<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
[X] EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-25098
Family Golf Centers, Inc.
------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 11-3223246
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
225 Broadhollow Road
Melville, New York 11747
---------------------------------------
(Address of principal executive offices)
(516) 694-1666
------------------------------
(Registrant's telephone number)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if changed since
last Report)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such report(s), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of May 13, 1998
- ---------------------------------------- --------------------------------
Common Stock, par value $.01 per share 19,567,830
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
<PAGE>
ITEM 1.
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTORY COMMENT
The condensed consolidated financial statements included herein have
been prepared by Family Golf Centers, Inc. ("the Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although management of the Company believes that the disclosures
are adequate to make the information presented not misleading. These condensed
consolidated financial statements should be read in conjunction with the notes
thereto. In the opinion of the management of the Company, the condensed
consolidated financial statements include all adjustments, consisting of only
normal recurring adjustments, necessary to fairly present the results for the
interim periods to which these financial statements relate.
The results of operations of the Company for the three months ended March 31,
1998 are not necessarily indicative of the results to be expected for the full
year.
2
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31,
ASSETS 1998 1997
====== ---- ----
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $1,922,000 $ 6,002,000
Short-term investments 7,799,000 55,846,000
Inventories 16,576,000 12,688,000
Prepaid expenses and other current assets 9,316,000 8,744,000
Prepaid income taxes 1,907,000
------------ ------------
Total current assets 37,520,000 83,280,000
Property, plant and equipment (net of accumulated depreciation) 255,470,000 208,884,000
Loan acquisition costs (net of accumulated amortization) 5,007,000 4,814,000
Other assets 6,935,000 7,725,000
Excess of cost over fair value of assets acquired
(net of accumulated amortization) 34,047,000 20,804,000
------------ ------------
TOTAL $338,979,000 $325,507,000
============ ============
LIABILITIES
===========
Current liabilities:
Accounts payable, accrued expenses and other current liabilities $12,556,000 $7,596,000
Income taxes payable 2,626,000
Current portion of long-term obligations 6,770,000 7,164,000
------------ ------------
Total current liabilities 19,326,000 17,386,000
Convertible subordinated notes 115,000,000 115,000,000
Long-term obligations (less current portion) 26,092,000 19,655,000
Deferred rent 709,000 650,000
Deferred tax liability 4,196,000 4,196,000
Other liabilities 700,000 208,000
------------ ------------
Total liabilities 166,023,000 157,095,000
------------ ------------
Minority interest 214,000
Commitments, contingencies and other matters
STOCKHOLDERS' EQUITY
Preferred stock - authorized 1,000,000 shares, none outstanding Common stock -
authorized 50,000,000 shares, $.01 par value;
19,567,000 and 19,347,000 shares outstanding at
March 31, 1998 and December 31, 1997, respectively 196,000 193,000
Additional paid-in capital 157,084,000 153,576,000
Retained earnings 16,036,000 14,690,000
Unearned compensation (527,000)
Treasury shares (47,000) (47,000)
------------ ------------
Total stockholders' equity 172,742,000 168,412,000
------------ ------------
TOTAL $338,979,000 $325,507,000
============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
3
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1997
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<S> <C> <C>
Operating revenues $14,967,000 $ 6,522,000
Merchandise sales 4,203,000 2,493,000
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Total revenue 19,170,000 9,015,000
Operating expenses 11,781,000 5,618,000
Cost of merchandise sold 2,816,000 1,679,000
Selling, general and
administrative expenses 1,524,000 1,086,000
----------- ------------
Income from operations 3,049,000 632,000
Interest expense (1,799,000) (191,000)
Other income 956,000 466,000
----------- ------------
Income before income taxes 2,206,000 907,000
Income tax expense 860,000 345,000
----------- ------------
Net income $1,346,000 $562,000
=========== ============
Basic earnings per share $0.07 $0.03
===== =====
Diluted earnings per share $0.07 $0.03
===== =====
Weighted average shares outstanding - Basic 19,445,000 17,803,000
=========== ============
Effect of dilutive securities 751,000 322,000
Weighed average shares outstanding - Dilutive 20,196,000 18,125,000
=========== ============
</TABLE>
The accompany notes to financial statements are
an integral part hereof.
4
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1998 1997
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,346,000 $562,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,126,000 1,028,000
(Increase) in inventories (3,888,000) (2,718,000)
(Increase) in prepaid expenses and other current assets (1,273,000) (2,233,000)
(Increase) in income taxes payable (4,533,000)
(Increase) Decrease in other assets 790,000 (857,000)
Increase in accounts payable and accrued expenses 3,950,000 1,546,000
Increase (Decrease) in deferred rent 59,000 128,000
Increase (Decrease) in other liabilities 706,000 (26,000)
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Net cash (used in) operating activities (717,000) (2,570,000)
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Cash flows from investing activities:
Acquisitions of property and equipment (41,437,000) (11,142,000)
Acquisitions of goodwill (9,773,000)
Net proceeds from sale of short-term investments 48,047,000 21,901,000
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Net cash (used in) provided by investing activities (3,163,000) 10,759,000
---------- -----------
Cash flows from financing activities:
(Increase) in loan acquisition costs (211,000)
Repayment of bank loans (1,756,000) (340,000)
Proceeds from the exercise of options and warrants 1,767,000 198,000
---------- -----------
Net cash (used in) financing activities (200,000) (142,000)
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,080,000) 8,047,000
Cash and cash equivalents - beginning of period 6,002,000 4,556,000
---------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $1,922,000 $12,603,000
========== ===========
Supplemental and noncash disclosures:
Acquisition of property in exchange for common stock 1,208,000
Acquisition of goodwill in exchange for mortgages and notes 3,742,000 $305,000
Acquisition of property subject to mortgage and notes 4,058,000
Property additions accrued but not paid 1,010,00 105,000
Interest paid 438,000 292,000
Taxes paid 4,980,00 1,172,000
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
5
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(NOTE A) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
[1] THE COMPANY:
The Company (as defined below), designs, constructs, operates, and
manages golf centers. The golf centers offer golf lessons and a
wide variety of practice opportunities, including facilities for
practicing driving, pitching, putting, chipping and sand play.
In addition, most centers have a pro shop, miniature golf
course, snack bar and electronic video games. The Company has
recently acquired Family Sports Supercenters consisting of ice rinks
and other indoor recreational activities and intends to acquire or
open additional supercenters and ice rinks in the future.
Through an agreement with Golden Bear Golf Centers, Inc. ("GBI"), the
Company is licensed to use the name "Golden Bear" for certain of the
Company's golf centers. The license agreement is terminable by GBI
under certain conditions.
[2] PRINCIPLES OF COMBINATION:
The consolidated financial statements include the accounts of Family
Golf Centers, Inc. ("FGCI") and its wholly owned and majority owned
subsidiaries (the "Company"). All significant intercompany transactions
and accounts have been eliminated. Minority interests in the Company's
operations were insignificant.
[3] EARNINGS PER SHARE:
In May, 1998 the Company effected a 3 for 2 stock split. The financial
statements give retroactive effect to this transaction.
(NOTE B) INVENTORIES:
Inventory consists of merchandise for sale in the pro shop at each
facility and is valued at the lower of cost on a first-in, first-out
basis or market.
(NOTE C) PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets consists principally of
short term expenses paid in advance, credit card receivables,
receivables from others and pre-opening costs.
(NOTE D) ACQUISITIONS:
During the first quarter of 1998, the Company acquired MetroGolf
Incorporated (Metro), the operator of eight golf facilities, through
the successful completion of a tender offer, Blue Eagle Golf Centers,
Inc., the operator of three golf facilities; an ice rink facility
in Raleigh, North Carolina; and a golf facility in Holbrook,
Massachusetts. In addition, in March 1998, the Company signed a
long-term lease to construct and operate an ice rink and family
entertainment center in New Rochelle, New York.
6
<PAGE>
The following unaudited pro forma information assumes that certain
acquisitions in 1998 had taken place at the beginning of 1998 and that
certain acquisitions in 1998 and 1997 had taken place at the beginning
of 1997:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------- ---------------
1998 1997
------------- ---------------
<S> <C> <C>
Total revenue $19,297,000 $84,170,000
Net income (loss) 816,000 6,859,000
Net income (loss) per share - basic $0.04 $0.35
- diluted 0.04 0.34
</TABLE>
(NOTE E) SUBSEQUENT EVENTS:
On April 2, 1998, the Company entered into a definitive merger
agreement with Eagle Quest Golf Centers, Inc., ("Eagle Quest")
pursuant to which, if consummated, Eagle Quest will become a
wholly-owned subsidiary of the Company (the "Merger Agreement"). The
Company believes that Eagle Quest, which is privately owned, is the
second largest owner, operator and manager of golf driving ranges in
North America, with 18 golf centers currently owned and managed in the
United States and Canada. At the time the Merger Agreement with
Eagle Quest was executed, Eagle Quest had signed non-binding letters
of intent to acquire eight additional golf centers.
Pursuant to the terms of the Merger Agreement, at the effective date
of the merger, the Company will issue 1,729,290 shares of the
Company's Common Stock, subject to adjustment, for the outstanding
shares, options and warrants of Eagle Quest. The number of
shares of the Company's Common Stock issuable under the Merger
Agreement shall be reduced, among other things, for (i) certain fees
and expenses in connection with the transaction and (ii) net
liabilities (as defined) in excess of $22.3 million as of March 31,
1998. The consummation of the transaction is subject to a number of
conditions, including approval of Eagle Quest's shareholders (75% of
those present and entitled to vote), certain regulatory approvals
(including approval under the Hart-Scott-Rodino Antitrust Improvement
Acts of 1976), clearance from the Securities and Exchange Commission
to the application of "pooling of interests" accounting of the
transaction, Eagle Quest's warrant holders exercising or agreeing to
exchange their warrants for the Company's Common Stock, the receipt of
certain consents (including landlord's consents) and other conditions.
If the agreement is terminated as a result of a breach by the other
party, the non-breaching party will be entitled to liquidated damages
in the amount of $2 million (plus, if Eagle Quest is the breaching
party, certain out-of-pocket expenses). Subsequent to the execution of
the Merger Agreement, the Company loaned Eagle Quest $2.25 million.
The loan is due on October 27, 1998 and bears interest at a rate of
15% per annum during the first three months of the term of the loan
and 20% per annum during the second three months of the term of the
Loan, and is secured by a pledge of the stock of an Eagle Quest
subsidiary which owns three golf facilities.
If the Eagle Quest Acquisition is consummated, it is contemplated that
the transaction will be accounted for as a pooling of interests.
Accordingly, the historical results of operations of the Company and
Eagle Quest will be combined for financial accounting purposes. Eagle
Quest's financial statements show revenues for the year ended December
31, 1997 and for the period from inception (February 5, 1996) to
December 31, 1996 were $8.1 million and $148,000, respectively, and
Eagle Quest's losses for such periods were $7.2 million and $885,000.
In addition, in the period that the acquisition is consummated, the
Company anticipates that it will record certain significant charges
relating to, among other things, the anticipated early retirement of
certain Eagle Quest indebtedness, fees and expenses, severance charges
and others. The precise amount of such charges is not currently
ascertainable, but the Company currently anticipates that such charges
will be significant.
As of December 31, 1997 and 1996, Eagle Quest's financial statements
show $37.5 million and $13.4 million, respectively, of total assets
and $27.7 and $6.0 million, respectively, of total liabilities.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with the
Company's Financial Statements and the notes thereto appearing elsewhere in
this Report. This Report contains statements which constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform
Act of 1995. These statements appear in a number of places in this Report
and include statements regarding the intent, belief or current expectations
of the Company with respect to (i) the Company's acquisition and financing
plans, (ii) trends affecting the Company's financial condition or results of
operations, (iii) the impact of competition and (iv) the expansion of certain
operations. The Company cautions that forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those in the forward-looking
statements as a result of various factors. The information contained in this
Report, including, without limitation, the information under "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the information contained in the Company's Annual Report on
Form 10-K for the year ended 1997 under "Risk Factors" and "Business"
identifies important factors that could cause or contribute to such differences.
GENERAL
The Company is a leading consolidator and operator of golf centers in the
United States. The Company's strategy is to continue to build upon its
leadership position in the golf center industry and expand its concept of
family-oriented sports entertainment through: (i) consolidation within the golf
center industry, (ii) enhancement of facilities and customer service, (iii)
leveraging centralized operations and (iv) developing complementary sports and
family entertainment facilities. The Company's golf centers are designed to
provide a wide variety of practice opportunities, including facilities for
driving, chipping, putting, pitching and sand play. In addition, the Company's
golf centers typically offer full-line pro shops, golf lessons instructed by
PGA-certified golf professionals and other amenities such as miniature golf and
snack-bars to encourage family participation. The Company has a proven track
record of successfully identifying, acquiring and integrating golf centers,
having grown from one golf facility in 1992 to 73 in operation or under
construction as of March 31, 1998.
The Company's golf facilities have opened at varying times over the past
several years. As a result of changes in the number of golf facilities open
from period to period, the seasonality of operations, the timing of
acquisitions, the completion of 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 $115,000,000 aggregate principal amount of 5 3/4%
convertible subordinated notes in October and November 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 revenues from its golf centers are derived from selling
tokens and debit cards for use in automated range-ball dispensing machines, pro
shop merchandise sales, charging for rounds of miniature golf, golf lessons and
management fees. The Company also derives revenues at its golf courses, from
golf club membership fees, fees for rounds of golf and golf lessons, pro-shop
merchandise by renting rinks to hockey leagues, teams and figure skaters,
charging admissions to its skating facilities for public skating, providing
lessons through USFSA-certified instructors, skate equipment rental, as well as
from food and beverage sales and video games. The Company derives revenues
from its Family Sports Supercenters from substantially the same sources as
described above. The Company currently operates two Family Sports Supercenters,
two stand alone ice rinks and is adding a family entertainment center and two
ice rinks to its Denver, Colorado center to make such facility a Family Sports
Supercenter.
As of March 31, 1998, the Company owned, leased or managed 73 golf facilities
(comprised of 55 golf centers and 18 combination golf center and golf course
facilities located in 20 states). Eight of the 73 golf centers are currently
under construction. Of the golf centers, seven are currently operated under
the name "Golden Bear Golf Centers", licensed from Jack Nicklaus' licensing
company, Golden Bear Golf Centers, Inc.
RESULTS OF OPERATIONS
The following table sets forth selected operations data of the Company
expressed as a percentage of total revenue (except for operating expenses which
is expressed as a percentage of operating revenue and cost of merchandise sold
which is expressed as a percentage of merchandise sales) for the periods
indicated below:
8
<PAGE>
THREE MONTHS ENDED
MARCH 31
-----------------
1998 1997
------ ------
Operating revenues 78.1% 72.3%
Merchandise sales 21.9 27.7
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Total revenue 100.0 100.0
Operating expenses 78.7 86.1
Cost of merchandise sold 67.0 67.4
Selling, general and
admin. expenses 8.0 12.0
Income from operations 15.9 7.0
Interest expense 9.4 2.1
Other income 5.0 5.2
Income before income taxes 11.5 10.1
Income tax expense 4.5 3.8
Net income 7.0 6.2
9
<PAGE>
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 Family Sports Supercenters and ice rink
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, 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 which, due
to their size and revenue seasonality, generate significantly more revenue than
the golf centers. 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 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 Company's
Sports Supercenters and ice rink facilities totaled $4.9 million for the three
months ended March 31, 1998. The Company had no non-golf revenues in the
comparable 1997 period.
Merchandise sales, consisting of golf clubs, balls, bags, gloves, videos,
apparel and related accessories, amounted to $ 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 revenue) in the 1998 period from $5.6 million (86% of operating
revenue) 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 counter seasonal impact of the Family Golf
Supercenters and ice skating 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 amounted to $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 golf facilities. Selling, general and administrative expense
declined as a percent 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 $115 million convertible debt outstanding in the 1998
period. Other income, primarily interest income, increased to $956,000 in the
1998
10
<PAGE>
period as compared to $466,000 in the 1998 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 amounted to $1.3
million as compared to $562,000 for the comparable 1997 period.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had working capital of $18.2 million compared
to $65.9 million at December 31, 1997. The decrease was principally due to the
acquisition of thirteen facilities including Metro.
The cash requirements of funding the Company's expansion have historically
exceeded cash flow from operations. Accordingly, the Company has satisfied its
capital needs primarily through debt and equity financing. The Company
continually explores raising additional capital through such means. However,
there can be no assurance that such financing will be available in the future
on terms acceptable to the Company or at all.
The Company's outstanding indebtedness as of March 31, 1998 of $147.9 million
bears interest at fixed and variable rates currently ranging from 5.25% to
10.5%. On June 30, 1997, the Company entered into a Credit Agreement (the
"Agreement") with The Chase Manhattan Bank (the "Bank") providing for a
two-year $20 million revolving credit facility converting to a four-year term
loan at the end of two years (the "Credit Facility"). After conversion to the
term loan, the loan is to be paid off in 16 substantially equal quarterly
installments. The Company's obligations under the Agreement 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
revolving credit facility, the Company may choose between an interest rate
based on (i) the greater of the Bank's prime rate or the federal funds rate
plus .5% per annum (the "Base Rate") plus .25% per annum or (ii) the LIBO rate
(the "LIBO Rate"), plus between 1% and 2% per annum (depending on the Company's
ratio of Consolidated Funded Debt to Consolidated EBITDA (as such terms are
defined in the Agreement) ). During the term loan, the interest rate will be
increased by .5% per annum in the case of Base Rate loans and .25% per annum in
the case of LIBO Rate loans. As of March 31, 1998, the Company had no
borrowings under the Agreement.
In October 1997, the Company issued 5 3/4% Convertible Subordinated Notes
(the "Notes") due October 2004 in the aggregate principal amount of
$115 million. 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 underwriters and offering costs were approximately
$110.6 million.
In March 1998, the Company 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% during the drawdown period and at
the prime rate during the paydown period. To date, no funds have been drawn
under this loan. The Company also obtained, in March 1998, a commitment from
ORIX USA Corporation 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 Company anticipates making substantial additional expenditures in
connection with the acquisition and operation of new facilities and capital
improvements to existing facilities. Facility opening expenditures primarily
relate to projected facility construction and opening costs, associated
marketing activities and the addition of personnel. In many cases, the Company
acquires, rather than leases, the land on which its facilities are located,
which entails additional expenditures. Based on the Company's experience with
its existing golf centers, the Company believes that the cost of opening or
acquiring a golf center generally ranges from approximately $1.0 million to
$4.0 million (exclusive of land costs). The Company also intends to acquire or
construct additional ice rink facilities and Family Sports Supercenters which,
on a per facility basis, are expected to cost more than the Company's golf
centers. The Company believes that the cost of opening or acquiring ice rink
facilities will range from approximately $2.0 million to $4.0 million and the
cost of opening or acquiring a Family Sports Supercenter to range from $8.0
million to $12.0 million. However, there can be no assurance that facility
opening or acquisition costs will not exceed the amounts estimated above.
Facility opening and acquisition costs vary substantially depending on the
location and status of the acquired property (i.e. where significant
improvements are necessary) and whether the Company acquires or leases the
related land. Land acquisition costs vary substantially depending on a number
of factors, including principally location. To the extent that the Company
acquires any golf courses, the Company may be required to make capital
11
<PAGE>
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.
TRENDS
The Company plans to open additional golf centers. As such additional golf
centers commence operations, total revenue should continue to increase. In
addition, the Company believes that as its currently opened golf centers
mature, revenue and operating income from its centers should increase due to
customer awareness, programs marketing the golf centers to various special
interest groups, expanding ties to the local business and golfing community,
marketing programs, and the growing popularity of golf. Any increases may be
partially offset by initial losses from pre-opening costs and initial operating
losses associated with new golf centers.
The Company also intends to open or acquire Family Sports Supercenters which
will include golf facilities such as driving ranges, miniature golf courses and
short game practice areas and other family-oriented recreational facilities
such as ice hockey rinks, batting cages, bowling lanes, video arcades and other
amusements. The Company believes that Family Sports Supercenters expand on the
Company's concept of family-oriented recreation, add additional sources of
revenue and attract a broader base of customers than golf centers. In addition,
the majority of amenities found at Family Sports Supercenters will have the
additional benefit of being counter-seasonal to the golf business. The
additional revenue attributed to these Family Sports Supercenters will be
partially offset by initial losses from acquisition, construction and other
pre-opening costs and initial operating losses associated with new
supercenters.
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 intends to apply the skills and resources it has used in the golf
center industry to capitalize on such similarities by selectively constructing,
or acquiring and enhancing, ice rinks over the next twelve months. In
addition, the Company expects to selectively augment certain of its existing
golf centers with sports and entertainment amenities including ice rinks, video
and virtual reality games, children's rides, batting cages and other
entertainment activities to create Family Sports Supercenters. The Company
believes that the addition of these facilities expands on the Company's concept
of family-oriented sports entertainment, improves utilization by adding
additional sources of revenues, attracts a more diversified base of customers,
increase visitation and per capital spending and have the added benefit of
being counter-seasonal to the Company's core golf business. However, there
can be no assurance that the Company will acquire ice rinks or Family Sports
Supercenters on acceptable terms.
12
<PAGE>
SEASONALITY
Historically, the second and third quarters have accounted for a greater
portion of the Company's revenues than have the first and fourth quarters of
the year. This is primarily due to an outdoor playing season limited by
inclement weather. Although most of the Company's facilities are designed to be
all-weather, portions of the facilities, such as miniature golf courses which
are outdoors, tend to be vulnerable to weather conditions. One of the Company's
golf centers and one golf course are closed during a portion of the winter.
Also, golfers are less inclined to practice when weather conditions limit their
ability to play golf on outdoor courses, Since August 1995, the Company has
acquired golf centers in various locations (Arizona, California, Florida,
Georgia, North Carolina, South Carolina, Texas and Virginia) where inclement
weather may not limit the outdoor season as much as such weather limits the
outdoor playing season at the Company's golf facilities in Northern states. In
addition, the ice rink facilities and the Family Sports Supercenters are
expected to generate a substantial portion of their revenues in the first and
fourth quarters of the years and accordingly, may partially offset such
seasonality. The timing of new facility acquisitions and openings may cause the
Company's results of operations to vary significantly from quarter to quarter.
Accordingly, period-to-period comparisons are not necessarily meaningful and
should not be relied on as indicative of future results.
13
<PAGE>
INFLATION
There was no significant impact on the Company's operations as a result of
inflation during the three months ended March 31, 1998.
YEAR 2000 ISSUES
Certain of the Company's computers systems and software interpret the year 2000
as the year 1980 or some other date. The operating system generally employed by
the Company is Windows 95, which is year 2000 compliant. The networking,
general ledger and accounts payable and facility point-of-sale and pro shop
software programs require software updates or modifications to address the year
2000 problems. 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-self 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 affect on the
Company's operations, however, no assurance can be given that the software
updates and new computers will resolve the problem as scheduled or at all.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS NONE
ITEM 2. CHANGE IN SECURITIES
During the quarter ended March 31, 1998, the Company issued
an aggregate of 32,600 shares of the Company's common stock
as part of the consideration for two separate acquisitions
consisting of the acquisition of certain assets of Wright
Brothers Golf Centers and of Gyan Kalwani. Such shares were
issued in the amounts, on the dates and for the securities
or assets listed below: (i) February 23, 1998, 9,100 shares,
the Wright Brothers golf center in Holbrook, Massachusetts;
and (ii) March 13, 1998, 23,500 shares, Gyan Kalwani, the
Laguna Creek golf center located in Sacramento, California.
Such issuances were not registered under the Securities Act
of 1933 (the "Act") in reliance on the exemption provided by
Section 4(2) of the Act. None of such issuances involved any
general solicitation and each of the recipients of the Common
Stock has represented that such recipient understands that
the Common Stock may not be sold or otherwise transferred
absent registration under the Act or an exemption therefrom
and each certificate representing shares of such Common Stock
bears a legend to such effect.
ITEM 3. DEFAULT UPON SENIOR SECURITIES NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE
ITEM 5. OTHER INFORMATION NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT 27 FINANCIAL DATA SCHEDULE
(B) REPORTS ON FORM 8-K
CURRENT REPORT ON FORM 8-K, DATED JANUARY 30, 1997 AND FILED
FEBRUARY 13, 1998.
15
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: __________, 1998
Melville, NY
FAMILY GOLF CENTERS, INC.
-------------------------
(Registrant)
By:/s/Krishnan P. Thampi
---------------------
KRISHNAN P. THAMPI
President,
Chief Operating Officer,
Assistant Secretary,
and Treasurer
16
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,922,000
<SECURITIES> 7,799,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 16,576,000
<CURRENT-ASSETS> 37,520,000
<PP&E> 263,296,000
<DEPRECIATION> 7,826,000
<TOTAL-ASSETS> 338,979,000
<CURRENT-LIABILITIES> 19,326,000
<BONDS> 0
0
0
<COMMON> 196,000
<OTHER-SE> 173,073,000
<TOTAL-LIABILITY-AND-EQUITY> 338,979,000
<SALES> 19,170,000
<TOTAL-REVENUES> 19,170,000
<CGS> 2,816,000
<TOTAL-COSTS> 16,121,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,799,000
<INCOME-PRETAX> 2,206,000
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE
PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
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</LEGEND>
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
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