<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
[X] EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
[ ] EXCHANGE ACT OF 1934
For the transition period from __________to__________
Commission File Number: 0-25098
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Family Golf Centers, Inc.
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(Exact name of Registrant as specified in its Charter)
Delaware 11-3223246
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
538 Broadhollow Road
Melville, New York 11747
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(Address of principal executive offices)
(516) 694-1666
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(Registrant's telephone number)
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(Former Name, Former Address and Former Fiscal Year,
if changed since last Report)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such report(s), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Class Outstanding as of May 14, 1999
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Common Stock, par value $.01 per share 25,979,085
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
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ITEM 1.
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTORY COMMENT
The condensed consolidated financial statements included herein have
been prepared by Family Golf Centers, Inc. (the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
management of the Company believes that the disclosures are adequate to make the
information presented not misleading. These condensed consolidated financial
statements should be read in conjunction with the notes thereto. In the opinion
of the management of the Company, the condensed consolidated financial
statements include all adjustments, consisting of only normal recurring
adjustments, necessary to fairly present the results for the interim periods to
which these financial statements relate.
The results of operations of the Company for the three months ended March 31,
1999 are not necessarily indicative of the results to be expected for the full
year.
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FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,535 $ 3,878
Restricted cash deposits 126 314
Short-term investments 5,412 17,374
Inventories 25,156 26,220
Prepaid expenses and other current assets 14,142 10,277
--------- ---------
Total current assets 46,371 58,063
Property, plant and equipment net 462,318 444,280
Loan acquisition costs (net) 6,357 6,269
Other assets 11,517 11,201
Excess of cost over fair value of assets acquired 51,795 52,227
--------- ---------
TOTAL $ 578,358 $ 572,040
========= =========
LIABILITIES
Current liabilities:
Accounts payable, accrued expenses and other current liabilities $ 17,037 $ 21,408
Income taxes payable 1,120 2,590
Current portion of long-term obligations 4,417 3,950
--------- ---------
Total current liabilities 22,574 27,948
Long-term obligations (less current portion) 140,731 130,621
Convertible subordinated notes 115,000 115,000
Deferred rent 1,354 1.193
Deferred tax liability 3,217 3,217
Other liabilities 4,704 4,738
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Total liabilities 287,580 282,717
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Minority interest 40 40
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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;
25,979,000 and 26,117,000 shares outstanding at
March 31, 1999 and December 31, 1998 260 261
Additional paid-in capital 289,361 292,040
Retained earnings 2,313 1,561
Accumulated other comprehensive income:
Foreign currency translation adjustment (583) (667)
Unearned compensation (566) (3,865)
Treasury shares (47) (47)
========= =========
Total stockholders' equity 290,738 289,283
========= =========
TOTAL $ 578,358 $ 572,040
========= =========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
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FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
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(Unaudited)
1999 1998
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<S> <C> <C>
Operating revenues $ 27,329 $ 16,737
Merchandise sales 7,820 4,760
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Total revenue 35,149 21,497
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Operating expenses 22,203 13,751
Cost of merchandise sold 5,346 3,240
Selling, general and administrative expenses 3,591 3,662
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Income from operations 4,009 844
Interest expense (3,155) (2,629)
Other income 378 956
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Income (loss) before income taxes and cumulative effect
of a change in accounting principle 1,232 (829)
Income tax expense 480 860
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Income (loss) before cumulative effect of a change in
accounting principle 752 (1,689)
Cumulative effect of a change in accounting principle:
Preopening expenses, net of tax effect -- (2,035)
------------ ------------
Net income (loss) $ 752 $ (3,724)
============ ============
Basic earnings per share:
Income (loss) before cumulative effect of
change in accounting principle .03 (.08)
Cumulative effect of change in accounting
principle -- (.10)
------------ ------------
Net income (loss) .03 (.18)
============ ============
Diluted earnings (loss) per share:
Income (loss) before cumulative effect of
change in accounting principle .03 (.08)
Cumulative effect of change in accounting
principle -- (.10)
------------ ------------
Net income (loss) .03 (.18)
============ ============
Weighted - average shares outstanding - basic 25,957,000 20,599,000
Effect Of Dilutive Securities 117,000 --
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Weighted average shares outstanding - diluted 26,074,000 20,599,000
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
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FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
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1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 752 $ (3,724)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Cummulative effect of a change in accounting principle 2,035
Depreciation and amortization 3,753 2,562
Non-cash operating expenses 15
(Increase) decrease in inventories 1,064 (3,763)
(Increase) in prepaid expenses and other current assets (3,865) (1,240)
(Increase) decrease in other assets (316) 722
Increase (decrease) in accounts payable and accrued expenses (1,480) 5,875
Increase in deferred rent 161 59
Increase (decrease)in other liabilities (34) 706
Increase (decrease) in income taxes payable (1,470) (4,533)
-------- --------
Net cash provided by (used in) operating activities (1,435) (1,286)
-------- --------
Cash flows from investing activities:
Acquisitions of property and equipment (23,728) (43,329)
Acquisitions of goodwill (9,773)
Restricted cash deposits 188
Net proceeds from sale of short-term investments 11,962 48,113
Increase (decrease) in foreign currency exchange 84
-------- --------
Net cash (used in) investing activities (11,494) (4,989)
======== ========
Cash flows from financing activities:
(Increase) in loan acquisition costs (88) (344)
Proceeds from loans, banks and others 11,512 5,205
Repayment of bank loans (935) (4,102)
Net proceeds from issuance of common stock 38
Proceeds from the exercise of options and warrants 1,647
Increase (decrease) in unearned compensation 97
-------- --------
Net cash provided by financing activities $ 10,586 $ 2,444
======== ========
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,343) (3,831)
Cash and cash equivalents - beginning of period 3,878 6,042
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD 1,535 2,211
======== ========
Supplemental and noncash disclosures:
Acquisition of property in exchange for common stock $ 522 $ 1,329
Acquisition of property subject to loans payable 1,012 4,058
Acquisition of goodwill in exchange for mortgages and notes 3,742
Issuance of stock for services rendered 53
Property additions accrued but not paid 3,903 1,010
Interest paid 1,798 1,578
Taxes paid 2,904 4,980
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
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FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(NOTE A) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
[1] THE COMPANY:
The Company (as defined below), designs, constructs, operates, and manages golf
centers. The golf centers offer golf lessons and a wide variety of practice
opportunities, including facilities for practicing driving, pitching, putting,
chipping and sand play. In addition, most centers have a pro shop, miniature
golf course, snack bar and electronic video games. The Company also operates ice
rinks and Family Sports Supercenters consisting of ice rinks and other indoor
recreational activities.
Through an agreement with Golden Bear Golf, Inc. ("GBGI"), the Company is
licensed to use the name "Golden Bear" for certain of the Company's golf
centers. In July 1998, the Company acquired fourteen golf centers from Golden
Bear Golf, Inc. and the original license agreement was terminated and replaced
with a new license agreement pursuant to which the Company has agreed to operate
its seven existing "Golden Bear" Golf Centers and the 14 acquired golf centers
under the name "Golden Bear".
[2] PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Family Golf
Centers, Inc. and its wholly owned and majority owned subsidiaries herein
referred to as "FGCI" and "Company". All significant intercompany transactions
and accounts have been eliminated. Minority interests in the Company's
operations were insignificant.
On June 30, 1998, FGCI issued 1,384,735 shares of its common stock in exchange
for all outstanding common stock, options and warrants of Eagle Quest Golf
Centers, Inc. ("Eagle Quest"). Eagle Quest, which was incorporated in British
Columbia, Canada on February 5, 1996, acquires, develops and operates golf
practice centers incorporating a driving range, a retail golf shop, and a
learning academy and, in some locations, a short/executive course. This
exchange, which qualified as a tax-free reorganization for federal income tax
purposes, has been accounted for as a pooling-of-interests combination and,
accordingly, the consolidated financial statements for periods prior to the
combination have been restated to include the combined results of operations,
financial position and cash flows of Eagle Quest as though it had been a part of
the Company since inception. Under the pooling of interests method, the assets
and liabilities of Eagle Quest are carried at their historical amounts and the
historical operating results of Eagle Quest are combined with those of Family
Golf Centers, Inc. for all periods presented.
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[3] CHANGE IN ACCOUNTING PRINCIPLE
On April 3, 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities (SOP
98-5). In the third quarter of 1998 the Company adopted SOP 98-5 effective as of
January 1, 1998. The impact of this change in accounting principle on the
Company relates to the treatment of pre-opening costs associated with newly
developed facilities. SOP 98-5 requires that these costs be expensed as incurred
as compared to the Company's previous policy to capitalize these costs and
amortize them over a twelve month period. The $2.0 million (net of tax effect)
cumulative effect change on prior year is included in the income for the three
months ended March 31, 1998.
(NOTE B) INVENTORIES:
Inventory consists of merchandise for sale in the pro shop at each facility and
is valued at the lower of cost on a first-in, first-out basis or market.
(NOTE C) ACQUISITIONS:
During the first quarter of 1999 the Company acquired three golf facilities
located in Lodi, California ("Lodi"), El Cajon, California ("El Cajon"), and
Portland, Oregon ("Portland").
These acquisitions, and all other acquisitions made by the Company in 1998,
other than Eagle Quest, have been accounted for under the purchase method of
accounting and, accordingly, the results of operations have been included from
the date of acquisition.
The following unaudited pro forma information assumes that certain acquisitions
in 1998 had taken place at the beginning of 1998. The operations of Lodi, El
Cajon and Portland were not material to the operations of the Company for the
period ended March 31, 1999.
DECEMBER 31,
------------
1998
------------
Total revenue 145,533,000
Net (loss) (3,143,000)
Net (loss) per share - basic (.15)
- diluted (.15)
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(NOTE D) BUSINESS SEGMENT INFORMATION:
Information concerning operations by industry segment is as follows (dollars in
thousands):
GOLF NON-GOLF
OPERATIONS OPERATIONS CONSOLIDATED
Three months ended March 31, 1999
Total revenue $ 24,461 $ 10,688 $ 35,149
Operating income 1,904 2,105 4,009
Depreciation and amortization 2,676 1,077 3,753
Identifiable assets 452,812 125,546 578,358
Capital expenditures 20,819 1,288 22,107
Three months ended March 31, 1998:
Total revenue $ 16,592 $ 4,905 $ 21,497
Operating income (loss) (55) 899 844
Depreciation and amortization 1,973 589 2,562
Identifiable assets 336,728 42,179 378,907
Capital expenditures 12,787 645 13,432
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.
(NOTE E) INDEBTEDNESS:
On December 2, 1998, and as amended, the Company replaced the existing $44.3
million credit facility with a syndicated $100,000,000 secured two (2) year
revolving credit facility converting to a four (4) year term loan. Chase serves
as the administrative agent for this new credit facility. The new credit
facility is secured by the pledge of the stock of most of the Company's
subsidiaries and such subsidiaries also guarantee 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 .25%
per annum or (ii) the LIBOR rate, plus between 1% and 2% per annum (depending on
the Company's ratio of Consolidated Funded Debt to Consolidated EBITDA (as such
terms are defined in the credit agreement). As of March 31, 1999, the Company
had drawn down $78.2 million of this facility.
(NOTE F) RESTRICTED STOCK:
In February 1999, a restricted stock award of common stock granted to certain
officers of the Company was termintated.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with the
Company's financial statements and the notes thereto appearing elsewhere in the
Report. This Report contains statements which constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements appear in a number of places in the Report and include
statements regarding the intent, belief or current expectations of the Company
with respect to (i) the Company's acquisition and financing plans, (ii) trends
affecting the Company's financial condition or results of operations, (iii) the
impact of competition and (iv) the expansion and integration of certain
operations. The Company cautions that forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those in the forward-looking
statements as a result of various factors. The information contained in this
Report, including, without limitation, the information under "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations", and the information contained in the Company's Annual Report on
Form 10-K for the year ended 1998 under "Risk Factors" and "Business" identifies
important factors that could cause or contribute to such differences.
GENERAL
The Company is the leading consolidator and operator of golf centers in North
America. The Company's strategy is to continue to build upon its leadership
position in the golf center industry and expand its concept of family-oriented
sports entertainment through: (i) consolidation within the golf center industry,
(ii) enhancement of facilities and customer service, (iii) leveraging
centralized operations and (iv) developing complementary sports and family
entertainment facilities. The Company's golf centers are designed to provide a
wide variety of practice opportunities, including facilities for driving,
chipping, putting, pitching and sand play. In addition, the Company's golf
centers typically offer full-line pro shops, golf lessons instructed by
PGA-certified golf professionals and other amenities such as miniature golf and
snack-bars to encourage family participation.
The Company's golf facilities have opened at varying times over the past several
years. As a result of changes in the number of golf facilities open from period
to period, the seasonality of operations, the timing of acquisitions, the
completion of various debt and equity financings and the expansion of the
Company's business to include ice rinks and Family Sports Supercenters, results
of operations for any particular period may not be indicative of the results of
operations in the future.
Most of the Company's revenues from its golf centers are derived from selling
tokens and debit cards for use in automated range-ball dispensing machines, pro
shop merchandise sales, charging for rounds of miniature golf, golf lessons and
management fees. The Company also derives revenues at its golf courses from golf
club membership fees, fees for rounds of golf and golf lessons. The Company
derives revenues from its ice rink facilities by renting rinks to hockey
leagues, charging admissions to its skating facilities for public skating,
providing lessons through USFSA-certified instructors, skate equipment rental,
and from pro-shop merchandise and food beverage sales and video games. The
Company derives revenues from its Family Sports Supercenters from substantially
the same sources as described above. As of March 31, 1999, the Company operates
or manages 26 family entertainment and ice rink facilities.
EAGLE QUEST MERGER
On June 30, 1998, the Company completed the acquisition of Eagle Quest for
1,384,735 shares of the Company's common stock for all of the outstanding common
stock, options and warrants of Eagle Quest. This transaction was accounted for
as a pooling-of-interests business combination. Eagle Quest was the second
largest operator of golf driving ranges in North America, with 18 golf centers
in Texas, Washington and Canada. Accordingly, financial statements for prior
periods have been restated to include the accounts of Eagle Quest. All amounts
discussed herein include the consolidated results of the Company and its
subsidiaries, including Eagle Quest.
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The differences between the Company's previously reported historical results and
the restated results discussed below are due to the combination of Eagle Quest's
revenues, expenses and losses with the historical revenues, expenses and income
of the Company. The restated results of operations for the Company are not
necessarily indicative of the results of operations of the consolidated entity
in the future.
Eagle Quest began operations in February 1996 and opened or acquired its
facilities at varying times commencing in 1996. Eagle Quest's strategy was to
establish the infrastructure to manage and operate a large number of facilities
and then to open or acquire such facilities. The Company believes that the
expenses of establishing and maintaining the infrastructure to service the
planned increase in facilities owned, leased and managed by Eagle Quest
contributed to Eagle Quest's losses and the level of its expenses as a
percentage of revenues.
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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:
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
---- ----
Operating revenues 77.8% 77.9%
Merchandise sales 22.2 22.1
Total revenue 100.0 100.0
Operating expenses 81.2 82.2
Cost of merchandise sold 68.4 68.1
Selling, general and admin. expenses 10.2 17.0
Income from operations 11.4 3.9
Interest expense 9.0 12.2
Other income 1.1 4.4
Income (loss) before income taxes extraordinary item
and cumulative effect of a change in accounting
principle 3.5 (3.9)
Income tax expense 1.4 4.0
Income before extraordinary items and
Cumulative effect of a change in
accounting principle 2.1 (7.9)
Cumulative effect of a change in
accounting principle
Preopening expenses (net of tax effect) -- (9.4)
Net income (loss) 2.1 (17.3)
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
The Company acquires golf centers, ice rinks and family entertainment centers at
varying times during the year, as a result of the change in the number of golf
centers open from period to period, the comparison between the 1999 and 1998
periods may not necessarily be meaningful.
Total revenue for the three months ended March 31, 1999 was $35.1 million as
compared to $21.5 million for the same period in 1998, an increase of $13.6
million (63%). The overall increase in revenue was primarily attributable to
having additional golf facilities in operation during the 1999 period as well as
the revenue generated by the Company's ice rinks and Family Sports Supercenters.
Total revenue for the 52 golf centers operating for the full three months ended
March 31, 1999 and 1998 increased 5% to $12.9 million in the 1999 period from
$12.3 million in the 1998 period. The increase in revenues for these golf
centers was primarily due to strong range and merchandise sales in the month of
March, offsetting essentially flat sales in the months of January and February.
In the first 2 months of the quarter, strong sales on the West Coast (compared
to weaker sales in 1998 due to adverse weather conditions (El Nino) were offset
by lower sales due to less favorable weather conditions on the East Coast. Total
revenue for the 17 Eagle Quest golf centers in operation for the full first
quarter of 1999 and 1998 decreased by 8%. Total revenue for the 52 Family Golf
Centers and 17 Eagle Quest centers in operation during the first quarter of 1999
and 1998 increased by 3% to $15.0 million from $14.6 million in 1998.
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Operating revenue, consisting of all sales except merchandise sales, amounted to
$27.3 million for the three months ended March 31, 1999, as compared to $16.7
million for the comparable 1998 period, an increase of $10.6 million (63%).
The increase in operating revenue was primarily attributable to having
additional golf facilities in operation during the 1999 period. Total operating
revenue for the 52 golf centers operating for the full three months ended March
31, 1999 and 1998 increased 5% to $8.6million in the 1999 period from $8.2
million in the 1998 period. Operating revenue for the 17 Eagle Quest golf
centers decreased by 8%. Non-golf revenue from the Company's Family Sports
Supercenters and ice rink facilities totaled $24.5 million for the three months
ended March 31, 1999 and $16.6 million in the comparable 1998 period. total
operational revenue for the 52 Family Golf Centers and 17 Eagle Quest centers
increased by 2% to $10.15 million in 1999 from $9.95 million in 1998.
Merchandise sales amounted to $7.8 million for the three months ended March 31,
1999 as compared to $4.8 million for the comparable 1998 period, an increase of
$3.0 million (62%). The increase in merchandise sales was primarily due to the
contribution of new locations and the continuing emphasis placed by the Company
on improving pro shop sales, improved purchasing procedures and increased
promotion. Total merchandise sales for the 52 golf centers operating for the
full three months ended March 31, 1999 and 1998 increased 5% to $4.3 million in
the 1999 period from $4.1 million in the 1998 period. Merchandise sales for the
17 Eagle Quest golf centers decreased by 8%. Total merchandise sales for the 52
Family Golf Centers and the 17 Eagle Quest golf centers increased by 5% to $4.85
million in 1999 from $4.6 million in 1998.
Operating expenses, consisting of operating wages and employee costs, land rent,
depreciation of golf driving range, skating and family entertainment facilities
and equipment, utilities and all other facility operating costs, increased to
$22.2 million (81.2% of operating revenue) in the 1999 period from $13.8 million
(82.2%) of operating revenue) in the 1998 period, an increase of $8.4 million
(62.0%). The increase in operating expenses was primarily due to having
additional golf and family entertainment centers in operation during the 1999
period.
The cost of merchandise sold increased to $5.3 million (68.4% of merchandise
sales) in the 1999 period from $3.2 million (68.1%) of merchandise sales) in the
comparable 1998 period. The overall increase in this cost of $2.1 million
(65.6%) was primarily due to the higher level of merchandise sales. The increase
in cost of merchandise sold as a percentage of merchandise sales was primarily
due the higher cost of goods sold at the Eagle Quest locations.
Selling, general and administrative expenses for the three months ended March
31, 1999 amounted to $3.6 million (10.2 % of total revenue) compared to $3.7
million (17.0% of total revenue) in the comparable 1998 period. The decrease of
$100,000 (2.7%) was the result of the combination in overhead costs between FGCI
and Eagle Quest. Selling, general and administrative expenses declined as a
percentage of total revenue primarily due to the substantial increase in revenue
and a relatively low corresponding incremental increase in certain selling,
general and administrative costs related to the reduction in combined overhead.
Interest expense increased to $3.2 million for the three months ended March 31,
1999 from $2.6 in the comparable 1998 period. The increase in interest expense
was due primarily to additional debt outstanding. Other income, including
interest income, decreased to $378,000 in the 1999 period as compared to
$956,000 in the 1998 period.
The Company had income before income taxes and cumulative effect in a change in
accounting principle of $1.2 million for the three months ended March 31, 1999,
as compared to loss of $829,000 in the comparable 1998 period.
LIQUIDITY AND CAPITAL RESOURCES
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<PAGE>
At March 31, 1999, the Company had working capital of $23.8 million compared to
$30.1 million at December 31, 1998.
The cash requirements of funding the Company's expansion have historically
exceeded cash flow from operations. Accordingly, the Company has satisfied its
capital needs primarily through debt and equity financing. The Company
continually explores raising additional capital through such means. However,
there can be no assurance that such financing will be available in the future on
terms acceptable to the Company or at all.
The Company's outstanding indebtedness as of March 31, 1999 including the Notes
(defined below) and other indebtedness of $260.1 million bears interest at fixed
and variable rates currently ranging from 5.25% to 9.875%. On December 2, 1998,
the Company entered into a Credit Agreement (the "Agreement") with The Chase
Manhattan Bank (the "Bank") providing for a two-year $100 million revolving
credit facility converting to a four-year term loan at the end of two years (the
"Credit Facility").
The Company anticipates making substantial additional expenditures in connection
with the construction, 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 may also acquire or construct
additional ice rink facilities and Family Sports Supercenters which, on a per
facility basis, are expected to cost more than the Company's golf centers. The
Company believes that the cost of opening or acquiring ice rink facilities will
range from approximately $2.0 million to $4.0 million and the cost of opening or
acquiring a Family Sports Supercenter to range from $8.0 million to $12.0
million. However, there can be no assurance that facility opening or acquisition
costs will not exceed the amounts estimated above. Facility opening and
acquisition costs vary substantially depending on the location and status of the
acquired property (i.e. whether significant improvements are necessary) and
whether the Company acquires or leases the related land. Land acquisition costs
vary substantially depending on a number of factors, including principally
location.
TRENDS
The Company plans to open or acquire additional golf centers. As the additional
golf centers acquired by the Company commence operations, total revenue should
continue to increase. In addition, the Company believes that as its currently
opened golf centers mature, revenue and operating income from its centers should
increase due to customer awareness, programs marketing the golf centers to
various special interest groups, expanding ties to the local business and
golfing community, marketing programs, and the growing popularity of golf. Any
increases may be partially offset by initial losses from pre-opening costs and
initial operating losses associated with new or newly acquired golf centers.
The Company has identified the ice rink industry as having a number of industry
and operational dynamics similar to those of the golf center industry. The
Company is applying the skills and resources it has used in the golf center
industry to capitalize on such similarities by selectively constructing, or
acquiring and enhancing, ice rinks. In addition, the Company expects to
selectively augment certain of its existing golf centers with sports and
entertainment amenities including ice rinks, video and virtual reality games,
children's rides, batting cages and other entertainment activities to create
Family Sports Supercenters. The Company believes that the addition of these
facilities expands on the Company's concept of family-oriented sports
entertainment, improves utilization by adding additional sources of revenues,
attracts a more diversified base of customers, increases visitation and per
capital spending and has the added benefit of being counter-seasonal to the
Company's core golf business. The additional revenue attributed to these Family
Sports Supercenters will be partially offset by initial losses from acquisition,
construction and other pre-opening costs and initial operating losses associated
with new supercenters.
-13-
<PAGE>
SEASONALITY
Historically, the second and third quarters have accounted for a greater portion
of the Company's revenues than have the first and fourth quarters of the year.
This is primarily due to an outdoor playing season limited by inclement weather.
Although most of the Company's facilities are designed to be all-weather,
portions of the facilities, such as driving ranges, miniature golf courses which
are outdoors, tend to be vulnerable to weather conditions. Also, golfers are
less inclined to practice when weather conditions limit their ability to play
golf on outdoor courses. The Company has acquired golf centers in various
locations (Arizona, California, Florida, Georgia, North Carolina, South
Carolina, Texas and Virginia) where inclement weather may not limit the outdoor
season as much as weather limits the outdoor playing season at the Company's
golf facilities in Northern states. In addition, the ice rink facilities and the
Family Sports Supercenters are expected to generate a greater portion of their
revenues in the first and fourth quarters of the years and accordingly, may
partially offset such seasonality. The timing of new facility acquisitions and
openings may cause the Company's results of operations to vary significantly
from quarter to quarter. Accordingly, period-to-period comparisons are not
necessarily meaningful and should not be relied on as indicative of future
results.
INFLATION
There was no significant impact on the Company's operations as a result of
inflation during the three months ended March 31, 1999.
YEAR 2000 ISSUES
In accordance with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company notes that certain statements
contained in the following discussion concerning the changeover to the year 2000
are forward-looking in nature and are subject to many risks and uncertainties.
These forward-looking statements include such matters as the Company's projected
state of readiness, the Company's projected cost of remediation, the expected
date of completion of each program or phase and the expected contingency plans
associated with any worst case scenarios. Such statements also constitute "year
2000 readiness disclosure" within the meaning of the year 2000 Information and
Readiness Disclosure Act.
The year 2000 issue is the result of computer programs using two digits rather
than four to define the applicable year. Such software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations leading to disruptions in the Company's
activities and operations.
The Company has formed a project team, comprised of the Company's management
information services staff, to identify and correct Year 2000 compliance issues
for the Company's information technology ("IT") systems as well as the non-IT
systems such as fire and burglar alarms, irrigation systems and time clocks. The
project team has been charged with the responsibility of investigating and
remediating any and all problems associated with the millennium bug. All systems
that are not compliant will be either modified or replaced as is necessary,
although since a majority of the Company's systems are industry standard
software systems which are year 2000 compliant, the Company does not expect that
significant modification or replacement will be necessary.
Although there can be no assurance, the total projected cost associated with the
Company's year 2000 program is not expected to be material to the Company's
financial position, results of operations or cash flows. The total cost for the
project (excluding internal payroll costs) is currently expected to approximate
$100,000 to $175,000, which is being funded with the Company's working capital.
As of March 31, 1999, the Company had incurred approximately $75,000 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,
-14-
<PAGE>
involves repairing, upgrading and/or replacing any non-compliant equipment and
systems. The Company has already begun replacing its older IBM systems to a year
2000 compliant Windows(R) based system as part of the Company's plans to upgrade
its point-of-sales merchandise control systems. The Company expects to adjust
rather than replace its non-IT systems to perform properly in the year 2000 and
thereafter. Phase III, Testing, involves testing the Company's systems,
software, and equipment for year 2000 readiness, or in certain cases, relying on
test results provided to the Company from suppliers. The project team has
commenced testing of the Company's most critical software programs to ensure
year 2000 compliance and has begun contacting all major suppliers to review year
2000 compliance issues of their products. By June 15, 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 March 31, 1999, the Company's overall progress by phase for all IT and
non-IT systems was as follows:
- --------------------------------------------------------------------------------
TARGET
PHASE PERCENT COMPLETE COMPLETION DATE
- --------------------------------------------------------------------------------
Phase I - Inventory Assessment 100% Complete
- --------------------------------------------------------------------------------
Phase II - Remediation 95% June 1, 1999
- --------------------------------------------------------------------------------
Phase III - Testing 90% June 15, 1999
- --------------------------------------------------------------------------------
Phase IV- Implementation and Completion 85% July 15, 1999
- --------------------------------------------------------------------------------
The completion dates set forth above are based on the Company's current
expectations. However, due to the uncertainties inherent in year 2000
remediation, no assurances can be given as to whether such projects will be
completed on such dates.
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations. The failure of
the Company's point-of sales systems and billing systems could result in the
Company's inability to timely post and record sales revenue and expenses. In
addition, the aging of the Company's accounts payable would be inaccurate. In
this unlikely event, the Company would manually record sales and expenses until
a year 2000 compliant system is applied.
The financial impact of any or all of the above worst-case scenarios has not
been and cannot be estimated by the Company due to the numerous uncertainties
and variables associated with such scenarios. Management believes, however, that
its year 2000 program will significantly reduce the Company's risks associated
with the change over to the year 2000.
At the present time the Company has not deferred any IT projects nor does it
anticipate that such a deferral will be necessary as a result of its year 2000
efforts.
-15-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS NONE
ITEM 2. CHANGE IN SECURITIES
During the quarter ended March 31, 1999, the Company issued an aggregate of
63,376 shares of Common Stock as part of the consideration for 3 separate
acquisitions. Such shares were issued in the amounts, on the dates and for
the securities or assets listed below: (i) January 14, 1999, 24,909 shares,
Shun Jong Lee, all of the issued and outstanding securities of the 82nd
Avenue Golf Range, Inc., a company which owned a golf center located in
Portland, Oregon as well as 8,000 shares to Western Golf Properties
International, Ltd. in connection with such transaction; (ii) March 5, 1999,
12,467 shares, El Cajon Golf Associates, Inc., the El Cajon golf center,
located in El Cajon, California; and (iii) March 15, 1999, 8000 shares, Carl
and Judith Fink, Lodi golf center, located in Lodi, California. Such
issuances were not registered under the Securities Act of 1933 (the "Act").
None of such issuances involved any general solicitation and each of the
recipients of the Common Stock has represented that such recipient
understands that the Common Stock may not be sold or otherwise transferred
absent registration under the Act or an exemption therefrom and each
certificate representing shares of such Common Stock bears a legend to such
effect.
ITEM 3. DEFAULT UPON SENIOR SECURITIES NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE
ITEM 5. OTHER INFORMATION NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT 27 FINANCIAL DATA SCHEDULE
(B) REPORTS ON FORM 8-K
The Company's current report on Form 8-K/A, dated December 2, 1998 and filed
January 14, 1999, reporting Item 7 Financials.
-16-
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: , 1999
-------------
Melville, NY
FAMILY GOLF CENTERS, INC.
(Registrant)
By:
-----------------------------
KRISHNAN P. THAMPI
President,
Chief Operating Officer,
Assistant Secretary,
and Treasurer
By:
-----------------------------
JEFFREY C. KEY
Chief Financial Officer
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE
PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,661,000
<SECURITIES> 5,412,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 25,156,000
<CURRENT-ASSETS> 46,371,000
<PP&E> 480,871,000
<DEPRECIATION> (18,553,000)
<TOTAL-ASSETS> 578,358,000
<CURRENT-LIABILITIES> 22,574,000
<BONDS> 0
0
0
<COMMON> 260,000
<OTHER-SE> 290,478,000
<TOTAL-LIABILITY-AND-EQUITY> 578,358,000
<SALES> 35,149,000
<TOTAL-REVENUES> 35,149,000
<CGS> 5,346,000
<TOTAL-COSTS> 31,140,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,155,000
<INCOME-PRETAX> 1,232,000
<INCOME-TAX> 480,000
<INCOME-CONTINUING> 752,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 752,000
<EPS-PRIMARY> 0.3
<EPS-DILUTED> 0.3
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