<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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.
225 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.
225 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:
<TABLE>
<S> <C>
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)
</TABLE>
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. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SHARES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) SHARE (2) PRICE (2) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$0.01 per share......... 4,025,000 shares $ 27.0625(2) $ 108,926,562.50 $ 32,133.34
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 525,000 shares which the Underwriters have the option to
purchase solely to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended, on
the basis of the high and low prices of the Registrant's Common Stock
reported on the Nasdaq National Market on May 20, 1998.
------------------
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 MAY 22, 1998
[LOGO]
FAMILY GOLF
CENTERS, INC.
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 May 20, 1998,
the closing price of the Common Stock as reported by the Nasdaq National Market
was $27.156. 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 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 Eagle Quest Golf Centers Inc. ("Eagle Quest") or any of the
facilities owned or operated by Eagle Quest, (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
the United States. 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 74 as of May 15, 1998, including eight
facilities under construction. 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 and increased diluted earnings per share from $0.08 in 1994 to
$0.59 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 2,700 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, presents 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 in the industry. 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 22 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.
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 revenues 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 revenues, 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 April 2, 1998, the Company entered into a
definitive merger agreement to acquire Eagle Quest (the "Eagle Quest
Acquisition"). The Company believes that Eagle Quest is the second largest
operator of golf driving ranges in North America, with 18 golf centers in
Texas, Washington and Canada. Upon consummation of the Eagle Quest Acquisition,
of which there can be no assurance, the Company will issue approximately 1.7
million shares of the Company's Common Stock, subject to certain adjustments,
to Eagle Quest's securityholders. The transaction is subject to a number of
conditions, including that it be accounted for as a pooling-of-interests and
that it receive the approval of Eagle Quest's shareholders. See "Business --
Eagle Quest."
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 225 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.............................. 23,090,330 shares (1)
Use of proceeds........................... To repay approximately $26.9
million of indebtedness of Eagle
Quest (assuming consummation of the
Eagle Quest Acquisition) and for
general corporate purposes,
including the acquisition, leasing,
development and improvement of golf
and complementary sports and
entertainment facilities. See "Use
of Proceeds."
Nasdaq National Market symbol............. FGCI
- ----------
(1) Excludes (i) 1,958,903 shares of Common Stock reserved for issuance upon
exercise of outstanding options and warrants, (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")
and (iii) 1,729,290 shares of Common Stock, subject to adjustment, to be
issued in connection with the Eagle Quest Acquisition. See "Management --
Stock Option and Award Plans," "Description of Capital Stock --
Outstanding Options and Warrants" and "Business -- Eagle Quest."
3
<PAGE>
SUMMARY FINANCIAL AND OTHER DATA(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
HISTORICAL PRO FORMA
-------------------------------------- PRO FORMA AS ADJUSTED
1995 1996 1997 1997(2) 1997(3)
------------ ------------ ------------ ----------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue ...................... $ 12,432 $ 27,904 $ 64,825 $ 72,997 $ 92,342
Operating expenses ................. 6,614 13,268 31,563 37,386 56,813
Cost of merchandise sold ........... 1,779 4,458 10,467 12,366 13,543
Selling, general and
administrative expenses ........... 1,242 3,580 5,132 12,630 13,773
-------- -------- -------- -------- --------
Operating income ................... 2,797 6,598 17,663 10,615 8,213
Net income (loss) .................. $ 1,074 $ 5,208 $ 10,524 $ 3,269 $ 2,047
Net income (loss) per share:
Basic ............................. $ 0.14 $ 0.35 $ 0.57 $ 0.17 $ 0.10
Diluted ........................... 0.14 0.34 0.56 0.16 0.09
Weighted average shares
outstanding (000s):
Basic ............................. 7,676 15,003 18,368 19,768 21,530
Diluted ........................... 7,907 15,435 18,799 20,199 21,961
GOLF FACILITY DATA:
Facilities open at beginning of
period ............................ 5 14 35 39
Facilities built during period ..... 1 1 1 1
Facilities acquired during
period (5) ........................ 8 20 17 30
-------- -------- -------- --------
Facilities open at end of
period ............................ 14 35 53 70
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------
HISTORICAL PRO FORMA
------------------------ PRO FORMA AS ADJUSTED
1997 1998 1998(2) 1998(4)
----------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue ...................... $ 9,015 $ 19,170 $ 21,497 $ 21,624
Operating expenses ................. 5,618 11,781 13,751 14,563
Cost of merchandise sold ........... 1,679 2,816 3,240 3,240
Selling, general and
administrative expenses ........... 1,086 1,524 3,442 3,442
-------- -------- -------- --------
Operating income ................... 632 3,049 1,064 379
Net income (loss) .................. $ 562 $ 1,346 $ (1,469) $ (1,107)
Net income (loss) per share:
Basic ............................. $ 0.03 $ 0.07 $ (0.07) $ (0.05)
Diluted ........................... 0.03 0.07 (0.07) (0.05)
Weighted average shares
outstanding (000s):
Basic ............................. 17,803 19,445 20,845 21,855
Diluted ........................... 18,125 20,196 20,845 21,855
GOLF FACILITY DATA:
Facilities open at beginning of
period ............................ 35 53 70
Facilities built during period ..... -- -- --
Facilities acquired during
period (5) ........................ 6 12 13
-------- -------- --------
Facilities open at end of
period ............................ 41 65 83
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1998
-----------------------------------------------
PRO FORMA
HISTORICAL PRO FORMA(2) AS ADJUSTED(6)
------------ -------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments ......... $ 9,721 $ 10,334 $ 73,682
Working capital ........................................... 18,194 10,607 78,790
Total assets .............................................. 338,979 379,002 441,348
Total debt (including current portion) .................... 147,862 171,263 147,862
Total stockholders' equity ................................ 172,742 180,589 266,336
</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," Pro Forma Financial Information and
the financial statements, and the notes thereto, of the Company, Eagle
Quest, MetroGolf and Leisure Complexes, Inc. ("LCI"), each included
elsewhere herein.
(2) Pro forma for the Eagle Quest Acquisition.
(3) 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 and
the Eagle Quest 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. See
"Use of Proceeds."
(4) Pro forma for the MetroGolf Acquisition, the Eagle Quest 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. See "Use of Proceeds."
(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) Pro forma as adjusted for the Eagle Quest Acquisition and for the
Offering (assuming an offering price of $27.156 per share) and the
application of the estimated net proceeds therefrom. 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 facilities, can be readily integrated into the Company's operating
structure. The Company's inability to efficiently integrate facilities or to
successfully enter 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. On a pro forma basis, giving effect to the Eagle Quest
Acquisition and certain acquisitions consummated after January 1, 1997 as if
they had occurred on January 1, 1997, the Company had net income of $0.4
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 $1.9 million (as compared to
net income of $1.3 million on a historical 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 Eagle Quest, 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 consummation of the Eagle Quest Acquisition is subject to a number of
conditions, many of which are outside of the control of the Company and there
can be no assurance that the Eagle Quest Acquisition will be consummated.
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 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 $148,000, respectively, and Eagle
Quest's net losses for such periods were $7.3 million and $886,000,
respectively. On a pro forma basis, giving effect to the contemplated Eagle
Quest Acquisition as if it had occurred on January 1, 1997, 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 $1.5
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
$26.2 million of additional indebtedness (the "Eagle Quest Debt"), and other
obligations of approximately $5.0 million. In addition, in the period that the
Eagle Quest Acquisition is consummated, the Company anticipates that it will
incur significant cash and non-cash charges 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. 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."
On April 27, 1998, the Company agreed to loan Eagle Quest up to $2.3
million, $1.9 million of which has been borrowed as of May 15, 1998. The loan
bears interest at a rate of 15% per annum during the first three months of the
loan and 20% per annum during the second three months of the loan. The loan is
secured by the stock of an Eagle Quest subsidiary and is due on October 27,
1998. There is no requirement that repayment of the loan be accelerated if the
merger agreement is terminated and, accordingly, the Company may be a creditor
of Eagle Quest even if the Eagle Quest Acquisition is not consummated.
The Eagle Quest Acquisition, if consummated, involves the acquisition of a
Canadian-based company with a number of Canadian-based properties. Accordingly,
the Company will become subject 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.
DEPENDENCE ON THE GOLF INDUSTRY AND DISCRETIONARY CONSUMER SPENDING
Although the Company has begun expanding 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
family entertainment activities like those 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.
6
<PAGE>
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 $26.9 million of the
Eagle Quest Debt (if the Eagle Quest Acquisition is consummated) 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 Golden Bear Golf Centers, Inc. (the "Licensor"). Golden Bear
Golf, Inc., an affiliate 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.
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 March 31, 1998, are expected 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 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.
7
<PAGE>
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. In addition, 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.
LEVERAGE, DEBT SERVICE AND COVENANTS
Pro forma for the Offering (at an assumed offering price of $27.156 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. 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
8
<PAGE>
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 $1.5 million
on the life of Mr. Chang. The Company does not intend to renew such policy when
it expires. 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 $27.156 per share of Common Stock,
purchasers in the Offering will experience immediate and substantial dilution
of $17.46 in net tangible book value per share of the Common Stock.
SIGNIFICANT STOCKHOLDER
Following completion of the Offering, Dominic Chang will beneficially own
3,749,001 shares of Common Stock, constituting approximately 16.2% of
outstanding shares (without giving effect to shares which may be issued
pursuant to the Eagle Quest Acquisition). 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
9
<PAGE>
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. 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 $90.2 million, after deducting underwriting
discounts and estimated offering expenses payable by the Company ($103.8
million if the Underwriters' over-allotment option is exercised in full), based
upon an assumed offering price of $27.156 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 ............................ $ 95.0 Repayment of Eagle Quest Debt (1) .............. $ 26.9
Capital improvements and construction (2) ...... 44.3
General corporate purposes, including
acquisitions .................................. 19.0
Fees and expenses .............................. 4.8
-------
Total sources of funds .............................. $ 95.0 Total uses of funds .......................... $ 95.0
====== =======
</TABLE>
- ----------
(1) Includes the repayment of approximately $26.9 million of debt to be
assumed pursuant to the Eagle Quest Acquisition, including (i) $10.9
million bearing interest at LIBOR plus 4.0% per annum, payable in monthly
installments through September 2002, plus $545,000 as a prepayment
penalty, (ii) $2.4 million bearing interest at 3.5% per month and payable
on demand, (iii) $1.8 million 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 $1.6 million first and second mortgage at 9.0% and
17.75% per annum, respectively, payable in monthly installments through
April 2000, (v) $2.5 million redeemable debentures due May 2002 bearing
interest at 12.5% per annum, plus $100,000 as a prepayment penalty, (vi)
$4.0 million redeemable debentures due June 2002 bearing interest at
13.5% per annum, (vii) a $800,000 mortgage payable in monthly
installments through February 2011 bearing interest at 6.9% per annum,
(viii) loans aggregating $700,000 from related parties bearing interest
at 15% per annum and due April 1998, (ix) a $425,000 mortgage bearing
interest at 13.0% per annum, increasing 1% per month to 25% per annum at
and from September 1999, due on July 1998, (x) a $300,000 mortgage
bearing interest at 7.0%, payable in monthly installments through April
2011 and (xi) $920,000 of other notes and liabilities to be assumed in
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.
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 (through May 20, 1998) ......... $ 31.00 $ 26.68
</TABLE>
On May 20, 1998, the last reported sale price for the Company's Common
Stock on the Nasdaq National Market was $27.156 per share. As of May 20, 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 pro forma capitalization of the
Company to give effect to the Eagle Quest Acquisition and the pro forma as
adjusted capitalization to give effect to the Eagle Quest Acquisition and the
Offering (assuming an offering price of $27.156 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," Pro Forma Unaudited
Condensed Balance Sheet, and the notes thereto, and the Company's financial
statements, and the notes thereto, each included elsewhere herein.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments...... $ 9,721 $ 10,334 $ 73,682
======== ======== ========
Total debt (including current portion):
Credit Facility (1) .................................. -- -- --
Other debt ........................................... 32,862 56,263 32,862
Convertible subordinated notes ....................... 115,000 115,000 115,000
-------- -------- --------
Total debt (including current portion) ............. 147,862 171,263 147,862
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
(20,994,000 shares pro forma, 24,494,000 shares pro
forma as adjusted) (2) ............................. 196 210 245
Additional paid-in capital ........................... 157,084 175,814 266,049
Retained earnings .................................... 16,036 5,080 557
Foreign currency translation adjustment .............. -- 214 214
Unearned compensation ................................ (527) (682) (682)
Treasury stock ....................................... (47) (47) (47)
-------- -------- --------
Total stockholders' equity ......................... 172,742 180,589 266,336
-------- -------- --------
Total capitalization ............................... $320,604 $354,681 $417,027
======== ======== ========
</TABLE>
- ----------
(1) The Company is currently negotiating to replace its existing Credit
Facility with a new credit facility which is expected to have increased
borrowing capacity, although there can be no assurance that such credit
facility can be obtained.
(2) Excludes (i) 1,958,903 shares of Common Stock reserved for issuance upon
exercise of outstanding options and warrants, (ii) 4,630,872 shares of
Common Stock issuable upon conversion of the Notes and (iii) 1,729,290
shares of Common Stock, subject to adjustment, to be issued in connection
with the Eagle Quest Acquisition. See "Management -- Stock Option and
Award Plans," "Description of Capital Stock -- Outstanding Options and
Warrants" and "Business -- Eagle Quest."
13
<PAGE>
SELECTED FINANCIAL DATA
The following table presents summary historical, pro forma and pro forma
as adjusted financial and other data of the Company. The pro forma financial
and other data give effect to the Eagle Quest Acquisition as if it had occurred
at the beginning of the stated periods. The pro forma as adjusted financial
data for the year ended December 31, 1997 give effect to (i) the Eagle Quest
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. The pro forma as adjusted financial data for the three months
ended March 31, 1998 give effect to (i) the Eagle Quest 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 pro forma balance sheet data gives effect to the Eagle
Quest Acquisition and the pro forma as adjusted balance sheet data gives
effect to the Eagle Quest Acquisition and the Offering (assuming an offering
price of $27.156 per share) and the application of the estimated net proceeds
therefrom, as if they had occurred on March 31, 1998. The pro forma and pro
forma as adjusted 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," Pro Forma Financial
Information and the financial statements, and the notes thereto, of the
Company, Eagle Quest, MetroGolf and LCI, each included elsewhere herein.
14
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
HISTORICAL PRO FORMA
------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1996(1) 1997(1)
----------- --------- ---------- ---------- ----------- ----------- -----------
(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 ........................ 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 (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 $ 0.26 $ 0.17
Extraordinary item .................. -- -- (0.02) -- -- -- --
------- ------ ------- ------- -------- ------- --------
Net income (loss) ................... (0.16) 0.09 0.14 0.35 0.57 0.26 0.17
Net income per share, diluted:
Income (loss) before
extraordinary item ................. (0.15) 0.09 0.16 0.34 0.56 0.26 0.16
Extraordinary item .................. -- -- (0.02) -- -- -- --
------- ------ ------- ------- -------- ------- --------
Net income (loss) ................... $ (0.15) $ 0.09 $ 0.14 $ 0.34 $ 0.56 $ 0.26 $ 0.16
======= ====== ======= ======= ======== ======= ========
Weighted average shares
outstanding (000's):
Basic ............................... 4,830 5,379 7,676 15,003 18,368 16,403 19,768
Diluted ............................. 4,911 5,454 7,907 15,435 18,799 16,835 20,199
GOLF FACILITY DATA:
Facilities open at beginning of
period ............................. 1 2 5 14 35 14 39
Facilities built during period ...... 1 2 1 1 1 1 1
Facilities acquired during the
period(4) .......................... 0 1 8 20 17 24 30
------- ------ ------- ------- -------- ------- --------
Facilities open at end of period 2 5 14 35 53 39 70
<CAPTION>
YEAR ENDED
DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------- ---------------------------------------------------------
PRO FORMA HISTORICAL PRO FORMA PRO FORMA
AS ADJUSTED -------------------- ----------------------- AS ADJUSTED
1997(2) 1997 1998 1997(1) 1998(1) 1998(3)
------------- --------- ---------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue ....................... $ 92,342 $ 9,015 $ 19,170 $ 9,701 $ 21,497 $ 21,624
Operating expenses .................. 56,813 5,618 11,781 6,030 13,751 14,563
Cost of merchandise sold ............ 13,543 1,679 2,816 1,932 3,240 3,240
Selling, general and
administrative expenses ............ 13,773 1,086 1,524 2,245 3,442 3,442
-------- ------- -------- ------- -------- --------
Operating income (loss) ............. 8,213 632 3,049 (506) 1,064 379
Interest expense .................... (4,405) (191) (1,799) (308) (2,629) (1,890)
Other income ........................ 1,125 466 956 466 956 908
-------- ------- -------- ------- -------- --------
Income before income taxes,
minority interest and
extraordinary item ................. 4,933 907 2,206 (348) (609) (603)
Income tax expenses (benefit) ....... 2,986 345 860 345 860 522
-------- ------- -------- ------- -------- --------
Income (loss) before minority
interest and extraordinary
Item ............................... 1,947 562 1,346 (693) (1,469) (1,125)
Minority interest (income) loss ..... 100 -- -- -- -- 18
Extraordinary item (net of tax
effect) ............................ -- -- -- -- -- --
-------- ------- -------- ------- -------- --------
Net income (loss) ................... $ 2,047 $ 562 $ 1,346 $ (693) $ (1,469) $ (1,107)
======== ======= ======== ======= ======== ========
Net income per share, basic:
Income (loss) before
extraordinary item ................. $ 0.10 $ 0.03 $ 0.07 $ (0.04) $ (0.07) $ (0.05)
Extraordinary item .................. -- -- -- -- -- --
-------- ------- -------- ------- -------- --------
Net income (loss) ................... 0.10 0.03 0.07 (0.04) (0.07) (0.05)
Net income per share, diluted:
Income (loss) before
extraordinary item ................. 0.09 0.03 0.07 (0.04) (0.07) (0.05)
Extraordinary item .................. -- -- -- -- -- --
-------- ------- -------- ------- -------- --------
Net income (loss) ................... $ 0.09 $ 0.03 $ 0.07 $ (0.04) $ (0.07) $ (0.05)
======== ======= ======== ======= ======== ========
Weighted average shares
outstanding (000's):
Basic ............................... 21,530 17,803 19,445 19,023 20,845 21,855
Diluted ............................. 21,961 18,125 20,196 19,023 20,845 21,855
GOLF FACILITY DATA:
Facilities open at beginning of
period ............................. 35 53 39 70
Facilities built during period ...... 0 0 0 --
Facilities acquired during the
period(4) .......................... 6 12 6 13
------- -------- ------- --------
Facilities open at end of period 41 65 45 83
</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 (6) .... $ 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
-------------------------------------------
PRO FORMA
HISTORICAL PRO FORMA(1) AS ADJUSTED(5)
------------ -------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents (6) .... $ 9,721 $ 10,334 $ 73,682
Working capital .................. 18,194 10,607 78,790
Total assets ..................... 338,979 379,002 441,348
Total debt ....................... 147,862 171,263 147,862
Total stockholders' equity ....... 172,742 180,589 266,336
</TABLE>
- ---------
(1) Pro forma for the Eagle Quest Acquisition.
(2) Pro forma for the 1997 Acquisitions, the LCI Acquisition, the MetroGolf
Acquisition, the Eagle Quest 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.
15
<PAGE>
(3) Pro forma for the MetroGolf Acquisition, the Eagle Quest 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. See "Use of Proceeds."
(4) 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.
(5) Pro forma as adjusted for the Eagle Quest Acquisition and the Offering
(assuming an offering price of $27.156 per share) and the application of
the estimated net proceeds therefrom. See "Use of Proceeds."
(6) Includes short-term investments.
16
<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.
GENERAL
Family Golf is the 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) 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 73 as of March 31, 1998,
including eight facilities under construction. 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, and increased diluted earnings per share
from $0.08 in 1994 to $0.59 for the twelve months ended March 31, 1998.
The Company's facilities have opened 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 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
centers from food and beverage sales, video games and batting cages. The
Company derives revenues 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 revenues 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 revenues 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."
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected operations data of the Company
expressed as a percentage of total revenue (except for operating expenses which
is expressed as a percentage of operating revenue and cost of merchandise sold
which is expressed as a percentage of merchandise sales) for the periods
indicated below:
<TABLE>
<CAPTION>
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 27.3 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 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.
18
<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.
19
<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 there being 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 $0.4 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.
20
<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 $0.4 million in 1996 from $0.9 million in
1995. Other income, primarily interest income, increased to $2.2 million in
1996 from $0.1 million 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.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash, cash equivalents and short-term
investments of $9.7 million compared to $61.8 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.
The Company's outstanding indebtedness as of March 31, 1998 of $147.9
million bears interest at fixed and variable rates currently ranging from 5.3%
to 15% per annum. During the fourth quarter of 1997, the Company 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, in whole or in part, at declining premiums commencing on October 15,
2003, together with accrued and unpaid interest, except that no redemption may
be made prior to October 15, 2000. 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.
On June 30, 1997, the Company 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"). As of
March 31, 1998, the Company had no outstanding borrowings under 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
21
<PAGE>
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. The Company is
currently negotiating to replace the Credit Facility with a new credit facility
which will have increased borrowing capacity over the Credit Facility, although
there can be no assurance that such a credit facility can be obtained.
In connection with the acquisition of LCI, the Company 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 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, 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 1.0% during the drawdown period and
at the prime rate during the paydown period. 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 the Company'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
5.25% 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.
If the Eagle Quest Acquisition had been consummated as of March 31, 1998,
the Company's indebtedness and contingent obligations would have increased by
approximately $26.3 million (all of which the Company currently plans to repay
upon such consummation or shortly thereafter) and approximately $2.3 million,
respectively. 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 (i) 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.
In addition, the Company made a loan to Eagle Quest of $1.9 million, which
matures in October 1998, bears interest at a rate of 15.0% per annum during the
first three months of its term and 20.0% per annum during the second three
months of its term. The loan is secured by a pledge of the stock of an Eagle
Quest subsidiary which owns three golf facilities. There is no requirement that
repayment of the loan be accelerated if the merger agreement is terminated and,
accordingly, the Company may be a creditor of Eagle Quest even if the Eagle
Quest Acquisition is not consummated.
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
22
<PAGE>
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 PENDING EAGLE QUEST ACQUISITION
On a pro forma basis, giving effect to the Eagle Quest Acquisition and
certain acquisitions consummated after January 1, 1997 as if they had occurred
on January 1, 1997, the Company had net income of $0.4 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 $1.9 million (as compared to net income of $1.3
million on a historical 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 Eagle Quest 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" and "-- Certain Factors Related to Eagle Quest."
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
23
<PAGE>
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. 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 as of March 31, 1998, the cumulative
effect of the change would have resulted in an expense of $2.8 million.
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.
24
<PAGE>
BUSINESS
Family Golf is the leading consolidator and operator of golf centers in
the United States. 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 74 as of May 15, 1998, including eight
facilities under construction. 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 and increased diluted earnings per share from $0.08 in 1994 to
$0.59 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 22 of the top 30 MSAs areas in the United States
and intends to focus its consolidation efforts on extending its
operations into the top 30 MSA in which it 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 revenues 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 revenues, 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.
RECENT DEVELOPMENTS
Eagle Quest Acquisition. On April 2, 1998, the Company entered into a
definitive merger agreement to acquire Eagle Quest. The Company believes that
Eagle Quest, is the second largest operator of golf driving ranges in North
America, with 18 golf centers in Texas, Washington and
25
<PAGE>
Canada. Upon consummation of the Eagle Quest Acquisition, of which there can be
no assurance, the Company will issue approximately 1.7 million shares of the
Company's Common Stock, subject to certain adjustments, to Eagle Quest's
securityholders. The transaction is subject to a number of conditions,
including that it be accounted for as a pooling-of-interests and that it
receive the approval of Eagle Quest's shareholders. See "-- Eagle Quest."
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. The Company believes that it is in
position to capitalize on the continued popularity of golf and particularly the
increasing number of beginning golfers. In addition, the GRRAA estimates that
in 1997 there were approximately 2,700 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 centers in the industry. 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 (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
26
<PAGE>
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 May 15, 1998, the Company operated three regulation 18-hole golf
courses and 15 par-3 or executive golf courses. The Company is also currently
constructing one 9-hole executive golf course. Each of the courses has a
clubhouse, a pro shop, a driving range and PGA-certified golf instructors on
site and banquet facilities or a restaurant.
27
<PAGE>
As of May 15, 1998, the Company owned, leased or managed 74 golf
facilities in 20 states, eight of which are under construction. Set forth below
is information concerning each of the Company's 66 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]
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] --
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]
<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 two Leased Aug. 1996
Fountain Inn, SC ....... 27-hole -- 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
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
</TABLE>
28
<PAGE>
- ----------
(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.
(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.
(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.
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.
The Company currently has eight 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 and Broward County, Florida. 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.
29
<PAGE>
In addition, Eagle Quest, which will become a wholly-owned subsidiary of
the Company upon consummation of the Eagle Quest Acquisition, currently owns or
leases 18 golf centers in the United States and Canada. Set forth below is
information concerning each of the locations operated by Eagle Quest:
<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>
Nanaimo, BC ............. 22 35 [X] [X]
Kelowna, BC ............. 40 13 [X] [X]
Kent, WA ................ 91 13 [X] [X]
Tacoma, WA .............. 55 15 [X] [X]
Vancouver, BC ........... 80 57 [X] [X]
Austin, TX .............. 75 25 [X] [X]
Dallas, TX .............. 55 27 [X] [X]
Houston, TX ............. 121 25 [X] [X]
Kingwood, TX ............ 50 65 [X] [X]
San Antonio, TX ......... 50 25 [X] [X]
Olympia, WA ............. 90 35 [X] [X]
Tumwater, WA ............ 28 36 [X] [X]
San Antonio, TX ......... 100 12 [X] [X]
Fort Worth, TX .......... 70 52 [X] [X]
Calgary, AL ............. 50 2 [X] --
Fort Worth, TX .......... 35 23 -- --
Houston, TX ............. 44 20 [X] [X]
Calgary, TX ............. 30 96 [X] [X]
<CAPTION>
DATE
GOLF MINIATURE OWNED OR OPENED
LOCATION OF FACILITY COURSE GOLF COURSES LEASED OR ACQUIRED(2)
- ------------------------- --------------- -------------- ---------- ---------------
<S> <C> <C> <C> <C>
Nanaimo, BC ............. 9-hole par 3 -- Owned Oct. 1996
Kelowna, BC ............. -- -- Leased Nov. 1996
Kent, WA ................ -- -- Owned Jan. 1997
Tacoma, WA .............. -- -- Owned Jan. 1997
Vancouver, BC ........... 18-hole exec -- Leased May 1997(3)
Austin, TX .............. -- -- Leased June 1997
Dallas, TX .............. 4-hole par-3 [X] Leased June 1997
Houston, TX ............. -- -- Leased June 1997
Kingwood, TX ............ 9-hole par-3 -- Leased June 1997
San Antonio, TX ......... -- -- Leased June 1997
Olympia, WA ............. 3-hole -- Leased June 1997
practice
Tumwater, WA ............ 9-hole exec. -- Leased June 1997
San Antonio, TX ......... -- -- Leased Aug. 1997
Fort Worth, TX .......... -- -- Owned Sept. 1997
Calgary, AL ............. -- -- Leased Nov. 1997
Fort Worth, TX .......... -- -- Leased Dec. 1997
Houston, TX ............. -- -- Leased Dec. 1997
Calgary, TX ............. 18-hole exec. -- Owned March 1998
</TABLE>
- ----------
(1) Instructors in Canada may be certified by the Canadian Professional Golf
Association rather than the PGA.
(2) Represents the first month that the facility generated revenue for Eagle
Quest.
(3) This facility has been under the management of Eagle Quest since May 1997
and was acquired in September 1997.
Eagle Quest currently has two golf centers under development. These
facilities are located in Coquitlan, British Columbia and Tacoma, Washington.
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
30
<PAGE>
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.
As of May 15, 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
31
<PAGE>
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 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.
EAGLE QUEST
On April 2, 1998, the Company entered into a definitive merger agreement
pursuant to which Eagle Quest will become a wholly-owned subsidiary of the
Company (the "Merger Agreement"). The Company believes that Eagle Quest is the
second largest operator of golf driving ranges in North America, with 18 golf
centers in Texas, Washington and Canada.
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, to Eagle Quest's securityholders. The number of
shares of the Company's Common Stock issuable under the Merger Agreement shall
be reduced, among other things, for certain fees and expenses in exchange for
or pursuant to certain of Eagle Quest's outstanding options and warrants, and
liabilities in excess of a defined amount. The consummation of the transaction
is subject to a number of conditions, including (i) approval of Eagle Quest's
shareholders (75% of those present and entitled to vote at a meeting scheduled
for June 1998), (ii) certain regulatory approvals (including approval under the
Hart-Scott-Rodino Antitrust Improvement Acts of 1976), (iii) clearance from the
Securities and Exchange Commission to the application of pooling-of-interests
accounting to the transaction, (iv) Eagle Quest's warrant holders exercising or
agreeing to exchange their warrants for the Company's Common Stock, (v) the
receipt of certain consents (including landlord's consents) and (vi) other
conditions. If the agreement is terminated as a result of a breach by either
party, the non-breaching party will be entitled to liquidated damages in the
amount of $2.0 million (plus, if Eagle Quest is the breaching party, certain
out-of-pocket expenses of the Company). The Company agreed to loan Eagle Quest
up to $2.3 million, of which $1.9 million has been drawn down as of May 15,
1998. This loan was made for the purposes of allowing Eagle Quest to pay down
certain indebtedness and to make capital improvements to certain of its
facilities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
32
<PAGE>
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 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.
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. Golden Bear
Golf, Inc., an affiliate 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.
EMPLOYEES
The Company had, as of April 30, 1998, 1,868 employees, of which 720 were
full-time employees and 1,148 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
33
<PAGE>
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
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.
34
<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
35
<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
36
<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 currently
exercisable.
(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 currently
exercisable.
37
<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 currently
exercisable.
(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 currently
exercisable.
(8) Stock options to purchase 52,500 shares of Common Stock were granted in
November 1997 at $17.709 per share (the fair market value of the Common
Stock on the date of such grant); none of these options are currently
exercisable.
No options were granted to Mr. Chang during the fiscal year ended December
31, 1997. The following table sets forth certain information concerning options
granted to Mr. Thampi during the fiscal year ended December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
----------------------------------------------------------------- --------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE
NAME GRANTED(1) FISCAL YEAR ($/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 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,
38
<PAGE>
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 at the
annual meeting of stockholders, the stockholders will be asked to approve 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.
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
39
<PAGE>
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 March 31, 1998, options to purchase 1,638,375 shares of Common Stock
have been granted under the Plans, of which options to purchase 226,834 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--
40
<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.
41
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of March 26, 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., 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) 19.2% 16.2%
The TCW Group, Inc. (4) ........................ 1,817,700 9.3% 7.9%
Scudder Kemper Investments, Inc.(9) ............ 1,555,620 7.9% 6.7%
Wells Fargo Bank, N.A.(10) ..................... 1,294,830 6.6% 5.6%
ICM Asset Management, Inc.(11) ................. 1,156,650 5.9% 5.0%
Krishnan P. Thampi (1) ......................... 280,466(7) 1.4% 1.2%
Jimmy C.M. Hsu (1) ............................. 171,875(5)(6) * *
James Ganley (1) ............................... 43,250(12) * *
Yupin Wang (1) ................................. 5,000(13) * *
All directors and executive officers of the 18.9%
Company as a group (thirteen persons) ......... 4,378,584(2)(3)(5)
(6)(7)(8) 22.4%
</TABLE>
- ----------
* Less than 1%.
(1) The address of such stockholder is: c/o Family Golf Centers, Inc., 225
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 1,107,501 shares pledged to banks to secure
personal loans to Mr. Chang.
(4) The address of The TCW Group, Inc. is: 865 Figueroa Street, Los Angeles,
California 90017.
(5) 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.
(6) Includes 15,500 shares of Common Stock issuable upon exercise of options
which are currently exercisable.
(7) Includes 142,541 shares of Common Stock issuable upon exercise of options
which are currently exercisable.
(8) Includes 127,194 shares of Common Stock in addition to those referred to
in notes (2) (3), (6), (7) above, issuable upon exercise of options which
are currently exercisable.
(9) The address of Scudder Kemper Investments ("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 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.
42
<PAGE>
(10) The address of the Wells Fargo Bank is: 343 Sansome Street, 3rd Fl., San
Francisco, CA 94163.
(11) The address of the ICM Asset Management, Inc. is: 601 W. Main Avenue,
Suite 600, Spokane, WA 99201.
(12) Includes 15,500 shares of Common Stock issuable upon exercise of options
which are currently exercisable.
(13) Includes 5,000 shares of Common Stock issuable upon exercise of options
which are currently exercisable.
43
<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 19,590,330 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
44
<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
1,491,791 shares of Common Stock at prices ranging from $2.33 to $68.00 per
share, with a weighted average price per share of $14.499.
Of such options, options to purchase 1,214,159 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
277,632 shares of Common Stock have been issued to certain executive officers,
which expire in 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 372,192 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 83,507 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.
45
<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 the Underwriters named below (the "Underwriters"), for whom
Jefferies & Company, Inc., BancAmerica Robertson Stephens, CIBC Oppenheimer
Corp., EVEREN Securities, Inc. and Prudential Securities Incorporated, are
acting as the representatives (the "Representatives"), 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 Representatives.
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 Representatives 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
46
<PAGE>
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.
Penalty bids permit the Representatives 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. Pursuant to an agreement between Eagle Quest
and BARS relating to the retention, Eagle Quest is required to pay to BARS
certain fees upon the closing of a transaction (including without limitation
upon the closing of the proposed Eagle Quest Acquisition), 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 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 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
47
<PAGE>
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.
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., 225 Broadhollow
Road, Melville, New York 11747; Attention: Chief Financial Officer. The
Company's telephone number is (516) 694-1666.
48
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
INDEX TO PRO FORMA FINANCIAL INFORMATION
<TABLE>
<S> <C>
Pro Forma and Pro Forma As Adjusted Unaudited Condensed Balance Sheet at March 31,
1998 .................................................................................... P-2
Notes to Pro Forma and Pro Forma As Adjusted 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 Unaudited Condensed Statements of Operations for the Year Ended
December 31, 1996 ....................................................................... P-6
Pro Forma Unaudited Condensed Statement of Operations for the Three Months Ended
March 31, 1997 .......................................................................... P-7
Pro Forma and Pro Forma As Adjusted Unaudited Condensed Statements of Operations for
the Year Ended December 31, 1997 ........................................................ P-8
Notes to Pro Forma and Pro Forma As Adjusted Unaudited Statement of Operations for the
Year Ended December 31, 1997 ............................................................ P-9
Pro Forma and Pro Forma As Adjusted Unaudited Condensed Statement of Operations for
the Three Months Ended March 31, 1998 ................................................... P-10
Notes to the Pro Forma and Pro Forma As Adjusted Unaudited Condensed Statement of
Operations for the Three Months Ended March 31, 1998 .................................... P-11
</TABLE>
P-1
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
PRO FORMA AND PRO FORMA AS ADJUSTED UNAUDITED
CONDENSED BALANCE SHEET
AT MARCH 31, 1998
The following pro forma condensed balance sheet assumes the consummation
of the Eagle Quest Acquisition as if it had occurred on March 31, 1998 and is
accounted for as pooling-of-interests in accordance with Accounting Principles
Board Opinion No. 16. The pro forma as adjusted unaudited condensed balance
sheet at March 31, 1998 reflects the Eagle Quest Acquisition and the assumed
repayment of outstanding indebtedness from the net proceeds from the sale of
1,044,000 shares of Common Stock of the Company at an assumed offering price of
$27.156 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 and pro forma as adjusted unaudited condensed balance sheets
should be read in conjunction with the notes thereto, the financial statements
of the Company and Eagle Quest, 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
unaudited condensed balance sheets are 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 AND PRO FORMA AS ADJUSTED UNAUDITED
CONDENSED BALANCE SHEET
AT MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THE EAGLE QUEST PRO FORMA
COMPANY ACQUISITION ADJUSTMENTS
----------- ----------------- -------------
<S> <C> <C> <C>
ASSETS
- ------
Cash and cash equivalents ............. $ 1,922 $ 289 --
Restricted cash deposits .............. -- 324 --
Short-term investments ................ 7,799 -- --
Inventories ........................... 16,576 2,060 --
Prepaid expenses and other current
assets ............................... 9,316 521 --
Prepaid income taxes .................. 1,907 -- --
-------- ---------- ---------
Total current assets .................. 37,520 3,194 --
Property, plant and equipment ......... 255,470 29,270 --
Loan acquisition costs ................ 5,007 1,002 --
Other assets .......................... 6,935 1,721 --
Excess of cost over fair value ........ 34,047 4,836 --
-------- ---------- ---------
Total assets ....................... $338,979 $ 40,023 --
======== ========== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
- --------------------
Accounts payable, accrued
expenses and other current
liabilities .......................... $ 12,556 $ 5,946 --
Current portion long-term
obligations .......................... 6,770 4,835 --
-------- ---------- ---------
Total current liabilities .......... 19,326 10,781 --
Convertible subordinated notes ........ 115,000 -- --
Long-term obligations (less current
portion) ............................. 26,092 13,501 --
Subordinated debentures ............... -- 5,065 --
Redeemable equity securities .......... -- 2,829 --
Deferred rent ......................... 709 -- --
Deferred tax liability ................ 4,196 -- --
Other liabilities ..................... 700 -- --
-------- ---------- ---------
Total liabilities .................. 166,023 32,176 --
Minority interest ..................... 214 -- --
Common stock .......................... 196 12,764 (A) $ (12,750)
Additional paid in capital ............ 157,084 5,980 (A) $ 12,750
Retained earnings ..................... 16,036 (10,956) --
Foreign currency translation
adjustment ........................... -- 214 --
Unearned compensation ................. (527) (155) --
Treasury stock ........................ (47) -- --
-------- ---------- ---------
Total stockholders' equity ......... 172,742 7,847 --
-------- ---------- ---------
Total liabilities and
stockholders' equity .............. $338,979 $ 40,023 --
======== ========== =========
<CAPTION>
PRO FORMA
REFLECTING THE
PRO FORMA EAGLE QUEST
REFLECTING THE ACQUISITION AND
EAGLE QUEST PRO FORMA REPAYMENT OF
ACQUISITION ADJUSTMENTS DEBT
------------------ ------------- ----------------
<S> <C> <C> <C>
ASSETS
- ------
Cash and cash equivalents ............. $ 2,211 -- $ 2,211
Restricted cash deposits .............. 324 -- 324
Short-term investments ................ 7,799 -- 7,799
Inventories ........................... 18,636 -- 18,636
Prepaid expenses and other current
assets ............................... 9,837 -- 9,837
Prepaid income taxes .................. 1,907 -- 1,907
----------- --------- --------
Total current assets .................. 40,714 -- 40,714
Property, plant and equipment ......... 284,740 284,740
Loan acquisition costs ................ 6,009 (C) $ (1,002) 5,007
Other assets .......................... 8,656 -- 8,656
Excess of cost over fair value ........ 38,883 -- 38,883
----------- --------- --------
Total assets ....................... $ 379,002 $ (1,002) $378,000
=========== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
- ---------------------
Accounts payable, accrued
expenses and other current
liabilities .......................... $ 18,502 -- $ 18,502
Current portion long-term
obligations .......................... 11,605 (B) $ (4,835) 6,770
----------- --------- --------
Total current liabilities .......... 30,107 (4,835) 25,272
Convertible subordinated notes ........ 115,000 -- 115,000
Long-term obligations (less current
portion) ............................. 39,593 (B) (13,501) 26,092
Subordinated debentures ............... 5,065 (B) (5,065) --
Redeemable equity securities .......... 2,829 -- 2,829
Deferred rent ......................... 709 -- 709
Deferred tax liability ................ 4,196 -- 4,196
Other liabilities ..................... 700 -- 700
----------- --------- --------
Total liabilities .................. 198,199 (23,401) 174,798
Minority interest ..................... 214 -- 214
Common stock .......................... 210 (B) 10 220
Additional paid in capital ............ 175,814 (B) 26,912 202,726
Retained earnings ..................... 5,080 (C) (1,002) 557
(D) (3,521)
Foreign currency translation
adjustment ........................... 214 -- 214
Unearned compensation ................. (682) -- (682)
Treasury stock ........................ (47) -- (47)
----------- --------- --------
Total stockholders' equity ......... 180,589 22,399 202,988
----------- --------- --------
Total liabilities and
stockholders' equity .............. $ 379,002 $ (1,002) $378,000
=========== ========= ========
</TABLE>
P-3
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA AND PRO FORMA AS ADJUSTED UNAUDITED CONDENSED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(A) To reflect the issuance of 1,400,000 shares of Common Stock for the assumed
Eagle Quest Acquisition.
(B) Reflects the sale of 1,044,000 shares of Common Stock of the Company at an
assumed offering price of $27.156 per share, the net proceeds of which
will be used to repay indebtedness of $26,277, including $645 of
prepayment penalties and $2,876 of debt discounts.
(C) To write-off loan acquisition costs relating to the repayment of debt.
(D) 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 statements of operations for
the year ended December 31, 1996 and the three months ended March 31, 1997
assumes the consummation of the Eagle Quest Acquisition as if such transaction
had occurred on January 1, 1996 and January 1, 1997, respectively, and that
such transaction is accounted for as a pooling-of-interests in accordance with
Accounting Principles Board Opinion No. 16 ("APB No. 16").
The following pro forma unaudited condensed statement of operations for
the year ended December 31, 1997 assumes the consummation of the Eagle Quest
Acquisition and reflects the LCI Acquisition, the MetroGolf Acquisition
(together, the "Acquired Companies") and the 1997 Acquisitions (as defined) 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 430,000 shares of Common Stock of the Company at an assumed offering price
of $27.156 per share. The acquisition of the Acquired Companies and the 1997
Acquisitions have been accounted for as purchases in accordance with APB 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 assumes the consummation of the Eagle
Quest Acquisition and reflects the MetroGolf 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 1,010,000
shares of Common Stock of the Company at an assumed offering price of $27.156
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
financial statements of the Company, Eagle Quest and the Acquired Companies,
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 acquired 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 UNAUDITED CONDENSED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
REFLECTING THE
THE EAGLE QUEST EAGLE QUEST
COMPANY ACQUISITION (1) ACQUISITION
----------- ----------------- ---------------
<S> <C> <C> <C>
Operating revenues ................................... $21,368 $ 27 $21,395
Merchandise sales .................................... 6,536 121 6,657
------- -------- -------
Total revenue ........................................ 27,904 148 28,052
Operating expenses ................................... 13,268 67 13,335
Cost of merchandise sold ............................. 4,458 82 4,540
Selling, general, and administrative expense ......... 3,580 1,180 4,760
------- -------- -------
Operating income (loss) .............................. 6,598 (1,181) 5,417
Interest expense ..................................... (370) (13) (383)
Other income ......................................... 2,172 -- 2,172
------- -------- -------
Income (loss) before income taxes .................... 8,400 (1,194) 7,206
Income tax expense (benefit) ......................... 3,192 (308) 2,884
------- -------- -------
Net income (loss) .................................... $ 5,208 $ (886) $ 4,322
======= ======== =======
Net income per share:
Basic ............................................... $ 0.35 $ 0.26
Diluted ............................................. 0.34 0.26
Weighted average shares outstanding (000s):
Basic ............................................... 15,003 1,400(A) 16,403
Effect of dilutive securities ....................... 432 -- 432
------- -------- -------
Diluted ............................................. 15,435 1,400(A) 16,835
</TABLE>
- ----------
(1) Represents operations from inception (February 5, 1996) through December
31, 1996.
(A) To reflect the issuance of 1,400,000 shares of Common Stock for the assumed
Eagle Quest Acquisition.
P-6
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
PRO FORMA UNAUDITED CONDENSED
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
EAGLE QUEST REFLECTING THE EAGLE
THE COMPANY ACQUISITION (1) QUEST ACQUISITION
------------- ----------------- ---------------------
<S> <C> <C> <C>
Operating revenues ................................... $ 6,522 $ 352 $ 6,874
Merchandise sales .................................... 2,493 334 2,827
------- -------- -------
Total revenue ........................................ 9,015 686 9,701
Operating expenses ................................... 5,618 412 6,030
Cost of merchandise sold ............................. 1,679 253 1,932
Selling, general, and administrative expense ......... 1,086 1,159 2,245
------- -------- -------
Operating income (loss) .............................. 632 (1,138) (506)
Interest expense ..................................... (191) (117) (308)
Other income ......................................... 466 -- 466
------- -------- -------
Income (loss) before income taxes .................... 907 (1,255) (348)
Income tax expense ................................... 345 -- 345
------- -------- -------
Net income (loss) .................................... $ 562 $ (1,255) $ (693)
======= ======== =======
Net income per share
Basic and diluted (2) .............................. $ 0.03 $ (0.04)
Weighted average shares
outstanding: basic and diluted (000's) (2) ......... 17,803 1,400 (A) 19,203
</TABLE>
------------
(1) Represents operations of Eagle Quest for the three months ended March
31, 1997.
(2) On a pro forma basis, the effect of dilutive securities is
anti-dilutive and therefore is not shown.
(A) To reflect the issuance of 1,400,000 shares of Common Stock for the
assumed Eagle Quest Acquisition.
P-7
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
PRO FORMA AND PRO FORMA AS ADJUSTED
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
REFLECTING
THE
THE EAGLE QUEST EAGLE QUEST THE 1997 LCI
COMPANY ACQUISITION(1) ACQUISITION ACQUISITIONS(2) ACQUISITION (2)
----------- ---------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Operating revenues .................. $ 49,108 $ 5,491 $ 54,599 $4,368 $ 10,763
Merchandise sales ................... 15,717 2,681 18,398 36 --
-------- --------- -------- ------ --------
Total revenue ....................... 64,825 8,172 72,997 4,404 10,763
Operating expenses .................. 31,563 5,823 37,386 3,309 8,209
Cost of merchandise sold ............ 10,467 1,899 12,366 1,177
Selling, general, and
administrative expense ............. 5,132 7,498 12,630 92 1,051
-------- --------- -------- ------ --------
Operating income (loss) ............. 17,663 (7,048) 10,615 (174) 1,503
Interest expense .................... (2,261) (1,602) (3,863) (184) (1,406)
Other income (expense) .............. 1,659 -- 1,659 13 --
-------- --------- -------- ------ --------
Income (loss) before income
taxes .............................. 17,061 (8,650) 8,411 (345) 97
Income tax expense (benefit) ........ 6,537 (1,395) 5,142 1 33
Minority interest in loss ........... -- -- -- -- --
-------- --------- -------- ------ --------
Net income (loss) ................... $ 10,524 $ (7,255) $ 3,269 $ (346) $ 64
======== ========= ======== ====== ========
Net income per share:
Basic ............................... $ 0.57 $ 0.17
Diluted ............................. 0.56 0.16
Weighted average shares
outstanding (000's):
Basic ............................... 18,368 1,400 (C) 19,768
Diluted ............................. 18,799 1,400 (C) 20,199
<CAPTION>
PRO FORMA
REFLECTING THE
EAGLE QUEST
ACQUISITION AND
METROGOLF PRO FORMA THE ACQUIRED OFFERING PRO FORMA
ACQUISITION(3) ADJUSTMENTS COMPANIES(4) ADJUSTMENTS AS ADJUSTED(5)
---------------- ----------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Operating revenues .................. $ 4,178 -- $ 73,908 -- $ 73,908
Merchandise sales ................... -- -- 18,434 -- 18,434
-------- ---------- -------- --------- --------
Total revenue ....................... 4,178 -- 92,342 -- 92,342
Operating expenses .................. 8,485 $ 216 (A) 56,813 -- 56,813
(792)(A)
Cost of merchandise sold ............ -- -- 13,543 -- 13,543
Selling, general, and
administrative expense ............. -- -- 13,773 -- 13,773
-------- ---------- -------- --------- --------
Operating income (loss) ............. (4,307) 576 8,213 -- 8,213
Interest expense .................... (2,323) 980 (A) (6,007) 1,602 (E) (4,405)
789 (A)
Other income (expense) .............. 28 (575)(A) 1,125 1,125
-------- ---------- -------- --------- --------
Income (loss) before income
taxes .............................. (6,602) 1,770 3,331 1,602 4,933
Income tax expense (benefit) ........ -- (2,190)(B) 2,986 -- 2,986
Minority interest in loss ........... 100 -- 100 -- 100
-------- ---------- -------- --------- --------
Net income (loss) ................... $ (6,502) $ 3,960 $ 445 $ 1,602 $ 2,047
======== ========== ======== ========= ========
Net income per share:
Basic ............................... $ 0.02 $ 0.10
Diluted ............................. 0.02 0.09
Weighted average shares
outstanding (000's):
Basic ............................... 1,332 (D) 21,100 430 (E) 21,530
Diluted ............................. 1,332 (D) 21,531 430 (E) 21,961
</TABLE>
- -------
(1) Represents operations of Eagle Quest for the year ended December 31,
1997.
(2) Represents operations from January 1, 1997 through date of acquisition.
(3) Represents operations for the twelve months ended December 31, 1997.
(4) Pro forma for the Eagle Quest Acquisition, 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 Eagle Quest Acquisition, the MetroGolf Acquisition, the
LCI Acquisition and the 1997 Acquisitions 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.
P-8
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA AND PRO FORMA AS ADJUSTED
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
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
acquisition had taken place at the beginning of the period:
<TABLE>
<CAPTION>
OTHER OTHER
INTEREST DEPRECIATION OPERATING (INCOME) FINANCING
ADJUSTMENT ADJUSTMENT EXPENSES EXPENSE CHARGE 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>
------------
(1) Assumes average borrowing at interest rates of 8.00% per annum.
(2) Assumes reduction of borrowings at interest rates of 10.00% per
annum, net of related reduction in interest income at 5.00% 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.
(B) To reflect the income tax effect arising from the losses of MetroGolf, LCI
and the 1997 Acquisitions.
(C) To reflect the issuance of 1,400,000 shares of Common Stock for the assumed
Eagle Quest Acquisition.
(D) To reflect the issuance of Common Stock for the 1997 Acquisitions.
(E) To reflect the reduction of interest expense assuming that the net proceeds
from the sale of 430,000 shares of Common Stock of the Company at an
assumed offering price of $27.156 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, extraordinary charges in connection with the assumed prepayment of
indebtedness, severance and other charges related to the Eagle Quest
Acquisition.
P-9
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
PRO FORMA AND PRO FORMA AS ADJUSTED
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
REFLECTING THE
THE EAGLE QUEST EAGLE QUEST METROGOLF
COMPANY ACQUISITION(2) ACQUISITION ACQUISITION(3)
----------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Operating revenues ............ $ 14,967 $ 1,770 $ 16,737 $ 109
Merchandise sales ............. 4,203 557 4,760 18
-------- ------------ -------- ------
Total revenue ................. 19,170 2,327 21,497 127
Operating expenses ............ 11,781 1,970 13,751 845
Cost of merchandise sold ...... 2,816 424 3,240 --
Selling, general, and
administrative expense ....... 1,524 1,918 3,442 --
-------- ------------ -------- ------
Operating income (loss) ....... 3,049 (1,985) 1,064 (718)
Interest expense .............. (1,799) (830) (2,629) (182)
Other income (expense) ........ 956 -- 956 --
-------- ------------ -------- ------
Income (loss) before income
taxes ........................ 2,206 (2,815) (609) (900)
Income tax expense ............ 860 -- 860 --
Minority interest in loss ..... -- -- -- 18
-------- ------------ -------- ------
Net income (loss) ............. $ 1,346 $ (2,815) $ (1,469) $ (882)
======== ============ ======== ======
Net income (loss) per share
Basic and Diluted(1) ......... $ 0.07 $ (0.07)
Weighted average shares
outstanding--
Basic and Diluted(1) (000's).. 19,445 1,400 (C) 20,845
<CAPTION>
PRO FORMA
REFLECTING THE
EAGLE QUEST
ACQUISITION AND
PRO FORMA THE METROGOLF OFFERING PRO FORMA
ADJUSTMENTS ACQUISITION (4) ADJUSTMENTS AS ADJUSTED(5)
----------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Operating revenues ............ -- $ 16,846 $ 16,846
Merchandise sales ............. -- 4,778 4,778
-------- -------- --------- --------
Total revenue ................. -- 21,624 21,624
Operating expenses ............ $ (35) (A) 14,563 14,563
2 (A)
Cost of merchandise sold ...... -- 3,240 3,240
Selling, general, and
administrative expense ....... 3,442 3,442
-------- -------- --------- --------
Operating income (loss) ....... 33 379 -- 379
Interest expense .............. 91 (2,720) $ 830 (D) (1,890)
Other income (expense) ........ (48) (A) 908 908
-------- -------- --------- --------
Income (loss) before income
taxes ........................ 76 (1,433) 830 (603)
Income tax expense ............ (338) (B) 522 522
Minority interest in loss ..... -- 18 18
-------- -------- --------- --------
Net income (loss) ............. $ 414 $ (1,937) $ 830 $ (1,107)
======== ======== ========= ========
Net income (loss) per share
Basic and Diluted(1) ......... $ (0.09) $ (0.05)
Weighted average shares
outstanding--
Basic and Diluted(1) (000's).. 20,845 1,010 (D) 21,855
</TABLE>
- -------
(1) On a pro forma basis, the effect of dilutive securities is anti-dilutive
and therefore is not shown.
(2) Represents operations of Eagle Quest for the three months ended March 31,
1998.
(3) Represents operations of MetroGolf from January 1, 1998 through date of
acquisition.
(4) Pro forma for the Eagle Quest Acquisition and the MetroGolf Acquisition
as if they had been consummated on January 1, 1998.
(5) Pro forma for the Eagle Quest Acquisition and the MetroGolf 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-10
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA AND PRO FORMA AS ADJUSTED
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
(A) Expense 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 10.00% per
annum, net of related reduction in interest income at 5.00% per
annum.
(2) Assumes interest earned at the rate of 5.00% per annum.
(B) To reflect the income tax effect arising from the losses from the MetroGolf
Acquisition.
(C) To reflect the issuance of Common Stock for the assumed Eagle Quest
Acquisition.
(D) To reflect the reduction of interest expense assuming that the net proceeds
from the sale of 1,010,000 shares of Common Stock of the Company at an
assumed offering price of $27.156 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, extraordinary charges in connection with the assumed
prepayment of indebtedness, severance and other charges related to the Eagle
Quest Acquisition.
P-11
<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
METROGOLF INCORPORATED AND SUBSIDIARIES
Independent auditors' report ............................................................ F-47
Consolidated balance sheet at December 31, 1997 ......................................... F-48
Consolidated statement of operations for the year ended December 31, 1997 ............... F-49
Consolidated statement of changes in stockholders' equity as of December 31, 1997 ....... F-50
Consolidated statement of cash flows for the year ended December 31, 1997 ............... F-51
Notes to financial statements ........................................................... F-52
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
LEISURE COMPLEXES, INC.
Independent auditors' report .......................................................... F-64
Balance sheet at December 31, 1996 .................................................... F-65
Statement of operations and accumulated deficit for the year ended December 31, 1996 .. F-67
Statement of cash flows for the year ended December 31, 1996 .......................... F-68
Notes to financial statements ......................................................... F-70
Accountants' compilation report ....................................................... F-79
Balance sheet at June 30, 1997 (unaudited) ............................................ F-80
Statement of income and accumulated deficit for the six months ended June 30, 1997
(unaudited) ......................................................................... F-82
Statement of cash flows for the six months ended June 30, 1997 (unaudited) ............ F-83
Notes to financial statements ......................................................... F-84
</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
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 7,676 15,003 18,368 17,803 19,445
Effect of dilutive securities ........................ 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 ................... 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 ................... $ 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)
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.
[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.
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)
[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. 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 as of March 31, 1998, the cumulative
effect of the change would have resulted in an expense of $2,773.
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 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;
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 B -- ACQUISITION OF GOLF FACILITIES (CONTINUED)
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 golf club manufacturer 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.
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.
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)
<TABLE>
<CAPTION>
FACILITIES ACQUIRED
----------------------------------------
THREE
MONTHS
YEAR ENDED
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.
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>
Subsequent to December 31, 1997 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 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.
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 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 and that the excess of cost over the fair
value of assets acquired is being amortized over 20 years.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
-------------- -------------
<S> <C> <C>
Total revenue ........................... $ 84,170 $ 19,297
Net income .............................. 6,859 816
Net income per share -- basic ........... $ .35 $ .04
Net income per share -- diluted ......... .34 .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.
On April 2, 1998, the Company entered into a definitive merger agreement
pursuant to which Eagle Quest Golf Centers, Inc. ("Eagle Quest") will become a
wholly-owned subsidiary of the Company (the "Eagle Quest Acquisition"). Eagle
Quest has 18 golf centers owned, leased or managed in Texas, Washington and
Canada. If the Eagle Quest Acquisition is consummated, of which there can be no
assurance, the Company will issue approximately 1,729,290 shares, subject to
certain adjustments, of the Company's common stock to Eagle Quest's securities
holders. The transaction is subject to a number of conditions including that it
be accounted for as a pooling of interests and that it receive the approval of
Eagle Quest's shareholders. These financial statements do not give retroactive
effect to this transaction. Eagle Quest began its operations in February 1996.
The following is the reported condensed financial operations and financial
position of Eagle Quest:
<TABLE>
<CAPTION>
THREE MONTHS
PERIOD ENDED YEAR ENDED ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -------------------------
1996 1997 1997 1998
-------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenue ...................... $ 149 $ 8,172 $ 686 $ 2,327
Net loss ........................... (885) (7,255) (1,255) (2,815)
Total assets ....................... 13,405 37,528 13,742 40,023
Total stockholders' equity ......... 7,412 9,861 7,581 7,847
</TABLE>
In April, 1998, the Company agreed to loan Eagle Quest up to $2,225 of
which Eagle Quest has borrowed approximately $1,900. Borrowings bear 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 are payable in October
1998. The loan is collateralized by the shares of a subsidiary of Eagle Quest.
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 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>
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.
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 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.
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.
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
[1] SHORT-TERM BORROWINGS:
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.
[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 -- --
</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>
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
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 $ 1,352
2000 ............... 1,216 5,769
2001 ............... 3,030 2,876
2002 ............... 7,721 7,464
2003 ............... 180 261
Thereafter ......... 6,395 8,370
-------- --------
$ 19,655 $ 26,092
======== ========
</TABLE>
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 G -- DEBT (CONTINUED)
[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.
[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
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)
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.
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 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:
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 I -- BUSINESS SEGMENT INFORMATION (CONTINUED)
<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 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>
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 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 and (ii) the
fair value of additional stock options in future years.
(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.
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.
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)
Additional information with respect to 1997, 1996 and 1995 stock option
activity 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 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.
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)
[1] STOCK OPTION PLANS:
The following table summarizes information about stock options outstanding
at December 31, 1997 and March 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE NUMBER OF
EXERCISE OPTIONS WEIGHTED AVERAGE CONTRACTUAL EXERCISE OPTIONS
PRICE OUTSTANDING REMAINING LIFE (IN YEARS) PRICE 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> <C>
$ 2.333 133,285 100,007 6.50 6.25 $ 2.333 133,285 100,007
4.000 1,920 750 7.67 7.42 4.00 1,920 750
5.917 9,000 6,000 7.50 7.25 5.917 6,000 3,000
9.917 154,230 143,724 7.80 7.55 9.917 93,686 83,179
13.250 80,250 80,250 8.25 8.00 13.25 26,749 53,500
18.083 45,000 45,000 8.50 8.25 18.083 15,000 15,000
15.167 183,754 174,506 8.58 8.33 15.167 57,510 48,263
15.167 323,852 304,298 8.96 8.71 15.167 105,440 85,886
11.583 144,882 144,882 9.25 9.00 11.583 -- 63,294
14.833 45,000 45,000 9.50 9.25 14.833 -- --
14.833 52,500 52,500 9.58 9.33 14.833 -- --
17.709 255,563 255,563 9.83 9.58 17.709 -- --
16.667 -- 25,125 -- 9.75 16.607 -- 25,125
20.000 -- 22,311 -- 8.54 20.00 -- 22,311
23.750 -- 90,000 -- 10.00 23.75 -- --
68.000 -- 1,875 -- 8.67 68.00 -- 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-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 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-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 K -- INCOME TAXES (CONTINUED)
The deferred tax assets (liabilities) are recorded as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------- -----------------------
1996 1997 1997 1998
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Deferred rent ............................... $ 93 $ 247 $ 93 $ 247
Book basis of assets over tax basis ......... (347) (4,443) (347) (4,443)
------ -------- ------ --------
Net deferred tax (liability) ................ $ (254) $ (4,196) $ (254) $ (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>
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
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) ............................... 29,269,768 26,990,565 8,406,781
Development costs ............................................. 1,131,908 966,603 506,133
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) ............... 4,835,948 4,908,741 2,598,000
Other assets .................................................. 588,971 587,585 --
------------- ------------ -----------
Total assets ................................................ $ 40,022,652 $ 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 ........................................... 2,359,329 1,560,160 395,781
Deferred revenue .............................................. 154,491 76,545 122,639
Current portion of long-term debt ............................. 4,834,700 3,713,000 139,964
------------- ------------ -----------
Total current liabilities ................................... 10,779,963 7,427,647 1,205,183
Long-term debt, net of current portion (note 7) ................ 13,501,461 12,454,615 4,787,322
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 ........................................... (10,955,721) (8,140,570) (885,497)
Accumulated other comprehensive income:
Foreign currency translation adjustment ..................... 213,858 194,814 --
------------- ------------ -----------
7,847,024 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 ................... $ 40,022,652 $ 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 ......... 1,529,581 1,025,518 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
------------ ------------ ------------ ----------
5,142,286 1,941,514 16,822,072 1,342,225
------------ ------------ ------------ ----------
Loss before income taxes ..................... 2,815,151 1,255,421 8,650,073 1,193,497
Income tax benefit ........................... -- -- (1,395,000) (308,000)
------------ ------------ ------------ ----------
Loss for the period .......................... $ 2,815,151 1,255,421 $ 7,255,073 $ 885,497
============ ============ ============ ==========
Other comprehensive income, net of tax:
Foreign currency translation ................ 19,044 -- 194,814 --
------------ ------------ ------------ ----------
Comprehensive loss ........................... $ 2,796,107 $ 1,255,421 $ 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 ...... -- (2,815,151) -- (2,815,151)
Translation
adjustment ............. -- -- 19,044 19,044
----------- -------------- --------- ------------
Balance, March 31,
1998 (unaudited) ......... $ (155,000) $ (10,955,721) $ 213,858 $ 7,847,024
=========== ============== ========= ============
</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 ............................... $ (2,815,151) $ (1,255,421) $ (7,255,073) $ (885,497)
Items not involving the use of cash: ..............
Depreciation .................................... 388,258 132,992 1,098,374 14,795
Deferred income taxes ........................... -- -- (1,395,000) (308,000)
Non-cash operating expenses ..................... 15,000 -- 928,977 386,000
Non-cash interest expense ....................... 47,922 510,000 266,596 --
Changes in non-cash operating working
capital:
Accounts receivable ............................. 4,573 252,824 149,661 (432,468)
Inventory ....................................... 125,048 (342,548) (1,212,887) (43,233)
Prepaid expenses ................................ 28,730 (29,366) (168,904) (29,514)
Trade accounts payable .......................... 1,526,332 -- 902,911 6,559
Accrued liabilities ............................. 846,999 54,581 1,164,379 395,781
Deferred revenue ................................ (47,830) -- (46,094) 122,639
------------- ------------- ------------- -------------
Net cash used in operations ........................ 119,881 (676,938) (5,567,060) (772,938)
Financing:
Proceeds from issue of share capital for cash ..... 37,742 407,568 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 ...................... 5,162,518 113,806 14,338,252 751,657
Repayment of long-term debt ....................... (2,346,298) -- (4,167,185) --
Deferred financing costs .......................... (132,845) (8,865) (985,441) --
------------- ------------- ------------- -------------
Net cash provided by financing ..................... 2,764,089 512,509 21,860,216 5,215,228
Investing:
Acquisition of business, net of cash acquired
and value assigned to shares issued (note 3) (2,277,464) -- (14,199,010) (3,013,430)
Purchase of property and equipment ................ (259,688) (521,678) (1,949,225) (76,280)
Development costs and other assets ................ (163,865) 186,564 (633,854) (433,443)
Restricted cash deposits .......................... 66,385 -- (58,443) (331,643)
------------- ------------- ------------- -------------
Net cash used in investing ........................ (2,634,632) (335,114) (16,840,532) (3,854,796)
------------- ------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 249,338 (499,543) (547,376) 587,494
Cash and cash equivalents, beginning of period ..... 40,118 419,594 587,494 --
------------- ------------- ------------- -------------
Cash and cash equivalents, end of period ........... $ 289,456 $ (79,949) $ 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 $2,815,151 and has generated cash aggregating $119,881 in
operating activities. The cash has been generated in operating activities by
increasing accounts payable and accrued liabilities. At March 31, 1998, the
Company has a working capital deficiency of $7,586,251. 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 shareholders 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 reviews and assesses the underlying value of property and
equipment as the situation dictates 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 flow (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 on 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 instruments 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 ................. 1,739,612 17,196,607 8,345,295
Other assets ........................... 525,000 600,000 116,000
Goodwill ............................... -- 2,471,238 2,598,000
----------- ------------ ------------
2,282,603 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)
----------- ------------ ------------
$ 2,277,464 $ 17,181,868 $ 6,588,750
=========== ============ ============
Consideration:
Cash ................................. $ 2,277,464 $ 14,199,010 $ 3,140,669
Redeemable equity securities ......... -- 514,400 --
Equity securities .................... -- 2,468,458 3,448,081
----------- ------------ ------------
Purchase price ......................... $ 2,277,464 $ 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
five 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
2003 ...........
</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 ......... 20,628,905 649,638 19,979,267
Furniture, fixtures and equipment ............ 2,096,831 192,895 1,903,936
------------ --------- ------------
$ 30,112,301 $ 842,533 $ 29,269,768
============ ========= ============
</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 --
$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
instalments of approximately $15,700 plus interest to
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 instalments 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 instalments 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 instalments of approximately
$3,000 plus interest to 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 instalments 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 instalments of Cdn.
$119,000 to 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). In connection with this loan 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 $550,000. This difference is being
amortized as interest expense over the term of the
loan (unamortized discount at March 31, 1998 --
550,000) ...................................................... 1,700,113 -- --
----------- ----------- ----------
Carried forward .............................................. 14,968,322 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 ......................................... $14,968,322 $15,546,311 $4,803,734
Mortgage payable bearing interest at 9% per annum,
repayable in monthly instalments of approximately
$9,200 to April 2000 subject to the ability of the
lender on the assets of a subsidiary and a general
charge over land and building of the Company
(repayable as Cdn. $1,300,000) ........................... 917,690 -- --
Mortgage payable bearing interest at 17.75% per annum,
repayable in monthly instalments of approximately
$10,400 to April 2000 subject to the ability of the
lender to demand repayment at anytime, and secured
by a second charge on the assets of a subsidiary, and a
general charge over land and building of the Company
(repayable as Cdn. $950,000) ............................. 670,620 -- --
Bank loan payable bearing interest at 13% per annum
until September 1998, then increases by 1% for every
month thereafter until September 1999, repayable in
an instalment of $423,549 (Cdn. $600,000) on April 13,
2003, and secured by the assets of a subsidiary .......... 423,549 -- --
Promissory notes payable to related parties bearing
interest at 15% per annum until April 9, 1998 and 20%
interest per annum thereafter, subject to the ability of
the lenders to demand repayment at anytime and
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 3,713,000 139,964
----------- ----------- ----------
Long-term debt, net of current portion .................... $13,501,461 $12,454,615 $4,787,322
=========== =========== ==========
</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)
<C> <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.
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 ................................................... 2,094,500 $ 0.82
Options exercised ................................................. (68,500) 0.29
Options forfeited ................................................. (26,000) 1.32
--------- -------
Deemed to be granted at December 31, 1997 and March 31, 1998,
being maximum number of options authorized under the Plan ......... 2,000,000 $ 0.83
========= =======
Exercisable options:
December 31, 1997 ................................................. 790,958 $ 0.61
========= =======
</TABLE>
In addition, to March 13, 1998 the board of directors has granted options
exercisable into 1,374,900 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. Of granted
options at April 2, 1998, 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.
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 .......... 997,000 --
----------- --------
Pro forma loss ................................. $ 8,252,073 $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):
There would be no impact on the reported loss for the three months ended
March 31, 1998 and 1997.
[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 in connection
with a mortgage payable (note 7) to purchase common shares of the Company
at Cdn. $1.10 per share. These warrants 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).
[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:
<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 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).
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)
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.
(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.
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)
[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 6,
ENDED YEAR ENDED 1996 TO
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996,
-------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Interest paid ............. $ $ 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
shareholder's 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. If completed as set out in the Merger Agreement,
the transaction is expected to close on or about July 7, 1998.
(b)(Unaudited): On April 27, 1998, the Company borrowed $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. The proceeds of the loan are to be used to repay certain existing
indebtedness and accounts payable, and for making capital improvements.
F-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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-76
<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-77
<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-78
<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-79
<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-80
<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-81
<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-82
<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-83
<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-84
<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-85
<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-86
<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-87
<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-88
<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-89
<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-90
<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-91
<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 ........................... 7
Use of Proceeds ........................ 13
Price Range of Common Stock ............ 14
Capitalization ......................... 15
Selected Financial Data ................ 16
Management's Discussion and Analysis
of Financial Condition and Results of
Operations .......................... 19
Business ............................... 27
Management ............................. 36
Principal Stockholders ................. 44
Description of Capital Stock ........... 46
Underwriting ........................... 48
Legal Matters .......................... 49
Experts ................................ 49
Available Information .................. 49
Incorporation of Certain Documents By
Reference ........................... 50
Index to Pro Forma Financial
Information .........................
Index to Financial Statements ..........
</TABLE>
3,500,000 SHARES
[LOGO] FAMILY GOLF
CENTERS INC.
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 ............ $
Accounting Fees and Expenses .................. $ 100,000.00*
Transfer Agent and Registrar Fees ............. $ 5,000.00*
Printing and Engraving Expenses ............... $
Miscellaneous ................................. $
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.
23.2 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.
24.1 Power of Attorney, included on page II-IV, the signature page hereto.
</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).
*** To be filed by amendment.
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 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.
II-3
<PAGE>
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 Registration Statement on Form S-3
("Registration Statement") and authorized this Registration Statement to be
signed on its behalf by the undersigned, in the City of Melville, State of New
York on May 22, 1998.
FAMILY GOLF CENTERS, INC.
By: /s/ Krishnan P. Thampi
-------------------------------------
Krishnan P. Thampi,
President, Chief Operating Officer
Assistant Secretary, Treasurer and
Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Dominic Chang, Krishnan P. Thampi and Jeffrey
Key, or any one of them, his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place,
and stead, in any and all capacities, to sign and file (i) any and all pre- or
post-effective amendments to this Registration Statement, and other documents
in connection therewith, and (ii) a Registration Statement, and any and all
amendments thereto, relating to the offering covered hereby filed pursuant to
Rule 462(b) under the Securities Act of 1933, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
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>
/s/ Dominic Chang Chairman of the Board May 22, 1998
- ----------------------------- and Chief Executive
Dominic Chang Officer (Principal
Executive Officer)
/s/ Krishnan P. Thampi President, Chief Operating May 22, 1998
- ----------------------------- Officer, Assistant
Krishnan P. Thampi Secretary, Treasurer and
Director
/s/ Jeffrey C. Key Chief Financial Officer May 22, 1998
- ----------------------------- (Principal Accounting and
Jeffrey C. Key Financial Officer)
Director May 22, 1998
- -----------------------------
James Ganley
Director May 22, 1998
- -----------------------------
Jimmy C.M. Hsu
/s/ Yupin Wang Director May 22, 1998
- -----------------------------
Yupin Wang
</TABLE>
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.
23.2 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.
24.1 Power of Attorney, included on page II-IV, the signature
page hereto.
</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).
*** To be filed by amendment.
II-6
<PAGE>
FAMILY GOLF CENTERS, INC.
3,500,000 Shares*
Common Stock
UNDERWRITING AGREEMENT
____ __, 1998
JEFFERIES & COMPANY, INC.
BANCAMERICA ROBERTSON STEPHENS
CIBC OPPENHEIMER CORP.
EVEREN SECURITIES, INC.
PRUDENTIAL SECURITIES INCORPORATED
As Representatives of the Several Underwriters
c/o Jefferies & Company, Inc.
650 Fifth Avenue, 4th Floor
New York, New York 10019
Dear Sirs:
Family Golf Centers, Inc., a Delaware corporation (the "Company")
hereby confirms its agreement with the underwriters named in Schedule I hereto
(the "Underwriters"), for which you are acting as representatives (the
"Representatives"), with respect to the sale by the Company and the purchase by
the Underwriters of 3,500,000 shares (the "Firm Shares") of the Company's
Common Stock, $.01 par value (the "Common Stock"). The Company has also agreed
to sell up to an aggregate of 525,000 shares (the "Additional Shares") of
Common Stock to cover over-allotments, if any. The Firm Shares and the
Additional Shares are hereinafter collectively referred to as the "Shares."
You have advised us that, subject to the terms and conditions herein
contained, you desire to purchase the Firm Shares and that you propose to make
a public offering of the Firm Shares as soon as you deem advisable after the
Registration Statement referred to below becomes effective.
- --------
* Plus an option to purchase from the Company up to 525,000 Additional
Shares to cover over- allotments.
<PAGE>
The terms that follow, when used in this Agreement, shall have the
meanings indicated. "Preliminary Prospectus" shall mean each prospectus subject
to completion included in the Company's registration statement on Form S-3
referred to in Section below or any amendment or post-effective amendment
thereto (including the prospectus subject to completion included in the
Registration Statement (as defined below) on the date that the Registration
Statement becomes effective (the "Effective Date") that omits Rule 430A
Information (as defined below)). "Registration Statement" shall mean the
registration statement referred to in Section below, including all financial
statement schedules and exhibits, as amended at the Representation Date (as
defined in Section 1(a) hereof) (or, if not effective at the Representation
Date, in the form in which it shall become effective) and, if any
post-effective amendment thereto becomes effective prior to the Closing Date
(as defined in Section hereof), shall also mean such registration statement as
so amended. The term "Registration Statement" shall include Rule 430A
Information deemed to be included therein at the Effective Date as provided by
Rule 430A (as defined below). "Prospectus" shall mean (x) if the Company relies
on Rule 434 under the Securities Act of 1933, as amended (the "Act"), the Term
Sheet (as defined below) relating to the Shares that is first filed pursuant to
Rule 424(b)(7) under the Act, together with the Preliminary Prospectus
identified therein that the Term Sheet supplements, or (y) if the Company does
not rely on Rule 434 under the Act, the prospectus first filed with the
Securities and Exchange Commission (the "Commission") pursuant to Rule 424(b)
under the Act, or, if no prospectus is required to be filed pursuant to Rule
424(b) under the Act, the prospectus included in the Registration Statement.
"Term Sheet" shall mean any term sheet that satisfies the requirements of Rule
434 under the Act. "Rule 158," "Rule 424," "Rule 434" and "Rule 430A" refer to
such rules under the Act (the rules and regulations under the Act, the "Act
Regulations"). "Rule 430A Information" means information with respect to the
Shares and the offering thereof permitted to be omitted from the Registration
Statement when it becomes effective pursuant to Rule 430A. For purposes of the
representations and warranties contained herein, to the extent reference is
made to the Prospectus and at the relevant time the Prospectus is not yet in
existence, such reference shall be deemed to be to the most recent Preliminary
Prospectus. For purposes of this Agreement, all references to the Registration
Statement, Prospectus, Preliminary Prospectus or Term Sheet or to any amendment
or supplement to any of the foregoing shall be deemed to include (i) the copy
filed with the Commission pursuant to its Electronic Data Gathering Analysis
and Retrieval system ("EDGAR") and (ii) any information incorporated by
reference therein pursuant to Item 12 of Form S-3 under the Act.
1. Representations and Warranties.
(a) The Company represents and warrants to, and agrees with,
each of the Underwriters as of the date hereof (such date being referred to as
the "Representation Date"), as follows:
(i) The Company meets the requirements for use of
Form S-3 under the Act and has filed with the Commission a registration
statement (Registration No. 333-____) on such form, including a prospectus
subject to completion, for the registration under the Act of the offering and
sale of the Shares. The Company may
-2-
<PAGE>
have filed one or more amendments thereto, including the related prospectus
subject to completion, each of which has previously been furnished to the
Representatives. After the execution of this Agreement, the Company will file
with the Commission either (A) prior to effectiveness of such registration
statement, a further amendment to such registration statement (including a form
of prospectus), a copy of which amendment has been furnished to and approved by
the Representatives prior to the execution of this Agreement, or (B) after
effectiveness of such registration statement, either (1) if the Company relies
on Rule 434 under the Act, a Term Sheet relating to the Shares that shall
identify the Preliminary Prospectus that it supplements containing such
information as is required or permitted by Rules 434, 430A and 424(b) under the
Act or (2) if the Company does not rely on Rule 434 under the Act, a prospectus
in the form most recently included in an amendment to such registration
statement (or, if no amendment shall have been filed, in such registration
statement) in accordance with Rules 430A and 424(b) of the Act Regulations and
as have been provided to and approved by the Representatives prior to execution
of this Agreement.
(ii) Neither the Commission nor any "blue sky" or
securities authority of any jurisdiction in which the Shares have been offered
has issued any order preventing or suspending the use of any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto. When any
Preliminary Prospectus was filed with the Commission it (A) complied in all
material respects with the applicable requirements of the Act and the Act
Regulations and (B) did not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. On the Effective Date, the Representation
Date and each Closing Date, the Registration Statement did and will, and when
the Prospectus or any Term Sheet that is a part thereof is first filed (if
required) in accordance with Rule 424(b) and on the Representation Date and
each Closing Date, the Prospectus will, comply in all material respects with
the applicable requirements of the Act and the Act Regulations; on the
Effective Date, the Representation Date and each Closing Date, the Registration
Statement did not and will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary
in order to make the statements therein not misleading; on the Effective Date,
the Representation Date and each Closing Date, and on the date of any filing
pursuant to Rule 424(b), the Prospectus or any Term Sheet that is a part
thereof did not and will not include any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and each Preliminary Prospectus and the Prospectus delivered to the
Underwriters for use in connection with the offering of the Shares will, at the
time of such delivery, be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T under the Act; provided, that the Company makes no
representations or warranties as to the information provided in writing to the
Company by or on behalf of the Underwriters through the Representatives
expressly for use in any Preliminary Prospectus, the Registration Statement or
the Prospectus, and the Company agrees that the only
-3-
<PAGE>
information provided in writing by or on behalf of Underwriters to the Company
expressly for use in any Preliminary Prospectus, the Registration Statement or
the Prospectus is that information contained in the last paragraph on the cover
page of the Prospectus, the stabilization legends on the inside front cover
page of the Prospectus, the table of Underwriters set forth under the caption
"Underwriting" in the Prospectus and the amounts of the selling concession and
reallowance set forth in the Prospectus.
(iii) The documents incorporated by reference in the
Registration Statement, Preliminary Prospectus and Prospectus pursuant to Item
12 of Form S-3 under the Act, when they were or hereafter are filed with the
Commission, complied and will comply in all material respects with the
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and the rules and regulations of the Commission thereunder, and, when
read together with the other information in the Registration Statement,
Preliminary Prospectus and Prospectus, none of such documents contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; since
January 1, 1997, the Company has timely filed all documents with the Commission
which were required to be filed under the Exchange Act and the rules and
regulations of the Commission thereunder on or prior to the date hereof.
(iv) The Company is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware,
with all requisite corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement and the Prospectus, and is duly qualified to conduct its business and
is in good standing in each jurisdiction or place where the nature or location
of its properties (owned or leased) or the conduct of its business requires
such qualification, except where the failure so to qualify would not have an
adverse effect on the condition (financial or other), business, properties,
prospects, net worth or results of operations of the Company or any of the
Subsidiaries (as hereinafter defined) that is or would be, singly or in the
aggregate, material to the Company and the Subsidiaries taken as a whole,
whether or not occurring in the ordinary course of business (a "Material
Adverse Effect").
(v) The only subsidiaries (as defined in the Act
Regulations) of the Company are the subsidiaries listed on Schedule 1(a)(v) to
this Agreement (individually, a "Subsidiary" and collectively, the
"Subsidiaries"). Each of the Subsidiaries is a corporation duly incorporated,
validly existing and in good standing in the jurisdiction of its incorporation
with all requisite corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement and the Prospectus, and is duly qualified to conduct its business and
is in good standing in each jurisdiction or place where the nature or location
of its properties (owned or leased) or the conduct of its business requires
such qualification, except where the failure to so qualify would not have a
Material Adverse Effect.
(vi) Each of the Company and each Subsidiary
possesses all authorizations, approvals, orders, licenses, certificates,
franchises and permits of and
-4-
<PAGE>
from, and have made all declarations and filings with, all regulatory or
governmental officials, bodies and tribunals ("Permits") to own, lease or
operate their respective properties and to conduct their respective businesses
described in the Registration Statement and the Prospectus, except where
failure to have obtained or made the same would not have a Material Adverse
Effect, and neither the Company nor any of the Subsidiaries has received any
notice of proceedings relating to the revocation or modification of any such
Permits. Except as described in the Registration Statement and Prospectus, each
of the Company and each Subsidiary has fulfilled and performed all its current
material obligations with respect to such Permits and no event has occurred
that allows, or after notice or lapse of time, or both, would allow, revocation
or termination thereof or result in any other material impairment of the rights
of the holder of any such Permit and such Permits contain no restrictions that
are materially burdensome to the Company or any of the Subsidiaries; and the
Company and each of the Subsidiaries are in compliance with all applicable
laws, rules, regulations, orders and consents, the violation of which would
have a Material Adverse Effect. The property and business of the Company and
the Subsidiaries conform in all material respects to the descriptions thereof
contained in the Registration Statement and the Prospectus.
(vii) All of the Company's issued and outstanding
capital stock has been duly authorized, validly issued and is fully paid and
nonassessable, and the Common Stock and the capitalization of the Company
conform to the descriptions thereof and the statements made with respect
thereto in the Registration Statement and the Prospectus as of the date set
forth therein. None of the issued shares of Common Stock have been issued in
violation of any preemptive or other rights to subscribe for or purchase shares
of capital stock of the Company. There are no outstanding securities
convertible into or exchangeable for, and no outstanding options, warrants or
other rights to purchase, any shares of the capital stock of the Company, nor
any agreements or commitments to issue any of the same, except as described in
the Registration Statement and the Prospectus, and there are no preemptive or
other rights to subscribe for or to purchase, and no restrictions upon the
voting or transfer of, any capital stock of the Company pursuant to the
Company's certificate of incorporation or by-laws or any agreement or other
instrument to which the Company is a party. All offers and sales of the
Company's capital stock prior to the date hereof were at all relevant times
duly registered or exempt from the registration requirements of the Act, and
were duly registered or the subject of an available exemption from the
registration requirements of the applicable state securities or blue sky laws.
(viii) All the outstanding shares of capital stock
of each Subsidiary have been duly authorized and validly issued and are fully
paid and nonassessable, and, except as otherwise set forth in the Registration
Statement and the Prospectus, all outstanding shares of capital stock of such
Subsidiaries are owned of record and beneficially by the Company, either
directly or through one of the other Subsidiaries, free and clear of any
security interests, liens, encumbrances, equities or other claims except that
shares of capital stock of certain Subsidiaries are pledged to secure loans.
There are no outstanding rights, warrants or options to acquire, or instruments
-5-
<PAGE>
convertible into or exchangeable for, any shares of capital stock or other
equity interest in any Subsidiary.
(ix) Each of the Company and each Subsidiary has
good and marketable title to, and is possessed of, each property, right,
interest or estate constituting the properties and assets described in the
Registration Statement and the Prospectus as owned by it, free and clear of all
liens, charges, encumbrances and restrictions, except such as are described in
the Registration Statement and the Prospectus or such as are not burdensome and
do not interfere with the use or proposed use of the property or the conduct of
the business of the Company or any Subsidiary in a manner that is or would be
material to the business of the Company and the Subsidiaries taken as a whole.
Each of the Company and each Subsidiary has valid, subsisting and enforceable
leases for the properties described in the Registration Statement and the
Prospectus as leased by it and no event has occurred which, with the passage of
time or the giving of notice or both, would cause a material breach of, or
default under any such lease.
(x) The Company has all requisite power, authority,
authorizations, approvals, orders, licenses, certificates and permits to enter
into this Agreement and to carry out the provisions and conditions hereof,
including the issuance and delivery of the Shares to the Underwriters as
provided herein. This Agreement has been duly and validly authorized by the
Company, and this Agreement has been duly executed and delivered by the Company
and constitutes a legal, valid and binding agreement of the Company,
enforceable against it in accordance with its terms, except to the extent
rights to indemnity hereunder may be limited by Federal or state securities
laws or public policy underlying such laws and except to the extent the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by equitable principles.
(xi) Each of the Company and each Subsidiary owns,
or possesses adequate rights to use, all trademarks, service marks, trade
names, licenses, copyrights and other rights necessary for the conduct of its
business as described in the Registration Statement and the Prospectus, and
neither the Company nor any of the Subsidiaries has received a notice, or knows
of any basis, of any conflict with the asserted rights of others in any such
respect that could have a Material Adverse Effect, except as described in the
Registration Statement and the Prospectus.
(xii) The Shares to be sold by the Company have been
duly and validly authorized for issuance by the Company and the Company has the
corporate power and authority to issue, sell and deliver the Firm Shares; and,
when the Shares are issued and delivered against payment therefor as provided
by this Agreement, the Shares will have been validly issued, fully paid and
nonassessable, and the issuance of such Shares will not be subject to any
preemptive or similar rights. All corporate action required to be taken by the
stockholders or the Board of Directors of the Company for the authorization,
issuance and sale of the Shares has been duly and validly taken.
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(xiii) Each of Richard A. Eisner & Company, LLP,
KPMG, and Feldman, Gutterman, Meinberg & Co., whose reports are filed with the
Commission as part of the Registration Statement, are independent certified
public accountants with respect to the Company and the Subsidiaries, under the
meaning of and as required by the Act and the Act Regulations.
(xiv) The consolidated financial statements and
related schedules and notes included or incorporated by reference in the
Registration Statement and the Prospectus present fairly the financial
position of the Company and the Subsidiaries, on the basis stated in the
Registration Statement, as of the respective dates thereof and the results
of operations and cash flows of the Company and the Subsidiaries, for the
respective periods covered thereby, all in conformity with generally
accepted accounting principles applied on a consistent basis throughout
the entire period involved, except as otherwise disclosed in the Registration
Statement and the Prospectus. The selected consolidated financial information
included under the caption "Selected Financial Data" in the Prospectus
presents fairly the information shown therein and has been compiled on a
basis consistent with that of the audited consolidated financial statements
of the Company included therein. The pro forma financial statements and other
pro forma financial information included in the Registration Statement and
the Prospectus have been prepared in all material respects with the
applicable accounting requirements of Rule 11-02 of Regulation S-X promulgated
by the Commission and present fairly, in all material respects, the information
shown therein; the assumptions used in the preparation of the pro forma
financial statements and other pro forma financial information and included
in the Registration Statement and Prospectus are reasonable and the
adjustments used therein are appropriate to give effect to the transactions
or circumstances referred to therein. No other financial statements or
schedules of the Company and its Subsidiaries are required by the Act or the
Act Regulations to be included in the Registration Statement or Prospectus.
(xv) Each of the Company and each Subsidiary
maintains a system of internal accounting controls sufficient to provide
reasonable assurance that (A) transactions are executed in accordance with
management's general or specific authorizations; (B) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset accountability;
(C) access to assets is permitted only in accordance with management's general
or specific authorization; and (D) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(xvi) Each of the Company and each Subsidiary
maintains insurance covering its properties, operations, personnel and
businesses. Such insurance insures against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged. Neither the Company nor any Subsidiary has been refused any insurance
coverage sought or applied for; and neither the Company nor any Subsidiary has
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar
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coverage from similar insurers as may be necessary to continue its business at
a cost that would not have a Material Adverse Effect. All such insurance is
outstanding and duly in force on the date hereof.
(xvii) Except as set forth in the Registration
Statement and the Prospectus, the Company and the Subsidiaries are in
compliance with all Federal, state, local or foreign laws or regulations
relating to pollution or protection of human health or the environment
("Environmental Laws"), except where the failure to be in compliance would not
have a Material Adverse Effect. Except as set forth in the Registration
Statement and the Prospectus, neither the Company nor any of the Subsidiaries
has authorized, conducted or has knowledge of the generation, transportation,
storage, use, treatment, disposal or release of any hazardous substance,
hazardous waste, hazardous material, hazardous constituent, toxic substance,
pollutant, contaminant, petroleum product, natural gas, liquified gas or
synthetic gas, defined or regulated under any Environmental Law on, in or under
any property currently leased or owned or by any means controlled by the
Company or any of the Subsidiaries (the "Real Property") in violation of any
applicable law, except for any violation which would not have a Material
Adverse Effect; there is no pending or, to the Company's knowledge, threatened
claim, action, litigation or any administrative agency proceeding involving the
Company or any of the Subsidiaries or their respective properties, nor has the
Company or any of the Subsidiaries received any written notice, or any oral
notice to any executive officer of the Company or any other employee
responsible for receipt of any such notice, from any governmental entity or
third party, that (A) alleges a violation of any Environmental Laws by the
Company or any of the Subsidiaries or any person or entity whose liability for
a violation of an Environmental Law the Company or any Subsidiary has retained
or assumed either contractually or by operation of law, which liability or
violation could be reasonably expected to have a Material Adverse Effect; (B)
alleges the Company or any of the Subsidiaries is a liable party under the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
ss. 9601 et seq., or any state superfund law; (C) alleges possible
contamination of the environment by the Company or any of the Subsidiaries; or
(D) alleges possible contamination of the Real Property.
(xviii) Neither the Company nor any of the
Subsidiaries is in violation of its respective charter or by-laws. Neither the
Company nor any Subsidiary is, nor with the passage of time or the giving of
notice or both would be, in violation of any law, ordinance, administrative or
governmental rule or regulation applicable to the Company or any of the
Subsidiaries, or of any judgment, order or decree of any court or governmental
agency or body or of any arbitrator having jurisdiction over the Company or any
of the Subsidiaries which would have a Material Adverse Effect, or in default
in the performance or observance of any obligation, agreement, covenant or
condition contained in any mortgage, loan agreement, note, bond, debenture,
credit agreement or any other evidence of indebtedness or in any agreement,
contract, indenture, lease or other instrument to which the Company or any of
the Subsidiaries is a party or by which the Company or any of the Subsidiaries
is bound, or to which any of the property or assets of the Company or any of
the Subsidiaries is subject, the
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<PAGE>
effect of which violation or default in performance or observance would have a
Material Adverse Effect.
(xix) There is no action, suit or proceeding before
or by any court, arbitrator or governmental agency or body pending or, to the
Company's knowledge, threatened, against the Company or any of the
Subsidiaries, or to which any of their respective properties is subject, (A)
that are required to be described in the Registration Statement or the
Prospectus but are not described as required or (B) that, if adversely
determined, could reasonably be expected to have a Material Adverse Effect.
There is no agreement, contract, indenture, lease or other document or
instrument that is required to be described in the Registration Statement or
the Prospectus or to be filed as an exhibit to the Registration Statement that
is not described or filed or incorporated by reference as required. All such
agreements to which the Company or any of its Subsidiaries is a party have been
duly authorized, executed and delivered by the Company or a Subsidiary,
constitute valid and binding agreements of the Company or a Subsidiary, and are
enforceable against the Company or a Subsidiary in accordance with the terms
thereof.
(xx) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, except
as otherwise stated therein, (A) neither the Company nor any of the
Subsidiaries (1) has issued any securities other than in connection with the
exercise of any outstanding options or warrants, (2) incurred any material
liability or obligation, direct or contingent, for borrowed money, (3) entered
into any transaction, not in the ordinary course of business, that is material
to the Company and the Subsidiaries taken as a whole, (4) entered into any
transaction with an affiliate of the Company (as the term "affiliate" is
defined in Rule 405 promulgated by the Commission pursuant to the Act), which
would otherwise be required to be disclosed in the Registration Statement and
the Prospectus, or (5) declared or paid any dividend on its capital stock or
made any other distribution to its equity holders, (B) there has not been any
material change in the capital stock or other equity, or material increase in
the short-term debt or long-term debt, of the Company or any of the
Subsidiaries and (C) there has been no change or development with respect to
the condition (financial or otherwise), business, properties, prospects, net
worth or results of operations of the Company or any of the Subsidiaries that
could have a Material Adverse Effect.
(xxi) Neither the execution, delivery or performance
of this Agreement, the offer, issuance, sale or delivery of the Shares, nor the
consummation of the other transactions contemplated hereby (A) requires the
consent, approval, authorization or order of any court or governmental agency
or body, except such as have been obtained under the Act and such as may be
required under the blue sky laws of any jurisdiction in connection with the
purchase and distribution of the Shares by the Underwriters or such as may be
required by the National Association of Securities Dealers, Inc. (the "NASD")
and such other approvals as have been obtained, (B) will conflict with, result
in a breach or violation of, or constitute a default under the terms of any
agreement, contract, indenture, lease or other instrument to which the Company
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or any of the Subsidiaries is a party or by which any of them or any of their
respective properties may be bound, or the charter or by-laws of the Company or
any Subsidiary; or will result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any of the
Subsidiaries or an acceleration of indebtedness pursuant to the terms of any
agreement or instrument to which any of them is a party or by which any of them
may be bound or to which any of the property or assets of any of them is
subject, or (C) will conflict with or violate any law, statute or regulation,
or any judgment, order, consent or memorandum of understanding applicable to
the Company or any Subsidiary of any court, regulatory body, administrative
agency, governmental body or arbitrator having jurisdiction over the Company or
any of the Subsidiaries or their respective properties.
(xxii) The Company has not distributed and, prior to
the later to occur of (A) the Closing Date or (B) completion of the
distribution of the Shares, will not distribute without the prior written
consent of Jefferies & Company, Inc. ("Jefferies") any offering material in
connection with the offering and sale of the Shares other than the Registration
Statement, any Preliminary Prospectus, the Prospectus or other materials, if
any, permitted by the Act and the Act Regulations.
(xxiii) Neither the Company nor any Subsidiary nor
any employee or agent of the Company or any Subsidiary has made any payment of
funds of the Company or any Subsidiary, or received or retained any funds, in
violation of any law, rule or regulation, or which payment, receipt or
retention of funds is of a character required to be disclosed in the
Registration Statement or the Prospectus.
(xxiv) Neither the Company nor any of the
Subsidiaries is involved in any labor dispute and, to the knowledge of the
Company, no such dispute is threatened.
(xxv) The Company and each of the Subsidiaries have
filed (or have obtained extensions thereto) all Federal, state and local tax
returns that are required to be filed (other than returns with respect to which
failure to so file would not have a Material Adverse Effect), which returns are
compete and correct in all material respects and have paid all taxes shown on
such returns and all assessments received by them with respect thereto to the
extent that the same have become due, except those taxes that are being
contested or protested in good faith by the Company or its Subsidiaries and as
to which any reserves required under generally accepted accounting principles
have been established; and the Company has no knowledge of any tax deficiency
which has been or might be asserted or threatened against the Company or any
Subsidiary which could have a Material Adverse Effect.
(xxvi) Except for the shares of capital stock of
each of the Subsidiaries, neither the Company nor any of the Subsidiaries owns
any share of stock or any other securities of any corporation or has any equity
interest in any firm, partnership, association or other entity other than as
reflected in the consolidated financial statements included in the Registration
Statement and the Prospectus.
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<PAGE>
(xxvii) No holder of any security of the Company has
the right (other than a right which has been waived in writing or complied
with) to have any security owned by such holder included in the Registration
Statement and, except as described in the Registration Statement and the
Prospectus, no holder of any security of the Company has the right to demand
registration of any security owned by such holder during the period ending 12
months after the date of the Prospectus.
(xxviii) Neither the Company nor any Subsidiary or
their respective officers, directors, employees or agents have taken or will
take, directly or indirectly, (A) any action designed to cause or to result in,
or that has constituted or which might reasonably be expected to constitute,
the stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Shares, or (B) since the filing of the
Registration Statement (1) sold, bid for, purchased or paid anyone any
compensation for soliciting purchases of, the Shares or (2) paid or agreed to
pay any person any compensation for soliciting another to purchase any
securities of the Company.
(xxix) As of the date of the Prospectus, neither the
Company nor any of the Subsidiaries is currently planning any probable
acquisitions for which disclosure of pro forma financial information would be
required by the Act.
(xxx) The Common Stock currently outstanding is duly
authorized for trading on the Nasdaq National Market and, prior to the Closing
Date, the Shares will be duly authorized for trading on the Nasdaq National
Market.
(xxxi) The Company is not an "investment company"
within the meaning of the Investment Company Act of 1940, as amended, and is
not subject to registration under such act.
(xxxii) The Company has obtained from each of its
officers and directors a written agreement (the "Lock-Up Agreements"), in form
and substance satisfactory to counsel for the Underwriters, that, for a period
of 90 days from the date of the Prospectus, he or she will not, without
Jefferies' prior written consent, offer, sell, contract to sell, grant any
option for the sale of, or otherwise dispose of, directly or indirectly, any
shares of Common Stock or any security convertible into, or exchangeable or
exercisable for, shares of Common Stock or other securities of the Company.
(xxxiii) To the Company's knowledge, no officer,
director or beneficial owner of 5% or more of the Common Stock of the Company
has any affiliation or association with the National Association of Securities
Dealers, Inc. (the "NASD") or any member thereof.
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<PAGE>
(b) Any certificate signed by any officer of the Company
delivered to the Representatives or to counsel for the Underwriters pursuant to
the terms of this Agreement shall be deemed a representation and warranty by
the Company to the Underwriters as to the matters covered thereby.
2. Sale and Delivery to the Underwriters; Closing.
(a) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Company agrees to sell
to each Underwriter, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $_____ per share (the
"Initial Price"), the number of Firm Shares set forth opposite such
Underwriter's name in Schedule I hereto.
(b) The Company grants to the Underwriters an option to
purchase all or any part of the Additional Shares at the Initial Price.
Additional Shares shall be purchased from the Company, for the accounts of the
Underwriters in proportion to the number of Firm Shares set forth in Schedule I
hereto opposite the name of such Underwriter. Such option may be exercised only
to cover over-allotments in the sale of the Firm Shares by the Underwriters and
may be exercised in whole or in part at any time and from time to time within
30 days after the date of this Agreement, in each case upon written or
facsimile notice, or verbal or telephonic notice confirmed by written or
telegraphic notice, by the Underwriters to the Company no later than 12:00
noon, New York City time, on the business day before the Firm Shares Closing
Date (as hereinafter defined) or at least two business days before the
Additional Shares Closing Date (as hereinafter defined), as the case may be,
setting forth the number of Additional Shares to be purchased and the time and
date (if other than the Firm Shares Closing Date) of such purchase.
(c) Payment of the purchase price for, and delivery of, the
Firm Shares to be purchased by the Underwriters shall be made at the offices of
Jefferies & Company, 650 Fifth Avenue, 4th Floor, Attention: Syndicate
Operations, New York, New York 10019, or at such other place as shall be agreed
upon by the Representatives and the Company at 10:00 A.M. on the third (fourth,
if the pricing occurred after 4:30 p.m. on any given day) business day after
the date of this Agreement, or such other time not later than ten business days
after such date as shall be agreed upon by the Representatives and the Company
(such time and date of payment and delivery being herein called the "Firm
Shares Closing Date"). Payment shall be made to the Company by wire transfer
and payable in immediately available funds to the order of the Company against
delivery to the Underwriters of the Firm Shares.
(d) Payment of the purchase price for, and delivery of, the
Additional Shares to be purchased by the Underwriters shall be made at the
office as set forth above or at such other place as shall be agreed upon by the
Representatives and the Company at the time and on the date (which may be the
same as, but in no event shall be earlier than, the Firm Shares Closing Date)
specified in the notice referred to in Section hereof (such time and date of
delivery and payment are called the
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<PAGE>
"Additional Shares Closing Date"). The Firm Shares Closing Date and the
Additional Shares Closing Date are called, individually, a "Closing Date" and
together, the "Closing Dates". Payment shall be made to the Company by wire
transfer and payable in immediately available funds to the order of the
Company.
(e) The Shares shall be in such denominations and registered
in such names as the Representatives may request in writing at least two
business days before the Firm Shares Closing Date or, in the case of the
Additional Shares, on the day of notice of exercise of the option as described
in Section hereof. The Shares will be made available for examination and
packaging by the Underwriters not later than 1:00 P.M. on the last business day
prior to the Firm Shares Closing Date (or the Additional Shares Closing Date in
the case of the Additional Shares) at such place as is designated by the
Representatives. If the Representatives so elect, delivery of the Shares may be
made by credit through full FAST transfer to the accounts of The Depository
Trust Company designated by the Representatives.
3. Covenants.
(a) The Company covenants with each Underwriter as follows:
(i) The Company will use its best efforts to cause
the Registration Statement, if not effective at the Representation Date, and
any amendment thereto, to become effective, as promptly as possible after the
filing thereof. The Company will not file any amendment to the Registration
Statement or amendment or supplement to the Prospectus to which the
Representatives shall reasonably object in writing after a reasonable
opportunity to review such amendment or supplement. Subject to the foregoing
sentences in this clause , if the Registration Statement has become or becomes
effective pursuant to Rule 430A, or filing of the Prospectus or any Term Sheet
that constitutes a part thereof or supplement to the Prospectus is otherwise
required under Rule 424(b), the Company will cause the Prospectus or any Term
Sheet that constitutes a part thereof, properly completed, or such supplement
thereto, to be filed with the Commission pursuant to Rule 434 and the
applicable paragraph of Rule 424(b) within the time period prescribed and will
provide evidence satisfactory to the Representatives of such timely filing. The
Company will promptly advise the Representatives (A) when the Registration
Statement, if not effective at the Representation Date, and any amendment
thereto, shall have become effective, (B) when the Prospectus or any Term Sheet
that constitutes a part thereof, and any supplement thereto, shall have been
filed (if required) with the Commission pursuant to Rule 434 and 424(b), (C)
when any amendment to the Registration Statement shall have been filed or
become effective, (D) of any request by the Commission for any amendment of or
supplement to the Registration Statement or any Prospectus or for any
additional information, (E) of the receipt by the Company of any notification
of, or if the Company otherwise has knowledge of, the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or the institution or threatening of any proceeding for that purpose,
(F) of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Shares for
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<PAGE>
sale in any jurisdiction or the initiation or threatening of any proceeding for
such purpose and (G) when any document shall have been filed by the Company
under the Act or the Exchange Act or under the rules and regulations
promulgated thereunder. The Company will use its best efforts to prevent the
issuance of any such stop order and, if issued, to obtain as soon as possible
the lifting thereof.
(ii) If, at any time when a prospectus relating to
the Shares is required to be delivered under the Act or the Act Regulations,
any event occurs as a result of which the Prospectus as then amended or
supplemented would include any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein in the light
of the circumstances under which they were made not misleading, or if it shall
be necessary to amend the Registration Statement or amend or supplement the
Prospectus to comply with the Act or the Act Regulations, the Company promptly
will prepare and file with the Commission, at the Company's expense, subject to
the second sentence of Section hereof, an amendment or supplement which will
correct such statement or omission or effect such compliance. Neither your
consent to, nor your delivery of, any such amendment or supplement shall
constitute a waiver of any of the conditions set forth in Section 5.
(iii) If at any time within the nine-month period
referred to in Section 10(a)(3) of the Act during which a prospectus relating
to the Shares is required to be delivered under the Act any event occurs, as a
result of which the Prospectus, including any amendments or supplements, would
include an untrue statement of a material fact, or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, or if it is necessary at any time to amend the Prospectus,
including any amendments or supplements, to comply with the Act or the Act
Regulations, the Company will promptly advise the Underwriters thereof and will
promptly prepare and file with the Commission, at its own expense, an amendment
or supplement which will correct such statement or omission or an amendment or
supplement which will effect such compliance and will use its best efforts to
cause the same to become effective as soon as possible; and, in case any
Underwriter is required to deliver a prospectus after such nine-month period,
the Company upon request, but at the expense of such Underwriter, will promptly
prepare such amendment or amendments to the Registration Statement and such
Prospectus or Prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Act.
(iv) During such period as a prospectus is required
by law to be delivered in connection with sales by an Underwriter or dealer,
the Company, at its expense, but only for the nine-month period referred to in
Section 10(a)(3) of the Act, will furnish to each Underwriter or mail to its
order copies of the Registration Statement, the Prospectus, the Preliminary
Prospectus and all amendments and supplements to any such documents in each
case as soon as available and in such quantities as such Underwriter may
request, for the purposes contemplated by the Act.
(v) The Company consents to the use of the
Prospectus in accordance with the provisions of the Act and with the securities
or blue sky laws of
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the jurisdictions in which the Shares are offered by the Underwriters
and by all dealers to whom Shares may be sold, both in connection with the
offering and sale of the Shares and for such period of time thereafter as the
Prospectus is required by the Act to be delivered in connection with the sales
by any Underwriter or dealer. The Company will comply with all requirements
imposed upon it by the Act, as now and hereafter amended, so far as necessary
to permit the continuance of sales of or dealing in the Shares in accordance
with the provisions hereof and the Prospectus.
(vi) As soon as practicable, the Company will make
generally available to its security holders and to the Underwriters a
consolidated earnings statement or statements of the Company and the
Subsidiaries covering a twelve-month period beginning with the first full
calendar quarter following the Effective Date which will satisfy the provisions
of Section 11(a) of the Act and Rule 158 thereunder.
(vii) The Company will, without charge, furnish (A)
to the Representatives, three signed copies of the Registration Statement
(including exhibits thereto and upon request, all documents incorporated by
reference therein), (B) to each Underwriter, a conformed copy of such
Registration Statement (without exhibits thereto) and (C) so long as delivery
of a prospectus by an Underwriter or dealer may be required by the Act, as many
copies of the Prospectus and all amendments and supplements thereto as the
Representatives may reasonably request. The copies of the Registration
Statement, and each amendment thereto, and the copies of the Prospectus, and
any amendments or supplements thereto, furnished to the Underwriters will be
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(viii) During the period of five years hereafter the
Company will furnish to the Representatives as soon as practicable after the
end of each fiscal year, a copy of its annual report to stockholders for such
year; and the Company will furnish to the Representatives (i) as soon as
available, a copy of each report or definitive proxy statement of the Company
filed with the Commission under the Exchange Act or mailed to stockholders, and
(ii) from time to time, such other information concerning the Company as the
Representatives may reasonably request, provided that prior to the Company's
furnishing any such other information that is nonpublic you shall enter into
such agreement respecting the confidentiality thereof as the Company may
reasonably request.
(ix) The Company will apply the net proceeds from
the offering and sale of the Shares to be sold by the Company in accordance
with the description set forth in the "Use of Proceeds" section of the
Prospectus.
(x) The Company will cooperate with the Underwriters
and their counsel in connection with endeavoring to obtain and maintain the
qualification or registration, or exemption from qualification, of the Shares
for offer and sale under the applicable securities laws of such states and
other jurisdictions of the United States as the Underwriters may designate;
provided, that in no event shall the Company be
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obligated to qualify to do business in any jurisdiction where it is not now so
qualified or to take any action which would subject it to taxation or general
service of process in any jurisdiction where it is not now so subject.
(xi) The Company will not at any time, directly or
indirectly (A) take any action designed to cause or result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of any of the Shares, or (B) (1) sell, bid for,
purchase or pay anyone any compensation for soliciting purchases of, the Shares
or (2) pay or agree to pay any person any compensation for soliciting another
to purchase any other securities of the Company.
(xii) The Company will comply with all the
provisions of any undertakings contained in the Registration Statement.
(xiii) The Company will not, directly or indirectly,
for a period of 90 days following the date of the Prospectus, without the prior
written consent of Jefferies, offer, sell, contract to sell, or grant any
option to purchase or otherwise dispose of, any shares of Common Stock or any
securities convertible into, or exchangeable for, shares of Common Stock, or
register for sale under the Act any shares of Common Stock or any securities
convertible into, or exchangeable for, shares of Common Stock, other than (A)
pursuant to any employee stock option plan of the Company in effect at the
Representation Date, or (B) upon exercise of any options or warrants
outstanding at the Representation Date, or (C) in connection with acquisitions
by the Company, up to a maximum of _________ shares; provided, however, that in
no case shall the Company offer, sell, contract to sell, or grant any option to
purchase or otherwise dispose of in any one acquisition more than 5% of the
Company's outstanding capital stock on a fully diluted basis.
(xiv) The Company shall cause the Shares to be
quoted on the Nasdaq National Market and shall use its best efforts to maintain
such trading while the Shares are outstanding.
(xv) Until the expiration of the 90-day period
following the date of the Prospectus, the Company shall not instruct its
transfer agent and registrar to remove the "Stop Transfer Order" placed on the
transferability of securities of the Company owned by its officers and
directors without the prior written consent of Jefferies.
4. Payment of Expenses.
(a) The Company covenants and agrees with the Underwriters
that the Company will pay (directly or by reimbursement): (i) the fees,
disbursements and expenses of counsel and accountants for the Company, and all
other expenses, in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus, the Prospectus and any
amendments or supplements thereto,
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and the furnishing of copies thereof, including charges for mailing, air
freight and delivery and counting and packaging thereof to the Underwriters and
dealers; (ii) the cost of printing this Agreement, the Agreement Among
Underwriters, the Selected Dealer Agreement, communications with the
Underwriters and selling group and the Preliminary and Supplemental Blue Sky
Survey, if any, and any other documents in connection with the offering,
purchase, sale and delivery of the Shares; (iii) all expenses in connection
with the qualification of the Shares for offering and sale under securities
laws as provided in Section 3(a) hereof, including filing and registration fees
and the fees, disbursements and expenses for counsel for the Underwriters in
connection with such qualification and in connection with Blue Sky surveys or
similar advice with respect to sales; (iv) the filing fees incident to, and the
fees and disbursements of counsel for the Underwriters in connection with,
securing any required review by the NASD of the terms of the sale of the
Shares; (v) all fees and expenses in connection with quotation of the Shares on
the Nasdaq National Market; (vi) the cost of publication of "tombstone"
advertisements with respect to the offering; (vii) the cost of at least five
sets of bound volumes of the Registration Statement and all related materials
to the individuals designated by the Representatives; and (viii) all other
costs and expenses incident to the performance of the obligations of the
Company under this Agreement which are not otherwise specifically provided for
in this Section 4, including the fees of the Company's transfer agent and
registrar, the cost of any stock issue or transfer taxes on sales of the Shares
to the Underwriters, the cost of the Company's personnel and other internal
costs, the cost of printing and engraving the certificates representing the
Shares and all expenses and taxes incident to the sale and delivery of the
Shares to be sold by the Company to the Underwriters or the Representatives
hereunder.
(b) If this Agreement is terminated by the Representatives in
accordance with the provisions of Section 5 or 8 hereof, the Company shall
reimburse the Representatives and the other Underwriters for all of their
reasonable out-of-pocket expenses, including the reasonable fees and
disbursements of counsel for the Underwriters.
5. Conditions of the Underwriters' Obligation.
The obligation of the Underwriters to purchase the Shares
hereunder is subject to the continued accuracy of the representations and
warranties of the Company herein contained as of the date hereof and on each
Closing Date, to the accuracy of the statements of the Company made in any
certificate or certificates pursuant to the provisions hereof as of the date
hereof and on each Closing Date and to the performance by the Company of its
obligations hereunder, and to the following further conditions:
(a) The Registration Statement shall have become effective
not later than 5:30 P.M. on the date hereof, or at such later time and date as
may be approved by the Representatives and the Company and shall remain
effective at each Closing Date. No stop order suspending the effectiveness of
the Registration Statement shall have been issued under the Act or proceedings
therefor initiated or threatened by the Commission. No order suspending the
effectiveness of the Registration Statement or
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the qualification or registration of the Shares under the securities or blue
sky laws of any jurisdiction shall be in effect or proceedings therefor
initiated or threatened by the Commission or the authorities of any such
jurisdiction. If the Company has elected to rely upon Rule 430A, the price of
the Shares and any price-related or other information previously omitted from
the effective Registration Statement pursuant to Rule 430A shall have been
transmitted to the Commission for filing pursuant to Rule 424(b) within the
prescribed time period, and prior to the Firm Shares Closing Date, the Company
shall have provided evidence satisfactory to the Representatives of such timely
filing, or a post-effective amendment providing such information shall have
been promptly filed and declared effective in accordance with the requirement
of Rule 430A.
(b) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there shall not have
occurred (i) any change, or any development involving a prospective change, in
or affecting the business, properties, prospects, condition (financial or
other) or results of operations of the Company or the Subsidiaries, taken as a
whole, which, in the judgment of the Representatives, materially affects the
market for the Shares or (ii) any material loss or interference with the
business or properties of the Company or any of the Subsidiaries from fire,
explosion, flood or other casualty, whether or not covered by insurance, or
from any labor dispute or any court or legislative or other governmental
action, order or decree, which is not set forth in the Registration Statement
and the Prospectus, if in the judgment of the Representatives any such
development makes it impracticable or inadvisable to proceed with completion of
the sale of and payment for the Shares.
(c) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there shall have been
no litigation or other proceeding instituted against the Company or any of the
Subsidiaries or any of their respective officers or directors in their
capacities as such, before or by any Federal, state or local court, commission,
regulatory body, administrative agency or other governmental body, domestic or
foreign, or arbitrator, in which litigation or proceeding an unfavorable
ruling, decision or finding would materially and adversely affect the business,
properties, business prospects, condition (financial or otherwise) or results
of operations of the Company and the Subsidiaries, taken as a whole.
(d) Each of the representations and warranties of the Company
contained herein shall be true and correct in all material respects at each
Closing Date, as if made at such Closing Date, and all covenants and agreements
contained herein to be performed on the part of the Company and all conditions
contained herein to be fulfilled or complied with by the Company at or prior to
each Closing Date, shall have been duly performed, fulfilled or complied with.
(e) Squadron, Ellenoff, Plesent & Sheinfeld, LLP, counsel for
the Company, shall have furnished to the Underwriters their opinion,
satisfactory in form and substance to counsel for the Underwriters, dated the
Firm Shares Closing Date (and, if applicable, the Additional Shares Closing
Date), to the effect that:
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(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the State
of Delaware with full corporate power and authority to own, lease and operate
its properties and conduct its business as described in the Registration
Statement and the Prospectus, and is duly qualified to conduct its business and
is in good standing in each jurisdiction or place where the nature or location
of its properties (owned or leased) or the conduct of its business requires
such registration or qualification, except where the failure so to register or
qualify would not have a Material Adverse Effect.
(ii) Each Subsidiary has been duly incorporated and
is validly existing as a corporation in good standing under the laws of the
jurisdiction in which it is incorporated, with full corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Registration Statement and the Prospectus, and is duly
qualified to conduct its business and is in good standing in each jurisdiction
or place where the nature or location of its properties (owned or leased) or
the conduct of its business requires such registration or qualification, except
where the failure so to register or qualify would not have a Material Adverse
Effect.
(iii) All the outstanding shares of capital stock of
each Subsidiary have been duly authorized and validly issued and are fully paid
and nonassessable and all outstanding shares of capital stock of each
Subsidiary are owned of record and, to such counsel's knowledge, beneficially
by the Company, either directly or through one of the other Subsidiaries, free
and clear of any perfected security interests and, to such counsel's knowledge,
other security interests, liens, encumbrances, equities, other rights to
purchase or other claims, except that shares of capital stock of certain of the
Subsidiaries are pledged to secure loans.
(iv) There are no preemptive or other rights to
subscribe for or to purchase shares of capital stock of the Company pursuant to
any statute, the certificate of incorporation or by-laws of the Company or, to
such counsel's knowledge, any agreement or other instrument to which the
Company is a party as to which any person can successfully maintain an action,
suit or proceeding against the Company for violation of his or her preemptive
rights with respect to the issuance of any shares of capital stock of the
Company.
(v) To the knowledge of such counsel, there is no
pending or threatened action, suit or proceeding before any court or
governmental agency, authority or body or any arbitrator involving the Company
or any of the Subsidiaries required to be disclosed in the Prospectus that is
not disclosed in the Prospectus, and there is no contract or other document
required to be described in the Registration Statement or the Prospectus, or to
be filed as an exhibit, which is not described or filed as required.
(vi) All of the Company's issued and outstanding
capital stock has been duly authorized, validly issued, is fully paid and
nonassessable, has been issued in compliance with all applicable Federal
securities laws and the capitalization of the
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Company conforms in all material respects to the descriptions thereof and the
statements made with respect thereto in the Registration Statement and the
Prospectus under the caption "Description of Capital Stock."
(vii) The Registration Statement has become
effective under the Act; any required filing of the Prospectus, and any
supplements thereto, pursuant to Rule 424(b) have been made in the manner and
within the time period required by Rule 424(b); to the knowledge of such
counsel, no stop order suspending the effectiveness of the Registration
Statement has been issued, no proceedings for that purpose have been instituted
or threatened, and the Registration Statement and the Prospectus (other than
the financial statements and other financial and statistical information
contained therein as to which such counsel need express no opinion) comply as
to form in all material respects with the requirements of the Act and the
applicable Act Regulations.
(viii) The statements in the Registration Statement
and Prospectus, insofar as they are descriptions of contracts, agreements or
other legal documents, are accurate in all material respects.
(ix) This Agreement has been duly authorized,
executed and delivered by the Company, is a valid and binding agreement of the
Company, enforceable in accordance with its terms (except to the extent rights
to indemnity hereunder or thereunder may be limited by Federal or state
securities laws or public policy underlying such laws and except to the extent
the enforcement hereof or thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by equitable principles) and the Company has
full corporate power and authority to enter into this Agreement.
(x) No consent, approval, authorization or order of
any court or governmental agency or body of which such counsel has knowledge is
required for the consummation of the transactions contemplated hereby, except
such as have been obtained under the Act and such as may be required under the
blue sky laws of any jurisdiction in connection with the purchase and
distribution of the Shares by the Underwriters or such as may be required by
the NASD (as to which such counsel need express no opinion) and such other
approvals (specified in such opinion) as have been obtained.
(xi) Neither the execution and delivery of this
Agreement, the issue and sale of the Shares, the consummation of any other of
the transactions herein contemplated, nor the fulfillment of the terms hereof,
will conflict with, or result in a breach or violation of, or constitute a
default under, or result in the creation or imposition of any lien, charge,
claim or encumbrance upon, any of the property or assets of the Company or any
of the Subsidiaries pursuant to (a) the terms of any agreement, contract,
indenture, lease or other instrument to which the Company or any of the
Subsidiaries is a party or by which the Company or any of the Subsidiaries is
bound or to which any of the property or assets of the Company or any of its
Subsidiaries is subject, which is filed or incorporated by reference as an
exhibit to the
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Registration Statement, filed or incorporated by reference as an
exhibit to any document which is itself incorporated by reference in the
Registration Statement or identified in writing to such counsel, (b) any law,
statute, rule, or regulation, or any judgment, order, consent or memorandum of
understanding known to such counsel of any court, regulatory body,
administrative agency, governmental body or arbitrator having jurisdiction over
the Company or any of the Subsidiaries, or (c) the charter or by-laws of the
Company.
(xii) The Shares have been duly and validly
authorized by the Company for issuance, and the Company has full corporate
power and authority to issue, sell and deliver the Firm Shares; and, when the
Shares are issued and delivered against payment therefor as provided by this
Agreement, the Shares will have been validly issued and will be fully paid and
nonassessable, and the issuance of such Shares will not be subject to any
statutory preemptive rights or similar statutory rights or, to such counsel's
knowledge, any other preemptive or similar rights.
(xiii) The certificates for the Shares are in due
and proper form under Delaware law and the by-laws of the Company and conform
with the form of certificate duly authorized by the Board of Directors of the
Company.
(xiv) The Shares, when issued, will conform in all
material respects to the description thereof contained in the Registration
Statement and the Prospectus under the caption "Description of Capital Stock."
(xv) The Company is not an "investment company"
within the meaning of the Investment Company Act of 1940, as amended, or
subject to registration under such act.
(xvi) Except as set forth in the Registration
Statement and the Prospectus, to the knowledge of such counsel no holder of any
securities of the Company or any other person has the right, contractual or
otherwise, to cause the Company to sell or otherwise issue to such person, or
to permit such person to underwrite the sale of, any of the Shares or the right
to have any Common Stock or other securities of the Company included in the
Registration Statement or the right, as a result of the filing of the
Registration Statement, to require registration under the Act of any shares of
Common Stock or other securities of the Company that has not been waived or
lapsed.
In addition, such counsel shall also state that such counsel has
participated in conferences with representatives of the Underwriters, officers
and representatives of the Company and the Subsidiaries and representatives of
the independent certified public accountants of the Company, at which
conferences the contents of the Registration Statement and the Prospectus and
related matters were discussed and that, although such counsel is not passing
upon and does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement and the
Prospectus (except as set forth in Section 5(e)(vi)), on the basis of the
foregoing (relying as to materiality to a large extent upon officers and other
representatives of the Company), no facts have come to the attention of such
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counsel which lead such counsel to believe that the Registration Statement at
the time it became effective or at the Representation Date and at the Firm
Shares Closing Date (and, if applicable, the Additional Shares Closing Date)
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus, at the Representation Date (unless the
term "Prospectus" refers to a prospectus which has been provided to the
Underwriters by the Company for use in connection with the offering of the
Shares which differs from the Prospectus on file at the Commission at the
Representation Date, in which case at the time it is first provided to the
Underwriters for such use) or at the Firm Shares Closing Date (and, if
applicable, the Additional Shares Closing Date), included or includes an untrue
statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, that such
counsel need not express any comment with respect to the financial statements,
supporting schedules or other financial and statistical data contained in the
Registration Statement or the Prospectus.
(f) Fulbright & Jaworski L.L.P., counsel for the
Underwriters, shall have furnished to the Underwriters an opinion with respect
to such matters as may be reasonably requested by the Underwriters, dated the
Firm Shares Closing Date (and, if applicable, the Additional Shares Closing
Date).
(g) The following conditions contained in clauses (A) through
(C) of this Section 5(g) shall have been satisfied on and as of each Closing
Date and the Company shall have furnished to the Underwriters a certificate of
the Company, signed by the Chairman of the Board or the President and the
principal financial or accounting officer of the Company, dated the Firm Shares
Closing Date (and, if applicable, the Additional Shares Closing Date), to the
effect that the signers of such certificate have carefully examined the
Registration Statement, the Prospectus, any supplement or amendment to the
Prospectus and this Agreement and that:
(A) the representations and warranties of the
Company in this Agreement are true and correct on and as of the Firm Shares
Closing Date (and, if applicable, on the Additional Shares Closing Date), with
the same effect as if made on the Firm Shares Closing Date (and, if applicable,
on the Additional Shares Closing Date); the Registration Statement, as amended
as of the Firm Shares Closing Date (and, if applicable, on the Additional
Shares Closing Date), does not include any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein not
misleading, and the Prospectus, as amended or supplemented as of the Firm
Shares Closing Date (and, if applicable, on the Additional Shares Closing
Date), does not include any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading; and the
Company has complied with all the agreements and satisfied all the conditions
under this Agreement on its part to be performed or satisfied at or prior to
the Firm Shares Closing Date (and, if applicable, at or prior to the Additional
Shares Closing Date);
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(B) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that purpose
have been instituted or, to the knowledge of the Company, threatened; and
(C) since the date of the most recent financial
statements included in the Prospectus, there has been no change or development
involving a prospective change, with respect to the business, properties,
prospects, financial condition or results of operations of the Company or the
Subsidiaries, taken as a whole, that could have a Material Adverse Effect.
(h) At the Effective Date, the Representation Date and at
each Closing Date, Richard A. Eisner & Company, LLP shall have furnished to the
Underwriters a letter or letters, dated respectively as of the Effective Date,
the Representation Date and each Closing Date, in form and substance
satisfactory to the Underwriters, containing statements and information of the
type customarily included in accountants' "comfort letters" to underwriters
with respect to the historical and pro forma financial statements and certain
financial and statistical information pertaining to the Company and the
Subsidiaries contained in the Registration Statement and the Prospectus.
(i) At the Effective Date and the Representation Date, KPMG
shall have furnished to the Underwriters a letter, dated respectively as of the
Effective Date and the Representation Date, in form and substance satisfactory
to the Underwriters, containing statements and information of the type
customarily included in accountants' "comfort letters" to underwriters with
respect to the historical and pro forma financial statements and certain
financial and statistical information pertaining to Eagle Quest Golf Centers,
Inc. contained in the Registration Statement and the Prospectus.
(j) At the Effective Date and the Representation Date,
Feldman, Gutterman, Meinberg & Co. shall have furnished to the Underwriters a
letter, dated respectively as of the Effective Date and the Representation
Date, in form and substance satisfactory to the Underwriters, containing
statements and information of the type customarily included in accountants'
"comfort letters" to underwriters with respect to the historical and pro forma
financial statements and certain financial and statistical information
pertaining to Leisure Complexes, Inc. contained in the Registration Statement
and the Prospectus.
(k) At each Closing Date, counsel for the Underwriters shall
have been furnished with such information, certificates and documents as they
may reasonably require for the purpose of enabling them to pass upon the
issuance and sale of the Shares as contemplated herein and related proceedings,
or to evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained, or otherwise in
connection with the offering contemplated hereby; and all opinions and
certificates mentioned above or elsewhere in this Agreement shall
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be reasonably satisfactory in form and substance to the Underwriters and
counsel for the Underwriters.
(l) On or prior to the Representation Date, the Company shall
have furnished to the Underwriters a Lock-Up Agreement in form and substance
reasonably satisfactory to the Representatives from [ ].
6. Indemnification and Contribution.
(a) The Company agrees to indemnify, defend and hold harmless
each Underwriter, the directors, officers, employees and agents of each
Underwriter and each person who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, to the fullest extent
lawful from and against any losses, expenses, claims, damages or liabilities
(including any and all investigative, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claim asserted), which, jointly or severally, any of
them may become subject under the Act, the Exchange Act or otherwise, as such
expenses are incurred, insofar as such losses, expenses, claims, damages or
liabilities arise out of or are based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement, or
in any Preliminary Prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or in any Blue Sky application or other document executed
by the Company specifically for that purpose or based upon information
furnished by the Company filed in any state or other jurisdiction in order to
qualify any or all of the Shares under the securities laws thereof or filed
with the Commission or any securities association or securities exchange (each,
an "Application"), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or (ii) any untrue statement or alleged untrue statement
made in Section 1(a) of this Agreement by the Company; provided, however, that
the Company will not be liable in any such case to the extent that any such
loss, expense, claim, damage or liability arises out of or is based upon any
such untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with the written
information furnished to the Company by the Representatives on behalf of any
Underwriter expressly for use in the Registration or the Prospectus; and
provided, further, that with respect to any untrue statement or omission or
alleged untrue statement or omission made in any Preliminary Prospectus, the
indemnity agreement contained in this Section 6(a) shall not inure to the
benefit of any such Underwriter the directors, officers, employees or agents of
such Underwriter or any person controlling such Underwriter and the Company
shall not be liable to any such Underwriter, the directors, officers, employees
or agents of such Underwriter or any persons controlling such Underwriter, from
whom the person asserting any such losses, expenses, claims, damages or
liabilities purchased the Shares concerned, to the extent that any such loss,
expense, claim, damage or liability results from the fact that there was not
sent or given to such person, at or prior to the written confirmation of the
sale of such Shares to such person, a copy of the Prospectus, as the same may
be amended or supplemented, within the time required by the Act (if -24-
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<PAGE>
required thereby), and the untrue statement or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact in such
Preliminary Prospectus was corrected in such Prospectus and the Company had
previously furnished copies thereof to such Underwriter on a timely basis in
order to permit the Prospectus (as the same may be amended or supplemented) to
be sent or given. The foregoing indemnity agreement shall be in addition to any
liability that the Company may otherwise have.
(b) Each Underwriter severally agrees to indemnify and hold
harmless the Company, each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, each
director of the Company and each officer who signs the Registration Statement,
to the same extent as the foregoing indemnities from the Company to each
Underwriter, the directors, officers, employees and agents of such Underwriter
and any person controlling such Underwriter, but only insofar as such loss,
expense, claim, damage or liability arises out of or is based upon any untrue
statement or omission or alleged untrue statement or omission made in reliance
or in conformity with information relating to such Underwriter furnished in
writing to the Company by the Representatives on behalf of such Underwriter,
expressly for use in the Registration Statement or the Prospectus. This
indemnity agreement will be in addition to any liability that any Underwriter
may otherwise have. The Company agrees that the statements set forth in the
last paragraph of the cover page of the Prospectus, the stabilization legend on
the inside front cover page of the Prospectus, the table of Underwriters set
forth under the heading "Underwriting" in the Prospectus and the amounts of the
selling concession and reallowance set forth in the Prospectus constitute the
only information provided in writing by the Representatives on behalf of any
Underwriter expressly for use in the Registration Statement or the Prospectus.
(c) If any action is brought against an indemnified party
under this Section , the indemnified party or parties shall promptly notify the
indemnifying party in writing of the institution of such action (provided that
the failure to give such notice shall not relieve the indemnifying party of any
liability which it may have pursuant to this Agreement, unless and to the
extent the indemnifying party did not otherwise learn of such action and such
failure has resulted in the forfeiture of substantive rights or defenses by the
indemnifying party) and the indemnifying party shall assume the defense of such
action, including the employment of counsel and payment of reasonable expenses.
The indemnified party or parties shall have the right to employ separate
counsel (including local counsel) in any such case and to participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of the indemnified party or parties unless (i) the employment of such
counsel shall have been authorized in writing by the indemnifying party in
connection with the defense of such action, (ii) the indemnifying party shall
not have employed counsel reasonably satisfactory to the indemnified party to
take charge of the defense of such action within a reasonable time after notice
of the institution of such action, (iii) such indemnified party or parties
shall have reasonably concluded that there may be defenses available to it or
them that are different from or additional to those available to the
indemnifying
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party or (iv) the use of counsel chosen by the indemnifying party to represent
the indemnified party would present such counsel with a conflict of interest
(in which case the indemnifying party shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties, in any of
which events such fees and expenses shall be borne by the indemnifying party
and paid as incurred; provided that the indemnifying party shall only be
responsible for the fees and expenses of one counsel for the indemnified party
or parties hereunder). Anything in this paragraph to the contrary
notwithstanding, the indemnifying party shall not be liable for any settlement
of any such claim or action effected without its written consent, which consent
shall not be unreasonably withheld. An indemnifying party will not, without the
prior written consent of the indemnified parties, settle or compromise or
consent to the entry of any judgment with respect to any pending or threatened
claim, action, suit or proceeding in respect of which indemnification or
contribution may be sought hereunder (whether or not the indemnified parties
are actual or potential parties to such claim or action) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action, suit or
proceeding.
(d) If the indemnification provided for in this Section is
unavailable to an indemnified party under subsections (a) or (b) of this
Section 6 or is insufficient to hold harmless a party indemnified thereunder,
in respect of any losses, expenses, claims, damages or liabilities referred to
therein, then each applicable indemnifying party shall contribute to the amount
paid in settlement of any action, suit or proceeding or any claims asserted,
but after deducting in the case of losses, expenses, claims, damages and
liabilities suffered by the Company, any contribution received by the Company
from persons other than the Underwriters who may also be liable for
contribution, including persons who control the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, officers of the
Company who signed the Registration Statement and directors of the Company, to
which the Company and one or more of the Underwriters may be subject, in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand, and the Underwriters on the other hand, from the
offering of the Shares or, if, but only if, such allocation is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to above but also the relative fault of the Company
on the one hand, and the Underwriters on the other hand, in connection with the
statements or omissions which resulted in such losses, expenses, claims,
damages or liabilities as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand, and the
Underwriters on the other hand, shall be deemed to be in the same proportion as
the total proceeds from the offering (net of underwriting discounts but before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault of
the Company on the one hand, and the Underwriters on the other hand, shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by
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the Company or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of the losses,
expenses, claims and liabilities referred to above shall be deemed to include
any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any claim or action. The Company and
the Underwriters agree that it would not be just and equitable if contribution
pursuant hereto were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
Section 6(d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount received by it by reason of such untrue
statement or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this Section 6(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The Company hereby agrees that in addition to its other
obligations under subsection (a) of this Section 6, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission described in subsection (a) of this Section, it
will reimburse the Underwriters on a monthly basis for all reasonable legal
fees and other expenses reasonably incurred in connection with investigating or
defending such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the obligations under this Section 6 and the possibility that
such payments might later be held to be improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is so
held to have been improper, the Underwriters shall promptly return such
payments to the Company.
7. Survival. The respective indemnity and contribution agreements
contained in Section hereof and the covenants, warranties and other
representations of the Company contained in this Agreement or contained in
certificates of officers of the Company or submitted pursuant hereto, shall
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter, or any of their respective officers, employees,
directors, stockholders or person who controls the Underwriters within the
meaning of Section 15 of the Act, or by or on behalf of the Company or any of
its directors, officers, employees or any person who controls the Company
within the meaning of Section 15 of the Act, and shall survive delivery of and
payment for the Shares.
8. Default by an Underwriter. If one or more of the Underwriters shall
fail or refuse at a Closing Date to purchase and pay for any of the Shares
agreed to be purchased by such Underwriter or Underwriters hereunder on such
date and the aggregate number of Firm Shares or Additional Shares, as the case
may be, which such
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<PAGE>
defaulting Underwriter or Underwriters, as the case may be, agreed but failed
or refused to purchase is not more than one-tenth of the total number of Shares
to be purchased on such date by all Underwriters, each nondefaulting
Underwriter shall be obligated severally, in the proportion which the number of
Firm Shares set forth opposite its name in Schedule I bears to the total number
of Firm Shares which all the non-defaulting Underwriters, as the case may be,
have agreed to purchase, or in such other proportion as the Representatives may
specify, to purchase the Firm Shares or Additional Shares, as the case may be,
which such defaulting Underwriter or Underwriters, as the case may be, agreed
but failed or refused to purchase on such date; provided that in no event shall
the number of Firm Shares or Additional Shares, as the case may be, which any
Underwriter has agreed to purchase pursuant to Section 2 hereof be increased
pursuant to this Section 8 by an amount in excess of one-tenth of such number
of Firm Shares or Additional Shares, as the case may be, without the written
consent of such Underwriter. If on the Firm Shares Closing Date or on the
Additional Shares Closing Date, as the case may be, any Underwriter or
Underwriters shall fail or refuse to purchase Firm Shares, or Additional
Shares, as the case may be, and the aggregate number of Firm Shares or
Additional Shares, as the case may be, with respect to which such default
occurs is more than one-tenth of the aggregate number of Shares to be purchased
on such date by all Underwriters in the event of a default by a Underwriter and
arrangements satisfactory to the Representatives and the Company for purchase
of such Shares are not made within 48 hours after such default, this Agreement
will terminate without liability on the part of any non-defaulting Underwriter
and the Company. In any such case which does not result in termination of this
Agreement, either the Representatives or the Company shall have the right to
postpone the Firm Shares Closing Date, or the Additional Shares Closing Date,
as the case may be, but in no event for longer than seven days, in order that
the required changes, if any, in the Registration Statement and the Prospectus
or any other documents or arrangements may be effected. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any default of any such Underwriter under this Agreement.
9. Termination of Agreement.
(a) The Representatives may terminate this Agreement, by
written notice to the Company prior to the Firm Shares Closing Date (or, if
applicable, the Additional Shares Closing Date) (i) if there shall occur any
default or breach by the Company hereunder or the failure to satisfy any of the
conditions contained in Section hereof, (ii) if there has been, since the date
of this Agreement or since the respective dates as of which information is
provided in the Registration Statement and prior to the Firm Shares Closing
Date (or, if applicable, the Additional Shares Closing Date), there shall have
been any material adverse change, or any development involving a prospective
material adverse change (including, without limitation, a change in the
management or control of the Company), in the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company, or (iii) if, since the date of this Agreement and prior to the Firm
Shares Closing Date (or, if applicable, the Additional Shares Closing Date),
(A) there has occurred any material adverse
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<PAGE>
change in the financial markets of the United States or in political, financial
or economic conditions in the United States or any outbreak or material
escalation of hostilities or declaration by the United States of a national
emergency or war or other calamity or crisis, the effect of which on the
financial securities markets of the United States is such as to make it, in the
judgment of the Representatives, impracticable or inadvisable to market the
Shares on the terms and in the manner contemplated by the Prospectus, or (B)
trading in any of the securities of the Company has been suspended by the
Commission, or trading generally on the New York Stock Exchange or the Nasdaq
National Market has been suspended (other than by limitation on hours or number
of days of trading), or minimum or maximum prices for trading have been fixed,
or maximum ranges for prices for securities have been required, by the New York
Stock Exchange or the Nasdaq National Market or by order of the Commission or
any other governmental authority or (C) a banking moratorium has been declared
by any of the Federal or New York authorities.
(b) If this Agreement is terminated pursuant to this Section
or any other provision of this Agreement, such termination shall be without
liability of any party to any other party except as provided in Sections and 6.
10. Notices. All notices and other communications hereunder shall be
in writing and shall be deemed to have been duly given if mailed or transmitted
by any standard form of telecommunication. Notices to the Underwriters shall be
directed to the Underwriters, c/o Jefferies & Company, Inc., 11100 Santa Monica
Boulevard, Los Angeles, California 90025, attention of Jerry Gluck, Esq., with
a copy to Fulbright & Jaworski L.L.P., 666 Fifth Avenue, New York, New York
10103, attention of Paul Jacobs, Esq.; notices to the Company shall be directed
to 225 Broadhollow Road, Melville, New York 11747, attention of Dominic Chang,
with a copy to Squadron, Ellenoff, Plesent & Sheinfeld, LLP, 551 Fifth Avenue,
New York, New York, 10176, attention of Kenneth R. Koch, Esq.
11. Parties. This Agreement shall inure to the benefit of and be
binding upon the Underwriters, the Company and their respective successors and
legal representatives. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to provide any person, firm or corporation,
other than the Underwriters, the Company and their respective successors and
legal representatives and the controlling persons and officers, employees,
directors and stockholders referred to in Sections and and their respective
heirs and legal representatives, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the Underwriters, the Company and their
respective successors and legal representatives, and said controlling persons,
stockholders, officers and directors and their respective heirs and legal
representatives, and for the benefit of no other person, firm or corporation.
No purchaser of Shares from the Underwriters shall be deemed to be a successor
by reason merely of such purchase.
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<PAGE>
12. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO
THE CONFLICTS OF LAWS PRINCIPLES THEREOF.
13. Counterparts. This Agreement may be executed by any one or more of
the parties hereto in any number of counterparts, each of which shall be deemed
to be an original, but all such counterparts shall together constitute one and
the same instrument.
[Remainder of page intentionally left blank]
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<PAGE>
* * * * *
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement among the Underwriters and the Company in accordance with its terms.
Very truly yours,
FAMILY GOLF CENTERS, INC.
By:
------------------------------------
Dominic Chang
Chairman and Chief Executive Officer
CONFIRMED AND ACCEPTED, as of the date first above written:
JEFFERIES & COMPANY, INC.
BANCAMERICA ROBERTSON STEPHENS
CIBC OPPENHEIMER CORP.
EVEREN SECURITIES, INC.
PRUDENTIAL SECURITIES INCORPORATED
By: JEFFERIES & COMPANY, INC.
By:
-----------------------------------
Name:
Title:
For themselves and as Representatives of
the other Underwriters named in this Agreement
<PAGE>
SCHEDULE I
Number of Firm Shares
Underwriter To Be Purchased
Jefferies & Company, Inc. ...........................
BancAmerica Robertson Stephens.......................
CIBC Oppenheimer Corp................................
EVEREN Securities, Inc...............................
Prudential Securities Incorporated...................
Total...................................
-----------
3,500,000
===========
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<PAGE>
MERGER AGREEMENT
BY AND AMONG
FAMILY GOLF CENTERS, INC.,
FAMILY GOLF ACQUISITION, INC.
AND
EAGLE QUEST GOLF CENTERS, INC.
DATED AS OF APRIL 2, 1998
<PAGE>
TABLE OF CONTENTS
ARTICLE I THE MERGER.......................................................1
Section 1.1 The Merger..............................................1
Section 1.2 Closing.................................................1
Section 1.3 Final Order.............................................2
Section 1.4 Arrangement Transactions................................2
Section 1.5 Adjustment of Exchange Ratio............................2
Section 1.6 Exchange of Securities..................................3
Section 1.7 Definition of Subsidiary and Affiliate..................5
ARTICLE II CERTAIN MATTERS RELATING TO EQ...................................6
Section 2.1 Memorandum and Articles of EQ...........................6
Section 2.2 Directors and Officers of EQ............................6
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB..........6
Section 3.1 Existence, Good Standing, Corporate Authority...........6
Section 3.2 Authorization, Validity and Effect of Agreements........6
Section 3.3 Capitalization..........................................6
Section 3.4 Parent Reports and Financial Statements.................7
Section 3.5 No Violation............................................7
Section 3.6 No Brokers..............................................8
Section 3.7 Parent Common Stock.....................................8
Section 3.8 Interim Operations of Merger Sub........................8
Section 3.9 Absence of Certain Changes..............................8
Section 3.10 Proxy Statement.........................................8
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF EQ.............................9
Section 4.1 Existence, Good Standing, Corporate Authority...........9
Section 4.2 Authorization, Validity and Effect of Agreements........9
Section 4.3 Capitalization..........................................9
Section 4.4 Options.................................................9
Section 4.5 No Violations..........................................10
Section 4.6 Subsidiaries and Affiliates............................10
Section 4.7 Financial Statements...................................10
Section 4.8 Absence of Undisclosed Liabilities.....................12
Section 4.9 Tangible Personal Property; Sufficiency of Assets......12
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Section 4.10 Real Property..........................................13
Section 4.11 Machinery and Equipment................................16
Section 4.12 Copyrights and Trademarks..............................16
Section 4.13 Contracts..............................................16
Section 4.14 Absence of Default.....................................18
Section 4.15 Insurance..............................................18
Section 4.16 Third Party Options....................................18
Section 4.17 Distributions, Satisfactions, Obligations..............19
Section 4.18 Capital Expenditures...................................20
Section 4.19 Litigation.............................................20
Section 4.20 Compliance with Law....................................20
Section 4.21 Transactions with Affiliates...........................21
Section 4.22 Prohibited Payments....................................21
Section 4.23 Tax Matters............................................21
Section 4.24 Employee Benefit Plans.................................24
Section 4.25 Executive Employees....................................26
Section 4.26 Employees..............................................26
Section 4.27 Environmental Laws.....................................27
Section 4.28 Bank Accounts, Letters of Credit and Powers of
Attorney...............................................28
Section 4.29 Minute Books; Records..................................28
Section 4.30 Full Disclosure........................................28
Section 4.31 Securities Offerings...................................29
Section 4.32 Brokers or Finders.....................................29
Section 4.33 Licenses...............................................29
Section 4.34 Proxy Statement........................................29
ARTICLE V COVENANTS.......................................................30
Section 5.1 Alternative Proposals..................................30
Section 5.2 Interim Operations of EQ...............................31
Section 5.3 Filings; Other Action..................................32
Section 5.4 Inspection of Records..................................33
Section 5.5 Further Action.........................................33
Section 5.6 Expenses...............................................33
Section 5.7 Survival of Representations and Warranties of EQ.......34
Section 5.8 Governmental Approvals.................................34
Section 5.9 Public Announcements...................................34
Section 5.10 Stockholders Meeting...................................34
Section 5.11 Proxy Statement........................................34
Section 5.12 Blue Sky...............................................35
Section 5.13 Affiliates.............................................35
Section 5.14 Options................................................35
Section 5.15 Termination of Written Employment Agreements...........36
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Section 5.16 Real Estate and Other Consents.........................36
Section 5.17 Preparation of Signing Date Balance Sheet..............36
Section 5.18 Schedules..............................................37
Section 5.19 Restrictive Legends....................................37
Section 5.20 Exhibits...............................................37
ARTICLE VI CONDITIONS......................................................37
Section 6.1 Conditions to Obligation of Each Part to Effect
the Arrangement........................................37
Section 6.2 Conditions to Obligation of EQ to Effect the
Arrangement............................................38
Section 6.3 Conditions to Obligation of Parent and Merger
Sub to Effect the Merger and Arrangement...............38
ARTICLE VII TERMINATION.....................................................40
Section 7.1 Termination............................................41
Section 7.2 Effect of Termination..................................42
ARTICLE VIII INDEMNIFICATION.................................................42
Section 8.1 Indemnity..............................................42
Section 8.2 Escrow Shares..........................................42
ARTICLE IX GENERAL PROVISIONS..............................................42
Section 9.1 Notices................................................42
Section 9.2 Assignment, Binding Effect.............................43
Section 9.3 Entire Agreement.......................................43
Section 9.4 Amendment..............................................43
Section 9.5 Governing Law..........................................43
Section 9.6 Counterparts...........................................44
Section 9.7 Headings...............................................44
Section 9.8 Interpretation.........................................44
Section 9.9 Waivers................................................44
Section 9.10 Incorporation of Schedules and Exhibits................44
Section 9.11 Severability...........................................44
Section 9.12 Enforcement of Agreement...............................44
EXHIBITS
Exhibit A Plan of Arrangement
iii
<PAGE>
Exhibit B Affiliate Agreement
Exhibit C Escrow Agreement
Exhibit D Registration Rights Agreement
Exhibit E Employment Agreement - Holmstrom
Exhibit F Employment Agreement - Stanton
Exhibit G Employment Agreement - Garnett
Exhibit H Non-Competition Agreement
Exhibit I Estoppel Certificate
Exhibit J U.S. Tax Matters Agreement
iv
<PAGE>
MERGER AGREEMENT
THIS MERGER AGREEMENT is dated as of April 2, 1998 (the "Agreement")
among Family Golf Centers, Inc, a Delaware corporation ("Parent"), Family Golf
Acquisition, Inc., a Delaware corporation and the wholly-owned subsidiary of
Parent ("Merger Sub"), and Eagle Quest Golf Centers, Inc., a corporation
organized under the laws of British Columbia ("EQ").
WHEREAS, the parties wish to provide for the terms and conditions upon
which EQ will be acquired by Merger Sub by means of a merger (the "Merger") by
way of arrangement (the "Arrangement") pursuant to section 252 of the Company
Act (British Columbia) (the "BCCA");
WHEREAS, it is the intention of the parties to this Agreement that for
federal income tax purposes, the merger provided for herein shall qualify as a
"reorganization" within the meaning of Sections 368(a)(1)(B) of the Code, as
defined herein;
WHEREAS, it is the intention of the parties to this Agreement that the
Merger provided for herein shall qualify as a "pooling of interests" for
accounting purposes; and
NOW THEREFORE, in consideration of the premises and of the
representations, warranties, covenants and agreements set forth herein, the
parties hereto hereby agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. As promptly as practicable after the execution
of this Agreement, EQ shall apply to the Supreme Court of British Columbia (the
"Court") pursuant to section 252 of the BCCA for an interim order (the "Interim
Order") in form and substance satisfactory to Parent providing for, among other
things, the calling and holding of the Stockholder Meeting (as defined in
section 5.10 of this Agreement) for the purpose of considering and, if deemed
advisable, approving the Arrangement under section 252 of the BCCA and pursuant
to the Plan of Arrangement substantially in the form of Exhibit A hereto (the
"Plan of Arrangement"). If the stockholders of EQ approve the Arrangement in
accordance with the terms of the Interim Order, thereafter EQ will take the
necessary steps to submit the Arrangement to the Court and apply for a final
order of the Court, in form and substance satisfactory to Parent, approving the
Arrangement in such fashion as the Court may direct (the "Final Order"). Upon
the terms and subject to the conditions of this Agreement, on the Closing Date
(as defined in Section 1.2 of this Agreement), the Arrangement shall become
effective.
Section 1.2 Closing. Subject to the terms and conditions of this
Agreement, the closing of the Merger and Arrangement (the "Closing") shall take
place (a) at the offices of Squadron, Ellenoff, Plesent & Sheinfeld, LLP, 551
Fifth Avenue, New York, New York 10176 at 10:00 a.m. on the later of July 7,
1998 or the first business day after all the conditions set forth in Article VI
of
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<PAGE>
this Agreement (other than those that are waived by the party or parties for
whose benefit such conditions exist) are satisfied; or (b) at such other place,
time, and/or date upon which the parties hereto may otherwise agree. The date
upon which the Closing shall occur is referred to herein as the "Closing Date."
Section 1.3 Final Order. On the Closing Date, the parties hereto shall
cause a certified copy of the Final Order and Plan of Arrangement to be filed
for acceptance by the Registrar appointed under section 320 of the BCCA (the
"Registrar of Companies") to give effect to the Merger and Arrangement pursuant
to section 252 of the BCCA.
Section 1.4 Arrangement Transactions. On the Closing Date, by virtue
of the Arrangement and pursuant to this Agreement, the following transactions
shall occur and shall be deemed to occur in the following order without any
further act or formality:
(a) The transactions set forth in section 2.1 of the Plan of
Arrangement shall occur with the effect that, subject to Section 1.6, each
holder of common shares, without par value, of EQ (the "EQ Stock") shall be
entitled to receive, for each share of EQ Stock issued and outstanding
immediately prior to the Closing Date, (y) that number of validly issued, fully
paid and non-assessable shares of Common Stock, par value $.01 per share, of
Parent (the "Parent Common Stock") equal to the Merger Consideration Shares (as
hereinafter defined) minus the Escrow Shares and the Special Escrow Shares (as
hereinafter defined), divided by (z) that number of validly issued, fully paid
and non-assessable shares of EQ Stock outstanding immediately prior to the
Closing Date (such ratio, as adjusted as contemplated pursuant to Section 1.5,
being referred to herein as the "Exchange Ratio").
(b) The transactions set forth in Section 2.1 of the Plan of
Arrangement shall occur so that, subject to Section 1.6 and Section 6.3(f)
hereof, each holder of the outstanding warrants (collectively, the "Warrants")
to purchase EQ Stock shall either exercise such exercisable Warrants prior to
the Closing Date pursuant to their original terms, or receive that number of
validly issued, fully paid and non-assessable shares of Parent Common Stock set
forth opposite such holder's name on Schedule 1.4(b) or, if Parent exercises
the option referred to in Section 6.3(f), shall be entitled, pursuant to the
terms of such Warrants to receive upon exercise of Warrants not exchanged for
Parent Common Stock the number of shares of Parent Common Stock, which such
holders would have received if such Warrants had been exercised immediately
prior to the Closing.
(c) The transactions set forth in Section 2.1 of the Plan of
Arrangement shall occur so that, subject to Section 1.6 and Section 6.3(f)
hereof, each holder of the outstanding options (the "Options"), under the
Option Plans (as hereinafter defined) to purchase EQ Stock shall either
exercise such exercisable options prior to the Closing Date pursuant to their
original terms, or receive that number of validly issued, fully paid and
non-assessable shares of Parent Common Stock set forth opposite such holder's
name on Schedule 1.4(c).
2
<PAGE>
Section 1.5 Adjustment of Exchange Ratio. In the event that,
subsequent to and including the date of this Agreement but prior to the Closing
Date, the outstanding shares of Parent Common Stock or EQ Stock, respectively,
shall have been changed into a different number of shares or interests or a
different class as a result of a stock split, reverse stock split, stock
dividend, subdivision, consolidation, reclassification, split, combination,
exchange, recapitalization or other similar transaction, the Exchange Ratio
shall be appropriately adjusted.
Section 1.6 Exchange of Securities.
(a) Prior to the Closing Date, Parent and Merger Sub shall enter
into an Exchange Agency Agreement and deposit 1,152,860 shares, subject to
reduction in accordance with the next sentence, of Parent Common Stock with
Continental Stock Transfer & Trust Company (the "Exchange Agent") to be issued
pursuant to the Arrangement. The 1,152,860 shares of Parent Common Stock shall
be reduced to recognize certain EQ obligations which must be settled
concurrently with the Closing by a number of shares equal to the sum of:
(i) the quotient of (y) the sum of (A) the fees and expenses of
BancAmerica Robertson Stephens to be paid by EQ or its
Subsidiaries in connection with the transactions contemplated
hereby (the "RS Expenses") and (B) the fees and expenses (other
than the RS Expenses) incurred by EQ, in excess of $150,000 in
United States Dollars ("USD"), and paid or payable to the third
parties (including all fees and expenses of KPMG (as defined)
pursuant to Section 5.17) in connection with the transactions
contemplated hereby, including, without limitation, costs and
expenses of or relating to the preparation, printing and filing
of the Proxy Statement (as hereinafter defined), furnishing
(including costs of shipping and mailing) such copies of the
Proxy Statement to its stockholders, any filings required to be
made by EQ and the fees and disbursements of counsel and
accountants to EQ, divided by (z) $35.00 USD;
(ii) the quotient of amounts paid or payable to employees or
consultants for severance, termination, or in respect of a
change of control, or similar provision with written employment
or consulting agreements as a result of the transactions
contemplated hereby divided by $35.00 USD;
(iii) the quotient of $100,000 USD divided by $35.00 USD in respect
of the proposed equity investment by Catterton Simon Partners
in EQ (the "Catterton Transaction");
(iv) the number of shares of Parent Common Stock issued pursuant to
Section 1.4(b) in exchange for Warrants;
(v) if Parent exercises the option referred to Section 6.3(f), in
addition to shares of Parent Common Stock referred to in the
immediately preceding paragraph as to exchanged Warrants, the
number of shares of Parent Common Stock with respect to the
Adjusted Warrants (as defined in Section 6.3(f)) which may be
deducted from the
3
<PAGE>
Merger Consideration pursuant to Section 6.3(f) (other than
those Warrants held by Scotty's Park Lane Limited Partnership);
(vi) the quotient of the Excess Liabilities (as defined in Section
5.17) divided by $35.00 USD;
(vii) in the event that there are any shares of EQ Stock, options,
warrants or any other security of EQ or any of its Subsidiaries
which EQ or any of its Subsidiaries is obligated to purchase,
or which the holder has the right to "put" to EQ or any of its
Subsidiaries ("Putable Securities"), the number of shares of
Parent Common Stock issued in satisfaction of such obligations:
and
(viii) the number of shares of Parent Common Stock issued pursuant to
Section 1.4(c) in exchange for the Options.
Notwithstanding anything to the contrary herein, no reduction shall be made
with respect to any items set forth in (iii) above, if and to the extent such
amounts have been accrued as liabilities on the Signing Date Balance Sheet (as
hereinafter defined). The shares of Parent Common Stock to be deposited, as so
reduced in accordance with the preceding sentence, are referred to as the
"Merger Consideration Shares." An amount of the Merger Consideration Shares
equal to the sum of (i) 5% thereof, (ii) any amount required to be escrowed
pursuant to Section 5.17 hereof, and (iii) an amount equal to the quotient of
$150,000 USD divided by $35.00 (collectively, the "Escrow Shares") shall be
deposited with Continental Stock Transfer and Trust Company (the "Escrow
Agent"), to be held and dealt with as provided in the Escrow Agreement among
the parties hereto and the Escrow Agent referred to in Section 6.1 hereof (the
"Escrow Agreement"), provided that in no event shall the Escrow Shares exceed
10% of the Merger Consideration. The Escrow Shares shall either be deducted pro
rata from the shares of Parent Common Stock payable to all stockholders of EQ
or, if it would not cause the condition set forth in Section 6.3(c) to not be
satisfied, shall come from the shares of Parent Common Stock payable to
officers of EQ who agree in writing to have their shares constitute the Escrow
Shares. All shares issued pursuant to this Section 1.6 shall bear a restrictive
legend as set forth in Section 5.19.
(b) As soon as reasonably practicable after the Closing Date in
accordance with section 4 of the Plan of Arrangement, Parent shall cause the
Exchange Agent to mail to each holder of record of EQ Stock immediately prior
to the Closing Date who, pursuant to the Arrangement, is entitled to receive
Parent Common Stock (i) a letter of transmittal (which shall specify that
delivery shall be effected, and the risk of loss and title to the certificates
which formerly represented EQ Stock shall pass only upon delivery of such
certificates to the Exchange Agent and shall be in such form and have such
other customary provisions as Parent, in consultation with EQ, may reasonably
specify) and (ii) instructions for use in effecting the surrender of
certificates which represent EQ Stock into certificates representing Parent
Common Stock which such holder has the right to receive pursuant to the
provisions of this Agreement. Upon surrender of a certificate which represented
EQ Stock for cancellation to the Exchange Agent, together with such letter of
transmittal, duly executed, the holder of such certificate shall be entitled to
receive in exchange therefor certificates representing
4
<PAGE>
that whole number of shares of Parent Common Stock equal to that number of
shares of EQ Stock formerly held by such holder multiplied by the Exchange
Ratio then in effect. No interest will be paid or accrued on the unpaid
dividends and distributions, if any, payable to the former holders of EQ Stock,
nor will any amounts be paid in respect of any such unpaid dividends and
distributions.
(c) Solely for the purpose of administrative convenience, no
certificate representing fractional Parent Common Stock shall be issued upon
surrender for exchange of certificates formerly representing EQ Stock, and such
fractional share interests shall not entitle the owner thereof to any rights as
a security holder of Parent. All holders entitled to receive a fractional share
of Parent Common Stock shall be entitled to receive, in lieu thereof, an amount
in cash determined by multiplying such fraction times $35.00 USD.
(d) Notwithstanding anything in this Agreement to the contrary,
shares of EQ Stock outstanding immediately prior to the Closing Date and held
by a holder who has not voted in favor of the Arrangement or consented thereto
in writing and who has exercised the rights of dissent referred to in Section
3.1 of the Plan of Arrangement in respect of such shares in accordance
therewith ("Dissenting Shares"), shall not entitle the holder thereof to
receive the Merger Consideration as provided herein, unless such holder fails
to perfect or withdraws or otherwise loses his right of dissent. If, after the
Closing Date, such holder fails to perfect or withdraws or otherwise loses his
right of dissent, such shares shall be treated as if they had been entitled, as
of the Closing Date, to receive the Merger Consideration, without interest
thereon. EQ shall give Parent prompt notice of any demands or notices of
dissent received by it as to EQ Stock, and, prior to the Closing Date, Parent
shall have the right to participate in all negotiations and proceedings with
respect to such demands. Prior to the Closing Date, EQ shall not, except with
the prior written consent of Parent, make any payment with respect to, or
settle or offer to settle, any such demands.
(e) From and after the Closing Date, the stock transfer books of
EQ shall be closed and no transfer of shares of EQ Stock shall thereafter be
made other than pursuant to the Plan of Arrangement. If after the Closing Date,
certificates representing such shares are presented to Parent or to the
Exchange Agent, they shall be exchanged for Parent Common Stock together with
any cash in lieu of fractional shares as provided herein and in the Plan of
Arrangement.
(f) All shares of Parent Common Stock issued in accordance with
the terms hereof, together with any cash paid in accordance with subsection (c)
above, shall be deemed to have been issued and paid in full satisfaction of all
rights pertaining to such EQ Stock.
(g) In addition, at the Closing, each holder of Warrants shall
have the right, upon delivery of their Warrants in exchange therefor, to
receive the number of shares of Parent Common Stock set forth opposite such
holder's name on Schedule 1.4(c) (as appropriately adjusted for stock
dividends, stock splits and similar events).
Section 1.7 Definition of Subsidiary and Affiliate. As used in this
Agreement, (i) a "Subsidiary" of any party means any corporation or other
organization, whether incorporated or
5
<PAGE>
unincorporated, of which such party or any other Subsidiary of such party is a
general partner or at least a majority of the securities or other interests
having by their terms ordinary voting power to elect a majority of the Board of
Directors or others performing similar functions with respect to such
corporation or other organization is directly or indirectly owned or controlled
by such party, by any one or more of its Subsidiaries, or by such party and one
or more of its Subsidiaries (ii) an "Affiliate" of any party means any
individual, corporation or other organization, whether incorporated or
unincorporated, which directly or indirectly controls, or is controlled by, or
is under common control with, such party. The term "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of any corporation or other
organization, whether incorporated or unincorporated, whether through the
ownership of voting securities, by contract or otherwise.
ARTICLE II
CERTAIN MATTERS RELATING TO
EQ
Section 2.1 Memorandum and Articles of EQ. The Memorandum and Articles
of EQ, as in effect at the Closing Date, shall be the Memorandum and Articles
of EQ until thereafter amended as provided by law.
Section 2.2 Directors and Officers of EQ. The directors and officers
of EQ immediately after the Closing Date shall be the persons designated by
Parent.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to EQ as of the date
hereof and at the Closing Date as follows:
Section 3.1 Existence, Good Standing, Corporate Authority. Parent and
Merger Sub are corporations duly organized, validly existing and in good
standing under the laws of their respective jurisdiction of incorporation. Each
of Parent and Merger Sub is duly licensed or qualified to do business as a
foreign corporation or partnership and is in good standing under the laws of
any other state of the United States in which the character of the properties
owned or leased by it or in which the transaction of its respective business
makes such qualification necessary, except where the failure to be so qualified
or to be in good standing would not have a material adverse effect on the
business, results of operations or financial condition of Parent and its
Subsidiaries taken as a whole (a "Parent Material Adverse Effect"). Parent and
Merger Sub have all requisite corporate power and authority to own, operate and
lease their respective properties.
Section 3.2 Authorization, Validity and Effect of Agreements. Each of
Parent and Merger Sub has the requisite corporate power and authority to
execute and deliver this Agreement and all
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agreements and documents to be executed and delivered in connection herewith
(the "Ancillary Agreements"), including the Escrow Agreement. The execution and
delivery of this Agreement (and the agreements contemplated hereby to be
executed by Parent or Merger Sub) and the consummation by Parent and Merger Sub
of the transactions contemplated hereby has been duly authorized by all
requisite corporate action. This Agreement constitutes, and all Ancillary
Agreements to be executed and delivered in connection herewith by Parent or
Merger Sub (when executed and delivered pursuant hereto for value received)
will constitute, the valid and legally binding obligations of Parent and Merger
Sub, enforceable against Parent and Merger Sub in accordance with their
respective terms.
Section 3.3 Capitalization. The authorized capital stock of Parent
consists of 50,000,000 shares of Parent Common Stock and 2,000,000 shares of
preferred stock, par value $.10 per share (the "Parent Preferred Stock"). As of
April 1, 1998, there were 12,997,846 shares of Parent Common Stock and no
shares of Parent Preferred Stock, issued and outstanding. Except as set forth
on Schedule 3.3, Parent has no outstanding bonds, debentures, notes or other
obligations the holders of which have the right to vote (or which are
convertible into or exercisable or exchangeable for securities having the right
to vote) with the stockholders of Parent on any matter. All issued and
outstanding shares of Parent Common Stock are duly authorized, validly issued,
fully paid, nonassessable and free of preemptive rights.
Section 3.4 Parent Reports and Financial Statements. Parent has
heretofore made available to EQ true and complete copies of (i) the Annual
Report of Parent on Form 10-K for the fiscal years ended December 31, 1996 and
1997; (ii) the Quarterly Reports of Parent on Form 10-Q for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997; and (iii) the Proxy
Statement, relating to the 1997 Annual Meeting of Shareholders of Parent; (such
reports, registration statements, definitive proxy statements and other
documents, together with any amendments thereto, are sometimes collectively
referred to as the "Parent Commission Filings"). As of their respective dates,
each of the Parent Commission Filings complied in all material respects with
the applicable requirements and, together with certain Current Reports on Form
8-K filed by Parent, constituted all filings required during the relevant time
periods under the Securities Act of 1933, as amended (the "Securities Act"),
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules and regulations under each such Act, and none of the Parent Commission
Filings and no representation or warranty by Parent or Merger Sub in this
Agreement contained as of such date any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading. All financial statements of Parent included in the
Parent Commission Filings were prepared in accordance with generally accepted
accounting principles in the United States ("U.S. GAAP") applied on a
consistent basis.
Section 3.5 No Violation. Neither the execution and delivery by Parent
and Merger Sub of this Agreement, nor the consummation by Parent and Merger Sub
of the transactions contemplated hereby in accordance with the terms hereof,
will (a) conflict with or result in a breach of any provisions of the
Certificate of Incorporation, as amended, or the Bylaws of Parent or any of its
Subsidiaries; (b) result in a breach or violation of, a default under, or the
triggering of any
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payment or other material obligations pursuant to, or accelerate vesting under,
the 1994, 1996 or 1997 Parent Stock Option Plan, or any grant or award made
under the foregoing; (c) violate, conflict with, result in a breach of any
provision of, constitute a default (or an event which, with notice or lapse of
time or both, would constitute a default) under, result in the termination, or
in a right of termination or cancellation of, accelerate the performance
required by, result in the triggering of any payment or other material
obligations pursuant to, result in the creation of any lien, security interest,
charge or encumbrance upon any of the material properties of Parent or its
Subsidiaries under, or result in being declared void, voidable, or without
further binding effect, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust or any material license, franchise,
permit, lease, contract, agreement or other instrument, commitment or
obligation to which Parent or any of its Subsidiaries is a party, or by which
Parent or any of its Subsidiaries or any of their respective properties is
bound or affected, except for any of the foregoing matters which would not have
a Parent Material Adverse Effect; (d) contravene or conflict with or constitute
a violation of any provision of any law, regulation, judgement, injunction,
order or decree binding upon or applicable to Parent or any of its Subsidiaries
which would have a Parent Material Adverse Effect; or (e) other than the
filings provided for in Sections 1.1 and 1.3, the filings of reports on Form 20
under certain Canadian provincial securities laws, filings required under the
Exchange Act, the Securities Act, the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), the rules of the National Association
of Securities Dealers, or applicable state securities and "Blue Sky" laws or
filings in connection with the maintenance of qualification to do business in
other jurisdictions (collectively, the "Regulatory Filings"), require any
consent, approval or authorization of, or declaration, of or filing or
registration with, any domestic governmental or regulatory authority, which the
failure to obtain or make would have a Parent Material Adverse Effect.
Section 3.6 No Brokers. Parent has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of EQ or Parent to pay any finder's fee, brokerage or agent's
commissions or other like payment in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby,
except for such fees or commissions which will be borne by Parent.
Section 3.7 Parent Common Stock. The issuance and delivery by Parent
of shares of Parent Common Stock in connection with the Arrangement and this
Agreement have been duly and validly authorized by all necessary corporate
action on the part of Parent. The shares of Parent Common Stock to be issued in
connection with the Arrangement and this Agreement, when issued in accordance
with the terms of this Agreement, will be validly issued, fully paid and
nonassessable and not subject to preemptive rights of any sort.
Section 3.8 Interim Operations of Merger Sub. Merger Sub has been
formed solely for the purpose of engaging in the transactions contemplated
hereby, and immediately prior to the Closing Date will have engaged in no other
business activities, will have no Subsidiaries, and will have conducted its
operations only as contemplated hereby.
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Section 3.9 Absence of Certain Changes. Except as otherwise disclosed
in the Parent Commission Filings, since December 31, 1996 there has not been
any Parent Material Adverse Effect.
Section 3.10 Proxy Statement. The information supplied or to be
supplied by Parent and any Subsidiary thereof for inclusion in the Proxy
Statement (as hereinafter defined), including any amendments and supplements
thereto, will not either at the date mailed to EQ's stockholders or at the time
of the Stockholder Meeting (as hereinafter defined), contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF EQ
EQ represents and warrants to Parent and Merger Sub as of the date
hereof and at the Closing Date as follows:
Section 4.1 Existence, Good Standing, Corporate Authority. EQ and each
of its Subsidiaries are corporations or partnerships duly organized, validly
existing and in good standing under the laws of their respective jurisdiction
of incorporation. EQ and each of its Subsidiaries is duly licensed or qualified
to do business as a foreign corporation or partnership and is in good standing
under the laws of any other state of the United States or province or territory
of Canada in which the character of the properties owned or leased by it or in
which the transaction of its respective business makes such qualification
necessary, except where the failure to be so qualified or to be in good
standing would not have a material adverse effect on the business, results of
operations or financial condition of EQ and its Subsidiaries taken as a whole
(a "EQ Material Adverse Effect"). EQ and each of its Subsidiaries have all
requisite corporate power and authority to own, operate and lease their
respective properties.
Section 4.2 Authorization, Validity and Effect of Agreements. EQ has
the requisite corporate power and authority to execute and deliver this
Agreement and all the Ancillary Agreements. The execution and delivery of this
Agreement (and the agreements contemplated hereby) and the consummation by EQ
of the transactions contemplated hereby has been duly authorized by all
requisite corporate action. This Agreement constitutes, and all Ancillary
Agreements to be executed and delivered in connection herewith (when executed
and delivered pursuant hereto for value received) will constitute, the valid
and legally binding obligations of EQ, enforceable against EQ in accordance
with their respective terms.
Section 4.3 Capitalization. The authorized capital stock of EQ
consists of 101,000,000 shares divided into 1,000,000 Class A preferred shares,
without par value per share, of which none are issued and outstanding, and
100,000,000 shares of EQ Stock. As of April 2, 1998, there were 28,610,054
shares of EQ Stock issued and outstanding and, except for the addition of any
shares of EQ Stock issued upon the exercise of Warrants or options outstanding
as of April 2, 1998, or the
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Musqueam conversion right described in Schedule 4.4(c) or any other shares
issuable upon exercise or conversion of any other outstanding options or
warrants as described in Schedule 4.4(c), there will be no additional shares
outstanding as of the Closing. Except as set forth on Schedule 4.3, EQ has no
outstanding bonds, debentures, notes or other obligations the holders of which
have the right to vote (or which are convertible into or exercisable or
exchangeable for securities having the right to vote) with the stockholders of
EQ on any matter. All issued and outstanding shares of EQ Stock are duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights.
Section 4.4 Options. Except as set forth on Schedule 4.4 hereto, there
are no existing agreements, subscriptions, options, warrants, calls,
commitments, trusts (voting or otherwise), or rights of any kind whatsoever
granting to any person or entity any interest in or the right to purchase or
otherwise acquire from EQ, or any of its Subsidiaries, at any time, or upon the
happening of any stated event, any securities, partnership interests,
membership interests or other equity interests of such entity, whether or not
presently issued or outstanding, nor are there any outstanding securities,
partnership interests, membership interests or other equity interests of any
such entity, or any other entity which are convertible into or exercisable or
exchangeable for shares or other securities, partnership interests, membership
interests or other equity interests of EQ, or any of its Subsidiaries, nor are
there any agreements, subscriptions, options, warrants, calls, commitments or
rights of any kind whatsoever granting to any person or entity any interest in
or the right to purchase or otherwise acquire from EQ, or any of its
Subsidiaries, or any other entity any securities so convertible or exercisable
or exchangeable, nor are there any proxies, agreements or understandings with
respect to the voting of or with respect to such interests, nor are there any
outstanding Putable Securities.
Section 4.5 No Violation. Except as set forth on Schedule 4.5 hereto,
neither the execution and delivery by EQ of this Agreement, nor the
consummation by EQ of the transactions contemplated hereby in accordance with
the terms hereof, will (a) conflict with or result in a breach of any
provisions of the Certificate of Incorporation, Bylaws or similar
organizational documents of EQ or any of its Subsidiaries; (b) violate,
conflict with, result in a breach of any provision of, constitute a default (or
an event which, with notice or lapse of time or both, would constitute a
default) under, result in the termination, or in a right of termination or
cancellation of, accelerate the performance required by, result in the
triggering of any payment or other material obligations pursuant to, result in
the creation of any lien, security interest, charge or encumbrance upon any of
the material properties of EQ or its Subsidiaries under, or result in being
declared void, voidable, or without further binding effect, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust
or any material license, franchise, permit, lease, contract, agreement or other
instrument, commitment or obligation to which EQ or any of its Subsidiaries is
a party, or by which EQ or any of its Subsidiaries or any of their respective
properties is bound or affected, except for any of the foregoing matters which
would not have a EQ Material Adverse Effect; (c) contravene or conflict with or
constitute a violation of any provision of any law, regulation, judgement,
injunction, order or decree binding upon or applicable to EQ or any of its
Subsidiaries which would have a EQ Material Adverse Effect; or (d) other than
the filings provided for in Sections 1.1 and 1.3, and applicable Regulatory
Filings, require any material consent, approval or authorization of, or
declaration, of or filing or registration with, any governmental or regulatory
authority, the failure to obtain or make would have a EQ Material Adverse
Effect.
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Section 4.6 Subsidiaries and Affiliates. Except as set forth on
Schedule 4.6 hereto, neither EQ, nor any of its Subsidiaries owns, directly or
indirectly any interest in any other entity.
Section 4.7 Financial Statements.
(a) Attached hereto as Schedule 4.7 are true and complete copies
of the following consolidated financial statements of EQ and each of its
Subsidiaries:
(i) audited consolidated balance sheets as of December 31,
1997 and 1996, each certified by independent certified public accountants or
chartered accountants, as applicable, and unaudited consolidated balance sheets
of EQ and its Subsidiaries as of February 28, 1998 (the "Balance Sheet Date"),
all prepared by management of EQ (an unaudited consolidated balance sheet as of
the Balance Sheet Date, a "Company Balance Sheet") in accordance with U.S. GAAP
consistently applied; and
(ii) audited consolidated statements of income, retained
earnings, cash flows and changes in shareholder's equity for the fiscal years
ended 1997 and 1996, each certified by independent certified public accountants
or chartered accountants, as applicable, and unaudited consolidated statements
of income, retained earnings, cash flows and changes in shareholder's equity
for the periods ended February 28, 1998, all prepared by management of EQ in
accordance with U.S. GAAP.
(b) Pursuant to Section 5.17, a consolidated balance sheet of EQ
will be prepared as of the date of this Agreement (the "Signing Date Balance
Sheet"), and, in addition, EQ will furnish on or prior to the Closing Date,
quarterly consolidated financial statements of income, retained earnings, cash
flows and changes in shareholders' equity for the quarters ended March 31,
1997, June 30, 1997, September 30, 1997, December 31, 1997 and March 31, 1998,
all prepared by the management of EQ and reviewed by KPMG in accordance with
U.S. GAAP.
(c) The foregoing financial statements were, or, in the case of
the Signing Date Balance Sheet, will be, prepared in accordance with U.S. GAAP
applied on a basis consistent with that of preceding audited accounting
periods. Such financial statements are, or, in the case of the Signing Date
Balance Sheet, will be, correct and complete in all material respects and are
in accordance with the books and records of the applicable entity. As of the
date hereof, all the accounts, books, ledgers and financial and other records
of whatever kind of each such entity have been properly and accurately kept and
are correct and complete in all material respects and there are no inaccuracies
or discrepancies contained or reflected therein. The financial statements
fairly present in all material respects the consolidated financial position of
EQ and its Subsidiaries of the dates thereof and the consolidated results of
operations, cash flows and changes in shareholder's equity of EQ for each of
the periods then ended in conformity with U.S. GAAP. The Signing Date Balance
Sheet will fairly present the consolidated financial position of EQ and the
Subsidiaries as of the date thereof in conformity with U.S. GAAP.
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(d) The prepaid insurance, expenses and taxes as set forth on
each Company Balance Sheet and the Signing Date Balance Sheet, or arising since
the date thereof, represent amounts of a benefit to future periods.
(e) Each Company Balance Sheet, the Signing Date Balance Sheet
and the notes thereto, correctly and completely set forth all liabilities of
such entity as of the date thereof (i) pursuant to all Plans and Government
Sponsored or Mandated Plans, as such terms are defined below, including all
unfunded past service costs, (ii) pursuant to all bonus, incentive,
compensation, insurance, deferred compensation, severance and other fringe
benefit plans, contracts, agreements, arrangements and programs of any type
coverage or form, including, without limitation, where applicable, any employee
welfare benefit program as defined in Section 3(1) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") and (iii) for vacation pay
and compensatory time.
Section 4.8 Absence of Undisclosed Liabilities. Except as set forth on
Schedule 4.8 hereto, there are no liabilities or obligations (whether absolute,
accrued, contingent or otherwise) with respect to either EQ or any of its
Subsidiaries, except (i) liabilities, obligations or contingencies which are
accrued or reserved against in the Company Balance Sheets and the Signing Date
Balance Sheet, and (ii) normally recurring liabilities incurred after the
Balance Sheet Date in the ordinary course of the operations of the business and
consistent with past practice.
Section 4.9 Tangible Personal Property; Sufficiency of Assets.
(a) Except as disclosed on Schedule 4.9 hereto, each of EQ and
each of its Subsidiaries has good and valid title to all tangible personal
property which it owns or uses in the operations of its business, including all
such tangible personal property reflected in its Company Balance Sheet as owned
by such entity, except (x) for personal property leased (exclusive of
capitalized leases) by such Company pursuant to a written agreement identified
on Schedule 4.9 and (y) for such tangible personal property disposed of to
third parties since the date of the Balance Sheet Date in the ordinary course
of business and consistent with past practices in each case free and clear of
all liens, charges, assessments, claims or encumbrances of any kind whatsoever
("Liens"), except (i) mechanics', materialmen's, carriers', workmen's,
warehousemen's, repairmen's, landlord's or other like Liens securing
obligations that are not delinquent, (ii) Liens for taxes and other
governmental charges which are not due and payable or which may be paid without
penalty, (iii) purchase money liens securing the purchase price of the related
personal property listed as purchase money liens on Schedule 4.9; and (iv)
other Liens, if any, set forth in Schedule 4.9. Except as set forth in Schedule
4.9, all of the tangible personal property owned or used in the operation of
the business of the Companies is in good working order, reasonable wear and
tear excepted, and are suitable for the use for which they are intended in all
material respects.
(b) Neither EQ nor its Subsidiaries own or lease any video,
amusement or arcade games. All of the inventory of each of EQ and its
Subsidiaries consists of a quality and quantity reasonably usable and saleable
in the ordinary course of business consistent with past practices, subject to
normal and customary allowances for spoilage, damage and outdated items
reflected on
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the books and records of each Company. All items included in the inventory of
each of EQ and its Subsidiaries are the property of such entity, free and clear
of all Liens, are not held by such entity on consignment from others and
conform in all material respects to all standards applicable to such inventory
or its use or sale imposed by law.
(c) Except as set forth on Schedule 4.9, the tangible personal
property of each of EQ and its Subsidiaries which is currently owned or leased
by it is, in the aggregate, all of the tangible personal property used to
conduct such business in the manner in which such business was conducted during
the 12 month period ended February 28, 1998 and since such time, except for
additions thereto and deletions therefrom in the ordinary course of business
and consistent with past practice which could not reasonably be expected to
have a EQ Material Adverse Effect.
Section 4.10 Real Property.
(a) Schedule 4.10 sets forth a list of all real property owned in
fee by each of EQ and its Subsidiaries (individually, an "Owned Property" and,
collectively, the "Owned Properties"). Except as set forth in Schedule 4.10,
each of EQ and its Subsidiaries has good and marketable fee title to its Owned
Property, including the buildings, structures and other improvements located
thereon, in each case free and clear of all Liens, except for (i) Liens for
taxes and other governmental charges, assessments or fees which are not yet due
and payable and (ii) imperfections of title which, individually or in the
aggregate , do not materially detract from the market value of or materially
interfere with the present use or occupation of any Owned Properties
("Permitted Liens"). There are no condemnations or eminent domain (which term,
as used herein, shall include all compulsory acquisitions or taking by
governmental entities) proceedings pending or threatened against any Owned
Property or any material portion thereof. To the best of EQ's knowledge, none
of the Owned Properties nor the use thereof contravene any applicable zoning or
building bylaw, covenant, registered or unregistered restriction, land use
contract, law, ordinance or regulation (whether relating to fire, safety, the
environment, building standards, health standards or otherwise) of any
governmental authority, all of which permit the present use and occupation of
the Owned Properties. None of EQ nor its Subsidiaries has received or has
knowledge of any notice or request from any governmental authority, insurance
company or board of fire underwriters requesting the performance of any work or
alteration in respect of any of the Owned Properties. There are no material or
structural defects relating to any improvements on any of the Owned Properties.
EQ has delivered to Parent complete and accurate copies of all title insurance
policies and surveys for the Owned Real Property located in the United States.
(b) Schedule 4.10 lists all real property (including all land and
buildings) which is leased by each of EQ and its Subsidiaries as lessee or
sublessee (the "Leased Real Estate"). EQ has delivered or caused to be
delivered to Parent complete and accurate copies of all written leases and
subleases (including all amendments, extensions and modifications thereof
together with particulars of any unwritten lease or sublease) which are listed
in Schedule 4.10. None of EQ nor its Subsidiaries has received notice of or has
knowledge of any condemnation or eminent domain proceedings pending or
threatened against any Leased Real Estate. To the best of EQ's knowledge, none
of the Leased Real Estate nor the use thereof contravene any applicable zoning
or building
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bylaw, covenant, registered or unregistered restriction, land use contract,
law, ordinance or regulation (whether relating to fire, safety, the
environment, building standards, health standards or otherwise) of any
governmental authority, all of which permit the present use and occupation of
the Leased Real Estate. None of EQ nor its Subsidiaries has received or has
knowledge of any notice or request from any governmental authority, insurance
company or board of fire underwriters requesting the performance of any work or
alteration in respect of any of the Leased Real Estate. There are no material
or structural defects relating to any Leased Real Estate. Except as set forth
in Schedule 4.10:
(i) each of the leases or subleases relating to the Leased
Real Estate (each, a "Lease" and collectively, the "Leases") is in full force
and effect and valid and binding on the lessor or sublessor and enforceable in
accordance with its terms (except insofar as such enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting creditors' rights generally or by the principles governing the
availability of equitable remedies), and all consents required under any Lease
in connection with this Agreement and the consummation of the transactions
contemplated hereby have been obtained;
(ii) no amount payable under any Lease is past due;
(iii) each of EQ and its Subsidiaries is in compliance in
all material respects with all commitments and obligations on its part to be
performed or observed under each Lease and is not aware of the failure by any
other party to any Lease to comply in all material respects with all of its
commitments and obligations;
(iv) none of EQ nor its Subsidiaries has received any notice
(A) of a default (which has not been cured), offset or counterclaim under any
Lease, or any other communication calling upon such entity to comply with any
provision of any Lease or asserting noncompliance, or asserting such entity has
waived or altered its rights thereunder, and no event or condition has happened
or presently exists which constitutes a default or, after notice or lapse of
time or both, would constitute a default under any Lease on the part of such
entity or any other party thereto, or (B) of any action, complaint, claim,
prosecution, indictment, suit, arbitration, investigation or proceeding (an
"Action") by or before any governmental entity against any party under any
Lease which if adversely determined could result in such Lease being terminated
or modified in a manner adverse to such entity;
(v) none of EQ nor its Subsidiaries has assigned, mortgaged,
pledged or otherwise encumbered its interest, under any Lease; and
(vi) none of EQ nor its Subsidiaries has exercised, or
failed to exercise within the time prescribed in each Lease, any option
provided therein to extend or renew the term thereof.
(c) The Owned Properties and the Leased Real Estate constitute,
in the aggregate, all of the real property used to conduct the business of EQ
and its Subsidiaries in the manner in
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which such business was conducted during the 12 month period ended February 28,
1998 and since such time. Except as set forth on Schedule 4.10, no consent is
required of any party to any of the Leases by virtue of this Agreement, and the
consummation of the transactions contemplated hereby will not result in the
termination of any Lease or a material alteration of the terms of any Lease.
Except as set forth on Schedule 4.10, none of the Leased Real Estate is owned,
in whole or in part, by any director, officer, stockholder, partner or member
of EQ or any of its Subsidiaries, by any affiliate of any affiliate of EQ or
any of its Subsidiaries, or by any entity created for the benefit of any family
member(s) of any of the foregoing persons.
(d) No portion of the Owned Property or Leased Real Estate is
subject to any pending condemnation proceeding or any proceeding by any
governmental authority that is materially adverse to the Owned Property or
Leased Real Estate and no such condemnation or other proceeding is threatened
or contemplated.
(e) Except as set forth on Schedule 4.10, the structures,
improvements and fixtures at or upon the Owned Property and Leased Real Estate,
including, but not limited to, roofs and structural elements thereof and the
mechanical, electrical, plumbing, heating, ventilation, air conditioning and
similar units and systems, have to date been reasonably maintained and are in
good operating condition for their intended use subject to the provision of
usual and customary maintenance and repair performed in the ordinary course of
business with respect to similar properties of like age and construction.
(f) All facilities located on the Owned Property and the Leased
Real Estate are supplied with utilities and other services necessary for the
operation of such facilities as presently operated, and all of such services
are adequate to conduct that portion of the businesses as presently is
conducted at each of such facilities.
(g) Except as set forth on Schedule 4.10, none of the Owned
Property or Leased Real Estate is located in either a special service district
or an area for which federal or other flood risk insurance is necessary.
(h) There is no water diffusion or other intrusion into any
buildings, structures or other improvements located on the Owned Property or
the Leased Real Estate which would impair the market value or use thereof in
connection with the conduct of the businesses conducted thereon.
(i) Except as set forth on Schedule 4.10, no notice of any
increase in the assessed valuation of the Owned Property or Leased Real Estate
and no notice of any contemplated special assessment has been received by EQ or
any of its Subsidiaries and, to the best knowledge of EQ, there is no
threatened special assessment pertaining to any of the Owned Property or Leased
Real Estate.
(j) Except as set forth on Schedule 4.10, there are no contracts
or agreements to which EQ or any of its Subsidiaries is a party or which were
effectuated by EQ or any of its
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Subsidiaries or by which any of the Owned Property or Leased Real Estate is
bound, granting to others the right of use or occupancy of any portion of the
Owned Property or Leased Real Estate.
(k) Except as set forth on Schedule 4.10, the zoning or special
use permit applicable to each tract of the Owned Property and Leased Real
Estate permits the presently existing improvements and the continuation of the
businesses presently being conducted on the Owned Property and the Leased Real
Estate as a conforming use. The existing use of each tract of the Owned
Property and the Leased Real Estate is not dependent on the use or availability
of any other tract and no material or unusual restrictions exist in the right
to remodel, rebuild or replace any improvements located on the Owned Property
or Leased Real Estate, or to continue the operation of the respective
businesses thereon. Neither EQ nor any of its Subsidiaries is aware of or has
reasonable grounds to believe that there are any pending changes in laws,
regulations, statutes or the like (including zoning) that will render any part
of the businesses conducted on Owned Property or Leased Real Estate as
presently conducted illegal or uneconomical. Neither EQ nor any of its
Subsidiaries is aware of or has reasonable grounds to believe that there is any
plan, study or effort by any governmental authority or of any nongovernmental
person or entity that in any way would have a EQ Material Adverse Effect.
(l) There is no building, structure or other improvement located
on any land adjoining any of the Owned Properties or the Leased Real Estate
which encroaches upon any of the Owned Property or the Leased Real Estate and
there is no building, structure or other improvement located on any of the
Owned Property or the Leased Real Estate which encroaches on any land adjoining
any of the Owned Property or the Leased Real Estate.
Section 4.11 Machinery and Equipment. EQ has previously furnished to
Parent and Merger Sub a correct and complete list of each item of machinery and
equipment owned by of EQ and its Subsidiaries having a value in excess of
$25,000 USD. All such items are in good operating condition and repair, subject
to normal wear and use, and are usable in the ordinary course of business
conducted by EQ and its Subsidiaries. The serial numbers of such machinery and
equipment consisting of motor vehicles, boats, engines, manufactured or mobile
homes, trailers and aircraft are set forth on Schedule 4.11.
Section 4.12 Copyrights and Trademarks. EQ has previously furnished to
Parent and Merger Sub a correct and complete list of all registered trademarks,
trade names, service marks, patents and copyrights which EQ or its Subsidiaries
owns or utilizes and all applications pending therefor, if any. As of the date
hereof, there are no pending, and no threatened, interference or opposition
actions or proceedings with respect to any such trademarks, trade names,
service marks, patents or copyrights, and the use of any such trademarks, trade
names, service marks, patents and copyrights does not infringe upon or conflict
with, any trademark, trade name, patent, copyright, or other proprietary right
of any other person. As of the date hereof, no notice has been received of any
claim of any such infringement upon, or conflict with, any trademark, trade
name, patent, copyright or other proprietary right of any person. EQ has
heretofore delivered to Parent and Merger Sub true, correct and complete copies
of all such documents.
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Section 4.13 Contracts. Schedule 4.13 lists each and every:
(i) contract or commitment to which any of EQ and its
Subsidiaries is a party not made in the ordinary course of business or
continuing over a period of more than six months from the date hereof or
exceeding $25,000 in USD in value, other than contracts and commitments listed
in any other Schedule hereto;
(ii) contract with or commitment to employees, advisors,
consultants;
(iii) debt instrument, including, without limitation, any
loan agreements, promissory notes, security agreements or other evidences of
indebtedness, where any of EQ or its Subsidiaries is a lender or borrower, in a
principal amount in excess of $25,000 USD;
(iv) contract, commitment or arrangement restricting any of
EQ or its Subsidiaries , or any of their respective employees from engaging in
business or from competing in any line of business with any other parties;
(v) contract, agreement or arrangement to which EQ or its
Subsidiaries is a party (whether as an original party or an assignee or
successor) for a line of credit or guarantee, pledge or undertaking of the
indebtedness of any other person or entity;
(vi) contract or commitment to which EQ or its Subsidiaries
is a party (whether as an original party or an assignee or successor) for any
charitable or political contribution;
(vii) loan agreement, security agreement, note, debenture,
or other contract or commitment (except for this Agreement) limiting or
restraining EQ or its Subsidiaries from declaring, setting aside, authorizing
or making payment of any dividend or any distribution, whether in cash or
property;
(viii) joint venture or partnership agreement to which EQ or
its Subsidiaries is, directly or indirectly, a party (whether as an original
party or as an assignee or successor);
(ix) agreement or agreements to which EQ or its Subsidiaries
is a party (whether as an original party or as an assignee or successor) with
respect to any assignment, discounting or reduction of any receivables, other
than normal trade discounts, of EQ or its Subsidiaries ;
(x) distributorship, sales agency, sales representative or
marketing agreement;
(xi) any license pursuant to which EQ or its Subsidiaries
has any liability or obligation or is receiving or will become entitled to
receive any benefits in excess of $25,000 USD in value, and any permit pursuant
to which such entity currently operates its business;
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(xii) existing agreements, options, commitments or rights
with, to or in any third party to acquire any assets or properties, real,
personal or mixed, or any interest therein, of EQ or its Subsidiaries, except
for those contracts for the sale of inventory entered into in the ordinary
course of business; and
(xiii) existing agreements, options, commitments or rights
("Acquisition Contracts") to acquire any assets or properties, real, personal
or mixed, or any interest therein, except for those relating to the acquisition
of inventory in the ordinary course of business, and letters of intent,
agreements-in-principal and heads of agreement ("Letters of Intent") with
respect to any of the foregoing.
EQ has heretofore delivered to Parent and Merger Sub true, correct and
complete copies of all documents described in Schedule 4.13.
Section 4.14 Absence of Default. Except as set forth in Schedule 4.14
hereto, each of EQ and its Subsidiaries has complied with and performed all of
its respective obligations required to be performed under all material
contracts, agreements and leases to which it is a party (whether as an original
party or as an assignee or successor) as of the date hereof, and is not in
default in any material respect under any contract, agreement, loan, lease,
undertaking, commitment or other obligation; and no event has occurred which,
with or without the giving of notice, lapse of time or both, would constitute a
default thereunder in any material respect. EQ, after due inquiry of each
Subsidiary, has no knowledge that any party has failed to comply with or
perform all of its obligations required to be performed under any material
contract, agreement or lease to which EQ or its Subsidiaries is a party
(whether as an original party or as an assignee or successor) as of the date
hereof, or that any event has occurred which, with or without the giving of
notice, lapse of time or both, would constitute a default by such party
thereunder. In addition, except as disclosed in Schedule 4.14, EQ, after due
inquiry of each Subsidiary, has no knowledge of any facts or circumstances
which make a default by any party to any material contract or obligation likely
to occur subsequent to the date hereof. EQ has not received any notice that a
party to any Letter of Intent intends not to enter into a definitive agreement.
Section 4.15 Insurance. Each of EQ and its Subsidiaries maintains
insurance coverages on its structures, facilities, fixtures, machinery,
equipment, motor vehicles, inventory and other properties and assets and with
respect to its employees and operations, covering risks which are prudently
insured against by similar businesses. EQ has previously furnished to Parent
and Merger Sub a correct and complete description of all such policies or
binders of insurance held by or on behalf of EQ and its Subsidiaries or any of
its or their properties or assets (specifying the insurer, the amount of the
coverage, the type of insurance, the risks insured, the expiration date, the
policy number, the premium and any agent or broker). Except as may otherwise
have been disclosed to Parent and Merger Sub in writing (i) no notice of
cancellation or nonrenewal with respect to, or disallowance of any claim under,
any such policy or binder has been received by either EQ or its Subsidiaries
from January 1, 1998 to the date hereof, and (ii) EQ, after due inquiry of each
Subsidiary has no knowledge of any state of facts or the occurrence of any
event which reasonably might form the basis of any claim against or relating to
its or their businesses or operations or any
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of their assets or properties which are covered by any of such policies or
binders which might substantially increase the insurance premiums payable under
any such policy or binder. EQ has previously furnished to Parent and Merger Sub
a correct and complete description of all outstanding performance bonds which
have been delivered to any person in connection with the business and
operations of each of EQ and its Subsidiaries .
Section 4.16 Third Party Options. Except as set forth pursuant to
Section 4.13(xiii) hereof, there are no existing agreements, options,
commitments or rights with, to or in any third party to acquire any assets or
properties, real, personal or mixed, or any interest therein, of EQ or its
Subsidiaries, except for those contracts entered into by any of them in the
ordinary course of business.
Section 4.17 Distributions, Satisfactions, Obligations. Except as
disclosed in Schedule 4.17 hereto, since the Balance Sheet Date, none of EQ nor
its Subsidiaries has:
(i) issued any stock, bonds, partnership or membership
interests or other securities or equity interests;
(ii) incurred any obligations or liabilities for money
borrowed;
(iii) incurred any material obligations or liabilities,
absolute or contingent;
(iv) discharged or satisfied any lien, encumbrance or
obligation, or paid any material liabilities, absolute or contingent, other
than in the ordinary course of the operation of the business;
(v) declared or made any dividend payment or distribution to
any stockholder, partner or member of any of EQ or its Subsidiaries ;
(vi) purchased or redeemed any shares of the capital stock
or other equity interests of EQ or its Subsidiaries ;
(vii) mortgaged or pledged or subjected to lien, charge or
other encumbrance, any of its material assets, tangible or intangible;
(viii) sold, transferred or disposed of any of its assets
except assets used or consumed in the ordinary course of business and obsolete
equipment and equipment which has been replaced in the ordinary course of
business;
(ix) suffered any material adverse change, material damage,
disruption of business or losses, whether covered by insurance or not, or
waived any rights of substantial value;
(x) increased compensation payable to or to become payable
by such entity to any of its employees whose salary (inclusive of bonus) is
expected to exceed $50,000 USD in
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1998, except for increases in the ordinary course of business to an employee on
the anniversary date of his employment, or upon his annual award date, which do
not exceed 10% of the base salary of such employee; or
(xi) operated its business in any way other than in the
ordinary course.
Section 4.18 Capital Expenditures. Except as set forth in Schedule
4.18 hereto since January 1, 1998, none of EQ nor its Subsidiaries has made or
budgeted for any capital expenditures or commitments, whether or not contracted
for, in an aggregate amount exceeding $10,000 USD.
Section 4.19 Litigation. Except as set forth in Schedule 4.19 hereto,
as of the date hereof, there are no actions, suits, labor disputes or
arbitrations, legal or administrative proceedings or investigations pending
against EQ or its Subsidiaries and no actions, suits, labor disputes or
arbitrations, legal or administrative proceedings or investigations are
contemplated or threatened against EQ or its Subsidiaries or any of its or
their assets, properties or businesses, nor is any basis known by EQ, after due
inquiry of each Subsidiary, to exist for any such action or for any
governmental investigation relating to any of EQ or its Subsidiaries or its or
their properties or businesses. Neither EQ nor its Subsidiaries nor their
assets, properties or business, are subject to any judgment, order, writ,
injunction or decree of any court, governmental agency, administrative tribunal
or arbitration tribunal.
Section 4.20 Compliance with Law.
(a) Each of EQ and its Subsidiaries:
(i) has complied with each, and is not in violation of any,
law, ordinance or governmental rule or regulation to which it or its business
is subject, and
(ii) has not failed to obtain any license, permit,
certificate or other governmental authorization or inspection necessary to the
ownership or use of its assets and properties or to the conduct of its
business, which, in the event of any noncompliance, violation or failure to
obtain, as the case may be, would have a material adverse effect on the
business, operations, prospects, properties, assets or condition (financial or
otherwise) of such entity.
(b) Except as set forth in Schedule 4.20 hereto, none of EQ nor
its Subsidiaries has, since (i) in the case of EQ, its date of incorporation,
and (ii) in the case of any Subsidiary, the date of its acquisition or
formation by EQ, received any claim or notice of any violation, of any
building, zoning, fire, health or employment laws (including, without
limitation, workers compensation legislation or human rights legislation),
ordinances, rules or regulations relating to the properties, premises, business
or employees of such entity, which in the event of any non-compliance or
violation would have a material adverse effect on the business, operations,
prospects, properties, assets or condition (financial or otherwise) of such
entity.
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(c) None of EQ nor its Subsidiaries has, nor has any director,
officer, agent or employee of any such entity: (i) made or agreed to make any
contributions, payments or gifts of its funds or property to any governmental
official, employee or agent where either the payment or the purpose of such
contribution, payment or gift was or is illegal under the laws of the United
States or Canada, any state or province thereof or any other jurisdiction
(foreign or domestic); (ii) established or maintained any unrecorded fund or
asset for any purpose, or made any false or artificial entries on any of its
books or records for any reason; (iii) made or agreed to make any contribution,
or reimbursed any political gift or contribution made by any other person or
entity, to candidates for public office whether federal, state, local or
foreign, where such contributions were or would be violative of applicable law;
or (iv) violated the U.S. Federal Corrupt Practices Act of 1977, as amended.
Section 4.21 Transactions with Affiliates. None of EQ nor its
Subsidiaries nor any current director or officer thereof controls or during the
last three years has controlled, directly or indirectly, any business,
corporate or otherwise, which is or was a party to any agreement, business
arrangement or course of dealing with any of EQ or its Subsidiaries or any
property or asset which was the subject of any agreement, business arrangement
or course of dealing with any of EQ or its Subsidiaries .
Section 4.22 Prohibited Payments. Neither EQ nor its Subsidiaries, nor
any of their respective officers, directors, employees, agents or affiliates
has offered, paid, or agreed to pay to any person or entity, including any
governmental official, or solicited, received or agreed to receive from any
such person or entity, directly or indirectly, any money or anything of value
for the purpose or with the intent of obtaining or maintaining business for any
such entity or otherwise affecting the business, operations, prospects,
properties, or condition (financial or otherwise) of any such entity and which
is or was in violation of any ordinance, regulation or law, or not properly and
correctly recorded or disclosed on the books and records of such entity. None
of EQ nor its Subsidiaries has engaged in any transaction, maintained any bank
account or used any other funds except for transactions, bank accounts and
funds which have been and are properly and correctly reflected in the normally
maintained books and records of such entity.
Section 4.23 Canadian Tax Matters.
(a) Except as set forth in Schedule 4.23 as of the time of
filing, all tax returns, elections, filings and designations of EQ or any of
its Subsidiaries required by law to be filed under Canadian federal,
provincial, municipal or local laws or any foreign (i.e., not Canadian) laws by
EQ or its Subsidiaries, or any affiliated, combined or unitary group of which
any such corporation is or was a member were in all respects true, complete and
correct and filed on a timely basis. Except as set forth in Schedule 4.23,
there are no agreements, waivers, or other arrangements with any taxation
authority providing for an extension of time with respect to the filing of any
tax return, election, designation or report by, or any payment of any amount
by, or any governmental charge against, EQ or any of its Subsidiaries or with
respect to the issuance of any assessment or re-assessment of any Taxes. Except
as set forth in Schedule 4.23, neither EQ nor any of its Canadian Subsidiaries
have made or filed any election or designation under any provision of the
Income Tax Act (Canada) or any relevant provincial taxing statute at any time
prior to the Closing Date.
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(b) EQ and its Subsidiaries have, within the time and in the
manner prescribed by law, paid all income tax, estimated tax, excise tax, sales
tax, goods and services tax, corporation capital tax, gross receipts tax,
franchise tax, employment and payroll-related tax, property tax, import tax and
all such other applicable taxes, whether or not measured in whole or in part by
net income (collectively, "Taxes") including all installments for the current
taxation year, that are due and payable and have paid all assessments and
re-assessments of Taxes, and all other governmental charges, penalties,
interest, and fines, due and payable on or before the date hereof.
(c) EQ and its Subsidiaries as of January 1, 1998 have
established on their books and records reserves that are adequate for the
payment of all Taxes not yet due and payable and there shall be no material
difference between the amounts of the book basis and the tax basis of assets
(net of liabilities) that are not accounted for by an accrual on the books for
Canadian income tax purposes.
(d) There are no liens for Taxes upon the assets of EQ or any of
its Subsidiaries except liens for Taxes not yet due.
(e) Except as set forth in Schedule 4.23, there are no
agreements, waivers or other arrangements regarding the application of the
statute of limitations with respect to any Taxes or returns that have been
given by EQ or any of its Subsidiaries.
(f) No power of attorney has been granted by EQ or any of its
Subsidiaries with respect to any matter relating to Taxes which is currently in
force.
(g) Except as set forth in Schedule 4.23, neither EQ nor any of
its Subsidiaries is a party to any agreement or arrangement (written or oral)
providing for the allocation or sharing of Taxes,
(h) Except as set forth in Schedule 4.23, there are no actions,
audits, assessments, re-assessments, suits, proceedings, investigations or
claims pending or threatened against EQ or any of its Subsidiaries or, to the
knowledge of EQ or any of its Subsidiaries in respect of Taxes, governmental
charges or assessments or any material matters under discussion with any
governmental authority relating to Taxes, governmental charges or assessments
asserted by any such authority.
(i) EQ and each of its Subsidiaries have withheld from each
payment made to any of their respective past or present employees, officers, or
directors the amount of all Taxes and other deductions required to be withheld
therefrom by law and has remitted the same to the proper tax or other receiving
officers within the time required under any applicable legislation.
(j) Except as set forth in Schedule 4.23, EQ duly collected and
remitted to the appropriate tax authority as and when required by law to do so
all amounts on account of all Goods and Services Tax and retail sales taxes and
neither EQ nor any of its Canadian Subsidiaries have
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claimed any input tax credit, refund or rebate under the Excise Tax Act
(Canada) to which it was not entitled for any reporting period of each such
entity ending on or before the Closing Date.
(k) EQ and each of its Subsidiaries has withheld from each
payment made to any non-resident of Canada the amount of all taxes and other
deductions required to be withheld therefrom and has remitted the same to the
proper tax or other receiving officers within the time required under any
applicable legislation.
(l) There has been no material debt of EQ or any of its
Subsidiaries which has been forgiven or settled at any time prior to the
Closing Date.
(m) EQ has not deducted any material amounts in computing its
income in a taxation year which will be included in a subsequent taxation year
under Section 78 of the Income Tax Act (Canada).
(n) EQ and each of its Subsidiaries have taxation years ending on
December 31 of each year.
(o) Except as set forth in Schedule 4.23, at the date hereof,
Canadian federal and British Columbia notices of assessment have been issued in
respect of the Canadian federal and British Columbia income tax returns for EQ
and its Canadian Subsidiaries for the 1996 and previous taxation years and no
notice of re-assessment has been issued in respect thereof for EQ or any of its
Canadian Subsidiaries for the 1996 or previous taxation years.
(p) Neither EQ nor any of its Subsidiaries are aware of any
contingent liability for any Taxes or any grounds that could result in an
assessment, reassessment, or determination of any Taxes by any taxation
authority, whether federal, provincial, state, municipal, local or foreign,
including the aggressive reporting of income, expenses, or claims for
deductions in filing any tax return.
(q) No payments have been made or authorized by EQ or by any of
its Subsidiaries to any of its present or former officers, directors,
shareholders or employees or to any person or company not dealing at arm's
length (within the meaning of the Income Tax Act (Canada)) with any of its
present or former officers, directors, shareholders or employees, except in the
ordinary course of business and at the reasonable and regular rates payable to
them of salary, pension, bonuses, fees, rents or other remuneration,
consideration or compensation of any nature.
(r) As of the date hereof, the paid-up capital of each share of
capital stock or other equity interests of EQ and its Canadian Subsidiaries is
as set forth on Schedule 4.23(r).
(s) As of the date hereof, the adjusted cost base to EQ of the
issued and outstanding shares in each of its Subsidiaries is as set forth on
Schedule 4.23(s).
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(t) As of December 31, 1996, the undepreciated capital cost for
Canadian income tax purposes of the depreciable property of EQ and each of its
Canadian Subsidiaries is as set forth on Schedule 4.23(t).
(u) As of December 31, 1996, the non-capital losses carried
forward for Canadian income tax purposes by EQ and each of its Canadian
Subsidiaries is as set forth on Schedule 4.23(u).
EQ has heretofore delivered to Parent and Merger Sub true, correct and
complete copies of all federal, state, provincial, local and foreign income tax
returns filed within the past two years referred to in this Section 4.23, and
have made available to Parent and Merger Sub access to all other income tax
returns referred to on such Schedule.
Section 4.24 Employee Benefit Plans
(a) EQ has previously furnished to Parent and Merger Sub a list
of all of employee benefit plans (within the meaning of ERISA), funds or
programs whether or not they are or are intended to be (i) covered or qualified
under the Internal Revenue Code of 1986, as amended (the "Code") or ERISA or
any other applicable law, (ii) written or oral, (iii) formal or informal, (iv)
funded or unfunded, or (v) generally available to all employees of each of EQ
and its Subsidiaries, which were or are established or maintained by such
entity and all other compensation practices, policies, terms or conditions,
whether written or unwritten (individually, a "Plan", and collectively, the
"Plans"), other than those sponsored or mandated by the federal or a provincial
government in Canada (hereinafter, collectively, "Government Sponsored or
Mandated Plans"). For purposes of this Section 4.24, the term "Company" shall
mean and include EQ and its Subsidiaries and any corporation which is a member
of a controlled group of corporations (as defined in Section 414(b) of the
Code) which includes any of EQ or its Subsidiaries; any trade or business
(whether or not incorporated) which is under common control (as defined in
Section 414(c) of the Code) with any Company; any organization (whether or not
incorporated) which is a member of an affiliated service group (as defined in
Section 414(m) of the Code) which includes any Company; and any other entity
required to be aggregated with any Company pursuant to regulations under
Section 414(o) of the Code.
(b) EQ has not contributed or been obligated to make any
contributions for the six-year period ending on the Closing Date, to any
multi-employer plans (within the meaning of Section 3(37) of ERISA).
(c) EQ has previously furnished to Parent and Merger Sub (i) true
and complete copies of all Plan documents and other instruments relating
thereto, (ii) accurate and complete detailed summaries of all oral Plans, (iii)
true and complete copies of the most recent financial statements with respect
to the Plans, (iv) true and complete copies of all annual reports prepared
within the past five years, and (v) true and complete copies of all filings
submitted to and any correspondence received from any government agency within
the past five years.
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(d) No Plan is intended to be or required to be qualified under
Section 401(a) and exempt from tax under Section 501(a) of the Code.
(e) The Plans and provisions thereof, the trusts created thereby,
and the operation of the Plans and Government Sponsored or Mandated Plans are
in compliance with and conform to applicable provisions of all applicable laws,
including, but not limited to, all federal, provincial and local Canadian laws,
the Code, ERISA, other statutes, and governmental rules and regulations and
there have been and there exist no prohibited transactions (as defined in
Section 406 of ERISA or Section 4975 of the Code) with respect to any Plan.
(f) Each Company has made, or will make, all contributions to the
applicable Plans and Government Sponsored or Mandated Plans for all periods up
to the Closing Date as required by the terms of the Plans, the Code and ERISA
and has accrued under financial statements all contributions that will have to
be made with respect to the Plans and Government Sponsored or Mandated Plans as
of the Closing Date. Each most recent Plan audit report and annual report,
certified by the Plan's auditors, fairly presents the financial condition of
the Plan as at the date thereof and the results of operations of the Plan for
the plan year reflected therein and, there has been no material adverse change
in the condition of the Plan since the date of the most recent Form 5500 or
audited annual financial statement.
(g) With respect to any Plan that is an employee welfare benefit
plan within the meaning of Section 3(1) of ERISA (a "Welfare Plan"), (i) each
such Welfare Plan the contributions to which are claimed as a deduction under
any provision of the Code is in compliance with all applicable requirements
pertaining to such deduction, (ii) with respect to any welfare benefit fund
within the meaning of Section 419 of the Code that comprises part of a Welfare
Plan, there is no disqualified benefit within the meaning of Section 4976(b) of
the Code that would subject the Company to a tax under Section 4976(a) of the
Code, and (iii) any such Plan that is a group health plan within the meaning of
Section 5000(b)(l) of the Code meets all of the requirements of Section 4980B
of the Code. EQ has previously furnished to Parent and Merger Sub a list of all
Welfare Plan benefits being provided or that will be provided to all former
employees (or other participants and beneficiaries) and the accrued liabilities
of same.
(h) The consummation of the transaction contemplated hereby will
not accelerate any liability under the Plans because of an acceleration of any
rights or benefits to which any participant or beneficiary (as such terms are
defined in Section 3 of ERISA) may be entitled thereunder.
(i) No Plan is in the process of being (i) amended in any manner
that would directly or indirectly increase the benefit accrued or which may be
accrued by any participant thereunder, or (ii) amended in any manner that would
materially increase the cost of maintaining such Plan.
(j) Each Plan and Government Sponsored or Mandated Plan that is
required or intended to be qualified under applicable law or registered or
approved by a governmental agency
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or authority, has been so qualified, registered or approved by the appropriate
governmental agency or authority, and nothing has occurred since the date of
the last qualification, registration or approval to adversely affect, or cause
the appropriate governmental agency or authority to revoke, such qualification
registration or approval.
(k) All contributions (including premiums) required by law or
contract to have been made or approved by EQ under or with respect to the Plans
and Government Sponsored or Mandated Plans have been paid or accrued by EQ.
Without limiting the foregoing, there are no unfunded liabilities under any
Plan or Government Sponsored or Mandated Plan.
(l) There are no pending or threatened matters, actions, audits,
suits, claims, investigations, litigation or other enforcement actions against
EQ with respect to any of the Plans or Government Sponsored or Mandated Plans.
(m) There are no actions, suits or claims pending or, to the best
knowledge of EQ, threatened by former or present employees of EQ (or their
beneficiaries) or any union representing employees of the Company with respect
to the Plans or Government Sponsored or Mandated Plans or the assets or
fiduciaries thereof (other than routine claims for benefits).
(n) Neither EQ nor any of its Subsidiaries has any 401(k) or
other type of pension plan in the United States.
(o) No conditions or event has occurred with respect to the Plans
and Government Sponsored or Mandated Plans which has or could reasonably be
expected to result in a liability to EQ.
Section 4.25 Executive Employees.
(a) Annexed hereto as Schedule 4.25 is a correct and complete
list of the names, titles and current annual salary rates of and bonuses paid
or payable (including the value of any stock-based compensation) to all present
non-union officers and employees, consultants and management service providers
of each of EQ and its Subsidiaries whose 1998 annual salary or compensation
(including bonuses paid or payable in 1997 or thereafter) is expected to exceed
$50,000 USD ("Executive Employees").
(b) Neither EQ nor any of its Subsidiaries has any employment
agreement with, and does not maintain any Plan with respect to, any Executive
Employees or other employees, except as disclosed on Schedule 4.25.
(c) All information and other relevant documentation relating the
financial condition of EQ and its Subsidiaries provided to Parent or Merger Sub
by EQ accurately reflect all outstanding liability relating to compensation for
length of service, overtime (including, without limitation, banked overtime),
vacation or holiday pay, salary, bonuses, stock options or any other
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compensation owed or owing to any and all employees, consultants and management
service providers of each of EQ and its Subsidiaries.
Section 4.26 Employees. Annexed hereto as Schedule 4.26 is a correct
and complete list of all labor and collective bargaining agreements (whether
written or oral) to which each of EQ or its Subsidiaries is a party or by which
any of them is bound, and all employment, profit sharing, deferred
compensation, bonus, stock option, stock purchase, pension, retainer,
consultancy, retirement, severance, welfare or incentive agreements, plans or
contracts (other than those identified herein) to which any of them is a party.
EQ has delivered copies of all such agreements, contracts and plans to Parent
and Merger Sub. None of EQ nor any of its Subsidiaries is in default with
regard to any of such agreements, plans or contracts. Each of EQ and its
Subsidiaries is in compliance in all material respects with all applicable laws
relating to the employment of labor. There are no controversies (other than
routine grievances) pending or threatened, between any of EQ or its
Subsidiaries, and any of its employees, consultants or labor unions or other
collective bargaining units representing any of its employees. No complaints
have been filed against any of EQ or its Subsidiaries with the National Labor
Relations Board or any provincial labor relations board, employment standards
board, human rights commission, workers compensation board or similar
regulatory authority, and none of EQ nor its Subsidiaries has received any
notice or communication reflecting an intention or a threat to file any such
complaint.
Section 4.27 Environmental Laws.
(a) Each of EQ and its Subsidiaries has obtained and holds all
permits, licenses and other authorizations which are required with respect to
the operation of its business under Federal, state, provincial, local and
foreign laws relating to pollution or protection of the environment, including
laws relating to emissions, discharges, releases or threatened releases or
pollutants, contaminants, chemicals, or industrial, toxic or hazardous
substances or wastes ("Hazardous Substances") into the environment (including,
without limitation, ambient air, surface water, ground water, land surface or
subsurface strata) or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, chemicals or industrial toxic or hazardous substances
or wastes (the "Environmental Laws"), except any permits, licenses and other
authorizations the absence of which would not, individually or in the
aggregate, materially adversely affect any of EQ or its Subsidiaries, and all
such permits, licenses and other authorizations are in good standing and EQ and
its Subsidiaries are not in default thereunder.
(b) Each of EQ and its Subsidiaries is in full compliance with
all other limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations, schedules and timetables contained in the
Environmental Laws or contained in any regulation, code, plan, order, decree,
judgment, injunction, notice or demand letter issued, entered, promulgated or
approved thereunder.
(c) There is no civil, criminal or administrative action, suit,
demand, claim, hearing notice or demand letter pending or threatened against
any of EQ or its Subsidiaries relating
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in any way to the Environmental Laws or any regulation, code, plan, order,
decree, judgment, injunction, notice or demand letter issued, entered,
promulgated or approved thereunder.
(d) No events, conditions, activities, practices, incidents,
actions or plans of action taken or to be taken by any of EQ or its
Subsidiaries are reasonably likely to (i) interfere with or prevent compliance
or continued compliance with the Environmental Laws or with any regulation,
code, plan, order, decree, judgment, injunction, notice or demand letter
issued, entered, promulgated or approved thereunder, in any manner which could
have a EQ Material Adverse Effect, (ii) give rise to any common law or legal
liability, including, without limitation, liability under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorizations Act of 1986, or any other
applicable Environmental Laws or similar state, provincial or local laws, or
(iii) form the basis of any claim, action, demand, suit, proceeding, hearing or
notice of violation based on or related to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling, or the
emission, discharge, release or threatened release into the environment, of any
pollutant, contaminant, chemical, or industrial, toxin or hazardous substance
or waste.
(e) EQ has made available to Parent and Merger Sub true and
correct copies of all environmental audits or assessments, analyses of soil,
groundwater, indoor and outdoor air, sediment, surface water and
asbestos-containing materials relating in whole or in part to EQ and its
Subsidiaries, any Owned Property or any Leased Real Estate undertaken by or on
behalf of EQ or any of its Subsidiaries, and any written communications
received by EQ relating in whole or in part to the existence of Hazardous
Substances at any Owned Property or Lease Real Estate or any real property
previously owned or operated by EQ or its Subsidiaries or the compliance of EQ
and its Subsidiaries with respect to any Environmental Law.
Section 4.28 Bank Accounts, Letters of Credit and Powers of Attorney.
EQ has previously furnished to Parent and Merger Sub a true and correct list of
(a) all bank accounts, lock boxes and safe deposit boxes relating to the
business and operations of each of EQ and its Subsidiaries, (b) all outstanding
letters of credit issued by financial institutions for the account of each of
EQ and its Subsidiaries (setting forth, in each case, the financial institution
issuing such letter of credit, the maximum amount available under such letter,
the terms (including the expiration date) of such letter of credit and the
party or parties in whose favor such letter of credit was issued), and (c) the
name and address of each person who has a power of attorney to act on behalf of
each of EQ and its Subsidiaries. EQ has heretofore delivered to Parent and
Merger Sub true, correct and complete copies of each such letter of credit and
each such power of attorney.
Section 4.29 Minute Books; Records. The minute books and/or other
official records, as applicable, of each of EQ and its Subsidiaries as
previously made available to Parent and Merger Sub for inspection, contain
complete and accurate records of all meetings and accurately reflect all other
action of the stockholders, boards of directors, management committees or other
governing bodies, as applicable, of each of EQ and its Subsidiaries. The stock
certificate books, stock transfer ledgers and/or capital account records, as
applicable, of each of EQ and its Subsidiaries as previously made available to
Parent and Merger Sub for inspection, are true and complete. All stock and/or
other
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applicable transfer taxes levied or payable with respect to all transfers of
shares and/or other equity interests, as applicable, of each of EQ and its
Subsidiaries prior to the date hereof have been paid and appropriate transfer
tax stamps affixed.
Section 4.30 Full Disclosure. No representation or warranty by EQ in
this Agreement, any Schedule hereto or in any list, certificate, document or
written statement delivered by EQ to Parent or Merger Sub pursuant hereto,
contains any untrue statement of a material fact or omits to state any material
fact necessary to make any statement herein or therein, in the light of the
circumstances under which it was made, not misleading. Except as described in
the Schedules hereto or in any list, certificate, document or written statement
delivered or to be delivered, all documents and agreements are valid and
effective in accordance with their respective terms, and there is not under any
of such documents or agreements, or any obligation, covenant or condition
contained therein, any existing default by any of EQ or its Subsidiaries or any
other party, or event which with notice, lapse of time, or both, would
constitute a default which would have a EQ Material Adverse Effect. There is no
fact known to EQ, which EQ has not disclosed or will not disclose to Parent and
Merger Sub which adversely affects or, so far as EQ, can now reasonably
foresee, which may adversely affect, the continued operation of any EQ or its
Subsidiaries.
Section 4.31 Securities Offerings. None of EQ nor its Subsidiaries has
offered, or is offering, for sale any of its securities by means of offering
memoranda or circulars, subscription agreements, or other documentation which
contains any untrue statement of a material fact or omits to state any material
fact necessary to make any statement therein, in the light of the circumstances
under which it was made, not misleading.
Section 4.32 Brokers or Finders. Other than BancAmerica Robertson
Stephens, no agent, broker, investment banker, financial advisor or other
person or entity is or will be entitled, by reason of any agreement, act or
statement by any of EQ or its Subsidiaries, to any financial advisory,
broker's, finder's or similar fee or commission in connection with any of the
transactions contemplated by this Agreement.
Section 4.33 Licenses.
(a) Each of EQ and its Subsidiaries holds all licenses
(including, without limitation, liquor licenses), franchises, registrations,
ordinances, authorizations, permits, certificates, variances, qualifications,
exemptions, orders, approvals and waivers of any governmental entity (Federal,
state, provincial and local) (collectively, "Licenses") which are required for
the conduct of its business operations as currently conducted. All of the
Licenses (including, without limitation, all liquor licenses) are in full force
and effect, and no Action is pending or threatened, seeking the revocation or
limitation of any of the Licenses. Schedule 4.33 lists all Licenses (including
all liquor licenses) that are material to the business of each of EQ and its
Subsidiaries. Except as indicated on Schedule 4.33, no License will terminate
as a result of this Agreement or the transactions contemplated hereby.
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(b) Schedule 4.33 lists all entities, other than EQ and its
Subsidiaries, that hold licenses to serve or sell alcoholic beverages in
locations on the premises of or associated with or contiguous to the facilities
operated by EQ and its Subsidiaries in connection with the business of EQ and
its Subsidiaries.
Section 4.34 Proxy Statement. The information supplied or to be
supplied by EQ and any Subsidiary thereof for inclusion in the Proxy Statement
(as hereinafter defined), including any amendments and supplements thereto,
will not either at the date mailed to EQ's stockholders or at the time of the
Stockholder Meeting (as hereinafter defined), contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. The Proxy Statement, as to
information supplied by EQ or any Subsidiary thereof, will comply in all
material respects with all applicable provisions of applicable Canadian law.
ARTICLE V
COVENANTS
Section 5.1 Alternative Proposals. From the date hereof until such
time as Parent's designees shall constitute a majority of the members of the
Board of Directors of EQ, EQ agrees that (a) neither it nor any of its
Subsidiaries shall, nor shall it, nor any of its Subsidiaries permit their
respective officers, directors, employees, agents, representatives or
Affiliates (including, without limitation, any investment banker, attorney or
accountant retained by them) to initiate, solicit or encourage, directly or
indirectly, any inquiries or the making or implementation of any proposal or
offer (including, without limitation any proposal or offer to its or their
stockholders) which constitutes or is reasonably likely to lead to any
Alternative Proposal, as hereinafter defined, or engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, or otherwise cooperate in any way with, any corporation,
partnership, person or other entity or group (each a "Third Party") relating to
an Alternative Proposal, or otherwise facilitate any effort or attempt to make
or implement an Alternative Proposal; (b) it will immediately cease and cause
to be terminated any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any of the foregoing, and will
take the necessary steps to inform the individuals or entities referred to
above of the obligations undertaken in this Section 5.1; and (c) it will notify
Parent immediately if any discussions or negotiations are sought to be
initiated, any inquiry or proposal is made, or any information is requested by
any Third Party with respect to an Alternative Proposal or which could lead to
an Alternative Proposal and immediately notify Parent of all material terms of
any proposal which it may receive in respect of any such Alternative Proposal,
including the identity of the Third Party making the Alternative Proposal or
the request for information, if known, and thereafter shall inform Parent on a
timely, ongoing basis of the status and content of any discussions or
negotiations with such Third Party, including immediately reporting any
material changes to the terms and conditions thereof. As used herein,
"Alternative Proposal" means any inquiry, proposal or offer from any Third
Party relating to a direct or indirect acquisition or purchase of 15% or more
of any class of equity securities or EQ or any of its Subsidiaries, any tender
offer or exchange offer that if consummated would result in any Third Party
beneficially
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owning 15% or more of any class of equity securities of EQ or any of its
Subsidiaries, any merger, consolidation, business combination, sale of all or
substantially all of the assets, recapitalization, liquidation, dissolution or
similar transaction involving EQ or any of its Subsidiaries, other than the
transactions contemplated by this Agreement, or any other transaction the
consummation of which could reasonably be expected to impede, interfere with,
prevent or materially delay the Merger or Arrangement or which would reasonably
be expected to dilute materially the benefits to Parent of the transactions
contemplated hereby. As used herein, "Superior Proposal" means any bona fide
fully-financed written offer made by a Third Party to acquire, directly or
indirectly, for consideration consisting of cash and/or securities, more than
50% of the EQ Stock then outstanding or all or substantially all of the assets
of EQ and otherwise on terms which the Board of Directors of EQ determines
(after consultation with a nationally recognized investment bank) to be
economically superior to the transaction contemplated by this Agreement.
Section 5.2 Interim Operations of EQ. Prior to the Closing Date,
unless Parent has consented in writing thereto, EQ and each of its
Subsidiaries:
(a) shall conduct its operations according to its usual, regular
and ordinary course in substantially the same manner as heretofore conducted;
(b) shall use its reasonable efforts to preserve intact its
business organizations and goodwill, keep available the services of officers
and employees and maintain satisfactory relationships with those persons having
business relationships with it;
(c) shall not amend its Certificate of Incorporation or its
Bylaws, Memorandum or Articles or comparable governing instruments;
(d) shall promptly notify Parent of any material emergency or
other material change in its condition (financial or otherwise), business,
properties, assets, liabilities, prospects or the normal course of its business
or of its properties, any material litigation or material governmental
complaints, investigations or hearings (or communications indicating that the
same may be contemplated), or the breach of any representation or warranty
contained herein;
(e) shall not (A), issue or redeem any capital stock or otherwise
change its capitalization as it existed on the date hereof other than as
contemplated by Section 4.3; (B) grant, confer or award any option, warrant,
conversion right or other right not existing on the date hereof to acquire any
capital stock; (C) increase any compensation or enter into or amend any
employment or consulting agreement with any of its present or future officers,
directors or employees; (D) grant, pay or admit liability to pay any severance
or termination package to any employee or consultant, except as necessary to
comply with Section 5.15; (E) adopt any new employee benefit plan (including
any stock option, benefit or purchase plan) or amend any existing employee
benefit plan in any respect;
(f) shall not declare, set aside or pay any dividend or make any
other distribution or payment with respect to any shares of its capital stock;
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(g) shall not enter into any material transaction, or agree to
enter into any material transaction, outside the ordinary course of business,
including, without limitation, any transaction involving a merger,
consolidation, joint venture, partial or complete liquidation or dissolution,
reorganization, recapitalization, restructuring or a purchase, sale, lease or
other disposition of a substantial portion of assets or capital stock.
(h) shall not incur any indebtedness for borrowed money or
guarantee any such indebtedness or issue or sell any debt securities or
warrants or rights to acquire any debt securities of others.
(i) shall not make any loans, advances or capital contributions
to, or investments in, any other person;
(j) shall not make or commit to make any capital expenditures
except as set forth in Schedule 5.2, up to a maximum after the date hereof of
$25,000 USD for each of its existing sites;
(k) shall not apply any of its assets to the direct or indirect
payment, discharge, satisfaction or reduction of any amount payable directly or
indirectly to or for the benefit of any Affiliate or enter into any transaction
with any Affiliate.
(l) shall not alter the manner of keeping its books, accounts or
records, or change in any manner the accounting practices therein reflected,
except to conform to requirements set forth in this Agreement;
(m) shall not grant or make any mortgage or pledge or subject
itself or any of its properties or assets to any lien, charge or encumbrance of
any kind;
(n) shall maintain insurance on its tangible assets and its
businesses in such amounts and against such risks and losses as are currently
in effect; and
(o) shall not take any action which would disqualify the Merger
or Arrangement as a "pooling of interests" for accounting purposes.
Section 5.3 Filings; Other Action.
(a) Subject to the terms and conditions herein provided, EQ and
Parent shall use all reasonable efforts to take, or cause to be taken, all
action and do, or cause to be done, all things necessary, proper or appropriate
to consummate and make effective the transactions contemplated by this
Agreement. If, at any time after the Closing Date, any further reasonable
action is necessary or desirable to carry out the purpose of this Agreement,
the proper officers and directors of Parent and EQ shall take all such
necessary action.
(b) (i) EQ and Parent shall give any notices to third parties,
and use all reasonable efforts to obtain any third party consents, necessary,
proper or advisable to consummate
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the transactions contemplated in this Agreement, including, without limitation,
the consents of any lenders, landlords or parties to agreements under which a
breach, with notice or lapse of time or both, would result in the termination
or cancellation thereof, accelerate the performance required thereby, result in
the triggering of any payment or other material obligations pursuant thereto,
result in the creation of any lien, security interest, charge or encumbrance
upon any material properties of EQ or any of its Subsidiaries thereunder, or
result in such agreements being declared void, voidable or without further
binding effect.
(ii) In the event that either party shall fail to obtain any
third party consent described in subsection (b) (i) above, such party shall use
all reasonable efforts, and shall take any such actions reasonably requested by
the other party hereto, to minimize any adverse effect upon EQ and Parent,
their Subsidiaries, and their respective businesses resulting, or which could
reasonably be expected to result after the Closing Date, from the failure to
obtain such consent.
(c) From and after the date of this Agreement until the Closing
Date, each party hereto shall promptly notify the others of (i) the occurrence,
or non-occurrence, of any event the occurrence, or non-occurrence, of which
would be likely to cause any condition to the obligations of any party to
effect the Merger or Arrangement and the other transactions contemplated by
this Agreement not to be satisfied, or (ii) the failure of EQ or Parent, as the
case may be, to comply with or satisfy any covenant, condition or agreement to
be complied with or satisfied by it pursuant to this Agreement which would be
likely to result in any condition to the obligations of any party to effect the
Merger or Arrangement and the other transactions contemplated by this Agreement
not to be satisfied; provided, however, that the delivery of any notice
pursuant hereto shall not cure any breach of any representation or warranty
requiring disclosure of such matter prior to the date of this Agreement or
otherwise limit or affect the remedies available hereunder to the party
receiving such notice.
Section 5.4 Inspection of Records. From the date hereof to the Closing
Date, EQ shall (a) allow all designated officers, attorneys, accountants and
other representatives of Parent reasonable access at all reasonable times to
the offices, records and files, correspondence, audits and properties, as well
as to all information relating to commitments, contracts, titles and financial
position, or otherwise pertaining to the business and affairs, of EQ; (b)
furnish to Parent and its representatives such financial and operating data and
other information as such persons may reasonably request; and (c) instruct the
employees, counsel, accountants and financial advisors of EQ to cooperate with
the Parent and its representatives in its investigation of EQ business.
Section 5.5 Further Action. Each party hereto shall, subject to the
fulfillment at or before the Closing Date of each of the conditions of
performance set forth herein or the waiver thereof, perform such further acts
and execute such documents as may be reasonably required to effect the
Arrangement.
Section 5.6 Expenses. Whether or not the Merger and Arrangement is
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall, except as otherwise provided
herein, be paid by EQ if incurred by EQ, and by Parent
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if incurred by Parent or Merger Sub; provided, however that (i) in the event
that this Agreement is terminated pursuant to Sections 7.1(c) or 7.1(g) hereof,
EQ shall promptly pay Parent or Merger Sub $2,000,000 USD as liquidated
damages, and reimburse Parent or Merger Sub, as the case may be, all
out-of-pocket expenses and fees (including, without limitation, fees and
expenses payable to all governmental authorities, banks, investment banking
firms and other financial institutions, and their respective agents and
counsel, and all fees and expenses of counsel, accountants, financial printers,
proxy solicitors, exchange agents, experts and consultants), whether incurred
prior to, on or after the date hereof, in connection with the Merger,
Arrangement and the consummation of the transactions contemplated hereby; or
(ii) in the event that this Agreement is terminated pursuant to Section 7.1(e),
Parent or Merger Sub shall promptly pay EQ $2,000,000 USD in liquidated
damages. In either instance, the liquidated damages provided for herein shall
represent the only damages that may be sought by the parties hereto, or any
stockholder of EQ, under this Agreement in the event of a termination of this
Agreement as aforesaid or any violation or breach of this Agreement which gave
rise thereto.
Section 5.7 Survival of Representations and Warranties of EQ.
Notwithstanding any right of Parent to investigate the affairs of EQ and
notwithstanding any knowledge of facts determined or determinable by Parent
pursuant to such investigation or right of investigation, Parent has the right
to rely fully upon the representations, warranties, covenants and agreements of
EQ contained in this Agreement. All such representations, warranties, covenants
and agreements shall survive the execution and delivery hereof and the
consummation of the transactions contemplated hereby for a period of one year
following the Closing Date. All representations, warranties, covenants and
agreements made herein by Parent and Merger Sub shall survive the execution and
delivery hereof and the consummation of the transactions contemplated hereby
for a period of one year following the Closing Date.
Section 5.8 Governmental Approvals. As promptly as practicable after
the execution of this Agreement, Parent, Merger Sub and EQ shall file
notification reports under the HSR Act, the Competition Act (Canada) and the
Investment Canada Act (collectively the "Acts"), as applicable, and shall
request early termination of any applicable waiting periods under such Acts and
use their commercially reasonable efforts to obtain clearance or authorization
under the Acts of the Arrangement and the other transactions contemplated by
this Agreement at the earliest practical time.
Section 5.9 Public Announcements. Each party to this Agreement and
their respective Subsidiaries shall consult with each other before issuing any
press release or otherwise making any public statements with respect to this
Agreement or any transaction contemplated hereby and shall not issue any such
press release (unless required by applicable law) or make any such public
statement without the prior consent of the other parties hereto, which consent
shall not be unreasonably withheld.
Section 5.10 Stockholders Meeting. EQ shall call a meeting of its
stockholders (the "Stockholder Meeting") to be held as promptly as practicable
for the purpose of considering and voting upon this Agreement and the
Arrangement. The Board of Directors of EQ shall recommend
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that the stockholders of EQ approve this Agreement and the Arrangement (the
"Stockholder Approval").
Section 5.11 Proxy Statement.
(a) As promptly as practicable after the execution of this
Agreement, EQ shall comply with applicable Canadian securities and corporate
laws and prepare and file as appropriate, a proxy statement relating to the
Stockholder Meeting to be held in connection with the Arrangement (together
with any amendments thereof or supplements thereto, the "Proxy Statement"), EQ
shall cause the Proxy Statement to comply as to form in all material respects
with applicable Canadian securities and corporate laws and shall take all or
any action required under any applicable federal or state securities laws of
the United States or provincial or territorial securities laws of Canada.
Parent shall furnish to EQ all information concerning Parent as EQ may
reasonably request in connection with the preparation of the documents referred
to herein. As promptly as practicable after the Interim Order shall have been
obtained from the Court, EQ shall mail the Proxy Statement to its stockholders.
(b) The information supplied by each of Parent and EQ for
inclusion in the Proxy Statement shall not, at (i) the time the Proxy Statement
is first mailed to the stockholders of EQ, (ii) the time of the Stockholders
Meeting, or (iii) the Closing Date, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. If at any
time prior to the Closing Date, any event or circumstance relating to EQ,
Parent or any of their respective Subsidiaries or officers or directors, should
be discovered by such party which should be set forth in an amendment or a
supplement to the Proxy Statement, such party shall promptly inform the other
thereof and take appropriate action in respect thereof.
Section 5.12 Blue Sky. Parent shall use its commercially reasonable
efforts to obtain prior to the Closing Date all approvals or permits required
to carry out the transactions contemplated hereby under applicable U.S. and
Canadian state, provincial, territorial and local securities laws and
regulations ("Blue Sky Laws") in connection with the issuance of the Parent
Common Stock pursuant to the Arrangement; provided, however, that with respect
to such qualifications Parent shall not be required to register or qualify as a
foreign corporation or take any action which would subject it to general
service of process or taxation in any jurisdiction where it is not now subject.
EQ shall cooperate with Parent in the making of all required filings under
applicable Canadian and Blue Sky Laws in connection with the issuance of Parent
Common Stock pursuant to the Arrangement. Notwithstanding anything in this
Agreement to the contrary, Parent shall be under no obligation to file a
registration statement with the Securities and Exchange Commission (the "SEC")
in order to register the Parent Common Stock to be issued pursuant to the
Arrangement under the Securities Act. As part of its applications for the
Interim Order and the Final Order, EQ will inform the Court that, if the Court
approves the Arrangement, the Parent Common Stock to be issued pursuant to the
Arrangement will not require registration under the Securities Act by virtue of
the Court's approval.
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Section 5.13 Affiliates. At least ten (10) days prior to the mailing
of the Proxy Statement, (a) EQ shall deliver to Parent a letter identifying all
persons who may be deemed to be affiliates of EQ under Rule 145 of the
Securities Act as of the record date of the Stockholders' Meeting, including,
without limitation, all of its directors and executive officers (the "Rule 145
Affiliates") and (b) EQ shall advise the persons identified in such letter of
the resale restrictions imposed by applicable securities laws and shall use
commercially reasonable efforts to obtain from each person identified in such
letter a written agreement substantially in the form of Exhibit B hereto.
Section 5.14 Options. The Committee (as defined in the Eagle Quest
Golf Centers, Inc. 1996 Stock Option Plan and the Eagle Quest Golf Centers,
Inc. 1997 Amended Stock Option Plan, collectively, the " Option Plans") shall
promptly after the date hereof, determine pursuant to Section 11.4 of the
Option Plans that the transactions contemplated hereby shall be deemed a
Terminating Event (as defined in the Option Plans) for purposes of the Option
Plans and shall within 30 days after the date hereof give the notice to
optionees under the Option Plans contemplated by Section 11.3 thereof.
Section 5.15 Termination of Written Employment Agreements. EQ shall
take such actions as are necessary to terminate the written employment and
consulting agreements set forth on Schedule 4.25 prior to the Closing Date.
Section 5.16 Real Estate and other Consents. EQ shall take all actions
and do all things necessary to obtain the consents described in, and satisfy
the conditions of, Section 6.3(h) hereof.
Section 5.17 Preparation of Signing Date Balance Sheet. On or before
May 22, 1998, EQ shall prepare and deliver to Parent and Merger Sub a
consolidated balance sheet of EQ as of the close of business on March 31, 1998
(the "Signing Date Balance Sheet"). The Signing Date Balance Sheet shall be
prepared in accordance with US GAAP applied on a basis consistent with that
used in, and in accordance with the same accounting principles applied in, the
preparation of the financial statements referred to in Section 4.7, and shall
be reviewed by KPMG Peat Marwick ("KPMG"). KPMG shall also provide an opinion
on the calculation (the "Calculation") of Signing Date Net Liabilities and
Excess Liabilities (as such terms are defined below) as of the date of such
Signing Date Balance Sheet and calculated as set forth below. Unless Parent
elects to forego such review, Richard A. Eisner & Company LLP ("Eisner") shall
have 25 days to review the Signing Date Balance Sheet and the Calculation. If
Eisner disagrees with the amount of Signing Date Net Liabilities shown on the
Signing Date Balance Sheet or the Calculation, then (i) it shall issue a report
to such affect and, unless the parties otherwise agree, the Signing Date Net
Liabilities as shown in the KPMG reviewed balance sheet and the Excess
Liabilities calculated by KPMG shall be increased (the "Liability Adjustment")
by 50% of the difference between such number from the KPMG reviewed balance
sheet and the Signing Date Net Liabilities and Excess Liabilities shown in the
Eisner report and (ii) a number of shares (the "Special Escrow Shares") of
Parent Common Stock equal to the quotient of 50% of such difference and $35.00
USD shall be placed in escrow pending the post-closing dispute resolution
described below. The "Signing Date Net Liabilities" shall mean the amount of
Total Liabilities, plus the value assigned to warrants issued with the
Subordinated Debenture (and minus the total purchase price paid in connection
with the acquisition of the
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Douglasdale Golf Center) as set forth on the Signing Date Balance Sheet plus
any other debt discount and deferred financing costs minus the sum of (A) cash
(exclusive of any cash from the issuance of shares of EQ Common Stock or the
exercise of options or warrants for EQ Common Stock subsequent to February 20,
1998), (B) restricted cash deposits and (C) inventory. (EQ shall cause a
physical inventory to be taken no later than April 15, 1998 and to be observed
by KPMG and, at Parent's option, Eisner for purposes of the preceding
sentence.) The amount, if any, by which such Signing Date Net Liabilities (as
adjusted for the Liability Adjustment) is greater than $22,300,000 USD shall
be, for purposes of Section 1.6(a), the Excess Liabilities (as adjusted for the
Liability Adjustment). If shares of Parent Common Stock have been escrowed
pursuant to this Section 5.17, then KPMG and Eisner shall have 30 days after
the Closing Date to come to an agreement as to what the Signing Date Net
Liabilities and Calculation should have been. If they are unable to agree
within such 30-day period, the two firms shall appoint a third accounting firm
of recognized national standing which shall resolve the dispute (including, if
necessary, auditing the Signing Date Balance Sheet) within 60 days and whose
decision shall be final and binding. Promptly after the dispute is resolved,
any Special Escrow Shares to which the holders of EQ Stock would have been
entitled based on such resolution shall be released from escrow to such holders
and any Special Escrow Shares or other Escrow Shares to which Parent or Merger
Sub would have been entitled shall be released from escrow to Parent. A number
of Shares of Parent Common Stock equal to the expenses of such third accounting
firm divided by $35.00 USD shall also be deducted from the Escrow Shares if the
Excess Liabilities, as determined by such third party accountants, is closer to
the amount of Excess Liabilities proposed by Eisner than to the amount of
Excess Liabilities proposed by KPMG.
Section 5.18 Schedules. Each of the parties hereto shall deliver all
final Schedules required to be delivered by them in a form acceptable to both
parties as contemplated hereby on or prior to April 15, 1998.
Section 5.19 Restrictive Legend. Each share of Parent Common Stock
issued pursuant to the Merger and Arrangement shall bear a restrictive legend
limiting the transfer of such shares until the date which is 31 days after the
first combined financial results of the parties hereto are publicly issued.
Section 5.20 Exhibits Exhibits substantially in the form of the
Exhibits previously delivered to the parties, with such changes as shall be
mutually agreed by the parties, shall be added as the definitive Exhibits
hereto on or before April 15, 1998. The parties covenant to negotiate in good
faith to finalize such Exhibits.
ARTICLE VI
CONDITIONS
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Section 6.1 Conditions to Obligation of Each Party to Effect the
Merger and Arrangement. The obligation of each party hereto to effect the
Merger and Arrangement shall be subject to the fulfillment at or prior to the
Closing Date of the following conditions:
(a) EQ shall have received the Stockholder Approval.
(b) All necessary regulatory and governmental approvals and
consents shall have been obtained.
(c) Any applicable waiting period under the HSR Act, the
Competition Act (Canada) and the Investment Canada Act shall have expired or
been terminated.
(d) Parent shall have received all permits and other
authorizations necessary to issue the Parent Common Stock pursuant to the
Arrangement including, without limitation, any necessary exemption orders or
waivers from applicable securities commissions in Canada.
(e) The parties hereto shall have entered into the Escrow
Agreement substantially in the form of Exhibit C hereto.
(f) The Final Order shall have been issued by the Court.
(g) A certified copy of each of the Final Order and the Plan of
Arrangement shall have been filed with the British Columbia Registrar of
Companies.
Section 6.2 Conditions to Obligation of EQ to Effect the Merger and
Arrangement. The obligation of EQ to effect the Merger and Arrangement shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) Parent shall have performed, in all material respects, all of
its agreements contained herein that are required to be performed by Parent on
or prior to the Closing Date, and EQ shall have received a certificate of the
President or Senior Vice President of Parent dated the Closing Date, certifying
to such effect.
(b) The representations and warranties of Parent and Merger Sub
contained in this Agreement and in any document delivered in connection
herewith shall be true and correct in all material respects as of the Closing,
and EQ shall have received a certificate of the President or Vice President of
Parent, dated the Closing Date, certifying to such effect.
(c) Parent shall have executed and delivered a registration
rights agreement substantially in the form of Exhibit D.
Section 6.3 Conditions to Obligation of Parent and Merger Sub to
Effect the Merger and Arrangement. The obligations of Parent and Merger Sub to
effect the Merger and Arrangement shall be subject to the fulfillment at or
prior to the Closing Date of the following conditions:
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(a) The representations and warranties of EQ contained in this
Agreement and in any document delivered in connection herewith shall be true
and correct in all material respects as of the Closing, and Parent and Merger
Sub shall have received a certificate of the President or Senior Vice President
of EQ, dated the Closing Date, certifying to such effect.
(b) EQ shall have performed, in all material respects, all of its
agreements contained herein that are required to be performed by EQ on or prior
to the Closing Date, and Parent shall have received a certificate of the
President or a Vice President of EQ, dated the Closing Date, certifying to such
effect.
(c) Parent and Merger Sub shall have received an opinion letter
from EQ's independent auditors concurring with EQ's management that EQ meets
the conditions of paragraphs 46(a)-(c) of the Accounting Principles Board #16
(APB16) which are the conditions required for EQ to be eligible for pooling of
interest accounting treatment in accordance with US GAAP.
(d) Merger Sub shall have executed and delivered employment
agreements, substantially in the form of Exhibits E, F and G attached hereto,
with respect to each of Messrs. Donald L. Holmstrom, Thomas C. Stanton and
Robert W. Garnett, respectively, or shall have entered into a two-year
non-competition agreement substantially in the form of Exhibit H hereto with
any such person who does not enter into such employment agreement.
(e) Each of the employment and consulting agreements listed on
Schedule 4.25 shall have been terminated by EQ or its applicable Subsidiary.
(f) All Options under the Option Plans shall have been exercised
in accordance with their terms, converted into shares of Parent Common Stock
pursuant to Section 1.4(c) or shall have expired or otherwise been terminated.
At the Closing, the holders of the Warrants shall have exercised their Warrants
or exchanged their Warrants for the number of shares of Parent Common Stock set
forth on Schedule 1.4(b), provided, however, that if one or more holders of
Warrants fail to so exercise or exchange their Warrants, in accordance with
their terms, then Parent and Merger Sub shall have the right, but not the
obligation, to close and to reduce the Merger Consideration by a number of
shares of Parent Common Stock equal to the number of shares obtained by
multiplying the maximum number of shares of EQ Stock which could be obtained
upon exercise of such Warrants (except for those with an exercise price of more
than $35.00 per share of Parent Common Stock) by the Exchange Ratio (assuming
all Warrant-holders had exchanged as set forth on Schedule 1.4(a) and without
giving effect to any reduction in such Exchange Ratio resulting from the
adjustment thereto which would be caused by this provision) and permitting such
Warrants (including any such Warrants with an exercise price of more than
$35.00 per share of Parent Common Stock) to become exercisable for Parent
Common Stock in accordance with their terms (the "Adjusted Warrants").
(g) Holders of not more than 2% of outstanding EQ Stock shall
have given notice of their intent to exercise rights of dissent pursuant to
Section 3.1 of the Plan of Arrangement.
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(h) (i) Parent and Merger Sub shall have received from each
landlord and any over landlord of each landlord and overlandlord of the Leased
Real Estate, an estoppel certificate in the form of Exhibit I hereto.
(ii) With respect to the Owned Property and Leased Real
Estate, Parent and Merger Sub shall have received from each of EQ's or its
Subsidiaries' lenders whose loan is secured by a mortgage or deed of trust
encumbering any of such properties (each a "Mortgage Lender"), a statement to
the effect that to its knowledge no default under its mortgage or deed of trust
exists nor is such lender aware of the occurrence or non-occurrence of any
event which, with notice or the passage of time, or both, would constitute such
a default.
(iii) Parent and Merger Sub shall have received from the
title company or companies it selects to report the condition of the title to
the Owned Property and Leased Real Estate located in the United States
commitments for title insurance with premiums at ordinary rates showing that
the condition of title is such as represented by EQ under Sections 4.10(a) or
4.10(b) hereof. On Schedule 6.3(h)(iii) EQ (a) lists the Owned Property and
Leased Real Property for which it or any of its Subsidiaries obtained title
insurance or a commitment for title insurance, (b) identifies the particular
title insurance company that issued such policy or commitment and (c) describes
the policy or commitment by its date and number. Parent or Merger Sub, when
selecting the title insurance company to report the condition of title to the
Owned Property and Leased Real Property, shall use the title insurance company
that issued each such policy or commitment to update same.
(iv) Any environmental site assessment commissioned by
Parent or Merger Sub with respect to any of the Owned Property and Leased Real
Estate shall show that the representations set forth in Section 4.27 are true
in all material respects.
(v) With respect to the Leased Real Estate and Owned
Property, Parent shall have received consents to a change of control
contemplated by the consummation of the Arrangement from (i) each landlord and
any overlandlord of each landlord whose consent to the Arrangement is required
by any Lease, and (ii) each Mortgage Lender whose consent to the Arrangement is
required by applicable loan documents or whose loan would be in default as a
result of the Arrangement.
(i) EQ shall have executed and delivered the U.S. Tax Matters
Agreement substantially in the form attached as Exhibit J hereto.
(j) No action shall have been taken, and no statute, rule,
regulation, executive order, judgment, decree, or injunction (other than a
temporary restraining order) shall have been enacted, entered, promulgated or
enforced (and not repealed, superseded, lifted or otherwise made inapplicable),
by any court of competent jurisdiction or governmental authority which
restrains, enjoins or otherwise prohibits the consummation of the transactions
contemplated hereby.
(k) Clearance from the SEC with respect to the treatment of the
transactions contemplated hereby as a "pooling of interests" for accounting
purposes shall have been obtained.
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(l) All obligations of EQ to purchase Putable Securities shall
have been terminated.
(m) EQ shall have delivered to Parent and Merger Sub audited
financial statements (as may be required by Item 305 of Regulation S-K under
the Act, and as requested by Eisner), consisting of an audited income statement
as of December 31, 1996, of each entity which EQ has acquired, or from whom EQ
has acquired an operating facility, from January 1, 1997 through the Closing
Date.
ARTICLE VII
TERMINATION
Section 7.1 Termination. This Agreement may be terminated and the
Merger and Arrangement contemplated hereby may be abandoned, by written notice
promptly given to the other parties hereto, at any time prior to the Closing
Date, whether prior to or after approval by their respective stockholders or
members:
(a) By mutual written consent of Parent and EQ;
(b) By either Parent or EQ, if a court of competent jurisdiction
or a Governmental Entity shall have issued an order, decree or ruling or taken
any other action, in each case permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and nonappealable;
(c) By Parent, if EQ fails to perform in all material respects
its obligations under this Agreement (including, without limitation, its
obligations under Sections 5.18 and 5.20), or there has been a material
violation or breach by EQ of any representation, warranty or agreement
contained herein;
(d) By Parent, if there shall have occurred a EQ Material Adverse
Effect since the date of this Agreement;
(e) By EQ, if Parent fails to perform in all material respects
its obligations under this Agreement, or there has been a material violation or
breach by Parent or Merger Sub of any representation, warranty or agreement
contained herein;
(f) By Parent, in its sole and absolute discretion, during the
period prior to the date which is the later of April 30, 1998 and ten (10) days
after delivery by KPMG of the 1997 audited consolidated financial statements of
EQ and its Subsidiaries, (the "Due Diligence Period"), provided, however, that
the Due Diligence Period, and the right to terminate during it, shall be
extended if EQ has not provided Parent with all agreements and other documents
referred to in this Agreement and the Schedules hereto and such other
information as has been reasonably requested
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by Parent by the number of days it takes to so furnish such information and
documents, plus two days after it has been furnished;
(g) By EQ, if, prior to the Closing Date, any Third Party has
made a bona fide fully financed written offer relating to an Alternative
Proposal, or has commenced a tender or exchange offer for EQ Stock, and EQ's
Board of Directors determines in good faith (i) after consultation with its
financial advisors, that such transaction constitutes a Superior Proposal and
(ii) after having received the written opinion of outside legal counsel to EQ,
that the failure to engage in such negotiations or discussions or provide such
information would result in a breach of the fiduciary duties of the Board of
Directors of EQ under applicable law;
Section 7.2 Effect of Termination. In the event of the termination of
this Agreement and abandonment of the Merger and Arrangement as provided in
Section 7.1 hereof, this Agreement shall forthwith become void and there shall
be no liability on the part of Parent or EQ, except as set forth in this
Section 7.2 and Section 5.6 hereof, and except to the extent that such
termination results from the willful breach of a party hereto of any of its
representations, warranties, covenants or agreements set forth in this
Agreement.
ARTICLE VIII
INDEMNIFICATION
Section 8.1 Indemnity. (a) Parent and Merger Sub and their assignees
(the "Indemnified Parties") shall be defended and held harmless from and
against any losses, liabilities, damages or deficiencies (including interest,
penalties and reasonable attorneys' fees and disbursements) ("Losses") based
upon, arising out of or otherwise in respect of the breach of any
representation, warranty, covenant or agreement of EQ contained in this
Agreement or in any document or other writing delivered pursuant to this
Agreement (determined for this purpose as if all references to knowledge and
materiality contained in Article IV are deleted).
(b) Notwithstanding anything to the contrary herein, the
Indemnified Parties shall not be entitled to indemnification under Section
8.1(a) with respect to the first $50,000 of Losses (the "Threshold Amount").
Section 8.2 Escrow Shares. The indemnification arising under Section
8.1 shall be satisfied solely from the Escrow Shares in accordance with the
terms of the Escrow Agreement.
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ARTICLE IX
GENERAL PROVISIONS
Section 9.1 Notices. Any notice required to be given hereunder shall
be sufficient if in writing, and sent by facsimile transmission or by courier
service (with proof of service), hand delivery or certified or registered mail
(return receipt requested and first-class postage prepaid), addressed as
follows:
If to Parent or Merger Sub: If to EQ:
Family Golf Centers, Inc. Eagle Quest Golf Centers, Inc.
225 Broadhollow Road 535 Thurlow Street, Suite 601
Melville, New York 11747 Vancouver, BC V6E3L2, CANADA
Fax: (516) 694-0918 Fax: (604) 608-0773
Attn: Dominic Chang, President Attn: R.W. Garnett, President
With copies to: With copies to:
Squadron, Ellenoff, Plesent & Jones, Day, Reavis, & Pogue
Sheinfeld, LLP 555 West Fifth Street, Suite 4600
551 Fifth Avenue Los Angeles, Ca 90013
New York, New York 10176 Fax: (213) 243-2539
Fax: (212) 697-6686 Attn: Gerry D. Osterland
Attn: Kenneth R. Koch
McCarthy Tetrault Swinton & Company
Barristers and Solicitors 840 Howe Street, Suite 1000
P.O. Box 10424, Pacific Centre Vancouver, BC V6Z 2M1
1300-77 Dunsmuir Street Attn: Kenneth N. Burnett
Vancouver, BC V7Y 1K2
Attn: Richard Balfour Catalyst, Corporate Finance Lawyers
1100-1055 West Hastings Street
Vancouver, BC V6E 2E9
Attn: James L. Heppell
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
Section 9.2 Assignment, Binding Effect. Neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties, except that Merger Sub
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may assign, in its sole discretion, any or all of its rights, interests and
obligations hereunder to any direct or indirect Subsidiary of Parent. Subject
to the preceding sentence, this Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective permitted successors
and assigns.
Section 9.3 Entire Agreement. This Agreement and any documents
delivered by the parties in connection herewith constitute the entire agreement
among the parties with respect to the subject matter hereof and supersede all
prior agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
Section 9.4 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
Section 9.5 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without regard
to its rules of conflict of laws.
Section 9.6 Counterparts. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument.
Section 9.7 Headings. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only and shall be given no
substantive or interpretive effect whatsoever.
Section 9.8 Interpretation. In this Agreement, unless the context
otherwise requires, words describing the singular number shall include the
plural and vice versa, and words denoting any gender shall include all genders
and words denoting natural persons shall include corporations and partnerships
and vice versa.
Section 9.9 Waivers. Except as provided in this Agreement, no action
taken pursuant to this Agreement, including, without limitation, any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representations,
warranties, covenants or agreements contained in this Agreement. The waiver by
any party hereto of a breach of any provision hereunder shall not operate or be
construed as a waiver of any prior or subsequent breach of the same or any
other provision hereunder.
Section 9.10 Incorporation of Schedules and Exhibits. The Schedules
and Exhibits attached hereto and referred to herein are hereby incorporated
herein and made a part hereof for all purposes as if fully set forth herein.
Section 9.11 Severability. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and
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provisions of this Agreement or affecting the validity or enforceability of any
of the terms or provisions of this Agreement in any other jurisdiction. If any
provision of this Agreement is so broad as to be unenforceable, the provision
shall be interpreted to be only so broad as is enforceable.
Section 9.12 Enforcement of Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to seek an injunction or injunctions to prevent breaches of this Agreement and
to enforce specifically the terms and provisions hereof, this being in addition
to any other remedy to which they are entitled at law or in equity.
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IN WITNESS WHEREOF, the parties have executed this Agreement and
caused the same to be duly delivered on their behalf on the day and year first
written above.
FAMILY GOLF CENTERS, INC.
By: /s/ Krishnan P. Thampi
--------------------------------
Name: Krishnan P. Thampi
Title: Chief Financial Officer,
Chief Opertaing Officer,
Executive Vice President,
Assistant Secretary and
Treasurer
FAMILY GOLF ACQUISITION, INC.
By: /s/ Krishnan P. Thampi
--------------------------------
Name: Krishnan P. Thampi
Title:
EAGLE QUEST GOLF CENTERS, INC.
By:/s/ Robert W. Garnett
--------------------------------
Name: Robert W. Garnett
Title: President
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EXHIBIT 23.1(A)
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in this Registration Statement on Form S-3 of our
report dated March 26, 1998 on our audit of the financial statements of Family
Golf Centers, Inc. and subsidiaries 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
May 21, 1998
<PAGE>
EXHIBIT 23.1(B)
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in this 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
May 21, 1998
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Eagle Quest Golf Centers Inc.:
We consent to the inclusion 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 of 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 May 22, 1998 and to the reference to our firm under the heading
"Experts" in the prospectus.
/s/ KPMG
Chartered Accountants
Vancouver, Canada
May 22, 1998
<PAGE>
[FELDMAN, GUTTERMAN, MEINBERG AND COMPANY LETTERHEAD]
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 Company
May 21, 1998
Manhasset, New York
