239) 5.542
------- ------- ---------
Outstanding at end of
year ...................... 435,308 5.687 1,018,290 11.737 1,429,236 13.391
------- --------- ---------
Options exercisable at
end of year ............... 71,307 2.333 172,898 5.026 439,590 9.965
======= ========= =========
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998
---------------------------
WEIGHTED
AVERAGE
SHARES PRICE
------------- ------------
<S> <C> <C>
Outstanding at
beginning of year ......... 1,429,236 $ 13.391
Options granted ............ 139,313 22.468
Options exercised .......... (76,758) 8.353
---------
Outstanding at end of
year ...................... 1,491,791 14.199
---------
Options exercisable at
end of year ............... 502,190 11.588
=========
</TABLE>
At December 31, 1997, there were 9,000, 0 and 441,938 options available
for grants under the Plan, the New Plan and the 1997 Plan, respectively. At
March 31, 1998, there were 9,000, 0 and 302,625 options available for grants
under the Plan, the New Plan and the 1997 Plan, respectively.
S-23
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE M -- STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1997 and March 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS WEIGHTED AVERAGE CONTRACTUAL NUMBER OF OPTIONS
OUTSTANDING REMAINING LIFE (IN YEARS) EXERCISABLE
---------------------------- ---------------------------- ---------------------------
EXERCISE DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31,
PRICE 1997 1998 1997 1998 1997 1998
- ------------ -------------- ----------- -------------- ----------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 2.333 133,285 100,007 6.50 6.25 133,285 100,007
4.00 1,920 750 7.67 7.42 1,920 750
5.917 9,000 6,000 7.50 7.25 6,000 3,000
9.917 154,230 143,724 7.80 7.55 93,686 83,179
13.25 80,250 80,250 8.25 8.00 26,749 53,500
18.083 45,000 45,000 8.50 8.25 15,000 15,000
15.167 183,754 174,506 8.58 8.33 57,510 48,263
15.167 323,852 304,298 8.96 8.71 105,440 85,886
11.583 144,882 144,882 9.25 9.00 63,294
14.833 45,000 45,000 9.50 9.25
14.833 52,500 52,500 9.58 9.33
17.709 255,563 255,563 9.83 9.58
16.667 25,125 9.75 25,125
20.000 22,311 8.54 22,311
23.750 90,000 10.00
68.000 1,875 8.67 1,875
--------- ------- ------- -------
1,429,236 1,491,791 439,590 502,190
========= ========= ======= =======
</TABLE>
In connection with the purchase of certain golf facilities, FGC
granted the sellers options to acquire up to an aggregate of 81,000 shares of
common stock at prices ranging from $0.01 to $26.67 per share, with a weighted
average price per share of $20.77. As of December 31, 1997 and March 31, 1998,
options to purchase 64,920 shares of common stock were outstanding.
Eagle Quest Stock Option Plans:
Eagle Quest has a stock option plan (the "Eagle Quest Plan") which
provides for the issuance of options to key employees, consultants and
directors. At December 31, 1997 and March 31, 1998, shareholders have
authorized the issuance of stock options up to an aggregate of the equivalent
of 82,068 FGC shares under the Eagle Quest Plan. The Board of Directors of
Eagle Quest, and subsequently the shareholders, approved an increase in the
authorized number of stock options to the equivalent of 164,136 FGC shares.
S-24
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE M -- STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes the transactions in the Eagle Quest Plan
since the incorporation of Eagle Quest on February 5, 1996.
<TABLE>
<CAPTION>
THE EQUIVALENT
FGC
EQUIVALENT WEIGHTED
NUMBER OF AVERAGE
FGC SHARES EXERCISE PRICE
------------ ---------------
<S> <C> <C>
Year ended December 31, 1997:
Options granted .......................................... 64,321 $ 11.70
Options exercised ........................................ (2,811) 7.07
Options forfeited ........................................ (4,103) 13.16
------ --------
Deemed to be granted at December 31, 1997 and March 31,
1998, being maximum number of options authorized under the
Eagle Quest Plan ......................................... 57,407 $ 11.70
------ --------
Exercisable options:
December 31, 1997 ........................................ 21,598 $ 10.48
------ --------
</TABLE>
Of granted options at December 31, 1997, the equivalent of 20,517 FGC
options have been granted to certain officers and become exercisable only upon
the occurrence of specified future events. As these events cannot be considered
to be more likely than not to occur, no compensation expense has been recorded
for these options. In addition, through March 13, 1998, the Board of Directors
has granted options exercisable into the equivalent of 81,079 FGC common
shares, which options are exercisable to February 12, 2008, provided that the
exercise of any of these options is subject to the receipt of shareholder
approval to increase the number of authorized stock options under the Eagle
Quest Plan. These options include the grant on February 12, 1998 of options to
certain key employees to purchase the equivalent of 32,827 FGC common shares at
an exercise price of Cdn $24.37 per share, expiring ten years from the date of
grant.
Stock options vest over periods of up to five years and generally expire
ten years from the date of grant. Stock options are generally granted at
exercise prices equal to the common share's fair value at the date of grant.
On March 31, 1998, the Board of Directors granted additional until options
exercisable into the equivalent of 12,146 FGC common shares, which options are
exercisable until March, 2008.
Upon the consummation of the acquisition of Eagle Quest, all of the above
stock options were redeemed for 67,189 common shares of the FGC based on the
agreed fair value.
[3] WARRANTS:
FGC:
In connection with the initial public offering in November 1994, the
Company issued warrants to the representatives of the underwriters to purchase
180,000 shares of common stock at $3.67 per share exercisable through November
1999, of which warrants to purchase 60,000 shares were exercised in connection
with a public offering in December 1995 and the remaining warrants to purchase
120,000 shares were exercised in 1996.
S-25
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE M -- STOCKHOLDERS' EQUITY (CONTINUED)
In connection with the public offering in December 1995, the FGC has
granted warrants to the representatives of the underwriters to purchase from
the Company up to 450,000 shares of common stock at $13.50 per share
exercisable through December 2000, of which warrants to purchase 3,324 and
74,484 shares were exercised in the year ended December 31, 1997 and the three
months ended March 31, 1998, respectively. As of December 31, 1997, warrants to
purchase 372,192 shares of common stock were outstanding.
In connection with consulting services to be rendered over a three-year
period, the FGC in 1996 issued warrants to a consultant to purchase 105,000
shares of common stock at $13.25 per share. Such warrants were exercised in
1996.
In connection with the purchase of LCI in July 1997, the FGC issued
warrants to the sellers to purchase an aggregate of 83,306 shares of common
stock at $18.33 per share exercisable through July 2002.
Eagle Quest:
(a) Subordinated Debentures:
The purchasers of the Eagle Quest Subordinated Debentures were issued
warrants to purchase the equivalent of 41,766 FGC common shares at a
price of $0.24 per common share for the period ending July 13, 2002.
Eagle Quest has recorded the warrants at the difference between their
fair value of $24.37 per warrant and the $0.24 per warrant exercise
price.
In the event that the Subordinated Debentures are not repaid by June 13,
2000, the number of warrants will increase to 65,632, if not repaid by
June 13, 2001, the number of warrants will increase to 89,499; and if not
repaid by June 13, 2002, the number of warrants will increase to 113,365.
(b) Other:
At December 31, 1997, Eagle Quest has outstanding warrants, including the
warrants issued in connection with the bank loan, to purchase an
additional 249,282 common shares. These warrants expire at various dates
to May 15, 2007. All warrants outstanding at December 31, 1997 were
granted in 1997. Of these warrants, 240,049 became exercisable in 1997,
8,207 become exercisable in 1998 and 1,026 become exercisable in 1999. In
certain circumstances, an additional 4,103 common shares may be purchased
pursuant to one of the issued and outstanding warrants. Certain of the
warrants are subject to anti-dilution provisions and the exercise price
of such warrants may decrease in certain circumstances.
On March 13, 1998, Eagle Quest issued 58,309 warrants to purchase common
shares of the Company at $26.81 per share in connection with a mortgage
payable. These warrants, which became exercisable on issue, expire on
March 6, 2008.
(c) Upon the consummation of the acquisition of Eagle Quest, all of the
above warrants were redeemed for 129,286 common shares of FGC the
accounts of based on the agreed fair value.
S-26
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE N -- INCOME TAXES
Income or (loss) before income taxes for each of the periods presented by
jurisdiction are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- --------------------
1995 1996 1997 1997 1998
--------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
United States ......... $1,924 $ 8,400 $ 11,570 $ (239) 35
Canada ................ -- (1,194) (3,159) (203) (864)
------ -------- -------- ------ ----
$1,924 $ 7,206 $ 8,411 $ (442) $ (829)
====== ======== ======== ====== ======
</TABLE>
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- -----------------
1995 1996 1997 1997 1998
-------- --------- --------- ------ --------
<S> <C> <C> <C> <C> <C>
Current ............................... $ 785 $2,514 $ 3,900 $345 $ 860
Deferred .............................. (51) 370 1,242
----- ------ ------- ---- -----
734 2,884 5,142 345 860
Change in valuation allowance ......... 65
----- ------ ------- ---- -----
Total provision ...................... $ 669 $2,884 $ 5,142 $345 $ 860
===== ====== ======= ==== =====
</TABLE>
At December 31, 1994, the Company had available net operating loss
carryforwards of approximately $180 for federal income tax purposes, which were
utilized in 1995. Temporary differences arise due to differences between
reporting for financial statement purposes and for federal income tax purposes
relating primarily to deferred rent expense and depreciation and amortization
methods.
Expected tax expense based on the United States statutory rate is
reconciled with the actual expense as follows:
<TABLE>
<CAPTION>
PERCENT OF PRE-TAX EARNINGS
--------------------------------------------------------------------
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------------ -----------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Expected tax expense (benefit) ......... 34.0% 34.0% 35.0% (34.0)% (35.0)%
Canadian and United States
operating losses for which no tax
benefit has been recognized .......... 2.0 22.8 108.0 134.7
State income tax (benefit), net of
federal tax effect ................... 7.6 3.7 5.6 3.7 5.6
Decrease in valuation allowance in
use of net operating loss ............ (7.7)
Other .................................. 1.1 0.3 (2.3) 0.3 ( 1.6)
---- ---- ---- ----- -----
35.0% 40.0% 61.1% 78.0% 103.7%
==== ==== ==== ===== =====
</TABLE>
S-27
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE N -- INCOME TAXES (CONTINUED)
The deferred tax assets (liabilities) are recorded as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 1998
--------- ----------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Deferred rent ....................................... $ 93 $ 247 $ 247
Tax basis of assets in excess of book basis ......... 759 714
Loss carryforwards .................................. 372 3,650
Valuation allowance ................................. (823) (1,758)
------ -------- --------
401 2,853 247
Deferred tax liabilities:
Book basis of assets in excess of tax basis ......... (655) (7,049) (4,443)
------ -------- --------
Net deferred (liability) ............................. $ (254) $ (4,196) $ (4,196)
====== ======== ========
</TABLE>
At December 31, 1997, the Eagle Quest has estimated net operating loss
carryforwards available for income tax purposes as follows:
<TABLE>
<CAPTION>
AMOUNT EXPIRATION DATE
---------- ----------------
<S> <C> <C>
Canada ................... $ 3,400 2004
United States ............ 5,300 2012
</TABLE>
NOTE O -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial statements:
Cash and cash equivalents approximate fair value. The cost and fair value
of short-term investments are disclosed in Note C.
Short-term loan payable -- the carrying amount approximates fair value due
to the short-term maturities of these instruments.
Long-term and other debt -- fair value is estimated based on borrowing
rates offered to the Company.
S-28
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE O -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and fair value of the Company's financial instruments
as of December 31, 1997 and March 31, 1998 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
---------- ----------
<S> <C> <C>
December 31, 1997:
Cash and cash equivalents .............. $ 6,042 $ 6,042
Restricted cash deposits ............... 390 390
Long-term debt ......................... 42,987 42,987
Convertible subordinated notes ......... 115,000 115,000
Redeemable equity securities ........... 2,805 2,805
Subordinated debentures ................ 4,981 4,981
March 31, 1998:
Cash and cash equivalents .............. 2,211 2,211
Restricted cash deposits ............... 324 324
Long-term debt ......................... 51,198 51,198
Convertible subordinated notes ......... 115,000 115,000
Redeemable equity securities ........... 2,829 2,829
Subordinated debentures ................ 5,065 5,065
</TABLE>
NOTE P -- SUBSEQUENT EVENT:
On June 16, 1998, the Company entered into an agreement to acquire Golden
Bear Golf Centers, Inc. ("Golden Bear"), a wholly owned subsidiary of Golden
Bear Golf, Inc. Golden Bear operates 14 golf centers. Closing of the
transaction is subject to a number of conditions, including regulatory
approvals. The purchase consideration for the acquisition is estimated at $32
million in cash minus certain indebtedness and liabilities. The Company will
also enter into new license agreements with respect to existing Golden Bear
Golf Centers and the newly acquired centers. This transaction will be accounted
for as a purchase in accordance with APB No. 16.
NOTE Q -- SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
--------------------- ------------------------ ------------------------- --------------------
1996 1997 1996 1997 1996 1997 1996 1997
--------- ----------- ----------- ------------ ------------ ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue ............ $3,362 $ 9,701 $ 6,852 $ 19,676 $ 10,654 $ 25,239 $7,185 $ 18,380
Operating income ......... (111) (600) 2,171 5,356 3,972 7,790 (317) (536)
Net income ............... (42) (787) 1,341 2,767 2,934 4,222 89 (2,933)
Net income per share:
Basic ................... $ -- $ (0.04) $ 0.10 $ 0.15 $ 0.17 $ 0.22 $ -- $ (0.14)
Diluted ................. -- (0.04) 0.10 0.15 0.16 0.21 -- (0.14)
</TABLE>
S-29
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
Independent auditors' report ............................................................ F-3
Consolidated balance sheets as at December 31, 1996, December 31, 1997 and March 31,
1998 (unaudited) ...................................................................... F-4
Consolidated statements of income for the years ended December 31, 1995, December 31,
1996, December 31, 1997 and for the three months ended March 31, 1997 (unaudited)
and March 31, 1998 (unaudited) ........................................................ F-5
Consolidated statements of changes in stockholders' equity for the years ended
December 31, 1995, December 31, 1996, December 31, 1997 and for the three months
ended March 31, 1998 (unaudited) ...................................................... F-6
Consolidated statements of cash flows for the years ended December 31, 1995,
December 31, 1996, December 31, 1997 and for the three months ended March 31, 1997
(unaudited) and March 31, 1998 (unaudited) ............................................ F-7
Notes to financial statements ........................................................... F-8
EAGLE QUEST GOLF CENTERS INC. AND SUBSIDIARIES
Auditors' report to the directors ....................................................... F-26
Consolidated balance sheets at March 31, 1998, December 31, 1997 and
December 31, 1996 ..................................................................... F-27
Consolidated statements of income for three months ended March 31, 1998 (unaudited) and
March 31, 1997 (unaudited), for the year ended December 31, 1997 and for the period
from incorporation on February 5, 1996 to December 31, 1996 ........................... F-28
Consolidated statements of shareholders' equity (deficit) from incorporation on
February 5, 1996 to December 31, 1996, for the year ended December 31, 1997, and for
the three months ended March 31, 1998 (unaudited) ..................................... F-29
Consolidated statements of cash flows for the three months ended March 31, 1998
(unaudited) and March 31, 1997 (unaudited), for the year ended December 31, 1997 and
for the period from incorporation on February 5, 1996 to December 31, 1996 ............ F-30
Notes to financial statements ........................................................... F-31
GOLDEN BEAR GOLF CENTERS, INC.
Independent auditor's report ............................................................ F-47
Consolidated balance sheets at December 31, 1997 and December 31, 1996 .................. F-48
Consolidated statements of operations for the years ended December 31, 1997 and
December 31, 1996 ..................................................................... F-49
Consolidated statements of shareholders' equity for the years ended December 31, 1997
and December 31, 1996 ................................................................. F-50
Consolidated statements of cash flows for the years ended December 31, 1997 and
December 31, 1996 ..................................................................... F-51
Notes to consolidated financial statements .............................................. F-52
Condensed consolidated balance sheets at December 31, 1997 and March 31, 1998 (unaudited) F-66
Condensed consolidated statements of operations for the three months ended
March 31, 1998 (unaudited) and March 31, 1997 (unaudited) ............................. F-67
Condensed consolidated statements of shareholders's equity for the years ended
December 31, 1998 and December 31, 1997 ............................................... F-68
Condensed consolidated statements of cash flows for the three months ended March 31, 1998
(unaudited) and March 31, 1997 (unaudited) ............................................ F-69
Notes to condensed consolidated financial statements .................................... F-70
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
METROGOLF INCORPORATED AND SUBSIDIARIES
Independent auditors' report .......................................................... F-72
Consolidated balance sheet at December 31, 1997 ....................................... F-73
Consolidated statement of operations for the year ended December 31, 1997 ............. F-74
Consolidated statement of changes in stockholders' equity as of December 31, 1997 ..... F-75
Consolidated statement of cash flows for the year ended December 31, 1997 ............. F-76
Notes to financial statements ......................................................... F-77
LEISURE COMPLEXES, INC.
Independent auditors' report .......................................................... F-89
Balance sheet at December 31, 1996 .................................................... F-90
Statement of operations and accumulated deficit for the year ended December 31, 1996 .. F-92
Statement of cash flows for the year ended December 31, 1996 .......................... F-93
Notes to financial statements ......................................................... F-95
Accountants' compilation report ....................................................... F-104
Balance sheet at June 30, 1997 (unaudited) ............................................ F-105
Statement of income and accumulated deficit for the six months ended June 30, 1997
(unaudited) ......................................................................... F-107
Statement of cash flows for the six months ended June 30, 1997 (unaudited) ............ F-108
Notes to financial statements ......................................................... F-109
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Family Golf Centers, Inc.
Melville, New York
We have audited the accompanying consolidated balance sheets of Family
Golf Centers, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements enumerated above present fairly,
in all material respects, the consolidated financial position of Family Golf
Centers, Inc. and subsidiaries at December 31, 1997 and 1996 and the
consolidated results of their operations and their consolidated cash flows for
each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
March 26, 1998 except as to Notes
M and N as to which the dates are June 30,
1998 and June 16, 1998, respectively
F-3
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1996 1997 1998
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 4,556 $ 6,002 $ 1,922
Short-term investments .......................................... 33,838 55,846 7,799
Inventories ..................................................... 6,258 12,688 16,576
Prepaid expenses and other current assets ....................... 3,642 8,744 9,316
Prepaid income taxes ............................................ 600 -- 1,907
-------- -------- --------
Total current assets ........................................... 48,894 83,280 37,520
Property, plant and equipment (net of accumulated
depreciation of $2,823, $6,160 and $7,539 at December 31,
1996, December 31, 1997 and March 31, 1998, respectively) ..... 103,889 208,884 255,470
Loan acquisition costs (net of accumulated amortization of
$61, $243 and $420 at December 31, 1996, December 31,
1997 and March 31, 1998, respectively) ........................ 185 4,814 5,007
Other assets .................................................... 2,646 7,725 6,935
Excess of cost over fair value of assets acquired (net of
accumulated amortization of $108, $451, and $723 at
December 31, 1996, December 31, 1997 and March 31, 1998,
respectively) ................................................. 2,679 20,804 34,047
-------- -------- --------
TOTAL ......................................................... $158,293 $325,507 $338,979
======== ======== ========
LIABILITIES
Current liabilities:
Accounts payable, accrued expenses and other current
liabilities ................................................... $ 3,659 $ 7,596 $ 12,556
Income taxes payable ............................................ -- 2,626 --
Short-term loan payable -- bank ................................. 5,000 -- --
Current portion of long-term obligations ........................ 3,560 7,164 6,770
-------- -------- --------
Total current liabilities ...................................... 12,219 17,386 19,326
Convertible subordinated notes ................................... 115,000 115,000
Long-term obligations (less current portion) ..................... 8,496 19,655 26,092
Deferred rent .................................................... 233 650 709
Deferred tax liability ........................................... 254 4,196 4,196
Other liabilities ................................................ 147 208 700
-------- -------- --------
Total liabilities .............................................. 21,349 157,095 166,023
-------- -------- --------
Minority interest ................................................ 214
--------
Commitments, contingencies and other matters
STOCKHOLDERS' EQUITY
Preferred stock -- authorized 2,000,000 shares, none outstanding
Common stock -- authorized 50,000,000 shares, $.01 par value;
17,775,000, 19,347,000 and 19,594,000 shares outstanding at
December 31, 1996, December 31, 1997 and March 31, 1998,
respectively .................................................... 178 193 196
Additional paid-in capital ....................................... 131,647 153,576 157,084
Retained earnings ................................................ 5,166 14,690 16,036
Unearned compensation ............................................ -- -- (527)
Treasury shares .................................................. (47) (47) (47)
-------- -------- --------
Total stockholders' equity ..................................... 136,944 168,412 172,742
-------- -------- --------
TOTAL .......................................................... $158,293 $325,507 $338,979
======== ======== ========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenues ................................... $ 9,795 $21,368 $ 49,108 $ 6,522 $ 14,967
Merchandise sales .................................... 2,637 6,536 15,717 2,493 4,203
------- ------- -------- ------- --------
Total revenue ...................................... 12,432 27,904 64,825 9,015 19,170
------- ------- -------- ------- --------
Operating expenses ................................... 6,614 13,268 31,563 5,618 11,781
Cost of merchandise sold ............................. 1,779 4,458 10,467 1,679 2,816
Selling, general and administrative expenses ......... 1,242 3,580 5,132 1,086 1,524
------- ------- -------- ------- --------
Total expenses ..................................... 9,635 21,306 47,162 8,383 16,121
------- ------- -------- ------- --------
Operating income ..................................... 2,797 6,598 17,663 632 3,049
Interest expense ..................................... (939) (370) (2,261) (191) (1,799)
Other income -- net (includes interest
income of $1,755 and $1,570 for the years
ended December 31, 1996 and
December 31, 1997, respectively and $466
and $528 for the three months ended
March 31, 1997 and March 31, 1998,
respectively) ....................................... 66 2,172 1,659 466 956
------- ------- -------- ------- --------
Income before income taxes and
extraordinary items ................................. 1,924 8,400 17,061 907 2,206
Income tax expense ................................... 669 3,192 6,537 345 860
------- ------- -------- ------- --------
Income before extraordinary item ..................... 1,255 5,208 10,524 562 1,346
Extraordinary charge -- early extinguishment
of debt (net of tax benefit of $121) ................ (181) -- -- -- --
------- ------- -------- ------- --------
Net income ........................................... $ 1,074 $ 5,208 $ 10,524 $ 562 $ 1,346
======= ======= ======== ======= ========
Basic earnings per share:
Income before extraordinary item ..................... $ .16 $ .35 $ .57 $ .03 $ .07
Extraordinary item ................................... (.02) -- -- -- --
------- ------- -------- ------- --------
Net income per share ................................. $ .14 $ .35 $ .57 $ .03 $ .07
======= ======= ======== ======= ========
Diluted earnings per share:
Income before extraordinary item ..................... $ .16 $ .34 $ .56 $ .03 $ .07
Extraordinary item ................................... (.02) -- -- -- --
------- ------- -------- ------- --------
Net income per share ................................. $ .14 $ .34 $ .56 $ .03 $ .07
======= ======= ======== ======= ========
Weighted average shares outstanding -- basic (000s) .. 7,676 15,003 18,368 17,803 19,445
Effect of dilutive securities (000s) ................. 231 432 431 322 751
------- ------- -------- ------- --------
Weighted average shares outstanding --
diluted (000's) ..................................... 7,907 15,435 18,799 18,125 20,196
======= ======= ======== ======= ========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
(PAR VALUE $0.01)
----------------------
NUMBER OF
SHARES
ISSUED ADDITIONAL
AND PAID-IN
OUTSTANDING AMOUNT CAPITAL
------------- -------- ------------
<S> <C> <C> <C>
Balance -- December 31, 1994 ................ 7,245,000 $ 72 $ 7,278
Issuance of stock ........................... 426,450 4 2,731
Net proceeds from public offering ........... 4,702,500 47 43,686
Public offering expenses .................... (1,317)
Exercise of warrants ........................ 97,425 1 307
Exercise of options ......................... 5,692 1 12
Preferential distribution to stockholders
of The Practice Tee, Inc. .................. (4,392)
Net income for the year .....................
---------- ---- -------
Balance -- December 31, 1995 ................ 12,477,067 125 48,305
Issuance of stock ........................... 514,350 5 6,510
Issuance of warrants ........................ 69
Net proceeds from public offering ........... 4,500,000 45 75,285
Public offering expenses .................... (1,064)
Exercise of warrants ........................ 225,000 2 1,830
Exercise of employee options ................ 58,136 1 212
Preferential distribution to stockholders
of The Practice Tee, Inc. ..................
Treasury stock received in exchange for a
note receivables (2,700 shares) ............
Income tax benefit upon exercise of stock
options .................................... 500
Net income for the year .....................
---------- ---- -------
Balance -- December 31, 1996 ................ 17,774,553 178 131,647
Issuance of stock and warrants .............. 1,332,798 13 18,686
Exercise of warrants ........................ 3,324 127
Exercise of employee options ................ 87,239 1 482
Issuance of stock in connection with
repayment of debt .......................... 133,764 1 2,029
Exercise of options issued in connection
with acquisitions .......................... 15,000 250
Preferential distribution to stockholders
of The Practice Tee, Inc. ..................
Income tax benefit upon exercise of stock
options .................................... 355
Net income for the year .....................
---------- ---- -------
Balance -- December 31, 1997 ................ 19,346,678 193 153,576
Issuance of stock ........................... 6,251 120
Issuance of stock in connection with
acquisitions ............................... 60,399 1 1,116
Exercise of warrants in connection with
acquisition ................................ 6,788 92
Exercise of warrants ........................ 74,484 1 1,005
Exercise of employee options ................ 76,758 1 640
Issuance of stock for compensation .......... 22,500 535
Unearned compensation .......................
Net income for the period ...................
---------- ---- -------
Balance -- March 31, 1998 (Unaudited) ....... 19,593,858 $196 $157,084
========== ==== ========
<CAPTION>
RETAINED
EARNINGS UNEARNED TREASURY
(DEFICIT) COMPENSATION SHARES TOTAL
----------- -------------- --------- -----------
<S> <C> <C> <C> <C>
Balance -- December 31, 1994 ................ $ (116) $ 7,234
Issuance of stock ........................... 2,735
Net proceeds from public offering ........... 43,733
Public offering expenses .................... (1,317)
Exercise of warrants ........................ 308
Exercise of options ......................... 13
Preferential distribution to stockholders
of The Practice Tee, Inc. .................. (4,392)
Net income for the year ..................... 1,074 1,074
-------- --------
Balance -- December 31, 1995 ................ 958 49,388
Issuance of stock ........................... 6,515
Issuance of warrants ........................ 69
Net proceeds from public offering ........... 75,330
Public offering expenses .................... (1,064)
Exercise of warrants ........................ 1,832
Exercise of employee options ................ 213
Preferential distribution to stockholders
of The Practice Tee, Inc. .................. (1,000) (1,000)
Treasury stock received in exchange for a
note receivables (2,700 shares) ............ $ (47) (47)
Income tax benefit upon exercise of stock
options .................................... 500
Net income for the year ..................... 5,208 5,208
-------- ----- --------
Balance -- December 31, 1996 ................ 5,166 (47) 136,944
Issuance of stock and warrants .............. 18,699
Exercise of warrants ........................ 127
Exercise of employee options ................ 483
Issuance of stock in connection with
repayment of debt .......................... 2,030
Exercise of options issued in connection
with acquisitions .......................... 250
Preferential distribution to stockholders
of The Practice Tee, Inc. .................. (1,000) (1,000)
Income tax benefit upon exercise of stock
options .................................... 355
Net income for the year ..................... 10,524 10,524
-------- ----- --------
Balance -- December 31, 1997 ................ 14,690 (47) 168,412
Issuance of stock ........................... 120
Issuance of stock in connection with
acquisitions ............................... 1,117
Exercise of warrants in connection with
acquisition ................................ 92
Exercise of warrants ........................ 1,006
Exercise of employee options ................ 641
Issuance of stock for compensation .......... 535
Unearned compensation ....................... $ (527) (527)
Net income for the period ................... 1,346 1,346
-------- ------- ----- --------
Balance -- March 31, 1998 (Unaudited) ....... $ 16,036 $ (527) $ (47) $172,742
======== ======= ===== ========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 1,074 $ 5,208 $ 10,524 $ 562 $ 1,346
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ................................ 739 2,187 5,736 1,028 2,126
Deferred tax expense (benefit) ............................... (51) 370 1,242 -- --
Issuance of warrants for consulting services ................. -- 69 80 -- --
Extraordinary charge -- early extinguishment
of debt -- loan acquisition cost write-off .................. 302 -- -- -- --
Changes in:
Inventories ................................................. (1,478) (4,317) (6,430) (2,718) (3,888)
Prepaid expenses and other current assets ................... (778) (3,248) (6,595) (1,188) (1,273)
Prepaid income taxes ........................................ 600
Other assets ................................................ (749) (1,211) (5,460) (1,902) 790
Accounts payable, accrued expenses and
other current liabilities .................................. 655 (491) 2,682 1,546 3,950
Deferred rent ............................................... (71) 117 417 128 59
Other liabilities ........................................... 119 (125) 61 (26) 706
Income taxes payable ........................................ 569 (669) 2,626 -- (4,533)
--------- --------- ---------- --------- ---------
Net cash provided by (used in) operating activities .......... 331 (2,110) 5,483 (2,570) (717)
--------- --------- ---------- --------- ---------
Cash flows from investing activities:
Acquisitions of property and equipment ......................... (15,213) (58,840) (66,583) (11,142) (41,317)
Increase in security deposits .................................. -- (230) -- -- --
Acquisition of goodwill ........................................ (259) (2,117) (15,768) -- (9,773)
Net (purchase) sales of short-term investments ................. -- (33,838) (22,008) 21,901 48,047
--------- --------- ---------- --------- ---------
Net cash provided by (used in) investing activities .......... (15,472) (95,025) (104,359) 10,759 (3,043)
--------- --------- ---------- --------- ---------
Cash flows from financing activities:
Loan acquisition costs ......................................... (246) -- (361) -- (211)
Decrease in due to officers .................................... (455) -- -- -- --
Proceeds from convertible subordinated notes
net of expenses .............................................. -- -- 110,550 -- --
Proceeds from loans, bank and others ........................... 17,916 6,843 29,895 -- --
Repayment of loans, bank and others ............................ (19,594) (4,584) (40,542) (340) (1,756)
Net proceeds from issuance of common stock ..................... 42,416 74,266 -- -- --
Preferential distribution to stockholders of
The Practice Tee, Inc. ....................................... (4,392) -- -- -- --
Proceeds from the exercise of warrants and options ............. 321 2,045 780 198 1,647
--------- --------- ---------- --------- ---------
Net cash provided by (used in) financing activities .......... 35,966 78,570 100,322 (142) (320)
--------- --------- ---------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............ 20,825 (18,565) 1,446 8,047 (4,080)
Cash and cash equivalents -- beginning of period ................ 2,296 23,121 4,556 4,556 6,002
--------- --------- ---------- --------- ---------
Cash and cash equivalents -- end of period ...................... $ 23,121 $ 4,556 $ 6,002 $ 12,603 $ 1,922
========= ========= ========== ========= =========
Supplemental and noncash disclosures:
Acquisition of property in exchange for common stock
and warrants ................................................. $ 2,734 $ 6,515 $ 18,699 -- $ 1,017
Acquisition of property subject to loans payable ............... -- 6,602 20,645 -- 4,058
Issuance of stock in connection with repayment of debt ......... -- -- 2,030 -- --
Acquisition of treasury stock in exchange for payment of
a note receivable ............................................ -- 47 -- -- --
Acquisition of property in exchange for loans from
selling stockholder .......................................... -- 3,102 2,053 -- --
Income tax benefit from exercise of stock options .............. -- 500 355 -- --
Accrual for preferential distribution to stockholders
of The Practice Tee, Inc. .................................... -- 1,000 1,000 -- --
Property additions accrued but not paid ........................ 669 89 254 $ 105 1,010
Interest paid .................................................. 1,296 958 1,695 292 438
Taxes paid ..................................................... 53 3,609 6,774 1,172 4,980
Acquisition of goodwill in exchange for mortgages
and notes .................................................... -- -- -- 305 3,742
</TABLE>
See notes to financial statements.
F-7
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] THE COMPANY:
Family Golf Centers, Inc. operates golf centers 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 golf lessons instructed by PGA-certified golf professionals,
full-line pro shops and other amenities to encourage family participation. As
of December 31, 1997, the Company owned, leased or managed 60 golf facilities
comprised of 46 golf centers and 14 combination golf center and golf course
facilities located in 17 states. Of the golf centers, seven are currently
operated under the name "Golden Bear" pursuant to a nonexclusive license
agreement, expiring August 2002, with Golden Bear Golf Centers, Inc. ("GBGC").
The license agreement is terminable by GBGC under certain conditions. Of the 14
combination golf center and golf course facilities, 12 include par-3 or 9-hole
golf courses, generally designed to facilitate the practice of golf, and two
include regulation 18-hole golf courses.
In July 1997, the Company acquired Leisure Complexes, Inc. ("LCI"), the
operator of a family sports and entertainment supercenter which includes a golf
center, an 18-hole executive golf course, an ice rink, additional family
amusements and an 18,000 square-foot conference center. Also in 1997, the
Company acquired an ice rink facility and another indoor family sports and
entertainment supercenter which includes two ice rinks, two soccer fields and
additional family amusements.
[2] PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Family Golf
Centers, Inc. and its wholly owned and majority owned subsidiaries
(collectively, the "Company").
All significant intercompany transactions and accounts have been
eliminated.
[3] CASH EQUIVALENTS:
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.
[4] SHORT-TERM INVESTMENTS:
Short-term investments are classified as "held to maturity" and are
reported at cost plus accrued income which approximates market value.
[5] INVENTORIES:
Inventory consists of merchandise for sale in the pro shop at each
facility and food and beverage in the restaurants and is valued at the lower of
cost on a first-in, first-out basis or market.
[6] PROPERTY, EQUIPMENT AND OTHER LONG LIVED ASSETS:
Property, equipment and other long lived assets are stated at cost.
Depreciation and amortization of the respective assets is computed using the
straight-line method over their estimated lives or the term of the lease,
including expected renewal options, if shorter. Leasehold improvements are
amortized using the straight-line method over the remaining life of the lease,
including expected renewal options.
F-8
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Excess of cost over fair value of assets acquired ("goodwill") arising on
the acquisition of business is amortized on a straight-line basis over its
estimated useful life of 20 years. The Company reviews and assesses the
recoverability of the carrying amount of goodwill, substantially all of which
relates to specific property, together with the related property to determine
potential impairment.
The carrying amount of all long lived assets is evaluated periodically to
determine if adjustment to the useful life or to the unamortized balance is
warranted. Such evaluation is based principally on the expected utilization of
the long lived assets and the projected undiscounted cash flows of the
operations in which the long lived assets are used.
Capitalized costs of long term improvements to existing sites, newly
acquired sites and newly constructed sites include certain internally generated
costs.
[7] PRE-OPENING COSTS:
Currently, costs associated with the opening of a new location are
deferred and amortized over one year following the opening of a site.
Pre-opening costs primarily consist of employee recruitment and training costs
as well as pre-opening marketing expenditures (see Note A[14]).
[8] LOAN ACQUISITION COSTS:
Loan acquisition costs incurred in connection with debt financing are
amortized over the life of the applicable loan weighted in accordance with the
amount of debt outstanding.
[9] INCOME TAXES:
The Company accounts for income taxes utilizing the asset and liability
approach requiring the recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences between the basis
of assets and liabilities for financial reporting purposes and tax purposes.
The Company files a consolidated federal income tax return.
[10] NET INCOME PER SHARE:
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 requires
the reporting of earnings per basic share and earnings per diluted share.
Earnings per basic share are calculated by dividing net income by the weighted
average outstanding shares during the period. Earnings per diluted share are
calculated by dividing net income by the basic shares and all dilutive
securities including options. Earnings per diluted share does not include the
impact of potential common shares which would be antidilutive based on market
prices.
[11] USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-9
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
[12] CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents and
short-term investments. The Company places its temporary cash investments in
short-term, investment grade, interest-bearing securities and, by policy,
limits the amount of credit exposure in any one investment.
[13] STOCK BASED COMPENSATION:
During 1996, the Company implemented Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
The provisions of SFAS No. 123 allow companies to either expense the estimated
fair value of stock options or to continue to follow the intrinsic value method
set forth in APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") but disclose the pro forma effects on net income (loss) had the fair
value of the options been expensed. The Company has elected to continue to
apply APB 25 in accounting for its stock option incentive plans.
[14] RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 1997, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure" and No. 131, "Disclosure about Segments of an Enterprise and
Related Information". These statements are effective for the fiscal years
beginning after December 15, 1997. The Company believes that the above
pronouncements will not have a significant effect on the information presented
in the financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" ("SOP"). The SOP is effective for financial statements for fiscal
years beginning after December 15, 1998 with earlier application allowable in
fiscal years for which annual financial statements have not been issued. The
effects of the initial application of this SOP will be reported as the
cumulative effect of a change in accounting principles. Had this SOP been
adopted effective January 1, 1998, the cumulative effect of the change would
result in a charge for the year ending December 31, 1998 of $1,651 net of
related tax benefit.
In the quarter ended March 31, 1998, the Company adopted a recent
accounting standard regarding comprehensive income. Such adoption had no impact
on the presentation, since there were no items of other comprehensive income.
[15] UNAUDITED FINANCIAL STATEMENTS:
The financial statements as at March 31, 1998 and for the three months
ended March 31, 1998 and March 31, 1997 are unaudited and are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. In the opinion of management, the financial statements include all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the Company's financial position and results of operations.
[16] INTERIM FINANCIAL REPORTING:
Pursuant to APB Opinion No. 28, "Interim Financial Reporting," certain
accounting principles and practices followed for annual reporting are modified
for interim reporting purposes, so that the reported
F-10
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
results for these interim periods better relate to the results of operations
for the annual periods. Therefore, certain costs and expenses other than
merchandise cost are allocated among interim periods based on an estimate of
benefit received or activity associated with the periods.
[17] RECLASSIFICATIONS:
Certain items have been reclassified to conform with the current
year/period presentation.
NOTE B -- ACQUISITION OF GOLF FACILITIES
In 1996, the Company acquired (i) golf recreational facilities, in
Flemington, New Jersey; Mohegan Lake, New York; Fairfield, Ohio; Tucson,
Arizona; Easton, Massachusetts; Flanders, New Jersey; Margate, Florida;
Maineville, Ohio and Milwaukee, Wisconsin; (ii) two combination golf center and
9-hole golf courses in Mesa, Arizona and Virginia Beach, Virginia; (iii) a golf
recreational facility on which there is a 27-hole golf course in Fountain Inn,
South Carolina and (iv) a par-3 golf course in West Palm Beach, Florida. In
1996, the Company also acquired leasehold interests and the related existing
golf recreational facilities in Indian River, Virginia; San Jose, California;
Denver, Colorado; Westminster, California; Glen Burnie, Maryland and St. Louis,
Missouri which includes a par-3 golf course. In 1996, the Company also acquired
a concession license with the City of Denver to manage an existing golf
recreational facility and restaurant.
In 1997, the Company acquired a golf recreational facility in
Philadelphia, Pennsylvania and a combination golf center and 18-hole golf
course in Palm Royale, California. In 1997, the Company also acquired leasehold
interests and (i) the related existing golf recreational facilities in Palm
Desert, California; Carver, Massachusetts; Raleigh, North Carolina; Arlington,
Texas; San Bruno, California; Milpitas, California; Warrenville, Illinois; Elk
Grove, California; Columbus, Ohio; Commack, New York and Lake Grove, New York;
(ii) the existing 18-hole golf courses in Olney, Maryland and Greenville, South
Carolina and (iii) an existing golf recreational facility on which there is a
9-hole executive course in Rio Salado, Arizona. The Company also acquired a
concession license with the City of New York to operate an existing golf
recreational facility in Randalls Island, New York and a management contract
from Bergen County, New Jersey to operate an existing golf-recreational
facility.
In addition to the golf facilities, the Company acquired LCI, a New York
corporation that owns and operates a new 170,000 square-foot family sports
supercenter including a golf center, an 18-hole executive golf course, an ice
rink, additional family amusements such as video and virtual reality games and
a conference center, in Lake Grove, New York; the Golf Academy of Hilton Head,
Inc., which operates a golf school and designs and manages corporate golf
events located in Hilton Head, South Carolina; Long Island Skating Academy
located in Syosset, New York; a family sports and entertainment supercenter
with two ice rinks, two soccer fields and additional family amusements located
in Cincinnati, Ohio and a designer and assembler of premium grade golf clubs
located in Palm Desert, California.
LCI also owned and operated seven stand-alone bowling centers, six of
which were sold shortly after the Company acquired them at the Company's cost.
During the three months ended March 31, 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 ("1998
Acquisitions"). In addition, in
F-11
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE B -- ACQUISITION OF GOLF FACILITIES (CONTINUED)
March 1998, the Company signed a long-term lease to construct and operate an
ice rink and family entertainment center in New Rochelle, New York and in April
1998 the Company entered into a concession license with the City of New York to
build a golf center and an in-line skating arena.
These acquisitions were accounted for using the purchase method of
accounting. The purchase prices paid for the various facilities consisted of
cash, common stock of the Company, notes, assumption of liabilities or a
combination thereof. Assets acquired and liabilities assumed and the
consideration paid is summarized as follows:
<TABLE>
<CAPTION>
FACILITIES ACQUIRED
----------------------------------------
THREE
YEAR ENDED MONTHS
DECEMBER 31, ENDED
------------------------- MARCH 31,
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
Property, plant, equipment and leasehold
interests .................................. $ 47,905 $ 54,761 $ 32,657
Other current assets ......................... 201 3,274 --
Excess of cost over fair value ............... 50 18,468 13,515
-------- --------- ---------
Total assets .............................. 48,156 76,503 46,172
Assumption of mortgage payable ............... (1,700) (20,645) (16,087)
Assumption of other liabilities .............. -- (7,688) (7,732)
-------- --------- ---------
Net assets acquired .......................... $ 46,456 $ 48,170 $ 22,353
======== ========= =========
Cash ......................................... $ 35,337 $ 27,418 $ 21,336
Fair value of common stock and warrants issued 6,363 18,699 1,017
Loan from selling stockholder ................ 3,102 2,053 --
Mortgage ..................................... 1,654 -- --
-------- --------- ---------
$ 46,456 $ 48,170 $ 22,353
======== ========= =========
</TABLE>
In November 1995, the Company acquired The Practice Tee, Inc. ("TPT"). TPT
operates a combination Golden Bear golf center and golf course facility in El
Segundo, California and a combination golf center and par-3 golf course
facility in Gilroy, California. The purchase price consisted of $6,000 which
included $2,000 for the achievement of certain operating targets.
The operating results of companies acquired are included in the Company's
results of operations from dates of acquisition.
F-12
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE B -- ACQUISITION OF GOLF FACILITIES (CONTINUED)
The following unaudited pro forma information assumes that the
acquisitions in 1997 had taken place at the beginning of 1996 and that the
acquisitions in 1996 and 1995 had taken place at the beginning of 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
---------- ------------ ------------
<S> <C> <C> <C>
Total revenue .................................. $25,855 $ 56,222 $ 79,992
Net income (loss) .............................. (490) 2,302 10,568
Net income (loss) per share -- basic ........... $ (.06) $ .14 $ .54
Net income (loss) per share -- diluted ......... (.06) .13 .53
</TABLE>
The aggregate purchase price of the 1998 Acquisitions was approximately
$43,100, consisting of cash, common stock of the Company and notes. The
purchase price included excess of cost over fair value of $10,700.
The following unaudited pro forma information for the year ended December
31, 1997 and for the three months ended March 31, 1998 assumes that, in
addition to the acquisitions in 1997 noted above, the 1998 Acquisitions had
taken place at the beginning of 1997.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
-------------- -------------
<S> <C> <C>
Total revenue ........................... $ 84,170 $ 19,297
Net income .............................. 7,700 878
Net income per share -- basic ........... $ .39 $ .05
Net income per share -- diluted ......... .38 .04
</TABLE>
Unaudited pro forma results do not include acquisitions which were not
material to the operations of the Company.
In addition, the Company purchased land and in certain locations was
awarded municipal contracts, to construct and operate golf facilities in
Norwalk, California; Bronx, New York; Brooklyn, New York; Broward County,
Florida; Seattle, Washington and Denver, Colorado.
NOTE C -- SHORT-TERM INVESTMENTS
Short-term investments including accrued interest, were as follows:
<TABLE>
<CAPTION>
AT
COST PLUS
ACCRUED FAIR UNREALIZED
HELD TO MATURITY INTEREST VALUE GAIN
- --------------------------------------------------- ---------- --------- -----------
<S> <C> <C> <C>
March 31, 1998:
Commercial paper and corporate bonds ......... $ 7,799 $ 7,799 $ --
======= ======= =======
December 31, 1997:
Commercial paper and corporate bonds ......... $55,846 $55,846 $ --
======= ======= =======
December 31, 1996:
U.S. Treasury and agencies ................... $33,838 $34,008 $ 170
======= ======= =======
</TABLE>
F-13
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE D -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------ AT MARCH 31,
1996 1997 1998
---------- ----------- -------------
<S> <C> <C> <C>
Golf driving range facilities ..................... $ 59,596 $118,608 $145,840
Leasehold interest and improvements ............... 29,216 58,869 68,481
Machinery and equipment ........................... 3,718 13,114 15,818
Furniture and fixtures ............................ 2,291 5,061 5,831
Construction in progress .......................... 11,891 19,392 27,039
-------- -------- --------
106,712 215,044 263,009
Accumulated depreciation and amortization ......... 2,823 6,160 7,539
-------- -------- --------
$103,889 $208,884 $255,470
======== ======== ========
</TABLE>
Net book value of the Company's property, plant and equipment pledged as
collateral for various loans aggregated $41,406 and $50,139 at December 31,
1997 and March 31,1998, respectively. Interest of $778, $942, and $413 has been
capitalized during the years ended December 31, 1996 and 1997 and the three
months ended March 31, 1998, respectively, which amounts are included in
property, plant and equipment. Included in property, plant and equipment at
December 31, 1997 and March 31, 1998 are $2,107 and $2,520, respectively, of
accumulated capitalized interest.
NOTE E -- PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Prepaid insurance ................................... $ 290 $ 566 $ 516
Prepaid taxes ....................................... 90 251
Pre-opening expenses ................................ 1,036 2,752 2,773
Accounts receivable and interest receivable ......... 500 2,617 1,881
Accounts receivable -- employees .................... 114 297 506
Other receivable and prepaids ....................... 1,612 2,261 3,640
------ ------ -------
$3,642 $8,744 $ 9,316
====== ====== =======
</TABLE>
NOTE F -- LEASING ARRANGEMENTS
Operating leases, which expire at various dates through 2047, are for land
at the facilities and for office space and, in some cases provide for the
payment of real estate taxes and other operating costs and are subject to
annual increases based on changes in the Consumer Price Index. Certain leases
require contingent rent payments based on a percentage of revenues.
F-14
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE F -- LEASING ARRANGEMENTS (CONTINUED)
Future annual minimum lease payments, including expected renewal options,
under operating lease agreements that have initial annual or remaining
noncancellable lease terms in excess of one year are as follows:
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, MARCH 31,
-------------- ----------
<S> <C> <C>
1998 ................................. $ 5,910 --
1999 ................................. 6,696 $ 6,307
2000 ................................. 7,004 7,006
2001 ................................. 7,146 7,264
2002 ................................. 7,195 7,366
2003 ................................. -- 7,344
Thereafter ........................... 154,488 168,654
--------- --------
Total minimum lease payments ......... $ 188,439 $203,941
========= ========
</TABLE>
Operating lease rent expense for the years ended December 31, 1995,
December 31, 1996 and December 31, 1997 was $1,527, $2,597 and $4,001,
respectively, and for the three months ended March 31, 1997 and March 31, 1998
was $617 and $1,423, respectively.
Pursuant to certain of the Company's land leases, rent expense charged to
operations differs from rent paid because of the effect of free rent periods
and scheduled rent increases. Accordingly, the Company has recorded deferred
rent payable of $233, $650, and $709 at December 31, 1996, December 31, 1997
and March 31, 1998, respectively. Rent expense is calculated by allocating
total rental payments, including those attributable to scheduled rent
increases, on a straight-line basis, over the lease term.
NOTE G -- DEBT
[1] SHORT-TERM AND CERTAIN OTHER BORROWING AGREEMENTS:
At December 31, 1996, the Company had borrowings under a revolving line of
credit of $5,000, providing for interest at the bank's prime rate.
On June 30, 1997, the Company entered into a two-year collateralized
revolving credit facility of up to $20.0 million with a bank convertible into a
four year term loan at the end of the first two years. After conversion to a
term loan, the loan is payable in 16 substantially equal quarterly
installments. Borrowings are at variable rates of interest. The loan is
collateralized by the pledge of the stock of most of the Company's subsidiaries
and such subsidiaries have also guaranteed the obligations. The agreement
includes certain convenants covering operational and financial requirements. At
December 31, 1997 and March 31, 1998 there were no amounts outstanding under
this facility.
In March 1998, the Company entered into a loan agreement with a bank
providing for a $10.0 million term loan collateralized by a mortgage on certain
properties. Borrowings under the loan mature in April 2003 and bear interest at
the prime rate less 1.0% during the drawdown period and at the prime rate
during the paydown period. The Company also obtained, in March 1998, a
commitment from a financial institution to provide a $10.0 million term loan
collateralized by a mortgage on certain properties. At March 31, 1998 there
were no amounts outstanding under these loan agreements.
F-15
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE G -- DEBT (CONTINUED)
[2] LONG-TERM OBLIGATIONS:
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1996 1997 1998
--------- --------- ----------
<S> <C> <C> <C>
Mortgage payable bearing interest at LIBOR plus 3.5% (capped at
10.5%), payable in monthly installments through May 2000 (the
loan is personally guaranteed by the Chairman of the Board) ......... $2,946 $ 2,874 $ 2,838
Promissory note due August 1997 bearing interest payable monthly
at 8.0% ............................................................. 998 -- --
Mortgage payable bearing interest payable monthly at bank's prime
rate (8.5% at December 31, 1996) .................................... 1,600 -- --
Mortgage payable due March 7, 2001 bearing interest at 5.25% ......... 1,700 1,700 1,700
Promissory notes (four notes of $480, $480, $250 and $250) payable
on or after January 1, 1997 and not later than July 1, 1997 bearing
interest payable monthly at 8.0%. The payee has an option to
require payment with common stock of the Company at $18.00 a
share ............................................................... 1,460 -- --
Mortgage payable due July 15, 1997 bearing interest at 8.0%.
Convertible into shares of the Company's common stock at $16.66
a share ............................................................. 700 -- --
Small business term loan bearing interest at 7.317%, payable in
monthly installments through August 2016 ............................ 742 725 720
Promissory note payable December 31, 1997 bearing interest at 8.0%.
Convertible into shares of the Company's common stocks at $19.33
a share ............................................................. 200 -- --
Promissory note bearing interest at prime with interest only for the
first year, and thereafter, payable in monthly installments ......... $1,710 -- --
Mortgage note payable due August 1, 2002 bearing interest at LIBOR
as adjusted, payable in monthly installments and an additional
payment of $5,000 due on or before May 1, 1998 (6.97% at
December 31, 1997 and 6.69% at March 31, 1998). The loan
includes certain covenants covering operational and financial
requirements ........................................................ -- $16,625 $16,413
Promissory note payable due January 2, 1998 bearing interest at 5.5%
per annum ........................................................... -- 1,150 --
Mortgage note payable due November 1, 2009 bearing interest at
9.875%, payable in monthly installments. The mortgage is based
upon a ten year amortization payout with a balloon payment that
calls for the entire principal balance to be due and payable on
November 1, 2009 .................................................... -- 3,745 3,737
Mortgage note payable in monthly installments with a balloon
payment on July 1, 2006 bearing interest at 8.5% .................... -- -- 2,325
Mortgage note payable in monthly installments with a balloon
payment on June 13, 2001 bearing interest at 8.0% ................... -- -- 1,726
</TABLE>
F-16
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE G -- DEBT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1996 1997 1998
--------- --------- ----------
<S> <C> <C> <C>
Note payable due June 1, 2005 bearing interest at 6.0% ................... -- -- 1,688
Promissory note payable due August 1, 2015 bearing interest at
7.217% payable in monthly installments .................................. -- -- 440
Promissory note payable due September 1998 bearing interest at 8.0% -- -- 150
Promissory notes payable was due August 1, 1997 bearing interest at
15.0% ................................................................... -- -- 380
Promissory note payable due June 1, 2005 bearing interest at 6.0% ........ -- -- 745
------ ------ ------
12,056 26,819 32,862
Less current portion ..................................................... 3,560 7,164 6,770
------ ------ ------
Noncurrent portion ..................................................... $ 8,496 $19,655 $26,092
======= ======= =======
</TABLE>
The long-term portion of the Company's debt at December 31, 1997 and March
31, 1998 is payable as follows:
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, MARCH 31,
1997 1998
-------------- ----------
<S> <C> <C>
1999 ............... $ 1,113 --
2000 ............... 1,216 $ 1,352
2001 ............... 3,030 5,769
2002 ............... 7,721 2,876
2003 ............... 180 7,464
2004 ............... -- 261
Thereafter ......... 6,395 8,370
-------- --------
$ 19,655 $ 26,092
======== ========
</TABLE>
[3] CONVERTIBLE SUBORDINATED NOTES:
In the fourth quarter of 1997, the Company issued 5 3/4% Convertible
Subordinated Notes (the "Notes") due October 2004 in the aggregate principal
amount of $115,000. Interest on the Notes is payable semi-annually on April 15
and October 15 of each year. The Notes are convertible at the option of the
holder into shares of common stock of the Company at any time after 60 days of
original issuance and prior to maturity, unless previously redeemed, at a
conversion price of $24.83 per share, subject to adjustment in certain events
as defined. The Notes are subordinated in right of payment to certain other
obligations of the Company including all existing and future Senior
Indebtedness (as defined in the indenture). Net proceeds of the offering, after
discount to the initial purchasers and offering costs, were approximately
$110,550.
NOTE H -- COMMITMENTS AND CONTINGENCIES
[1] EMPLOYMENT AGREEMENTS:
The Company has employment agreements, as amended, expiring through March
2001 with three of its officers, who are also stockholders of the Company,
which provide for aggregate annual base salaries of $260 in 1997, $363 in 1998,
$438 in 1999 and $148 in 2000.
F-17
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE H -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
[2] CONCESSION LICENSES:
The Company manages several facilities for municipalities pursuant to
concession licenses, three of which are terminable at will by the licensor. The
Company's concession license with the City of New York (the "City") for the
Douglaston, New York golf center, which was entered into in 1994 and which
expires on December 31, 2006, the concession license with the City for the
Randall's Island, New York golf center, which was assumed in 1997 and which
expires on March 1, 2007, the concession license with the City for the
Dreier-Offerman Park, Brooklyn, New York golf center, which was entered into in
April 1998 and which expires on March 30, 2019 and the concession license with
the Metropolitan Transportation Authority for the Bronx, New York golf center,
currently under construction, which was entered into in 1997 and which expires
on December 31, 2009 (respectively, the "Douglaston License," the "Randall's
Island License", the "Brooklyn License" and the "Bronx License"), are
terminable at will. Pursuant to the Douglaston License and the Randall's Island
License, the Company has made approximately $3,100 and $774, respectively, of
capital improvements. Pursuant to the Brooklyn License, the Company is
obligated to make $4.0 million of capital improvements prior to March 1, 1999.
Pursuant to the Bronx License, the Company is obligated to make a minimum of
$3,000 of capital improvements. If any of these concession licenses are
terminated, the licensor may retain, except within the first eight years of the
Bronx License, and is not obligated to pay the Company, for the value of such
capital improvements.
The Douglaston License provides for payment of fees to New York City of
the greater of $900 or up to 50% of gross revenues (as defined) on an annual
basis. The Randall's Island license requires a fee of the greater of $500 or a
percentage of revenue as defined in the agreement on an annual basis. The Bronx
License provides for annual minimum payments ranging from $500 in 1999 to $990
in 2009, or a percentage of gross revenue (as defined) whichever is greater.
[3] LICENSE AGREEMENT:
Pursuant to its license agreement with GBGC, the Company paid a one-time
facility development fee for each Golden Bear golf center. In addition, the
Company is required to pay annual royalty fees for each Golden Bear golf center
it operates based on Adjusted Gross Revenues ("AGR") as defined, equal to 3.0%
of AGR less than $2,000 plus 4.0% of AGR between $2,000 and $3,000, plus 5.0%
of AGR over $3,000. The minimum royalty fee for each Golden Bear golf center
ranges up to $50 per year. (See Note N.)
On September 13, 1995, the Company's exclusive rights to open Golden Bear
golf centers in defined territories were terminated and the restrictions on the
Company's right to develop golf centers under its own name in such territories
were removed.
Royalty fees incurred for the years ended December 31, 1995, 1996 and 1997
amounted to $184, $299 and $301, respectively. Such fees for the three months
ended March 31, 1997 and 1998 were $65 and $72, respectively. All such fees
have been charged to operations.
[4] PURCHASE OF TPT AND RELATED PARTY TRANSACTIONS:
In November 1995, the Company acquired TPT. Prior to the acquisition, two
of the officers of the Company individually owned, in aggregate, 70.0% of the
shares of TPT. The excess of cost over fair value of assets acquired of $4,392
was considered a preferential distribution to certain stockholders. The
purchase price included a contingent payment up to $2,000, payable upon the
achievement of certain
F-18
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE H -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
operating income targets which were achieved in 1996 and 1997. The contingent
purchase price in respect of the years ended December 31, 1996 and 1997 of
$1,000 for each of the years payable to the former TPT shareholders has been
reflected as an additional preferential distribution.
Under an existing agreement with TPT, the Company had an option to acquire
TPT (the "TPT Option") for a price equal to 12.5 times the net after tax income
of TPT during the full 12 months immediately preceding the exercise of such
option. Such price was payable in shares of the Company's common stock. The TPT
Option could have been exercised at any time commencing on the earlier of (i)
January 1, 1998 or (ii) the date on which TPT had after-tax income of at least
$1,000 over a twelve-month period until the expiration date of such option on
December 31, 2003.
[5] OTHER COMMITMENTS:
At December 31, 1997 and March 31, 1998, the Company had commitments for
various construction projects, aggregating $46,500 and $54,500, respectively,
to be completed within 12 to 24 months.
NOTE I -- BUSINESS SEGMENT INFORMATION
Information concerning operations by industry segment is as follows:
<TABLE>
<CAPTION>
GOLF NON-GOLF
OPERATIONS OPERATIONS CONSOLIDATED
------------ ------------ -------------
<S> <C> <C> <C>
Three months ended March 31, 1998:
Total revenue ......................... $ 14,265 $ 4,905 $ 19,170
Operating earnings .................... 2,150 899 3,049
Depreciation and amortization ......... 1,537 589 2,126
Identifiable assets ................... 296,800 42,179 338,979
Capital expenditures .................. 12,544 645 13,189
Year ended December 31, 1997:
Total revenue ......................... $ 56,516 $ 8,309 $ 64,825
Operating earnings .................... 15,261 2,402 17,663
Depreciation and amortization ......... 5,204 532 5,736
Identifiable assets ................... 300,027 25,480 325,507
Capital expenditures .................. 20,007 580 20,587
</TABLE>
Non-golf operations relate to complementary sports and entertainment
facilities which includes ice rink facilities, soccer fields and other family
sports and amusements.
There were no non-golf operations for the years ended December 31, 1995
and 1996 and for the three months ended March 31, 1997.
NOTE J -- STOCKHOLDERS' EQUITY
(1) STOCK SPLIT:
The Board of Directors approved a three for two stock split which was
distributed in May 1998. Stockholder's equity has been restated to give
retroactive recognition to the stock split for all the periods presented by
reclassifying from additional paid in capital to common stock, the par value of
additional shares arising from the split. In addition, all references to number
of shares and per share amounts have been restated to reflect the stock split.
F-19
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE J -- STOCKHOLDERS' EQUITY (CONTINUED)
(2) STOCK OPTION PLANS:
The Company applies APB 25 and related interpretations in accounting for
its employee stock options. Under APB 25, where the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation is recognized.
If compensation expense for the Company's stock-based compensation plans
had been determined consistent with SFAS No. 123, the Company's net income and
net income per share including pro forma results would have been the amounts
indicated below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- -----------------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Net income:
As reported ......... $ 1,074 $ 5,208 $ 10,524 $ 562 $ 1,346
Pro forma ........... 960 4,546 6,820 (589) (484)
Net income per share:
As reported:
Basic ............. $ 0.14 $ 0.35 $ 0.57 $ 0.03 $ 0.07
Diluted ........... 0.14 0.34 0.56 0.03 0.07
Pro forma:
Basic ............. 0.13 0.30 0.37 (0.03) (0.02)
Diluted ........... 0.12 0.24 0.36 (0.03)(a) (0.02)(a)
</TABLE>
The pro forma effect on net income for the years ended December 31, 1995,
1996 and 1997 and for the three months ended March 31, 1997 and 1998 may not be
representative of the pro forma effect on net income of future years due to,
among other things: (i) the vesting period of the stock options, (ii) the fair
value of additional stock options in future years and (iii) options granted in
1995 and prior are not included.
(a) The Company has not included potential common shares in the diluted loss
per share computation, as the result would be antidilutive.
For the purpose of the above table, the fair value of each option grant is
estimated as of the date of grant using the Black-Scholes option-pricing model
with the following assumptions:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- ---------------------
1995 1996 1997 1997 1998
--------- --------- ---------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Dividend yield .................. 0% 0% 0% 0% 0%
Expected volatility ............. 0.69 0.73 0.76 -- 0.82 0.82 0.73
Risk-free interest rate ......... 6.00% 6.00% 5.81% -- 6.58% 6.58% 5.52%
Expected life in years .......... 5 5 5 5 5
</TABLE>
The weighted average fair value at date of grant for options granted
during the years 1995, 1996 and 1997 were $3.55, $9.85 and $10.33,
respectively, using the above assumptions. The weighted average fair value at
the date of grant for options granted during the three months ended March 31,
1997 and March 31, 1998 were $12.10 and $15.40, respectively.
F-20
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE J -- STOCKHOLDERS' EQUITY (CONTINUED)
The Company's 1994 Stock Option Plan (the "Plan") provides for the grant
of options to purchase up to 450,000 shares of common stock to employees,
officers, directors and consultants of the Company. Options may be either
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or nonqualified options.
Incentive stock options may be granted only to employees of the Company, while
nonqualified options may be issued to nonemployee directors, consultants and
others, as well as to employees of the Company. The Company's 1996 Stock
Incentive Plan (the "New Plan") is identical to the Plan, except that the New
Plan provides (i) for the grant of options to purchase up to 750,000 shares of
common stock, (ii) an automatic grant of nonqualified stock options to purchase
15,000 shares to each nonemployee director upon his election or appointment to
the Board of Directors and (iii) annual grants (commencing on the date the New
Plan was approved by stockholders) to each nonemployee director of nonqualified
stock options to purchase 15,000 shares of common stock at the fair market
value of the common stock on the date of the grant.
The Company's 1997 Stock Incentive Plan (the "1997 Plan") is identical to
the New Plan. The Company will grant options under the 1997 Plan, once no more
options are available under the New Plan.
The exercise price per share of common stock subject to an incentive
option may not be less than the fair market value per share of common stock on
the date the option is granted. The per share exercise price of common stock
subject to a nonqualified option may be established by the Board of Directors.
Incentive stock options granted under the Plan cannot be exercised more
than 10 years from the date of grant.
Additional information with respect to stock option activity for the years
ended December 31, 1995, 1996 and 1997 and for three months ended March 31,
1998 is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1995 1996 1997
---------------------- ------------------------ --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ---------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period ......................... 231,000 $ 2.333 435,308 $ 5.687 1,018,290 $ 11.737
Options granted ................. 210,000 9.285 641,118 15.131 498,185 15.399
Options exercised ............... (5,692) 2.333 (58,136) (3.720) (87,239) 5.542
------- ------- ---------
Outstanding at end of period..... 435,308 5.687 1,018,290 11.737 1,429,236 13.391
------- --------- ---------
Options exercisable at end of
period ......................... 71,307 2.333 172,898 5.026 439,590 9.965
======= ========= =========
<CAPTION>
THREE MONTHS ENDED
--------------------------
MARCH 31, 1998
--------------------------
WEIGHTED
AVERAGE
SHARES PRICE
------------- ------------
<S> <C> <C>
Outstanding at beginning of
period ......................... 1,429,236 $ 13.391
Options granted ................. 139,313 22.468
Options exercised ............... (76,758) 8.353
---------
Outstanding at end of period..... 1,491,791 14.199
---------
Options exercisable at end of
period ......................... 502,190 11.588
=========
</TABLE>
At December 31, 1997, there were 9,000, 0 and 441,938 options available
for grant under the Plan, the New Plan and the 1997 Plan, respectively. At
March 31, 1998, there were 9,000, 0 and 302,625 options available for grant
under the Plan, the New Plan and the 1997 Plan, respectively.
F-21
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE J -- STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1997 and March 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
EXERCISE OPTIONS WEIGHTED AVERAGE CONTRACTUAL OPTIONS
PRICE OUTSTANDING REMAINING LIFE (IN YEARS) EXERCISABLE
- ------------ ---------------------------- ---------------------------- ---------------------------
DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31,
1997 1998 1997 1998 1997 1998
-------------- ----------- -------------- ----------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 2.333 133,285 100,007 6.50 6.25 133,285 100,007
4.000 1,920 750 7.67 7.42 1,920 750
5.917 9,000 6,000 7.50 7.25 6,000 3,000
9.917 154,230 143,724 7.80 7.55 93,686 83,179
13.250 80,250 80,250 8.25 8.00 26,749 53,500
18.083 45,000 45,000 8.50 8.25 15,000 15,000
15.167 183,754 174,506 8.58 8.33 57,510 48,263
15.167 323,852 304,298 8.96 8.71 105,440 85,886
11.583 144,882 144,882 9.25 9.00 -- 63,294
14.833 45,000 45,000 9.50 9.25 -- --
14.833 52,500 52,500 9.58 9.33 -- --
17.709 255,563 255,563 9.83 9.58 -- --
16.667 -- 25,125 -- 9.75 -- 25,125
20.000 -- 22,311 -- 8.54 -- 22,311
23.750 -- 90,000 -- 10.00 -- --
68.000 -- 1,875 -- 8.67 -- 1,875
------- ------- ------- -------
1,429,236 1,491,791 439,590 502,190
========= ========= ======= =======
</TABLE>
In connection with the purchase of certain golf facilities, the Company
granted the sellers options to acquire up to an aggregate of 81,000 shares of
common stock at prices ranging from $0.01 to $26.67 per share, with a weighted
average price per share of $20.77. As of December 31, 1997 and March 31, 1998,
options to purchase 64,920 shares of common stock were outstanding.
[2] WARRANTS:
In connection with the initial public offering in November 1994, the
Company issued warrants to the representatives of the underwriters to purchase
180,000 shares of common stock at $3.67 per share exercisable through November
1999, of which warrants to purchase 60,000 shares were exercised in connection
with a public offering in December 1995 and the remaining warrants to purchase
120,000 shares were exercised in 1996.
In connection with the public offering in December 1995, the Company
granted warrants to the representatives of the underwriters to purchase from
the Company up to 450,000 shares of common stock at $13.50 per share
exercisable through December 2000, of which warrants to purchase 3,324 and
74,484 shares were exercised in the year ended December 31, 1997 and the three
months ended March 31, 1998, respectively. As of December 31, 1997, warrants to
purchase 372,192 shares of common stock were outstanding.
F-22
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE J -- STOCKHOLDERS' EQUITY (CONTINUED)
In connection with consulting services to be rendered over a three-year
period, the Company in 1996 issued warrants to a consultant to purchase 105,000
shares of common stock at $13.25 per share. Such warrants were exercised in
1996.
In connection with the purchase of LCI in July 1997, the Company issued
warrants to the sellers to purchase an aggregate of 83,306 shares of common
stock at $18.33 per share exercisable through July 2002.
NOTE K -- INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- ----------------
1995 1996 1997 1997 1998
-------- --------- --------- ------ -------
<S> <C> <C> <C> <C> <C>
Current ............................... $ 785 $2,822 $5,295 $345 $860
Deferred .............................. (51) 370 1,242
----- ------ ------ ---- ----
734 3,192 6,537 345 860
Change in valuation allowance ......... 65
----- ------ ------ ---- ----
Total provision ....................... $ 669 $3,192 $6,537 $345 $860
===== ====== ====== ==== ====
</TABLE>
At December 31, 1994, the Company had available net operating loss
carryforwards of approximately $180 for federal income tax purposes, which were
utilized in 1995. Temporary differences arise due to differences between
reporting for financial statement purposes and for federal income tax purposes
relating primarily to deferred rent expense and depreciation and amortization
methods.
Expected tax expense based on the statutory rate is reconciled with the
actual expense as follows:
<TABLE>
<CAPTION>
PERCENT OF PRE-TAX EARNINGS
-----------------------------------------------------------------
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Expected tax expense ......................... 34.0% 34.0% 35.0% 34.0% 35.0%
State income tax (benefit), net of federal tax
effect ...................................... 7.6 3.7 5.6 3.7 5.6
Decrease in valuation allowance in use of net
operating loss .............................. (7.7) -- -- -- --
Other ........................................ 1.1 0.3 (2.3) 0.3 (1.6)
---- ---- ---- ---- ----
35.0% 38.0% 38.3% 38.0% 39.0%
==== ==== ==== ==== ====
</TABLE>
F-23
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE K -- INCOME TAXES (CONTINUED)
The deferred tax assets (liabilities) are recorded as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 1998
--------- ----------- ------------
<S> <C> <C> <C>
Deferred rent ............................... $ 93 $ 247 $ 247
Book basis of assets over tax basis ......... (347) (4,443) (4,443)
------ -------- --------
Net deferred tax (liability) ................ $ (254) $ (4,196) $ (4,196)
====== ======== ========
</TABLE>
NOTE L -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial statements:
Cash and cash equivalents approximate fair value. The cost and fair value
of short-term investments are disclosed in Note C.
Short-term loan payable -- the carrying amount approximates fair value due
to the short-term maturities of these instruments.
Long-term debt and convertible subordinated notes -- fair value is
estimated based on borrowing rates offered to the Company.
The carrying amounts and fair value of the Company's financial instruments
as of December 31, 1997 and March 31, 1998 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
---------- ----------
<S> <C> <C>
December 31, 1997:
Cash and cash equivalents .............. $ 6,002 $ 6,002
Long-term debt ......................... 26,819 26,819
Convertible subordinated notes ......... 115,000 115,000
March 31, 1998:
Cash and cash equivalents .............. 1,922 1,922
Long-term debt ......................... 32,862 32,862
Convertible subordinated notes ......... 115,000 115,000
</TABLE>
NOTE M -- COMBINATION WITH EAGLE QUEST GOLF CENTERS, INC.
On June 30, 1998, the Company 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
business combination will be accounted for as a pooling-of-interests
combination and, accordingly, the Company's historical consolidated financial
statements presented in future reports will be restated to include the combined
results of operations, financial position and cash flows of Eagle Quest.
F-24
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE M -- COMBINATION WITH EAGLE QUEST GOLF CENTERS, INC. (CONTINUED)
The following unaudited pro forma data summarizes the combined results of
operations of the Company and Eagle Quest as if the combination had been
consummated on December 31, 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- ---------------------------
1995 1996 1997 1997 1998
------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues ......... $-- $ 149 $ 8,172 $ 686 $ 2,327
=== ======= ======== ======== ========
Net (loss) ............. $-- $ (886) $ (7,255) $ (1,349) $ (3,037)
=== ======= ======== ======== ========
Net (loss) per share:
Basic ................. -- $ (1.89) $ (7.43) $ (1.66) $ (2.63)
Diluted ............... -- $ (1.89) $ (7.43) $ (1.66) $ (2.63)
=== ======= ======== ======== ========
</TABLE>
In April 1998, FGC agreed to loan Eagle Quest up to $2,225, of which Eagle
Quest borrowed approximately $1,900 bearing interest at a rate of 15% per annum
during the first three months of its term and 20% per annum during the second
three months of its term and payable in October 1998.
NOTE N -- SUBSEQUENT EVENT:
On June 16, 1998, the Company entered into an agreement to acquire Golden
Bear Golf Centers, Inc. ("Golden Bear"), a wholly owned subsidiary of Golden
Bear Golf, Inc. Golden Bear operates 14 golf centers. Closing of the
transaction is subject to a number of conditions including regulatory
approvals. The purchase consideration for the acquisition is estimated at $32
million minus certain indebtedness and liabilities. The Company will also enter
into new license agreement with respect to existing Golden Bear golf centers
and the newly acquired centers. This transaction will be accounted for as a
purchase in accordance with APB No. 16.
NOTE O -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------------------- ------------------------ ------------------------- ------------------------
1996 1997 1996 1997 1996 1997 1996 1997
----------- ----------- ----------- ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue $ 3,362 $ 9,015 $ 6,852 $ 17,542 $ 10,654 $ 21,867 $ 7,036 $ 16,401
Operating income 10 632 2,404 6,461 4,153 7,321 31 3,249
Net income 69 562 1,574 4,068 3,115 4,232 450 1,662
Net income per share:
Basic $ 0.01 $ 0.03 $ 0.12 $ 0.23 $ 0.18 $ 0.23 $ 0.03 $ 0.09
Diluted 0.01 0.03 0.12 0.23 0.18 0.22 0.03 0.09
</TABLE>
F-25
<PAGE>
AUDITORS' REPORT
To The Directors
Eagle Quest Golf Centers Inc.
We have audited the consolidated balance sheets of Eagle Quest Golf
Centers Inc. and Subsidiaries as at December 31, 1997 and 1996 and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the year ended December 31, 1997 and the period from incorporation on
February 5, 1996 to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of Eagle Quest Golf Centers Inc.
and Subsidiaries as at December 31, 1997 and 1996 and the results of their
operations and cash flows for the year ended December 31, 1997 and the period
from incorporation on February 5, 1996 to December 31, 1996 in accordance with
generally accepted accounting principles in the United States.
KPMG
Chartered Accountants
Vancouver, Canada
March 13, 1998, except as to note 16(a)
which is as of April 2, 1998
COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA-U.S.
REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the
addition of an explanatory paragraph (following the opinion paragraph) when the
financial statements are affected by conditions and events that cast
substantial doubt on the Company's ability to continue as a going concern, such
as those described in note 1 to the financial statements. Our report to the
directors dated March 13, 1998, except as to note 16(a) which is as of April 2,
1998, is expressed in accordance with Canadian reporting standards which do not
permit a reference to such events and conditions in the auditors' report when
these are adequately disclosed in the financial statements.
KPMG
Chartered Accountants
March 13, 1998, except as to note 16(a)
which is as of April 2, 1998
F-26
<PAGE>
EAGLE QUEST GOLF CENTERS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Expressed in United States Dollars)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
---------------- ---------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 289,456 $ 40,118 $ 587,494
Restricted cash deposits (note 4) ............................. 323,701 390,086 331,643
Accounts receivable ........................................... 147,833 152,406 266,468
Inventory ..................................................... 2,059,858 2,167,254 564,977
Prepaid expenses .............................................. 372,864 401,255 143,164
------------- ------------ -----------
Total current assets ........................................ 3,193,712 3,151,119 1,893,746
Property and equipment (note 5) ................................ 28,744,768 26,990,565 8,406,781
Development costs .............................................. 1,036,907 966,603 506,133
Deferred financing costs, net of accumulated amortization of
$115,941 (December 31, 1997 -- $61,790) ....................... 1,002,345 923,651 --
Goodwill, net of accumulated amortization of $247,693
(December 31, 1997 -- $174,900; 1996 -- $nil) ................. 5,360,948 4,908,741 2,598,000
Other assets ................................................... 588,971 587,585 --
------------- ------------ -----------
Total assets .................................................. $ 39,927,651 $ 37,528,264 $13,404,660
============= ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (note 6) .................................... $ 105,887 62,915 $ --
Trade accounts payable ........................................ 3,325,556 2,015,027 546,799
Accrued liabilities ........................................... 2,484,686 1,560,160 395,781
Deferred revenue .............................................. 154,491 76,545 122,639
Current portion of long-term debt ............................. 4,834,700 3,713,000 860,173
------------- ------------ -----------
Total current liabilities ................................... 10,905,320 7,427,647 1,925,392
Long-term debt, net of current portion (note 7) ................ 13,501,461 12,454,615 4,067,113
Subordinated debenture (note 8) ................................ 5,065,386 4,980,503 --
Redeemable equity securities (note 9) .......................... 2,828,818 2,804,493 --
Shareholders' equity:
Share capital:
Preferred shares:
1,000,000 class A shares issuable in series with rights to
be designated by the Board of Directors .....................
Common shares:
Authorized:
100,000,000 common shares without par value ..............
Issued and outstanding:
28,290,054 (December 31, 1997-- 28,140,718; 1996--
19,870,551) common shares .................................. 12,763,887 12,696,762 5,308,602
Subscriptions receivable ...................................... -- -- (490,950)
Additional paid-in capital .................................... 5,980,000 5,280,000 3,480,000
Deferred stock compensation ................................... (155,000) (170,000) --
Accumulated deficit ........................................... (11,176,079) (8,140,570) (885,497)
Accumulated other comprehensive income:
Foreign currency translation adjustment ..................... 213,858 194,814 --
------------- ------------ -----------
7,626,666 9,861,006 7,412,155
Future operations (note 1)
Commitments and contingencies (note 12)
Subsequent events (notes 10 and 16)
Total liabilities and shareholders' equity ................... $ 39,927,651 $ 37,528,264 $13,404,660
============= ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
EAGLE QUEST GOLF CENTERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in United States Dollars)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FOR THE THREE FOR THE THREE INCORPORATION ON
MONTHS ENDED MONTHS ENDED FOR THE YEAR ENDED FEBRUARY 5, 1996
MARCH 31, MARCH 31, DECEMBER 31, TO DECEMBER 31,
1998 1997 1997 1996
--------------- --------------- -------------------- --------------------
<S> <C> <C> <C> <C>
(unaudited) (unaudited)
Revenues:
Golf center operations ...................... $ 1,770,435 $ 352,240 $ 5,490,550 $ 27,449
Merchandise ................................. 556,700 333,853 2,681,449 121,279
------------ ------------ ------------ ----------
2,327,135 686,093 8,171,999 148,728
Operating costs:
Golf center operations ...................... 1,969,820 412,404 5,822,543 66,655
Cost of merchandise sold .................... 424,672 253,253 1,898,883 82,514
General and administrative expenses ......... 1,749,939 1,119,063 6,399,984 1,165,286
Depreciation and amortization ............... 388,258 132,992 1,098,374 14,795
Interest expense ............................ 829,955 117,347 1,602,288 12,975
------------ ------------ ------------ ----------
5,362,644 2,035,059 16,822,072 1,342,225
------------ ------------ ------------ ----------
Loss before income taxes ..................... 3,035,509 1,348,966 8,650,073 1,193,497
Income tax benefit (note 13) ................. -- -- (1,395,000) (308,000)
------------ ------------ ------------ ----------
Loss for the period .......................... 3,035,509 1,348,966 7,255,073 885,497
Other comprehensive income, net of tax:
Foreign currency translation ................ 19,044 15,637 194,814 --
------------ ------------ ------------ ----------
Comprehensive loss ........................... $ 3,016,465 $ 1,333,329 $ 7,060,259 $ 885,497
============ ============ ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
EAGLE QUEST GOLF CENTERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Expressed in United States Dollars)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON SUBSCRIPTIONS PAID-IN
STOCK RECEIVABLE CAPITAL
-------------- --------------- ------------
<S> <C> <C> <C>
Common shares issued:
For cash and notes,
net of issuance
costs (19,420,551
shares) ................ $ 4,954,521 $ (490,950) $ --
On acquisition of
businesses (note 3)
(450,000 shares) ....... 258,081 -- 3,190,000
For services rendered 96,000 -- 290,000
Loss for the period ....... -- -- --
------------ ---------- ----------
Balance, December 31,
1996 ..................... 5,308,602 (490,950) 3,480,000
Common shares issued:
For cash, net of costs
(6,495,744 shares) ....... 5,600,745 490,950 --
For cash on exercise
of options (68,500
shares) ................ 19,980 -- --
On acquisition of
businesses (note 3)
(1,414,318 shares) ..... 1,530,458 -- 938,000
For services rendered
(291,605 shares) ....... 236,977 -- 182,000
Deferred stock
compensation due
to stock options
granted ................ -- -- 680,000
Amortization of
deferred
compensation ........... -- -- --
Loss for the period ....... -- -- --
Translation adjustment -- -- --
------------ ---------- ----------
Balance, December 31,
1997 ..................... 12,696,762 -- 5,280,000
Common shares issued:
For cash, net of costs
(60,000 shares) ........ 14,045 -- --
On issuance of debt
(1,421,000
warrants) .............. -- -- 700,000
Amortization of
deferred
compensation ............ -- -- --
For services rendered
(89,336 shares) ........ 53,080 -- --
Loss for the period ....... -- -- --
Translation
adjustment ............... -- -- --
------------ ---------- ----------
Balance, March 31,
1998 (unaudited) ......... $ 12,763,887 $ -- $5,980,000
============ ========== ==========
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
-----------
FOREIGN
DEFERRED CURRENCY
STOCK ACCUMULATED TRANSLATION
COMPENSATION DEFICIT ADJUSTMENT TOTAL
-------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
Common shares issued:
For cash and notes,
net of issuance
costs (19,420,551
shares) ................ $ -- $ -- $ -- $ 4,463,571
On acquisition of
businesses (note 3)
(450,000 shares) ....... -- -- -- 3,448,081
For services rendered -- -- -- 386,000
Loss for the period ....... -- (885,497) -- (885,497)
----------- ------------- --------- ------------
Balance, December 31,
1996 ..................... -- (885,497) -- 7,412,155
Common shares issued:
For cash, net of costs
(6,495,744 shares) ....... -- -- -- 6,091,695
For cash on exercise
of options (68,500
shares) ................ -- -- -- 19,980
On acquisition of
businesses (note 3)
(1,414,318 shares) ..... -- -- -- 2,468,458
For services rendered
(291,605 shares) ....... -- -- -- 418,977
Deferred stock
compensation due
to stock options
granted ................ (680,000) -- -- --
Amortization of
deferred
compensation ........... 510,000 -- -- 510,000
Loss for the period ....... -- (7,255,073) -- (7,255,073)
Translation adjustment -- -- 194,814 194,814
----------- ------------- --------- ------------
Balance, December 31,
1997 ..................... (170,000) (8,140,570) 194,814 9,861,006
Common shares issued:
For cash, net of costs
(60,000 shares) ........ -- -- -- 14,045
On issuance of debt
(1,421,000
warrants) .............. -- -- -- 700,000
Amortization of
deferred
compensation ............ 15,000 -- -- 15,000
For services rendered
(89,336 shares) ........ -- -- -- 53,080
Loss for the period ....... -- (3,035,509) -- (3,035,509)
Translation
adjustment ............... -- -- 19,044 19,044
----------- ------------- --------- ------------
Balance, March 31,
1998 (unaudited) ......... $ (155,000) $ (11,176,079) $ 213,858 $ 7,626,666
=========== ============= ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
EAGLE QUEST GOLF CENTERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in United States Dollars)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FOR THE THREE FOR THE THREE INCORPORATION ON
MONTHS ENDED MONTHS ENDED FOR THE YEAR ENDED FEBRUARY 5, 1996
MARCH 31, MARCH 31, DECEMBER 31, TO DECEMBER 31,
1998 1997 1997 1996
--------------- --------------- -------------------- --------------------
<S> <C> <C> <C> <C>
(unaudited) (unaudited)
Cash provided by (used in):
Operations:
Loss for the period ............................... $ (3,035,509) $ (1,348,966) $ (7,255,073) $ (885,497)
Items not involving the use of cash: ..............
Depreciation and amortization ................... 388,258 132,992 1,098,374 14,795
Deferred income taxes ........................... -- -- (1,395,000) (308,000)
Non-cash operating expenses ..................... 15,000 459,970 928,977 386,000
Non-cash interest expense ....................... 47,922 -- 266,596 --
Changes in non-cash operating working
capital:
Accounts receivable ............................. 4,573 252,839 149,661 (432,468)
Inventory ....................................... 125,048 (342,548) (1,212,887) (43,233)
Prepaid expenses ................................ 28,730 (29,824) (168,904) (29,514)
Trade accounts payable .......................... 1,526,332 218,933 902,911 6,559
Accrued liabilities ............................. 447,356 (155,913) 1,164,379 395,781
Deferred revenue ................................ (47,830) (8,489) (46,094) 122,639
------------ ------------ ------------- ------------
Net cash used in operations ........................ (500,120) (821,006) (5,567,060) (772,938)
Financing:
Proceeds from issue of share capital for cash ..... 37,742 898,498 6,091,695 4,463,571
Proceeds on exercise of options ................... -- -- 19,980 --
Increase in bank indebtedness ..................... 42,972 -- 62,915 --
Proceeds from subordinated debentures ............. -- -- 6,500,000 --
Proceeds from long-term debt ...................... 5,162,518 159,728 14,338,252 751,657
Repayment of long-term debt ....................... (2,346,298) (45,922) (4,167,185) --
Deferred financing costs .......................... (132,845) -- (985,441) --
------------ ------------ ------------- ------------
Net cash provided by financing ..................... 2,764,089 1,012,304 21,860,216 5,215,228
Investing:
Acquisition of business, net of cash acquired
and value assigned to shares issued (note 3) (1,769,119) -- (14,199,010) (3,013,430)
Purchase of property and equipment ................ (243,033) (521,678) (1,949,225) (76,280)
Development costs and other assets ................ (68,864) (169,163) (633,854) (433,443)
Restricted cash deposits .......................... 66,385 46,970 (58,443) (331,643)
------------ ------------ ------------- ------------
Net cash used in investing ........................ (2,014,631) (643,871) (16,840,532) (3,854,796)
------------ ------------ ------------- ------------
Increase (decrease) in cash and cash equivalents 249,338 (452,573) (547,376) 587,494
Cash and cash equivalents, beginning of period ..... 40,118 587,494 587,494 --
------------ ------------ ------------- ------------
Cash and cash equivalents, end of period ........... $ 289,456 $ 134,921 $ 40,118 $ 587,494
============ ============ ============= ============
</TABLE>
- ----------
Non-cash transactions and supplementary information (note 15).
See accompanying notes to consolidated financial statements.
F-30
<PAGE>
EAGLE QUEST GOLF CENTERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31, 1997
PERIOD FROM INCORPORATION ON FEBRUARY 5, 1996 TO DECEMBER 31, 1996
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
[1] FUTURE OPERATIONS:
Eagle Quest Golf Centers Inc. (the "Company") was incorporated under the
Company Act (British Columbia) on February 5, 1996. The business of the Company
is to acquire, develop and operate golf practice centers incorporating a
driving range, a retail golf shop, and a learning academy and, in some
locations, a short/executive course. At March 31, 1998, the Company operated
through 18 (December 31, 1997 -- 17; 1996 -- 4) locations in Canada and the
United States.
During the period from incorporation on February 5, 1996 to December 31,
1997, the Company has incurred losses aggregating $8,140,570 and has utilized
cash aggregating $6,339,998 in its operating activities. At December 31, 1997,
the Company has a working capital deficiency of $4,276,528. In addition, the
Company has significant indebtedness which is being repaid by lender agreement
over extended terms notwithstanding that it is formally due on demand.
Subsequent to December 31, 1997 and through to March 13, 1998, the Company has
not obtained additional financing, although management continues to pursue
sources. There can be no guarantee that the required additional financing will
be obtained. The Company's ability to meet its obligations as they come due is
primarily dependent upon the identification of additional financing, whether
from operations or otherwise, that will not require repayment in 1998. Failure
to identify and obtain such financing may limit the Company's ability to
satisfy its obligations as they come due which may, in turn, result in
accelerations of due dates on certain indebtedness and impair the Company's
ability to continue as a going concern. This could negatively impact the
recoverability of the carrying value of assets.
On April 2, 1998, the Company entered into an agreement whereby it would
be acquired by Family Golf Centers, Inc. ("Family Golf") (note 16). If
completed as anticipated, management is of the opinion that the Company's
obligations will be met by Family Golf as they come due. If this transaction
does not complete as anticipated, the Company will need to identify and obtain
additional financing as discussed in the preceding paragraph.
(Unaudited):
For the three months ended March 31, 1998, the Company incurred additional
losses aggregating $3,035,509 and has utilized cash aggregating $500,120 in
operating activities. At March 31, 1998, the Company has a working capital
deficiency of $ 7,711,608 and subsequent to March 31, 1998 has ceased
construction activity on a leased property (note 12(c)). As indicated above,
the Company requires additional economic financing to meet its obligations. The
failure to complete the Family Golf transaction or identify financing sources
will result in significant doubt as to the Company's ability to continue to
operate.
[2] SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States. The
consolidated financial statements include the accounts of the Company and
its subsidiary companies, all of which are wholly-owned, from their
respective dates of acquisition of control or formation. Material
intercompany transactions and balances have been eliminated in
consolidation.
F-31
<PAGE>
EAGLE QUEST GOLF CENTERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31, 1997
PERIOD FROM INCORPORATION ON FEBRUARY 5, 1996 TO DECEMBER 31, 1996
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
[2] SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
(b) Foreign currency translation:
The Company's functional and reporting currency is the United States
dollar as its operating, financing and investing activities are principally
carried out in that currency.
The functional currency of the Company's Canadian operations is the
Canadian dollar. Assets and liabilities are translated into United States
dollars at the rates of exchange in effect at the balance sheet date and
revenues and expenses are translated at the average rates of exchange for
the period. Translation adjustments are included in the foreign currency
translation adjustment section of shareholders' equity.
The Company and its subsidiaries will periodically undertake transactions
in a currency other than their specific functional currency. Such
transactions are translated into their functional currency using exchange
rates at the date of the transaction. Gains and losses arising on
settlement of foreign currency denominated transactions or balances are
included in the determination of income. The Company does not enter into
derivative instruments to offset the impact of foreign exchange
fluctuations. Foreign exchange gains and losses included in the
determination of loss are not significant for any period presented.
(c) Use of estimates:
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates which
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the balance sheet date, and the
recognition of revenues and expenses for the reporting period. Actual
amounts may differ from these estimates. Areas where significant estimates
have been applied include the assessment of recoverability of property and
equipment, goodwill and other assets, all of which are dependent upon
estimates of future cash flows, and the estimated useful lives over which
such assets are depreciated.
(d) Cash equivalents:
Cash equivalents include highly liquid investments with remaining terms
to maturity of three months or less when acquired.
(e) Inventory:
Inventory is comprised of finished goods and is valued at the lower of
cost, determined on a weighted average cost basis and including applicable
freight, or market.
(f) Property and equipment:
Property and equipment are recorded at cost.
Depreciation is provided using the straight-line method over the
estimated useful lives as follows:
<TABLE>
<S> <C>
Buildings and improvements 5 to 25 years
Leasehold improvements term of the lease
Furniture, fixtures and equipment 3 to 10 years
</TABLE>
F-32
<PAGE>
EAGLE QUEST GOLF CENTERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31, 1997
PERIOD FROM INCORPORATION ON FEBRUARY 5, 1996 TO DECEMBER 31, 1996
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
[2] SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The Company periodically reviews and assesses the recoverability of the
carrying amount of property and equipment on a location-by-location basis
to determine whether a provision for impairment should be recorded. Such
determination is made by comparing the carrying value of property and
equipment and related goodwill to the future cash flows (undiscounted)
expected to result from the location. When these cash flows are less than
the carrying value, impairment is calculated by reference to the fair value
of the specific assets.
(g) Development costs:
Incremental direct costs incurred on projects under development are
capitalized as incurred. Upon completion of development, these costs are
added to property and equipment and depreciated prospectively. In addition,
development costs include deposits on potential future acquisitions which
are recorded at cost and included in the cost of acquisition on closing or
adjusted to recoverable amount by a charge against income if the
acquisition does not complete.
(h) Deferred finance costs:
Incremental direct costs incurred in negotiating and securing the
Company's long-term debt are capitalized as incurred. These costs are being
amortized against earnings over the respective term of the related debt.
(i) Goodwill:
Goodwill arising on the acquisition of businesses is amortized on a
straight-line basis over its estimated useful life of 20 years. The Company
reviews and assesses the recoverability of the carrying amount of goodwill
annually to determine potential impairment. Except when goodwill is related
to specific property and equipment, in which case the assessment is made as
described in note 2(f), this assessment is made by determining whether the
amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating
cash flows are not achieved and is related to the return of property and
equipment acquired on the specific business combinations that have given
rise to the goodwill.
(j) Share issue costs:
Share issue costs are accounted for, net of tax, as a reduction in the
proceeds from the issuance of shares.
(k) Stock-based compensation:
The Company has elected to apply Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for its stock options. Under APB 25,
compensation expense is only recorded to the extent that the exercise price
is less than the fair value of the underlying stock on the date of grant.
The Company amortizes deferred stock compensation expense for stock options
ratably over the vesting period. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
123, "Accounting for Stock-Based Compensation" ("SFAS 123").
F-33
<PAGE>
EAGLE QUEST GOLF CENTERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31, 1997
PERIOD FROM INCORPORATION ON FEBRUARY 5, 1996 TO DECEMBER 31, 1996
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
[2] SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
(l) Income taxes:
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carry forwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(m) Unaudited financial instruments:
The consolidated financial statements, including the financial
information disclosed in these notes, as at March 31, 1998 and for the
three months ended March 31, 1998 and 1997 is unaudited; however, such
financial information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary
to a fair statement of the results for the interim periods presented.
[3] BUSINESS COMBINATIONS:
During the year ended December 31, 1997, the Company acquired thirteen
golf centers comprised of thirteen driving ranges and four executive courses.
During the period ended December 31, 1996, the Company acquired four golf
centers comprised of four driving ranges and one executive course. (Unaudited)
In the three months ended March 31, 1998, the Company acquired one additional
golf center.
All of the acquisitions have been accounted for by the purchase method
whereby the fair value of the consideration issued is allocated between the
assets acquired and liabilities assumed based on their estimated fair values to
the Company. The operations of the acquired businesses have been consolidated
with effect from the respective dates of acquisition.
F-34
<PAGE>
EAGLE QUEST GOLF CENTERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31, 1997
PERIOD FROM INCORPORATION ON FEBRUARY 5, 1996 TO DECEMBER 31, 1996
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
[3] BUSINESS COMBINATIONS: (CONTINUED)
The summarized assets acquired and liabilities assumed are as follows:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCORPORATION
THREE MONTHS ON FEBRUARY 5,
ENDED YEAR ENDED 1996 TO
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
-------------- ---------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Cash ............................................ $ -- $ -- $ 127,239
Non-cash current assets ......................... 17,991 514,176 542,084
Property and equipment .......................... 1,756,267 17,196,607 8,345,295
Other assets .................................... -- 600,000 116,000
Goodwill ........................................ -- 2,471,238 2,598,000
---------- ------------ ------------
1,774,258 20,782,021 11,728,618
Current liabilities ............................. (5,139) (565,317) (539,978)
Long-term debt .................................. -- (1,639,836) (4,175,890)
Deferred income taxes ........................... -- (1,395,000) (424,000)
---------- ------------ ------------
$1,769,119 $ 17,181,868 $ 6,588,750
========== ============ ============
Consideration:
Cash .......................................... $1,769,119 $ 14,199,010 $ 3,140,669
Redeemable equity securities (note 9) ......... -- 514,400 --
Equity securities ............................. -- 2,468,458 3,448,081
---------- ------------ ------------
Purchase price .................................. $1,769,119 $ 17,181,868 $ 6,588,750
========== ============ ============
</TABLE>
In connection with the acquisition of a business in 1996, a principal
shareholder of the Company transferred 2,900,000 common shares to the vendor
for nominal consideration. This transfer has been accounted for as a
contribution of capital to the Company of approximately $3,190,000 and included
in the purchase price and the values assigned to the assets acquired.
Pro forma net income (loss) as if each of the material acquisitions in
1997 and 1996 had occurred at the beginning of 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
--------------- -------------
<S> <C> <C>
Revenues ................................ $ 10,891,009 $8,604,086
Expenses:
Operations ............................. 16,772,163 9,481,014
Depreciation and amortization .......... 1,630,318 1,753,515
Interest ............................... 2,937,723 2,870,133
------------ ----------
Loss before income taxes ................ $ 10,449,195 $5,500,576
============ ==========
</TABLE>
Under certain purchase agreements, the selling parties are entitled to
additional consideration based on the achievement of certain profitability or
performance targets. Upon achievement of the contingency
F-35
<PAGE>
EAGLE QUEST GOLF CENTERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31, 1997
PERIOD FROM INCORPORATION ON FEBRUARY 5, 1996 TO DECEMBER 31, 1996
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
[3] BUSINESS COMBINATIONS: (CONTINUED)
target, the obligations are accrued in the accounts with an offsetting increase
to the purchase price (generally by an increase to goodwill). In aggregate, the
Company has agreed to a maximum additional contingent consideration in the next
four calendar years which has not been recognized in the consolidated financial
statements at March 31, 1998 as follows:
<TABLE>
<S> <C>
1999 ........... $525,000
2000 ........... 300,000
2001 ........... 250,000
2002 ........... 250,000
</TABLE>
[4] RESTRICTED CASH DEPOSITS:
Restricted cash deposits represent short-term investments pledged as
collateral primarily for letters of credit on certain properties. The pledges
expire in 1998.
[5] PROPERTY AND EQUIPMENT:
As at March 31, 1998 (unaudited):
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
-------------- -------------- -------------
<S> <C> <C> <C>
Land ......................................... $ 7,386,565 $ -- $ 7,386,565
Buildings and leasehold improvements ......... 20,103,905 649,638 19,454,267
Furniture, fixtures and equipment ............ 2,096,831 192,895 1,903,936
----------- --------- -----------
$29,587,301 $ 842,533 $28,744,768
=========== ========= ===========
</TABLE>
As at December 31, 1997:
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
-------------- -------------- ---------------
<S> <C> <C> <C>
Land ......................................... $ 5,823,469 $ -- $ 5,823,469
Buildings and leasehold improvements ......... 19,914,758 483,376 19,431,382
Furniture, fixtures and equipment ............ 1,849,774 114,060 1,735,714
------------ --------- ------------
$ 27,588,001 $ 597,436 $ 26,990,565
============ ========= ============
</TABLE>
As at December 31, 1996:
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
-------------- -------------- -------------
<S> <C> <C> <C>
Land ......................................... $ 4,294,807 $ -- $ 4,294,807
Buildings and leasehold improvements ......... 3,894,991 6,181 3,888,810
Furniture, fixtures and equipment ............ 231,778 8,614 223,164
----------- -------- -----------
$ 8,421,576 $ 14,795 $ 8,406,781
=========== ======== ===========
</TABLE>
F-36
<PAGE>
EAGLE QUEST GOLF CENTERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31, 1997
PERIOD FROM INCORPORATION ON FEBRUARY 5, 1996 TO DECEMBER 31, 1996
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
[6] BANK INDEBTEDNESS:
Bank indebtedness is comprised of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ -------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Amount drawn under operating lines of credit
(Cdn. $150,000; December 31, 1997 -- Cdn.
$90,000).................................. $105,887 $62,915 $ --
======== ======= =======
</TABLE>
At March 31, 1998, the Company has available operating lines of credit
aggregating Cdn. $150,000 (U.S. $105,900 at March 31, 1998) that bear interest
at bank prime (6.5% at March 31, 1998) plus 0.5% and are secured by the assets
of the Company's Canadian subsidiaries.
[7] LONG-TERM DEBT:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
--------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Bank loan payable of up to $16 million bearing interest
at LIBOR (5.969% at December 31, 1997) plus 4% per
annum on its principal, repayable in monthly
installments of approximately $15,700 plus interest to
maturity on September 2002, and secured by the
assets of specific U.S. subsidiaries. In connection with
this loan, the lender was issued warrants to purchase
1,000,000 common shares of the Company at a price
of $1.50 per common share to August 27, 2004, which
warrants were assigned a value of $560,000. This
difference is being amortized as interest expense over
the term of the loan (unamortized discount at
March 31, 1998 -- $476,000; December 31, 1997 --
$504,000) .............................................. $ 10,420,030 $ 10,452,180 $ --
Convertible promissory note payable bearing interest at
6.5% per annum during the first year, 7.5% during the
second year, and 8.5% during the third year on its
principal, repayable in installments of $699,000 (Cdn.
$1.0 million) on February 28, 1998 (paid) and
$1,750,000 (Cdn. $2.5 million) on September 19, 2000.
At the time of an Initial Public Offering, the
noteholder can elect to convert any portion of the
unpaid note into common shares of the Company on
the basis of Cdn. $2.50 per share ...................... 1,764,789 2,446,697 --
------------ ------------ -----------
Carried forward ....................................... 12,184,819 12,898,877 --
</TABLE>
F-37
<PAGE>
EAGLE QUEST GOLF CENTERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31, 1997
PERIOD FROM INCORPORATION ON FEBRUARY 5, 1996 TO DECEMBER 31, 1996
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
[7] LONG-TERM DEBT: (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
-------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Brought forward .............................................. $12,184,819 $12,898,877 $ --
Bank loan payable bearing interest at Canadian bank
prime plus 0.5% per annum (6% at December 31,
1997), repayable in monthly installments of
approximately $8,700 plus interest to February 2008
subject to the ability of the lender to demand
repayment at any time, and secured by the assets of a
subsidiary (repayable as Cdn. $2,233,210) ..................... -- 1,561,139 --
Bank loan payable bearing interest at U.S. prime plus
3% per annum, repayable to February 2000, and
secured by the assets of a subsidiary, repaid in 1997 ......... -- -- 3,497,583
Mortgage payable bearing interest at 6.9% per annum,
repayable in monthly installments of approximately
$3,000 plus interest to maturity on February 2011
subject to the ability of the lender to demand
repayment at any time, and secured by the assets of a
subsidiary and a general charge over the assets of the
Company (repayable as Cdn. $1,126,644) ........................ 795,316 797,962 751,658
Promissory note payable bearing interest at the bank's
prime plus 2% per annum, repaid in 1997 ....................... -- -- 554,493
Mortgage payable bearing interest at 7% per annum,
repayable in monthly installments of approximately
$1,000 plus interest to April 2011 subject to the ability
of the lender to demand repayment at anytime, and
secured by the assets of a subsidiary and a general
charge over the assets of the Company (repayable as
Cdn. $408,086) ................................................ 288,074 288,333 --
Mortgage payable bearing interest at 3.5% per month on
its principal, repayable in monthly installments of
approximately $84,000 (Cdn. $119,000) to maturity on
August 1998 subject to the ability of the lender to
demand repayment at any time, and secured by the
assets of a subsidiary and a general charge over land
and building of the Company (repayable as Cdn.
$3,400,000). .................................................. 2,400,113 -- --
----------- ----------- ----------
Carried forward .............................................. 15,668,322 15,546,311 4,803,734
</TABLE>
F-38
<PAGE>
EAGLE QUEST GOLF CENTERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31, 1997
PERIOD FROM INCORPORATION ON FEBRUARY 5, 1996 TO DECEMBER 31, 1996
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
[7] LONG-TERM DEBT: (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
-------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Brought forward ...................................... $15,668,322 $15,546,311 $4,803,734
Mortgages payable bearing interest at 9% per annum on
principal of Cdn. $1,300,000 and 17.75% per annum on
principal of Cdn. $950,000, repayable in aggregate
monthly installments of approximately $19,600 to
maturity on April 2000, secured by a first and second
charge over all of the assets of the subsidiary
(repayable as Cdn. $2,250,000). In connection with
these mortgages the lender was issued warrants to
purchase 1,421,000 common shares of the Company at
a price of $1.10 per common share to March 6, 2008,
which warrants were assigned a value of $700,000.
This difference is being amortized as interest expense
over the term of the loan (unamortized discount at
March 31, 1998 -- $700,000)............................ 888,310 -- --
Bank loan payable bearing interest at 13% per annum
until September 1998, then increases by 1% for every
month thereafter until September 1999, repayable on
April 13, 2003, and secured by the assets of a
subsidiary (repayable as Cdn. $600,000) ............... 423,549 -- --
Promissory notes payable to related parties bearing
interest at 15% per annum until April 9, 1998 and 20%
per annum thereafter, repayable on demand, secured
by the assets of a subsidiary and a general charge over
land and building of the Company (repayable as Cdn.
$989,000) ............................................. 698,151 -- --
Other debt bearing interest at rates varying from 6% to
12% ................................................... 657,829 621,304 123,552
----------- ----------- ----------
18,336,161 16,167,615 4,927,286
Less current portion ................................... 4,834,700 3,713,000 860,173
----------- ----------- ----------
Long-term debt, net of current portion ................. $13,501,461 $12,454,615 $4,067,113
=========== =========== ==========
</TABLE>
The promissory notes of $698,151 were not repaid on April 9, 1998.
At December 31, 1997, the principal portion of the long-term debt
repayable in each of the next five years is approximately as follows:
<TABLE>
<S> <C>
1998 ......... $ 3,713,000
1999 ......... 388,000
2000 ......... 2,021,000
2001 ......... 264,000
2002 ......... 10,060,000
</TABLE>
F-39
<PAGE>
EAGLE QUEST GOLF CENTERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31, 1997
PERIOD FROM INCORPORATION ON FEBRUARY 5, 1996 TO DECEMBER 31, 1996
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
[8] SUBORDINATED DEBENTURES:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
-------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Redeemable subordinated debenture (the
"Redeemable Debenture") due on May 16, 2002,
bearing interest at 12.5% per annum payable
quarterly, and secured by subordinate fixed and
floating charges over the Company's assets located
in Canada. The debenture is redeemable in whole
or in part by the Company at a price beginning at
105% of principal during year 1, decreasing by 1%
annually to 100% in year 5.
o The purchaser of the Redeemable Debenture
was issued warrants to purchase 1,250,000
common shares of the Company at a price of
$1.10 per common share to May 15, 2007. The
carrying amount of the Redeemable Debentures
on issuance has been reduced by the value
attributable to the warrants, being $690,000. This
difference is being amortized as interest expense
over the term of the Redeemable Debenture.
o Face value of Redeemable Debenture .................. $ 2,500,000 $ 2,500,000 $ --
Less: debt discount ................................. (586,500) (621,000) --
----------- ----------- ------
1,913,500 1,879,000 --
Subordinated debentures (the "Subordinated
Debentures") due on June 21, 2002, bearing
interest at 13.5% per annum payable monthly, and
secured by subordinate fixed and floating charges
over the Company's assets located in Canada.
o The purchasers of the Subordinated Debentures
were issued warrants to purchase 1,017,838
common shares of the Company at a price of
$0.01 per common share to July 13, 2005. The
fair value of these warrants has been estimated
as $1.00 per warrant. The carrying amount of the
Subordinated Debentures has been reduced by
the value attributable to the warrants, being
$1,007,660. This difference is being amortized as
interest expense over the term of the
Subordinated Debentures. ............................
o Face value of Subordinated Debentures ............... 4,000,000 4,000,000 --
Less: debt discount ................................. (848,114) (898,497) --
----------- ----------- ------
</TABLE>
F-40
<PAGE>
EAGLE QUEST GOLF CENTERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31, 1997
PERIOD FROM INCORPORATION ON FEBRUARY 5, 1996 TO DECEMBER 31, 1996
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
[8] SUBORDINATED DEBENTURES: (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
- ------------ -------------- -------------
(UNAUDITED)
<S> <C> <C>
3,151,886 3,101,503 --
--------- --------- --
$5,065,386 $ 4,980,503 $ --
========== =========== ======
</TABLE>
[9] REDEEMABLE EQUITY SECURITIES:
The Company has issued the following equity securities for which it has,
at the holder's option, redemption obligations in the future:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
-------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
250,000 common shares issued in connection with an
acquisition, redeemable to December 10, 1998 at
Cdn. $2 per share .................................... $ 359,000 $ 359,000 $ --
70,000 common shares issued in connection with an
acquisition, redeemable during the 60 days ending
August 29, 1999 at $5 per share, net of discount of
$137,842 (December 31, 1997 -- $162,167) being
amortized as interest expense over the redemption
period ............................................... 212,158 187,833 --
1,250,000 warrants issued in connection with the
Redeemable Debentures, redeemable at the
redemption date, which is any date during the 180
day period following May 2002 at a price to be
determined on the redemption date .................... 690,000 690,000 --
1,017,838 warrants issued in connection with the
Subordinated Debentures, redeemable during the
30 day period ending June 13, 2005 at their fair
value at the redemption date ......................... 1,007,660 1,007,660 --
1,000,000 warrants issued in connection with a bank
loan, redeemable at any time within 60 days of the
first to occur of the prepayment of the related loan
or its stated maturity date of September 2002 at
their fair value at the redemption date .............. 560,000 560,000 --
----------- ----------- --------
$ 2,828,818 $ 2,804,493 $ --
=========== =========== ========
</TABLE>
[10] STOCK OPTION PLANS:
The Company has a stock option plan (the "Plan") which provides for the
issuance of options to key employees, consultants and directors. At December
31, 1997 and March 31, 1998, shareholders have authorized the issuance of stock
options up to an aggregate of 2,000,000 shares under the Plan. Subject to
shareholder approval, the Board of Directors of the Company has approved an
increase in the authorized number of stock options to 4,000,000 shares (note
16(c)).
F-41
<PAGE>
EAGLE QUEST GOLF CENTERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31, 1997
PERIOD FROM INCORPORATION ON FEBRUARY 5, 1996 TO DECEMBER 31, 1996
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
[10] STOCK OPTION PLANS: (CONTINUED)
The following table summarizes the transactions in the Plan since the
incorporation of the Company on February 5, 1996. As the Plan was not approved
by shareholders until the Company's first shareholder meeting in May 1997, no
options are deemed to have been granted prior to that date.
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
------------- ---------------
<S> <C> <C>
Year ended December 31, 1997:
Options granted ..................................................... 1,567,500 $ 0.48
Options exercised ................................................... (68,500) 0.29
Options forfeited ................................................... (100,000) 0.54
--------- -------
Deemed to be granted at December 31, 1997 and March 31, 1998 ......... 1,399,000 $ 0.48
========= =======
Exercisable options:
December 31, 1997 ................................................... 526,333 $ 0.43
========= =======
</TABLE>
Of granted options at December 31, 1997, 500,000 have been granted to
certain officers and become exercisable only upon the occurrence of specified
future events. As these events cannot be considered to be more likely than not
to occur, no compensation expense has been recorded for these 500,000 options.
In addition, to March 13, 1998 the board of directors has granted options
exercisable into 1,975,900 common shares at exercise prices between $0.72 to
$2.00 per share, which options are exercisable to February 12, 2008, provided
that the exercise of any of these options is subject to the receipt of
shareholder approval to increase the number of authorized stock options under
the Plan. These options include the grant on February 12, 1998 of options to
certain key employees to purchase 800,000 common shares at an exercise price of
Cdn. $1.00 per share, expiring ten years from the date of grant.
Stock options vest over periods of up to five years and generally expire
ten years from the date of grant. Stock options are generally granted at
exercise prices equal to the common share's fair value at the date of grant. As
permitted by FAS 123, the Company has chosen to continue accounting for stock
options at their intrinsic value. Included in expenses for 1997 is $510,000
representing the compensatory benefit (Unaudited -- three months ended March
31, 1998 -- $15,000). This benefit has been calculated by reference to
differences between the option exercise price and the fair values of the
Company's common shares at the date upon which the options receive all
shareholder and other approvals that are required for the options to become
exercisable in accordance with their terms.
Had the fair value method of accounting been applied to the Company's
issued stock options, the impact would be as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- -----------
<S> <C> <C>
Loss for the period, as reported ............... $ 7,255,073 $885,497
Estimated fair value of option grants .......... 639,000 --
----------- --------
Pro forma loss ................................. $ 7,894,073 $885,497
=========== ========
</TABLE>
The fair value of option grants has been estimated using the Black-Scholes
option-pricing model with the following assumptions used for grants in both
periods:
F-42
<PAGE>
EAGLE QUEST GOLF CENTERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31, 1997
PERIOD FROM INCORPORATION ON FEBRUARY 5, 1996 TO DECEMBER 31, 1996
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
[10] STOCK OPTION PLANS: (CONTINUED)
<TABLE>
<S> <C>
Dividend yield .................. 0%
Risk-free interest rate ......... 5.60%
Expected option life ............ 5 years
Expected volatility ............. 0%
</TABLE>
(Unaudited):
On March 31, 1998, the board of directors granted additional options
exercisable into 296,000 common shares, at exercise prices between $0.72 and
$1.44 per share, which options are exercisable to March, 2008.
There would be no impact on the reported loss for the three months ended
March 31, 1998 and 1997 due to the issuance of options.
[11] WARRANTS:
(a) Subordinated Debentures:
The purchasers of the Company's Subordinated Debentures (note 8) were
issued warrants to purchase 1,017,838 common shares of the Company at a
price of $0.01 per common share for a period ending July 13, 2002. The
Company has recorded the warrants at the difference between their fair
value of $1.00 per warrant and the $0.01 per warrant exercise price.
In the event that the Subordinated Debentures are not repaid by June 13,
2000, the number of warrants will increase to 1,599,459; if not repaid by
June 13, 2001, the number of warrants will increase to 2,181,080; and if
not repaid by June 13, 2002, the number of warrants will increase to
2,762,702.
(b) Other:
At December 31, 1997, the Company has outstanding warrants, including the
warrants issued in connection with the bank loan (note 7), to purchase an
additional 6,075,000 common shares at prices ranging from $1.00 to $2.25
per share. These warrants expire at various dates to May 15, 2007. All
warrants outstanding at December 31, 1997 were granted in 1997. Of these
warrants, 5,850,000 became exercisable in 1997, 200,000 become exercisable
in 1998 and 25,000 become exercisable in 1999. In certain circumstances, an
additional 100,000 common shares may be purchased pursuant to one of the
issued and outstanding warrants. Certain of the warrants are subject to
anti-dilution provisions and the exercise price of such warrants may
decrease in certain circumstances.
(Unaudited):
On March 13, 1998 the Company issued 1,421,000 warrants to purchase
common shares of the Company at $1.10 per share in connection with a
mortgage payable (note 7). These warrants, which become exercisable on
issue, expire on March 6, 2008.
(c) Redemption:
Certain of the warrants described in (a) and (b) are redeemable at the
holder's option. See note 9.
F-43
<PAGE>
EAGLE QUEST GOLF CENTERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31, 1997
PERIOD FROM INCORPORATION ON FEBRUARY 5, 1996 TO DECEMBER 31, 1996
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
[12] COMMITMENTS AND CONTINGENCIES:
(a) Operating leases
The Company has entered into non-cancellable operating leases for land at
twelve of its golf centers, various equipment used in the centers, and
office spaces. Operating lease obligations at December 31, 1997 for each of
the next five fiscal years are approximately as follows:
<TABLE>
<S> <C>
1998 .................. $847,000
1999 .................. 916,000
2000 .................. 885,000
2001 .................. 878,000
2002 .................. 824,000
</TABLE>
Rent expense for 1997 was $567,600 (1996 -- $19,300).
(b) Contingent consideration:
Under certain purchase agreements, the selling party is entitled to
additional consideration based on the achievement of certain profitability
or performance targets (note 3).
(c) Contingencies:
(i) The Company has suspended construction activity on a leased
property. Pursuant to the terms of the lease, the landlord has the
right to cancel the lease if construction is not completed on or
before July 31, 1998. The carrying value at March 31, 1998 of costs
capitalized to the project under construction is approximately
$800,000.
(ii) The Company has received a demand for payment of approximately
$360,000 as a reimbursement of expenses incurred in connection with
an aborted transaction to purchase securities of the Company. The
Company disputes both the amount of the expenses and its legal
obligation to reimburse the claimant. However, the ultimate outcome
of this claim is not known. Any costs associated with the resolution
of the claim will be recorded as determinable.
[13] INCOME TAXES:
Loss before income taxes for each of the periods presented by jurisdiction
are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
Canada ................. $ 3,159,042 $ 1,193,497
United States .......... 5,491,031 --
----------- -----------
$ 8,650,073 $ 1,193,497
=========== ===========
</TABLE>
The tax effects of temporary differences and carry forwards that give rise
to significant portions of deferred tax assets and liabilities at December 31,
1997 and 1996 were as follows:
F-44
<PAGE>
EAGLE QUEST GOLF CENTERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31, 1997
PERIOD FROM INCORPORATION ON FEBRUARY 5, 1996 TO DECEMBER 31, 1996
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
[13] INCOME TAXES: (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
--------------- -------------
<S> <C> <C>
Deferred tax assets:
Tax basis in excess of accounting basis ................... $ 714,000 $ 758,931
Loss carry forwards ....................................... 3,650,000 372,175
------------ ----------
4,364,000 1,131,106
Valuation allowance ........................................ (1,758,000) (823,106)
------------ ----------
2,606,000 308,000
Deferred tax liabilities:
Accounting basis of property and equipment in excess of tax
basis .................................................... (2,606,000) (308,000)
------------ ----------
$ -- $ --
============ ==========
</TABLE>
SFAS 109 requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of the
deferred tax asset will not be realized. During 1997, the net increase in the
valuation allowance was $934,894 (1996 -- $823,106).
At December 31, 1997, the Company has estimated net operating loss carry
forwards available for income tax purposes as follows:
<TABLE>
<CAPTION>
EXPIRY
AMOUNT DATE
-------------- -------
<S> <C> <C>
Canada ................ $ 3,400,000 2004
United States ......... 5,300,000 2012
-----------
$ 8,700,000
===========
</TABLE>
[14] FINANCIAL INSTRUMENTS:
(a) Fair value:
The Company's financial instruments recorded on the consolidated balance
sheets includes cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities and indebtedness (including short-term
debt, Subordinated Debentures and redeemable equity securities). Due to
their short-term to maturity the carrying value of all financial
instruments other than indebtedness approximates their fair value. The fair
value of long-term debt is dependent upon interest rates in the markets in
which the assets are located, the lender's assessment of required risk
premiums and the nature and extent of attached equity securities. None of
the Company's long-term debt trades in a public market. Due to the nature
of the underlying considerations to the Company's indebtedness, it is not
possible to estimate the current fair value of the Company's debt.
(b) Derivative instruments:
At March 31, 1998, December 31, 1997 and 1996, the Company has not
entered into off-balance sheet derivative instruments.
F-45
<PAGE>
EAGLE QUEST GOLF CENTERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31, 1997
PERIOD FROM INCORPORATION ON FEBRUARY 5, 1996 TO DECEMBER 31, 1996
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
[14] FINANCIAL INSTRUMENTS: (CONTINUED)
(c) Credit risk:
The Company's products and services are purchased by a wide range of
customers in different regions of North America. Due to the nature of its
operations, the Company has no concentrations of credit risk.
(d) Interest rate risk:
As described in notes 6 and 7, certain of the Company's debt instruments
bear interest at floating rates. Fluctuations in these rates will impact
the cost of financing incurred in the future.
[15] CONSOLIDATED STATEMENTS OF CASH FLOWS:
The following is supplementary information presented to the consolidated
statements of cash flows:
<TABLE>
<CAPTION>
PERIOD FROM
INCORPORATION
THREE MONTHS ON FEBRUARY 5,
ENDED YEAR ENDED 1996 TO
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996,
-------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Interest paid ............. $569,501 $ 1,304,464 $12,975
Income taxes paid ......... -- -- --
======== =========== =======
</TABLE>
In addition, the consolidated statements of cash flows exclude
indebtedness assumed or issued, and securities issued, on business combinations
(see note 3) and shares issued for services rendered (see statement of
shareholders' equity).
[16] SUBSEQUENT EVENTS:
(a) On April 2, 1998, the Company entered into a Merger Agreement whereby
all of its outstanding shares would be exchanged for common shares of Family
Golf Centers, Inc. The Merger Agreement has been approved by each of the Board
of Directors of the Company and Family Golf Centers, Inc. and is subject to
approval by the Company's shareholders, regulatory and government approval and
completion of due diligence.
(b)(Unaudited): On April 27, 1998, the Company entered into an agreement
to borrow $2,250,000 from Family Golf. The loan bears interest at 15% per annum
until July 27, 1998 and increases to 20% per annum for the period July 29, 1998
through October 27, 1998, the maturity date. The loan is secured by the shares
of a subsidiary of the Company.
(c)(Unaudited): On June 2, 1998, the shareholders of the Company approved
both the Merger Agreement with Family Golf (note 16(a)) and the increase in the
number of shares able to be issued under the Plan to 4,000,000 (note 10).
(d)(Unaudited): Subsequent to June 2, 1998, 1,207,000 stock options
previously granted but not exercisable as of December 31, 1997 as described in
note 10, were rescinded.
F-46
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholder of Golden Bear Golf Centers, Inc.:
We have audited the accompanying balance sheets of Golden Bear Golf Centers,
Inc. (a Florida Corporation) and subsidiary as of December 31, 1997 and 1996,
and the related consolidated statements of operations, shareholder's equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Golden Bear Golf
Centers, Inc. and subsidiary as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
- -------------------------
West Palm Beach, Florida,
June 8, 1998, (except with respect to
the matter discussed in Note 12, as to
which the date is June 16, 1998).
F-47
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................... $ 890,347 $ 9,666,374
Accounts receivable, net of allowances of $249,522 in 1997
and $0 in 1996 ................................................ 389,472 730,138
Inventory ....................................................... 2,399,919 1,937,131
Prepaid expenses and other current assets ....................... 172,898 30,585
------------ ------------
Total current assets ....................................... 3,852,636 12,364,228
PROPERTY AND EQUIPMENT, net ...................................... 23,592,076 17,458,533
INVESTMENT IN JNAI ............................................... 289,496 --
INTANGIBLES AND OTHER ASSETS, net ................................ 6,777,646 4,470,781
------------ ------------
Total assets ............................................... $ 34,511,854 $ 34,293,542
============ ============
LIABILITIES AND SHAREHOLDER'SEQUITY
CURRENT LIABILITIES:
Accounts payable ................................................ $ 1,572,238 $ 1,703,823
Accrued liabilities ............................................. 743,717 110,344
Notes payable and capital leases, current portion ............... 3,023,396 443,895
Due to affiliates ............................................... 295,741 224,169
Deferred revenue ................................................ 30,000 86,275
------------ ------------
Total current liabilities .................................. 5,665,092 2,568,506
NOTES PAYABLE AND CAPITAL LEASES, net of current
portion ......................................................... 7,771,018 5,556,667
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDER'S EQUITY:
Common stock--
Class A, $1.00 par value, 6,500 shares authorized, 4,068 shares
issued and outstanding in 1997 and 1996 ....................... 4,068 4,068
Class B, $1.00 par value, 1,000 shares authorized, none issued
and outstanding in 1997 and 1996 .............................. -- --
Additional paid-in capital ...................................... 28,361,470 27,588,447
Accumulated deficit ............................................. (7,289,794) (1,424,146)
------------ ------------
Total shareholder's equity ................................. 21,075,744 26,168,369
------------ ------------
Total liabilities and shareholder's equity ................. $ 34,511,854 $ 34,293,542
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-48
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996
---------------- ---------------
<S> <C> <C>
REVENUE .................................................. $15,995,456 $ 3,034,184
OPERATING COSTS AND EXPENSES:
Operating expenses ...................................... 19,894,926 4,080,285
Corporate overhead allocation ........................... 1,074,554 202,759
Depreciation and amortization ........................... 2,105,592 276,455
----------- -----------
Total operating costs and expenses .................... 23,075,072 4,559,499
----------- -----------
Loss from operations .................................. (7,079,616) (1,525,315)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income ......................................... 167,866 339,990
Interest expense ........................................ (768,862) (179,835)
Other ................................................... (60,062) 227
----------- -----------
Total other income (expense) .......................... (661,058) 160,382
----------- -----------
Loss before income taxes .............................. (7,740,674) (1,364,933)
PROVISION (BENEFIT) FOR INCOME TAXES ..................... (794,773) 2,530
----------- -----------
Net loss before equity in income of affiliate ......... (6,945,901) (1,367,463)
EQUITY IN INCOME OF AFFILIATE ............................ 1,080,253 --
----------- -----------
Net loss .............................................. ($ 5,865,648) ($ 1,367,463)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-49
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
CLASS A COMMON CLASS B COMMON ADDITIONAL
----------------- ----------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------- -------- -------- -------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
December 31, 1995 ....... 1,000 $1,000 250 $ 250 $ 108,750 ($ 56,683) $ 53,317
Recapitalization (Note 1) 3,068 3,068 (250) (250) 1,497,182 -- 1,500,000
Capital contribution ..... -- -- -- -- 25,982,515 -- 25,982,515
Net loss ................. -- -- -- -- -- (1,367,463) (1,367,463)
----- ------ ---- ------ ----------- ----------- ------------
BALANCE,
December 31, 1996 ....... 4,068 4,068 -- -- 27,588,447 (1,424,146) 26,168,369
Capital contribution ..... -- -- -- -- 444,419 -- 444,419
Contribution of JNAI by
Parent .................. -- -- -- -- 328,604 -- 328,604
Net loss ................. -- -- -- -- -- (5,865,648) (5,865,648)
----- ------ ---- ------ ----------- ----------- ------------
BALANCE,
December 31, 1997 ....... 4,068 $4,068 -- -- $28,361,470 ($ 7,289,794) $ 21,075,744
===== ====== ==== ====== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-50
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................... ($ 5,865,648) ($ 1,367,463)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ................................... 2,105,592 276,455
Provision for uncollectible accounts ............................ 311,886 --
Undistributed income of equity affiliate ........................ 39,108 --
Changes in assets and liabilities:
Accounts receivable ............................................. 28,780 (425,837)
Due to affiliates ............................................... 71,572 151,461
Inventory ....................................................... (462,788) (1,937,131)
Prepaid expenses and other current assets ....................... (142,313) (349)
Intangibles and other assets .................................... (283,472) (88,589)
Accounts payable ................................................ (131,585) 1,628,819
Accrued liabilities ............................................. 633,373 95,414
Deferred revenue ................................................ (56,275) (103,725)
----------- ------------
Net cash used in operating activities ........................ (3,751,770) (1,770,945)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of golf centers ....................................... (1,515,236) (15,036,093)
Capital expenditures, net ......................................... (5,673,292) (2,460,615)
----------- ------------
Net cash used in investing activities ........................ (7,188,528) (17,496,708)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution from Parent .................................. 444,419 25,982,515
Proceeds from revolving credit facility ........................... 2,550,000 --
Proceeds received in recapitalization ............................. -- 1,500,000
Proceeds from notes payable and capital leases .................... -- 1,800,000
Payments on notes payable and capital leases ...................... (830,148) (384,292)
Proceeds from note payable -- shareholder ......................... -- 1,625,000
Payment note payable -- shareholder ............................... -- (1,625,000)
----------- ------------
Net cash provided by financing activities .................... 2,164,271 28,898,223
----------- ------------
Net increase (decrease) in cash and cash equivalents ......... (8,776,027) 9,630,570
CASH AND CASH EQUIVALENTS, beginning of year ....................... 9,666,374 35,804
----------- ------------
CASH AND CASH EQUIVALENTS, end of year ............................. $ 890,347 $ 9,666,374
=========== ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
OPERATING AND INVESTING ACTIVITIES:
Capital contribution of investment in JNAI ...................... $ 328,604 --
Centers acquired with capital leases ............................ -- $ 2,465,757
Notes payable issued in acquisition of golf centers ............. $ 3,074,000 $ 1,700,000
Deferred profit participation obligation issued in connection
with acquisition of golf center ................................ -- $ 419,097
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest .......................................... $ 661,648 $ 179,835
Cash paid for income taxes ...................................... $ 88,277 $ 2,530
</TABLE>
The accompanying notes are an integral part of these statements.
F-51
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Golden Bear
Golf Centers, Inc. and its wholly-owned subsidiary Golden Bear Apparel, Inc.
(collectively, the "Company"). The Company's investment in JNAI, a 50% owned
affiliate, is accounted for under the equity method. All significant
intercompany transactions and balances between the Company and its subsidiary
have been eliminated in consolidation. The accompanying consolidated financial
statements reflect the accounts of the Company as a subsidiary of Golden Bear
Golf, Inc. ("Parent") subject to corporate and administrative expense
allocations as described in Note 10, Related Party Transactions. Such
information does not necessarily reflect the financial position or results of
operations of the Company as a separate, stand-alone entity.
GENERAL
Golden Bear Golf Centers, Inc. was incorporated in December 1992 to offer
franchise opportunities for the operation of golf instruction and practice
facilities that consist of practice stations and the teaching techniques
developed by Jack Nicklaus, Jim Flick and the staff of an affiliated company.
The Company is a wholly-owned subsidiary of Golden Bear Golf, Inc. In
connection with the franchise program, the Company enters into various
agreements with franchisees including, but not limited to, development and
license agreements which provide for the establishment and operation of golf
centers and use of various trademarks, trade names and associated logos and
symbols. In addition, the Company also owns and operates its own golf
instruction and practice facilities at numerous locations in several states.
The Company generally leases its golf facilities under long-term lease
arrangements.
All of the Company's 14 golf centers are located within the United States.
Currently, there are seven licensed Golden Bear Golf Centers in the United
States that are operated by one owner, who is not affiliated with the Company.
The licensee has been provided a license to operate these seven Golden Bear
Golf Centers and is able to utilize certain of the Company's trademarks,
servicemarks and other rights relating to the operation of the facilities.
Additionally, the Company has two agreements that grant certain rights to
develop one Golden Bear Golf Center within the Baltimore/Washington D.C. area.
Licensees are required to operate their Golden Bear Golf Centers in
compliance with the Company's methods, standards and specifications regarding
such matters as facility design, site approval, layout and design of teaching
and practicing related facilities, fixtures and furnishings, decor and signage,
merchandise type, presentation and customer service. Licensees are not required
to purchase supplies or products from the Company other than workbooks,
software and manuals associated with teaching studios which must be included in
each facility. Licensees pay a facility license fee for each facility opened by
the licensee within the designated territory, and pay continuing monthly
royalty fees of 3% to 5% of adjusted gross revenues, subject to minimum
guaranteed royalties. In some instances, generally for facilities in less
populated areas, in lieu of monthly revenue-based royalty fees, fixed annual
fees generally are paid, subject to increases based on the consumer price
index.
For the years ended December 31, 1997 and 1996, the Company incurred
substantial losses and as of December 31, 1997 has accumulated a deficit of
$7,289,794. Additionally, management of the Company anticipates incurring
losses in the near term and will rely on Golden Bear Golf, Inc. for financial
support, if necessary. Management of the Company believes that Golden Bear
Golf, Inc. will have the financial resources available and that it will
continue to provide the necessary level of financial support to fund the
operations of the Company.
RECAPITALIZATION
On June 6, 1996, the Company's Articles of Incorporation were amended to
provide that the aggregate number of shares which the Company shall have
authority to issue is 7,500 shares of common
F-52
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
stock having a par value of $1.00 and having all of the same rights, including,
without limitation, identical rights in the profits and proceeds of liquidation
of the Company. The common stock includes two classes as follows: 6,500 shares
of "Class A" common stock, each share having one vote with respect to all
matters for which voting rights are provided to the shareholders of the Company
and 1,000 shares of "Class B" common stock, which have no voting rights.
On June 7, 1996, Golden Bear Golf, Inc. entered into an exchange agreement
which was consummated August 1, 1996 upon the closing of an initial public
offering of Golden Bear Golf, Inc. Parties to the plan of reorganization
included, among others, the Golden Bear Golf, Inc. affiliates, the Company,
Paragon Construction International, Inc. and Golden Bear International, Inc., a
privately owned company controlled by Jack Nicklaus.
Pursuant to the exchange agreement, Golden Bear Golf, Inc. acquired all of
the issued and outstanding shares of the Company, increased the number of Class
A common shares outstanding of the Company to 4,068 and redeemed all of the
Company's Class B common shares.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of highly liquid investment
instruments with a maturity of three months or less when purchased. Such
investments, totaling $0 and approximately $8.3 million at December 31, 1997
and 1996, respectively, are comprised of interest bearing short-term commercial
paper.
ACCOUNTS RECEIVABLE AND REVENUE RECOGNITION
Revenues attributable to the operations of the Company's golf instruction
and practice facilities include practice range fees, miniature golf fees,
batting cage fees, lessons, food and beverage operations, and retail
merchandise sales. Such revenues are recognized concurrent with the time the
services or products are provided.
Revenues also include franchise fees and royalty fees received from
franchisees. Franchise fees relate to the establishment of the golf centers and
royalty fees relate to the providing of assistance by Golf Centers with
marketing, training and other operational issues. Accordingly, franchise fees
are recognized as revenue when substantially all such services required under
the development agreement have been performed. Royalty fees are based upon
franchisees' adjusted gross revenues, as defined, and are recognized as
revenues when earned. Deferred revenue includes franchise fees due or collected
in excess of amounts earned of $30,000 and $86,275 as of December 31, 1997 and
1996, respectively. Franchise and royalty fee income totaled $880,164 and
$773,694 for the years ended December 31, 1997 and 1996, respectively.
INVENTORY
Inventory is comprised primarily of finished goods such as golfing
apparel, golf clubs and accessories that are held for retail sale in the pro
shops of the Company's golf center facilities. Such inventory is valued at the
lower of cost or market based on the first-in, first-out inventory method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Construction in progress is
comprised of ongoing development costs associated with the planned upgrades and
additions to golf center facilities acquired by the Company. Expenditures for
major additions and improvements are capitalized, while minor replacements,
maintenance and repairs are charged to expense as incurred. When property is
retired or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts and any resulting gain or loss is recognized
currently.
F-53
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation is provided over the estimated useful lives of the assets
involved using the straight-line and accelerated methods. The estimated useful
lives generally are: ten to thirty years for buildings and improvements, three
to seven years for leasehold improvements and five to ten years for equipment,
furniture and fixtures. The buildings and improvements acquired in connection
with the Company's acquisition of golf centers are depreciated over periods
that do not exceed the terms of the related ground leases for the underlying
real property, including options to extend the respective terms.
INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist primarily of the cost of acquired
golf center facilities in excess of the fair value of the net tangible assets
acquired. The cost in excess of the fair value of net tangible assets is
amortized over periods ranging from ten to thirty years on a straight-line
basis. Such costs acquired in connection with the Company's acquisition of golf
centers are amortized over periods that do not exceed the terms of the related
ground leases for the underlying real property, including options to extend the
respective terms.
In 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS No. 121 requires that long-lived assets, including certain
identifiable intangibles, and the goodwill related to those assets, be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset in question may not be recoverable. The Company
continually evaluates whether events and circumstances have occurred that may
warrant revision of the estimated useful life of its long-lived assets or
whether the remaining balance of such long-lived assets should be evaluated for
possible impairment. The Company uses an estimate of the related undiscounted
cash flows over the remaining life of the long-lived assets in measuring their
recoverability.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of the fair value of certain financial instruments. Cash,
accounts receivable, inventory, prepaid expenses and other current assets,
accounts payable, accrued liabilities, deferred revenue, together with notes
payable and capital leases are reflected in the accompanying financial
statements at cost which approximates fair value. The estimated fair value of
fixed rate indebtedness at December 31, 1997 was approximately $2.4 million,
which approximates the carrying value. The estimated fair value of such
indebtedness was determined based on the expected future payments discounted at
risk adjusted rates for debt of similar terms and remaining maturities.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109.
"Accounting for Income Taxes". Under this method, deferred income taxes are
determined on the estimated future tax effects of differences between the
financial reporting and tax basis of assets and liabilities given the
provisions of enacted laws. Deferred income tax provisions and benefits are
based on changes to the asset and liability from year to year.
F-54
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Golden Bear Golf, Inc. files a consolidated tax return for Federal income
tax purposes. The tax benefit for the Company's net operating losses for the
year ended December 31, 1997 has been recorded by the Company, and is included
as a component of Due to Affiliates in the accompanying balance sheets.
ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which is required to be adopted in 1998. This statement establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. This statement requires
that an enterprise (i) classify items of other comprehensive income by their
nature in financial statements and (ii) display the accumulated balance of
other comprehensive income separately from retained deficit and additional
paid-in capital in the equity section of the balance sheets. Comprehensive
income is defined as the change in equity during the financial reporting period
of a business enterprise resulting from non-owner sources. The adoption of SFAS
No. 130 is not expected to have a material impact on the Company's financial
statements.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Land ............................................ $ 1,918,000 $ 1,918,000
Buildings and leasehold improvements ............ 18,826,034 11,850,409
Equipment, furniture and fixtures ............... 4,524,085 1,588,926
Construction in progress ........................ 350,865 2,329,932
------------ -----------
25,618,984 17,687,267
Less accumulated depreciation and amortization .. (2,026,908) (228,734)
------------ -----------
$ 23,592,076 $17,458,533
============ ===========
</TABLE>
3. INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Costs in excess of tangible net assets acquired ......... $6,807,507 $4,246,000
Deposits ................................................ 187,658 212,228
Franchise costs ......................................... 52,055 52,055
Other ................................................... 123,652 46,306
---------- ----------
7,170,872 4,556,589
Less accumulated amortization ........................... (393,226) (85,808)
---------- ----------
$6,777,646 $4,470,781
========== ==========
</TABLE>
F-55
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- ----------
<S> <C> <C>
Payroll and related costs ......... $225,061 $ 53,023
Sales and property taxes .......... 75,509 33,030
Other expenses .................... 443,147 24,291
-------- --------
$743,717 $110,344
======== ========
</TABLE>
5. NOTES PAYABLE AND CAPITAL LEASES
Notes payable and capital leases consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996
--------------- -------------
<S> <C> <C>
Note payable to financial institution, due in monthly principal
installments of $10,000 plus interest at prime + 3/4%, with balloon
payment due at maturity in August, 2003 ................................ $ 1,640,000 $1,760,000
Notes payable to sellers of golf centers, with interest generally
ranging from 8% to prime + 1 1/4%, maturing through June, 2004(a) ...... 3,780,723 1,367,008
Capital lease obligations secured by certain golf center facilities,
maturing through April, 2025(c) ........................................ 2,424,751 2,454,457
Deferred profit participation obligation, payable quarterly, discounted
at an effective rate of 9%, matures December, 2006(c) .................. 398,940 419,097
Revolving credit facility with a bank, with interest at prime payable
quarterly, due August 26, 1998(b) ...................................... 2,550,000 ---
------------ ----------
10,794,414 6,000,562
Less current portion .................................................... (3,023,396) (443,895)
------------ ----------
$ 7,771,018 $5,556,667
============ ==========
</TABLE>
- ----------
(a) In September 1996, the Company issued non-interest bearing notes payable
of $600,000 in connection with the purchase of East Coast Facilities. Such
notes, which had certain defined payment terms and an outstanding
principal balance of $267,008 at December 31, 1996, were repaid in full at
their maturity in September 1997. Also in September 1996, the Company
issued a note payable for $750,000 in connection with its acquisition of
Highlander Facilities. The note is secured by certain property and
equipment of the golf center and bears interest at 8% payable monthly,
with the entire principal due in August 2001.
In December 1996, the Company issued a note payable for $350,000 in
connection with the purchase of MacDivott's Golf Center. The note is
secured by certain property and equipment of the golf center and bears
interest at prime + 1/2% payable quarterly, with the entire principal due
in December 1999. In August 1997, the Company purchased a mini-golf
facility located adjacent to MacDivott's Golf Center and issued a
promissory note for $175,000 in connection with such acquisition. The
promissory note is secured by certain property and equipment of the
mini-golf facility and requires quarterly principal payments of $6,250 plus
interest at prime + 1%. Based on such required quarterly payments, the note
will be fully amortized in June 2004. The outstanding principal balance on
the note was $162,500 at December 31, 1997.
F-56
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. NOTES PAYABLE AND CAPITAL LEASES (CONTINUED)
In January 1997, the Company incurred certain secured indebtedness
aggregating approximately $2.1 million in connection with the purchase of
Oasis Golf Center. In August 1997, the Company repaid a $200,000
non-interest bearing installment due on such indebtedness and in September
1997, the Company made another $200,000 payment and modified the terms of
the remaining obligations. The remaining obligations were consolidated into
a $1.8 million promissory note requiring monthly payments of principal and
interest at prime + 1 1/4% calculated on a ten year amortization schedule.
In addition to such recurring monthly installments, the Company is also
obligated to make additional annual $50,000 principal payments in September
of each year through 2002 at which time any remaining outstanding principal
is payable in a balloon payment. The outstanding principal balance on the
note was $1.8 million at December 31, 1997.
In February 1997, the Company issued a note payable for $800,000 in
connection with the purchase of Caddyshack Golf Dome. The note is secured
by certain property and equipment of the golf center and requires quarterly
payments of $38,820 representing the amortization of principal and interest
at 9%. Based on such required quarterly payments, the note will be fully
amortized in March 2004. The outstanding principal balance on the note was
$736,123 at December 31, 1997.
(b) In September 1997, the Golden Bear Golf, Inc. entered into a definitive
credit agreement with a bank for a $10 million revolving credit facility to
be used to finance the working capital required to fund Golden Bear Golf,
Inc.'s growth as well as for general corporate purposes. The initial credit
agreement provides for a term of two years. Outstanding borrowings, which
bear interest at the prime rate payable quarterly, are secured by Golden
Bear Golf, Inc. and the Company's assets excluding various golf center
properties and certain other assets pledged to secure other long-term debt.
The Company's outstanding portion of the credit agreement totaled $2,550,
000 at December 31, 1997. During the second quarter of 1998, Golden Bear
Golf, Inc. was out of compliance with certain financial covenants of the
credit agreement. Effective May 28, 1998, the credit agreement was amended
and restated and the maturity date of the debt was changed to August 26,
1998. Accordingly the $2,550,000 outstanding is classified as a current
liability in the accompanying balance sheet. In addition, as of December
31, 1997 the Company has a $750,000 standby letter of credit with a bank
pledged as collateral on the promissory note payable to the sellers of
Caddyshack Golf Dome, Inc. (see Note 11).
(c) The following table sets forth the future minimum lease payments under
capital lease obligations and the future minimum payments required under
the deferred profit participation obligation, together with the present
value of the net minimum lease payments and profit participation payments,
as of December 31, 1997.
F-57
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. NOTES PAYABLE AND CAPITAL LEASES (CONTINUED)
<TABLE>
<CAPTION>
DEFERRED PROFIT
CAPITAL LEASE PARTICIPATION
OBLIGATIONS OBLIGATION
--------------- ----------------
<S> <C> <C>
Years ending December 31:
1998 .......................................... $ 259,313 $ 64,000
1999 .......................................... 266,693 64,000
2000 .......................................... 266,693 64,000
2001 .......................................... 266,693 64,000
2002 .......................................... 266,693 64,000
Thereafter .................................... 4,237,597 272,000
------------ ----------
Total minimum payments ........................ 5,563,682 592,000
Less amounts representing interest(d) ......... (3,138,931) (193,060)
------------ ----------
Present value of minimum payments ............. $ 2,424,751 $ 398,940
============ ==========
</TABLE>
(d) Represents amounts necessary to reduce the net minimum payments to
present value calculated at the Company's estimated incremental
borrowing rate at the inception of the respective obligations.
The aggregate maturities of notes payable and borrowings under the revolving
credit facility were as follows, at December 31, 1997:
<TABLE>
<CAPTION>
MATURITIES OF
INDEBTEDNESS
--------------
<S> <C>
Years ending December 31:
1998 .................... $2,951,595
1999 .................... 776,945
2000 .................... 454,800
2001 .................... 1,235,416
2002 .................... 1,292,809
Thereafter .............. 1,259,158
----------
$7,970,723
==========
</TABLE>
6. EQUITY INCOME OF UNCONSOLIDATED AFFILIATE
Effective January 1, 1997, Golden Bear Golf, Inc. contributed its interest
of Jack Nicklaus Apparel International ("JNAI") and its various partnerships to
Golden Bear Apparel Inc. JNAI operates apparel licensing activities of the
Company in the Far East. The Company serves as a 50% general partner and is
generally entitled to receive 50% of the cash distributions of the various
partnerships' operations. The joint venture agreement provides that any capital
contributions required by JNAI be made in equal amounts by each of the two
partners. Additionally, substantially all items of net income earned or losses
incurred by JNAI are allocated to its two partners in equal shares. JNAI may
set aside reasonable cash reserves for working capital purposes and for payment
of the expenses of the venture along with other obligations and contingencies.
However, all remaining funds of JNAI are required to be distributed at least
annually to the partners. Neither partner of JNAI may assign or otherwise
transfer any interest in JNAI without the consent of the other partner. The
joint venture agreement provides that JNAI shall continue until December 31,
2000, unless otherwise terminated prior to that date by the mutual consent of
both partners or by operation of law. However, the termination date set forth
in the joint venture agreement can be extended by mutual consent of both
partners. Upon termination of JNAI, its net remaining assets are to be
distributed to its two partners in the manner set forth in the joint venture
agreement, which generally provides for distributions of equal amounts.
F-58
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. EQUITY INCOME OF UNCONSOLIDATED AFFILIATE (Continued)
Although JNAI conducts its operations in the United States, substantially
all of its revenues are received for licensees located in the Asia Pacific
region, primarily Japan and Korea. All of the revenues of JNAI's licensees are
generated in foreign currencies. The licensees pay their license fees to JNAI
in U.S. dollars based on the exchange rate on the date of payment. Although
foreign currency fluctuations have not been significant historically,
fluctuations in the values of these currencies relative to the U.S. dollar
could have a material adverse effect on JNAI's future profitability. To the
extent that the Asia Pacific markets are volatile and unfavorably impact JNAI's
customers, such events could have an adverse effect on JNAI's operations in the
future periods.
The following is a condensed summary of the operating results of JNAI for
the fiscal year ended November 30, 1997:
<TABLE>
<S> <C>
Licensing revenues ...................... $2,927,236
Operating expenses ...................... 755,052
Provision for JNAI income taxes ......... 10,400
----------
Net income .............................. $2,161,784
==========
</TABLE>
7. INCOME TAXES
The components of the provision (benefit) for income taxes for the
respective fiscal years consisted of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
Current:
Federal ..................................... $ (883,050) $ --
State ....................................... 64,081 2,202
Foreign ..................................... 24,196 328
Deferred:
Federal ..................................... (1,321,523) (525,355)
State ....................................... (194,342) (77,258)
Change in valuation allowance ................ 1,515,865 602,613
------------ -----------
Provision (benefit) for income taxes ......... $ (794,773) $ 2,530
============ ===========
</TABLE>
A reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate for the respective fiscal years is shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996
---------------- --------------
<S> <C> <C>
Statutory Federal income tax rate ......... $ (2,264,543) $ (464,077)
Net operating loss not utilized ........... 1,469,770 466,607
------------ ----------
Effective tax rate ........................ $ (794,773) $ 2,530
============ ==========
</TABLE>
F-59
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES (CONTINUED)
The net deferred income tax asset is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996
--------------- -------------
<S> <C> <C>
Deferred income tax assets:
Allowance for bad debts .................. $ 97,314 $ --
Net operating loss carryforwards ......... 1,952,366 558,011
Other, net ............................... 68,798 44,602
---------- --------
2,118,478 602,613
Valuation allowance ........................ (2,118,478) (602,613)
---------- --------
$ -- $ --
========== ========
</TABLE>
At December 31, 1997, the Company had available Federal net operating loss
carryforwards of approximately $1,900,000 which expire in the year 2012, along
with approximately $368,027 of foreign tax credit carryforwards which expire in
2002.
8. RETIREMENT SAVINGS PLAN
The Company participates in a retirement savings plan ("Savings Plan")
sponsored by an affiliate of Golden Bear Golf, Inc. The Savings Plan operates
as a defined contribution plan and is qualified under Section 401(k) of the
Internal Revenue Code. The Savings Plan covers all employees who have completed
one year of service. The Company matches the employees' contributions, up to a
maximum of $1,500 per employee per Savings Plan year. A participant's
individual contribution is limited to the maximum amount for such year under
the Internal Revenue Code. Discretionary contributions can also be made to the
Savings Plan. All employees who have completed one year of service and are
employed at year-end are eligible for this contribution. Company contributions
to the Savings Plan were $10,434 and $4,772 during the years ended December 31,
1997 and 1996, respectively.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company generally leases the real property underlying its golf center
facilities under long-term lease arrangements. The lease terms typically
provide for minimum rentals to be paid each year along with certain additional
contingent rentals based on a percentage of sales. Although such lease
arrangements may include certain related buildings and improvements, the
substantial majority of the lease payments attributable to the operations of
the Company's golf centers are for the real property underlying the respective
golf centers. At December 31, 1997, the Company had such long-term operating
lease agreements associated with 13 of its golf center facilities, with terms
expiring at various dates through December, 2017. Most of these leases contain
one or more renewal options, generally for five or ten-year periods. Total rent
expense under such leases was $2.3 million during 1997 of which approximately
$1.6 million represented minimum required rentals and the balance reflected
contingent rentals based on a percentage of the respective golf centers' sales.
Rent expense under such ground leases was $506,844 for 1996, substantially all
of which was comprised of minimum rentals.
F-60
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In addition to the operating leases associated with its golf centers, the
Company also leases its corporate executive and administrative office
facilities and leases certain other office space, office equipment,
construction equipment and vehicles. The rent expense incurred under these
leases was approximately $3.3 million and $1.2 million during the years ended
December 31, 1997 and 1996, respectively. Future minimum lease payments
required under noncancelable operating lease obligations at December 31, 1997,
are as follows:
<TABLE>
<CAPTION>
MINIMUM
LEASE
PAYMENTS
-------------
<S> <C>
Years ending December 31:
1998 .................... $ 1,687,596
1999 .................... 1,753,716
2000 .................... 1,791,657
2001 .................... 1,809,510
2002 .................... 1,829,931
Thereafter .............. 21,135,056
-----------
$30,007,466
===========
</TABLE>
CLAIMS AND ASSESSMENTS
In the normal course of business, the nature of the Company's operations
may result in claims for damages. In the opinion of management, there are no
pending legal proceedings that would have a material effect on the consolidated
financial statements of the Company.
10. RELATED PARTY TRANSACTIONS
In the ordinary course of business the Company purchases golf equipment
manufactured by Nicklaus Golf Equipment Company, L.C., a privately owned
company in which Jack Nicklaus has a 50% equity interest. Such equipment is
purchased primarily for resale in the pro shops of the Company's golf centers.
During fiscal 1997 and fiscal 1996, golf equipment at an aggregate cost of
$405,205 and $61,388 respectively, was purchased through this source.
Parent's corporate general and administrative costs not specifically
attributable to its operating subsidiaries have been allocated to the Company
based upon the ratio of the Company's revenues and are included in Due to
Affiliate in the accompanying consolidated balance sheets. Allocated expenses
include such items as salaries, rent and other general and administrative
expenses. These amounts approximate management's estimate of Parent's corporate
general and administrative costs required to support the Company's operations.
Management believes that the amounts allocated to the Company are no less
favorable to the Company than the expenses the Company would incur to obtain
such services on its own or from unaffliliated third parties.
As of December 31, 1997, the Company's Due to Affiliate balance totaling
$295,741 is non-interest bearing and due on demand.
11. ACQUISITIONS
On April 15, 1996, the Company entered into a long-term lease agreement
for McDain Golf Center of Monroeville (an existing golf practice and
instruction facility located in the greater Pittsburgh, Pennsylvania area). The
portion of the long-term lease attributable to building and improvements has
been accounted for as a capital lease totaling approximately $1.2 million.
F-61
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. ACQUISITIONS (CONTINUED)
On June 17, 1996, the Company purchased Cool Springs Golf Center (an
existing golf practice and instruction facility located in Pittsburgh,
Pennsylvania) for approximately $2.9 million. The fair value of the net assets
acquired (substantially all land, property and equipment) was approximately
$2.6 million, resulting in the recording of goodwill in the amount of $300,000
which is being amortized over a term of 30 years. The purchase price was funded
in part, by a $1.625 million shareholder loan which was repaid from the
proceeds of the Golden Bear Golf Inc.'s initial public offering. In September
1996, the Company refinanced these facilities with a secured, long-term loan
from a financial institution.
On August 7, 1996, the Company purchased certain assets utilized in
connection with Tom's River Golf Center (an existing golf practice and
instruction facility located in Tom's River, New Jersey) for approximately $1.9
million, which was paid in cash at the closing. The purchase price was funded
from the proceeds of the Golden Bear Golf, Inc.'s initial public offering.
Concurrent with the purchase of assets, the Company entered into a long-term
ground lease for the related real property which provides for an initial term
of 20 years that may be extended for two additional five-year terms.
On September 9, 1996, the Company purchased certain assets utilized in
connection with Rollandia Golf Park Plus (an existing golf practice and
instruction facility located in the Dayton, Ohio area) and entered into a
long-term 20 year lease arrangement for certain buildings and improvements
along with the real property underlying the facilities. The portion of the
long-term lease attributable to buildings and improvements has been accounted
for as a capital lease totaling approximately $1.2 million. The purchase price
for the assets was $1.1 million, which was paid in cash at the closing from the
proceeds of the initial public offering of Golden Bear Golf, Inc.
On September 11, 1996, the Company purchased East Coast Facilities
(comprised of an existing Golden Bear Golf Center located in Columbus, Ohio and
a Golden Bear Golf Center in Fort Lauderdale, Florida which commenced
operations in November, 1996) for approximately $5.9 million, of which $5.3
million was paid in cash at the closing and $600,000 is evidenced by promissory
notes. The $5.3 million paid at closing was funded from the proceeds of the
initial public offering of Golden Bear Golf, Inc. The fair value of the net
assets acquired (substantially all property and equipment) was approximately
$4.2 million, resulting in the recording of goodwill in the amount of $1.7
million which is being amortized over the 20 year term of the related ground
leases.
On September 13, 1996, the Company consummated the acquisition and lease
of certain assets utilized in connection with Highlander Facilities (comprised
of an existing Golden Bear Golf Center located in Carrollton, Texas and an
existing Golden Bear Golf Center located in Moreno Valley, California). The
Company purchased the facility located in Texas for $2.25 million, of which
$1.5 million was paid at closing and $750,000 is evidenced by a promissory
note. The $1.5 million paid at closing was funded from the proceeds of the
initial public offering of Golden Bear Golf, Inc. The fair value of the net
assets acquired (substantially all property and equipment) was approximately
$1.4 million, resulting in the recording of $816,000 of goodwill which is being
amortized over the expected 25 year term (including renewal options) of the
related ground lease. With respect to the facility located in California, the
Company entered into a ground lease for the real property and an operating
lease of the facility. Both the ground lease and the operating lease are for a
period of ten years, renewable for two additional five-year terms.
On November 20, 1996, the Company entered into an agreement to assume a
long-term lease for certain real property located in College Park, Maryland,
upon which the Company plans to build a golf center. The remaining term of the
lease expires on December 29, 2015. Rent due under the lease is based upon
certain minimum annual amounts plus a percentage of the project's sales. In
addition, under the terms of a related finder's agreement, the Company will be
obligated to pay a percentage (as defined) of the project's annual gross
revenues for the duration of such periods as the Company owns and operates the
facility.
F-62
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. ACQUISITIONS (CONTINUED)
On December 31, 1996, the Company purchased Pop's Golf Center (an existing
golf practice and instruction facility located in Lake Park, Florida) for
approximately $762,000 in cash and a profit participation obligation payable to
one of the former shareholders of the golf center, requiring payment of amounts
equal to the greater of $64,000 per year or 4.5% of the project's gross annual
revenues for the duration of such periods as the Company owns and operates the
facility. For financial statement purposes, the net present value of the
minimum payments anticipated to be made under the profit participation
agreement of $419,097 has been recorded as a deferred acquisition obligation.
The cash portion of the purchase price was paid at the closing from proceeds of
the initial public offering of Golden Bear Golf, Inc. The fair value of net
assets acquired (substantially all property and equipment) was approximately
$1.03 million, which resulted in the recording of goodwill in the amount of
$150,000 which is being amortized over the 10 year term of the related ground
lease.
On December 31, 1996, the Company consummated the acquisition of
MacDivott's Wood and Putter (an existing golf practice and instruction facility
located in Royal Oak, Michigan) in a stock purchase transaction and assumed the
ground lease for the underlying real property. The total purchase price of the
common shares was $1.45 million, of which $1.1 million was paid in cash at the
closing and the remainder is evidenced by a $350,000 promissory note. The cash
portion of the purchase price was funded from the proceeds of the initial
public offering of Golden Bear Golf, Inc. The fair value of net assets acquired
(substantially all property and equipment) by the stock purchase was
approximately $350,000, which resulted in the recording of $1.1 million of
goodwill which is being amortized over the expected 27 year term (including
renewal options) of the related ground lease.
Effective January 1, 1997, the Company entered into a long-term lease
agreement for certain assets and the underlying real property utilized in
connection with the Sunset Golf Center (an existing golf practice and
instruction facility located in Beaverton, Oregon). The lease term is for a
period of 20 years and provides for annual rentals equal to the greater of a
minimum base rent or a percentage rent calculated based on the gross revenues
of the project.
On January 31, 1997, the Company purchased Oasis Golf Center (an existing
"dome" type golf practice and instruction facility located in Plymouth,
Michigan) for $3.2 million of which $1.0 million was paid in cash at the
closing and the remainder was evidenced by a $1.0 million secured promissory
note and certain other obligations to pay $1.2 million. The cash portion of the
purchase price was funded from the proceeds of the Company's initial public
offering. The fair value of net assets acquired (substantially all property and
equipment) was approximately $1.8 million, resulting in the recording of
goodwill in the amount of $1.4 million which will be amortized over the 20 year
term of the related ground lease for the underlying property.
On February 28, 1997, the Company purchased Caddyshack Golf Dome (an
existing golf practice and instruction facility located in Williamsville, New
York) for approximately $1.1 million of which $300,000 was paid in cash at the
closing and $800,000 was evidenced by certain secured promissory notes. The
$300,000 paid at the closing was funded from the proceeds of the initial public
offering of Golden Bear Golf, Inc. The fair value of net assets acquired
(substantially all property and equipment) was approximately $500,000,
resulting in the recording of goodwill in the amount of $600,000 which will be
amortized over the expected 20 year term (including renewal options) of the
related ground lease for the underlying property.
On August 12, 1997, the Company purchased a mini-golf facility located
adjacent to the previously acquired MacDivott's Golf Center located in Royal
Oak, Michigan, for $225,000 of which $50,000 was paid in cash at closing and
$175,000 was represented by a promissory note. In connection with the
acquisition, the Company entered into a ground lease for the underlying real
property for an initial term of approximately 11 years, with three options to
renew for additional five year terms each.
F-63
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. ACQUISITIONS (CONTINUED)
Apart from the acquisition of MacDivott's Wood and Putter which was
represented by a stock purchase transaction, all of the above acquisitions were
acquired pursuant to asset purchase agreements. In addition, all of the
foregoing acquisitions were accounted for under the purchase method of
accounting. Accordingly, the results of operations of these golf centers are
included in the accompanying Consolidated Statements of Operations for all
periods starting with their respective acquisition dates. Had these
acquisitions occurred as of January 1, 1996, the Company's summarized unaudited
pro forma results of operations for the respective years would have been as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-----------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Pro forma total revenues ............... $ 16,354,290 $ 10,830,706
Pro forma loss from operations ......... (7,009,412) (1,776,873)
Pro forma net loss ..................... (5,835,363) (2,112,926)
</TABLE>
The unaudited pro forma results have been prepared pursuant to the
requirements of APB No. 16 and include certain adjustments, such as additional
amortization expense as a result of goodwill, increased interest expense on
acquisition indebtedness, and related income tax effects. The pro forma results
do not purport to be indicative of results that would have occurred had the
acquisitions been in effect for the periods presented, nor do they purport to
be indicative of the results that will be obtained in the future.
12. SUBSEQUENT EVENT
On June 16, 1998, Golden Bear Golf, Inc. entered into an agreement to sell
all of the issued and outstanding stock of the Company to Family Golf Center,
Inc. for approximately $32 million less the outstanding balance of any capital
lease obligations and purchase money indebtedness remaining in connection with
Golden Bear Golf, Inc.'s initial purchase of the Company's golf centers. Prior
to the closing of this sale, management intends to distribute certain assets
and liabilities to Golden Bear Golf, Inc.
F-64
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 1,202,989 $ 890,347
Accounts receivable, net .......................................... 343,740 389,472
Inventory ......................................................... 2,363,210 2,399,919
Prepaids .......................................................... 254,555 172,898
------------ ------------
Total current assets ............................................ 4,164,494 3,852,636
PROPERTY AND EQUIPMENT, net ........................................ 23,410,768 23,592,076
INVESTMENT IN JNAI ................................................. 148,410 289,496
INTANGIBLES AND OTHER ASSETS, net .................................. 6,690,852 6,777,646
------------ ------------
Total assets ...................................................... $ 34,414,524 $ 34,511,854
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................. $ 1,342,523 $ 1,572,238
Accrued liabilities ............................................... 1,420,792 743,717
Due to affiliates ................................................. 720,225 295,741
Deferred revenue .................................................. 30,000 30,000
Notes payable and capital leases, current portion ................. 3,481,572 3,023,396
------------ ------------
Total current liabilities ...................................... 6,995,112 5,665,092
NOTES PAYABLE AND CAPITAL LEASES,
net of current portion ............................................ 8,281,634 7,771,018
SHAREHOLDER'S EQUITY
Common stock--
Class A, $1.00 par value, 6,500 shares authorized, 4,068 shares
issued and outstanding in 1998 and 1997 ........................ 4,068 4,068
Class B, $1.00 par value, 1,000 shares authorized, none issued or
outstanding in 1998 or 1997 .................................... -- --
Additional paid-in capital ........................................ 28,361,470 28,361,470
Accumulated deficit ............................................... (9,227,760) (7,289,794)
------------ ------------
Total shareholder's equity ..................................... 19,137,778 21,075,744
------------ ------------
Total liabilities and shareholder's equity ..................... $ 34,414,524 $ 34,511,854
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-65
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
REVENUES ............................................... $ 3,685,912 $ 2,871,830
OPERATING COSTS AND EXPENSES:
Operating expenses .................................... 4,398,084 3,745,478
Depreciation and amortization ......................... 637,302 229,315
Corporate overhead allocation ......................... 175,472 394,837
------------ ------------
Total operating costs and expenses .................. 5,210,858 4,369,630
------------ ------------
Loss from operations ................................ (1,524,946) (1,497,800)
------------ ------------
OTHER INCOME (EXPENSE):
Interest income ....................................... 488 81,806
Interest expense ...................................... (268,637) (154,956)
Other ................................................. -- 35,729
------------ ------------
Total other income (expense) ........................ (268,149) (37,421)
------------ ------------
Loss before income taxes ............................ (1,793,095) (1,535,221)
PROVISION (BENEFIT) FOR INCOME TAXES ................... 3,785 (422,802)
------------ ------------
Net loss before equity in income of affiliate ......... (1,796,880) (1,112,419)
------------ ------------
EQUITY IN INCOME OF AFFILIATE .......................... 108,914 405,923
------------ ------------
Net loss .............................................. $ (1,687,966) $ (706,496)
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-66
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
CLASS A COMMON CLASS B COMMON ADDITIONAL
----------------- ----------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------- -------- -------- -------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997..... 4,068 $4,068 -- -- $28,361,470 $ (7,289,794) $ 21,075,744
Capital contribution .......... -- -- -- -- -- (250,000) (250,000)
Net loss ...................... -- -- -- -- -- (1,687,966) (1,687,966)
----- ------ ---- ---- ----------- ------------ ------------
BALANCE, March 31, 1998 ....... 4,068 $4,068 -- -- $28,361,470 $ (9,227,760) $ 19,137,778
===== ====== ==== ==== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-67
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------
1998 1997
---------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................................... $ (1,687,966) $ (706,496)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................................ 637,302 229,315
Undistributed income of equity affiliate ..................................... 141,086 (164,528)
Changes in assets and liabilities:
Accounts receivable ......................................................... 45,732 118,284
Due to affiliates ........................................................... 424,484 418,913
Inventory ................................................................... 36,709 (366,375)
Prepaid expenses and other current assets ................................... (81,657) (177,412)
Intangibles and other assets ................................................ 2,318 (393,662)
Accounts payable ............................................................ (229,715) (31,614)
Accrued liabilities ......................................................... 677,075 (757,780)
------------ ------------
Net cash used in operating activities ..................................... (34,632) (1,831,355)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of golf centers .................................................... -- (1,465,236)
Capital expenditures, net ...................................................... (131,218) (1,348,515)
------------ ------------
Net cash used in investing activities ..................................... (131,218) (2,813,751)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution from Parent ............................................... -- 13,825
Distribution to Parent ......................................................... (250,000) --
Proceeds from revolving credit facility ........................................ 167,000 --
Proceeds from capital lease obligations ........................................ 674,152 --
Payments on notes payable and capital leases ................................... (112,660) (93,551)
------------ ------------
Net cash provided by financing activities ................................. 478,492 (79,726)
------------ ------------
Net increase (decrease) in cash and cash equivalents ...................... 312,642 (4,724,832)
CASH AND CASH EQUIVALENTS, beginning of period .................................. 890,347 9,666,374
------------ ------------
CASH AND CASH EQUIVALENTS, end of period ........................................ $ 1,202,989 $ 4,941,542
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
ACTIVITIES:
Acquisitions of equipment accounted for as capital leases .................... $ 240,300 --
Notes payable issued in connection with the acquisition of golf centers -- $ 2,899,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-68
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements of
Golden Bear Golf Centers, Inc. (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included.
The results of operations and cash flows for the three months ended March
31, 1998 are not necessarily indicative of the results of operations or cash
flows which may be reported for the remainder of 1998.
2. NOTES PAYABLE AND CAPITAL LEASES
Notes payable and capital leases consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Note payable to financial institution, due in monthly principal
installments of $10,000 plus interest at prime + 3/4%, with balloon
payment due at maturity in August, 2003 ................................... $ 1,600,000 $ 1,640,000
Notes payable to sellers of golf centers, with interest generally
ranging from 8% to prime + 1 1/4%, maturing through June, 2004 ............ 3,724,818 3,780,723
Capital lease obligations secured by certain golf center facility assets,
maturing through April, 2025 (b) .......................................... 3,329,473 2,424,751
Deferred profit participation obligation, payable quarterly, discounted
at an effective rate of 9%, matures December, 2006 ........................ 391,915 398,940
Revolving credit facility with a bank, with interest at prime payable
quarterly, due August 26, 1998 (a) ........................................ 2,717,000 2,550,000
------------ ------------
11,763,206 10,794,414
Less current portion ....................................................... (3,481,572) (3,023,396)
------------ ------------
$ 8,281,634 $ 7,771,018
============ ============
</TABLE>
(a) In September 1997, the Golden Bear Golf, Inc. (the "Parent") entered into a
definitive credit agreement with a bank for a $10 million revolving credit
facility to be used to finance the working capital required to fund Golden
Bear Golf, Inc.'s growth as well as for general corporate purposes. The
initial credit agreement provides for a term of two years. Outstanding
borrowings, which bear interest at the prime rate payable quarterly, are
secured by Golden Bear Golf, Inc. and the Company's assets excluding
various golf center properties and certain other assets pledged to secure
other long-term debt.
The Company's outstanding portion of the credit agreement totaled
$2,717,000 and $2,550,000 at March 31, 1998 and December 31, 1997,
respectively. During the second quarter of 1998, Golden Bear Golf, Inc. was
out of compliance with certain financial covenants under the credit
agreement. Effective May 28, 1998, the credit agreement was amended and
restated and the maturity date of the
F-69
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2. NOTES PAYABLE AND CAPITAL LEASES (CONTINUED)
debt was changed to August 26, 1998. Accordingly, the $ 2,717,000 and
$2,550,000 outstanding at March 31, 1998 and December 31, 1997,
respectively, are classified as current liabilities in the accompanying
balance sheets. In addition, as of March 31, 1998 the Company has a
$750,000 standby letter of credit with a bank pledged as collateral on the
promissory note payable to the sellers of Caddyshack Golf Dome, Inc (see
Note 6).
(b) During the first three months of 1998, Golden Bear Golf, Inc. entered into
a 36 month capital lease agreement totaling approximately $ 914,000 to
lease "Point of Sale" computer hardware and software for use in the
Company's golf center facilities. Under the terms of the agreement, the
Company received computer hardware and software totaling approximately
$240,000 and approximately $674,000 of cash to be spent by the Company to
purchase additional computer hardware and software and for support services
for the Company's implementation of the computer system. The Company
capitalizes expenditures for internal use software in accordance with
Statement of Position 98-1 "Accounting for the Costs of Software Developed
or Obtained for Internal Use." Through May 1998, the Company has incurred
approximately $442,000 of expenditures in accordance with the lease
agreement and is committed to incur an additional $232,000 of expenditures.
The lease agreement includes penalties for termination or non-performance
by the Company under the agreement.
The Company continually evaluates whether events and circumstances have
occurred that may warrant revision of the estimated useful life of its
long-lived assets or whether the remaining balance of such long-lived
assets should be evaluated for possible impairment. As of March 31, 1998,
the Company has determined that no events have occurred that would warrant
revision to the estimated useful life of the assets acquired under this
agreement or whether the invested amounts of the assets should be
evaluated for possible impairment.
3. OPERATIONS OF JNAI
The apparel licensing activities of the Company in the Far East are
conducted through Jack Nicklaus Apparel International ("JNAI") and its various
partnerships. The Company serves as a 50% general partner and is generally
entitled to receive 50% of the cash distributions of the various partnerships'
operations. The Company's investment in JNAI is recorded on the equity method.
The following is a condensed summary of the operating results of JNAI:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
----------- -------------
<S> <C> <C>
Licensing revenues .................. $379,845 $ 765,250
Operating expenses .................. 114,955 83,268
Provision (benefit) for income taxes 47,062 (129,866)
-------- ----------
Net income .......................... $217,828 $ 811,848
======== ==========
</TABLE>
4. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company purchases golf equipment
manufactured by Nicklaus Golf Equipment Company, L.C., a privately owned
company in which Mr. Nicklaus has a 50% equity interest. Such equipment is
purchased primarily for resale in the pro shops of the Company's golf center
facilities. During the three months ended March 31, 1998 and 1997, the Company
purchased such golf equipment at a cost of $7,658 and $38,667, respectively.
F-70
<PAGE>
GOLDEN BEAR GOLF CENTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. COMMITMENTS
As of March 31, 1998, the Company has commitments to incur approximately
$250,000 of capital improvements to certain facilities. Additionally, in March
1998, one of the Company's golf center facilities incurred approximately
$290,000 of wind damage. In May 1998, the Company received insurance proceeds
of approximately $250,000. Accordingly, the Company recorded a $40,000
liability for the difference between the insurance proceeds and the estimated
future cost to repair the facility.
6. ACQUISITIONS
During the first quarter of 1997, the Company entered into a long-term
lease agreement for certain assets and the underlying real property utilized in
connection with the Sunset Golf Center. In addition, during the first quarter
of 1997 the Company also purchased Oasis Golf Center, Caddyshack Golf Dome and
a mini-golf facility for approximately $3.2 million, $1.1 million and $225,000,
respectively. For further information, refer to the audited Consolidated
Financial Statements and Notes thereto of the Company for the year ended
December 31, 1997.
These acquisitions were accounted for under the purchase method of
accounting. Accordingly, the results of operations of these golf centers are
included in the accompanying Statements of Operations for all periods starting
with their respective acquisition dates. Had these acquisitions occurred as of
January 1, 1997, the Company's summarized unaudited pro forma results of
operations for the period ended March 31, 1997 would have been as follows:
<TABLE>
<S> <C>
Pro forma total revenues ............... $ 3,230,664
Pro forma loss from operations ......... $ (1,465,017)
Pro forma net loss ..................... $ (676,211)
</TABLE>
7. INCOME TAXES
For the three months ended March 31, 1998, the Company has not recorded a
tax benefit for net operating losses incurred due to uncertainty of the
realization of such benefit.
8. SUBSEQUENT EVENT
On June 16, 1998, Golden Bear Golf, Inc. entered into an agreement to sell
all of the issued and outstanding stock of the Company to Family Golf Center,
Inc. for approximately $32 million less the outstanding balance of any capital
lease obligations and purchase money indebtedness remaining in connection with
Golden Bear Golf, Inc.'s initial purchase of the Company's golf centers. Prior
to the closing of this sale, management intends to distribute certain assets
and liabilities to Golden Bear Golf, Inc.
F-71
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
MetroGolf Incorporated
Denver, Colorado
We have audited the accompanying consolidated balance sheet of MetroGolf
Incorporated and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements enumerated above present fairly,
in all material respects, the consolidated financial position of MetroGolf
Incorporated and subsidiaries as of December 31, 1997, and the consolidated
results of their operations and their consolidated cash flows for the year then
ended in conformity with generally accepted accounting principles.
As discussed in Note A, in February 1998, MetroGolf Incorporated and
subsidiaries was acquired by Family Golf Centers, Inc.
Richard A. Eisner & Company, LLP
New York, New York
April 10, 1998
F-72
<PAGE>
METROGOLF INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1997
---------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 59,000
Inventories ................................................................... 191,000
Other ......................................................................... 85,000
------------
Total current assets ........................................................ 335,000
Property and equipment, net ................................................... 17,422,000
Excess of cost over net assets acquired, net of accumulated amortization of
$89,000 ..................................................................... 1,448,000
Deferred financing costs, net of accumulated amortization of $197,000 ......... 109,000
Other assets .................................................................. 324,000
------------
Total ........................................................................ $ 19,638,000
============
LIABILITIES
Current liabilities:
Accounts payable .............................................................. $ 2,088,000
Accrued expenses .............................................................. 1,483,000
Note payable, Family Golf Centers, Inc. ....................................... 296,000
Current portion of capital lease obligations .................................. 133,000
Current portion of long-term debt ............................................. 4,578,000
------------
Total current liabilities ................................................... 8,578,000
Long-term liabilities:
Long-term debt, less current portion .......................................... 9,021,000
Capital lease obligations, less current portion ............................... 1,450,000
------------
Total liabilities ............................................................ 19,049,000
------------
Minority interest in subsidiaries .............................................. 220,000
------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock -- 1,000,000 shares authorized, $1 par value; no shares issued
and outstanding ...............................................................
Common stock -- 50,000,000 shares authorized, no par value; 4,434,607 issued
and outstanding ............................................................... 10,113,000
Notes receivable, stockholder .................................................. (91,000)
Accumulated deficit ............................................................ (9,653,000)
------------
Total stockholders' equity ................................................... 369,000
------------
Total ........................................................................ $ 19,638,000
============
</TABLE>
See notes to financial statements.
F-73
<PAGE>
METROGOLF INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
-----------------
<S> <C>
Revenues:
Greens fees and driving range ........................................... $ 2,390,000
Membership .............................................................. 593,000
Merchandise ............................................................. 453,000
Food and beverage ....................................................... 347,000
Instruction ............................................................. 299,000
Administration .......................................................... 96,000
-------------
Total .................................................................. 4,178,000
-------------
Operating expenses:
Range and course operation .............................................. 2,148,000
Food and beverage ....................................................... 320,000
Instruction expense ..................................................... 207,000
Salaries ................................................................ 912,000
General and administrative .............................................. 3,770,000
Depreciation and amortization ........................................... 1,128,000
-------------
Total .................................................................. 8,485,000
-------------
Loss from operations ..................................................... (4,307,000)
-------------
Other income (expense):
Interest income ......................................................... 21,000
Interest expense ........................................................ (2,323,000)
Other ................................................................... 7,000
-------------
Total .................................................................. (2,295,000)
-------------
Minority interest in loss of subsidiaries ................................ 100,000
-------------
Net loss ............................................................... $ (6,502,000)
=============
Net loss per common share -- basic and diluted ........................... $ (1.94)
Weighted average number of common shares outstanding -- basic and diluted 3,345,093
</TABLE>
See notes to financial statements.
F-74
<PAGE>
METROGOLF INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK NOTES
--------------------------- RECEIVABLE, ACCUMULATED
SHARES AMOUNT STOCKHOLDER DEFICIT TOTAL
----------- ------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance -- January 1, 1997 ............ 2,233,775 $ 6,792,000 $ (83,000) $ (3,151,000) $ 3,558,000
Issuance of common stock in
connection with acquisitions ......... 985,550 1,417,000 -- -- 1,417,000
Conversion of convertible
subordinated notes ................... 1,114,400 953,000 -- -- 953,000
Issuance of common stock in
connection with Harborside
equipment lease ...................... 40,000 85,000 -- -- 85,000
Value of below market conversion
feature on issuance of
convertible debt ..................... -- 789,000 -- -- 789,000
Issuance of common stock in
connection with debt ................. 60,882 77,000 -- -- 77,000
Increase in notes receivable,
stockholder .......................... -- -- (8,000) -- (8,000)
Net loss .............................. -- -- (6,502,000) (6,502,000)
--------- ----------- --------- ------------ ------------
Balance -- December 31, 1997 .......... 4,434,607 $10,113,000 $ (91,000) $ (9,653,000) $ 369,000
========= =========== ========= ============ ============
</TABLE>
See notes to financial statements.
F-75
<PAGE>
METROGOLF INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
------------------
<S> <C>
Cash flows from operating activities:
Net loss ................................................................... $ (6,502,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................ 1,128,000
Gain on sale of asset .................................................... (7,000)
Accrued interest charges ................................................. 355,000
Minority interest in subsidiaries' losses ................................ (100,000)
Changes in:
Inventories ............................................................. 38,000
Other assets ............................................................ (112,000)
Other current assets .................................................... 97,000
Accounts payable ........................................................ 632,000
Accrued expenses ........................................................ 398,000
-------------
Net cash used in operating activities .................................. (4,073,000)
-------------
Cash flows from investing activities:
Acquisition of property and equipment -- acquired businesses ............... (222,000)
Acquisition of property and equipment ...................................... (206,000)
Proceeds from sale of asset ................................................ 21,000
-------------
Net cash used in investing activities .................................. (407,000)
-------------
Cash flows from financing activities:
Proceeds from convertible debt ............................................. 3,197,000
Payments on capital lease obligations ...................................... (149,000)
Proceeds from long-term debt, net .......................................... 356,000
Payment of financing costs ................................................. (65,000)
Advances from Family Golf Centers, Inc. .................................... 296,000
-------------
Net cash provided by financing activities .............................. 3,635,000
-------------
Net decrease in cash and cash equivalents ................................... (845,000)
Cash and cash equivalents, beginning of year ................................ 904,000
-------------
Cash and cash equivalents, end of year ...................................... $ 59,000
=============
Supplementary disclosure of cash flow information:
See Note L
</TABLE>
See notes to financial statements.
F-76
<PAGE>
METROGOLF INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE A -- ORGANIZATION AND BUSINESS
MetroGolf Incorporated (the "Company"), a Colorado corporation, was
incorporated on July 29, 1994 by its sole common stockholder. The Company was
formed for the purpose of acquiring and consolidating its stockholders'
ownership of two pre-existing corporations, as described below and, therefore,
it is a continuation of these pre-existing corporations. The Company acquires,
develops and manages urban golf centers and other golf facilities.
On July 29, 1994, the Company acquired all of the issued and outstanding
common stock of MetroGolf Virginia, Inc. ("VA"), a Colorado corporation
incorporated on February 21, 1992. Prior to the formation of the Company, VA
was the primary operating entity in the business of golf course management,
development and acquisition. VA is the managing general partner of Goose Creek
Golf Partners Limited Partnership ("Goose Creek"), a Virginia Limited
Partnership formed on June 1, 1992. Also on July 29, 1994, the Company acquired
90.0 percent of the issued and outstanding common stock of MetroGolf Illinois
Center, Inc. ("IC"), a Colorado corporation incorporated on May 26, 1993. IC is
the managing partner of Illinois Center Golf Partners, L.P. ("Illinois
Center"), an Illinois Limited Partnership formed on May 28, 1993. The Company
issued 680,782 shares of its common stock to an individual for his 100.0
percent interest in VA and his 90.0 percent interest in IC. This exchange of
ownership with entities under common control has been accounted for at
historical cost in a manner similar to that of a pooling-of-interests. As of
December 31, 1997, the Company held 89.0 percent of the issued and outstanding
common stock of IC. Prior to the July 29, 1994 business reorganization, VA and
IC were entities under common control and management. In October 1996, the
Company purchased 93.6 percent of the limited partnership interests in Illinois
Center and 89.7 percent of the limited partnership interest in Goose Creek.
On March 30, 1994, the Company formed and acquired 51.0 percent of the
issued and outstanding common stock of MetroGolf Management, Inc. ("MGM"), a
Colorado corporation. MGM provides golf management services to Illinois Center.
During April 1996, the Company acquired the remaining 49.0 percent of MGM for
no consideration.
During 1996, the Company acquired three golf centers: one in Fremont,
California and two in San Diego, California.
In 1997, the Company acquired three additional golf centers located in
Colorado, California and New York.
In September 1997, the Company purchased 99.0 percent of the limited
partnership and general partnership interests in a golf practice facility
located in Solano, California (the "Solano Golf Center").
In 1998, approximately 7,664,000 shares representing all of the then
outstanding shares of common stock of the Company were acquired by Family Golf
Centers, Inc. ("FGCI") at $1.50 per share, or an aggregate of approximately
$11,497,000.
NOTE B -- SIGNIFICANT ACCOUNTING POLICIES
[1] PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned and majority-owned subsidiaries as of December
31, 1997 and for the year then ended. All significant intercompany accounts and
transactions have been eliminated in consolidation.
[2] CASH AND CASH EQUIVALENTS:
The Company considers all money market accounts and highly liquid debt
instruments purchased with original maturities of three months or less to be
cash equivalents.
F-77
<PAGE>
METROGOLF INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE B -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[3] INVENTORIES:
Inventories primarily consist of merchandise for sale in the pro shop at
each facility. Also included in inventories are food and beverage in the
restaurants. Both inventories are valued at the lower of cost on a first-in,
first-out basis or market.
[4] PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost less accumulated depreciation
and amortization, and are depreciated and amortized on a straight-line method
over the estimated useful lives of the assets which range from 3 to 37 years or
over the term of the lease, whichever is shorter. Equipment under capital
leases is stated at cost and is amortized over the estimated useful life of the
equipment or over the term of the lease, whichever is shorter.
[5] DEFERRED FINANCING COSTS:
Deferred financing costs are being amortized using the straight-line
method over the term of the convertible subordinated notes payable.
[6] EXCESS OF COST OVER NET ASSETS ACQUIRED:
The excess of costs over the fair value of the net assets acquired, which
relates to the acquisitions of Goose Creek and Illinois Center, are being
amortized over a 20-year period and a 13-year period, respectively, using the
straight-line method. Permanent impairments are evaluated periodically based
upon expected future cash flows in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". There were no impairments
recorded in the financial statements for the year ended December 31, 1997.
[7] REVENUE RECOGNITION:
Greens fees, driving range fees, golf cart rental, merchandise and food
and beverage revenue is recognized as revenue immediately upon sale to the
customer. Instruction revenue is recognized when the lessons are provided.
Membership fees are recognized as revenue ratably over the life of the
membership, usually 12 months.
[8] CONCENTRATION OF RISK:
The Company's financial instruments that are exposed to concentration of
credit risk consist primarily of cash and cash equivalents. The Company's cash
and cash equivalents are in demand deposit accounts placed with federally
insured financial institutions. Such deposit accounts at times may exceed
federally insured limits. The Company has not experienced any losses on such
amounts.
[9] USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
F-78
<PAGE>
METROGOLF INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE B -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[10] FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Note receivable, stockholder
The carrying amount approximates fair value due to the short-term nature
of this instrument.
Long-term debt
Substantially all of these notes bear interest at a floating rate of
interest based upon the lending institution's prime lending rate. Accordingly,
the fair value approximates their reported carrying amount at December 31,
1997.
[11] LOSS PER SHARE:
During 1997, the Company adopted Statement of Financial Accounting
Standard No. 128 "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 requires
the reporting of basic and diluted earnings/loss per share. Basic loss per
share is calculated by dividing net loss by the weighted average outstanding
shares during the period. All potential common shares are anti-dilutive and
therefore not included in the calculation of diluted loss per share.
[12] STOCK OPTION PLANS:
The Company applied Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), and the related
interpretations in accounting for all stock option plans. Under APB No. 25, no
compensation cost has been recognized for stock options issued to employees as
the exercise price of the Company's stock options granted equals or exceeds the
market price of the underlying common stock on the date of grant.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), requires the Company to provide pro
forma information regarding net loss as if compensation cost for the Company's
stock options plans had been determined in accordance with the fair value based
method prescribed in SFAS No. 123. To provide the required pro forma
information, the Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model.
[13] INCOME TAXES:
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
Temporary differences are differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements that will
result in taxable or deductible amounts in future years.
NOTE C -- 1997 ACQUISITIONS
[1] ACQUISITION OF ROCKY POINT GOLF CENTER:
In April 1997, the Company purchased the leasehold interest in the Rocky
Point Golf Center ("Rocky Point") for approximately $965,000. The Company
issued notes payable to the seller for
F-79
<PAGE>
METROGOLF INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE C -- 1997 ACQUISITIONS (CONTINUED)
$175,000, issued 517,649 shares of common stock of the Company for $700,000,
paid cash of $75,000 and acquisition costs of approximately $15,000. The
purchase price has been allocated to property and equipment.
[2] ACQUISITION OF SOLANO GOLF CENTER:
In September 1997, the Company purchased the leasehold interest and
certain other assets in the Solano Golf Center ("Solano") for approximately
$1,108,000. The Company assumed long-term debt of approximately $483,000,
issued 399,276 shares of common stock of the Company for approximately $586,000
and paid acquisition costs of approximately $39,000 of which $13,000 was paid
by issuing 6,623 shares of common stock.
The allocation of purchase price is as follows:
<TABLE>
<S> <C>
Property and equipment ......... $1,084,000
Inventory ...................... 71,000
Accounts payable ............... (47,000)
----------
Total purchase price .......... $1,108,000
==========
</TABLE>
[3] ACQUISITION OF HITTER'S HAVEN:
In October 1997, the Company purchased the leasehold interest of Hitter's
Haven for $1,112,000. The Company assumed long-term debt of $888,000, issued
52,486 shares of common stock of the Company for $100,000, and paid cash of
approximately $93,000 and acquisition costs of approximately $31,000, of which
approximately $18,000 was paid by issuing 9,516 shares of common stock. The
purchase price was allocated to property and equipment.
All of the acquisitions were recorded using the purchase method of
accounting, pursuant to which the assets are valued at the fair market value at
the date of acquisition. The operating results of these acquisitions have been
included in the Company's results of operations from the date of acquisition.
NOTE D -- PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma information for the year ended December
31, 1997 presents the consolidated results of operations of the Company as if
the acquisition of Rocky Point, Solano and Hitter's Haven had occurred at the
beginning of the year. The unaudited pro forma financial data does not purport
to be indicative of the results which actually would have been obtained had the
purchases been affected at the beginning of the year or of the results which
may be obtained in the future.
<TABLE>
<S> <C>
Revenues ............................................... $ 4,547,000
Net loss ............................................... (6,480,000)
Net loss per common share -- basic and diluted ......... (1.69)
Weighted average number of common shares outstanding --
basic and diluted ..................................... 3,843,064
</TABLE>
F-80
<PAGE>
METROGOLF INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE E -- PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<S> <C>
Land .......................................................... $ 3,669,000
Buildings and related improvements ............................ 6,803,000
Land improvements and irrigation equipment, including
$330,747 under capital lease.................................. 5,592,000
Furniture, fixtures and equipment, including $1,464,003 under
capital lease ................................................ 2,496,000
-----------
18,560,000
Less: accumulated depreciation and amortization ............... 1,138,000
-----------
$17,422,000
===========
</TABLE>
NOTE F -- NOTES RECEIVABLE, STOCKHOLDER
On December 31, 1996, the Company entered into a note agreement with a
common stockholder. The note bears interest at eight percent per annum and is
due on demand. The outstanding balance on the note, including accrued interest
is approximately $91,000 as of December 31, 1997.
NOTE G -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
-------------
<S> <C>
Convertible subordinated notes (including accrued interest of
$157,000) (1) .................................................. $3,354,000
Note payable, Textron (2) ....................................... 3,162,000
Note payable, Textron (3) ....................................... 1,389,000
Convertible debt (4) ............................................ 1,343,000
Note payable, bank (5) .......................................... 729,000
Note payable (including accrued interest of $93,000) (6)......... 677,000
Convertible debt (7) ............................................ 593,000
Note payable, Heller Financial (8) .............................. 483,000
Note payable, bank (9) .......................................... 448,000
Note payable, SBA (10) .......................................... 440,000
Notes payable, seller (11) ...................................... 392,000
Convertible notes (12) .......................................... 380,000
Note payable, seller (13) ....................................... 150,000
Notes payable, other ............................................ 59,000
----------
13,599,000
Less: current portion ........................................... 4,578,000
----------
$9,021,000
==========
</TABLE>
- ----------
(1) From May 9, 1997 through August 21, 1997, the Company raised
approximately $3,197,000 in convertible subordinated notes ("1997
Notes"). Net proceeds from the offering, after paying commissions and
offering costs were approximately $2,785,000. The 1997 Notes bear
interest at 10%,
F-81
<PAGE>
METROGOLF INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE G -- LONG-TERM DEBT (CONTINUED)
with interest payable January 1, 1998. The 1997 Notes are due on June 30,
2002. Of the 1997 Notes, $1,984,000, plus any accrued but unpaid interest,
is convertible, at the option of the holder, at any time upon the earlier
of (i) December 15, 1997, (ii) the date of delivery by the Company of
notice to prepay the 1997 Notes and (iii) date of delivery by the Company
of notice to allow immediate conversion, into common shares of the Company
at $1.05 per share. Of the 1997 Notes, $1,093,000, plus any accrued but
unpaid interest, are convertible, at the option of the holder, at any time
upon the earlier of (i) December 31, 1997, (ii) the date of delivery by the
Company of notice to prepay the 1997 Notes and (iii) date of delivery by
the Company of notice to allow immediate conversion, into common shares of
the Company at $1.35 per share. Of the 1997 Notes, $120,000 plus any
accrued but unpaid interest, are convertible, at the option of the holder,
at any time upon the earlier of (i) December 31, 1997, (ii) the date of
delivery by the Company of notice to prepay the 1997 Notes and (iii) the
date of delivery by the Company of notice to allow immediate conversion,
into common shares of the Company at $1.40 per share. Under certain
circumstances, the Company has the option to prepay the 1997 Notes, upon 1
day's notice, subject to the noteholder's right to convert. The discount
resulting from the conversion right has been recorded to common stock in
the amount of approximately $789,000 and has been amortized from the date
of issuance through the date of first conversion, December 1997.
(2) On June 1, 1992, Goose Creek was advanced $3.6 million under a loan
agreement whereby Goose Creek may borrow up to $4.2 million. Borrowings
under the loan agreement bear interest at 12 percent and had an original
maturity date of June 1, 1997. Principal and interest payments are due
under a seasonal payment structure with a balloon payment of principal due
on October 1998, the date to which the loan was extended. The loan is
collateralized by all property of Goose Creek and is personally guaranteed
by the president of the Company.
(3) On January 31, 1996, Illinois Center entered into a $2,000,000 promissory
note with Textron. Textron advanced $1,750,000 to Illinois Center of which
approximately $361,000 has been repaid. The note bears interest at 10.75%
and is due on or before December 31, 2002. Principal and interest payments
are due under a seasonal payment structure. The note is collateralized by
substantially all of the assets of Illinois Center and is personally
guaranteed by the president of the Company.
(4) On October 21, 1996, in conjunction with proceeds raised from the Company's
initial public offering ("IPO"), the Company acquired 93.6% of the limited
partnership interests in Illinois Center for approximately $2,902,000; with
approximately $1,588,000 paid in cash and the issuance of approximately
$1,293,000, net of original issue discount ("OID") of approximately
$394,000, in convertible notes and acquisition costs of approximately
$21,000. Each convertible note is due on June 1, 2005 and bears interest at
6% per annum. Interest payments are payable semi-annually on June 1 and
December 1 of each year; however, that interest only will be payable for
the first 24 months. Thereafter, interest will continue to be paid
semi-annually and principal will be amortized evenly over the remaining
seven years to maturity. The notes are convertible into a warrant to
purchase 2,500 shares of common stock of the Company for each $25,000
principal amount of convertible notes at an exercise price equal to 120% of
the IPO price ($7.20). The conversion may take place anytime after November
20, 1997 and prior to full payment of principal by the Company.
The market rate on the convertible notes payable has been determined to be
greater than the stated interest rate which results in an OID on the face
of the convertible note payable in the amount of $394,000 based on an
effective rate of 12%. The OID is being charged to interest over the life
of the convertible notes payable under the effective interest method.
F-82
<PAGE>
METROGOLF INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE G -- LONG-TERM DEBT (CONTINUED)
(5) On July 1, 1996, Fremont Center was purchased for approximately $1,350,000.
The Company paid $650,000 in cash and entered into a $700,000 promissory
note with the seller. The note bears interest at 9% per annum and had an
original maturity date of November 15, 1996. The note was extended to
January 15, 1997, for a one time extension fee and a default interest rate
of 10% from the inception of the note. On January 15, 1997, the note was
refinanced through March 3, 1997 with a bank at an interest rate of 2% over
the Norwest Bank prime rate. The note was subsequently extended to June 3,
1997 and then again through June 2012 in consideration for a non-refundable
fee of approximately $15,000. Principal and interest payments are amortized
over the term of the note. The note is collateralized by all leasehold
improvements on the property.
(6) In January 1996, Illinois Center purchased its clubhouse facility and
various items of equipment which were previously under operating leases for
$1,434,000. Illinois Center paid $850,000 in cash and entered into a
$584,000 promissory note. The note bears interest at eight percent per
annum and is due June 1, 2005. Principal and interest payments on the note
commence January 1, 1998. The note is collateralized by the clubhouse
facility and various items of equipment. The note is subordinate to
Illinois Center's Textron note payable.
(7) On October 21, 1996, in conjunction with proceeds raised from the Company's
IPO, the Company acquired all of the limited partnership interests in Goose
Creek for approximately $1,210,000; with approximately $621,000 paid in
cash and the issuance of approximately $571,000, net of OID of
approximately $174,000, in convertible notes and acquisition costs of
approximately $18,000. Each convertible note is due on June 1, 2005 and
bears interest at 6% per annum. Interest payments are payable semi-annually
on June 1 and December 1 of each year; however, interest only will be
payable for the first 24 months. Thereafter, interest will continue to be
paid semi-annually and principal will be amortized evenly over the
remaining seven years to maturity. The notes shall be convertible, in whole
or in part, into fully paid and nonassessable shares of common stock of the
Company, at the option of the holder. The share conversion shall be the
principal of the note being converted, plus accrued and unpaid interest
divided by the IPO price ($6.00). The conversion may take place anytime
after November 20, 1997 and prior to full payment of principal by the
Company.
The market rate on the convertible notes payable has been determined to be
greater than the stated interest rate which results in an OID on the face
of the convertible note payable in the amount of approximately $174,000
based on an effective rate of 12%. The OID is being charged to interest
over the life of the convertible notes payable under the effective
interest method.
(8) In September 1997, the Company assumed long-term debt in the amount of
approximately $483,000 in connection with the acquisition of Solano Golf
Center. The note bears interest at 2.75% above the prime rate per annum.
Interest only payments are required in the first twelve months from the
acquisition. Thereafter, principal and accrued interest are paid in monthly
installments.
(9) In October 1997, the Company assumed a loan in the amount of approximately
$448,000 in connection with the acquisition of Hitter's Haven. The note
bears interest at 2% above the prime rate per annum. Interest only payments
are required through the maturity date of August 17, 2005, when the
principal becomes due.
(10) In October 1997, the Company assumed a loan in the amount of approximately
$440,000 in connection with the acquisition of Hitter's Haven. The note
bears interest at 7.217% per annum. The loan requires equal monthly
installments in the amount of approximately $4,000 and continues through
August 1, 2015, when the full unpaid balance of principal and interest
shall become due and payable.
F-83
<PAGE>
METROGOLF INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE G -- LONG-TERM DEBT (CONTINUED)
(11) In December 1996, the Company entered into a note payable with the seller
of Palms Golf Center (a 1996 acquisition) in the amount of approximately
$460,000. The note bears interest at 10.5%. Pursuant to the acquisition
agreement, the Company is required to arrange for alternative financing
on this note by July 1, 1997. As of December 31, 1997, the Company was in
default of the agreement and accordingly the entire note payable is
included in current liabilities.
(12) During August 1995, Goose Creek entered into three unsecured convertible
note agreements. The notes accrue interest at 8% per annum through August
1, 1996. Thereafter, the notes accrue interest at 15% per annum. Interest
only payments are due on the first of each month. The notes were due on
August 1, 1997 and are in default at December 31, 1997. The note
agreements are subordinate to Goose Creek's note payable with Textron.
The note agreements contain a conversion provision whereby the
noteholders may convert no less than all of the then outstanding
principal and accrued interest into limited partnership interests.
(13) During April 1997, the Company entered into a note payable in the amount
of $175,000 in connection with the acquisition of the leasehold interest
of Rocky Point. The note bears interest at 8% per annum. The remaining
principal of $150,000 plus interest is due September 1998.
Future maturities of long-term debt as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998 ............... $ 4,578,000
1999 ............... 1,241,000
2000 ............... 1,887,000
2001 ............... 2,075,000
2002 ............... 1,318,000
Thereafter ......... 2,501,000
-----------
$13,600,000
===========
</TABLE>
Subsequent to the acquisition of the Company by FGCI, approximately
$7,260,000 of debt was repaid.
NOTE H -- CAPITAL LEASE OBLIGATIONS
The Company leases equipment under capital leases.
Future minimum lease payments and the present value of the minimum lease
payments under the capital lease obligations as of December 31, 1997 are as
follows:
<TABLE>
<S> <C>
Total future minimum lease payments ........................ $2,595,000
Less: amount representing interest ......................... 1,012,000
----------
Present value of minimum lease payments .................... 1,583,000
Less: current portion of capital lease obligations ......... 133,000
----------
Long-term portion of capital lease obligations ............. $1,450,000
==========
</TABLE>
F-84
<PAGE>
METROGOLF INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE H -- CAPITAL LEASE OBLIGATIONS (CONTINUED)
As of December 31, 1997, minimum future lease payments on capital lease
obligations for each of the next five years and in the aggregate are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-----------
<S> <C>
1998 ............... $ 322,000
1999 ............... 276,000
2000 ............... 286,000
2001 ............... 289,000
2002 ............... 292,000
Thereafter ......... 1,130,000
----------
$2,595,000
==========
</TABLE>
NOTE I -- COMMITMENTS AND CONTINGENCIES
[1] EMPLOYMENT AGREEMENTS:
At December 31, 1997, the Company has employment agreement with its
President and Executive Vice President that provide aggregate annual base
salaries of $425,000. The agreements expire on December 31, 1998.
[2] OPERATING LEASES:
The Company currently has lease, sublease and ground lease agreements for
space and equipment at the various golf operating facilities which run through
the year 2030. The leases generally call for the Company to be responsible for
all facility operating expenses and entitled to receive income generated from
the facility. The monthly lease payments due to the lessors vary from monthly
base rental amounts, to percentages of gross monthly revenues or available
operational proceeds as defined in the lease agreements. The leases call for
the Company to maintain certain general liability insurance levels and provide
golf professionals to teach lessons to the public.
The Company also leases office space and equipment under noncancelable
leases with terms that expire at various dates through April 2002.
Future minimum lease payments, under operating lease agreements that have
initial or remaining non-cancelable lease terms in excess of one year are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998 ............... $ 515,000
1999 ............... 638,000
2000 ............... 720,000
2001 ............... 783,000
2002 ............... 813,000
Thereafter ......... 14,482,000
-----------
$17,951,000
===========
</TABLE>
Rent expense for the year ended December 31, 1997 was approximately
$378,000.
F-85
<PAGE>
METROGOLF INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE I -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has contingent payments in conjunction with the ground
sublease and sublicense agreements for Illinois Center for real estate tax
contributions. As of December 31, 1997, Illinois Center made no real estate tax
contribution but has accrued approximately $688,000.
[3] COMMITMENTS:
At December 31, 1997, the Company had construction commitments aggregating
approximately $5,000,000.
NOTE J -- STOCKHOLDERS' EQUITY
[1] COMMON STOCK:
During August 1995, the Company amended its articles of incorporation to
increase the authorized shares of common stock from 1,000,000 shares to
9,000,000 shares.
On October 21, 1996, the Company completed the sale of 1,175,000 shares of
its common stock in an IPO. The Company received net proceeds of approximately
$5,461,000 after paying offering costs of $1,589,000.
Simultaneously with the completion of the Company's IPO on October 21,
1996, $1,063,000 of the Company's convertible subordinated notes payable and
accrued interest of $56,000 were converted into 356,168 shares of common stock
in accordance with the provisions of the convertible subordinated notes (see
Note G).
On November 10, 1997, the Company's shareholders approved an increase in
the authorized common shares to 50,000,000.
[2] WARRANTS:
Pursuant to a note payable entered into with FGCI, the Company issued a
warrant to purchase 500,000 shares of common stock at an exercise price of
$1.00 per share, with an expiration date of June 1999. Borrowings under the
note bear interest at 8 percent per annum and which under certain circumstances
was due on the effective date of the merger between the Company and FGCI.
As of December 31, 1997, the Company had warrants outstanding to purchase
1,019,931 (excluding FGCI warrants) shares of common stock at exercise prices
ranging from $1.05 to $7.20 per share.
[3] STOCK OPTION PLAN:
In connection with the IPO, the Board of Directors adopted the Company's
1996 Employee Stock Option and Stock Bonus Plan (the "Employee Plan"). The
Employee Plan provides for an initial authorization of 250,000 shares of common
stock for issuance thereunder at exercise prices no less than 85% of the fair
market value of the common stock at the time of grant. The options will vest
over a five-year period, except that up to 10% of the options may be subject to
a shorter vesting period at the discretion of the Company's Board of Directors.
Options may not be exercised more than three months after an employee's
termination of employment with the Company unless such termination was a result
of death, disability or retirement, in which case the exercise period is
extended to one year. The exercise price may be paid in cash, by tendering
shares of the common stock (valued at fair market value on the date of
exercise) if so provided in the applicable stock option agreement, or by a
combination of such means of payment, as may be determined by the Stock Option
Committee.
F-86
<PAGE>
METROGOLF INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE J -- STOCKHOLDERS' EQUITY (CONTINUED)
The Company's Senior Executive Incentive Option Plan (the "Senior Plan")
provides for the granting to senior executives of incentive stock options.
Pursuant to the Senior Plan, 500,000 shares of the Company's common stock have
been reserved for granting at prices and for periods to be determined by the
Company's Board of Directors. The vesting period of the options is also
determined by the Board of Directors and vest pursuant to the terms in the
Senior Plan.
As of December 31, 1997, the Company had the following stock options
outstanding under these plans:
<TABLE>
<CAPTION>
GRANT EXPIRATION EXERCISE OPTIONS
DATE DATE PRICE GRANTED
- ------------------------- -------------------- -------------- ----------
<S> <C> <C> <C>
September 16, 1996 September 15, 2006 $ 1.50(1) 250,000
October 16, 1996 October 15, 2006 1.50 (1) 5,000
November 25, 1996 November 24, 2006 1.50 (1) 53,000
November 25, 1996 November 24, 2006 5.10 25,000
December 3, 1997 December 2, 2007 1.25 335,000
-------
Options outstanding ................................ 668,000
=======
</TABLE>
- ----------
(1) In December 1997, the exercise price of these options was reduced from
$6.00 per share.
The options' exercise price was equal to the common stock's market price
at the date of grant.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), requires the Company to provide pro
forma information regarding net loss as if compensation for the Company's stock
option plans had been determined in accordance with the fair value based method
prescribed in SFAS No. 123. Had compensation cost for the Company's stock
option plans been determined based upon the fair value at the grant date for
awards under the plan consistent with the methodology prescribed under SFAS No.
123, the Company's net loss in 1997 would have been approximately $6,758,000 or
$2.02 per share. The Company estimated the fair value of each stock option at
the grant date by using the Black-Scholes option pricing model with the
following weighted-average assumptions used: dividend yield of 0%; expected
volatility of 20%; risk free interest rate of 5.8%; and expected life of five
years.
A summary of the status of the Company's stock option plans as of December
31, 1997 and changes during the year is presented below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------- -----------------
<S> <C> <C>
Outstanding -- January 1, 1997 ............... 333,000 $ 5.93
Cancelled .................................... (308,000) (6.00)
Reissued ..................................... 308,000 1.50
Granted ...................................... 335,000 1.25
--------
Outstanding -- December 31, 1997 ............. 668,000 $ 1.51
========
Weighted average fair value of options granted
during the year ............................. $ .39
=======
</TABLE>
F-87
<PAGE>
METROGOLF INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE J -- STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------
NUMBER WEIGHTED
OUTSTANDING AVERAGE WEIGHTED
RANGE OF AT REMAINING AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE
PRICES 1997 LIFE PRICE
- ---------------------- -------------- ------------- ---------
<S> <C> <C> <C>
$1.25 - $1.50....... 643,000 9 $ 1.37
$5.10............... 25,000 9 $ 5.10
</TABLE>
All such options became exercisable in February 1998 upon the acquisition of
the Company by FGCI.
NOTE K -- INCOME TAXES
At December 31, 1997, the Company has available net operating loss
carryforwards of approximately $9,000,000 for tax reporting purposes which
expire through 2011. Pursuant to the provisions of the Internal Revenue Code,
future utilization of these past losses are subject to certain limitations
based on changes in the ownership of the Company's stock.
The Company has deferred tax assets fully reserved as of December 31,
1997. Deferred tax assets and liabilities at December 31, 1997 are as follows:
<TABLE>
<S> <C>
Net operating loss carryforward ......................... $ 3,540,000
Book depreciation over tax .............................. (620,000)
Deferred rent adjustment ................................ (54,000)
Book expense in excess of tax-organization cost ......... (26,000)
------------
2,840,000
Valuation allowance ..................................... (2,840,000)
------------
Net deferred tax assets (liability) ..................... $ 0
============
</TABLE>
A 100 percent valuation allowance has been established to reflect
management's evaluation that it is unlikely that the deferred tax assets will
be realized. The change in the valuation allowance for the year ended December
31, 1997 was $1,579,000.
NOTE L -- SUPPLEMENTAL DATA AND NONCASH DISCLOSURES TO STATEMENT OF CASH FLOWS
For the year ended December 31, 1997, the Company had the following
noncash activity:
<TABLE>
<S> <C>
Accrued interest on stockholder loan .............................. $ 8,000
Amortization of discount on debt .................................. 789,000
Acquisition of property subject to loans payable .................. 1,546,000
Acquisition of property in exchange for common stock .............. 1,484,000
Acquisition of property subject to capital lease obligation ....... 1,373,000
Acquisition of property subject to accounts payable ............... 47,000
Acquisition of property in connection with other assets ........... 38,000
Inventory related to acquisitions ................................. 71,000
Issuance of common stock for services ............................. 77,000
Issuance of common stock in connection with debt conversion ....... 953,000
Interest paid ..................................................... 901,000
</TABLE>
F-88
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Leisure Complexes, Inc.:
We have audited the accompanying balance sheet of Leisure Complexes, Inc.
at December 31, 1996, and the related statements of operations, accumulated
deficit and cash flows for the year then ended. These financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Leisure Complexes, Inc. at
December 31, 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
As discussed in Note 7 to the financial statements, subsequent to December
31, 1996, the Company was acquired.
/s/ Feldman Gutterman Meinberg & Co.
June 27, 1997
Manhasset, New York
F-89
<PAGE>
LEISURE COMPLEXES, INC.
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash escrow -- redeemable preferred stock ............................ $ 1,300,000
Parts, product & beverage inventory .................................. 269,171
Trade accounts receivables ........................................... 116,910
Loan receivable -- employees ......................................... 46,982
Dividend receivable -- workmen's compensation ........................ 19,556
Deferred tax assets .................................................. 83,565
Prepaid assets ....................................................... 189,647
-----------
Total Current Assets .............................................. 2,025,831
-----------
Property and Equipment, net of accumulated depreciation ............... 26,790,945
-----------
Other Assets:
Goodwill ............................................................. 100,351
Deferred charges, net of amortization ................................ 355,003
Deferred tax asset, net of deferred tax liability of $190,482......... 119,605
Security deposits .................................................... 10,572
-----------
Total Other Assets ................................................ 585,531
-----------
Total Assets ...................................................... $29,402,307
===========
</TABLE>
(continued)
F-90
<PAGE>
LEISURE COMPLEXES, INC.
BALANCE SHEET
DECEMBER 31, 1996
(CONTINUED)
<TABLE>
<S> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Cash overdraft ................................................ $ 126,732
Accounts payable & accrued expenses and taxes payable ......... 1,819,952
Construction related payables -- Sports Plus .................. 1,335,125
Accrued interest payable ...................................... 458,272
Mortgages payable ............................................. 789,736
Notes payable ................................................. 536,038
Line of credit -- State Bank of Long Island ................... 100,000
Line of credit -- Chase Manhattan Bank ........................ 400,000
Due to affiliates ............................................. 92,280
League deposits ............................................... 205,682
Tournaments & exchanges ....................................... 153,396
ProAm tournament advance deposits ............................. 159,593
Vending & amusement games, advance deposits ................... 67,437
------------
Total Current Liabilities .................................. 6,244,243
------------
Long-term Liabilities:
Mortgages payable ............................................. 9,332,081
Notes payable ................................................. 1,745,194
Construction loan ............................................. 10,550,000
Equipment loan ................................................ 3,700,000
Loan guarantee fee ............................................ 90,553
Notes payable -- shareholders -- Series I ..................... 64,487
Notes payable -- shareholders -- Series II .................... 450,000
Other shareholder loans ....................................... 1,257,000
Sports Plus associated bank fees & costs payable .............. 712,500
------------
Total Long-term Liabilities ................................ 27,901,815
------------
Total Liabilities .......................................... 34,146,058
------------
Redeemable Preferred stock ..................................... 1,350,000
------------
Shareholders' Equity (Deficit):
Capital stock ................................................. 50,000
Additional paid in capital .................................... (3,810,689)
Accumulated deficit ........................................... (2,333,062)
------------
Total Shareholders' Equity (Deficit) ....................... (6,093,751)
------------
Total Liabilities & Shareholders' Equity (Deficit) ......... $ 29,402,307
============
</TABLE>
See Notes to Financial Statements.
F-91
<PAGE>
LEISURE COMPLEXES, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Sales ...................................................... $ 14,092,648
Operating Expenses ......................................... 11,972,573
Selling, General and Administrative Expenses ............... 1,631,683
------------
Income from Operations ..................................... 488,392
Interest Expense ........................................... (1,974,719)
Other Income ............................................... 419,888
------------
(Loss) before (Provision) Benefit for Income Taxes ......... (1,066,439)
(Provision) Benefit for Income Taxes -- Deferred ........... 203,170
------------
Net (Loss) ................................................. (863,269)
Accumulated Deficit -- Beginning of Year ................... (1,469,793)
------------
Accumulated Deficit -- End of Year ......................... $ (2,333,062)
============
</TABLE>
See Notes to Financial Statements.
F-92
<PAGE>
LEISURE COMPLEXES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Cash Flows From Operating Activities:
Net (Loss) ...................................................................... $ (863,269)
Adjustments to reconcile net (loss) to net cash provided by operating activities:
Depreciation and amortization charges ......................................... 1,510,815
Provision/(benefit) for income taxes .......................................... (203,170)
(Increase) decrease in assets:
Trade accounts receivable .................................................... (74,426)
Dividend receivable -- workmens compensation ................................. 6,169
Loan receivables -- employee ................................................. (5,589)
Product and beverage inventory ............................................... (39,614)
Insurance reimbursement affiliate ............................................ 3,409
Due to affiliates ............................................................ 148,931
Prepaid real estate taxes and tax escrow ..................................... 307
Prepaid assets ............................................................... (17,225)
Security deposits ............................................................ (112)
Deferred charges ............................................................. (14,220)
Increase (decrease) in liabilities:
Accounts and accrued expenses and taxes payable .............................. 1,369,008
Accrued interest payable ..................................................... 316,720
League deposits .............................................................. (43,501)
Tournaments and exchanges .................................................... 83,104
Pro Am tournament advance deposits ........................................... (101,933)
Vending and amusement games, advance deposits ................................ 65,436
-------------
Cash Provided By Operating Activities ...................................... 2,140,840
-------------
Cash Flows From Investing Activities:
Capital improvements and purchases of fixtures & equipment ...................... (13,237,130)
-------------
Cash Flows From Financing Activities:
Proceeds from Chemical Bank construction loan ................................. 6,488,073
Proceeds from Chemical Bank -- equipment loan ................................. 3,313,784
Additions to shareholders loans payable ....................................... 1,252,000
Additional paid in capital due to officer stock agreement compensation plan ... 33,000
Proceeds from State Bank of Long Island -- term loan/line of credit ........... 600,000
Proceeds from State Bank of Long Island -- line of credit ..................... 100,000
Issuance of redeemable preferred stock ........................................ (1,300,000)
Proceeds from preferred stock issuance ........................................ 1,300,000*
Proceeds from Chemical Bank -- line of credit ................................. 1,600,000
Aggregate principal repayments on mortgages/notes payable ..................... (1,185,040)
Repayment of line of credit -- Chemical Bank .................................. (1,600,000)
Partial repayment of loan to shareholder ...................................... (70,000)
Payment of commitment fee ..................................................... (25,000)
-------------
Cash Provided From Financing Activities ....................................... 10,506,817
-------------
(Decrease) in Cash ............................................................ (589,473)
Cash and Cash Equivalents -- Beginning of Year ................................... 462,741
-------------
Cash and Cash Equivalents -- End of Year ...................................... $ (126,732)
=============
Supplemental Disclosure of Cash Flow Information
Cash Paid for Interest ........................................................ $ 1,974,719
=============
</TABLE>
F-93
<PAGE>
- ------------
Supplemental Disclosure of Non Cash Investing and Financing Activities:
* In January 1997, a shareholder elected to convert their $50,000 Series II
Note to the Company's new issuance of Convertible Redeemable Preferred
Stock. This conversion is reflected at December 31, 1996.
Upon the closing on August 8, 1996 of the sports and entertainment loan with
Chase Manhattan, Chase Manhattan is deemed to have earned and therefore the
Company has accrued $87,500 in commitment and success fees.
See Notes to Financial Statements.
F-94
<PAGE>
LEISURE COMPLEXES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In previous years, the Company prepared its financial statements using the
income tax basis of accounting. This basis differed from generally accepted
accounting principles (GAAP) primarily because the Company revalued and stepped
up the basis of certain assets over their historical cost when they were
contributed in the tax-free reorganization of February 1, 1991. For the year
ended December 31, 1996, the Company has changed its basis of presentation to
reflect the financial statements in accordance with GAAP.
All interdivision accounts and transactions have been eliminated.
Organization
Leisure Complexes, Inc. ("the Company") formerly known as Melville Bowling
Center, Inc. (prior to the February 1, 1991 merger) was incorporated May 1976
under the laws of the State of New York and elected Small Business Corporation
("S" Corporation) status for both Federal and New York State income tax
purposes (see Note 4). The Company 's bowling division operates seven (7)
facilities on Long Island.
On July 1, 1996, the Company commenced partial business operations at
Sports Plus(TM). Sports Plus(TM) is a Company created concept that operates a
year round indoor family oriented active leisure and recreation center designed
to provide a wide variety of entertainment for all ages. The facilities include
bowling, ice skating, lasertag, virtual reality interactive sports, motion
theater, restaurant, "Edutainment" center for tiny tots, lounge, snack bar,
sports bar, and event center that will be used for large meetings, corporate
gatherings, concerts, trade shows and conventions. The Company also manages an
18 hole executive golf course, driving range, and club house that is adjacent
to the Sports Plus facility.
Capital Structure
Redeemable Preferred Stock
On October 25, 1996 and again in April 1997, the Company released and
issued a Private Placement Memorandum Offering to raise $6,000,000 of
additional capital by issuing $100 Convertible Redeemable Preferred Stock.
As of December 31, 1996, the Company raised $1,300,000 from this offering.
The holder of the Company's preferred stock will be entitled to receive
dividends at the rate of $20 per share accruing annually and warrants that
will be valued based upon a future initial public offering of $30,000 for
each $100,000 unit of preferred stock. The warrants will be exercisable and
convertible at 120% of the IPO price. The Company presently intends to pay
an annual dividend on its Cumulative, Non-Voting, Non-Participating,
Convertible Redeemable Preferred Stock at the rate of $8 per share. It is
the present intent of the Company that the remaining $12 dividend per share
will accrue on the books of the Company and be paid in full, without
interest, not earlier than any conversion or redemption of such preferred
stock. If the Company calls the preferred stock prior to the IPO, the
shareholder is entitled to an additional $15 per share for each share
redeemed in addition to the call price (see Note 7).
At December 31, 1996, dividends in arrears on the $20 cumulative
redeemable preferred stock amounted to $19,239. This was paid upon
liquidation of the cumulative redeemable preferred stock on July 24, 1997
when the Company was acquired (see Note 7).
Common Stock
In March 1997, the Board of Directors authorized a reclassification of
the shares of no par value common stock of the Company at a value of
$500,530, to common stock having a par value of $.01
F-95
<PAGE>
LEISURE COMPLEXES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
per share, thus shares of common stock increased changing the number of
shares authorized to 10,000,000, and issued and outstanding from 400 shares
to 5,000,000 shares. This transaction was accounted for by issuing
5,000,000 shares of $.01 par value of common stock by increasing additional
paid in capital in the amount of $450,530. This transaction is reflected in
these financial statements.
Since the Company plans to issue Convertible Redeemable Preferred Stock
in connection with their private placement memorandum offering, they have
reserved 1,409,524 shares as a result of the reclassification for issuance
upon the sale and conversion of the maximum amount of the Convertible
Redeemable Preferred Stock to be sold by this offering. The determination
of how many shares need to be reserved is based upon managements and their
placement and investment advisors, Josephthal Lyon & Ross, Inc., best
estimate of what the Company's initial public offering (IPO) will price out
at.
Concentration of Credit Risk
At December 31, 1996, the Company had cash or cash equivalents
(short-term, highly liquid investments readily convertible into cash with a
maturity of three months or less) in excess of federally insured limits of
$100,000.
Income Taxes
Effective October 1, 1996, the Company elected to revoke their small
business "S" corporation status and will thereafter be treated and taxed as a
"C" corporation. Accordingly, a benefit for federal and state income taxes has
been provided for in accordance with FASB 109 by the Company for the three
month period ended December 31, 1996 that the Company operated as a "C"
corporation.
Inventory
The Company maintains inventory on machine parts and replacements and
redemption prizes. Additionally, the Company maintains inventory for their
food, beverage, liquor and beer purchases.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Employee Benefit Plan
The Company has a defined contributions plan (401-K) covering all
employees who meet the eligibility requirements. To be eligible, an employee
must be a full time employee who has one year of service and must be age
twenty-one or older. The Company contributes fifty percent (50%) of the first
six percent (6%) of base compensation that a participant contributes to the
plan through their elected deferrals. Additional amounts may be contributed at
the discretion of Company's Board of Directors.
2. REAL PROPERTY, FIXED ASSETS AND EQUIPMENT AT DECEMBER 31, 1996
Property and equipment are stated at cost. The costs of additions and
betterments are capitalized and expenditures for repairs and maintenance are
expensed in the period incurred. Assets placed into service during and after
1981 use either the straight line or accelerated methods for depreciation.
F-96
<PAGE>
LEISURE COMPLEXES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. REAL PROPERTY, FIXED ASSETS AND EQUIPMENT AT DECEMBER 31, 1996 (CONTINUED)
<TABLE>
<CAPTION>
TOTAL
--------------
<S> <C>
Building ....................................... $20,423,393
Bldg. improvements ............................. 2,553,703
Equipment ...................................... 14,798,522
Furniture & Fixtures ........................... 840,274
Leasehold Improvements ......................... 64,512
Site Development ............................. 36,160
Other Assets ................................. 134,256
-----------
38,850,820
Land ........................................ 884,305
-----------
Total before depreciation .................... 39,735,125
Less: accumulated depreciation ............... 12,944,180
-----------
Total assets -- net of depreciation .......... $26,790,945
===========
</TABLE>
3. MORTGAGES AND NOTES PAYABLE
Long term debt at December 31, 1996 consists of the following:
<TABLE>
<CAPTION>
PRINCIPAL BALANCE
-----------------------------
CURRENT NON CURRENT INTEREST MATURITY
LENDER PROPERTY MATURITY MATURITY RATE DATE
- ------ -------- -------- -------- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Mortgage --
Chase Manhattan - I Melville
Bayshore $ 252,704 $ 3,269,954 11.42% August 17, 2000
Consolidated Mortgage --
Chase Manhattan - II Sayville
Shirley
Centereach 220,360 3,285,763 10.57% August 14, 2001
Consolidated Mortgage
Chase Manhattan Syosset 156,672 1,736,368 P+1.5% January 1, 2009
Note Payable -- Junior
Mortgages -- 160,000 1,039,996 P+1.5% June 1, 2004
---------- -----------
789,736 9,332,081
---------- -----------
Chase Manhattan -- term
loan Syosset 247,200 659,240 P+1.0% August 31, 2000
Note Payable -- Property
Acquisition --
Shareholder Bayshore 68,838 297,621 9.25% February 1, 2001
State Bank -- term loan Sports Plus 220,000 788,333 P+1.5% August, 2001
---------- -----------
536,038 1,745,194
---------- -----------
Total $1,325,774 $11,077,275
========== ===========
</TABLE>
F-97
<PAGE>
LEISURE COMPLEXES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. MORTGAGES AND NOTES PAYABLE (CONTINUED)
The future principal maturities as of the above date are as follows:
<TABLE>
<CAPTION>
CONSOLIDATED MORTGAGE
-----------------------------------
YEAR END CHASE MANHATTAN CHASE MANHATTAN
DECEMBER 31 TOTAL I II
- ------------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
1997 .............. $ 1,325,774 $ 252,704 $ 220,360
1998 .............. 1,387,288 283,122 244,814
1999 .............. 1,455,824 317,202 271,982
2000 .............. 3,764,065 2,669,630 302,165
2001 .............. 2,960,422 -- 2,466,802
Thereafter ........ 1,509,676 -- --
----------- ---------- ----------
$12,403,049 $3,522,658 $3,506,123
=========== ========== ==========
<CAPTION>
CHASE MANHATTAN
SYOSSET ACQUITION
------------------------
YEAR END NOTE PAYABLE SPORTS PLUS
DECEMBER 31 MORTGAGES ACQUISITION MORTGAGE TERM LOAN TERM LOAN
- ------------------- -------------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
1997 .............. $ 160,000 $ 68,838 $ 156,672 $247,200 $ 220,000
1998 .............. 160,000 75,480 156,672 247,200 220,000
1999 .............. 160,000 82,768 156,672 247,200 220,000
2000 .............. 160,000 90,758 156,672 164,840 220,000
2001 .............. 160,000 48,615 156,672 -- 128,333
Thereafter ........ 399,996 -- 1,109,680 -- --
---------- -------- ---------- -------- ----------
$1,199,996 $366,459 $1,893,040 $906,440 $1,008,333
========== ======== ========== ======== ==========
</TABLE>
Consolidated Mortgage -- Chase Manhattan - I
On August 17, 1990, the Company entered into a loan agreement with Chase
Manhattan (Chase) (formerly Chemical Bank) to increase Melville's existing
mortgage of $841,625. At this closing, Chase Manhattan loaned to Bayshore Bowl,
and to Melville, an additional sum of $3,758,375. The additional sum was
consolidated with Melville's existing mortgage to Chemical to create a single
mortgage lien of $4,600,000.
Bayshore's portion of the mortgage with Chase was $3,200,000, the balance
of $1,400,000 was attributable to Melville.
The mortgage loan bears interest at a fixed rate of 11.42%. Commencing
September 17, 1990 payments of principal and interest are due and monthly
thereafter in the amount of $53,503 to be applied first against interest and
the balance against principal. The entire principal balance is due and payable
August 17, 2000.
Consolidated Mortgage -- Chase Manhattan - II
On August 14, 1991, the Company refinanced with Chase Manhattan existing
mortgages held on the following properties:
<TABLE>
<CAPTION>
PROPERTY MORTGAGE HELD BY
-------- ------------------
<S> <C>
Shirley Lanes .................... Marine Midland
Sayville Bowling Center .......... Southhold Savings
Recreational Concepts ............ Marine Midland
Recon Associates ................. Marine Midland
</TABLE>
The new consolidated mortgage with Chase Manhattan as originally issued
aggregated $4,359,000 and is in addition to the previous $4,600,000 mortgage
that was executed August 17, 1990 by the Company.
The mortgage bears interest at a fixed rate of 10.57% per annum commencing
September 14, 1991 with payments of principal and interest due monthly in the
amount of $48,373. The mortgage is based upon a fifteen year amortization
payout with a ten year balloon that calls for the entire principal balance to
be due and payable on August 14, 2001.
Stock Buyout Acquisition
On August 16, 1990, the then principal shareholders of the former Company,
Arthur J. Calace, Jr. and Jay Orloff, reached an agreement whereby Calace
acquired Orloff's ownership interest in the Company and its former affiliates.
F-98
<PAGE>
LEISURE COMPLEXES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. MORTGAGES AND NOTES PAYABLE (CONTINUED)
The consideration paid for this acquisition was $2,800,000. Upon the
execution of the agreement, $500,000 was paid to Orloff and an installment note
in the amount of $2,300,000 was issued by Calace to Orloff. This note was
subsequently refinanced on May 19, 1994 and incorporated by Chase Manhattan as
junior debt (see Note 3- Junior Mortgage).
Subsequent to the plan of reorganization (see Note 1), Mr. Calace assigned
both his interest acquired from Jay Orloff and the resulting obligation of
$2,300,000 to the Company.
Syosset Bowl Acquisition and Financing
On April 14, 1993, the Company purchased for $2,000,000 the real property
that was previously known as Syosset Bowl. The real property purchased was a
vacant building that occupied one parcel of land.
In connection with this acquisition, the Company obtained the necessary
financing from its shareholders', Chase Manhattan and current operations. The
funds obtained for this acquisition and improvement were received from the
following sources:
<TABLE>
<S> <C> <C>
Shareholders' Series II -- Notes Payable ......... $ 500,000
Chase Manhattan Acquisition Mortgage ............. $1,612,500
Chase Manhattan Construction Loan ................ 737,500 2,350,000
----------
Chase Manhattan Equipment Term Loan .............. 1,450,000
----------
Total Financing Obtained ...................... $4,300,000
==========
</TABLE>
The Shareholders Series II notes payable of $450,000 bear interest at ten
percent (10%) per annum payable quarterly. The notes mature and are payable in
full on January 1, 1998. The series of notes consists of five (5) separate
notes payable to five different shareholders ranging from $25,000 to $300,000
per note. One note, in the amount of $50,000 was converted to Convertible
Redeemable Preferred Stock subsequent to the balance sheet date. However, the
conversion is reflected at December 31, 1996.
On January 20, 1994, Chase Manhattan consolidated its original acquisition
mortgage of $1,612,500 and construction loan of $737,500 with the Company into
a single first mortgage of $2,350,000. This new consolidated first mortgage
bears interest at the rate of one and one half percent (1 1/2%) over the Chase
Manhattan prime rate. The principal is payable in 180 equal monthly
installments of $13,056 commencing on February 1, 1994. The entire principal
balance is due and payable January 1, 2009.
The Chase Manhattan Term loan of $1,450,000 was used to finance the
purchase of equipment. The loan bears interest at one and one half percent (1
1/2%) per annum above prime and is amortized over seven (7) years according to
the following amortization schedule:
<TABLE>
<S> <C>
-- Twenty four (24) equal payments commencing on September 30, 1993 of
$8,915 and $ 213,960
-- Fifty nine (59) equal payments commencing on September 30, 1995 of
$20,600 and 1,215,400
-- One final principal payment due on August 31,2000 of 20,640
----------
$1,450,000
==========
</TABLE>
F-99
<PAGE>
LEISURE COMPLEXES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. MORTGAGES AND NOTES PAYABLE (CONTINUED)
Junior Mortgage
On May 19, 1994, the Company entered into a new loan agreement with Chase
Manhattan to refinance the "Orloff" acquisition note for $1,600,000. The loan
bears interest at the floating rate of 1.5% over the Bank's prime rate. The
payments of principal are fixed in the amount of $13,334 and begin on July 1,
1994. The entire balance of the mortgage is due with accrued interest on June
1, 2004.
Line of Credit
The Company had established a line of credit at Chase Manhattan for funds
up to $400,000.
Loan Covenants
As a condition for providing the Company with the long-term financing
detailed above, Chase Manhattan has included in their mortgage and note
agreements certain loan covenants. These loan covenants specify certain
financial statement amounts and ratios that are to be maintained by the
Company. At December 31, 1996, the Company is not in compliance with the loan
covenants. However, the Company did receive a waiver from Chase Manhattan
regarding the loan covenants.
As an additional condition for providing the Company with the long term
financing, Chase Manhattan requested that Mr. Calace in addition to the Company
provide Chase Manhattan with his personal guarantee on all existing loans and
mortgages. In consideration for this guarantee the Company has agreed to accrue
a loan guarantee fee at a rate of one quarter of one percent (1/4%) per annum
on the average outstanding principal balance each year, payable to Mr. Calace.
Since this fee is not being paid currently, the Company has recorded and
recognized the obligation.
Sports Plus Construction and Equipment Loan
In August 1996, the Company executed with Chase Manhattan an extension and
modification agreement on their existing loan for an additional $1,250,000
bringing the total construction financing commitment by Chase to $14,250,000.
On August 25, 1995 the Company entered into a loan agreement with Chase
Manhattan to finance the construction and purchase of equipment for the
development of their Sports Plus project (see Note 6). The loan is secured by a
commercial mortgage for an amount not to exceed $14,250,000.
Both the construction and equipment loans bear interest at the rate of 2%
over the prime lending rate and is payable monthly.
Construction is to be completed within eighteen months of the closing of
this loan. At the time of completion Chase Manhattan will convert this
construction loan and the equipment loan to permanent financing in accordance
with the mortgage commitment.
The permanent loan will bear interest at a rate equal to 2% plus the prime
rate payable monthly. The loan will be amortized as follows:
o During the first two (2) year term of the permanent loan, twenty-four
(24) consecutive monthly principal payments based upon a nineteen (19)
year amortization rate commencing on the first day of the month after
the conversion from a construction (interest only) loan to a permanent
loan.
o During the last eight (8) year term of the permanent loan, ninety-five
(95) consecutive monthly principal payments based upon a fourteen and a
third (14 1/3) year amortization rate.
o One final principal payment equal to the unpaid principal plus the
accrued but unpaid interest.
F-100
<PAGE>
LEISURE COMPLEXES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. MORTGAGES AND NOTES PAYABLE (CONTINUED)
The loan is subject to various fees of which some were paid on exercising
the commitment, some at the time of closing, and the balance to be paid
over four years. These fees aggregate $1,127,500. In addition to the
corporate guarantee, collateral, and security interests assigned, the
loan is also personally guaranteed by Mr. Calace, the Company's chairman
and largest single shareholder.
Additionally, Chase Manhattan required and received from the
shareholders' of the Company their stock pledge as collateral for
fifty-one percent (51%) of the Company's stock.
This loan like previous existing loans with Chase Manhattan is also
subject to certain loan covenants, financial ratios and minimum balances to be
maintained.
Sports and Entertainment Facility -- Term Loan -- State Bank of Long Island
In April, 1996, the Company increased their line of credit by $100,000
from $1,000,000 to $1,100,000 and converted the line of credit to a sixty (60)
month term loan. The payments of principal are fixed in the amount of $18,333
and began in August 1996. The loan is a five (5) year term loan payable at an
interest rate of 1.5% over the bank's prime rate.
State Bank of Long Island -- Line of Credit
On July 29, 1996, the Company established a line of credit and borrowed
the maximum funds of $100,000. These funds are to be used for the day to day
operation of the facility. The line bears interest at the rate of 1% over the
Bank's prime rate. The line of credit is due and payable on August 29, 1997.
4. INCOME TAXES
As of December 31, 1996, the Company adopted FASB 109 since it now reports
and files as a "C" corporation. As a result of adopting FASB 109, the Company
has recognized deferred tax assets that are deductible temporary differences
which aggregate to $393,652, primarily related to the basis of fixed assets and
deferred tax liabilities for taxable temporary differences which aggregate to
$190,482, primarily related to depreciation. At December 31, 1996, the Company
had a net operating loss (NOL) in the amount of $141,662 which will be used to
offset future taxable income. This NOL will expire in the year 2011.
5. COMMITMENTS:
Rocky Point Bowl
On July 1, 1989, the Company extended its existing lease agreement with In
Towne Shopping Center Co. to run through June 30, 2009. The Company had
originally entered into a lease agreement with In Towne Shopping Center Co.,
Inc., on March 30, 1973 for the rental of 30,880 square feet to be used for
their bowling operations. The original lease agreement was for a twenty year
period with escalating base rents and cost of living index adjustments
commencing June 1, 1976.
During the period ended December 31, 1996, rental expense under the
long-term lease obligation was $135,855.
F-101
<PAGE>
LEISURE COMPLEXES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS: (CONTINUED)
Future obligations over the primary terms of the Company's long-term
leases as of December 31, 1996 are:
<TABLE>
<CAPTION>
AMOUNT
PER ANNUM* TOTAL
------------ -------------
<S> <C> <C>
7/1/94 -- 6/30/99 ......... $100,000 $ 250,000
7/1/99 -- 6/30/04 ......... 110,000 550,000
7/1/04 -- 6/30/09 ......... 120,000 600,000
-------- ----------
$330,000 $1,400,000
======== ==========
</TABLE>
- ----------
* Note -- These amounts are exclusive of any future cost of living index
adjustments.
Stony Brook Bowl
The Company entered into a lease agreement with S&E Realty on June 1, 1976
for the rental of 34,500 square feet to be used for their bowling operations.
The original lease agreement was for a twenty year period with escalating base
rents commencing June 1, 1976.
In August, 1996, the Company did not renew their lease with S&E Realty
when it expired. The Company instead moved the business into the new Sports
Plus facility location (Lake Grove Bowl).
During the period ended December 31, 1996, rental expense under the
long-term lease obligation was $105,000.
Sports Plus
The Company entered into a lease agreement with a related party (Three
Grove Partners) to lease the land on which the Sports Plus facility is located.
The lease is for a term of 48 years with annual base rents of $256,000, payable
in equal monthly installments of $21,334. In addition to the base rent, the
Company shall pay an additional 5% on the amount of revenues earned in excess
of the Company's gross operating income base level of $8,000,000 in any
calendar year. As a condition to this lease, Three Grove Partners agreed to
subordinate their land value to Chase Manhattan Bank for up to $14,250,000.
During the period ended December 31, 1996, the rental expense under the
above long-term lease obligation was $96,003.
Private Placement Agreement
The Company signed an agreement with Josephthal Lyon & Ross Incorporated
(Josephthal) to act as their exclusive placement agent to sell $4,000,000 of
its preferred stock subscriptions. Josephthal will be paid at each closing of
sales a cash commission of eight percent (8%) of the subscription price of each
share sold by or through Josephthal. This agreement was subsequently canceled
on June 10, 1997.
Guarantee
Barclays Bank, in exchange for releasing Leisure's corporate guarantee on
their mortgage with Three Grove Partners (a related party), agreed to release
their first lien and priority position to Chase Manhattan Bank on the 16 acre
parcel of land that Three Grove Partners owns and leases to Sports Plus and
Leisure Complexes, Inc. under a long term ground lease.
6. TRANSACTIONS WITH RELATED PARTIES
In the normal course of business, receivables, payables, revenues, and
expenses have been, and will continue to be generated from transactions with
related parties. The Company had entered into various agreements with a number
of entities controlled by, and or affiliated with, its shareholders and
officers.
F-102
<PAGE>
LEISURE COMPLEXES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
One such agreement calls for a management fee to be charged by the Company
to their affiliates, The Ponds. This management fee is being accrued at a rate
of three percent (3%) per annum of their total gross revenues.
7. SUBSEQUENT EVENT
In May 1997, the catering facility of a related party, Three Grove
Partners, transferred its kitchen equipment and related loan with Suffolk
County National Bank in the amount of $207,722.
In June 1997, prior to canceling their agreement with Josephthal, the
Company raised an additional $300,000, exclusive of selling commission costs,
from the private placement memorandum offering (see Note 1).
Sale of Business (Unaudited)
On July 24, 1997, the Company and its shareholders agreed to sell its
business pursuant to an acquisition agreement with Family Golf Center, Inc.
("FGCI") that will be treated as a tax free merger to the existing Company
shareholders.
In exchange for the Company's net assets and continuing business
operations, FGCI assumed all existing debt and liabilities of the Company and
issued stock of 509,090 of FGCI to the existing shareholders of the Company.
F-103
<PAGE>
To the Shareholders of
Leisure Complexes, Inc.:
We have compiled the accompanying balance sheet of Leisure Complexes, Inc.
as of June 30, 1997 and the related statements of income and accumulated
deficit and cash flows for the six month interim period then ended, in
accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying financial statements and accordingly, do not express
an opinion or any other form of assurance on them.
As discussed in Note 7 to the financial statements, subsequent to June 30,
1997, the Company was acquired.
/s/ Feldman Gutterman Weinberg & Co.
August 5, 1997
Manhasset, New York
F-104
<PAGE>
LEISURE COMPLEXES, INC.
BALANCE SHEET
AT JUNE 30, 1997
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash in bank ......................................................... $ 601,005
Parts, product & beverage inventory .................................. 275,472
Trade accounts receivables ........................................... 136,643
Dividend receivable -- workmen's compensation ........................ 23,992
Deferred tax assets .................................................. 83,565
Prepaid real estate taxes ............................................ 183,209
Prepaid assets ....................................................... 170,892
-----------
Total Current Assets ............................................... 1,474,778
-----------
Property and Equipment, net of accumulated depreciation ............... 26,574,254
-----------
Other Assets:
Goodwill ............................................................. 100,351
Deferred charges, net of amortization ................................ 382,459
Deferred tax asset, net of deferred tax liability of $224,311......... 85,776
Security deposits .................................................... 10,572
-----------
Total Other Assets ................................................. 579,158
-----------
Total Assets ....................................................... $28,628,190
===========
</TABLE>
(Continued)
F-105
<PAGE>
LEISURE COMPLEXES, INC.
BALANCE SHEET
AT JUNE 30, 1997
(CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C>
Current Liabilities:
Accounts payable & accrued expenses and taxes payable ................ $ 1,947,507
Construction related payables -- Sports Plus ......................... 230,310
Accrued interest payable ............................................. 474,735
Mortgages payable .................................................... 789,736
Notes payable ........................................................ 536,038
Suffolk County National Bank ......................................... 62,521
Line of credit -- State Bank of Long Island .......................... 100,000
Line of credit -- Chase Manhattan Bank ............................... 400,000
Loan payable -- Family Golf Centers, Inc ............................. 500,000
Due to affiliates .................................................... 303,344
League deposits ...................................................... 164,511
Tournaments & exchanges .............................................. 150,613
Vending & amusement games, advance deposits .......................... 34,783
------------
Total Current Liabilities .......................................... 5,694,098
------------
Long-term Liabilities:
Mortgages payable .................................................... 9,009,309
Notes payable ........................................................ 1,552,794
Suffolk County National Bank ......................................... 137,768
Construction loan .................................................... 10,503,125
Equipment loan ....................................................... 3,684,375
Loan guarantee fee ................................................... 154,204
Notes payable -- shareholders -- Series I ............................ 64,487
Notes payable -- shareholders -- Series II ........................... 450,000
Other shareholder loans .............................................. 1,257,000
Sports Plus associated bank fees & costs payable ..................... 712,500
------------
Total Long-term Liabilities ........................................ 27,525,562
------------
Total Liabilities .................................................. 33,219,660
------------
Redeemable Preferred stock (net of issuance costs of $310,539)......... 1,439,461
------------
Shareholders' Equity (Deficit):
Capital stock ........................................................ 50,000
Additional paid in capital ........................................... (3,810,689)
Accumulated deficit .................................................. (2,270,242)
------------
Total Shareholders' Equity (Deficit) ............................... (6,030,931)
------------
Total Liabilities & Shareholders' Equity (Deficit) ................. $ 28,628,190
============
</TABLE>
See Accountants' Compilation Report and Notes to Financial Statements
F-106
<PAGE>
LEISURE COMPLEXES, INC.
STATEMENT OF INCOME AND ACCUMULATED DEFICIT
FOR THE SIX MONTH INTERIM PERIOD ENDED JUNE 30, 1997
<TABLE>
<S> <C>
Sales ................................................ $ 10,558,710
Operating Expenses ................................... 8,209,432
Selling, General and Administrative Expenses ......... 1,050,802
------------
Income from Operations ............................... 1,298,476
Interest Expense ..................................... (1,405,513)
Other Income ......................................... 203,686
------------
Income before (Provision) for Income Taxes ........... 96,649
(Provision) for Income Taxes -- Deferred ............. (33,829)
------------
Net Income ........................................... 62,820
Accumulated Deficit -- Beginning of Period ........... (2,333,062)
------------
Accumulated Deficit -- End of Period ................. $ (2,270,242)
============
</TABLE>
See Accountants' Compilation Report and Notes to Financial Statements.
F-107
<PAGE>
LEISURE COMPLEXES, INC.
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<S> <C>
Cash Flows From Operating Activities:
Net Income ...................................................................... $ 62,820
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization charges ......................................... 987,716
(Provision) for income taxes .................................................. 33,829
(Increase) decrease in assets:
Cash escrow released for operations .......................................... 1,300,000
Trade accounts receivable .................................................... (19,733)
Dividend receivable -- workmen's compensation ................................ (4,436)
Loan receivables -- employee ................................................. 46,982
Product and beverage inventory ............................................... (6,301)
Prepaid real estate taxes and tax escrow ..................................... (183,209)
Prepaid assets ............................................................... 18,756
Deferred charges ............................................................. (123,463)
Increase (decrease) in liabilities:
Accounts and accrued expenses and taxes payable .............................. 191,219
Accrued interest payable ..................................................... 16,463
Due to affiliates ............................................................ 211,064
League deposits .............................................................. (41,171)
Tournaments and exchanges .................................................... (2,783)
Pro Am tournament advance deposits ........................................... (159,593)
Vending and amusement games, advance deposits ................................ (32,654)
------------
Cash Provided By Operating Activities ........................................ 2,295,506
------------
Cash Flows From Investing Activities:
Capital improvements and purchases of fixtures & equipment ...................... (1,834,758)
------------
Cash Flows From Financing Activities:
Proceeds from State Bank of Long Island -- line of credit ....................... 400,000
Aggregate principal repayments on mortgages/notes payable ....................... (377,400)
Advance from Family Golf Center, Inc ............................................ 500,000
Costs associated with issuance of preferred stock ............................... (255,611)
------------
Cash Provided From Financing Activities ....................................... 266,989
------------
Increase in Cash .............................................................. 727,737
Cash -- Beginning of Year ..................................................... (126,732)
------------
Cash -- End of Year ........................................................... $ 601,005
============
Supplemental Disclosure of Cash Flow Information
Cash Paid for Interest .......................................................... $ 1,405,513
============
Supplemental Disclosure of Non Cash Investing and Financing Activities:
</TABLE>
* In January 1997, a shareholder elected to convert their $50,000 Series II
Note to the Company's new issuance of Convertible Redeemable Preferred
Stock. This conversion is reflected at December 31, 1996.
Upon the closing on August 8, 1996 of the sports and entertainment loan with
Chase Manhattan, Chase Manhattan is deemed to have earned and therefore the
Company has accrued $87,500 in commitment and success fees.
See Accountants' Compilation Report and Notes to Financial Statements.
F-108
<PAGE>
LEISURE COMPLEXES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying interim financial statements represent a six month period
of operations. The intended purpose of these financial statements is to assist
the management and owners of Leisure Complexes, Inc. in evaluating the six
month period ended June 30th.
In the opinion of the management of the Company, the financial statements
include all adjustments consisting of only normal recurring adjustments
necessary to fairly present the results for the interim period to which these
financial statements relate.
All interdivision accounts and transactions have been eliminated.
ORGANIZATION:
Leisure Complexes, Inc. ("The Company") formerly known as Melville Bowling
Center, Inc. (prior to the February 1, 1991 merger) was incorporated May 1976
under the laws of the State of New York and elected Small Business Corporation
("S" Corporation) status for both Federal and New York State income tax
purposes (see Note 4).
On July 1, 1996 the Company commenced partial business operations at
Sports Plus (Trade Mark) . Sports Plus (Trade Mark) is a Company created
concept that operates a year round indoor family oriented active leisure and
recreation center designed to provide a wide variety of entertainment for all
ages. The facilities include bowling, ice skating, lasertag, virtual reality
interactive sports, motion theater, restaurant, "Edutainment" center for tiny
tots, lounge, snack bar, sports bar, and event center that will be used for
large meetings, corporate gatherings, concerts, trade shows and conventions.
The Company also manages an 18 hole executive golf course, driving range, and
club house that is adjacent to the Sports Plus (Trade Mark) facility.
CAPITAL STRUCTURE:
Redeemable Preferred Stock:
On October 25, 1996 and again in April 1997, the Company released and
issued a Private Placement Memorandum Offering to raise $6,000,000 of
additional capital by issuing $100 Convertible Redeemable Preferred Stock. As
of June 30, 1997, the Company raised $1,750,000 in gross proceeds from this
offering, exclusive of selling commissions and offering costs.
The holder of the Company's preferred stock will be entitled to receive
dividends at the rate of $20 per share accruing annually and warrants that will
be valued based upon a future initial public offering of $30,000 for each
$100,000 unit of preferred stock. The warrants will be exercisable and
convertible at 120% of the IPO price. The Company presently intends to pay an
annual dividend on its Cumulative, Non-Voting, Non-Participating, Convertible
Redeemable Preferred Stock at the rate of $8 per share. It is the present
intent of the Company that the remaining $12 dividend per share will accrue on
the books of the Company and be paid in full, without interest, not earlier
than any conversion or redemption of such preferred stock. When the Company
calls the preferred stock prior to the IPO, the shareholder is entitled to an
additional $15 per share for each share redeemed in addition to the call price
(see Note 7).
At June 30, 1997 dividends in arrears on the $20 cumulative redeemable
preferred stock amounted to $164,294. This was paid upon liquidation of the
cumulative redeemable preferred stock on July 24, 1997 when the Company was
acquired (see Note 7).
COMMON STOCK:
In March 1997, the Board of Directors authorized a reclassification of the
shares of no par value common stock of the Company at a value of $500,530, to
common stock having a par value of $.01 per share, thus shares of common stock
increased changing the number of shares authorized to 10,000,000,
F-109
<PAGE>
LEISURE COMPLEXES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
and issued and outstanding from 400 shares to 5,000,000 shares. This
transaction was accounted for by issuing 5,000,000 shares of $.01 par value of
common stock by increasing additional paid in capital in the amount of
$450,530. This transaction is reflected in these financial statements.
Since the Company plans to issue Convertible Redeemable Preferred Stock in
connection with their private placement memorandum offering, they have reserved
1,409,524 shares as a result of the reclassification for issuance upon the sale
and conversion of the maximum amount of the Convertible Redeemable Preferred
Stock to be sold by this offering. The determination of how many shares need to
be reserved is based upon managements and their placement and investment
advisors, Josephthal Lyon & Ross, Inc. best estimate of what the Company's
initial public offering (IPO) will price out at.
CONCENTRATION OF CREDIT RISK:
At June 30, 1997, the Company had cash or cash equivalents (short-term,
highly liquid investments readily convertible into cash with a maturity of
three months or less) in excess of federally insured limits of $100,000.
INCOME TAXES:
Effective October 1, 1996, the Company elected to revoke their small
business "S" corporation status and will thereafter be treated and taxed as a
"C" corporation. Accordingly, a benefit for federal and state income taxes has
been provided for in accordance with FASB 109 by the Company for the six month
period ended June 30, 1997.
INVENTORY:
The Company maintains inventory on machine parts and replacements and
redemption prizes. Additionally, the Company maintains inventory for their
food, beverage, liquor and beer purchases.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
EMPLOYEE BENEFIT PLAN:
The Company has a defined contributions plan (401-K) covering all
employees who meet the eligibility requirements. To be eligible, an employee
must be a full time employee who has one year of service and must be age
twenty-one or older. The Company contributes fifty percent (50%) of the first
six percent (6%) of base compensation that a participant contributes to the
plan through their elected deferrals. Additional amounts may be contributed at
the discretion of the Company's Board of Directors.
F-110
<PAGE>
LEISURE COMPLEXES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. REAL PROPERTY, FIXED ASSETS AND EQUIPMENT AT JUNE 30, 1997:
Property and equipment is stated at cost. The costs of additions and
betterments are capitalized and expenditures for repairs and maintenance are
expensed in the period incurred. Assets placed into service during and after
1981 use either the straight line or accelerated methods for depreciation.
<TABLE>
<CAPTION>
TOTAL
----------------
<S> <C>
Building ........................................ $ 20,423,393
Building improvements ........................... 2,740,778
Equipment ....................................... 15,236,839
Furniture & fixtures ............................ 886,268
Leasehold improvements .......................... 64,512
Site development ................................ 36,160
Other assets .................................... 192,817
-------------
39,580,767
Land ........................................... 884,305
-------------
Total Before Depreciation ...................... 40,465,072
Less: Accumulated Depreciation ................. (13,890,818)
-------------
Total Assets -- Net of Depreciation . .......... $ 26,574,254
=============
</TABLE>
3. MORTGAGES AND NOTES PAYABLE:
Long term debt at June 30, 1997 consists of the following:
<TABLE>
<CAPTION>
PRINCIPAL BALANCE
-------------------------
CURRENT NON CURRENT INTEREST MATURITY
LENDER PROPERTY MATURITY MATURITY RATE DATE
------ -------- -------- -------- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Mortgage
-- Chase Manhattan -- I Melville - $ 252,704 $ 3,168,139 11.42% August 17, 2000
Bayshore -
Consolidated Mortgage
-- Chase Manhattan -- II Sayville -
Shirley -
Centereach - 220,360 3,196,756 10.57% August 14, 2001
Consolidated Mortgage
Chase Manhattan Syosset 156,672 1,671,088 P+1.5% January 1, 2009
Note Payable --
Junior Mortgages -- 160,000 973,326 P+1.5% June 1, 2004
---------- -----------
789,736 9,009,309
---------- -----------
Chase Manhattan
-- term loan Syosset 247,200 576,840 P+1.0% August 31, 2000
Note Payable -- Property
Acquisition -- Shareholder Bayshore 68,838 297,621 9.25% February 1, 2001
State Bank -- term loan Sports Plus 220,000 678,333 P+1.5% August, 2001
---------- -----------
536,038 1,552,794
---------- -----------
Total $1,325,774 $10,562,103
========== ===========
</TABLE>
F-111
<PAGE>
LEISURE COMPLEXES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. MORTGAGES AND NOTES PAYABLE: (CONTINUED)
The future principal maturities as of the above date are as follows:
<TABLE>
<CAPTION>
CHASE MANHATTAN
CONSOLIDATED MORTGAGE SYOSSET ACQUISITION
----------------------------------- ------------------------
YEAR END CHASE MANHATTAN CHASE MANHATTAN NOTE PAYABLE SPORTS PLUS
DECEMBER 31 TOTAL I II MORTGAGES ACQUISITION MORTGAGE TERM LOAN TERM LOAN
- ------------- ------------- ----------------- ----------------- -------------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $ 1,325,774 $ 252,704 $ 220,360 $ 160,000 $ 68,838 $ 156,672 $247,200 $220,000
1998 1,387,288 283,122 244,814 160,000 75,480 156,672 247,200 220,000
1999 1,455,824 317,202 271,982 160,000 82,768 156,672 247,200 220,000
2000 3,579,850 2,567,815 302,165 160,000 90,758 156,672 82,440 220,000
2001 2,761,415 -- 2,377,795 160,000 48,615 156,672 -- 18,333
Thereafter 1,377,726 -- -- 333,326 -- 1,044,400 -- --
----------- ---------- ---------- ---------- -------- ---------- -------- --------
$11,887,877 $3,420,843 $3,417,116 $1,133,326 $366,459 $1,827,760 $824,040 $898,333
=========== ========== ========== ========== ======== ========== ======== ========
</TABLE>
CONSOLIDATED MORTGAGE -- CHASE MANHATTAN-I:
On August 17, 1990, Location Service Corp. (DBA Bayshore Bowl) and
Melville Bowling Center, Inc. (Melville), entered into a loan agreement with
Chase Manhattan (Chase) (formerly Chemical Bank) to increase Melville's
existing mortgage of $841,625. At this closing, Chase Manhattan loaned to
Bayshore Bowl, and to Melville, an additional sum of $3,758,375. The additional
sum was consolidated with Melville's existing mortgage to Chemical to create a
single mortgage lien of $4,600,000.
Bayshore's portion of the mortgage with Chase was $3,200,000, the balance
of $1,400,000 was attributable to Melville.
The mortgage loan bears interest at a fixed rate of 11.42%. Commencing
September 17, 1990 payments of principal and interest are due and monthly
thereafter in the amount of $53,503 to be applied first against interest and
the balance against principal. The entire principal balance is due and payable
August 17, 2000.
CONSOLIDATED MORTGAGE -- CHASE MANHATTAN-II:
On August 14, 1991, the Company refinanced with Chase Manhattan existing
mortgages held on the following properties:
<TABLE>
<CAPTION>
PROPERTY MORTGAGE HELD BY
-------- ------------------
<S> <C>
Shirley Lanes Marine Midland
Sayville Bowling Center Southhold Savings
Recreational Concepts Marine Midland
Recon Associates Marine Midland
</TABLE>
The new consolidated mortgage with Chase Manhattan as originally issued
aggregated $4,359,000 and is in addition to the previous $4,600,000 mortgage
that was executed August 17, 1990 by Location Service Corp. and Melville
Bowling Center, Inc.
The mortgage bears interest at a fixed rate of 10.57% per annum commencing
September 14, 1991 with payments of principal and interest due monthly in the
amount of $48,373. The mortgage is based upon a fifteen year amortization
payout with a ten year balloon that calls for the entire principal balance to
be due and payable on August 14, 2001.
STOCK BUYOUT ACQUISITION:
On August 16, 1990, the then principal shareholders of the former Company,
Arthur J. Calace, Jr. and Jay Orloff, reached an agreement whereby Calace
acquired Orloff's ownership interest in the Company and its former affiliates.
F-112
<PAGE>
LEISURE COMPLEXES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. MORTGAGES AND NOTES PAYABLE: (CONTINUED)
The consideration paid for this acquisition was $2,800,000. Upon the
execution of the agreement, $500,000 was paid to Orloff and an installment note
in the amount of $2,300,000 was issued by Calace to Orloff. This note was
subsequently refinanced on May 19, 1994 and incorporated by Chase Manhattan as
junior debt (see Note 3 -- Junior Mortgage).
Subsequent to the plan of reorganization (see note 1), Mr. Calace assigned
both his interest acquired from Jay Orloff and the resulting obligation of
$2,300,000 to the new corporation.
SYOSSET BOWL ACQUISITION AND FINANCING:
On April 14, 1993, the Company purchased for $2,000,000 the real property
that was previously known as Syosset Bowl. The real property purchased was a
vacant building that occupied one parcel of land.
In connection with this acquisition, the Company obtained the necessary
financing from its shareholders', Chase Manhattan and current operations. The
funds obtained for this acquisition and improvement were received from the
following sources:
<TABLE>
<S> <C> <C>
- -- Shareholders' Series II -- Notes Payable ......... $ 500,000
- -- Chase Manhattan Acquisition Mortgage ............. $1,612,500
- -- Chase Manhattan Construction Loan ................ 737,500 2,350,000
----------
- -- Chase Manhattan Equipment Term Loan .............. 1,450,000
----------
Total Financing Obtained ........................... $4,300,000
==========
</TABLE>
The Shareholders Series II notes payable of $450,000 bear interest at ten
percent (10%) per annum payable quarterly. The notes mature and are payable in
full on January 1, 1998. The series of notes consists of five (5) separate
notes payable to five different shareholders ranging from $25,000 to $300,000
per note. On January 1, 1997, a note in the amount of $50,000 was converted to
Convertible Redeemable Preferred Stock.
On January 20, 1994, Chase Manhattan consolidated its original acquisition
mortgage of $1,612,500 and construction loan of $737,500 with the Company into
a single first mortgage of $2,350,000. This new consolidated first mortgage
bears interest at the rate of one and one half percent (1 1/2%) over the Chase
Manhattan prime rate. The principal is payable in 180 equal monthly
installments of $13,056 commencing on February 1, 1994.
The Chase Manhattan Term loan of $1,450,000 was used to finance the
purchase of equipment. The loan bears interest at one and one half percent (1
1/2%) per annum above prime and is amortized over seven (7) years according to
the following amortization schedule:
<TABLE>
<S> <C>
- -- Twenty four (24) equal payments commencing on September 30, 1993 of $8,915 and $ 213,960
- -- Fifty nine (59) equal payments commencing on September 30, 1995 of $20,600 and 1,215,400
- -- One final principal payment due on August 31, 2000 of ........................ 20,640
----------
$1,450,000
==========
</TABLE>
JUNIOR MORTGAGE:
On May 19, 1994, the Company entered into a new loan agreement with Chase
Manhattan to refinance the "Orloff" acquisition note for $1,600,000. The loan
bears interest at the floating rate of 1.5% over the Bank's prime rate. The
payments of principal are fixed in the amount of $13,334 and begin on July 1,
1994. The entire balance of the mortgage is due with accrued interest on June
1, 2004.
F-113
<PAGE>
LEISURE COMPLEXES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. MORTGAGES AND NOTES PAYABLE: (CONTINUED)
LINE OF CREDIT:
The Company had established a line of credit at Chase Manhattan for funds
up to $400,000.
LOAN COVENANTS:
As a condition for providing the Company with the long-term financing
detailed above, Chase Manhattan has included in their mortgage and note
agreements certain loan covenants. These loan covenants specify certain
financial statement amounts and ratios that are to be maintained by the
Company. At June 30, 1997, the Company is not in compliance with the loan
covenants. However, the Company did receive a waiver from Chase Manhattan
regarding the loan covenants.
As an additional condition for providing the Company with the long term
financing, Chase Manhattan requested that Mr. Calace in addition to the
Corporation provide Chase Manhattan with his personal guarantee on all existing
loans and mortgages. In consideration for this guarantee the Company has agreed
to accrue a loan guarantee fee at a rate of one quarter of one percent (1/4%)
per annum on the average outstanding principal balance each year, payable to
Mr. Calace. Since this fee is not being paid currently, the Company has
recorded and recognized the obligation.
SPORTS PLUS CONSTRUCTION AND EQUIPMENT LOAN:
In August 1996, the Company executed with Chase Manhattan an extension and
modification agreement on their existing loan for an additional $1,250,000
bringing the total construction financing commitment by Chase to $14,250,000.
On August 25, 1995 the Company entered into a loan agreement with Chase
Manhattan to finance the construction and purchase of equipment for the
development of their Sports Plus project (see Note 6). The loan is secured by a
commercial mortgage for an amount not to exceed $14,250,000.
Both the construction and equipment loans bear interest at the rate of 2%
over the prime lending rate and is payable monthly.
Construction is to be completed within eighteen months of the closing of
this loan. At the time of completion Chase Manhattan will convert this
construction loan and the equipment loan to permanent financing in accordance
with the mortgage commitment.
The permanent loan will bear interest at a rate equal to 2% plus the prime
rate payable monthly. The loan will be amortized as follows:
o During the first two (2) year term of the permanent loan, twenty-four
(24) consecutive monthly principal payments based upon a nineteen (19)
year amortization rate commencing on the first day of the month after
the conversion from a construction (interest only) loan to a permanent
loan.
o During the last eight (8) year term of the permanent loan, ninety-five
(95) consecutive monthly principal payments based upon a fourteen and a
third (14 1/3) year amortization rate.
o One final principal payment equal to the unpaid principal plus the
accrued but unpaid interest. The loan is subject to various fees of
which some were paid on exercising the commitment, some at the time of
closing, and the balance to be paid over four years. In addition to the
corporate guarantee, collateral, and security interests assigned, the
loan is also personally guaranteed by Mr. Calace, the Company's chairman
and largest single shareholder.
Additionally, Chase Manhattan required and received from the shareholders'
of the Company their stock pledge as collateral for fifty-one percent (51%) of
the Company's stock.
F-114
<PAGE>
LEISURE COMPLEXES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. MORTGAGES AND NOTES PAYABLE: (CONTINUED)
This loan like previous existing loans with Chase Manhattan is also
subject to certain loan covenants, financial ratios and minimum balances to be
maintained.
SPORTS AND ENTERTAINMENT FACILITY -- TERM LOAN -- STATE BANK OF LONG ISLAND:
In April, 1996, the Company increased their line of credit by $100,000
from $1,000,000 to $1,100,000 and converted the line of credit to a sixty (60)
month term loan. The payments of principal are fixed in the amount of $18,333
and began in August 1996. The loan is a five (5) year term loan payable at an
interest rate of 1.5% over the banks prime rate.
STATE BANK OF LONG ISLAND -- LINE OF CREDIT:
On July 29, 1996, the Company established a line of credit and borrowed
the maximum funds of $100,000. These funds are to be used for the day to day
operation of the facility. The line bears interest at the rate of 1% over the
Bank's prime rate. The line of credit is due and payable on August 29, 1997.
KITCHEN EQUIPMENT:
In May 1997, the catering facility of a related party, Three Grove
Partners, transferred its kitchen equipment and related loan with Suffolk
County National Bank in the amount of $207,722. This loan bears interest at the
rate of prime plus 2% and is due May 31, 2000.
4. INCOME TAXES:
As of June 30, 1997, the Company adopted FASB 109 since it now reports and
files as a "C" corporation. As a result of adopting FASB 109, the Company has
recognized deferred tax assets that are deductible temporary differences which
aggregate to $393,652, primarily related to the basis of fixed assets and
deferred tax liabilities for taxable temporary differences which aggregate to
$224,311, primarily related to depreciation. At December 31, 1996, the Company
had a net operating loss (NOL) in the amount of $141,662, which will be used to
offset future taxable income. This NOL will expire in the year 2011.
5. COMMITMENTS:
ROCKY POINT:
On July 1, 1989 Rocky Point extended its existing lease agreement with In
Towne Shopping Center Co. to run through June 30, 2009. The Company had
originally entered into a lease agreement with In Towne Shopping Center Co.,
Inc., on March 30, 1973 for the rental of 30,880 square feet to be used for
their bowling operations. The original lease agreement was for a twenty year
period with escalating base rents and cost of living index adjustments
commencing June 1, 1976.
During the period ended June 30, 1997, rental expense under the long-term
lease obligation was $67,093.
Future obligations over the primary terms of the Company's long-term
leases as of December 31, 1996 are:
<TABLE>
<CAPTION>
*AMOUNT PER ANNUM TOTAL
------------------- -------------
<S> <C> <C>
7/1/94--6/30/99 ........... $100,000 $ 250,000
7/1/99--6/30/04 ........... 110,000 550,000
7/1/04--/6/30/09 .......... 120,000 600,000
-------- ----------
$330,000 $1,400,000
======== ==========
</TABLE>
- ----------
* Note -- These amounts are exclusive of any future cost of living index
adjustments.
F-115
<PAGE>
LEISURE COMPLEXES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS: (CONTINUED)
STONY BROOK:
Stony Brook Bowl entered into a lease agreement with S&E Realty on June 1,
1976 for the rental of 34,500 square feet to be used for their bowling
operations. The original lease agreement was for a twenty year period with
escalating base rents commencing June 1, 1976.
In August, 1996, the Company did not renew their lease with S&E Realty
when it expired. The Company instead moved the business into the new Sports
Plus facility location (Lake Grove Bowl).
SPORTS PLUS:
The Company entered into a lease agreement with a related party (Three
Grove Partners) to lease the land on which the Sports Plus facility is located.
The lease is for a term of 48 years with annual base rents of $256,000, payable
in equal monthly installments of $21,334. In addition to the base rent, the
Company shall pay an additional 5% on the amount of revenues earned in excess
of the Companies gross operating income base level of $8,000,000 in any
calendar year. As a condition to this lease, Three Grove Partners agreed to
subordinate their land value to Chase Manhattan Bank for up to $14,250,000.
During the period ended June 30, 1997, the rental expense under the above
long-term lease obligation was $238,255.
PRIVATE PLACEMENT AGREEMENT:
The Company signed an agreement with Josephthal Lyon & Ross Incorporated
(Josephthal) to act as their exclusive placement agent to sell $4,000,000 of
its preferred stock subscriptions. Josephthal will be paid at each closing of
sales a cash commission of eight percent (8%) of the subscription price of each
share sold by or through Josephthal. This agreement was subsequently canceled
on June 10, 1997.
GUARANTEE:
Barclays Bank, in exchange for releasing Leisure's corporate guarantee on
their mortgage with Three Grove Partners (a related party), agreed to release
their first lien and priority position to Chase Manhattan Bank on the 16 acre
parcel of land that Three Grove Partners owns and leases to Sports Plus and
Leisure Complexes, Inc. under a long term ground lease.
6. TRANSACTIONS WITH RELATED PARTIES:
In the normal course of business, receivables, payables, revenues, and
expenses have been, and will continue to be generated from transactions with
related parties. The Company had entered into various agreements with a number
of entities controlled by, and or affiliated with, its shareholders and
officers.
One such agreement calls for a management fee to be charged by the Company
to their affiliates, The Ponds. This management fee is being accrued at a rate
of three percent (3%) per annum of their total gross revenues.
7. SUBSEQUENT EVENT:
Sale of Business:
On July 24, 1997, the Company and its shareholders agreed to sell its
business pursuant to an acquisition agreement with Family Golf Centers, Inc.
("FGCI") that will be treated as a tax free merger to the existing Company
shareholders.
In exchange for the Company's net assets and continuing business
operations, FGCI assumed all existing debt and liabilities of the Company and
issued stock of 509,090 of FGCI to the existing shareholders of the Company.
F-116
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATES AS OF WHICH SUCH INFORMATION IS
FURNISHED.
-----------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
The Company ............................ 1
Risk Factors ........................... 5
Use of Proceeds ........................ 11
Price Range of Common Stock ............ 12
Capitalization ......................... 13
Selected Financial Data ................ 14
Management's Discussion and Analysis
of Financial Condition and Results of
Operations .......................... 16
Business ............................... 28
Management ............................. 38
Principal Stockholders ................. 45
Description of Capital Stock ........... 47
Underwriting ........................... 49
Legal Matters .......................... 50
Experts ................................ 50
Available Information .................. 51
Incorporation of Certain Documents By
Reference ........................... 51
Index to Pro Forma Financial
Information ......................... P-1
Index to Supplemental Financial
Statements .......................... S-1
Index to Financial Statements .......... F-1
</TABLE>
3,500,000 SHARES
[FAMILY GOLF CENTERS, INC. LOGO]
FAMILY GOLF CENTERS, INC.
COMMON STOCK
------------------------------------------------
PROSPECTUS
------------------------------------------------
JEFFERIES & COMPANY, INC.
BANCAMERICA ROBERTSON STEPHENS
CIBC OPPENHEIMER
EVEREN SECURITIES, INC.
PRUDENTIAL SECURITIES INCORPORATED
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or expected to be incurred by the Company in connection
with the issuance and distribution of the securities being offered hereby
(items marked with an asterisk (*) represent estimated expenses):
<TABLE>
<S> <C>
SEC Registration Fee .......................... $ 32,133.34
Legal Fees and Expenses ....................... $ 150,000.00*
Blue Sky Fees (including counsel fees) ........ $ 10,000.00*
NASD Filing Fee ............................... $ 11,393.00
Nasdaq National Market Listing Fee ............ $ 17,500.00
Accounting Fees and Expenses .................. $ 100,000.00*
Transfer Agent and Registrar Fees ............. $ 5,000.00*
Printing and Engraving Expenses ............... $ 125,000.00*
Miscellaneous ................................. $ 48,973.66*
Total ......................................... $ 500,000.00*
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Delaware General Corporation Law, Section 102(b)(7), enables a corporation
in its original certificate of incorporation, or an amendment thereto validly
approved by stockholders, to eliminate or limit personal liability of members
of its Board of Directors for violations of a director's fiduciary duty of
care. However, the elimination or limitation shall not apply where there has
been a breach of the duty of loyalty, failure to act in good faith, intentional
misconduct or a knowing violation of a law, the payment of a dividend or
approval of a stock repurchase which is deemed illegal or an improper personal
benefit is obtained. The Company's Certificate of Incorporation includes the
following language:
"No director of the Corporation shall be liable to the Corporation or any
of its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that this provision does not eliminate the liability of the
director (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of Title 8 of the Delaware Code, or (iv) for any transaction
from which the director derived an improper personal benefit."
Article Eighth of the Certificate of Incorporation of the Company permits
indemnification of, and advancement of expenses to, among others, officers and
directors of the Company. Such Article provides as follows:
"(a) Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit, or proceeding, whether
civil, criminal, administrative, or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a director, officer , employee,
or agent of the Corporation or any of its direct or indirect subsidiaries or is
or was serving at the request of the Corporation as a director, officer,
employee, or agent of any other corporation of a partnership, joint venture,
trust, or other enterprise, including service with respect to an employee
benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a director, officer,
employee, or agent or in any other capacity while serving as a director,
officer, employee, or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than permitted prior
thereto), against all expense, liability, and loss (including attorneys' fees,
judgments, fines, excise or other taxes assessed with respect to an employee
benefit plan, penalties, and amounts paid in settlement) reasonable incurred or
suffered by such indemnitee in connection therewith, and such indemnification
shall continue as to an indemnitee who has
II-1
<PAGE>
ceased to be a director, officer, employee, or agent and shall inure to the
benefit of the indemnitee's heirs, executors, and administrators; provided,
however, that, except as provided in paragraph (c) of this Article Eighth with
respect to proceedings to enforce rights to indemnification, the Corporation
shall indemnify and such indemnitee in connection with a proceeding (or part
thereof) initiated by such indemnitee only if such proceeding (or part thereof)
was authorized by the Board of Directors of the Corporation.
(b) The right to indemnification conferred in paragraph (a) of this
Article Eighth shall include the right to be paid by the Corporation the
expenses incurred in defending any proceeding for which such right to
indemnification is applicable in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a director or officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, service to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"),
by or on behalf of such indemnitee, to repay all amounts so advanced if it
shall ultimately be determined by final judicial decision from which there is
not further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Article Eighth or otherwise.
(c) The rights to indemnification and to the advancement of expenses
conferred in paragraphs (a) and (b) of this Article Eighth shall be contract
rights. If a claim under paragraph (a) or (b) of this Article Eighth is not
paid in full by the Corporation within sixty days after a written claim has
been received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be twenty
days, the indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in whole
or in part in any such suit, or in a suit brought by the Corporation to recover
an advancement of expenses pursuant to the terms of an undertaking, the
indemnitee shall be entitled to be paid also the expenses of prosecuting or
defending such suit. In (i) any suit brought by the indemnitee to enforce a
right to indemnification hereunder (but not in a suit brought by an indemnitee
to enforce a right to an advancement of expenses) it shall be a defense that,
the indemnitee has not met any applicable standard for indemnification set
forth in the Delaware General Corporation Law, and (ii) any suit by the
Corporation to recover an advancement of expense pursuant to the terms of an
undertaking, the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by
the indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article Eighth or otherwise, shall be on the Corporation.
(d) The rights to indemnification and to the advancement of expenses
conferred in this Article Eighth shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, this
certificate of incorporation, by-law, agreement, vote of stockholders or
disinterested directors, or otherwise.
(e) The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee, or agent of the Corporation or
another corporation, partnership, joint venture, trust, or other enterprise
against any expense, liability, or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability, or
loss under the Delaware General Corporation Law.
II-2
<PAGE>
(f) The Corporation's obligation, if any, to indemnify any person who was
or is serving as a director, officer, employee, or agent of any direct or
indirect subsidiary of the Corporation or, at the request of the Corporation,
of any other corporation or of a partnership, joint venture, trust, or other
enterprise shall be reduced by an amount such person may collect as
indemnification from such other corporation, partnership, joint venture, trust
or other enterprise.
(g) Any repeal or modification of the foregoing provisions of this Article
Eighth shall not adversely affect any right or protection hereunder of any
person in respect of any act or omission occurring prior to the time of such
repeal or modification."
The Company maintains a policy of insurance under which the directors and
officers of the Company are insured, subject to the limits of the policy,
against certain losses arising from claims made against such directors and
officers by reason of any acts or omissions covered under such policy in their
respective capacities as directors and officers.
ITEM 16. EXHIBITS
The following exhibits are filed herewith:
<TABLE>
<S> <C>
***1.1 Form of Underwriting Agreement.
***2.1 Merger Agreement, dated April 2, 1998, by and among the Company, Family Golf
Acquisition, Inc. and Eagle Quest Golf Centers, Inc.
*3.1 Certificate of Incorporation, as amended.
**3.2 Amended and Restated Bylaws.
***4.1 Pages 7 and 8 of the Certificate of Incorporation defining rights of security holders
(contained in the Certificate of Incorporation, as amended, filed as Exhibit 3.1).
***4.2 Pages 1, 3, 4, 6 and 9 of the Bylaws defining rights of security holders (contained in the
Amended and Restated Bylaws, filed as Exhibit 3.2).
5.1 Opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP.
23.1(A) Consent of Richard A. Eisner & Company, LLP.
23.1(B) Consent of Richard A. Eisner & Company, LLP.
23.1(C) Consent of Richard A. Eisner & Company, LLP.
23.2 Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (contained in Opinion filed as
Exhibit 5.1).
23.3 Consent of KPMG.
23.4 Consent of Feldman, Gutterman, Meinberg & Co.
23.5 Consent of Arthur Andersen, LLP.
***24.1 Power of Attorney.
</TABLE>
- ----------
* Incorporated by reference to exhibit 3.1 filed in Amendment No. 1 to the
Company's Registration Statement on Form SB-2 filed on June 12, 1996
(Registration No. 333-4541).
** Incorporated by reference to exhibit 3.2 to the Company's Registration
Statement on Form SB-2 filed on May 24, 1996 (Registration Statement No.
333-4541).
*** Previously filed.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit
II-3
<PAGE>
plan's annual report pursuant to section 15(d) of the Securities Act of 1934)
that is incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing this Amendment No. 1 to Registration
Statement on Form S-3 ("Registration Statement") and authorized this Amendment
No. 1 to Registration Statement to be signed on its behalf by the undersigned,
in the City of Melville, State of New York on July 1, 1998.
FAMILY GOLF CENTERS, INC.
By: /s/ Jeffrey C. Key
-------------------------------------
Jeffrey C. Key
Chief Financial Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------- ---------------------------- -------------
<S> <C> <C>
* Chairman of the Board July 1, 1998
- ----------------------------- and Chief Executive
Dominic Chang Officer (Principal
Executive Officer)
* President, Chief Operating July 1, 1998
- ----------------------------- Officer, Assistant
Krishnan P. Thampi Secretary, Treasurer and
Director
* Chief Financial Officer July 1, 1998
- ----------------------------- (Principal Accounting and
Jeffrey C. Key Financial Officer)
* Director July 1, 1998
- -----------------------------
Yupin Wang
Director July 1, 1998
-----------------------------
James Ganley
----------------------------- Director July 1, 1998
Jimmy C.M. Hsu
</TABLE>
- ----------
* By Jeffrey C. Key, individually and as attorney-in-fact.
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE IN SEQUENTIAL
NO. NUMBERING SYSTEM
- ----------------- -------------------
<S> <C>
***1.1 Form of Underwriting Agreement.
***2.1 Merger Agreement, dated April 2, 1998, by and among the Company, Family Golf
Acquisition, Inc. and Eagle Quest Golf Centers, Inc.
*3.1 Certificate of Incorporation, as amended.
**3.2 Amended and Restated Bylaws.
***4.1 Pages 7 and 8 of the Certificate of Incorporation defining rights of security holders
(contained in the Certificate of Incorporation, as amended, filed as Exhibit 3.1).
***4.2 Pages 1, 3, 4, 6 and 9 of the Bylaws defining rights of security holders (contained in the
Amended and Restated Bylaws, filed as Exhibit 3.2).
5.1 Opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP.
23.1(A) Consent of Richard A. Eisner & Company, LLP.
23.1(B) Consent of Richard A. Eisner & Company, LLP.
23.1(C) Consent of Richard A. Eisner & Company, LLP.
23.2 Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (contained in Opinion filed as
Exhibit 5.1).
23.3 Consent of KPMG.
23.4 Consent of Feldman, Gutterman, Meinberg & Co.
23.5 Consent of Arthur Andersen, LLP.
***24.1 Power of Attorney.
</TABLE>
- ----------
* Incorporated by reference to exhibit 3.1 filed in Amendment No. 1 to the
Company's Registration Statement on Form SB-2 filed on June 12, 1996
(Registration No. 333-4541).
** Incorporated by reference to exhibit 3.2 to the Company's Registration
Statement on Form SB-2 filed on May 24, 1996 (Registration Statement No.
333-4541).
*** Previously filed.
II-6
<PAGE>
Squadron, Ellenoff, Plesent & Sheinfeld, LLP
551 Fifth Avenue
New York, New York 10176
July 2, 1998
Family Golf Centers, Inc.
538 Broadhollow Road
Melville, New York 11747
Ladies and Gentlemen:
You have requested our opinion, as counsel for Family Golf Centers,
Inc., a Delaware corporation (the "Company") in connection with the
registration statement on Form S-3 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Act"), for the registration of
4,025,000 shares of common stock, par value $0.01 per share, of the Company
(the "Common Stock").
The Registration Statement relates to an offering of up to 4,025,000
shares (including up to 525,000 shares issuable upon exercise of the
Underwriters' Over-Allotment Option) of Common Stock, all of which are being
sold by the Company.
We have examined such records and documents and made such examinations
of law as we have deemed relevant in connection with this opinion. It is our
opinion that when there has been compliance with the Act and the applicable
state securities laws, the shares of Common Stock to be sold by the Company,
when issued, delivered, and paid for in the manner described in the form of
Underwriting Agreement filed as Exhibit 1.1 to the Registration Statement will
be legally issued, fully paid and nonassessable.
<PAGE>
Family Golf Centers, Inc.
July 2, 1998
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Registration Statement. In so doing, we do not admit
that we are in the category of persons whose consent is required under Section
7 of the Act or the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
Very truly yours,
/s/ Squadron, Ellenoff, Plesent &
Sheinfeld, LLP
<PAGE>
EXHIBIT 23.1(A)
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in this Amendment No. 1 to the Registration
Statement on Form S-3 of our reports dated i) March 26, 1998, except as to
Notes M and N as to which the dates are June 30, 1998 and June 16, 1998,
respectively on our audit of the financial statements of Family Golf Centers,
Inc. and subsidiaries and ii) March 26, 1998 except as to Notes B and P as to
which the dates are June 30, 1998 and June 16, 1998, respectively, on our audit
of the supplemental financial statements of Family Golf Centers, Inc. and
subsidiares as at December 31, 1997 and December 31, 1996 and for each of the
years in the three-year period ended December 31, 1997. We also consent to the
reference to our firm under the caption "Experts".
/s/ Richard A. Eisner & Company, LLP
New York, New York
July 1, 1998
<PAGE>
EXHIBIT 23.1(B)
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in this Amendment No. 1 to the Registration
Statement on Form S-3 of our report dated April 10, 1998 on our audit of the
financial statements of MetroGolf Incorporated and subsidiaries as at December
31, 1997 and for the year then ended. We also consent to the reference to our
firm under the caption "Experts".
/s/ Richard A. Eisner & Company, LLP
New York, New York
July 1, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
The Board of Directors
Eagle Quest Golf Centers Inc.:
We consent to the use of our report dated March 13, 1998, except as to
note 16(a) which is as of April 2, 1998, with respect to the consolidated
balance sheets of Eagle Quest Golf Centers Inc. and subsidiaries as at December
31, 1997 and 1996 and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the year ended December 31,
1997 and the period from incorporation on February 5, 1996 to December 31,
1996, which report appears in the Form S-3 of Family Golf Centers, Inc. dated
on or about July 1, 1998 and to the reference to our firm under the heading
"Experts" in the prospectus.
/s/ KPMG
Chartered Accountants
Vancouver, Canada
July 1, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Registration
Statement on Form S-3 of our report dated June 27, 1997 of our audit of the
financial statements of Leisure Complexes, Inc. as at December 31, 1996. We
also consent to the reference to our firm under the caption "Experts."
/s/ Feldman, Gutterman, Meinberg and Co.
July 1, 1998
Manhasset, New York
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use
of our reports (and to all references to our Firm) included in or made a part
of this registration statement.
/s/ Arthur Andersen LLP
West Palm Beach, Florida,
July 1, 1998.
