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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) of the SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-25098
FAMILY GOLF CENTERS, INC.
(NAME OF REGISTRANT AS SPECIFIED)
Delaware 11-3223246
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
538 Broadhollow Road
Melville, New York 11747
(Address of principal executive offices)
(516) 694-1666
(Registrant's telephone number)
Securities registered pursuant to 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value Nasdaq Stock Market
$.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's voting stock (based upon
the closing sales price of such stock) held by nonaffiliates of the Registrant
was $129,282,094 on March 29, 1999. (For purposes of this report, the number of
shares of Common Stock of the Registrant held by non-affiliates was determined
by aggregating the number of shares beneficially held by officers and directors
of the Registrant and by others who, to the Registrant's knowledge, own 10% or
more of the Common Stock, and subtracting such shares from the total number of
shares outstanding).
The Registrant had 26,173,135 shares of Common Stock outstanding as of
March 29, 1999.
Documents incorporated by reference: None.
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THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD LOOKING STATEMENTS THAT
INVOLVE CERTAIN RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS.
PART I
ITEM 1. BUSINESS
GENERAL
Family Golf Centers, Inc., a Delaware corporation incorporated in 1994
("Family Golf" or the "Company"), is the leading consolidator and operator of
golf centers in North America. The Company's golf centers provide a wide
variety of practice and play opportunities, including facilities for driving,
chipping, putting, pitching and sand play. The Company's golf centers typically
offer full-line pro shops, golf lessons instructed by PGA-certified golf
professionals and other amenities such as miniature golf and snack bars to
encourage family participation. The Company has grown from one golf facility in
1992 to 119 as of December 31, 1998, including 10 facilities under
construction. In addition, 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 selectively acquired, constructed and begun
operating complementary sports and family entertainment facilities, including
ice rinks and "Family Sports Supercenters." Family 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. As of
December 31, 1998, the Company operated eight stand-alone ice rink facilities,
managed 16 additional ice rink facilities and operated three Family Sports
Supercenters, with two ice and family entertainment centers under construction.
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:
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 facilities in
28 of the top 30 Metropolitan Statistical Areas ("MSAs") in the United States
and intends to focus its consolidation efforts on extending its operations
throughout the top 30 MSAs.
Facility and Service Enhancement. The Company typically initiates a
capital improvement plan after each acquisition to broaden the scope of
services and products offered. Such improvements have historically increased
revenues and improved operating performance at the golf centers. Improvements
may include enclosing, heating or lighting play areas to lengthen the season
and hours of operation, adding tiers of hitting tees, offering lessons from
PGA-certified golf professionals and adding amenities, such as batting cages,
miniature golf, restaurants, snack bars and video games, designed to appeal to
the whole family, generate additional revenue and increase the frequency and
duration of facility visitation. The Company believes that the quality of its
facilities and its emphasis on customer service differentiate the Company from
its competitors.
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
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with sports and entertainment amenities, including ice rinks, video and virtual
reality games, children's rides, batting cages and other entertainment
activities, to create Family Sports Supercenters. The Company believes that the
addition of these facilities expands the Company's concept of family-oriented
sports entertainment, adds additional sources of revenue, attracts a more
diverse customer base, increases visitation and per capita spending and has the
added benefit of being counterseasonal to the Company's core golf business.
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 ACQUISITIONS
SkateNation Acquisition. On December 2, 1998, the Company consummated the
acquisition of SkateNation, Inc. ("SkateNation"), a wholly-owned subsidiary of
TrizecHahn (USA) Corporation, for $28.9 million (consisting of $17.0 million of
cash and $11.9 million of indebtedness), subject to certain adjustments (the
"SkateNation Acquisition"). Immediately prior to the acquisition, SkateNation
operated six ice rink facilities and managed 16 additional ice rink facilities
throughout the United States.
Golden Bear Acquisition. On July 20 and July 21, 1998, respectively, the
Company acquired Golden Bear Golf Centers, Inc. and IMG Properties, Inc.
(collectively, "Golden Bear"), each of which was a wholly-owned subsidiary of
Golden Bear Golf, Inc. ("GBGI"), for $32.0 million (including certain
indebtedness, capital leases and other liabilities), subject to certain
post-closing adjustments (the "Golden Bear Acquisition"). The Company believes
that, prior to the acquisition, Golden Bear was the third largest operator of
golf driving ranges in North America with 14 golf centers in California,
Florida, Maryland, Michigan, New Jersey, New York, Ohio, Oregon, Pennsylvania
and Texas.
Eagle Quest Acquisition. On June 30, 1998, the Company acquired Eagle
Quest Golf Centers, Inc. ("Eagle Quest") for 1,384,735 shares of the Company's
common stock, par value $.01 per share (the "Common Stock"), subject to certain
post-closing adjustments (the "Eagle Quest Acquisition"). The Company believes
that, prior to the acquisition, Eagle Quest was the second largest operator of
golf driving ranges in North America with 20 golf centers (including two under
construction) in Texas, Washington and Canada.
MetroGolf Acquisition. In February 1998, the Company acquired MetroGolf
Incorporated ("MetroGolf") pursuant to a cash tender followed by a merger (the
"MetroGolf Acquisition"). Prior to the acquisition, MetroGolf operated eight
facilities in California, Colorado, Illinois, New York and Virginia.
GOLF FACILITIES
According to the National Golf Foundation, 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 estimates that in 1997 there were
approximately 2,200 stand-alone driving ranges in the United States, of which
83% were independently owned and operated. The Company believes that the large
size and highly fragmented nature of the golf center industry, combined with
the lack of experience, expertise and financial resources of the existing
owner-operators, present significant opportunities for the Company to continue
acquiring, upgrading and renovating golf centers.
The Company's golf centers are typically larger, more attractive and offer
more amenities than the average golf center. The Company believes that it
attracts customers to its golf centers due to the quality, convenience and
comfort of its facilities and their appeal to the whole family. The golf
centers are designed to provide a wide variety of practice opportunities,
including facilities for driving, chipping, putting, pitching and sand play,
and typically offer full-line pro shops, golf lessons instructed by
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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 Island, 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, videos and
golf-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 Adams Golf.
The Company also sells private label products at its pro shops, including
balls, gloves and other merchandise bearing the Company's logo. In December
1997, the Company acquired Confidence Golf, Inc., a designer and assembler of
premium-grade golf clubs. Confidence golf clubs are sold at the Company's golf
facilities as well as independent pro shops and retailers. In some limited
instances, as with certain plastic golf shoe spikes, the Company acts as a
distributor of golf merchandise both to its facilities and to non-affiliated
third parties.
As of December 31, 1998, the Company operated four regulation 18-hole golf
courses. As of December 31, 1998, the Company operated 26 par-3 or executive
golf courses. The Company is also currently constructing one 9-hole executive
golf course. Most of the courses have a clubhouse, a pro shop, a driving range
and PGA-certified golf instructors on site and banquet facilities or a
restaurant.
Of the Company's facilities, 21 are operated under the name "Golden Bear"
pursuant to a non-exclusive license agreement (the "License Agreement") with a
subsidiary of GBGI (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 Company does not
have the right to open additional Golden Bear golf centers. The License
Agreement expires on December 31, 2008, except that the Company has the right
to terminate the agreement effective December 31, 2000. The License Agreement
is also subject to termination by the Licensor or the Company under certain
other circumstances. Pursuant to the License Agreement, the Company will pay
the Licensor $795,000 per year (based on 21 Golden Bear golf centers in
operation). In addition, if such 21 centers generate Adjusted Gross Revenues
(as defined in the License Agreement) in excess of $30.0 million a year, the
Licensor will receive incentive compensation ranging from 1% to 3% of such
excess revenue. During the term of the License Agreement, the Company will have
the exclusive right to operate golf centers under the name "Golden Bear" within
a 10-mile radius of the Company's Golden Bear golf centers, except with respect
to the Golden Bear golf center located in Carrollton, Texas for which the
exclusive territory is reduced.
As of December 31, 1998, the Company had 10 golf centers under
development. These facilities are located in Bronx, New York; Brooklyn, New
York; Holbrook, Massachusetts; New York City, New York; Federal Way,
Washington; Columbus, Ohio; County Line, Colorado; Green Valley Ranch,
Colorado; Tacoma, Washington; and Coquitlam, British Columbia. The Company
expects to have all of these facilities operational by the end of 1999, except
for the New York City, New York facility which is subject to certain regulatory
approvals and the Brooklyn, New York facility which is subject to a pending
action seeking to overturn a dismissal of an attempt to obtain a temporary
restraining order. See "Risk Factors -- Dependence on Certain Agreements."
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
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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 eight
stand-alone ice rink facilities, manages 16 additional ice rink facilities and
operates three Family Sports Supercenters, including a golf center in Denver,
Colorado recently converted into a Family Sports Supercenter by the addition of
two ice rinks and other family entertainment amenities.
According to the National Hockey League (the "NHL"), there are
approximately 2,200 ice facilities in the United States and approximately 5,500
in Canada. In addition, according to the National Sporting Goods Association,
there are 7.4 million ice skaters in the United States. Furthermore, USA
Hockey, a national hockey association, registered 384,779 hockey players in the
1996-97 season, a 97.2% increase over the 1990-1991 season. The Company
believes that the relatively small number of ice rinks in the United States and
increasing interest in ice-related sports will create a need for additional
facilities. The Company also believes that interest in hockey is increasing as
a result of recent NHL expansion.
The Company anticipates that its ice rink facilities will typically be
designed with the rinks as the main attraction, but with amenities at the
facility to provide family entertainment and generate additional revenues. Such
amenities include a pro shop, video games, a supervised play area for young
children, restaurants and snack bars. The pro shops are stocked with skates,
hockey sticks, jerseys, protective equipment such as helmets and pads and other
skating, hockey and figure skating-related items. The Company generates
revenues at its ice rink facilities by renting the rinks to hockey leagues,
teams and figure skaters, charging admission to its skating facilities for
public skating, providing lessons through USFSA-certified instructors, skate
and equipment rentals and pro shop sales. The Company also generates revenues
from food and beverage sales, video games and birthday and private party
rentals.
In addition to making capital improvements designed to add
revenue-generating amenities, the Company may also make capital expenditures to
improve overall attractiveness of its ice rink facilities and upgrade equipment
to improve efficiency and reduce operating expenses, such as utility costs. In
those instances where the land available to the Company permits and the
demographics are favorable, the Company may add ice rinks and other amenities
to existing golf centers (or vice versa) and make additional improvements to
convert such facilities to Family Sports Supercenters.
The Company acquired its first ice rink in July 1997 as part of its
acquisition (the "LCI Acquisition") of Leisure Complexes, Inc. ("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. On
December 2, 1998, the Company consummated the acquisition of SkateNation, which
operated six ice rink facilities and managed an additional 16 ice rink
facilities throughout the United States. As of December 31, 1998, the Company
owned three ice rink facilities, leased five ice rink facilities and managed an
additional 16 ice rink facilities. In October 1998, the Company completed the
conversion of a golf center in Denver, Colorado into a Family Sports
Supercenter by adding, two NHL-regulation size ice rinks (which are currently
being used as practice facilities by the NHL's Colorado Avalanche and by
world-renowned figure skater Scott Hamilton) and other family entertainment
amenities. As of December 31, 1998, the Company owned one Family Sports
Supercenter and leased two Family Sports Supercenters.
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 has commenced
construction and 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. The
Company expects the Woodbridge facility to be completed by January 1, 2000.
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OPERATIONS
The Company has golf 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 three divisional managers (East, Central and West
Coast). Each golf facility has a general manager who reports to a regional or
divisional manager, one to two assistant managers, a head golf professional, up
to four PGA-certified professionals who instruct golfers, approximately five
full-time staff members and approximately 13 to 20 part-time employees,
depending on the season. Each ice rink facility has a general manager, one
assistant manager, a hockey director, a figure skating director, approximately
four to six other full-time employees and approximately 25 to 35 part-time
employees, depending on the season. Currently, each of the Company's Family
Sports Supercenters employs 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.
The Company utilizes a number of internal controls and procedures to
monitor and safeguard the cash generated by its facilities. The primary control
is a computer system at each facility that can be monitored from corporate
headquarters and that provides point of sale and inventory controls and
management reports on a daily basis. The primary control of all cash accounts
is centralized at corporate headquarters.
In order to meet the Company's continued growth and its need to address a
more stringent control model, Family Golf is implementing a new information
management system that provides a complete end-to-end solution for inventory
management, purchasing and cash management controls, as well as accounts
payable and general ledger systems. This implementation began in the first
quarter of 1999, and is expected to be fully operational by the second quarter
of 1999.
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.
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The Company continues to explore strategic marketing relationships. In
connection with this strategy, the Company entered into a marketing
relationship with American Express Travel Related Services pursuant to which
holders of American Express cards may redeem their accumulated membership
points to earn practice privileges and golf instruction at the Company's
facilities nationwide. In 1998, more than two million participants in the
American Express Awards Program received information on the Company's special
offers. In 1999, over 3 million American Express card holders will have the
opportunity to participate in a Family Golf offer.
The Company was 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 offered Nike Junior Camp programs
at 20 of the Company's sites in 1998.
In November 1998, the Company and The Coca-Cola Company ("Coca-Cola")
entered into an agreement designating Coca-Cola as the exclusive carbonated and
non-carbonated beverage for all Company locations within the United States.
Under the terms of the four-year agreement, Coca-Cola will be the "Official
Soft Drink" for all of the Company's golf, ice and family entertainment centers
and will provide marketing and promotional support to each U.S. site.
LICENSING AND FRANCHISING
In 1996 the Company 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 21 of its golf centers under the name
"Golden Bear" pursuant to the License Agreement with the Licensor. GBGI, the
parent of the Licensor, is a competitor of the Company. The Licensor is
permitted to establish, or license others to establish, Golden Bear golf
centers that compete with the Company's golf centers, including the Company's
Golden Bear golf centers, provided that, the Company has the exclusive right to
operate Golden Bear golf centers within a 10-mile radius of the Company's
Golden Bear golf centers (except with respect to the Golden Bear golf center
located in Carrollton, Texas for which the exclusive territory is reduced).
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 December 31, 1998, approximately 3,719 employees,
of which 2,076 were full-time employees and 1,643 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
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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 material non-compliance or
violation by the Company 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 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.
RISK FACTORS
ACQUISITION AND GROWTH STRATEGY; RISKS ASSOCIATED WITH INTEGRATING NEW
FACILITIES
The Company's ability to significantly increase revenue, 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 can be readily
integrated into the Company's operating structure. The Company's inability to
efficiently integrate facilities or to successfully operate within the ice rink
and family entertainment industries could have a material adverse effect on the
Company's financial condition and results of operations. In addition, a number
of the facilities which the Company has acquired have, and facilities it may
acquire in the future may have, experienced losses. After giving effect on a
pro forma basis to certain acquisitions consummated after January 1, 1998 as if
they had occurred on January 1, 1998, the Company would have had a net loss of
approximately $9.9 million (as compared to a net loss of $5.0 million on a
historical basis) for the year ended December 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
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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 will operate profitably and will not materially adversely
affect the Company's financial condition and results of operations.
ADDITIONAL FINANCING REQUIREMENTS
The Company anticipates that it will need to raise substantial additional
capital in the future to continue its long-term expansion plans. There can be
no assurance that the Company will be able to obtain additional financing on
favorable terms, or at all.
SUBSTANTIAL LEVERAGE
As of December 31, 1998, the Company had approximately $250.0 million
aggregate principal amount of indebtedness outstanding, including $115 million
aggregate principal amount of 5 3/4% convertible subordinated notes (the
"Notes") issued by the Company during the fourth quarter of 1997 and $67.7
million of indebtedness under the Company's Credit Facility (as defined). In
addition the Credit Facility provides for borrowings of up to $100.0 million,
subject to compliance with certain financial tests and ratios. Subject to
certain restrictions set forth in the Credit Facility, the Company may also
incur additional indebtedness in the future for acquisitions, capital
expenditures and other corporate purposes. The Company's ability to meet its
debt service obligations and to reduce its total indebtedness will be dependent
upon the Company's future performance, which will be subject to general
economic conditions, industry cycles and financial, business and other factors
affecting the operations of the Company, many of which are beyond its control.
There can be no assurance that the Company's business will continue to generate
sufficient cash flow at or above current levels. If the Company is unable to
generate cash flow from operations in the future to service its debt, it may be
required, among other things, to seek additional financing in the debt or
equity markets, to refinance or restructure all or a portion of its
indebtedness, including the Notes, to sell selected assets or to reduce or
delay planned capital expenditures or acquisitions. There can be no assurance
that any such financing, refinancing or sale of assets would be available on
terms satisfactory to the Company, if at all.
RESTRICTIONS IMPOSED BY CREDIT FACILITY
The Credit Facility and certain instruments governing the Company's
indebtedness include covenants that, among other things, restrict the ability
of the Company to incur additional indebtedness, dispose of assets, merge or
consolidate with another entity, create liens, pay dividends, or make
investments, acquisitions or capital expenditures. Under the Credit Facility,
the Company is also required to maintain compliance with certain financial
tests and ratios and borrowings under the Credit Facility will be limited by
such tests and there can be no assurance that all or a portion of the $100.0
million will be available when required by the Company. In addition, the Credit
Facility restricts the Company's ability to prepay the Company's other
indebtedness. The ability of the Company to comply with such provisions may be
affected by events that are beyond the Company's control. 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. Moreover, as a result of these covenants, the ability of the
Company to respond to changing business and economic conditions and to secure
additional financing, if needed, may be restricted significantly, and the
Company may be prevented from engaging in transactions that might otherwise be
considered beneficial to the Company.
DEPENDENCE ON THE GOLF INDUSTRY AND DISCRETIONARY CONSUMER SPENDING
Although the Company has expanded its business outside the golf industry,
the Company is highly dependent on the golf industry, and the public's interest
in utilizing golf practice centers, for the
8
<PAGE>
generation of its revenues and cash flow. 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. In addition, the amount spent by consumers on
discretionary items, such as the family entertainment activities offered by the
Company, have historically been dependent upon levels of discretionary income,
which may be adversely affected by general economic conditions. A decrease in
consumer spending on golf and other family entertainment activities could have
a material adverse effect on the Company's financial condition and results of
operations.
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 21 of its golf centers under the name
"Golden Bear" pursuant to the License Agreement with the Licensor. GBGI, the
parent of the Licensor, is a competitor of the Company. The Licensor is
permitted to establish, or license others to establish, Golden Bear golf
centers that compete with the Company's golf centers, including the Company's
Golden Bear golf centers, provided that, with one exception, the Company has
the exclusive right to operate Golden Bear golf centers within a 10-mile radius
of the Company's Golden Bear golf centers. There can be no assurance that
competition will not adversely affect the Company's business or ability to
acquire additional properties.
DEPENDENCE ON CERTAIN AGREEMENTS
The future success of the business and operations of the Company is
dependent, in part, upon certain key operating agreements, including its real
property leases, management agreements with respect to certain municipal
facilities and the License Agreement. Certain of these agreements are
terminable at will and others may be terminated prior to their scheduled
expiration should the Company default in its obligations thereunder. The
termination or non-renewal of any of these agreements may have a material
adverse effect on the Company. In particular, certain of the Company's
management agreements with municipalities require the Company to make capital
improvements to the facilities under management.
If any of these management agreements are terminated, in most cases the
municipality may retain, and is not obligated to pay the Company for the value
of, such capital improvements. Unless reimbursed,
9
<PAGE>
the Company would immediately have to write-off, for accounting purposes, the
undepreciated value of these capital improvements (which aggregate
approximately $15.0 million as of December 31, 1998), which are currently being
depreciated and amortized over the life of the relevant management agreement.
In addition, the Company operates 21 of its golf centers under the name
"Golden Bear" pursuant to the License Agreement with the Licensor. Termination
of the License Agreement could adversely affect the Company's Golden Bear golf
centers and, possibly, the Company. The License Agreement expires December 31,
2008, subject to termination by the Company effective on December 31, 2000. The
License Agreement is also subject to termination by the Company or the Licensor
under certain other circumstances. The value of the "Golden Bear" name is
dependent, in part, upon the continued popularity of Jack Nicklaus.
Accordingly, the occurrence of any event which diminishes the reputation of Mr.
Nicklaus and the related "Golden Bear" symbol could adversely affect the
Company's Golden Bear golf centers. GBGI has disclosed in its public filings
that it is a defendant in substantial class action litigation involving claims
under the federal securities laws.
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 material non-compliance or violation by the
Company of any environmental laws, ordinances or regulations and the Company
believes that it is in substantial compliance with all such laws, ordinances
and regulations applicable to its properties or operations. 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,
2001. The Company owns key person life insurance in the amount of $7.25 million
on the life of Mr. Chang. In addition, it is an event of default under the
Credit Facility and certain other indebtedness 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 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.
CONTROL BY CURRENT STOCKHOLDER
As of March 26, 1999, Dominic Chang beneficially owned 3,749,001 shares of
Common Stock, constituting approximately 14.3% of such outstanding shares. Mr.
Chang is, therefore, 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.
10
<PAGE>
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.
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, $.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, there can be no assurance that the Company will not do
so in the future. The ability of the Board of Directors to issue preferred
stock could have the effect of delaying, deferring or preventing a change of
control of the Company or the removal of existing management and, as a result,
could prevent the stockholders of the Company from being paid a premium over
the market value for their shares of Common Stock. The Company's By-Laws
contain provisions requiring advance notice of stockholder proposals and
imposing certain procedural restrictions on stockholders wishing to call a
special meeting of stockholders. Under the Credit Facility and the Term Debt
(as defined), it is an event of default if Mr. Chang is not Chairman of the
Board, Chief Executive Officer and beneficial owner of at least 5% of the
outstanding Common Stock. In addition, the Indenture (the "Indenture") with
respect to the Notes 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).
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).
11
<PAGE>
ITEM 2. PROPERTIES.
The Company maintains its executive offices in approximately 16,874 square
feet of space in Melville, New York pursuant to a lease expiring in June 2008.
As of December 31, 1998, the Company owned land, subject to mortgages, on which
40 of its facilities are located. Information concerning such properties is set
forth below.
<TABLE>
<CAPTION>
APPROXIMATE DATE OPENED
FACILITY LOCATION ACRES OWNED OR ACQUIRED
- --------------------------- ------------- ------------
<S> <C> <C>
Queensbury, NY 200 May 1995
Greenville, SC 24 May 1995
Glen Allen, VA 10 Aug. 1995
Duluth, GA 56 Aug. 1995
Alpharetta, GA 26 Aug. 1995
Valley View, OH 5 Nov. 1995
Mesa, AZ 39 Feb. 1996
Flemington, NJ 17 March 1996
Yorktown Heights, NY 14 April 1996
Tucson, AZ 18 June 1996
West Palm Beach, FL 32 June 1996
Fountain Inn, SC 283 Aug. 1996
Flanders, NJ 24 Aug. 1996
South Easton, MA 70 Sept. 1996
Margate, FL 17 Oct. 1996
Milwaukee, WI 65 Nov. 1996
Mainville, OH 32 Dec. 1996
Southampton, PA 12 June 1997
Palm Royale, CA 25 June 1997
Federal Way, WA (1) 22 Oct. 1997
Evendale, OH 16 Dec. 1997
Elk Grove, CA 20 Dec. 1997
Kansas City, KS 25 Jan. 1998
Wichita, KS 25 Jan. 1998
Leesburg, VA 110 Feb. 1998
Holbrook, MA (1) 76 Feb. 1998
Carlsbad, CA 12 April 1998
Fort Worth, TX 52 June 1998
Kent, WA 13 June 1998
Tacoma, WA 15 June 1998
Douglasdale, AB 96 June 1998
Nanaimo, BC 35 June 1998
Pittsburgh, PA 27 July 1998
Kansas City, MO 25 Sept. 1998
Coyote Creek, BC 72 Oct. 1998
Voorhees, NJ 18 Oct. 1998
Thunder Bay, ON 3 Dec. 1998
Vaughan, ON 39 Dec. 1998
Richmound, VA 2.5 Dec. 1998
Glen Allen, VA 3 Dec. 1998
</TABLE>
- ----------
(1) Under construction.
12
<PAGE>
As of December 31, 1998, the Company leased the land on which 73 of its
facilities are located. None of such leases are with affiliates of the Company.
Information concerning such leases is set forth below.
<TABLE>
<CAPTION>
APPROXIMATE LEASE DATE OPENED
FACILITY LOCATION ACRES LEASED EXPIRATION DATE OR ACQUIRED
- ----------------------- -------------- ------------------------ ------------
<S> <C> <C> <C>
Farmingdale, NY 13 February 28, 2002 (1) March 1992
Wayne, NJ 16 February 28, 2003 July 1993
Elmsford, NY 27 February 27, 2019 (2) July 1994
Utica, NY 18 December 7, 2019 (1) Dec. 1994
Clay, NY 23 June 30, 2005 (3) Jan. 1995
Gilroy, CA 36 October 31, 2002 (4) Nov. 1995
Valley View, OH 14 November 8, 2010 (2) Nov. 1995
Henrietta, NY 28 October 10, 2020 (1) Jan. 1996
Virginia Beach, VA 81 March 20, 2027 (5) March 1996
Indian River, VA 14 December 31, 2002 (6) May 1996
Fairfield, OH 24 October 17, 2002 (2) June 1996
St. Louis, MO 42 February 28, 2002 (1) June 1996
Alviso, CA 25 March 31, 2013 (2) July 1996
Westminster, CA 17 February 28, 2008 (2) July 1996
Englewood, CO 55 June 30, 2017 (7) Aug. 1996
Glen Burnie, MD 38 December 31, 2012 Sept. 1996
Palm Desert, CA 17 July 31, 2000 (8) Feb. 1997
Raleigh, NC 20 March 11, 2022 (4) March 1997
Olney, MD 150 March 25, 2007 March 1997
Green Oaks, TX 29 October 31, 2001 (9) March 1997
Rio Salado, AZ 70 December 8, 2015 (2) April 1997
San Bruno, CA 15 December 31, 2003 (10) April 1997
Milpitas, CA 16 August 5, 2009 June 1997
Carver, MA 19 December 31, 2002 June 1997
Lake Grove, NY 54 May 31, 2042 July 1997
Columbus, OH 37 March 21, 2005 (1) Aug. 1997
Commack, NY 18 February 28, 2010 (10) Sept. 1997
Greenville, SC 29 May 31, 2007 (11) Sept. 1997
Syosset, NY 3 July 31, 2001 (16) Sept. 1997
County Line, CO (24) 25 May 1, 2018 Oct. 1997
Warrenville, IL 59 October 31, 2015 (12) Dec. 1997
Stuart, FL 26 June 28, 2002 (17) Jan. 1998
Raleigh, NC 6 December 9, 2047 Feb. 1998
Colorado Springs, CO 24 December 31, 2022 Feb. 1998
Chicago, IL 23 July 14, 2008 Feb. 1998
Palms, San Diego CA 5 December 16, 2002 (1) Feb. 1998
Rocky Point, NY 17 December 31, 2007 (4) Feb. 1998
San Diego, CA 4.63 April 30, 2002 (4) Feb. 1998
Suisin, CA 20 August 1, 2030 (13) Feb. 1998
New Rochelle, NY (24) 3 December 31, 2023 (2) March 1998
Austin, TX 27 May 14, 2004 (2) June 1998
Dallas, TX 28 January 24, 2021 (15) June 1998
Fort Worth, TX 23 April 1, 2000 (2) June 1998
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE LEASE DATE OPENED
FACILITY LOCATION ACRES LEASED EXPIRATION DATE OR ACQUIRED
- ---------------------- -------------- ------------------------ -------------
<S> <C> <C> <C>
Houston, TX 20 October 31, 2002 (2) June 1998
Houston, TX 25 May 16, 2007 (2) June 1998
Kingwood, TX 65 May 15, 2010 (20) June 1998
San Antonio, TX 21 November 30, 2007 (13) June 1998
San Antonio, TX 25 December 31, 2028 (1) June 1998
Olympia, WA 35 August 31, 2002 (2) June 1998
Tumwater, WA 36 August 1, 2025 June 1998
Calgary, AB 2 June 30, 2000 (10) June 1998
Kelowna, BC 13 August 8, 2021 (22) June 1998
Vancouver, BC 57 April 30, 2038 June 1998
Moreno Valley, CA 17 September 10, 2006 (2) July 1998
Markham, Ontario 8 August 31, 2005 July 1998
Lake Park, FL 28 December 31, 2006 July 1998
North Lauderdale, FL 18 December 31, 2015 (13) July 1998
College Park, MD 21 December 23, 2015 July 1998
Plymouth, MI 42 January 31, 2017 July 1998
Royal Oaks, MI 13 December 31, 2003 (23) July 1998
Toms River, NJ 7 August 5, 2016 (2) July 1998
Williamsville, NY 16 February 28, 2007 (2) July 1998
Dayton, OH 48 September 8, 2016 (20) July 1998
Polaris, OH 33 December 31, 2008 July 1998
Beaverton, OR 20 December 31, 2016 July 1998
Monroeville, PA 27 April 14, 2025 July 1998
Carrollton, TX 22 September 10, 2011 (2) July 1998
Sacramento, CA 14 September 28, 2015 (2) Sept. 1998
Shelton, CT 18 April 30, 2008 (9) Dec. 1998
Simsbury, CT 17 March 31, 2019 (7) Dec. 1998
Odenton, MD 9 November 30, 2020 (18) Dec. 1998
Reston, VA 4 December 1, 2003 (7) Dec. 1998
Dale City, VA 7 February 28, 2025 (19) Dec. 1998
</TABLE>
- ----------
(1) The Company has the option to extend the lease term for three additional
five-year periods.
(2) The Company has the option to extend the lease term for two additional
five-year periods.
(3) The Company has the option to extend the lease term for one ten-year
period plus four additional five-year periods.
(4) The Company has the option to extend the lease term for one five-year
period.
(5) This lease is for land on which part of the Virginia Beach, Virginia golf
center is located.
(6) The Company has the option to extend the lease term for six additional
ten-year periods and one three year, six-month period.
(7) The Company has the option to extend the lease term for two ten-year
periods.
(8) The Company has the option to purchase the sublandlord's right to the
leased premises. The original lease expires on July 31, 2000 with three
five-year renewal options.
(9) The Company has the option to purchase sublandlords right to the leased
premises. The original lease expires on March 31, 2012 with one
fifteen-year renewal option.
(10) The Company has the option to extend the lease term for four five-year
periods.
(11) The Company has the option to extend the lease term for three ten-year
periods.
(12) The Company has the option to extend the lease term for one one-year
period.
(13) The Company has the option to extend the lease term for one ten-year
period.
(14) The Company has the option to extend the lease term for one twelve-year
six-month period.
14
<PAGE>
(15) The Company has the option to extend the lease term for six five-year
periods.
(16) The Company has the option to extend the lease for two periods of eight
years eight months and twelve years, respectively.
(17) The Company is required to purchase the leased premises prior to
expiration of the lease.
(18) The Company has the option to extend the lease for two additional 15 year
periods.
(19) The Company has the option to extend the lease for one additional ten
year period.
(20) The Company has the option to purchase the leased premises prior to
expiration of the lease.
(21) The Company has the option to extend the lease for three additional three
year periods.
(22) The Company has the option to extend the lease for an additional 30 year
period.
(23) The Company has the option to extend the lease for one period of ten
years and two five year periods.
(24) Under construction.
After giving effect to renewal options, none of the Company's current
leases is scheduled to expire until 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. For
additional information concerning the leases, see Note H to the Financial
Statements included elsewhere herein.
The Company operates twelve facilities for municipalities pursuant to
concession licenses. These facilities are located in Douglaston, New York; El
Segundo, California; Denver, Colorado; Mahwah, New Jersey; Randall's Island,
New York; Bronx, New York; Miami, Florida; Fremont, California; Encino,
California; Evergreen, Colorado; Overland Park, Colorado and Seattle,
Washington. In addition, the Company is constructing six facilities at the
following locations for municipalities pursuant to concession licenses:
Brooklyn, New York; New York City, New York; Green Valley Ranch, Colorado;
Woodbridge, New Jersey; Tacoma Firs, Washington and Coquitlam, British
Columbia. The Company's concession license for the Douglaston, New York golf
center, the concession license for the Randall's Island, New York golf center,
and the concession license for the Bronx, New York golf center are terminable
at will. The Company's management agreement with the City of El Segundo for the
El Segundo golf facility terminates on February 4, 2001.
Many of the 16 management agreements which were in effect as of December
31, 1998 and pursuant to which the Company manages municipally-owned ice
arenas, have a term of one year or less, or are terminable by either the
municipality or the Company upon 30 days written notice.
ITEM 3. 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 other
than routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
There were no matters submitted to a vote of stockholders during the
fourth quarter of the fiscal year ended December 31, 1998.
15
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON STOCK OF THE REGISTRANT AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock, par value $.01 per share (the "Common Stock"),
commenced trading on the Nasdaq National Market on November 17, 1994 under the
symbol "FGCI." The following table sets forth, for the periods indicated, the
high and low last sales prices for the Company's Common Stock as reported by
the Nasdaq National Market and as retroactively adjusted for a three-for-two
stock split effected in the form of a stock dividend paid on May 4, 1998 to
holders of record as of April 20, 1998.
<TABLE>
<CAPTION>
STOCK PRICE
---------------------
HIGH LOW
-------- ----------
<S> <C> <C>
Calendar Year 1997:
First Quarter ............... 21 7/16 11 1/2
Second Quarter .............. 19 9/16 11 3/16
Third Quarter ............... 19 3/16 14 11/16
Fourth Quarter .............. 22 3/16 16 1/2
Calendar Year 1998:
First Quarter ............... 27 3/4 19 3/16
Second Quarter .............. 31 9/16 23 1/4
Third Quarter ............... 27 15 1/8
Fourth Quarter .............. 24 1/2 10
</TABLE>
As of March 29, 1999, there were approximately 389 holders of record of
the Common Stock. The Company believes there were in excess of 400 beneficial
owners of the Common Stock. As of March 29, 1999, the last sales price for the
Company's Common Stock as reported by the Nasdaq National Market was $7.25.
Except for a three-for-two stock split effected in the form of a stock
dividend paid on May 4, 1998 to holders of record as of April 20, 1998, the
Company has neither declared nor paid dividends on its Common Stock and does
not intend to declare or pay any dividends in the foreseeable future. The
Company currently intends to retain earnings, if any, for the development and
expansion of its business. 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 position of the Company, general economic
conditions and other pertinent factors. In addition, the Company's Credit
Facility prohibits the payments of any dividends, unless the Company would be
in compliance with the Credit Facility, including certain financial ratios,
after giving effect to such dividends.
During the year ended December 31, 1998, the Company issued an aggregate
of 1,646,829 shares of Common Stock as part of the consideration for 11
separate acquisitions. Such shares were issued in the amounts, on the dates,
and for the securities or assets listed below: (i) February 23, 1998, 9,100
shares, the Wright Brothers golf center in Holbrook, Massachusetts; (ii) March
13, 1998, 23,500 shares, Gyan Kalwani, the Laguna Creek golf center located in
Sacramento, California; (iii) May 15, 1998, 10,118 shares, the acquisition of
all of the outstanding securities of Pardoc Vending Corp.; (iv) May 15, 1998,
750 shares, the acquisition of certain assets of the Blue Line Pro Shop; (v)
June 30, 1998, l,384,735 shares, the acquisition of all of the outstanding
shares of Eagle Quest Golf Centers, Inc.; (vi) May 21, 1998, 3,000 shares, to
enter a long term lease to construct and operate a golf center in Shelton,
Connecticut; (vii) May 1, 1998, 85,376 shares, the acquisition of the right to
construct and/or manage the golf facilities located at Overland Park, in
Overland, Colorado, the Evergreen Golf Course, in Evergreen, Colorado and the
Green Valley Ranch Golf Course, in Green Valley Ranch, Colorado; (viii)
September 8, 1998, 40,000 shares, the acquisition of certain assets of
Chillicothe Properties, Inc., including a golf center in Kansas City, Missouri;
(ix) September 22, 1998, 36,250 shares, the acquisition of all of the
outstanding stock of Pinnacle Entertainment, Inc., a company which operates
coin-operated machines, from the
16
<PAGE>
former stockholders of such company; (x) October 13, 1998, 24,000 shares, the
acquisition of certain assets of Stafford Family Park Partners I, LP, including
a golf center in Voorhees, New Jersey; and (xi) December 13, 1998, 30,000
shares, the acquisition of certain assets of the Thunderbay golf center in
Thunderbay, Ontario. Such issuances were not registered under the Securities
Act of 1933 (the "Act") in reliance on the exemptions provided by Section 4(2)
or Regulation S of the Act. None of such issuances involved any general
solicitation and each of the recipients of the Common Stock has represented
that such recipient understands that the Common Stock may not be sold or
otherwise transferred absent registration under the Act or an exemption
therefrom and each certificate representing shares of such Common Stock bears a
legend to such effect.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five years ended December
31, 1994, 1995, 1996, 1997 and 1998 were derived from audited financial
statements of the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ------------ ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenue ............................. $ 6,362 $12,432 $ 28,052 $ 72,997 $122,164
Operating expense ......................... 4,215 6,614 13,335 37,386 62,451
Cost of merchandise sold .................. 750 1,779 4,540 12,366 20,330
Selling, general and administrative
expenses ................................ 548 1,242 4,760 12,630 11,723
Merger, acquisition, integration and
other related charges ..................... 7,752
------- ------- -------- -------- --------
Operating income (loss) ................... 849 2,797 5,417 10,615 19,908
Interest expense .......................... (313) (939) (383) (3,863) 11,309
Other income .............................. 16 66 2,172 1,659 1,938
------- ------- -------- -------- --------
Income (loss) before income taxes
minority interest, extraordinary
item and cumulative effect of a
change in accounting principle ............ 552 1,924 7,206 8,411 10,537
Income tax expenses (benefit) .............. (65) 669 2,884 5,142 8,600
------- ------- -------- -------- --------
Income (loss) before minority
interest, extraordinary item and
cumulative effect of a change in
accounting principle ...................... 617 1,255 4,322 3,269 1,937
Minority interest in (income) loss ......... (129)
Extraordinary item (net of tax
effect) ................................... (181) (4,890)
------- ------- -------- -------- --------
Cumulative effect of a change in
accounting principle ...................... (2,035)
--------
Net income (loss) .......................... $ 488 $ 1,074 $ 4,322 $ 3,269 (4,988)
======= ======= ======== ======== ========
Net income (loss) per share before
extraordinary item ........................ 0.09 0.16 0.27 0.16 0.08
Extraordinary item (net of tax
effect) ................................... (0.02) (0.21)
Cumulative effect of a change in
accounting principle ...................... (0.08)
------- ------- -------- -------- --------
Net income (loss) per share ................ $ 0.09 $ 0.14 $ 0.27 $ 0.16 $ (0.21)
======= ======= ======== ======== ========
Weighted average number of
common shares outstanding ................. 5,454 7,907 15,905 19,814 23,855
======= ======= ======== ======== ========
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance Sheet Data:
Cash and cash equivalents and short
term investments .......................... $ 2,296 $23,121 $ 39,313 $ 62,278 $ 21,566
Working capital ............................ (204) 20,598 36,643 61,618 30,115
Total assets ............................... 16,077 61,582 171,698 363,036 572,040
Short-term borrowings ......................
Total long-term debt, including
current maturity .......................... 6,328 8,193 21,983 $165,836 249,571
Total stockholders' equity ................. $ 7,234 $49,388 $144,356 $178,273 289,283
</TABLE>
18
<PAGE>
ITEM 7. 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
North America. The Company's golf centers provide a wide variety of practice
and play opportunities, including facilities for driving, chipping, putting,
pitching and sand play. The Company's golf centers typically offer full-line
pro shops, golf lessons instructed by PGA-certified golf professionals and
other amenities such as miniature golf and snack bars to encourage family
participation. The Company has grown from one golf facility in 1992 to 119 as
of December 31, 1998, including 10 facilities under construction. In addition,
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 selectively acquired, constructed and begun operating complementary sports
and family entertainment facilities, including ice rinks and "Family Sports
Supercenters." Family 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. As of December 31, 1998,
the Company operated eight stand-alone ice rink facilities, managed 16
additional ice rink facilities and operated three Family Sports Supercenters.
The Company has opened or acquired facilities at varying times over the
past several years. As a result of changes in the number of facilities open
from period to period, the seasonality of operations, the timing of
acquisitions, the completion of the Company's initial public offering of Common
Stock in November 1994 (the "Initial Public Offering"), the public offering of
Common Stock in December 1995 (the "1995 Public Offering"), the public offering
of Common Stock 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 "Note Offering"), the public offering of Common Stock in July 1998
(the "1998 Offering") and the expansion of the Company's business to include
ice rinks and Family Sports Supercenters, results of operations for any
particular period may not be indicative of the results of operations in the
future.
Most of the Company's revenue from its golf centers are derived from
selling tokens and debit cards for use in automated range-ball dispensing
machines, pro shop merchandise sales, charging for rounds of miniature golf,
golf lessons and management fees. The Company also derives revenue from its
golf centers from food and beverage sales, video games and batting cages. The
Company derives revenue from its golf courses from golf club membership fees,
fees for rounds of golf and golf lessons, pro shop merchandise sales and from
food and beverage sales at the clubhouses. The Company derives revenue from its
ice rinks by renting the rinks to hockey leagues and teams and figure skaters,
charging admission to its skating facilities for public skating, providing
lessons through USFSA-certified instructors, skate equipment rentals and pro
shop merchandise sales, as well as from food and beverage sales and video
games. The Company derives revenue from its Family Sports Supercenters from
substantially the same sources as described above. As a result of their greater
size and number of attractions, the Company's Family Sports Supercenters are
expected to generate significantly more revenue than individual golf centers,
and are expected to generate a majority of their revenue in the first and
fourth quarters of each calendar year.
On June 30, 1998, the Company issued 1,384,735 shares of its Common Stock
in exchange for all outstanding common stock, options and warrants of Eagle
Quest. This exchange, which qualified as a tax-free reorganization for federal
income tax purposes, has been accounted for as a pooling-of-interests
combination and, accordingly, the consolidated financial statements for periods
prior to the combination have been restated to include the combined results of
operations, financial position and cash flows of Eagle Quest (which was
incorporated in February 1996) as though it had been a part of the Company
since inception. Under the pooling-of-interests method, the assets and
liabilities of Eagle Quest are carried at their historical amounts and the
historical operating results of Eagle Quest are combined with those of Family
Golf for all periods presented. All information presented below reflects such
combination.
19
<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>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Operating revenues ................................................. 76.3% 74.8% 75.7%
Merchandise sales .................................................. 23.7 25.2 24.3
Total revenue ...................................................... 100.0 100.0 100.0
Operating expenses ................................................. 62.3 68.5 67.5
Cost of merchandise sold ........................................... 68.2 67.2 68.6
Selling, general and administrative expenses ....................... 17.0 17.3 9.6
Merger, acquisition, integration and other related charges ......... -- -- 6.3
Income from operations ............................................. 19.3 14.5 16.3
Interest expense ................................................... (1.3) (5.3) (9.3)
Other income ....................................................... 7.7 2.3 1.6
Income before income taxes extraordinary item and cumulative effect
of a change in accounting principle ............................... 25.7 11.5 8.6
Income tax expense ................................................. 10.3 7.0 7.0
Income before extraordinary items and cumulative effect of a change
in accounting principle ........................................... 15.4 4.5 1.6
Extraordinary item ................................................. -- -- 4.0
Preopening expenses (net of tax effect) ............................ -- -- 1.7
Net income (loss) .................................................. 15.4% 4.5% 4.1%
</TABLE>
TWELVE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1997
At varying times during 1998 and in 1997, the Company opened or acquired
golf centers, ice rinks and family entertainment centers. Notably, the Company
completed the acquisition of (i) MetroGolf, an owner and operator of eight golf
centers, in February 1998; (ii) Eagle Quest, an owner and operator of 18 golf
centers, in June 1998; (iii) Golden Bear, an owner and operator of 14 golf
centers, in July 1998; and (iv) SkateNation, an owner and operator of six ice
rink facilities and a manager of 16 ice rink facilities, in December 1998. As a
result of these and other acquisitions, significant renovations to acquired
facilities subsequent to their purchase by the Company and new facility
openings, the comparison between 1998 and 1997 may not be meaningful.
Total revenue for the twelve months ended December 31, 1998 was $122.2
million as compared to $73.0 million for the same period in 1997, an increase
of $49.2 million (or 67.4%). Total revenue for the full year in 1998 of $122.2
million was comprised of $71.8 million in golf operating revenues, $20.7
million in non-golf operating revenues and $29.7 million of merchandise sales.
Total revenue for 1997 of $73.0 million was comprised of $46.3 million in golf
operating revenues, $8.3 million in non-golf operating revenues and $18.4
million in merchandise sales. The overall increase in revenue was attributable
to having additional golf centers, ice rinks and Family Sports Supercenters in
operation during the 1998 period, as well as an overall increase in revenue at
those sites owned in both 1997 and 1998. Total revenue for the 38 golf centers
operating for the full twelve months ended December 31, 1998 and 1997 increased
6.1% to $50.5 million in the 1998 period from $47.7 million in the 1997 period.
The increase in revenue for these golf centers was primarily due to stronger
merchandise and golf instruction sales and better winter weather conditions in
the Northeast and Southeast regions, partially offset by adverse weather
attributed to the El Nino effect on the West Coast. Revenue for the four golf
centers operated by Eagle Quest for the full twelve month period decreased by
30.6%, while revenue for the 34 golf centers operated by Family Golf increased
by 9.2%. The increase in non-golf revenue in 1998 from 1997 resulted primarily
from an increase in the number of facilities owned or operated. Comparison of
non-golf revenue between 1998 and 1997 may not be meaningful.
Operating revenue, consisting of all sales except merchandise sales,
amounted to $92.5 million for the twelve months ended December 31, 1998, as
compared to $54.6 million for the comparable 1997 period, an increase of $37.9
million (69.4%). The increase in operating revenue was primarily attributable
to
20
<PAGE>
having additional golf centers, ice rinks and Family Sports Supercenters in
operation during the 1998 period, as well as an overall increase in revenue at
those sites owned in both 1997 and 1998. Total operating revenue for the 38
golf centers operating for the full twelve months ended December 31, 1998 and
1997 increased 2.9% to $30.6 million in the 1998 period from $29.5 million in
the 1997 period. Operating revenue for the four Eagle Quest golf centers
decreased by 15.3% while operating revenue for the 34 Family Golf centers
increased by 4.1%. Non-golf revenue from the Company's Family Sports
Supercenters and ice rinks totaled $21.4 million for the twelve months ended
December 31, 1998 and $8.3 million in the comparable 1997 period.
Merchandise sales, consisting of golf clubs, balls, bags, gloves, videos,
apparel and related accessories, amounted to $29.7 million for the twelve
months ended December 31, 1998 as compared to $18.4 million for the comparable
1997 period, an increase of $11.3 million (or 61.2%). The increase in
merchandise sales was primarily due to having additional golf centers, ice
rinks, and Family Sports Supercenters in operation during the 1998 period, as
well as an overall increase in revenue at those sites owned in both 1997 and
1998. Total merchandise sales for the 38 golf centers operating for the full
twelve months ended December 31, 1998 and 1997 increased 12.2% to $18.3 million
in the 1998 period from $12.5 million in the 1997 period, due to the increased
emphasis placed by the Company on improving pro shop sales, improved purchasing
procedures and increased promotion. Merchandise sales for the four Eagle Quest
golf centers decreased by 46.7% primarily due to lack of pro shop inventory in
the first half of 1998 as a result of Eagle Quest's working capital shortage.
Merchandise sales for the 34 Family Golf centers increased by 19.7% for the
twelve month period ended December 31, 1998.
Operating expenses, consisting of operating wages and employee costs, land
rent, depreciation of golf driving range facilities and equipment, utilities
and all facility operating costs, increased to $62.5 million (67.5% of
operating revenue) in the 1998 period from $37.4 million (68.5% of operating
revenue) in the 1997 period, an increase of $25.1 million (67.0%). The increase
in operating expenses was primarily due to the operating costs of locations
that were operated by the Company during the 1998 period which were not owned
in the 1997 period.
The cost of merchandise sold increased to $20.3 million (68.6% of
merchandise sales) in the 1998 period from $12.4 million (67.2% of merchandise
sales) in the comparable 1997 period. The overall increase in the cost of
merchandise sold of $7.9 million (64.4%) was primarily due to the higher level
of merchandise sales. The increase in cost of merchandise sold as a percentage
of merchandise sales is primarily due to the higher cost of goods sold at the
Eagle Quest locations in 1997.
Selling, general and administrative expenses for the twelve months ended
December 31, 1998 amounted to $11.7 million (9.6% of total revenue) compared to
$12.6 million (17.3% of total revenue) in 1997, a decrease of $900,000. The
decrease in selling, general and administrative expenses from 1997 to 1998 and
as expressed as a percentage of total revenue was a result of the elimination
of duplicative overhead expenses at Eagle Quest and due to the substantial
increase in revenues and a relatively low corresponding incremental increase in
certain selling, general and administrative costs at Family Golf.
The Company incurred $7.8 million (6.3% of total revenue) of merger,
acquisition, integration and other related charges relating to the acquisition
of Eagle Quest by the Company on June 30, 1998. Included in these costs were:
$3.7 million of fees and professional expenses, $1.4 million of severance and
compensation expenses, $2.7 million of costs related to the integration of
Eagle Quest sites and other write-offs.
Interest expense increased to $11.3 million for the twelve months ended
December 31, 1998 from $3.9 million in the comparable 1997 period. Other
income, primarily interest income, increased to $1.9 million in the 1998 period
from $1.7 million in the 1997 period. The increase in interest expense was
primarily due to the increase in debt in 1998 from the sale of $115.0 million
of the Notes in October 1997 and indebtedness incurred in 1998 in conjunction
with the acquisitions of MetroGolf, Eagle Quest, Golden Bear and SkateNation.
Excluding the merger, acquisition, integration and other related expenses,
the Company had operating income of $27.7 million for the twelve months ended
December 31, 1998, as compared to
21
<PAGE>
operating income of $10.6 million in the comparable 1997 period. Inclusive of
the acquisition related charges, income before income taxes, extraordinary item
and cumulative effect of a change in accounting principle for the twelve months
ended December 31, 1998 was $10.5 million. Earnings before income taxes,
extraordinary item and cumulative effect of change in accounting principle,
excluding merger, acquisition, integration and other related expenses, for the
twelve months ended December 31, 1998 amounted to $18.3 million, as compared to
$8.4 million in the comparable 1997 period.
In the third quarter of 1998, the Company incurred a loss on the
extinguishment of debt and recorded an extraordinary item of $4.9 million. The
extraordinary charge consisted principally of the write-off of debt discounts,
loan acquisition costs and prepayment penalties incurred.
In the third quarter of 1998, the Company adopted SOP 98-5 effective as of
January 1, 1998 and recorded a cumulative effect of a change in accounting
principle amounting to a charge of $2.0 million (net of tax effect). The change
relates to the treatment of pre-opening costs associated with newly developed
facilities.
TWELVE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1996
Results for the twelve months ended December 31, 1997 reflect the
operations of 31 golf centers for the full period and eight golf centers that
underwent significant renovation during 1997. The December 31, 1997 results
also reflect the operation of an additional 31 golf centers built or acquired
during the course of 1997. Results for the year ended December 31, 1996 reflect
the operations of 14 golf centers for the full period, two of which underwent
renovation for approximately one month and one of which underwent renovation
for approximately two months of 1996. The December 31, 1996 results also
reflect the operation of 25 golf centers built or acquired during 1996. As a
result of the change in the number of golf centers open from period to period,
the comparison between 1997 and 1996 may not necessarily be meaningful.
Total revenue for the twelve months ended December 31, 1997 was $73.0
million as compared to $28.1 million for the same period in 1996, an increase
of $44.9 million (160%). 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 $54.6 million for 1997 as compared to $21.4
million for 1996, an increase of $33.2 million (155%). The overall increase in
revenues was primarily attributable to having additional golf centers in
operation during the 1997 period, as well as revenues from non-golf operations.
Revenues from non-golf operations were $8.3 million during 1997. There were no
revenues from non-golf operations in 1996.
Merchandise sales were $18.4 million for 1997 as compared to $6.7 million
for 1996. The increase in merchandise sales of $11.7 million (176%) was due to
the contribution of new locations to the 1997 period and the continuing
emphasis placed by the Company on improving pro shop sales, improved purchasing
procedures and increased promotion.
Operating expenses increased to $37.4 million (68% of operating revenues)
in 1997 from $13.3 million (62% of operating revenues) in 1996. The overall
increase of $24.1 million (180%) was primarily due to the operating costs of
locations that were not open for all or part of 1996. The increase as a
percentage of sales was due to a higher percentage of leased, as compared to
owned, facilities during the 1997 period.
The cost of merchandise sold increased to $12.4 million (67% of
merchandise sales) in 1997 from $4.5 million (68% of merchandise sales) in
1996. The overall increase in this cost of $7.8 million (172%) was primarily
due to the higher level of merchandise sales.
Selling, general and administrative expenses in 1997 were $12.6 million
(17% of total revenue) as compared to $4.8 million (17% of total revenue) in
1996, an increase of $7.9 million (165%). This increase was primarily due to an
increase in corporate staff, advertising and other expenses resulting from the
increased number of golf centers operating during 1997, as well as Eagle
Quest's strategy of establishing an infrastructure to operate and manage sites
in advance of the acquisition of such sites.
22
<PAGE>
Interest expense increased to $3.9 million in 1997 from $383,000 in 1996
primarily due to the debt associated with the LCI Acquisition in July 1997, the
Convertible Note Offering in the fourth quarter of 1997 and a substantial
increase in Eagle Quest's indebtedness. Other income, primarily interest
income, decreased to $1.7 million in 1997 from $2.2 million in 1996. The
decrease in other income is attributable to lower amounts of cash invested in
short-term investments in 1997 as compared with 1996.
The Company had income before income taxes of $8.4 million for 1997 as
compared to $7.2 million in 1996. Net income after income taxes decreased to
$3.3 million in 1997 as compared to $4.3 million in 1996. Effective income tax
rates in both periods were high due to the inability to apply all of Eagle
Quest's losses for such periods to offset taxable income.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash, cash equivalents and
short-term investments of $21.6 million compared to $62.3 million at December
31, 1997. The decrease was due principally to the acquisition of 62 facilities,
including those operated by MetroGolf, Eagle Quest and Golden Bear, and
construction expenditures, partially offset by the proceeds of the 1998
Offering.
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 equity and debt financings, as well as cash
flow from operations. The Company continually explores raising additional
capital through such means. However, there can be no assurance that such
financing will be available in the future on terms acceptable to the Company or
at all.
The Company's outstanding indebtedness as of December 31, 1998, including
the Notes and other indebtedness of $250.0 million, bears interest at fixed and
variable rates currently ranging from 5.3% to 15.0% per annum. During the
fourth quarter of 1997, the Company completed the $115 million 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 subordinated to all
present and future senior indebtedness (as defined in the Indenture) of the
Company. The Notes are redeemable at the option of the Company at any time
after October 15, 2000, in whole or in part, at declining premiums together
with accrued and unpaid interest. The Notes are convertible at the option of
the holder into Common Stock at any time prior to maturity, unless previously
redeemed or repurchased, at a conversion price of $24.83 per share, subject to
adjustment under certain circumstances. Upon a Change of Control (as defined in
the Indenture), subject to certain conditions, 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 repurchase 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 December 2, 1998, Family Golf and a syndicate of banks led by The Chase
Manhattan Bank ("Chase") entered into a two-year $100.0 million secured
revolving credit facility (as amended, the "Credit Facility") which converts to
a four-year term loan in December 2000. 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 1.50% and 2.75% per annum (depending on the Company's
ratio of Consolidated Funded Debt to Consolidated EBITDA (as such terms are
defined in the Credit Facility)). During the term loan, the interest rate will
be increased by 0.5% per annum in the case of Base Rate loans and 0.25% per
annum in the case of LIBOR loans. The Credit Facility contains certain
restrictive covenants, including, among others, covenants limiting liens,
indebtedness, acquisitions, asset sales, construction of new facilities,
capital expenditures and investments and covenants requiring continued
compliance with certain financial tests, including, among others, a net worth
test and several financial ratios. Borrowings under the Credit Facility will be
limited by the financial tests thereunder and there can be no assurance that
all or a portion of the $100.0 million will be available when required by the
Company. The Company may pay dividends as long as no event of default has
occurred and is
23
<PAGE>
continuing. Included among the events of default are any Change of Control (as
defined in the Credit Facility) of the Company. A portion of the proceeds of
the Credit Facility were used to repay $42.7 million principal amount of
indebtedness to Chase, which was outstanding as of September 30, 1998. As of
December 31, 1998, $67.7 million was outstanding under the Credit Facility.
In connection with the LCI Acquisition, Family Golf incurred term debt
(the "Term Debt") to refinance LCI's existing indebtedness. The principal
amount of the Term Debt ($10.7 million as of December 31, 1998) is being paid
in monthly installments through August 2002. The Company has the same interest
rate choices with respect to the Term Debt as it does with respect to the term
loan under the Credit Facility and the Term Debt is subject to the same
operational financial requirements. The indebtedness is secured by a mortgage
lien upon the three parcels of real property leased by LCI.
In March 1998, Family Golf entered into a loan agreement with Chinatrust
Bank providing for a $10.0 million term loan secured by a mortgage on five of
the Company's existing properties. The loan matures in April 2003 and bears
interest at the prime rate less 1.0% during the drawdown period and at the
prime rate during the paydown period. As of December 31, 1998, the Company had
drawn down the full $10.0 million.
On July 20, 1998, the Company entered into a loan agreement with ORIX USA
Corporation ("ORIX") providing for a $10.0 million term loan, secured by a
mortgage on five of the Company's existing properties. The loan matures in July
2003 and bears interest at either (i) the prime rate or (ii) LIBOR plus 2.25%.
As a condition to obtaining this loan, ORIX required that the Company enter
into an interest rate protection agreement. Accordingly, the Company entered
into a Swap Transaction Agreement with Chase, on July 20, 1998, which, in
effect, fixes the LIBOR rate under the Term Loan Agreement at 5.93%. In the
event LIBOR exceeds such fixed rate, Chase is required to pay such excess to
the Company, and in the event that LIBOR is less than such fixed rate, the
Company is required to pay Chase such difference. As of December 31, 1998, $10
million was outstanding under the Orix loan.
On December 2, 1998, the Company acquired SkateNation for $28.9 million
(consisting of $17.0 million of cash and $11.9 million of indebtedness),
subject to certain adjustments. Such indebtedness is described below.
SkateNation, SkateNation of Piney Orchard ("Piney Orchard"), SkateNation
of Prince William ("Prince William"), SkateNation of Richmond South ("Richmond
South") and SkateNation of Richmond West ("Richmond West") are borrowers and
guarantors under a Master Loan Agreement with NationsBank N.A. ("NationsBank"),
dated October 1, 1997 (the "NationsBank Loan Agreement"). This agreement
encompasses four term loans, each secured by the guarantee of, and
cross-defaulted to, the loan to each of SkateNation, Piney Orchard, Prince
William, Richmond South and Richmond West. The outstanding indebtedness under
the NationsBank Loan Agreement is evidenced by four promissory notes each of
which (i) bears interest at LIBOR plus the Applicable Margin (as defined in the
NationsBank Loan Agreement) and (ii) is payable, plus accrued interest, in
monthly installments commencing in November 1997 and ending in March 2001. As
of December 31, 1998, the outstanding principal and accrued and unpaid interest
owed under the promissory notes was as follows: (i) approximately $1.4 million
by Piney Orchard; (ii) approximately $2.7 million by Prince William; (iii)
approximately $1.8 million by Richmond South; and (iv) approximately $2.5
million by Richmond West. Pursuant to the terms of the NationsBank Loan
Agreement, NationsBank has a first priority security interest and deed and
trust lien on all the assets of Piney Orchard, Prince William, Richmond South
and Richmond West. As a result of the SkateNation Acquisition, NationsBank was
entitled to accelerate the maturity of the loans. NationsBank has given the
Company a temporary waiver, expiring June 30, 1999, and the parties are
currently negotiating an amendment to the NationsBank Loan Agreement to
restructure the covenants and keep the loans in place until their originally
scheduled maturity.
International Skating Center of Connecticut, LLC, a wholly-owned
subsidiary of SkateNation ("ISCC"), is obligated under a Mortgage Loan and
Security Agreement, dated August 9, 1996 (the "Fleet Loan Agreement") by and
between Fleet National Bank and ISCC. As of December 31, 1998, the aggregate
principal and accrued and unpaid interest on the original $3.6 million mortgage
note was approximately $3.1 million, which is payable in monthly installments
ending in August 2001 and bears
24
<PAGE>
interest at 8.5%. Pursuant to the terms of the Fleet Loan Agreement, Fleet
National Bank has a first priority security interest and lien on the assets of
ISCC, has obtained a leasehold mortgage on ISCC's leasehold interests, and has
received a pledge of ISCC's depository account.
In connection with the purchase of ISCC, ISCC executed a purchase money
note in favor of World Skate, LLC in the amount of $200,000 secured by an
open-end leasehold mortgage deed, assignment of subleases and security
agreement (the "PM Loan"). As of December 31, 1998, the outstanding principal
and accrued and unpaid interest under the PM Loan was approximately $201,000.
The Company anticipates making substantial additional expenditures in
connection with the acquisition and operation of new facilities and capital
improvements to existing facilities. Facility opening expenditures primarily
relate to projected facility construction and opening costs, associated
marketing activities and the addition of personnel. In many cases, the Company
acquires, rather than leases, the land on which its facilities are located,
which entails additional expenditures. Based on the Company's experience with
its existing golf centers, the Company believes that the cost of opening or
acquiring a golf center generally ranges from approximately $1.0 million to
$4.0 million (exclusive of land costs). The Company also intends to acquire or
construct additional ice rink facilities and Family Sports Supercenters which,
on a per facility basis, are expected to cost more than the Company's golf
centers. The Company believes that the cost of opening or acquiring ice rink
facilities will range from approximately $2.0 million to $6.0 million
(exclusive of land costs) and the cost of opening or acquiring Family Sports
Supercenters will range from $10.0 to $14.0 million (exclusive of land costs).
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
After giving effect on a pro forma basis to certain acquisitions
consummated after January 1, 1998 as if they had occurred on January 1, 1998,
the Company would have had a net loss of approximately $9.9 million (as
compared to a net loss of $5.0 million on a historical basis) for the year
ended December 31, 1998 and a net loss of $10.6 million (as compared to net
income of $3.3 million) for the twelve months ended December 31, 1997. 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,
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, and, in this connection, the recently acquired Eagle
Quest and Golden Bear facilities.
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
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
25
<PAGE>
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 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. In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires an entity to recognize all derivatives as
either assets or liabilities in the financial statements and measure those
instruments at fair value. The statement also establishes accounting and
reporting standards for hedging activities. The statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Earlier
application is permitted in any fiscal quarter beginning after June 1998. In
October 1998, the Financial Accounting Standards Board issued SFAS No. 134
"Accounting for Mortgage-Backed Securities, Retained after the Securitization
of Mortgage Loans Held for sale by a Mortgage Banking Enterprise," amending
previously issued SFAS No. 65, effective for the fiscal quarter beginning after
December 15, 1998. The Company believes that the above pronouncements either
are not applicable or will not have a significant effect on the information
presented in the financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" ("SOP"). The SOP is effective for financial statements for fiscal
years beginning after December 15, 1998 with earlier application allowable in
fiscal years for which annual statements have not been issued. The effects of
the initial application of this SOP will be reported as the cumulative effect
of a change in accounting principles. The Company adopted the SOP in the third
quarter of 1998 effective as of January 1, 1998. The cumulative effect of the
change in accounting principles resulted in a charge of $2.0 million, net of
related tax benefit.
INFLATION
There was no significant impact on the Company's operations as a result of
inflation during 1996, 1997 or 1998.
YEAR 2000 ISSUES
In accordance with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company notes that certain statements
contained in the following discussion concerning the change over to the year
2000 are forward-looking in nature and are subject to many risks and
uncertainties. These forward-looking statements include such matters as the
Company's projected state of readiness, the Company's projected cost of
remediation, the expected date of completion of each program or phase and the
expected contingency plans associated with any worst case scenarios. Such
statements also constitute "year 2000 readiness disclosure" within the meaning
of the Year 2000 Information and Readiness Disclosure Act.
The year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Such software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in system failures or miscalculations leading to disruptions in the Company's
activities and operations.
The Company has formed a project team, comprised of the Company's
management information services staff, to identify and correct Year 2000
compliance issues for the Company's information technology ("IT") systems as
well as the non-IT systems such as fire and burglar alarms, irrigation systems
and time clocks. The project team has been charged with the responsibility of
investigating and remediating any and all problems associated with the
millennium bug. All systems that are not compliant
26
<PAGE>
will be either modified or replaced as is necessary, although since a majority
of the Company's systems are industry standard software systems which are year
2000 compliant, the Company does not expect that significant modification or
replacement will be necessary.
Although there can be no assurance, the total projected cost associated
with the Company's year 2000 program is not expected to be material to the
Company's financial position, results of operations or cash flows. The total
cost for the project (excluding internal payroll costs) is currently expected
to approximate $100,000 to $175,000, which is being funded with the Company's
working capital. As of December 31, 1998, the Company had incurred
approximately $25,000 relating to its year 2000 compliance project.
The project team has defined a four-phase approach to determining the year
2000 readiness of the Company's systems, software and equipment. Phase I,
Inventory Assessment, involves the inventory of all systems, software and
equipment and the identification of any year 2000 issues. This phase is
complete. Phase II, Remediation, involves repairing, upgrading and/or replacing
any non-compliant equipment and systems. The Company has already begun
replacing its older IBM systems with year 2000 compliant Windows (Registered
Trademark) based systems as part of the Company's plans to upgrade its
point-of-sales merchandise control systems. The Company expects to adjust
rather than replace its non-IT systems to perform properly in the year 2000 and
thereafter. Phase III, Testing, involves testing the Company's systems,
software, and equipment for year 2000 readiness, or in certain cases, relying
on test results provided to the Company from suppliers. The project team has
commenced testing of the Company's most critical software programs to ensure
year 2000 compliance and has begun contacting all major suppliers to review
year 2000 compliance issues of their products. By May 1, 1999, the Company
intends to engage an independent consultant to verify and validate the state of
readiness of the Company's systems. Phase IV, Implementation and Completion,
involves placing compliant systems, software and equipment into production or
service and implementing all necessary contingency plans. In the event that any
program or system fails system readiness testing, the Company will rely on its
contingency plans to alleviate the year 2000 issues. These contingency plans
will include, but will not be limited to, development of backup and recovery
procedures, remediation of existing systems in parallel with the installation
of new systems, replacement with temporary manual processes and identification
of alternative suppliers.
As of December 31, 1998, the Company's overall progress by phase for all
IT and non-IT systems was as follows:
<TABLE>
<CAPTION>
TARGET
PHASE PERCENT COMPLETE COMPLETION DATE
- ------------------------------------------------- ------------------ ----------------
<S> <C> <C>
Phase I--Inventory Assessment ................... 100% Complete
Phase II--Remediation ........................... 95% May 1, 1999
Phase III--Testing .............................. 80% May 15, 1999
Phase IV--Implementation and Completion ......... 75% June 30, 1999
</TABLE>
The completion dates set forth above are based on the Company's current
expectations. However, due to the uncertainties inherent in year 2000
remediation, no assurance can be given as to whether such projects will be
completed on such dates.
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations. The failure
of the Company's point-of sales systems and billing systems could result in the
Company's inability to timely post and record sales revenue and expenses. In
addition, the aging of the Company's accounts payable would be inaccurate. In
this unlikely event, the Company would manually record sales and expenses until
a year 2000 compliant system is applied.
The financial impact of any or all of the above worst-case scenarios has
not been and cannot be estimated by the Company due to the numerous
uncertainties and variables associated with such scenarios. Management
believes, however, that its year 2000 program will significantly reduce the
Company's risks associated with the change over to the year 2000.
27
<PAGE>
At the present time the Company has not deferred any IT projects nor does
it anticipate that such a deferral will be necessary as a result of its year
2000 efforts.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has entered into three interest rate protection agreements
covering approximately $22 million in outstanding indebtedness. Such agreements
permit the Company to achieve fixed rates of interest in lieu of variable rates
of interest.
ITEM 8. FINANCIAL STATEMENTS
The financial statements of the Company are included herein commencing on
page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT
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 ...................... 49 Chairman of the Board and Chief Executive Officer
James Ganley ....................... 62 Director
Jimmy C.M. Hsu ..................... 49 Director
Krishnan P. Thampi ................. 50 President, Chief Operating Officer, Assistant Secretary,
Treasurer and Director
Yupin Wang ......................... 66 Director
Jeffrey C. Key ..................... 33 Chief Financial Officer
Richard W. Hasslinger .............. 48 Senior Vice President
Robert J. Krause ................... 53 Senior Vice President
William A. Schickler, III .......... 50 Senior Vice President
Pamela S. Charles .................. 36 Vice President, Secretary and General Counsel
Garrett J. Kelleher ................ 62 Vice President -- Finance
Rodger P. Potocki .................. 55 Vice President -- Regional Manager
Margaret M. Santorufo .............. 33 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. Mr. Chang is currently serving as a
director of the National Golf Foundation and Stonybrook University Foundation.
He is also a member of the Metropolitan Regional Advisory Board of The Chase
Manhattan Corporation. 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
Stonybrook.
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 and was Group Executive responsible
for Banking Operation 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 the position of
Executive Vice President. In 1995, Mr. Hsu became Vice Chairman of Russ Berrie.
Mr. Hsu is currently an independent investor.
29
<PAGE>
Krishnan P. Thampi is the President, Chief Operating Officer, Assistant
Secretary, Treasurer and a director of the Company. Prior to March 1998 and
since 1992, Mr. Thampi was the 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. From January 1993 to July 1995, Mr. Key was
employed by Fahnestock & Co. Inc. in its investment banking group and from June
1989 until January 1993 he was in the credit analysis department of Security
Pacific National Bank. 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.
Richard W. Hasslinger joined the Company's predecessor in November 1992 as
a Site Manager and has been a Senior Vice President 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 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 where
he has been responsible for the Company's operations in the West Coast Region
since 1992. Previously, 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
associated with the law firm of Squadron, Ellenoff, Plesent & Sheinfeld, LLP
where she specialized in federal securities law, mergers and acquisitions. From
1987 to 1994, Ms. Charles was associated with the law firm of Schulte, Roth &
Zabel. Ms. Charles received her law degree from Hofstra University of Law and
holds a Bachelors Degree from the State University of New York at Binghamton.
30
<PAGE>
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 -- 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.
There are no family relationships among any of the directors or executive
officers of the Company. The Company's executive officers serve in such
capacity at the pleasure of the Board of Directors.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who beneficially own more than ten percent of a registered class of the
Company's equity securities, to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
Common Stock and the other equity securities of the Company. Officers,
directors, and persons who beneficially own more than ten percent of a
registered class of the Company's equities are required by the regulations of
the Securities and Exchange Commission to furnish the Company with copies of
all Section 16(a) forms they file. To the Company's knowledge, based solely on
review of the copies of such reports furnished to the Company and written
representations that no other reports were required, during the fiscal year
ended December 31, 1998, all Section 16(a) filing requirements applicable to
its officers, directors, and greater than ten percent beneficial owners were
complied with; except two reports were filed late, one each by Messrs. Wang and
Key.
ITEM 11. EXECUTIVE COMPENSATION
All share and per share numbers included herein have been retroactively
adjusted to give effect to a three-for-two stock split in the form of a stock
dividend which was paid on May 4, 1998 to holders of record as of April 20,
1998.
The following table sets forth the annual and long-term compensation for
services in all capacities paid to Dominic Chang, the Company's Chairman of the
Board and Chief Executive Officer, Krishnan P. Thampi, the Company's President,
Chief Operating Officer, Assistant Secretary, Treasurer and Director, Jeffrey
C. Key, the Chief Financial Officer, Pamela S. Charles, a Vice President,
Secretary and General Counsel and William A. Schickler, a Senior Vice President
(the "Named Executives") during 1996, 1997 and 1998.
31
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------
NAME AND
PRINCIPAL OTHER ANNUAL
POSITION YEAR SALARY BONUS COMPENSATION
- ---------------------------- ------ ----------- ------- ---------------------
<S> <C> <C> <C> <C>
Dominic Chang, 1998 $175,000 -- $12,000(1)
Chairman of the Board and 1997 $140,000 -- $ 9,000(1)
Chief Executive Officer 1996 $120,000 -- $ 9,000(1)(2)
Krishnan P. Thampi, 1998 $150,000 $ 7,200(1)
President, 1997 $120,000 -- $ 7,200(1)
Chief Operating Officer, 1996 $100,000 -- $ 7,200(1)
Treasurer and Director
Jeffrey C. Key, 1998 $130,000 -- --
Chief Financial Officer 1997 -- -- --
1996 -- -- --
Pamela S. Charles 1998 $110,000 -- $ 4,800(1)
Vice President, 1997 $ 95,000 -- $ 4,800(1)
Secretary and 1996 -- -- --
General Counsel
William A. Schickler, III 1998 $100,000 -- $ 4,800(1)
Senior Vice President 1997 $ 99,000 -- $ 4,800(1)
1996 $ 99,000 -- $ 4,800(1)
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------------------------
LONG-TERM
NAME AND RESTRICTED SECURITIES INCENTIVE
PRINCIPAL STOCK UNDERLYING PLAN ALL OTHER
POSITION AWARDS OPTIONS PAYOUTS COMPENSATION
- ---------------------------- ----------------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Dominic Chang, -- --
Chairman of the Board and -- -- -- --
Chief Executive Officer -- -- -- --
Krishnan P. Thampi, --(3) 30,000
President, -- 90,132 -- --
Chief Operating Officer, -- 127,500 -- --
Treasurer and Director
Jeffrey C. Key, $534,375(4) 110,000 -- --
Chief Financial Officer -- -- -- --
-- -- -- --
Pamela S. Charles $ 36,986(5) 15,000 -- --
Vice President, -- 22,500 -- --
Secretary and -- 30,000 -- --
General Counsel
William A. Schickler, III $ 73,971(6) 15,000 -- --
Senior Vice President -- 20,250 -- --
-- 67,500 -- --
</TABLE>
- ----------
(1) Includes amounts paid to lease an automobile.
(2) Does not include $650,000 earned by Mr. Chang as a contingent purchase
price relating to the purchase by the Company in November 1995 of the
Practice Tee, Inc.
(3) A restricted stock award of 170,250 shares of Common Stock was granted in
December 1998 which award was terminated in February 1999.
(4) Represents a restricted stock award of 22,500 shares of Common Stock
granted in March 1998 which award vests in three equal installments in
March 1999, 2000 and 2001. A restricted stock award of 25,000 shares of
Common Stock was granted in December 1998 which award was terminated in
February 1999.
(5) Represents a restricted stock award of 2,250 shares of Common Stock
granted in December 1998 of which 1,500 shares vest in January 1999 and
750 shares vest in January 2000.
(6) Represents a restricted stock award of 4,500 shares of Common Stock
granted in December 1998 which award vests in three equal installments in
January 1999, 2000 and 2001.
The following table sets forth certain information concerning options
granted to the Named Executives during the fiscal year ended December 31, 1998.
No options were granted to Mr. Chang during the fiscal year ended December 31,
1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
OPTION GRANTS IN LAST FISCAL YEAR PRICE APPRECIATED FOR
INDIVIDUAL GRANTS (1) OPTION TERM
------------------------------------------------------------------- -----------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO EXERCISE OR
UNDERLYING OPTIONS EMPLOYEES IN BASE PRICE
NAME GRANTED (1) FISCAL YEAR ($/SHARE) EXPIRATION DATE 5%($) 10%($)
- --------------------------- -------------------- -------------- ------------ ------------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Krishnan P. Thampi 30,000 4% $12.125 October 12, 2008 $258,360 $288,000
Jeffrey C. Key 90,000 12% $23.750 March 16, 2008 0 0
20,000 3% $12.125 October 12, 2008 $172,240 $192,000
Pamela S. Charles 15,000 2% $12.125 October 12, 2008 $129,180 $144,000
William A. Schickler, III 15,000 2% $12.125 October 12, 2008 $129,180 $144,000
</TABLE>
(1) All options were granted pursuant to the 1998 Stock Option and Award Plan
with the exception of the 90,000 options granted to Mr. Key which were
granted under the Company's 1997 Stock Incentive Plan.
32
<PAGE>
AGGREGATED OPTION EXERCISES DURING THE FISCAL YEAR ENDED DECEMBER 31, 1998 AND
FISCAL YEAR END OPTION VALUES.
The following table sets forth certain information concerning each
exercise of stock options during the last completed fiscal year by each Named
Executive and the number and value of securities underlying exercisable and
unexercisable stock options as of the fiscal year ended December 31, 1998 held
by each Named Executive.
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
SHARES ACQUIRED VALUE REALIZED ----------------------------- ----------------------------
NAME ON EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- ----------------- --------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Dominic Chang 0 -- 15,000 -- $ 228,750 --
Krishnan P. Thampi 0 -- 212,544 132,588 $1,965,684 $699,769
Jeffrey C. Key 0 -- 6,000 110,000 $ 37,500 0
Pamela S. Charles 10,000 $81,679 17,500 40,000 $ 30,625 $267,225
William A. Schickler, III 0 -- 89,250 51,000 $ 656,148 $266,420
</TABLE>
The following table sets forth certain information concerning the grant of
restricted stock to each of the Named Executives during the fiscal year ended
December 31, 1998. No restricted stock was granted to Mr. Chang during the
fiscal year ended December 31, 1998.
LONG-TERM INCENTIVE PLANS--AWARDS
IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF SHARES, PERFORMANCE OR
UNITS OR OTHER RIGHTS OTHER PERIOD UNTIL
NAME (#) MATURATION OR PAYOUT
---- --------------------- --------------------
<S> <C> <C>
Krishnan Thampi ................... --(1) January 2001
Jeffrey C. Key .................... 22,500(2)(3) March 2002
Pamela S. Charles ................. 2,250(4) January 2000
William A. Schickler, III ......... 4,500(5) January 2001
</TABLE>
- ----------
(1) A restricted stock award of 170,250 shares of Common Stock was granted in
December 1998 which award was terminated in February 1999.
(2) A restricted stock award of 22,500 shares of Common Stock was granted in
March 1998 which award vests in three equal installments in March 1999,
2000 and 2001. Such award is subject to forfeiture in the event the Named
Executive's employment relationship with the Company terminates prior to
vesting.
(3) A restricted stock award of 25,000 shares of Common Stock was granted in
December 1998 which award was terminated in February 1999.
(4) A restricted stock award of 2,250 shares of Common Stock was granted in
December 1998 of which 1,500 shares vest in January 1999 and 750 shares
vest in January 2000. Such award is subject to forfeiture in the event
the Named Executive's employment relationship with the Company terminates
prior to vesting.
(5) A restricted stock award of 4,500 shares of Common Stock was granted in
December 1998 which award vests in three equal installments in January
1999, 2000 and 2001. Such award is subject to forfeiture in the event the
Named Executive's employment relationship with the Company terminates
prior to vesting.
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
33
<PAGE>
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-employees
directors, consultants and others, as well as to employees of the Company. On
March 6, 1996 the Board of Directors of the Company adopted, and on June 7,
1996, the stockholders approved, the Company's 1996 Stock Incentive Plan (the
"1996 Plan"). The 1996 Plan is identical to the 1994 Plan, except that the 1996
Plan provided (i) for the grant of options to purchase up to 750,000 shares of
Common Stock and (ii) an automatic grant of non-qualified stock options to
purchase 15,000 shares to each non-employee director upon his election or
appointment to the Board of Directors and annual grants (commencing on the date
the 1996 Plan was approved by stockholders) to each non-employee director of
non-qualified stock options to purchase 15,000 shares of Common Stock at the
fair market value of the Common Stock on the date of the grant. On April 25,
1997, the Board of Directors of the Company adopted, and on June 24, 1997 the
stockholders approved, the Company's 1997 Stock Incentive Plan (the "1997
Plan"). The 1997 Plan is identical to the 1996 Plan. On April 23, 1998, the
Board of Directors of the Company adopted, and on June 26, 1998 the
stockholders approved, the Company's 1998 Stock Option and Award Plan (the
"1998 Plan"). The 1998 Plan is identical to the 1997 Plan except that (i) it
provides for the grant of stock awards (either outright or for a price
determined) as well as options, (ii) it provides for grants of stock awards and
options for up to 1,5000,000 shares of Common Stock to those employees,
officers, directors, consultants or other individuals or entities eligible
under the 1998 Plan 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 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
34
<PAGE>
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 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. Incentive stock
options granted under the Plans, cannot be exercised more than 10 years from
the date of the 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 December 31, 1998, options to purchase 2,248,500 shares of Common
Stock have been granted under the Plans, of which options to purchase 280,648
shares have been exercised. In addition, on March 8, 1995, Messrs. Chang and
Thampi were each granted options outside of the 1994 Plan 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 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. On March 16, 1998 the
Company made an award outside the 1998 Plan of 22,500 shares of restricted
stock to Jeffrey Key, which award vests over three years.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements, each expiring on
December 31, 2001, 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, $140,000 and $175,000 in 1996, 1997 and 1998, respectively, and
will receive a base salary of $190,000, $205,000 and $220,000 in 1999, 2000,
and 2001, 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.
35
<PAGE>
Pursuant to his employment Mr. Thampi received a base salary of $100,000,
$120,000 and $150,000 in 1996, 1997 and 1998, respectively, and will receive a
base salary of $165,000, $180,000 and $195,000 in 1999, 2000 and 2001,
respectively. Such base salaries are subject to additional increases 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-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 serves as Chief Financial Officer
of the Company and receives 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 Plans
currently provide for the 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.
REPORT ON REPRICING OF STOCK OPTIONS
The Company did not adjust or amend the exercise price of stock options
previously awarded to the Named Executives during the last fiscal year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee consists of Dominic Chang, James
Ganley and Yupin Wang, each of whom is a non-employee member of the Company's
Board of Directors, with the exception of Mr. Chang, who is also the Company's
Chief Executive Officer and Chairman of the Board.
COMPENSATION COMMITTEE REPORT TO STOCKHOLDERS
The Compensation Committee of the Board of Directors is responsible for
determining the compensation of executive officers of the Company, other than
compensation awarded pursuant to the Company's Plans which are administered by
the Stock Option and Award Committee of the Board of Directors. Mr. Chang
abstains from any vote regarding his compensation.
36
<PAGE>
The Stock Option and Award Committee is responsible for granting and
setting the terms of stock option and awards under the 1994 Plan, the 1996
Plan, the 1997 Plan and the 1998 Plan. Messrs. Ganley and Wang serve on the
Stock Option and Award Committee.
GENERAL POLICIES REGARDING COMPENSATION OF EXECUTIVE OFFICERS
The Company's executive compensation policies are intended (1) to attract
and retain high quality managerial and executive talent and to motivate these
individuals to maximize stockholder returns, (2) to afford appropriate
incentives for executives to produce sustained superior performance, and (3) to
reward executives for superior individual contributions to the achievement of
the Company's business objectives. The Company's compensation structure
typically consists of base salary and stock options or awards. Together, these
components link each executive's compensation directly to individual and
Company performance.
Salary. Base salary levels reflect individual positions, responsibilities,
experience, leadership and potential contribution to the success of the
Company. Actual salaries vary based on the Compensation Committee's assessment
of the individuals executive's performance and the Company's performance.
Stock Option and Stock Awards. Stock options, which are granted at the
fair market value of the Common Stock on the date of grant, and stock awards,
which typically vest over time, are currently the Company's sole long-term
compensation vehicle. Such stock options and awards are intended to provide
employees with sufficient incentive to manage from the perspective of an owner
with an equity stake in the business.
In determining the size of individual options or stock grants, the Stock
Option and Award Committee considers the aggregate number of shares available
for grant, the number of individuals to be considered for an award, and the
range of potential compensation levels that the options and stock awards may
yield. The number and timing of grants to executive officers are decided by the
Stock Option and Award Committee based on its subjective assessment of the
performance of each grantee. In determining the size and timing of options and
stock awards, the Stock Option and Award Committee weighs any factors it
considers relevant and gives such factors the relative weight it considers
appropriate under the circumstances then prevailing. While an ancillary goal of
the Stock Option and Award Committee in awarding stock options and stock awards
is to increase the stock ownership of the Company's management, the Stock
Option and Award Committee does not, when determining the amount of awards,
consider the amount of stock already owned by an officer (except as required by
the terms of the 1998 Plan). The Stock Option and Award Committee believes that
to do so could have the effect of inappropriately or inequitably penalizing or
rewarding executives based upon their personal decision as to stock ownership
and option exercises.
In 1993, the Internal Revenue Code was amended to limit the deductibility
of compensation paid to certain executives in excess of $1 million.
Compensation not subject to the limitation includes certain compensation
payable solely because an executive attains performance goals
("performance-based compensation"). The Company intends that stock options
granted under the Plans with an exercise price equal to or greater than the
fair market value of the shares at the time of the grant will qualify as
performance-based compensation. Stock awards will not qualify as
performance-based compensation. The Company's compensation deduction for a
particular executive's total compensation, including compensation realized with
respect to stock awards, will be limited to $1 million. The Compensation
Committee's philosophy with respect to the $1 million cap on the tax
deductibility of executive compensation is to maximize the benefit of tax laws
by seeking performance-based exemptions and related stockholder approval where
consistent with the Company's compensation policies and practices.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
Mr. Chang's base salary for the fiscal year ended December 31, 1998 was
determined by the terms of his employment agreement with the Company which is
described elsewhere in this report. The members of the Compensation and Stock
Option and Award Committees of the Company believe that Mr. Chang's base salary
level and stock option grants are modest in comparison to the outstanding
contributions Mr. Chang has made to the Company's growth and financial position
during the last fiscal year.
37
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION COMMITTEE STOCK OPTION AND AWARD COMMITTEE
- ----------------------- ----------------------------------
<S> <C>
Dominic Chang James Ganley
James Ganley Yupin Wang
Yupin Wang
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of March 26, 1999
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 below have sole voting and
dispositive power with respect to the shares of Common Stock shown as
beneficially owned by them. Information as to SAFECO Corporation, Warburg,
Pincus Asset Management, Inc., West Highland Capital, Inc., and Scudder Kemper
Investments, 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
OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES BENEFICIALLY OWNED SHARES
- ---------------------------------------------- ---------------------------------------------------- ------------
<S> <C> <C>
Dominic Chang (1) ............................ 3,749,001(3) 14.3%
SAFECO Corporation (2) ....................... 3,654,150 14.0%
Warburg Pincus Asset Management, Inc. (4) .... 2,159,500 8.3%
West Highland Capital, Inc. (5) .............. 1,500,000 5.8%
Scudder Kemper Investments, Inc. (6) ......... 1,372,320 5.3%
Krishnan P. Thampi (1) ....................... 363,013(7) 1.4%
Jimmy C.M. Hsu (1) ........................... 174,375(8) *
James Ganley (1) ............................. 53,250(9) *
Yupin Wang (1) ............................... 15,000(10) *
All directors and executive officers of
the Company as a group (13 persons) 4,686,972(3)(7)(8)(9)(10)(11) 18.0%
</TABLE>
- ----------
* Less than 1%
(1) The address of the stockholder is: c/o Family Golf Centers, Inc., 538
Broadhollow Road, Melville, New York 11747.
(2) The address of SAFECO Corporation ("SAFECO") is SAFECO Plaza, Seattle,
Washington 98185. Includes an aggregate of 2,183,250 shares of Common
Stock beneficially owned by registered investment companies for which a
subsidiary of SAFECO serves as an adviser and by employee benefit plans
for which SAFECO is a plan sponsor. SAFECO disclaims beneficial ownership
of these shares.
(3) Includes 1,000 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. Includes an aggregate of 800,000 shares
pledged to banks to secure personal loans to Mr. Chang.
38
<PAGE>
(4) The address of Warburg Pincus Asset Management, Inc. ("WPAM") is 466
Lexington Avenue, New York, New York 10017. WPAM is an Investment Advisor
registered with the Securities and Exchange Commission (the "SEC") under
Section 208 of the Investment Advisors Act of 1940, as amended (the
"Investment Advisors Act"). WPAM serves as investment advisor to many
accounts including various registered investment companies. 2,159,500
share of Common Stock listed above are owned by WPAM's accounts.
(5) The address of West Highland Capital, LLC ("WHC") is 300 Drakes Landing
Road, Suite 290, Greenbrae, CA 94904. WHC is a registered investment
advisor whose clients have the right to receive, or the power to direct
the receipt of dividends from, or the proceeds from the sale of the
shares of Common Stock.
(6) The address of Scudder Kemper Investments, Inc. ("SKI") is 345 Park
Avenue, New York, NY 10154. SKI is an Investment Advisor registered with
the SEC under Section 208 of the Investment Advisors Act. 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 1,372,320
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.
(7) Includes 225,088 shares of Common Stock issuable upon the exercise of
options which are currently exercisable. Excludes 170,250 restricted
shares of Common Stock which were awarded under the 1998 Plan and which
were terminated in February 1999.
(8) Does not include 66,250 shares of Common Stock beneficially owned by Mr.
Hsu's brother. Mr. Hsu disclaims beneficial ownership of his brother's
shares. Includes 18,000 shares of Common Stock issuable upon exercise of
options which are currently exercisable.
(9) Includes 25,500 shares of Common Stock issuable upon the exercise of
options which are currently exercisable.
(10) Includes 15,000 shares of Common Stock issuable upon the exercise of
options which are currently exercisable.
(11) Includes (i) 236,999 shares of Common Stock issuable upon the exercise of
options which are currently exercisable, (ii) 39,750 restricted shares of
Common Stock awarded under the 1998 Plan, and (iii) 833 shares of Common
Stock beneficially owned by the spouse of an officer of the Company.
Excludes 195,250 restricted shares of Common Stock which were awarded
under the 1998 Plan and which were terminated in February 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Chang is a guarantor of $3.0 million principal amount loaned to the
Company by Orix in May 1995. Such loan matures in May 2000.
39
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Form 10-K:
(1) Financial Statements. The following Financial Statements of Family Golf
Centers, Inc. and report of independent public accountants relating
thereto are filed with this report on Form 10-K.
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the Years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years ended December 31,
1998, 1997 and 1996
Notes to Financial Statements
(2) Financial Statement Schedules. None
(3) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- --------------------- ----------------------------------------------------------------------------- ---------
<S> <C> <C>
3.1* Certificate of Incorporation, as amended.
3.2* Amended and Restated By-laws.
4.1** Form of Stock Certificate.
4.2*** Indenture, dated April 8, 1996, between 202 Golf Associates, Inc. and
Yorktown Family Golf Centers, Inc.
4.3**** Indenture, dated October 16, 1997, between United States Trust Company
of New York, as Trustee and Family Golf Centers, Inc.
10.1* Employment Agreement, dated as of September 11, 1994, between Family
Golf Centers, Inc. and Dominic Chang.
10.1.1***** Amendment No. 1, dated March 8, 1995, to the Employment Agreement,
dated as of September 11, 1994, between Family Golf Centers, Inc. and
Dominic Chang, filed as Exhibit 10.1.
10.1.2 Amendment No. 2 to Employment Agreement, dated as of April 1, 1998, 77
to Employment Agreement, dated as of September 11, 1994, as amended
by Amendment No. 1, dated March 8, 1995, between Family Golf Centers,
Inc. and Dominic Chang, filed as Exhibit 10.1 and 10.1.1, respectively.
10.2* Employment Agreement, dated as of September 11, 1994, between Family
Golf Centers, Inc. and Krishnan Thampi.
10.2.1***** Amendment No. 1, dated March 8, 1995, to the Employment Agreement,
dated as of September 11, 1994, between Family Golf Centers, Inc. and
Krishnan P. Thampi, filed as Exhibit 10.2.
10.2.2 Amendment No. 2 to Employment Agreement, dated as of April 1, 1998, 80
to Employment Agreement, dated as of September 11, 1994, as amended
by Amendment No. 1, dated March 8, 1995, between Family Golf Centers,
Inc. and Krishnan P. Thampi, filed as Exhibit 10.2 and 10.2.1, respectively.
10.3****** Employment Agreement, dated as of March 16, 1998, between Family Golf
Centers, Inc. and Jeffrey C. Key.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- --------------------- ---------------------------------------------------------------------------- ---------
<S> <C> <C>
10.4* License Agreement, dated September 14, 1994, between Orient Associates
International, Inc. and City of New York Parks & Recreation Department.
10.5* Form of Common Stock Purchase Warrant, for an aggregate of 24,950
shares of Common Stock, expiring on August 15, 1999.
10.6* Family Golf Centers, Inc. 1994 Stock Incentive Plan.
10.7+ Family Golf Centers, Inc. 1996 Stock Incentive Plan.
10.8++ Family Golf Centers, Inc. 1997 Stock Incentive Plan.
10.9+++ Family Golf Centers, Inc. 1998 Stock Option and Award Plan.
10.10++++ Purchase and Sale Contract, dated May 1, 1995, between Evergreen Bank,
N.A. f/k/a The First National Bank of Glens Falls and Family Golf
Centers, Inc.
10.11++++ Mortgage and Security Agreement, dated May 15, 1995, between Family
Golf Centers, Inc., as Mortgagor and Orix USA Corporation, as
Mortgagee.
10.12++++ Purchase Money Note, dated May 15, 1995, made by Family Golf Centers,
Inc. in favor of Orix USA Corporation in the principal amount of
$3,000,000.
10.13***** Mortgage, dated March 25, 1994 granted by Pelham Enterprises, Inc. in
favor of United Carolina Bank of South Carolina.
10.14***** Warrant to purchase 80,000 shares of Common Stock, dated November 23,
1994, issued to Hampshire Securities Corporation by Family Golf Centers,
Inc.
10.15***** Warrant to purchase 40,000 shares of Common Stock, dated November 23,
1994 issued to Brenner Securities Corporation by Family Golf Centers, Inc.
10.16***** Form of Representatives' Warrants.
10.17***** TPT/FGC Purchase Agreement, dated as of September 28, 1995, between
Family Golf Centers, Inc., Dominic Chang, Krishnan Thampi, Ken Simonds
and William Schickler III.
10.18+++++ Stock Option Agreement, dated September 28, 1995, between Family Golf
Centers, Inc. and Upper Hembree Partners, L.P.
10.19++++++ Stock Option Agreement, dated as of November 8, 1995, among Family
Golf Centers, Inc., Golf Masters Limited Partnership and Air Dome
Limited Partnership.
10.20*** Guaranty, dated March 7, 1996, by Family Golf Centers, Inc., in favor of
Flemington Equities VII.
10.21*** Mortgage Note, dated March 7, 1996, in the principal amount of $1,700,000
made by Flemington Family Golf Centers, Inc. in favor of Flemington
Equities VII and related Mortgage Deed.
10.22+ Form of Warrants to purchase an aggregate of 70,000 shares of Common
Stock, dated as of March 7, 1996, issued to Monness, Crespi & Hardt &
Co. by Family Golf Centers, Inc.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ---------------------- -------------------------------------------------------------------------- ---------
<S> <C> <C>
10.23! Promissory Note, dated September 30, 1996, in the principal amount of
$446,720 made by Colbert-Ballard Golf Learning Centers, Inc. in favor of
C.B. Family Golf Centers, Inc., a wholly owned subsidiary of Family Golf
Centers, Inc.
10.24! Guaranty of Promissory Note made by Harry J. Moorhouse and Dorothy
Moorhouse in favor of C.B. Family Golf Centers, Inc., a wholly owned
subsidiary of Family Golf Centers, Inc.
10.25** Form of Option Agreement.
10.26** Option Agreement, dated September 30, 1996, between Family Golf
Centers, Inc. and KKL Golf Partnership.
10.27** Form of Warrant.
10.28** Form of Registration Rights Agreement.
10.29**** Form of 5 3/4% Convertible Subordinated Promissory Note due 2004 of
Family Golf Centers, Inc.
10.30!! Agreement and Plan of Merger, dated as of December 23, 1997, by and
among Family Golf Centers, Inc., Family Golf Acquisition, Inc. and
MetroGolf Incorporated.
10.31!!! Merger Agreement, dated April 2, 1998, by and among Eagle Quest Golf
Centers Inc. and Family Golf Centers, Inc.
10.32!!!! Stock Purchase Agreement, dated June 16, 1998, as amended, between
Family Golf Centers, Inc. and Golden Bear Golf, Inc.
10.32.1!!!!! Amendment No. 3 to the Stock Purchase Agreement, dated July 20, 1998,
between Family Golf Centers, Inc. and Golden Bear Golf, Inc.
10.33!!!! Form of Sublicense Agreement between Family Golf Centers, Inc. and
Golden Bear Golf, Inc.
10.34!!!!!! Stock Purchase Agreement, dated November 27, 1998, by and among
Family Golf Centers, Inc., Eagle Quest Golf Centers (U.S.), Inc. and
TrizecHahn (USA) Corporation.
10.34.1!!!!!! Amendment No. 1 to the Stock Purchase Agreement, dated December 2,
1998, by and among Family Golf Centers, Inc., Eagle Quest Golf Centers
(U.S.), Inc. and TrizecHahn (USA) Corporation.
10.35!!!!!! Credit Agreement, dated as of December 2, 1998, by and among Family
Golf Centers, Inc., The Chase Manhattan Bank, as Agent and as Lender,
and the Lenders which are parties thereto.
10.35.1 Amendment to the Credit Agreement, dated as of December 8, 1998, by 83
and among Family Golf Centers, Inc., The Chase Manhattan Bank, as
Agent and as Lender, and the Lenders which are parties thereto.
10.35.2 Amendment No. 2 to the Credit Agreement, dated as of December 31, 87
1998, by and among Family Golf Centers, Inc., The Chase Manhattan
Bank, as Agent and as Lender, and the Lenders which are parties thereto.
11.1 Statement re: Computation of Earnings Per Share. 94
21.1 Subsidiaries of Family Golf Centers, Inc. 96
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ------------- ---------------------------------------------- ---------
<S> <C> <C>
23.1 Consent of Richard A. Eisner & Company, LLP. 103
27.1 Financial Data Schedule. 105
</TABLE>
- ----------
* Incorporated by reference to the Company's Registration Statement on Form
SB-2 dated, September 12, 1994 (Registration No. 33-83910).
** Incorporated by reference to the Company's Pre-Effective Registration
Statement on Form S-3, dated September 25, 1998 (Registration No.
333-64363).
*** Incorporated by reference to the Company's Current Report on Form 8-K/A
(Amendment No. 1), dated March 6, 1996 and filed May 20, 1996 amending
Reports on Form 8-K dated March 6, 1996 and April 8, 1996.
**** Incorporated by reference to the Company's Registration Statement on Form
S-3, dated January 13, 1998 (Registration No. 333-44165).
***** Incorporated by reference to the Company's Registration Statement on
Form SB-2, dated October 3, 1995 (Registration No. 33-97686).
****** Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
+ Incorporated by reference to the Company's Registration Statement on Form
SB-2, dated May 24, 1996 (Registration No. 333-4541).
++ Incorporated by reference to Annex A of the Company's Proxy Statement on
Schedule 14A, dated April 30, 1997.
+++ Incorporated by reference to Annex A of the Company's Proxy Statement on
Schedule 14A, dated May 15, 1998.
++++ Incorporated by reference to the Pre-Effective Amendment No. 2 to
Company's Current Report on Form 8-K/A (Amendment No. 1), dated June 6,
1995.
+++++ Incorporated by reference to the Company's Current Report on Form 8-K,
dated October 11, 1995.
++++++ Incorporated by reference to the Pre-Effective Amendment No. 1 the
Company's Registration Statement on Form SB-2, dated November 9, 1995
(Registration No. 33-97686).
! Incorporated by reference to the Company's Current Report on Form 8-K,
dated September 25, 1996 and filed October 9, 1996.
!! Incorporated by reference to the Company's Tender Offer Statement on
Schedule 14D-1 dated, December 31, 1997.
!!! Incorporated by reference to the Company's Pre-Effective Registration
Statement on Form S-3, dated May 22, 1998 (Registration No. 333-53503).
!!!! Incorporated by reference to the Company's Current Report on Form 8-K,
dated June 16, 1998 and filed July 8, 1998.
!!!!! Incorporated by reference to the Company's Current Report on Form 8-K,
dated June 20, 1998 and filed July 31, 1998.
!!!!!! Incorporated by reference to the Company's Current Report on Form 8-K,
dated December 2, 1998 and filed December 15, 1998.
(b) Reports on Form 8-K.
The Company's Current Report on Form 8-K, dated December 2, 1998 and filed
December 15, 1998, reporting an Item 2 event, an Item 5 event and Item 7
financials.
The Company's Current Report on Form 8-K/A, dated June 30, 1998 and filed
September 11, 1998, reporting Item 7 financials.
43
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
FAMILY GOLF CENTERS, INC.
By: /s/ Dominic Chang
-------------------------
Name: Dominic Chang
Title: Chairman of the Board,
President and Chief Executive
Officer
Dated: March 31, 1999
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- -------------------------- ----------------------------------------------- ----------------
<S> <C> <C>
/s/ Dominic Chang Chairman of the Board and Chief Executive March 31, 1999
- ----------------------- Officer (Principal Executive Officer)
Dominic Chang
/s/ Krishnan P. Thampi President, Chief Operating Officer, Assistant March 31, 1999
- ----------------------- Secretary, Treasurer and Director
Krishnan P. Thampi
/s/ James Ganley Director March 31, 1999
- -----------------------
James Ganley
/s/ Jimmy C.M. Hsu Director March 31, 1999
- -----------------------
Jimmy C.M. Hsu
/s/ Yupin Wang Director March 31, 1999
- -----------------------
Yupin Wang
/s/ Jeffrey C. Key Chief Financial Officer (Principal Financial March 31, 1999
- ----------------------- Officer)
Jeffrey C. Key
</TABLE>
44
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
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, 1998 and 1997 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December
31, 1998. These consolidated financial statements are the responsibility of the
management of Family Golf Centers, Inc. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the consolidated financial statements of Eagle Quest Golf Centers,
Inc. and subsidiaries which statements reflect total assets of $37,528,000 for
1997 of the related consolidated financial statement totals, and which reflect
net losses of $7,255,000 for 1997 and $886,000 for 1996 included in the related
consolidated financial statement totals. These statements were audited by other
auditors, whose report has been furnished to us, and our opinion insofar as its
relates to data included for Eagle Quest Golf Centers, Inc. and subsidiaries,
is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of Family Golf Centers,
Inc. and subsidiaries at December 31, 1998 and 1997 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, 1998, in conformity with
generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
March 29, 1999
F-1
<PAGE>
AUDITORS' REPORT
To The Directors
Eagle Quest Golf Centers Inc.
We have audited the consolidated balance sheets of Eagle Quest Golf
Centers Inc. and subsidiaries as at December 31, 1997 and 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 (not presented separately herein). 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 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 LLP
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 LLP
Chartered Accountants
Vancouver, Canada
March 13, 1998, except as to note 16(a)
which is as of April 2, 1998
F-2
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 3,878 $ 6,042
Restricted cash deposits ................................................ 314 390
Short-term investments .................................................. 17,374 55,846
Inventories ............................................................. 26,220 14,855
Prepaid expenses and other current assets ............................... 10,277 9,298
-------- --------
Total current assets .................................................. 58,063 86,431
Property, plant and equipment net ....................................... 444,280 235,875
Loan acquisition costs (net of accumulated amortization of $1,183 and
$305 at December 31, 1998 and December 31, 1997, respectively)......... 6,269 5,738
Other assets ............................................................ 11,201 9,279
Excess of cost over fair value of assets acquired (net of accumulated
amortization of $2,851, and $626 at December 31, 1998 and
December 31, 1997, respectively) ...................................... 52,227 25,713
-------- --------
$572,040 $363,036
======== ========
LIABILITIES
Current liabilities:
Accounts payable, accrued expenses and other current liabilities ........ $ 21,408 $ 11,247
Income taxes payable .................................................... 2,590 2,626
Short-term loan payable -- bank ......................................... 63
Current portion of long-term obligations ................................ 3,950 10,877
-------- --------
Total current liabilities ............................................. 27,948 24,813
Long-term obligations (less current portion) ............................. 130,621 32,110
Convertible subordinated notes ........................................... 115,000 115,000
Subordinated debenture ................................................... 4,981
Redeemable equity securities ............................................. 2,805
Deferred rent ............................................................ 1,193 650
Deferred tax liability ................................................... 3,217 4,196
Other liabilities ........................................................ 4,738 208
-------- --------
Total liabilities ..................................................... 282,717 184,763
-------- --------
Minority interest ........................................................ 40
--------
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;
26,117,000 and 20,500,000 shares outstanding at December 31, 1998
and December 31, 1997 ................................................... 261 205
Additional paid-in capital ............................................... 292,040 171,541
Retained earnings ........................................................ 1,561 6,549
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment ............................... (667) 195
Unearned compensation .................................................... (3,865) (170)
Treasury shares .......................................................... (47) (47)
-------- --------
Total stockholders' equity ............................................ 289,283 178,273
-------- --------
$572,040 $363,036
======== ========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
Operating revenues ................................................. $ 92,509 $ 54,599 $21,395
Merchandise sales .................................................. 29,655 18,398 6,657
-------- -------- -------
Total revenue ................................................... 122,164 72,997 28,052
-------- -------- -------
Operating expenses ................................................. 62,451 37,386 13,335
Cost of merchandise sold ........................................... 20,330 12,366 4,540
Selling, general and administrative expenses ....................... 11,723 12,630 4,760
Merger, acquisition, integration and other related charges ......... 7,752
--------
Total expenses .................................................. 102,256 62,382 22,635
-------- -------- -------
Operating income ................................................... 19,908 10,615 5,417
Interest expense ................................................... 11,309 (3,863) (383)
Other income -- net (includes interest income of $1,905, $1,570 and
$1,755 for the years ended December 31, 1998, December 31, 1997
and December 31, 1996, respectively ............................... 1,938 1,659 2,172
-------- -------- -------
Income before income taxes, extraordinary item and cumulative
effect of a change in accounting principle ........................ 10,537 8,411 7,206
Income tax expense ................................................. 8,600 5,142 2,884
-------- -------- -------
Income before extraordinary item and cumulative effect of a change
in accounting principle ........................................... 1,937 3,269 4,332
Extraordinary item -- loss on extinguishment of debt ............... (4,890)
Cumulative effect of a change in accounting principle:
Pre-opening expenses, net of tax effect ........................... (2,035)
-------- -------- -------
Net income (loss) .................................................. $ (4,988) $ 3,269 $ 4,332
======== ======== =======
Basic earnings (loss) per share:
Income before extraordinary item and cumulative effect of a
change in accounting principle .................................. $ .08 $ .17 $ .28
Extraordinary item ................................................ (.21)
Cumulative effect of a change in accounting principle ............. (.08)
--------
Net income (loss) ................................................. (.21) $ .17 $ .28
-------- -------- -------
Diluted earnings (loss) per share:
Income before extraordinary item and cumulative effect of a
change in accounting principle .................................. $ .08 $ .16 $ .27
Extraordinary item ................................................ (.21)
Cumulative effect of a change in accounting principle ............. (.08)
-------- -------- -------
Net income (loss) ................................................. $ (.21) $ .16 $ .27
======== ======== =======
Weighted average shares outstanding -- basic (000's) ............... 23,009 19,344 15,473
Effect of dilutive securities (000's) .............................. 846 470 432
-------- -------- -------
Weighted average shares outstanding -- diluted (000's) ............. 23,855 19,814 15,905
======== ======== =======
</TABLE>
See notes to financial statements.
F-4
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
(COMMON STOCK - COMPREHENSIVE
PAR VALUE $.01) INCOME (LOSS)
---------------------- --------------
NUMBER OF FOREIGN
SHARES ADDITIONAL CURRENCY
ISSUED AND PAID-IN RETAINED TRANSACTION
OUTSTANDING AMOUNT CAPITAL EARNINGS ADJUSTMENT
------------- -------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance -- December 31, 1995 ........ 12,477,067 125 48,305 958
Issuance of Stock:
For cash, notes and in connection
with acquisitions ................. 1,329,043 13 14,905
For services rendered .............. 386
Issuance of warrants ................ 69
Net proceeds from public offering ... 4,500,000 45 75,285
Public offering expenses ............ (1,064)
Exercise of warrants ................ 225,000 2 1,830
Exercise of employee options ........ 58,136 1 212
Preferential distribution to stock-
holders of The Practice Tee, Inc. (1,000)
Treasury stock received in exchange
for note receivables (2,700
shares) ............................
Income tax benefit upon exercise of
stock options ...................... 500
Net income and comprehensive
income for the year ................ 4,322
---------- ---- -------- --------- ------
Balance -- December 31, 1996 ........ 18,589,246 186 140,428 4,280
Issuance of Stock and Warrants:
For cash and in connection with
acquisitions ...................... 1,657,111 17 26,751
For repayment of debt .............. 133,764 1 2,029
For services rendered .............. 11,956 419
Exercise of warrants ................ 3,324 127
Exercise of employee options ........ 90,047 1 502
Exercise of options issued in
connection with acquisitions ....... 15,000 250
Preferential distribution to stock-
holders of The Practice Tee, Inc. (1,000)
Income tax benefit upon exercise of
stock options ...................... 355
Deferred stock compensation due
to options granted ................. 680
Unearned compensation (net) of
amortization .......................
Net income for the year ............. 3,269
Translation adjustment .............. 195
Comprehensive income ................
---------- ---- -------- --------- ------
Balance -- December 31, 1997 ........ 20,500,448 205 171,541 6,549 195
Issuance of Stock:
For cash ........................... 2,462 38
In connection with acquisitions .... 313,572 3 4,904
For compensation ................... 246,166 3 4,202
In exchange for Eagle Quest
Options, Warrants and
Redeemable equity securities ...... 209,785 2 2,851
Net proceeds from public offering ... 4,600,000 46 106,490
Public offering expenses ............ (2,000)
Warrants issued in connection with
debt ............................... 700
Exercise of warrants issued in
connection with acquisition ........ 2,535 50
Exercise of warrants ................ 108,819 1 1,458
Exercise of employee options ........ 133,572 1 1,326
Income tax benefit upon exercise of
stock options ...................... 480
Unearned compensation (net) .........
Net (loss) for the year ............. (4,988)
Translation adjustment .............. (862)
Comprehensive loss ..................
---------- ---- -------- --------- ------
Balance -- December 31, 1998 ........ 26,117,359 $261 $292,040 $ 1,561 $ (667)
========== ==== ======== ========= ======
<CAPTION>
COMPREHENSIVE
SUBSCRIPTION UNEARNED TREASURY INCOME
RECEIVABLE COMPENSATION SHARES (LOSS) TOTAL
-------------- -------------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Balance -- December 31, 1995 ........ 49,388
Issuance of Stock:
For cash, notes and in connection
with acquisitions ................. (491) 14,427
For services rendered .............. 386
Issuance of warrants ................ 69
Net proceeds from public offering ... 75,330
Public offering expenses ............ (1,064)
Exercise of warrants ................ 1,832
Exercise of employee options ........ 213
Preferential distribution to stock-
holders of The Practice Tee, Inc. (1,000)
Treasury stock received in exchange
for note receivables (2,700
shares) ............................ $ (47) (47)
Income tax benefit upon exercise of
stock options ...................... 500
Net income and comprehensive
income for the year ................ $ 4,322 4,322
---- -------- ----- ======== --------
Balance -- December 31, 1996 ........ (491) (47) 144,356
Issuance of Stock and Warrants:
For cash and in connection with
acquisitions ...................... 491 27,259
For repayment of debt .............. 2,030
For services rendered .............. 419
Exercise of warrants ................ 127
Exercise of employee options ........ 503
Exercise of options issued in
connection with acquisitions ....... 250
Preferential distribution to stock-
holders of The Practice Tee, Inc. (1,000)
Income tax benefit upon exercise of
stock options ...................... 355
Deferred stock compensation due
to options granted ................. 680
Unearned compensation (net) of
amortization ....................... (170) (170)
Net income for the year ............. $ 3,269 3,269
Translation adjustment .............. 195 195
--------
Comprehensive income ................ $ 3,464
---- -------- ----- ======== --------
Balance -- December 31, 1997 ........ -- (170) (47) 178,273
Issuance of Stock:
For cash ........................... 38
In connection with acquisitions .... 4,907
For compensation ................... 4,205
In exchange for Eagle Quest
Options, Warrants and
Redeemable equity securities ...... 2,853
Net proceeds from public offering ... 106,536
Public offering expenses ............ (2,000)
Warrants issued in connection with
debt ............................... 700
Exercise of warrants issued in
connection with acquisition ........ -- 50
Exercise of warrants ................ 1,459
Exercise of employee options ........ 1,327
Income tax benefit upon exercise of
stock options ...................... 480
Unearned compensation (net) ......... (3,695) (3,695)
Net (loss) for the year ............. $ (4,988) (4,988)
Translation adjustment .............. (862) (862)
--------
Comprehensive loss .................. $ (5,850)
---- -------- ----- ======== --------
Balance -- December 31, 1998 ........ $ (3,865) $ (47) $289,283
==== ======== ===== ========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
------------ ------------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ....................................................................... $ (4,988) $ 3,269 $ 4,322
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Cumulative effect of a change in accounting principle (Net of tax effect) .............. 2,035
Depreciation and amortization .......................................................... 11,138 7,101 2,202
Deferred tax expense (benefit) ......................................................... 321 (153) 62
Noncash expenses ....................................................................... 316 929 386
Issuance of stock for compensation ..................................................... 509
Issuance of warrants for consulting services ........................................... 80 69
Extraordinary charge -- early extinguishment of debt ................................... 4,890
Changes in:
Inventories ........................................................................... (11,365) (7,643) (4,360)
Prepaid expenses and other current assets ............................................. (4,075) (6,614) (3,711)
Prepaid income taxes .................................................................. 600
Other assets .......................................................................... (2,211) (6,094) (1,645)
Accounts payable, accrued expenses and other current liabilities ...................... 7,526 4,703 35
Deferred rent ......................................................................... 543 417 117
Other liabilities ..................................................................... 10 61 (125)
Income taxes payable .................................................................. 444 2,626 (669)
---------- ---------- ---------
Net cash provided by (used in) operating activities .................................... 5,093 (718) (3,317)
---------- ---------- ---------
Cash flows from investing activities:
Acquisitions of property and equipment .................................................. (166,602) (82,731) (61,929)
Increase in security deposits ........................................................... (230)
Acquisition of goodwill ................................................................. (28,662) (15,768) (2,117)
Restricted cash deposits ................................................................ 76 (58) (332)
Net (purchase) sales of short-term investments .......................................... 38,472 (22,008) (33,838)
---------- ---------- ---------
Net cash used in investing activities .................................................. (156,716) (120,565) (98,446)
---------- ---------- ---------
Cash flows from financing activities:
Loan acquisition costs .................................................................. (6,299) (1,346)
Proceeds from convertible subordinated notes net of expenses ............................ 110,550
Proceeds from subordinated debentures ................................................... 6,500
Repayment of subordinated debentures .................................................... (4,981)
Proceeds from loans, bank and others .................................................... 133,058 44,295 7,594
Repayment of loans, bank and others ..................................................... (79,728) (44,709) (4,584)
Net proceeds from issuance of common stock .............................................. 104,574 6,092 78,730
Proceeds from the exercise of warrants and options ...................................... 2,835 800 2,045
---------- ---------- ---------
Net cash provided by financing activities .............................................. 149,459 122,182 83,785
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents ..................................... (2,164) 899 (17,978)
Cash and cash equivalents -- beginning of year ........................................... 6,042 5,143 23,121
---------- ---------- ---------
Cash and cash equivalents -- end of year ................................................. $ 3,878 $ 6,042 $ 5,143
========== ========== =========
Supplemental and noncash disclosures:
Acquisition of property in exchange for common stock and warrants ....................... $ 5,607 $ 21,167 9,963
Acquisition of property in exchange for redeemable equity securities .................... 514
Acquisition of property subject to mortgage loans payable ............................... 35,286 22,285 10,778
Acquisition of treasury stock in exchange for payment of a note receivable .............. 47
Acquisition of property in exchange for loans from
selling stockholder .................................................................... 2,589 2,053 3,102
Increase in capital leases .............................................................. 4,520
Issuance of stock in connection with repayment of debt .................................. 2,030
Exchange of redeemable equity securities for common stock ............................... 2,853
Income tax benefit from exercise of stock options ....................................... 480 355 500
Accrued for preferential distribution to stockholders
of The Practice Tee, Inc. .............................................................. 1,000 1,000
Property additions accrued but not paid ................................................. 2,725 254 89
Interest paid ........................................................................... 11,011 4,303 984
Taxes paid .............................................................................. 8,325 6,774 3,069
</TABLE>
F-6
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] THE COMPANY:
Family Golf Centers, Inc. (the "Parent") and its wholly-owned subsidiaries
(together with the Parent, "FGC") operate golf centers designed to provide a
wide variety of practice opportunities, including facilities for driving,
chipping, putting, pitching and sand play. In addition, FGC's golf centers
typically offer golf lessons instructed by PGA-certified golf professionals,
full-line pro shops and other amenities to encourage family participation. As
of December 31, 1998, FGC owned, leased or managed 119 golf facilities
comprised of 89 golf centers and 30 combination golf center and golf course
facilities located in 23 states. Of the golf centers, 21 were operated under
the name "Golden Bear" pursuant to a license agreement with Golden Bear Golf
Centers, Inc. ("GBGC") (See Notes C and K[3]).
In addition to its core golf business, the Company has acquired and begun
operating complementary sports and family entertainment facilities, including
ice rinks and family sports supercenters. As of December 31, 1998, the Company
owned, leased or managed 24 ice rink facilities, including 16 managed
facilities and owned one family sports supercenter and leased two family sports
supercenters.
[2] PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of FGC and
Eagle Quest Golf Centers, Inc. and its wholly-owned subsidiaries ("Eagle
Quest") (collectively the "Company"). All significant intercompany transactions
and accounts have been eliminated. These statements give retroactive effect to
the acquisition of Eagle Quest on June 30, 1998, which has been accounted for
as a pooling-of-interests. As of June 30, 1998 Eagle Quest operated 20 golf
facilities, two of which were under construction.
[3] FOREIGN CURRENCY TRANSLATION:
The functional currency of Eagle Quest's Canadian operations is the
Canadian dollar. Assets and liabilities are translated into United States
dollars at the rates of exchange in effect at the balance sheet date and
revenues and expenses are translated at the average rates of exchange for the
period. Translation adjustments are included in the foreign currency
translation adjustment section of stockholders' equity.
Eagle Quest will periodically undertake transactions in a currency other
than its specific functional currency. Such transactions are translated into
the functional currency using exchange rates at the date of the transaction.
Gains and losses arising on settlement of foreign currency denominated
transactions or balances are included in the determination of income. FGC does
not enter into derivative instruments to offset the impact of foreign exchange
fluctuations. Foreign exchange gains and losses included in the determination
of operations are not significant for any period presented.
[4] CASH EQUIVALENTS:
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.
[5] SHORT-TERM INVESTMENTS:
Short-term investments are classified as "held to maturity" and are
reported at cost plus accrued income which approximates market value.
[6] INVENTORIES:
Inventory consists primarily of merchandise for sale in the pro shop at
each facility and food and beverage in the restaurants and is valued at the
lower of cost, principally determined on a first-in, first-out basis, or
market.
F-7
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[7] PROPERTY, EQUIPMENT AND OTHER LONG LIVED ASSETS:
Property, equipment and other long lived assets are stated at cost.
Depreciation and amortization of the respective assets is computed using the
straight-line method over their estimated lives or the term of the lease,
including expected renewal options, if shorter. Leasehold improvements are
amortized using the straight-line method over the remaining life of the lease,
including expected renewal options.
Excess of cost over fair value of assets acquired ("goodwill") arising on
the acquisition of businesses is amortized on a straight-line basis over its
estimated useful life of up to 20 years. The Company reviews and assesses the
recoverability of the carrying amount of goodwill, substantially all of which
relates to specific property, together with the related property to determine
potential impairment.
The carrying amount of all long lived assets is evaluated periodically to
determine if adjustment to the useful life or to the unamortized balance is
warranted. Such evaluation is based principally on the expected utilization of
the long lived assets and the projected undiscounted cash flows of the
operations in which the long lived assets are used.
Capitalized costs of long term improvements to existing sites, newly
acquired sites and newly constructed sites include certain internally generated
costs.
Costs incurred in connection with the development of internal-use software
are capitalized in accordance with the criteria set forth in Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use.
[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 bases
of assets and liabilities for financial reporting purposes and tax purposes and
operating loss carryforwards. FGC files a consolidated federal income tax
return with its eligible domestic subsidiaries.
[10] PER SHARE DATA:
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 (loss) per basic share and earnings (loss) per
diluted share. Earnings (loss) per basic share are calculated by dividing net
income (loss) by the weighted average outstanding shares during the period. Net
income (loss) per diluted share are calculated to include the effect of all
dilutive securities including options where there is income before
extraordinary item and cumulative effect of a change in accounting principle.
Earnings per diluted share do not include the impact of potential common shares
(related to the convertible debt) 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
F-8
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
[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 February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employer's Disclosures about Pensions and Other Post Retirement
Benefits." The statement is effective for fiscal years beginning after December
15, 1997. In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 requires an entity to recognize all derivatives as either assets or
liabilities in the financial statements and measure those instruments at fair
value. The statement also establishes accounting and reporting standards for
hedging activities. The statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999, earlier application is permitted in
any fiscal quarter beginning after June 1998. In October 1998, the Financial
Accounting Standards Board issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for sale by
a Mortgage Banking Enterprise," amending previously issued SFAS No. 65,
effective for the fiscal quarter beginning after December 15, 1998. The Company
believes that the above pronouncements either are not applicable or will not
have a significant effect on the information presented in the financial
statements.
The financial statements reflect the adoption of 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".
The financial statements also reflect the adoption of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" which
is effective January 1, 1998 and requires application of the provisions of the
statement to comparative financial statements for earlier periods.
Comprehensive income (loss), which represents all changes in equity that result
from recognized transactions and other economic events of the period other than
transactions with owners in their capacity as owners, is being reported in the
statement of changes in stockholders' equity.
[15] MERGER, ACQUISITION AND INTEGRATION EXPENSES:
For the year ended December 31, 1998, the Company incurred $7,800 of
merger, acquisition, integration and other related charges relating to the
acquisition of Eagle Quest by the Company on June.
F-9
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
30, 1998. Included in these costs were: $3,700 of fees and professional
expenses, $1,400 of severance and compensation expenses and $2,700 of costs
related to the integration of Eagle Quest sites and asset write-offs.
[16] EARLY EXTINGUISHMENT OF DEBT
From the proceeds of the public offering of 4.6 million shares of common
stock in July 1998, the Company paid off approximately $26,000 of debt incurred
through the acquisition of Eagle Quest. In connection with the early
extinguishment of debt the Company recorded extraordinary charges of $4,900.
The extraordinary charges consisted principally of the write off of debt
discounts, loan acquisition costs and prepayment penalties incurred. No income
tax benefit was recognized in connection with this extinguishment.
[17] CHANGE IN ACCOUNTING PRINCIPLE:
On April 3, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities (SOP 98-5). In the third quarter of 1998, the Company adopted SOP
98-5 effective as of January 1, 1998. The impact of this change in accounting
principle on the Company relates to the treatment of pre-opening costs
associated with newly developed facilities. SOP 98-5 requires that these costs
be expensed as incurred as compared to the Company's previous policy to
capitalize these costs and amortize them over a twelve month period.
NOTE B -- COMBINATION WITH EAGLE QUEST GOLF CENTERS, INC.
On June 30, 1998, FGC issued 1,384,735 shares of its common stock in
exchange for all outstanding common stock, options, warrants and put rights of
Eagle Quest. Eagle Quest, which was incorporated in British Columbia, Canada on
February 5, 1996, acquires, develops and operates golf practice centers
incorporating a driving range, a retail golf shop, and a learning academy and,
in some locations, a short/executive course. This exchange, which qualified as
a tax-free reorganization for federal income tax purposes, has been accounted
for as a pooling-of-interests combination and, accordingly, the consolidated
financial statements for periods prior to the combination have been restated to
include the combined results of operations, financial position and cash flows
of Eagle Quest as though it had been a part of FGC since inception. The results
of operations prior to the combination, previously reported by the separate
companies and the combined amounts presented in the consolidated financial
statements follow.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31
------------------ ------------
1998 1997
------------------ ------------
<S> <C> <C>
Total revenue:
FGC ................. $ 50,090 $64,825
Eagle Quest ......... 6,031 8,172
-------- -------
Combined ............ $ 56,121 $72,997
======== =======
Net income (loss):
FGC ................. $ 5,697 $10,524
Eagle Quest ......... (11,267) (7,255)
-------- -------
Combined ............ $ (5,570) $ 3,269
======== =======
</TABLE>
F-10
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE C -- ACQUISITION OF GOLF FACILITIES
FGC ACQUISITIONS:
In 1996, FGC acquired (i) golf recreational facilities, in Flemington, New
Jersey; Mohegan Lake, New York; Fairfield, Ohio; Tucson, Arizona; Easton,
Massachusetts; Flanders, New Jersey; Margate, Florida; Maineville, Ohio and
Milwaukee, Wisconsin; (ii) two combination golf center and 9-hole golf courses
in Mesa, Arizona and Virginia Beach, Virginia; (iii) a golf recreational
facility on which there is a 27-hole golf course in Fountain Inn, South
Carolina; and (iv) a par-3 golf course in West Palm Beach, Florida. In 1996,
the Company also acquired leasehold interests and the related existing golf
recreational facilities in Indian River, Virginia; San Jose, California;
Denver, Colorado; Westminster, California; Glen Burnie, Maryland and St. Louis,
Missouri which includes a par-3 golf course. In 1996, FGC also acquired a
concession license with the City of Denver to manage an existing golf
recreational facility and restaurant.
In 1997, FGC acquired a golf recreational facility in Philadelphia,
Pennsylvania and a combination golf center and 18-hole golf course in Palm
Royale, California. In 1997, FGC also acquired leasehold interests and (i) the
related existing golf recreational facilities in Palm Desert, California;
Carver, Massachusetts; Raleigh, North Carolina; Arlington, Texas; San Bruno,
California; Milpitas, California; Warrenville, Illinois; Elk Grove, California;
Columbus, Ohio; Commack, New York and Lake Grove, New York; (ii) the existing
18-hole golf courses in Olney, Maryland and Greenville, South Carolina; and
(iii) an existing golf recreational facility on which there is a 9-hole
executive course in Rio Salado, Arizona. FGC also acquired a concession license
with the City of New York to operate an existing golf recreational facility in
Randalls Island, New York and a management contract from Bergen County, New
Jersey to operate an existing golf-recreational facility.
In addition to the golf facilities, in 1997 FGC acquired LCI, a New York
corporation that owns and operates a 170,000 square-foot family sports
supercenter including a golf center, an 18-hole executive golf course, an ice
rink, additional family amusements such as video and virtual reality games and
conference center, in Lake Grove, New York; the Golf Academy of Hilton Head,
Inc. which operates a golf school and designs and manages corporate golf events
located in Hilton Head, South Carolina; Long Island Skating Academy located in
Syosset, New York; a family sports and entertainment supercenter with two ice
rinks, two soccer fields and additional family amusements located in
Cincinnati, Ohio and a designer and assembler of premium grade golf clubs
located in Palm Desert, California. LCI also owned and operated seven
stand-alone bowling centers, six of which were sold shortly after FGC acquired
them at FGC's cost.
During the first quarter of 1998 the Company acquired: MetroGolf
Incorporated ("Metro"), the operator of eight golf facilities, through the
successful completion of a tender offer; Blue Eagle Golf Centers, Inc., the
operator of three golf facilities; an ice rink facility in Raleigh, North
Carolina; and a golf facility in Holbrook, Massachusetts. In addition, in March
1998, the Company signed a long-term lease to construct and operate an ice rink
facility consisting of two NHL regulation-size ice rinks and family
entertainment center in New Rochelle, New York.
In addition to the combination with Eagle Quest, during the second quarter
of 1998, the Company also acquired a golf facility in Carlsbad, California and
the right to operate existing golf facilities in Overland Park and Evergreen,
Colorado under concession agreements with the City of Denver. In addition, the
Company entered into a concession license with the City of New York to build a
golf center in Brooklyn, New York, a long-term lease to construct and operate a
golf facility in Shelton, Connecticut and a concession license to construct and
operate a golf facility in Green Valley Ranch, Colorado. In addition, in the
second quarter of 1998, the Company signed a long-term lease to construct and
operate an ice rink facility with two sheets of ice and a family entertainment
center in Woodridge, New Jersey.
F-11
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE C -- ACQUISITION OF GOLF FACILITIES (CONTINUED)
In July 1998, the Company acquired Golden Bear Golf Centers, Inc. and a
related subsidiary (together "Golden Bear") for $32,000, less certain
indebtedness, capital leases and other liabilities, subject to certain
post-closing adjustments (the "Golden Bear Acquisition"). The Golden Bear
Acquisition included 14 golf centers in California, Florida, Maryland,
Michigan, New Jersey, New York, Ohio, Oregon, Pennsylvania and Texas.
The Company entered into a new license agreement with respect to the
existing Golden Bear Golf Centers and the newly acquired centers. See Note
K(3).
In addition to the acquisition of Golden Bear, during the third quarter of
1998, the Company also acquired a 9-hole golf course in Kansas City, Missouri,
leasehold interests in golf facilities in Markham, Ontario, Canada, Sacramento,
California and all of the outstanding stock of Pinnacle Entertainment, Inc. an
operator of coin operated amusement machines.
In December 1998, the Company acquired SkateNation, Inc., a wholly-owned
subsidiary of TrizecHahn (USA) Corporation ("SkateNation"), for $29,000,
including certain indebtedness, subject to certain adjustments. SkateNation
leases, operates or manages 16 commercial ice rinks in the United States.
In addition to the acquisition of SkateNation, during the fourth quarter
of 1998, the Company also acquired a golf facility in Vaugham, Canada and
leasehold interests and the related golf recreational facilities in Thunder
Bay, Canada and Vorhees, New Jersey.
EAGLE QUEST ACQUISITIONS:
In 1996 Eagle Quest acquired four golf centers comprised of four driving
ranges and one executive course. In 1997 Eagle Quest acquired thirteen golf
centers comprised of thirteen driving ranges and four executive courses. In the
six months ended June 30, 1998, Eagle Quest acquired one additional golf
center.
These acquisitions by FGC and Eagle Quest were accounted for using the
purchase method of accounting. The purchase prices paid for the various
facilities consisted of cash, common stock, warrants, notes or assumption of
liabilities or a combination thereof. Assets acquired and liabilities assumed
and the consideration paid is summarized as follows:
<TABLE>
<CAPTION>
FACILITIES ACQUIRED
--------------------------
YEAR ENDED
DECEMBER 31,
--------------------------
1998 1997
----------- ------------
<S> <C> <C>
Property, plant, equipment and leasehold interests ......... $ 120,969 $ 72,558
Other current assets ....................................... 7,627 3,788
Excess of cost over fair value ............................. 23,254 20,939
--------- ---------
Total assets ............................................. 151,850 97,285
Assumption of mortgages payable ............................ (21,315) (22,285)
Assumption of other liabilities ............................ (24,629) (9,648)
--------- ---------
Net assets acquired ........................................ $ 105,906 $ 65,352
========= =========
Cash ....................................................... $ 83,739 $ 41,617
Fair value of common stock and warrants issued ............. 5,607 21,168
Redeemable equity securities ............................... -- 514
Loan from selling stockholder .............................. 2,589 2,053
Mortgage ................................................... 13,971
--------- ---------
$ 105,906 $ 65,352
========= =========
</TABLE>
F-12
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE C -- ACQUISITION OF GOLF FACILITIES (CONTINUED)
In connection with the acquisition of a business by Eagle Quest in 1996, a
principal shareholder of Eagle Quest transferred common shares to the vendor
for nominal consideration. This transfer has been accounted for as a
contribution of capital to the Company of approximately $3,190 and included in
the purchase price and the values assigned to the assets acquired.
In November 1995, FGC acquired The Practice Tee, Inc. ("TPT"). TPT
operates a combination Golden Bear golf center and golf course facility in El
Segundo, California and a combination golf center and par-3 golf course
facility in Gilroy, California. The purchase price consisted of $6,000 which
included $2,000 for the achievement of certain operating targets.
The operating results of companies acquired under the purchase method of
accounting are included in the Company's results of operations from dates of
acquisition.
The following unaudited pro forma information assumes that the
acquisitions in 1998 and 1997 had taken place at the beginning of 1997 and that
the acquisitions in 1997 and 1996 had taken place at the beginning of 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Total revenue ......................... $144,598 $120,800 $64,826
Net loss .............................. (2,999) (10,630) (2,890)
Net loss per share -- basic ........... $ (.14) $ (.55) (.17)
Net loss per share -- diluted ......... $ (.14) $ (.55) (.17)
</TABLE>
Subsequent to December 31, 1998 (the "1999 Acquisitions") the Company
acquired golf facilities located in Lodi, New Jersey; El Cajon, California and
Portland, Oregon.
The aggregate purchase price of the 1999 Acquisitions was approximately
$2,000 consisting of cash, common stock, assumption of liabilities or a
combination thereof.
The following unaudited pro forma information for the year ended December
31, 1998 assumes that, in addition to the acquisitions in 1998 noted above, the
1999 acquisitions had taken place at the beginning of 1998.
<TABLE>
<S> <C>
Total revenue .......................... $145,533
Net loss ............................... (3,143)
Net loss per share -- basic ............ $ (.15)
Net loss per share -- dilutive ......... $ (.15)
</TABLE>
Unaudited pro forma results do not include acquisitions which were not
material to the operations of the Company.
In addition, FGC purchased land and in certain locations was awarded
municipal contracts, to construct and operate golf facilities in Norwalk,
California; Bronx, New York; Broward County, Florida; Seattle, Washington and
Denver, Colorado. In 1998, the Company opened its facilities in Broward County,
Florida and Seattle, Washington.
Under certain purchase agreements entered into by Eagle Quest, the sellers
are entitled to additional consideration based on the achievement of certain
profitability or performance targets. Upon achievement of the contingency
target, the obligations are accrued with an offsetting increase to the purchase
F-13
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE C -- ACQUISITION OF GOLF FACILITIES (CONTINUED)
price (generally by an increase to goodwill). In the aggregate, Eagle Quest has
agreed to a maximum additional contingent consideration in the next four
calendar years which has not been recognized in the consolidated financial
statements at December 31, 1998 as follows:
<TABLE>
<S> <C>
1999 ................... $525
2000 ................... 460
2001 ................... 250
2002 ................... 250
</TABLE>
NOTE D -- SHORT-TERM INVESTMENTS
Short-term investments including accrued interest, were as follows:
<TABLE>
<CAPTION>
AT
COST PLUS
ACCRUED FAIR UNREALIZED
HELD TO MATURITY INTEREST VALUE GAIN
- ----------------------------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
December 31, 1998:
Commercial paper and corporate bonds ......... $17,374 $17,374 $--
======= ======= ===
December 31, 1997:
Commercial paper and corporate bonds ......... $55,846 $55,846 $--
======= ======= ===
</TABLE>
NOTE E -- RESTRICTED CASH DEPOSITS
Restricted cash deposits represent short-term investments pledged as
collateral primarily for letters of credit on certain properties.
NOTE F -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Land .................................................... $ 69,112 $ 39,297
Leasehold interests, buildings and improvements ......... 327,852 163,918
Machinery and equipment ................................. 31,212 14,964
Furniture and fixtures .................................. 13,256 5,061
Construction in progress ................................ 17,667 19,392
-------- --------
459,099 242,632
Accumulated depreciation and amortization ............... 14,819 6,757
-------- --------
$444,280 $235,875
======== ========
</TABLE>
Net book value of the Company's property, plant and equipment pledged as
collateral for various loans aggregated $133,935 and $68,397 at December 31,
1998 and December 31, 1997, respectively. Interest of $3,565, and $942 has been
capitalized during the years ended December 31, 1998, and 1997, respectively,
which amounts are included in property, plant and equipment. Included in
property, plant and equipment at December 31, 1998 and December 31, 1997 are
$5,672 and $2,107, respectively, of accumulated capitalized interest. (See Note
K[5]).
F-14
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE G -- PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ---------
<S> <C> <C>
Prepaid insurance ................................... $ 576 $ 566
Prepaid taxes ....................................... -- 251
Pre-opening expenses ................................ -- 2,752
Accounts receivable and interest receivable ......... 7,638 2,769
Accounts receivable -- employees .................... 243 297
Other receivable and prepaids ....................... 1,820 2,663
------- ------
$10,277 $9,298
======= ======
</TABLE>
NOTE H -- LEASING ARRANGEMENTS
Operating leases, which expire at various dates through 2051, are for
principally 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>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1999 ................................. $ 14,093
2000 ................................. 14,671
2001 ................................. 14,920
2002 ................................. 15,002
2003 ................................. 15,025
Thereafter ........................... 328,343
--------
Total minimum lease payments ......... $402,054
========
</TABLE>
Operating lease rent expense for the years ended December 31, 1998, 1997
and 1996, was $11,949, $4,569 and $2,616 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 $1,193, and $650 at December 31, 1998, and December 31, 1997,
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
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE I -- DEBT
[1] SHORT-TERM BORROWING AGREEMENTS:
Eagle Quest:
Eagle Quest's bank indebtedness is comprised of:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
-------------
<S> <C>
Amount drawn under operating lines of credit (December 31, 1997 -
Cdn. $90) ...................................................... $63
</TABLE>
At December 31, 1997, Eagle Quest had available operating lines of credit
from a bank aggregating Cdn. $150 (U.S. $106) that bear interest at bank prime
plus 0.5% and are secured by the assets of Eagle Quest's Canadian subsidiaries.
Upon the acquisition of Eagle Quest, the loan was repaid in full.
[2] LONG-TERM OBLIGATIONS:
On June 30, 1997, FGC entered into a two-year collateralized revolving
credit facility of up to $20,000 with a bank convertible into a four year term
loan at the end of the first two years. After conversion to a term loan, the
loan is payable in 16 substantially equal quarterly installments. Borrowings
are at variable rates of interest. The loan is collateralized by the pledge of
the stock of most of FGC's subsidiaries and such subsidiaries have also
guaranteed the obligations. The agreement includes certain convenants covering
operational and financial requirements. At December 31, 1997, there were no
amounts outstanding under this facility.
On December 2, 1998, and as amended, the credit facility was replaced with
a syndicated $100,000 secured two (2) year revolving credit facility converting
to a four year term loan (the "New Facility") in December 2000. The new credit
facility is secured by the pledge of the stock of most of the Company's
subsidiaries and such subsidiaries have also guaranteed such obligations.
Interest under the new credit facility is to be either (i) the greater of the
Bank's prime rate or the federal funds rate plus .5% per annum plus a margin of
.75% per annum or (ii) the LIBOR, plus between 1.50% and 2.75% per annum
depending on a specific financial ratio.
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
FGC:
Mortgage payable bearing interest at LIBOR plus 3.5% (capped at 10.5%), payable in monthly
installments through May 2000 (the loan is personally guaranteed by the Chairman of
the Board) .............................................................................. $ 2,802 $ 2,874
Mortgage payable due March 7, 2001 bearing interest at 5.25% ............................. 1,700 1,700
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 6.314% at December 31, 1998). The loan includes certain
covenants covering operational and financial requirements ............................... 10,746 16,625
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 on a twenty year amortization payout with a balloon
payment that calls for the entire principal balance to be due and payable on
November 1, 2009 ........................................................................ 3,435 3,745
Mortgage note payable in monthly installments with a balloon payment on July 1, 2006
bearing interest at 8.5% ................................................................ 2,261
</TABLE>
F-16
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE I -- DEBT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ---------
<S> <C> <C>
Mortgage note payable in monthly installments with a balloon payment on June 13, 2001
bearing interest at 8% .................................................................. 1,630
Note payable due June 1, 2005 bearing interest at 6% ..................................... 1,688
Other debts bearing interest at rates varying from 6% to 15% ............................. 3,800 725
Revolving credit facility of up to $100,000 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 ....................................................................... 67,698
Term loan bearing interest at the prime rate less 1% during the drawdown period and at the
prime rate during the paydown period. Borrowings under the loan mature in April, 2003,
collateralized by a mortgage on certain properties ...................................... 10,000
Promissory note bearing interest at 7%, payable in monthly installments through May 1, 1,662
2003
Term loan bearing interest at either LIBOR plus 2.25% or the prime rate and maturing on
July 19, 2003, collateralized by a mortgage on certain properties. See Note (1) ......... 9,914
Note payable due August 1, 2003, bearing interest at prime plus .75% payable in monthly
principal installments of $10 plus interest ............................................. 1,516
Promissory note payable due September, 2002, bearing interest at prime plus 1.25% payable
in monthly installments plus $50 in September of each year .............................. 1,618
Mortgage note payable in monthly installments with a balloon payment on April 1, 2001
bearing interest at 8.5% ................................................................ 1,899
Mortgage note payable in monthly installments with a balloon payment on August 8, 2001
bearing interest at 8.5% ................................................................ 3,267
Mortgage note payable in monthly installments with a balloon payment on March 1, 2001
bearing interest at libor plus 3.25% .................................................... 1,339
Mortgage note payable in monthly installments with a balloon payment on June 1, 2001
bearing interest at libor plus 3.25% .................................................... 1,772
Mortgage note payable in monthly installments with a balloon payment on October 1, 2002
bearing interest at libor plus 3.25% .................................................... 2,464
Mortgage note payable in monthly installments with a balloon payment on March 1, 2001
bearing interest at libor plus 3.25% .................................................... 2,654
Eagle Quest:
Bank loan payable of up to $16,000 bearing interest at LIBOR (5.969% at December 31,
1997) plus 4% per annum on its principal, repayable in monthly installments plus
interest to September 2002, and secured by the assets of specific U.S. subsidiaries, net
of unamortized discount of $504 ......................................................... 10,452
Convertible promissory note payable bearing interest at 6.5% per annum during the first
year, 7.5% during the second year, and 8.5% during the third year on its principal,
repayable in installments of $699 (Cdn. $1,000) on February 28, 1998 (paid) and $1,750
(Cdn. $2,500) on September 19, 2000. .................................................... 2,447
Bank loan payable bearing interest at Canadian bank prime plus 0.5% per annum (6% at
December 31, 1997), repayable in monthly installments plus interest to February 2008
subject to the ability of the lender to demand repayment at any time, and secured by the
assets of a subsidiary (repayable as Cdn. $2,233)........................................ 1,561
Other debt bearing interest at rates varying from 6% to 18% .............................. 706 1,708
------ ------
134,571 42,987
Less current portion ..................................................................... 3,950 10,877
------- ------
Noncurrent portion ....................................................................... $130,621 $32,110
======== =======
</TABLE>
- ----------
Note (1) As a condition of this loan, FGC entered into an interest rate
protection agreement with a bank. Under this Swap Transaction
Agreement the LIBOR rate is fixed at 5.93%. In the event LIBOR
exceeds such fixed rate, the bank is required to pay such excess to
FGC, and in the event that LIBOR is less than such fixed rate, FGC is
required to pay the bank such difference.
F-17
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE I -- DEBT (CONTINUED)
The long-term portion of the FGC's debt at December 31, 1998 is payable as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000 ....................... 6,363
2001 ....................... 16,543
2002 ....................... 29,427
2003 ....................... 37,598
2004 ....................... 17,715
Thereafter ................. 22,975
------
$130,621
========
</TABLE>
[3] CONVERTIBLE SUBORDINATED NOTES:
In the fourth quarter of 1997, the FGC 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 FGC at any time after 60 days of original
issuance and prior to maturity, unless previously redeemed, at a conversion
price of $24.83 per share, subject to adjustment in certain events as defined.
The Notes are subordinated in right of payment to certain other obligations of
the FGC including all existing and future Senior Indebtedness (as defined in
the indenture). Net proceeds of the offering, after discount to the initial
purchasers and offering costs, were approximately $110,550.
[4] SUBORDINATED DEBENTURES:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
-------------
<S> <C>
Redeemable subordinated debenture (the "Redeemable Debenture") due on May 16, 2002,
bearing interest at 12.5% per annum payable quarterly, and secured by a subordinate
lien on Eagle Quest's assets located in Canada, net of unamortized debt discount
of $621 ................................................................................ $1,879
Subordinated debentures (the "Subordinated Debentures") due on June 21, 2002, bearing
interest at 13.5% per annum payable monthly, and secured by a subordinate lien on
Eagle Quest's assets located in Canada, net of unamortized discount of $898 ............ 3,102
------
$4,981
======
</TABLE>
NOTE J -- REDEEMABLE EQUITY SECURITIES
The following equity securities are redeemable for cash at the holder's
option:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
-------------
<S> <C>
10,259 common shares issued in connection with an acquisition, redeemable to December 10,
1998 at Cdn $49 per share (a) ........................................................... $ 359
2,871 common shares issued in connection with an acquisition, redeemable during the 60
days ending August 29, 1999 at $122 per share, net of discount of $138 (December 31, 1997
-- $162) being amortized as interest expense over the redemption period (a) ............. 188
51,293 warrants issued in connection with the Redeemable Debentures, redeemable at the
redemption date, which is any date during the 180 day period following May 2002 at a
price to be determined on the redemption date ........................................... 690
41,766 warrants issued in connection with the Subordinated Debentures, redeemable during
the 30 day period ending June 13, 2005 at their fair value at the redemption date ....... 1,008
41,034 warrants issued in connection with a bank loan, redeemable at any time within 60
days of the first to occur of the prepayment of the related loan or its stated maturity
date of September 2002 at their fair value at the redemption date ....................... 560
------
$2,805
======
</TABLE>
<PAGE>
- ----------
(a) Upon the consummation of the acquisition of Eagle Quest, all of the
redeemable shares of common stock were redeemed for an aggregate of
13,130 common shares of FGC based on the agreed fair value.
F-18
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE K -- 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, $455 in 1998,
$495 in 1999, $535 in 2000 and $415 in 2001.
[2] CONCESSION LICENSES:
The Company manages several facilities for municipalities pursuant to
concession licenses, four of which are terminable at will by the licensor. The
Company's concession license with the City of New York (the "City") for the
Douglaston, New York golf center, which was entered into in 1994 and which
expires on December 31, 2006, the concession license with the City for the
Randall's Island, New York golf center, which was assumed in 1997 and which
expires on March 1, 2007, the concession license with the City for the
Dreier-Offerman Park, Brooklyn, New York golf center, currently under
construction, 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 which opened in 1999 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, the Randall's Island License, the Brooklyn License and the Bronx
License the Company has made approximately $3,933, $2,556, $3,300 and $5,767,
respectively, of capital improvements. Pursuant to the Brooklyn License, the
Company is obligated to make $4,000 of capital improvements prior to March 1,
1999. 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 original license agreement with Golden Bear Golf, Inc.,
the Company paid a one-time facility development fee for each Golden Bear golf
center. In addition, the Company is required to pay annual royalty fees for
each Golden Bear golf center it operates based on Adjusted Gross Revenues
("AGR") as defined, equal to 3% of AGR less than $2,000 plus 4% of AGR between
$2,000 and $3,000, plus 5% of AGR over $3,000. The minimum royalty fee for each
Golden Bear golf center ranges up to $50 per year.
Royalty fees incurred for the years ended December 31, 1998, 1997 and 1996
amounted to $400, $301 and $299, respectively.
In connection with the acquisition of Golden Bear, the Company entered
into a new license agreement covering all 21 Golden Bear golf facilities. The
agreement provides for minimum royalty payments of $795 per year plus 1% of AGR
in excess of $30,000, and additional 1% each, for revenue in excess of $40,000
and $50,000.
[4] PURCHASE OF TPT AND RELATED PARTY TRANSACTIONS:
In November 1995, the Company acquired TPT. Prior to the acquisition, two
of the officers of the Company individually owned, in aggregate, 70% of the
shares of TPT. The excess of cost over fair value
F-19
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE K -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
of assets acquired of $4,392 was considered a preferential distribution to
certain stockholders. The purchase price included a contingent payment up to
$2,000, payable upon the achievement of certain operating income targets which
were achieved in 1996 and 1997. The contingent purchase price in respect of the
years ended December 31, 1996 and 1997 of $1,000 for each of the years payable
to the former TPT shareholders has been reflected as an additional preferential
distribution.
Under an existing agreement with TPT, the Company had an option to acquire
TPT (the "TPT Option") for a price equal to 12.5 times the net after tax income
of TPT during the full 12 months immediately preceding the exercise of such
option. Such price was payable in shares of the Company's common stock. The TPT
Option may have been exercised at any time commencing on the earlier of (i)
January 1, 1998 or (ii) the date on which TPT has after-tax income of at least
$1,000 over a twelve-month period until the expiration date of such option on
December 31, 2003.
[5] OTHER COMMITMENTS:
At December 31, 1998, the Company had commitments for various construction
projects, aggregating $51,000, to be completed within 12 to 24 months.
NOTE L -- BUSINESS SEGMENT INFORMATION
Information concerning operations by industry segment is as follows:
<TABLE>
<CAPTION>
GOLF NON-GOLF
OPERATIONS OPERATIONS CONSOLIDATED
------------ ------------ -------------
<S> <C> <C> <C>
Year ended December 31, 1998:
Total revenue ......................... $100,734 $ 21,430 $122,164
Operating income ...................... 15,267 4,641 19,908
Depreciation and amortization ......... 8,954 2,184 11,138
Identifiable assets ................... 454,199 117,841 572,040
Capital expenditures .................. 172,832 65,052 237,884
Year ended December 31, 1997:
Total revenue ......................... $ 64,688 $ 8,309 $ 72,997
Operating income ...................... 8,213 2,402 10,615
Depreciation and amortization ......... 6,569 532 7,101
Identifiable assets ................... 309,001 54,035 363,036
Capital expenditures .................. 92,362 52,156 144,518
</TABLE>
Non-golf operations relate to complementary sports and family
entertainment facilities which includes ice rink facilities, soccer fields and
other indoor family sports and amusements.
There were no non-golf operations for the year ended December 31, 1996.
NOTE M -- STOCKHOLDERS' EQUITY
[1] STOCK SPLIT:
The Board of Directors approved a three for two stock split which was
distributed in May 1998. Stockholder's equity has been restated to give
retroactive recognition to the stock split for all the periods presented by
reclassifying from additional paid in capital to common stock, the par value of
additional shares arising from the split. In addition, all references to number
of shares and per share amounts have been restated to reflect the stock split.
F-20
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE M -- STOCKHOLDERS' EQUITY (CONTINUED)
[2] STOCK OPTION PLANS:
The Company has stock-based compensation plans, which provide for the
granting of stock options to employees for the purchase of common stock at the
fair value of the stock on the date of grant.
The Company has elected to continue to account for stock option grants in
accordance with APB 25 and related interpretations. Accordingly, no
compensation cost has been recognized for fixed options because the exercise
prices of the stock options on the date of grant equal the market values of the
Company's common stock.
Had the compensation costs for the plans been determined based upon the
fair value at the grant date consistent with SFAS No. 123, the Company's net
income (loss) and net income (loss) per share on a pro forma basis would have
been the amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Net income (loss):
As reported .............. $ (4,988) $ 3,269 $4,322
Pro forma ................ (11,028) (1,074) 3,661
Net income (loss) per share:
As reported:
Basic ................... (0.21) 0.17 0.28
Diluted ................. (0.21) 0.16 0.27
Pro forma:
Basic ................... (0.48) (0.06) 0.24
Diluted ................. (0.48) (0.06) 0.23
</TABLE>
The Company has not included potential common shares in the 1998 and 1997
pro forma diluted loss per share computation, where the result would be
antidilutive.
These pro forma amounts may not be representative of future disclosures
due to, among other things: (i) the estimated fair value of stock option is
amortized over the vesting period, (ii) additional options may be granted in
future years and (iii) options granted in 1995 and prior thereto are not
included.
The weighted average fair value at date of grant for options granted
during the years 1998, 1997 and 1996 were $10.46, $10.33 and $9.85,
respectively, using the Black-Scholes option-pricing model with the following
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
--------------- --------------- ---------
<S> <C> <C> <C>
Dividend yield .................. 0% 0% 0%
Expected volatility ............. 0.62 0.76 - 0.82 0.73
Risk-free interest rate ......... 4.37% - 5.59% 5.60% - 6.58% 6%
Expected life in years .......... 5 5 5
</TABLE>
F-21
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE M -- STOCKHOLDERS' EQUITY (CONTINUED)
FGC Stock Option Plans:
FGC's 1994 Stock Option Plan (the "Plan") provides for the grant of
options to purchase up to 450,000 shares of common stock to employees,
officers, directors and consultants of the FGC's. Options may be either
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or nonqualified options.
Incentive stock options may be granted only to employees of the Company, while
nonqualified options may be issued to nonemployee directors, consultants and
others, as well as to employees of the Company. The Company's 1996 Stock
Incentive Plan (the "New Plan") is identical to the Plan, except that the New
Plan provides (i) for the grant of options to purchase up to 750,000 shares of
common stock, (ii) an automatic grant of nonqualified stock options to purchase
15,000 shares to each nonemployee director upon his election or appointment to
the Board of Directors and (iii) annual grants (commencing on the date the New
Plan was approved by stockholders) to each nonemployee director of nonqualified
stock options to purchase 15,000 shares of common stock at the fair market
value of the common stock on the date of the grant.
FGC's 1997 Stock Incentive Plan (the "1997 Plan"), which provides for the
grant of options to purchase up to 750,000 shares of common stock, is identical
to the New Plan. FGC will grant options under the 1997 Plan, once no more
options are available under the New Plan.
FGC's 1998 Stock Option and Award Plan (the "1998 Plan"), adopted by the
Board of Directors on April 23, 1998 and approved by the stockholders on June
26, 1998, 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 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.
The following summarizes the stock option activity for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------- ------------ ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ............... 1,429,236 $ 13.391 1,018,290 $ 11.737 435,308 $ 5.687
Options granted ................................ 749,438 18.016 498,185 15.399 641,118 15.131
Options exercised .............................. (133,572) 10.359 (87,239) 5.542 (58,136) (3.720)
--------- --------- ---------
Outstanding at end of year ..................... 2,045,102 15.284 1,429,236 13.391 1,018,290 11.737
--------- --------- ---------
Options exercisable at end of year ............. 799,558 13.049 439,590 9.965 172,898 5.026
========= ========= =========
Options available for grant at end of year ..... 914,750
=========
</TABLE>
F-22
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE M -- STOCKHOLDERS' EQUITY (CONTINUED)
In December 1998, the Company issued 220,000 restricted shares of common
stock under the 1998 Plan, of which 195,250 shares were terminated in February
1999.
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ ---------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER CONTRACTUAL WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING LIFE REMAINING EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------- ------------- ----------------- ------------------ ------------- -----------------
<S> <C> <C> <C> <C> <C>
$2.33 87,756 5.50 $ 2.33 87,756 $ 2.33
$4.00--$5.92 6,750 6.52 5.70 6,750 5.70
$9.92--$14.63 847,918 8.66 12.09 264,455 11.42
$15.17--$20.00 795,803 8.15 16.25 438,722 16.05
$23.75--$27.00 305,000 9.39 25.30 -- --
$68.00 1,875 7.92 68.00 1,875 68.00
------- ---- ------- ------- -------
$2.33--$68.00 2,045,102 8.43 $ 15.28 799,558 $ 13.05
========= ==== ======= ======= =======
</TABLE>
Additionally, in connection with the purchase of certain golf facilities,
FGC granted the sellers options to acquire up to an aggregate of 81,000 shares
of common stock at prices ranging from $0.01 to $26.67 per share, with a
weighted average exercise price per share of $20.77. As of December 31, 1998,
options to purchase 64,888 shares of common stock were outstanding all of which
were exercisable.
Eagle Quest Stock Option Plans:
At December 31, 1997, Eagle Quest had a stock option plan (the "Eagle
Quest Plan") which provided for the issuance of options to key employees,
consultants and directors. Prior to the acquisition, shareholders had
authorized the issuance of stock options up to an aggregate of the equivalent
of 82,068 FGC shares under the Eagle Quest Plan. The Board of Directors of
Eagle Quest, and subsequently the shareholders, approved an increase in the
authorized number of stock options to the equivalent of 164,136 FGC shares.
The following table summarizes the transactions in the Eagle Quest Plan
since the incorporation of Eagle Quest on February 5, 1996.
<TABLE>
<CAPTION>
THE EQUIVALENT
FGC
EQUIVALENT WEIGHTED
NUMBER OF AVERAGE
FGC SHARES EXERCISE PRICE
------------ ---------------
<S> <C> <C>
Year ended December 31, 1997:
Options granted ........................................... 64,321 $11.70
Options exercised ......................................... (2,808) 7.07
Options forfeited ......................................... (4,103) 13.16
------
Deemed to be granted at December 31, 1997 and June 30, 1998,
being maximum number of options authorized under the
Eagle Quest Plan .......................................... 57,410 $11.70
------
Exercisable options:
December 31, 1997 ......................................... 21,598 $10.48
------
</TABLE>
F-23
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE M -- STOCKHOLDERS' EQUITY (CONTINUED)
Of granted options at December 31, 1997, the equivalent of 20,517 FGC
options have been granted to certain officers and become exercisable only upon
the occurrence of specified future events. As these events cannot be considered
to be more likely than not to occur, no compensation expense has been recorded
for these options. In addition, through March 13, 1998, the Board of Directors
has granted options exercisable into the equivalent of 81,079 FGC common
shares, which options are exercisable to February 12, 2008, provided that the
exercise of any of these options were subject to the receipt of shareholder
approval to increase the number of authorized stock options under the Eagle
Quest Plan. These options include the grant on February 12, 1998 of options to
certain key employees to purchase the equivalent of 32,827 FGC common shares at
an exercise price of $24.37 per share, expiring ten years from the date of
grant.
On March 31, 1998, the Board of Directors granted additional options
exercisable into the equivalent of 12,146 FGC common shares, which options are
exercisable until March 2008.
Upon the consummation of the acquisition of Eagle Quest, all of the then
outstanding Eagle Quest stock options were redeemed for 67,189 common shares of
FGC based on the agreed fair value.
[3] WARRANTS:
FGC:
In connection with the initial public offering in November 1994, the
Company issued warrants to the representatives of the underwriters to purchase
180,000 shares of common stock at $3.67 per share exercisable through November
1999, of which warrants to purchase 60,000 shares were exercised in connection
with a public offering in December 1995 and the remaining warrants to purchase
120,000 shares were exercised in 1996.
In connection with the public offering in December 1995, FGC has granted
warrants to the representatives of the underwriters to purchase from the
Company up to 450,000 shares of common stock at $13.50 per share exercisable
through December 2000, of which warrants to purchase 108,068 and 3,324 shares
were exercised in the years ended December 31, 1998 and December 31, 1997,
respectively. As of December 31, 1998, warrants to purchase 338,608 shares of
common stock were outstanding.
In connection with consulting services to be rendered over a three-year
period, FGC in 1996 issued warrants to a consultant to purchase 105,000 shares
of common stock at $13.25 per share. Such warrants were exercised in 1996.
In connection with the purchase of LCI in July 1997, the FGC issued
warrants to the sellers to purchase an aggregate of 83,306 shares of common
stock at $18.33 per share exercisable through July 2002, of which warrants to
purchase 1,476 were exercised in the year ended December 31, 1998. As of
December 31, 1998 warrants to purchase 81,830 shares of common stock were
outstanding.
Eagle Quest:
(a) Subordinated Debentures and Warrants:
The purchasers of the Eagle Quest Subordinated Debentures were issued
warrants to purchase the equivalent of 41,766 FGC common shares at a
price of $0.24 per common share for the period ending July 13, 2002.
Eagle Quest recorded the warrants at the difference between their fair
value of $24.37 per warrant and the $0.24 per warrant exercise price.
In the event that the Subordinated Debentures were not repaid by June
13, 2000, the number of warrants was to increase to 65,632, if not
repaid by June 13, 2001, the number of warrants was to increase to
89,499; and if not repaid by June 13, 2002, the number of warrants was
to increase to 113,365.
F-24
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE M -- STOCKHOLDERS' EQUITY (CONTINUED)
(b) Other Warrants:
At December 31, 1997, Eagle Quest had outstanding warrants, including the
warrants issued in connection with a bank loan, to purchase an additional
249,282 common shares. These warrants expire at various dates to May 15,
2007. All warrants outstanding at December 31, 1997 were granted in 1997.
Of these warrants, 240,049 became exercisable in 1997, 8,207 became
exercisable in 1998 and 1,026 become exercisable in 1999. In certain
circumstances, an additional 4,103 common shares may be purchased
pursuant to one of the issued and outstanding warrants. Certain of the
warrants are subject to anti-dilution provisions and the exercise price
of such warrants may decrease in certain circumstances.
On March 13, 1998, Eagle Quest issued 58,309 warrants to purchase common
shares of the Company at $26.81 per share in connection with a mortgage
payable. These warrants, which became exercisable on issue, expire on
March 6, 2008.
(c) Redemption of Eagle Quest Warrants:
Upon the consummation of the acquisition of Eagle Quest, all of the Eagle
Quest warrants were redeemed for 129,286 common shares of FGC based on
the agreed fair value.
NOTE N -- INCOME TAXES
Income or (loss) before income taxes extraordinary item and cumulative
effect of a change in accounting principle for each of the periods presented by
jurisdiction are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
------------ ---------- -----------
<S> <C> <C> <C>
United States .............. $ 20,695 $11,570 8,400
Canada ..................... (10,158) (3,159) (1,194)
-------- ------- ------
$ 10,537 $ 8,411 $ 7,206
======== ======= =======
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current .................. $8,279 $3,900 $2,514
Deferred ................. 321 1,242 370
------ ------ ------
Total provision ......... $8,600 $5,142 $2,884
====== ====== ======
</TABLE>
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.
F-25
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE N -- INCOME TAXES (CONTINUED)
Expected tax expense based on the United States statutory rate is
reconciled with the actual expense as follows:
<TABLE>
<CAPTION>
PERCENT OF PRE-TAX EARNINGS
------------------------------------
YEAR ENDED
DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Expected tax expense ............................................ 35.0% 35.0% 34.0%
Canadian and United States operating losses and other
expenses for which no tax benefit has been recognized ......... 45.5 22.8 2.0
State income tax (benefit), net of federal tax effect ........... 5.8 5.6 3.7
Utilization of net operating loss carryforwards ................. (4.7)
Other ........................................................... (2.3) .3
---- ---- ----
81.6% 61.1% 40.0%
==== ==== ====
</TABLE>
The deferred tax assets (liabilities) are recorded as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Deferred rent ....................................... 437 $ 247
Tax basis of assets in excess of book basis ......... 714 714
Loss carryforwards .................................. 8,800 3,650
Valuation allowance ................................. (6,908) (1,758)
------ -------
3,043 2,853
Deferred tax liabilities:
Book basis of assets in excess of tax basis ......... (6,260) (7,049)
------ -------
Net deferred (liability) ............................. (3,217) $(4,196)
====== =======
</TABLE>
At December 31, 1998, the Eagle Quest has estimated net operating loss
carryforwards available for income tax purposes as follows:
<TABLE>
<CAPTION>
EXPIRING
AMOUNT THROUGH
---------- ---------
<S> <C> <C>
Canada ................ $15,000 2005
United States ......... 6,000 2018
</TABLE>
NOTE O -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial statements:
Cash and cash equivalents approximate fair value. The cost and fair value
of short-term investments are disclosed in Note C.
Short-term loan payable -- the carrying amount approximates fair value due
to the short-term maturities of these instruments.
F-26
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE O -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Long-term and other debt -- 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, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
---------- ----------
<S> <C> <C>
December 31, 1998:
Cash and cash equivalents .............. $ 3,878 $ 3,878
Restricted cash deposits ............... 314 314
Long-term debt ......................... 134,571 134,571
Convertible subordinated notes ......... 115,000 107,000
December 31, 1997:
Cash and cash equivalents .............. $ 6,042 $ 6,042
Restricted cash deposits ............... 390 390
Long-term debt ......................... 42,987 42,987
Convertible subordinated notes ......... 115,000 115,000
Redeemable equity securities ........... 2,805 2,805
Subordinated debentures ................ 4,981 4,981
</TABLE>
NOTE P -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
---------------------- ----------------------- ------------------------- -----------------------
1997 1998 1997 1998 1997 1998 1997 1998
----------- ---------- ------------ ---------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue ................... $ 9,701 $ 21,497 $ 19,676 $ 34,624 $ 25,240 $ 38,613 $ 18,380 $ 27,430
Operating income (loss) ......... (600) 844 5,357 2,658 6,394 12,809 (536) 3,597
Net income (loss) ............... (787) (3,724) 2,767 (3,881) 4,222 1,841 (2,933) 776
Net income (loss) per share:
Basic .......................... $ (0.04) $ (0.18) $ 0.15 $ (0.19) $ 0.22 $ 0.07 $ (0.14) $ 0.03
Diluted ........................ (0.04) (0.18) 0.15 (0.19) 0.21 0.07 (0.14) 0.03
</TABLE>
F-27
<PAGE>
AMENDMENT NO. 2
TO
EMPLOYMENT AGREEMENT
Amendment No. 2 dated as of April 1, 1998 to Employment Agreement,
dated as of September 11, 1994 as amended by Amendment No. 1 dated March 8,
1995 (the "Employment Agreement") between Family Golf Centers, Inc., a Delaware
corporation with offices at 538 Broadhollow Road, Melville, New York 11747 (the
"Company"), and Dominic Chang (the "Employee").
The Company and the Employee desire to amend the Employment Agreement
in certain respects as hereinafter set forth, on terms and conditions
hereinafter set forth. Accordingly, the Company and the Employee hereby agree
as follows:
1. Definitions. All Capitalized terms used herein which are defined in
the Employment Agreement and not otherwise defined herein are used herein as
defined therein.
2. Term. Section 1 of the Employment Agreement is hereby amended to
read in its entirety as follows:
1. TERM. The Company desires to engage Employee, and Employee
agrees to serve, on the terms and conditions of this
Agreement for a period commencing on the date hereof, and
ending December 31, 2001, or such shorter period as may be
provided herein. The period during which Employee is
employed hereunder is hereafter referred to as the
"Employment Period".
<PAGE>
3. Compensation.
(a) Section 3(a)(5) of the Employment Agreement is hereby amended to
read in its entirety as follows:
(5) $175,000 during the year commencing January 1, 1998 and
ending December 31, 1998;
(b) Sections 3(a)(6) of the Employment Agreement is hereby amended to
read in its entirety as follows:
(6) $ 190,000 during the year commencing January 1, 1999 and
ending December 31, 1999;
(c) The following clauses shall be added to the end of Section 3(a):
(7) $ 205,000 during the year commencing January 1, 2000 and
ending December 31, 2000.
(8) $ 220,000 during the year commencing January 1, 2001 and
ending December 31, 2001.
IN WITNESS WHEREOF, the parties have executed this Amendment No. 2 as
of the day of the first year written above.
FAMILY GOLF CENTERS, INC.
By: /s/ Krishnan P. Thampi
-------------------------------
Name: Krishnan p. Thampi
Title: President
/s/ Dominic Chang
---------------------
DOMINIC CHANG
<PAGE>
AMENDMENT NO. 2
TO
EMPLOYMENT AGREEMENT
Amendment No. 2 dated as of April 1, 1998 to Employment Agreement,
dated as of September 11, 1994 as amended by Amendment No. 1 dated March 8,
1995 (the "Employment Agreement") between Family Golf Centers, Inc., a Delaware
corporation with offices at 538 Broadhollow Road, Melville, New York 11747 (the
"Company"), and Krishnan Thampi (the "Employee").
The Company and the Employee desire to amend the Employment Agreement
in certain respects as hereinafter set forth, on terms and conditions
hereinafter set forth. Accordingly, the Company and the Employee hereby agree
as follows:
1. Definitions. All capitalized terms used herein which are defined in
the Employment Agreement and not otherwise defined herein are used herein as
defined therein.
2. Term. Section 1 of the Employment Agreement is hereby amended to
read in its entirety as follows:
1. TERM. The Company desires to engage Employee, and Employee
agrees to serve, on the terms and conditions of this
Agreement for a period commencing on the date hereof, and
ending December 31, 2001, or such shorter period as may be
provided herein. The period during which Employee is
employed hereunder is hereafter referred to as the
"Employment Period".
<PAGE>
3. Compensation.
(a) Section 3(a)(5) of the Employment Agreement is hereby amended to
read in its entirety as follows:
(5) $150,000 during the year commencing January 1, 1998 and
ending December 31, 1998;
(b) Sections 3(a)(6) of the Employment Agreement is hereby amended to
read in its entirety as follows:
(6) $ 165,000 during the year commencing January 1, 1999 and
ending December 31, 1999;
(c) The following clauses shall be added to the end of Section 3(a):
(7) $ 180,000 during the year commencing January 1, 2000 and
ending December 31, 2000.
(8) $ 195,000 during the year commencing January 1, 2001 and
ending December 31, 2001.
IN WITNESS WHEREOF, the parties have executed this Amendment No. 2 as
of the day of the first year written above.
FAMILY GOLF CENTERS, INC.
By: /s/ Dominic Chang
--------------------------------
Name: Dominic Chang
Title: Chief Executive Officer
/s/ Krishnan P. Thampi
-----------------------------------
KRISHNAN P. THAMPI
<PAGE>
AMENDMENT dated as of December 8, 1998 (this "Amendment")
to the Credit Agreement dated as of December 2, 1998, as
amended (the "Credit Agreement") by and among FAMILY GOLF
CENTERS, INC., a New York corporation (the "Company"),
THE CHASE MANHATTAN BANK, a New York banking corporation
("Chase"), as Agent and as a Lender, and the Lenders
Party Thereto.
WHEREAS, the Company has requested and the Agent and the Lenders have agreed,
subject to the terms and conditions of this Amendment, to amend certain
provisions of the Credit Agreement as set forth herein;
NOW, THEREFORE, in consideration of the premises and of the mutual agreements
herein contained, the parties hereto agree as follows:
1. Amendments.
-----------
(a) Notwithstanding anything to the contrary in the Credit Agreement, the
Company agrees it shall not request any Loan, or the issuance, amendment,
renewal or extension of any Letter of Credit during the period December 2, 1998
through December 30, 1998 and neither any Lender nor the Agent shall have any
obligation to fund any such request during such period.
(b) The definition "LIBO Margin" in Section 1.01 is hereby amended (i) to
delete the reference to "December 31, 1998" and to insert the date "April 15,
1999" in place thereof, (ii) to delete the reference to "1.00%" in the first
sentence following the grid and to substitute the percentage "3.00%" in place
thereof, (iii) to delete the reference to "September 30, 1998" and to insert
the date "December 31, 1998" in place thereof and (iv) to delete each reference
to "January 1, 1999" and to insert the date "April 15, 1999" in place thereof.
(c) Section 3.01(a) is hereby amended to delete the reference to ".25%
per annum" and to insert in place thereof the following:
(i) , during the period commencing the Closing Date and
ending April 15, 1999, 1.25% per annum and (ii), at all
times thereafter, .25% per annum.
(d) Section 3.01(c) is hereby amended to delete the reference to ".75%
per annum" and to insert in place thereof the following:
(i) , during the period commencing the Closing Date and
ending April 15, 1999, 1.25% per annum and (ii) at all
times thereafter .75% per annum.
<PAGE>
2. Miscellaneous.
--------------
Capitalized terms used herein and not otherwise defined herein shall have the
same meanings as defined in the Credit Agreement.
Except as expressly amended hereby, the Credit Agreement shall remain in full
force and effect in accordance with the original terms thereof.
The amendments herein contained are limited specifically to the matters set
forth above and do not constitute directly or by implication an amendment or
waiver of any other provision of Credit Agreement or any default which may
occur or may have occurred under the Credit Agreement.
The Company hereby represents and warrants that (a) after giving effect to this
Amendment, the representations and warranties by the Company and each of its
Subsidiaries pursuant to the Credit Agreement and the Loan Documents to which
each is a party are true and correct in all material respects as of the date
hereof with the same effect as those such representations and warranties have
been made on and as of such date, unless such representation is as of a
specific date, in which case, as of such date, (b) after giving effect to this
Amendment, no Default or Event of Default has occurred and is continuing.
Please be advised that should there be a need for further amendments or waivers
with respect to these covenants or any other covenants, those requests shall be
evaluated by the Lenders when formally requested, in writing, by the Company,
and the Lenders may deny any such requests for any reason in their sole
discretion.
This Amendment may be executed in one or more counterparts, each of which shall
constitute an original, but all of which when taken together shall constitute
but one Amendment. This Amendment shall become effective when duly executed
counterparts hereof which, when taken together, bear the signatures of each of
the parties hereto shall have been delivered to the Agent.
This Amendment shall constitute a Loan Document.
<PAGE>
IN WITNESS WHEREOF, the Company and the Agent, as authorized on behalf of the
Required Lenders, have caused this Amendment to be duly executed by their duly
authorized officers, all as of the day and year first above written.
FAMILY GOLF CENTERS, INC.
By: /s/ Robert J. Krause
------------------------------------
Name: Robert J. Krause
Title: Senior Vice President
THE CHASE MANHATTAN BANK,
as Agent
By: /s/ Robert F. Eisen, Jr.
------------------------------------
Name: Robert F. Eisen, Jr.
Title: Vice President
<PAGE>
AMENDMENT NO. 2 dated as of December 31, 1998 (this
"Amendment") to the Credit Agreement dated as of December
2, 1998, as amended (the "Credit Agreement") by and among
FAMILY GOLF CENTERS, INC., a New York corporation (the
"Company"), THE CHASE MANHATTAN BANK, a New York banking
corporation ("Chase"), as Agent and as a Lender, and the
Lenders Party Thereto.
WHEREAS, the Company has requested and the Agent and the Lenders have agreed,
subject to the terms and conditions of this Amendment, to amend certain
provisions of the Credit Agreement as set forth herein;
NOW, THEREFORE, in consideration of the premises and of the mutual agreements
herein contained, the parties hereto agree as follows:
1. Amendment.
- -- ----------
a. The definition of "Consolidated Debt Service Coverage Ratio" in
Section 1.01 of the Credit Agreement is hereby amended in its entirety as
follows:
"Consolidated Debt Service Coverage Ratio" shall mean for any
period, the ratio of (a) Consolidated EBITDA plus, to the extent
deducted in determining Consolidated EBITDA, all operating lease
expenses, less (i) all cash dividends, distributions and withdrawals
paid (including amounts reserved for such purposes) with respect to
any capital stock, (ii) all redemptions, repurchases and retirements
of capital stock (including amounts reserved for such purposes), and
(iii) cash tax payments, to (b) the sum of (i) all interest accrued
or paid (if not previously accrued) on any Indebtedness, during the
immediately preceding four fiscal quarters, plus (ii) the scheduled
installments of principal on all Indebtedness with an original
maturity of 365 days or more plus (iii) the scheduled operating
lease expenditures during the next succeeding four fiscal quarters.
All the foregoing categories shall be calculated with respect to the
Company and its Subsidiaries and shall be calculated (without
duplication) over the four fiscal quarters next preceding the date
of calculation thereof with the exception of (i) the scheduled
installments of principal on all Indebtedness of the Company and its
Subsidiaries with an original maturity of 365 days or more, and (ii)
the scheduled operating lease expenditures referred to in
clause (b)(iii) above, which shall each be calculated based upon the
next succeeding four fiscal quarters. Notwithstanding the foregoing,
with respect to the fiscal quarter ended June 30, 1998 and each
earlier fiscal quarter only, the foregoing categories which are
calculated over the prior four fiscal quarters shall not be
calculated to include the operations of Eagle Quest Golf Centers
Inc. and its subsidiaries.
b. The definition of "LIBO Margin" in Section 1.01 of the Credit
Agreement is hereby amended in its entirety to provide as follows:
"LIBO Margin" shall mean (a) with respect to an Adjusted Libor Loan
which is a Revolving Credit Loan, the percentage set forth below
under the heading "Revolving Credit Loan LIBO Margin" opposite the
applicable ratio and (b) with respect to an
<PAGE>
Adjusted Libor Loan which is a Term Loan, the percentage set forth
below under the heading "Term Loan LIBO Margin" opposite the
applicable ratio.
<TABLE>
<CAPTION>
Revolving
Credit Loan Term Loan
Consolidated Funded Debt LIBO Margin LIBO Margin
to Consolidated EBITDA (360 day basis) (360 day basis)
---------------------- --------------- ---------------
<S> <C> <C>
Equal to or less than 2.00:1.00 1.50% 1.75%
Greater than 2.00:1.00 but 1.75% 2.00%
equal to or less than 2.50:1.00
Greater than 2.50:1.00 but 2.00% 2.25%
equal to or less than 3.00:1.00
Greater than 3.00:1.00 but 2.25% 2.50%
equal to or less than 4.00:1.00
Greater than 4.00:1.00 but 2.50% 2.75%
less than 5:00:1:00
Equal to or greater than 5:00:1:00 2.75% 3.00%
</TABLE>
Notwithstanding the foregoing, during the period commencing the
Closing Date and ending on April 15, 1999, the LIBO Margin shall be
2.50%. The LIBO Margin will be set or reset with respect to each
Loan on the date which is five Business Days following the date of
receipt by the Agent of the financial statements referred to in
Section 6.03(a) and Section 6.03(b) together with a certificate of
the Chief Financial Officer of the Company certifying the ratio of
Consolidated Funded Debt to Consolidated EBITDA and setting forth
the calculation thereof in detail; provided, however, (a) the LIBO
Margin will first be reset on April 16, 1999, provided the financial
statements for the fiscal year ending December 31, 1998, and the
certificate of the Chief Financial Officer of the Company identified
above are delivered to the Agent not less than five (5) Business
Days prior to April 16, 1999; and (b) if any such financial
statement and certificate are not received by the Agent within the
time period required pursuant to Section 6.03(a) or Section 6.03(b),
as the case may be, the LIBO Margin will be set or reset, unless the
rate of interest specified in Section 3.01(e) is in effect, based on
a ratio of Consolidated Funded Debt to Consolidated EBITDA of
greater than 5.00:1.00 from the date such financial statement and
certificate were due until the date which is five Business Days
following the receipt by the Agent of such financial statements and
certificate, and provided, further, that the Lenders shall not in
any way be deemed to have waived any Default or Event of Default,
including without limitation, an Event of Default resulting from the
failure of the Company to comply with Section 7.13 of this
Agreement, or any rights or remedies hereunder or under any other
Loan Document in connection with the foregoing proviso. During the
occurrence and continuance of a
<PAGE>
Default or Event of Default, no downward adjustment, and only upward
adjustments, shall be made to the LIBO Margin."
c. Section 3.01(a) of the Credit Agreement is hereby amended in its
entirety to provide as follows:
"(a) Each Alternate Base Rate Loan which is a Revolving Credit Loan
shall bear interest for the period from the date thereof on the
unpaid principal amount thereof at a fluctuating rate per annum
equal to the Alternate Base Rate plus a margin of .75% per annum."
d. Section 3.01(c) of the Credit Agreement is hereby amended in its
entirety to provide as follows:
"(c) Each Alternate Base Rate Loan which is a Term Loan shall bear
interest for the period from the date thereof on the unpaid
principal amount thereof at a fluctuating rate per annum equal to
the Alternate Base Rate plus a margin of 1.25% per annum."
e. Section 3.03 is hereby amended to redesignate clause "(b)" as clause
"(c)" and to redesignate clause "(c)" as clause "(d)" and to add a new clause
"(b)" which shall read in its entirety as follows:
"(b) In the event of the initial offering or placement of the
Subordinated Debt permitted pursuant to Paragraph 2 hereof, the
Company shall on the date of such offering or placement apply a
portion of the proceeds therefrom to payment in full of the
outstanding Revolving Credit Loans."
f. Section 7.13(b) of the Credit Agreement is hereby amended by deleting
the table therein and replacing it with the following table in its place and
stead:
Period Ratio
------ -----
December 31, 1998 through March 30, 2000 3.50:1.00
March 31, 2000 and thereafter 4.00:1.00
g. Section 7.13(c) of the Credit Agreement is hereby amended by deleting
the table therein and replacing it with the following table in its place and
stead:
Period Ratio
------ -----
December 31, 1998 through June 29, 1999 5.90:1.00
June 30, 1999 through September 29, 1999 5.50:1.00
September 30, 1999 through December 30, 2000 5.00:1.00
December 31, 2000 and thereafter 4.50:1.00
h. Section 7.13(e) of the Credit Agreement is hereby amended in its
entirety to provide as follows:
<PAGE>
"(e) Consolidated Senior Funded Debt to Consolidated EBITDA. Permit
at any time during the periods set forth below the ratio of
Consolidated Senior Funded Debt to Consolidated EBITDA to exceed the
ratio set forth below opposite the applicable period:
Period Ratio
------ -----
Closing Date through September 29, 1999 3.00:1.00
September 30, 1999 through December 30, 1999 2.75:1.00
December 31, 1999 and thereafter 2.50:1.00
2. Consent.
--------
The Required Lenders hereby agree to the issuance by the Company of
Subordinated Debt, in an amount not to exceed $150,000,000, during the period
commencing on the date hereof through December 31, 1999, on the terms described
on Exhibit A hereto provided that no Default or Event of Default (including,
without limitation due to a cross default with respect to a default under the
Company's Term Loan Agreement with ORIX USA Corporation) has occurred and is
then continuing or would occur after giving effect to such issuance of
Subordinated Debt and subject to the prior approval by the Required Lenders of
the terms and conditions of the indenture or other agreement or instrument
governing the terms of such Subordinated Debt.
3. Continuing Covenants.
---------------------
The Company covenants and agrees to deliver to the Agent, no later than January
30, 1999, a copy of the duly executed amendment with respect to the Company's
Term Loan Agreement with ORIX USA Corporation, in form and substance
satisfactory to the Agent in its sole discretion, which amendment revises the
financial covenants in such agreement to financial covenants which are no more
onerous than those found in the Credit Agreement, provided, that if such Term
Loan Agreement shall have been irrevocably terminated prior to January 31, 1999
and there shall remain no indebtedness of the Company due and owing to ORIX USA
Corporation thereunder by the Company, the Company shall not be required to
deliver such Amendment.
4. Miscellaneous.
---------------
This Amendment shall be construed and enforced in accordance with the laws of
the State of New York.
This Amendment shall become effective upon the Agent's receipt, in form and
substance satisfactory to the Agent and its counsel of the following: (i) this
Amendment duly executed on behalf of the Company and consented to by each
Guarantor, (ii) a copy of the duly executed waiver to the Company's Term Loan
Agreement with ORIX USA Corporation, in form and substance satisfactory to the
Agent in its sole discretion, which waiver shall waive compliance by the
Company with the financial covenants in such agreement and (iii) such other
certificates, instruments, documents and agreements as may be required by the
Agent and its counsel.
<PAGE>
Capitalized terms used herein and not otherwise defined herein shall have the
same meanings as defined in the Credit Agreement.
Except as expressly amended hereby, the Credit Agreement shall remain in full
force and effect in accordance with the original terms thereof.
The amendments herein contained are limited specifically to the matters set
forth above and do not constitute directly or by implication an amendment or
waiver of any other provision of Credit Agreement or any default which may
occur or may have occurred under the Credit Agreement.
The Company hereby represents and warrants that (a) after giving effect to this
Amendment, the representations and warranties by the Company and each of its
Subsidiaries pursuant to the Credit Agreement and the Loan Documents to which
each is a party are true and correct in all material respects as of the date
hereof with the same effect as those such representations and warranties have
been made on and as of such date, unless such representation is as of a
specific date, in which case, as of such date, and (b) after giving effect to
this Amendment, no Default or Event of Default has occurred and is continuing.
Please be advised that should there be a need for further amendments or waivers
with respect to these covenants or any other covenants, those requests shall be
evaluated by the Lenders when formally requested, in writing, by the Company,
and the Lenders may deny any such requests for any reason in their sole
discretion.
This Amendment may be executed in one or more counterparts, each of which shall
constitute an original, but all of which when taken together shall constitute
but one Amendment. This Amendment shall become effective when duly executed
counterparts hereof which, when taken together, bear the signatures of each of
the parties hereto shall have been delivered to the Agent.
This Amendment shall constitute a Loan Document.
<PAGE>
IN WITNESS WHEREOF, the Company and the Agent, as authorized on behalf of the
Required Lenders, have caused this Amendment to be duly executed by their duly
authorized officers, all as of the day and year first above written.
FAMILY GOLF CENTERS, INC.
By: /s/ Robert J. Krause
-------------------------------------
Name: Robert J. Krause
Title: Senior Vice President
THE CHASE MANHATTAN BANK,
as Agent
By: /s/ Robert F. Eisen, Jr.
-------------------------------------
Name: Robert F. Eisen, Jr.
Title: Vice President
<PAGE>
EXHIBIT 11.1
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income before extraordinary
item and cumulative effect of
a change in accounting principle ...... $ 1,937,000 $ 3,269,000 $ 4,332,000
Extraordinary item ..................... (4,890,000)
Cumulative effect of a change in
accounting principle .................. (2,035,000)
------------ ----------- -----------
Net income ............................. $ (4,988,000) $ 3,269,000 $ 4,332,000
============ =========== ===========
Weighted average number of common
shares outstanding
- Basic ............................. 23,009,000 19,344,000 15,473,000
Shares issuable upon exercise of
dilutive options and warrants ......... 2,237,000 1,859,000 1,437,000
Less shares assumed repurchased ........ (1,391,000) (1,389,000) (1,005,000)
------------ ----------- -----------
Weighted average number of common
shares outstanding
- Diluted ........................... 23,855,000 19,814,000 15,905,000
============ =========== ===========
Basic earnings (loss) per share:
Income before extraordinary item and
cumulative effect of a change in
accounting principle ................ $ .08 $ .17 $.28
Extraordinary item .................... (.21)
Cumulative effect of a change in
accounting principle ................ (.08)
------ ------ -----
Net income (loss) ..................... (.21) $ .17 $.28
====== ====== =====
Diluted earnings (loss) per share:
Income before extraordinary item and
cumulative effect of a change in
accounting principle ................ $ .08 $ .16 $.27
Extraordinary item .................... (.21)
Cumulative effect of a change in
accounting principle ................ (.08)
------ ------ -----
Net income (loss) ..................... $(.21) $ .16 $.27
====== ====== =====
</TABLE>
<PAGE>
WHOLLY-OWNED SUBSIDIARIES OF
FAMILY GOLF CENTERS, INC.
<TABLE>
<CAPTION>
SUBSIDIARY STATE OF
---------- INCORPORATION
-------------
<S> <C> <C>
1. Orient Associates International, Inc. New York
2. Skydrive Alley Pond Company, Inc. New York
3. Skydrive Greenburgh Co., Inc. New York
4. Skycon Construction Co., Inc. New York
5. Skydrive Willowbrook NJ, Inc. New Jersey
6. Skydrive Co., Inc. New York
7. Pelham Family Golf Centers, Inc. Delaware
8. Richmond Family Golf Centers, Inc. Delaware
9. Peachtree Family Golf Centers, Inc. Delaware
10. Alpharetta Family Golf Centers, Inc. Delaware
11. Valley View Family Golf Centers, Inc. Delaware
12. Mesa Family Golf Centers, Inc. Delaware
13. Virginia Beach Family Golf Centers, Inc. Delaware
14. Flemington Family Golf Centers, Inc. Delaware
15. Yorktown Family Golf Centers, Inc. Delaware
16. The Practice Tee, Inc. California
17. TPT El Segundo, Inc. California
18. Global/Golf Gavilan California
19. Indian River Family Golf Centers, Inc. Delaware
20. Tucson Family Golf Centers, Inc. Delaware
21. Cincinnati Family Golf Centers, Inc. Ohio
22. St. Louis Family Golf Centers, Inc. Delaware
23. West Palm Beach Family Golf Centers, Inc. Delaware
24. San Jose Family Golf Centers, Inc. California
<PAGE>
25. Easton Family Golf Centers, Inc. Delaware
26. Randall's Island Family Golf Centers, Inc. Delaware
27. Privatization Plus, Inc. Maryland
28. Westminster Family Golf Centers, Inc. Delaware
29. Carolina Springs Family Golf Centers, Inc. Delaware
30. Denver Family Golf Centers, Inc. Delaware
31. Flanders Family Golf Centers, Inc. Delaware
32. Margate Family Golf Centers, Inc. Delaware
33. The Seven Iron, Inc. Colorado
34. C.B. Family Golf Centers, Inc. Delaware
35. Darlington Family Golf Centers, Inc. Delaware
36. Maineville Family Golf Centers, Inc. Delaware
37. Milwaukee Family Golf Centers, Inc. Delaware
38. Olney Family Golf Centers, Inc. Delaware
39. Palm Desert Family Golf Centers, Inc. Delaware
40. Broward Family Golf Centers, Inc. Delaware
41. Englewood Family Golf Centers, Inc. Delaware
42. Raleigh Family Golf Centers, Inc. Delaware
43. Tempe Family Golf Centers, Inc. Delaware
44. Green Oak Golf Practice Center, Inc. Texas
45. Bronx Family Golf Centers, Inc. Delaware
46. Milpitas Family Golf Centers, Inc. Delaware
47. San Bruno Family Golf Centers, Inc. Delaware
48. Interbay Family Golf Centers, Inc. Delaware
49. Carver Family Golf Centers, Inc. Delaware
50. Palm Family Golf Centers, Inc. Delaware
51. Cerritos Family Golf Centers, Inc. Delaware
52. Philadelphia Family Golf Centers, Inc. Delaware
53. Encino/Balboa Family Golf Centers, Inc. Delaware
54. Brooklyn Family Golf Centers, Inc. Delaware
<PAGE>
55. Lake Grove Family Golf Centers, Inc. New York
56. Golden Spikes, Inc. Delaware
57. Whitehall Family Golf Centers, Inc. Delaware
58. Sports Plus Properties, Inc.(2) New York
59. Sports Plus Properties, LLC(2) New York
60. Genprop, LLC(2) New York
61. Iceworks of America, Inc. Delaware
62. Commack Family Golf Centers, Inc. Delaware
63. Greenville Family Golf Centers, Inc. Delaware
64. The Golf Academy of Hilton Head Island, Inc. South Carolina
65. Chicago Family Golf Centers, Inc. Delaware
66. Federal Way Family Golf Centers, Inc. Delaware
67. County Line Family Golf Centers, Inc. Delaware
68. Fairfield Family Golf Centers, Inc Delaware
69. Confidence Golf, Inc. California
70. Kansas Family Golf Centers, Inc. Delaware
71. Elk Grove Family Golf Centers, Inc. Delaware
72. Sports Plus Cincinnati, Inc. Delaware
73. Wichita Family Golf Centers, Inc. Delaware
74. Stuart Family Golf Centers, Inc. Delaware
75. Holbrook Family Golf Centers, Inc. Delaware
76. Sports Plus Raleigh, Inc. Delaware
77. Shelton Family Golf Centers, Inc. Delaware
78. Sports Plus Woodbridge, Inc. Delaware
79. Sports Plus New Rochelle, Inc. Delaware
80. MetroGolf Incorporated Colorado
81. MetroGolf San Diego, Inc. Colorado
82. MetroGolf Virginia, Inc. Colorado
83. MetroGolf Illinois Center, Inc. Colorado
84. MetroGolf New York, Inc. Colorado
<PAGE>
85. MetroGolf Management, Inc. Colorado
86. Family Golf Acquisition, Inc. Delaware
87. Carlsbad Family Golf Centers, Inc. Delaware
88. Family Golf Vending, Inc. Delaware
89. Evergreen Family Golf Centers, Inc. Delaware
90. Evergreen Golf Course, L.L.C. Colorado
91. Overland Family Golf Centers, Inc. Delaware
92. Overland Park, L.L.C. Colorado
93. Green Valley Family Golf Centers, Inc. Delaware
94. Green Valley Ranch Golf Course, L.L.C. Colorado
95. Pardoc Vending Corp. New York
96. Eagle Quest Golf Centers, Inc. British Columbia
97. Fiddler's Green Golf Centers, Inc. British Columbia
98. Musqueam Golf Centers, Inc. British Columbia
99. Eagle Quest Golf Centers (Alberta II), Inc. Alberta
100. Eagle Quest Golf (Coquitlam), Inc. British Columbia
101. Tee to Green Golf Range (1993), Inc. British Columbia
102. Musqueam Recreations, Ltd. British Columbia
103. Eagle Quest Golf Centers (Alberta), Inc. Alberta
104. EagleQuest Golf (Ontario), Inc. Ontario
105. Eagle Quest Golf Centers (Texas), Inc. Texas
106. Eagle Quest Golf Centers (Texas II), Inc. Texas
107. Precision Courses, Inc. Texas
<PAGE>
108. Eagle Quest Golf Centers (California), Inc. California
109. IMG Properties, Inc. Michigan
110. Eagle Quest Golf Centers (H.P.), Inc. Texas
111. Eagle Quest Golf Centers Entertainment, Inc. Texas
112. Eagle Quest Golf Centers (Washington), Inc. Washington
113. Eagle Quest Golf Centers (U.S.), Inc. Delaware
114. Golf Park, Inc. Washington
115. Solano Golf Center, L.P. California
116. Goose Creek Golf Partners, L.P. Virginia
117. Illinois Center Golf Partners, L.P. Illinois
118. Vintage New York, L.L.C. New York
119. GBGC Family Golf Centers, Inc. Florida
120. Sacramento Family Golf Centers, Delaware
Inc.
121. Voorhees Family Golf Centers, Inc. Delaware
122. Portland Family Golf Centers, Inc. Delaware
123. Kansas City Family Golf Centers, Delaware
Inc.
124. Blue Eagle of Kansas, Inc. Kansas
125. Blue Eagle of Florida, Inc. Florida
126. Blue Eagle (OP), Inc. Kansas
127. Pinnacle Entertainment, Inc. Missouri
128. SkateNation Inc. Delaware
129. International Skating Center of Connecticut, L.L.C. Delaware
130. SkateNation of Piney Orchard, L.L.C Delaware
131. SkateNation of Prince William, L.L.C Virginia
132. SkateNation of Reston, L.L.C. Delaware
133. SkateNation of Richmond South, L.L.C Delaware
134. SkateNation of Richmond West, LLC Delaware
<PAGE>
135. Recreational Management Services Corporation Pennsylvania
136. Recreational Management Services of New Jersey, Inc. New Jersey
137. Recreational Management Services Corporation New Jersey
138. 82nd Avenue Golf Range, Inc. Oregon
139. RMSC of California, Inc. California
140. El Cajon Family Golf Centers, Inc. Delaware
141. Lodi Family Golf Centers, Inc. Delaware
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference into the Registration Statements
on Form S-8 (nos. 333-17275 and 33-38192) and on Form S-3 (Nos. 333-15753,
333-2716, 333-40693, 333-44165, 333-64363 and 333-53503) of Family Golf
Centers, Inc. (the "Company") of our report dated March 29, 1999 relating to
the consolidated financial statements of the Company appearing in the 1998
Annual Report on Form 10-K of the Company.
/s/ RICHARD A. EISNER & COMPANY, LLP
RICHARD A. EISNER & COMPANY, LLP
New York, New York
March 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains Summary Financial Information extracted from the
Consolidated Balance Sheet and the Consolidated Statement of Income for the year
ended December 31, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,192,000
<SECURITIES> 17,374,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 26,220,000
<CURRENT-ASSETS> 58,063,000
<PP&E> 459,099,000
<DEPRECIATION> 14,819,000
<TOTAL-ASSETS> 572,040,000
<CURRENT-LIABILITIES> 27,948,000
<BONDS> 0
0
0
<COMMON> 261,000
<OTHER-SE> 289,022
<TOTAL-LIABILITY-AND-EQUITY> 572,040,000
<SALES> 122,164,000
<TOTAL-REVENUES> 122,164,000
<CGS> 20,330,000
<TOTAL-COSTS> 102,256,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,309,000
<INCOME-PRETAX> 10,537,000
<INCOME-TAX> 8,600,000
<INCOME-CONTINUING> 1,937,000
<DISCONTINUED> 0
<EXTRAORDINARY> (4,890,000)
<CHANGES> (2,035,000)
<NET-INCOME> (4,988,000)
<EPS-PRIMARY> (121)
<EPS-DILUTED> (121)
</TABLE>
