<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 September 30, 1999
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
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)
(631) 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 November 19, 1999
- ---------------------------------------- ------------------------------------
Common Stock, par value $.01 per share 26,038,236
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE>
ITEM 1.
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTORY COMMENT
The condensed consolidated financial statements included herein have been
prepared by Family Golf Centers, Inc. (the "Company"), without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and 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 financial statements included in the
Company's annual report filed on Form 10-K and 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 nine months ended September 30,
1999 are not necessarily indicative of the results to be expected for the full
year.
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<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
---- ----
<S> <C> <C>
(UNAUDITED)
Current assets:
Cash and cash equivalents $5,285 $3,878
Restricted cash deposits 331 314
Short-term investments 17,374
Inventories 13,330 26,220
Prepaid expenses and other current assets 7,093 10,277
Prepaid and refundable income taxes 10,737
----------------- ----------------
Total current assets 36,776 58,063
Property, plant and equipment (net) 424,463 444,280
Assets held for sale 37,000
Loan acquisition costs (net) 6,758 6,269
Other assets 6,681 11,201
Excess of cost over fair value of assets acquired 39,218 52,227
----------------- ----------------
TOTAL $550,896 $572,040
================= ================
LIABILITIES
Current liabilities:
Accounts payable, accrued expenses and other current liabilities $27,876 $21,408
Income taxes payable 2,590
Current portion of long-term obligations 6,694 3,950
----------------- ----------------
Total current liabilities 34,570 27,948
----------------- ----------------
Long-term obligations (less current portion) 167,140 130,621
Convertible subordinated notes 115,000 115,000
Deferred rent 1,649 1,193
Deferred tax liability 3,217
Other liabilities 6,856 4,738
----------------- ----------------
Total liabilities 325,215 282,717
----------------- ----------------
Minority interest 40 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;
26,038,000 and 26,117,000 shares outstanding at
September 30, 1999 and December 31, 1998 260 261
Additional paid-in capital 289,362 292,040
Retained earnings (accumulated deficit) (62,743) 1,561
Accumulated other comprehensive (losses):
Foreign currency translation adjustment (552) (667)
Unearned compensation (639) (3,865)
Treasury shares (47) (47)
----------------- ----------------
Total stockholders' equity 225,641 289,283
----------------- ----------------
TOTAL $550,896 $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 amounts)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating revenues $96,892 $72,592 $34,045 $29,541
Merchandise sales 29,902 22,142 10,102 9,072
--------------- --------------- --------------- --------------
Total revenue 126,794 94,734 44,147 38,613
------- ------ ------ ------
Operating expenses 96,790 46,395 41,010 17,110
Cost of merchandise sold 29,320 15,089 15,601 6,180
Selling, general and
administrative expenses 11,638 9,187 4,057 2,514
Merger, acquisition, integration and other related
charges 7,752
Impairment and other related charges 58,059 58,059
--------------- --------------- --------------- --------------
Income (loss) from operations (69,013) 16,311 (74,580) 12,809
Interest expense (13,924) (7,764) (6,598) (2,389)
Other income 664 1,805 170 615
--------------- --------------- --------------- --------------
Income (loss) before income taxes, extraordinary item
and cumulative effect of a change in accounting principle
(82,273) 10,352 (81,008) 11,035
Income tax expense (benefit) (17,969) 9,191 (17,476) 4,304
--------------- --------------- --------------- --------------
Income (loss) before extraordinary item
and cumulative effect of a change in accounting
principle $(64,304) $1,161 $(63,532) $6,731
Extraordinary Item:
Extinguishment of debt (4,890) (4,890)
Cumulative effect of a change in accounting principle
Pre-opening expenses, net of tax effect (2,035)
--------------- --------------- --------------- --------------
Net income (loss) $(64,304) $(5,764) $(63,532) $1,841
========= ======== ========= ======
Basic and diluted income (loss) per share:
Income (loss) before cumulative effect of a change in
accounting principle $(2.47) $0.05 $(2.44) $0.27
Extraordinary Item (0.22) (0.20)
Cumulative effect of a change in accounting principle (0.09)
--------------- --------------- --------------- --------------
Net income (loss) per share $(2.47) $(0.26) $(2.44) $0.07
======= ======= ======= =====
Weighted average shares outstanding - basic 26,064 20,010 26,038 24,528
Effect of dilutive securities 636 636
--------------- --------------- --------------- --------------
Weighted average shares outstanding - dilutive 26,064 22,646 26,038 25,164
====== ====== ====== ======
</TABLE>
The accompany notes to financial statements are an integral part hereof.
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<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(64,304) $(5,764)
Adjustments to reconcile net loss to net cash provided by operating activities:
Extraordinary Item - extinguishment of debt 4,890
Cumulative effect of change in accounting principal 2,035
Non-cash impairment and other related charges 57,059
Non-cash inventory valuation write-down 3,485
Issuance of stock for compensation 144
Deferred tax benefit (3,217)
Depreciation and amortization 15,743 8,298
Non-cash merger, acquisition, integration and other related charges 2,969
Non-cash operating write-down 3,915 640
(Increase) decrease in inventories 5,737 (10,260)
(Increase) in prepaid expenses and other current assets (3,594) (6,333)
(Increase) in prepaid income taxes (10,737)
Decrease in other assets 2,344 2,101
Increase in accounts payable and accrued expenses 4,947 3,386
Increase in other liabilities 2,118 3,193
(Decrease) in income taxes payable (2,590) (283)
Increase in deferred rent 456
---------------- ---------------
Net cash provided by operating activities 11,506 4,872
---------------- ---------------
Cash flows from investing activities:
Acquisitions of property and equipment (64,907) (140,757)
Acquisitions of goodwill (2,331) (15,994)
Change in restricted cash deposits (17) 76
Net proceeds from sale of short-term investments 17,374 15,140
---------------- ---------------
Net cash (used in) investing activities (49,881) (141,535)
---------------- ---------------
Cash flows from financing activities:
(Increase) in loan acquisition costs (493) (1,248)
Proceeds from loans, banks and others 54,551 73,359
Repayment of bank loans (14,276) (37,129)
Cost of prepayment of debt (884)
Net proceeds from issuance of common stock 104,574
Proceeds from the exercise of options and warrants 2,780
---------------- ---------------
Net cash provided by financing activities 39,782 141,452
---------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,407 4,789
Cash and cash equivalents - beginning of period 3,878 6,042
---------------- ---------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $5,285 $10,831
====== =======
Supplemental and non-cash disclosures:
Acquisition of property in exchange for common stock $ 522 $7,548
Acquisition of goodwill in exchange for mortgages, notes, and common stock 1,012 3,953
Acquisition of property subject to loans payable 6,642
Issuance of stock for services rendered 53
Property additions accrued but not paid 821 431
Interest paid 8,733 8,278
Taxes paid 383 8,100
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
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<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 ("Golf Operations"). 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 ("Non-Golf Operations")
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 14 golf centers from GBGI 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.
[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 of capitalizing these costs and
amortizing them over a twelve month period.
(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. In
the nine months ended September 30, 1999, the Company recorded a charge of $3.5
million included in cost of merchandise sales to writedown obsolete, slow moving
and excess inventories to their market value.
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<PAGE>
(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"). No acquisitions were made during the second or
third quarters of 1999.
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 September 30, 1999.
DECEMBER 31,
------------------
1998
------------------
Total revenue 144,598
Net (loss) (2,999)
Net (loss) per share - basic (.14)
- diluted (.14)
(NOTE D) BUSINESS SEGMENT INFORMATION:
Information concerning operations by industry segment is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
GOLF NON-GOLF
OPERATIONS OPERATIONS CONSOLIDATED
<S> <C> <C> <C>
Nine months ended September 30, 1999:
Total revenue $100,963 $25,831 $126,794
Operating income (loss) (69,742) 729 (69,013)
Depreciation and amortization 12,283 3,460 15,743
Identifiable assets 419,148 131,748 550,896
Capital expenditures 30,304 36,934 67,238
Nine months ended September 30, 1998:
Total revenue $80,858 $13,876 $94,734
Operating income 13,851 2,460 16,311
Depreciation & amortization 6,302 1,996 8,298
Identifiable assets 465,179 64,038 529,217
Capital expenditures 164,299 11,026 175,325
Three months ended September 30, 1999:
Total revenue $36,263 $7,884 $44,147
Operating loss (73,741) (839) (74,580)
Depreciation and amortization 5,056 1,290 6,346
Three months ended September 30, 1998:
Total revenue $34,129 $4,484 $38,613
Operating income 12,331 478 12,809
Depreciation and amortization 2,495 647 3,142
</TABLE>
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<PAGE>
(NOTE E) INDEBTEDNESS:
As a result of our financial performance in the second quarter of this year, we
were not in compliance with several covenants under our $100 million Credit
Facility (the "Old Credit Facility"), including all the financial covenants
which are based on earnings before interest, taxes, depreciation and
amortization.
On October 18, 1999, the lenders under the Old Credit Facility agreed to
restructure and expand the facility to a $130 million Credit Facility ("New
Credit Facility"). The New Credit Facility replaces the Company's previous Old
Credit Facility. The net proceeds of $30 million under the New Credit Facility
are to be used to finance construction projects and for working capital
purposes. The New Credit Facility provides for varying interest rates between
Alternative Base Rate (as that term is defined in the Credit Agreement to mean
the greater of The Chase Manhattan Bank's prime rate of lending or the Federal
Funds Rate plus 1/2%) plus 1 1/2% and Alternative Base Rate plus 3%, is
collateralized by substantially all of the Company's assets and requires certain
scheduled principal payments through its maturity date on December 31, 2002. As
part of the restructuring, the Company was required to issue to the lenders
warrants for up to 10% of the Company's outstanding common stock on a fully
diluted basis, at an exercise price of $0.50 per share, subject to adjustment
and the Company's right to cancel up to 50% of such warrants under certain
circumstances. The market price of the Company's common stock on October 18,
1999 was $2.00 per share. The issuance of such warrants will result in a charge
which will be amortized over the life of the New Credit Facility.
During the nine months ended September 30, 1999, the Company borrowed an
additional $37.5 million under the Old Credit Facility, $10.5 million of which
was used to repay all amounts outstanding under the mortgage loan with ORIX USA
Corporation. In September 1999, the Company obtained a swing line from the
lenders and as of September 30, 1999, $105.2 million was outstanding under the
Old Credit Facility.
On November 12, 1999, the Company restructured its term loans with Bank of
America (formerly known as NationsBank N.A). The restructured loan agreement
provides for interest rates of prime plus 2 1/2%, a mandatory prepayment of
$250,000 due on or before September 30, 2000 and a maturity date of March 1,
2001. As part of the restructuring, the Company was required to issue to Bank of
America warrants for 100,000 shares of the Company's common stock at an exercise
price of $0.50 per share, subject to adjustment and the Company's right to
cancel up to 100% of such warrants under certain circumstances. As of September
30, 1999, $6.1 million was outstanding under the term loans with Bank of
America. The issuance of such warrants will result in a charge which will be
amortized over the life of the restructured term loans.
In the third quarter of 1999, the Company was not in compliance with certain
financial covenants under a loan with Fleet Bank. On November 19, 1999, the
Company restructured its term loan with Fleet Bank. The amended loan agreement
provides for a guaranty of Family Golf Centers, Inc. or in lieu thereof, a
$150,000 payment into a cash escrow account by June 30, 2000 and a maturity
date of August 8, 2001. As of September 30, 1999, $2.8 million was outstanding
under the loan with Fleet Bank.
In accordance with EITF Issue No. 96-19, Debtor's Accounting for a Modification
or Exchange of Debt Instruments, the Company anticipates recognizing an
extraordinary loss in the amount of $2.6 million in the fourth quarter of 1999.
The extraordinary loss results from the substantial modification of the terms of
the New Credit Facility and relates to the write-off of debt acquisition costs
previously carried on the balance sheet in connection with the Old Credit
Facility and from professional fees and expenses incurred in connection with the
restructuring of the credit facility.
(NOTE F) RESTRICTED STOCK:
In February 1999, a restricted stock award of common stock granted to certain
officers of the Company was rescinded.
(NOTE G) ASSET IMPAIRMENT AND OTHER CHARGES:
In the third quarter of 1999, as a result of operating losses and in connection
with the restructuring of the Old Credit Facility and the strategic review of
its ongoing operations, the Company's management performed a review of
long-lived assets in accordance with Statement of Financial Accounting Standards
No. 121 "Accounting for
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<PAGE>
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS No. 121") and determined that events and changes in circumstances have
resulted in the carrying amount of certain long-lived assets exceeding the sum
of the expected future cash flows associated with such assets. The measurement
of the impairment losses recognized was based on the difference between the fair
values, net of estimated disposal costs, and the carrying amounts of the assets.
In connection with such review a decision was made to exit various areas of
operations that were underperforming. As of September 30, 1999, the Company
identified 23 golf facilities which had been carried at a value of $73.5 million
consisting of property, plant and equipment of $61.2 million, intangible assets
of $6.5 million and other assets of $5.8 million that it intends to dispose of
or sell. The Company has recorded an impairment charge of $ 36.5 million to
write the carrying amount of such assets down to their estimated fair value.
There can be no assurance that the estimates of fair value used by the Company
will approximate the actual selling price of such assets upon their sale or
disposition. Further, the Company has also identified 13 underperforming golf
facilities whose undiscounted future cash flows are not expected to result in
the recovery of the carrying amount of such assets, resulting in an impairment
charge of $19.9 million. In addition, the Company incurred legal, consulting and
other incremental fees and costs aggregating approximately $1.7 million relating
to implementing its restructuring efforts, including retaining a business
advisory firm. In the aggregate, the Company recorded $58.1 million in charges
for write-downs of long-lived assets and related costs in the third quarter.
Included in operating expenses in the accompanying Consolidated Statement of
Operations for the three and nine months ended September 30, 1999 are additional
charges of $3.9 million relating to writedowns of accounts receivable and other
operating assets in connection with the strategic decision to focus on core
activities.
Impairment related to long lived assets and other assets held for sale reduced
the related asset balances on the balance sheet. Fees and other incremental
costs which enabled the Company to address the effects of its recent
restructuring were recorded as paid or as other accrued expenses as incurred.
In connection with the ongoing restructuring of the operations and the need to
raise cash, the Company is exploring other strategies and is pursuing the
disposition of non-golf operations and other golf facilities. Such actions may
result in the Company incurring additional losses.
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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 our
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) our 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. We caution 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 our Annual Report on Form 10-K for the year ended December 31, 1998 under
"Risk Factors" and "Business" identifies important factors that could cause or
contribute to such differences.
GENERAL
Family Golf Centers, Inc. operates golf centers, ice rink facilities and family
entertainment centers in North America. Our golf centers are designed to provide
a wide variety of practice opportunities, including facilities for driving,
chipping, putting, pitching and sand play. In addition, our 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. From 1992 through 1998, we expanded rapidly,
growing from one golf facility in 1992 to 121 golf facilities as of September
30, 1999. As a result of our performance over the last three quarters (and our
liquidity constraints, as described below), we are not likely to continue to
expand over the near term, but instead will focus on core business operations.
Our 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 our 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 our revenues from the 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. We also derive revenues at our golf courses from golf club
membership fees, fees for rounds of golf and golf lessons. Our Non Golf
operations consists of Ice Rink Facilities and Family Entertainment Centers. We
derive revenues from our 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. We derive revenues
from our Family Sports Supercenters from substantially the same sources as
described above. As of September 30 1999, we operated or managed 25 family
entertainment and ice rink facilities.
EAGLE QUEST MERGER
On June 30, 1998, we completed the acquisition of Eagle Quest for 1,384,735
shares of our 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 Family Golf Centers, Inc. and its
subsidiaries, including Eagle Quest.
The differences between our previously reported historical results and the
restated results discussed below are due to the combination of Eagle Quest's
revenues, expenses and losses with historical revenues, expenses and income of
the Company. Our restated results of operations are not necessarily indicative
of the results of operations of the consolidated entity in the future.
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<PAGE>
RECENT DEVELOPMENTS
As a result of the Company's liquidity crisis, arising from the inability to
comply with the financial covenants under our $100 million credit facility in
the second quarter of this year, the Company undertook a strategic review of its
business with the assistance of Zolfo Cooper, LLC, a business advisory firm. As
part of its strategic planning process, the Company identified certain non-core
assets and certain underperforming assets. The decision was made to dispose of
these assets so that the Company could raise capital, and focus attention and
financial resources on the remaining core businesses. Additional restructuring
steps were initiated including staff and expense reduction programs, evaluation
of the retail component of our business, and implementation of a new management
information system. The Company incurred substantial costs related to the
restructuring in the quarter, including legal and consulting fees and the
write-down of long-lived and other assets. In addition, the Company wrote down
obsolete, slow moving and excess inventory to the lower of cost or market. The
Company experienced a reduction in gross margin resulting from the liquidation
of inventory to raise cash for operations. Accordingly, the restructuring is an
on going process and the Company continues to evaluate all of its business
operations.
RESULTS OF OPERATIONS
The following table sets forth selected operations data 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>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ---------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues 76.4% 76.6% 77.1% 76.5%
Merchandise sales 23.6 23.4 22.9 23.5
------------- ------------ ---------------- -------------
Total revenue 100.0 100.0 100.0 100.0
Operating expenses 100.0 63.9 120.5 57.9
Cost of merchandise sold 98.1 68.1 154.4 68.1
Selling, general and
admin. Expenses 9.2 9.7 9.2 6.5
Merger, acquisition,
integration and other
related charges 8.2 ---
Impariment and other related charges 45.0 141.6
Income (loss) from operations (54.4) 17.2 (168.9) 33.2
Interest expense 11.0 8.2 14.9 6.2
Other income .5 1.9 .4 1.6
Income (loss) before income taxes (64.9) 10.9 (183.0) 29.0
Income tax expense (benefit) (14.2) 9.7 (21.6) 11.1
Income (loss) before extraordinary
items and Cumulative effect of change
in accounting principle (5.1) 1.0 (143.9) 17.4
Extraordinary Item:
extinguishment of Debt 5.0 13.0
Cumulative Effect of change in
accounting principle - preopening
expense 2.0 .05
Net income (loss) (5.1) (6.0) (143.9) (1.0)
</TABLE>
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NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
We acquire 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 nine months ended September 30, 1999 was $126.8 million as
compared to $94.7 million for the same period in 1998, an increase of $32.1
million (33.8%). The overall increase in revenue was attributable to having
additional golf centers in operation during the 1999 period, as well as the
revenue generated by our ice rink and Family Sports Supercenters. Total revenue
for the 66 golf centers operating for the full nine months ended September 30,
1999 and 1998 decreased 1.9% to $60.7 million in the 1999 period from $61.8
million in the 1998 period. Operating revenues decreased by 2.1% to $42.2
million while merchandise sales decreased by 1.3% to $18.5 million. Total
revenues for the 50 golf centers operated by Family Golf Centers in the 1998 and
1999 periods decreased by 0.6% while operating revenues for these centers
decreased by 0.1% and merchandise sales decreased by 1.8 %. Total revenue for
the 16 golf centers operated by Eagle Quest in the 1998 period declined by 8.8%,
while operating revenues declined 11.9 % and merchandise sales increased by
2.2%.
Operating revenue, consisting of all sales except merchandise sales, amounted to
$96.9 million for the nine months ended September 30, 1999, as compared to $72.6
million for the comparable 1998 period, an increase of $24.3 million (33.5%).
The increase in operating revenue was primarily attributable to having
additional golf centers in operation during the 1999 period, as well as the
revenue generated by our ice rinks and Family Sports Supercenters. Non-golf
revenue from our Sports Supercenters and ice rinks totaled $25.8 million for the
nine months ended September 30, 1999.
Merchandise sales, consisting of golf clubs, balls, bags, gloves, videos,
apparel and related accessories, amounted to $29.9 million for the nine months
ended September 30, 1999 as compared to $22.1 million for the comparable 1998
period, an increase of $7.8 million (35.0%). The increase in merchandise sales
was due to the contribution of new locations.
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 facility operating costs, increased to $96.8
million (100% of operating revenue) in the 1999 period from $46.4 million (63.9%
of operating revenue) in the 1998 period, an increase of $50.5 million (108.6%).
The increase in operating expenses was primarily due to the operating costs of
locations that were operated by the Company during the 1999 period which were
not operated in the 1998 period. The increase in operating expenses as a
percentage of revenues resulted from several factors, including increased staff
expense at our golf centers which was incurred to focus on improving pro shop
and lesson revenues, without achieving, however, the expected revenue
improvement; training and related expenses incurred in connection with the
implementation of our new MIS system; and the opening of several new facilities
later than anticipated which resulted in significant expenses without
corresponding revenues. Operating Expenses for the nine months ended September
30, 1999 includes a charge of $3.9 million from managements' review and
revaluation of certain assets.
The cost of merchandise sold increased to $29.4 million (98.1% of merchandise
sales) in the 1999 period from $15.1 million (68.1% of merchandise sales) in the
comparable 1998 period. The overall increase in the cost of merchandise sold of
$14.2 million (94.3%) was due in part to the higher level of merchandise sales.
The increase in cost of merchandise sold as a percentage of merchandise sales
for the nine months ended September 30, 1999 includes the effects of the
Company's liquidation of inventory to raise cash, inability to purchase current
product from major equipment manufacturers and the write down to the lower of
cost or market for obsolete, slow moving and excess inventory of $3.5 million.
The Company anticipates that gross margins in the fourth quarter of 1999 and the
first quarter of 2000 will continue to be negatively impacted by the need to
raise cash and inability to obtain new merchandise.
Selling, general and administrative expenses for the nine months ended September
30, 1999 amounted to $11.6 million (9.2% of total revenue) compared to $9.2
million (9.7% of total revenue) in the comparable 1998 period, an
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increase of $2.5 million (26.7%), primarily due to the expenses associated with
opening and operating additional golf centers and skating and entertainment
facilities.
In the third quarter of 1999, management performed a review of long lived assets
in accordance with Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS No. 121") and determined that events and changes in
circumstances resulted in the carrying amount of the assets exceeding the sum of
the expected future cash flows associated with such assets. As a result of such
review, $56.4 million in charges were recorded for write-downs of long-lived
assets in the third quarter. The Company incurred legal, consulting and other
incremental fees and costs of $1.7 million relating to implementing its
restructuring efforts, including retaining a business advisory firm.
Interest expense increased to $13.9 million for the nine months ended September
30, 1999 from $7.8 million in the comparable 1998 period. Other income,
primarily interest income, declined to $664,000 in the 1999 period from $1.8
million in the 1998 period a decrease of $1.1 million.
Loss before income taxes (benefit), extraordinary item and cumulative effect of
a change in accounting principal for the nine months ended September 30, 1999
was $82.3 million, as compared to $10.4 million for the nine months ended
September 30, 1998. Net loss for the nine months ended September 30, 1999 was
$64.3 million as compared to $5.8 million for the nine months ended September
30, 1998.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
We acquire 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 September 30, 1999 was $44.1 million as
compared to $38.6 million for the same period in 1998, an increase of $5.5
million (14.3%). 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 our ice rinks and Family Sports Supercenters. Total
revenues for the 81 golf centers operating for the full three month period in
1998 and 1999 decreased by 5.2% from $ 28.1 million in 1998 to $ 26.7 million in
1999. The 81 golf centers consisted of 54 golf centers operated by Family Golf
during the 1998 period, 17 golf centers acquired from Eagle Quest, 7 golf
centers acquired from Metro Golf in 1998 and 3 golf centers acquired from Blue
Eagle during 1998. Total revenues for the 54 Family Golf facilities decreased by
6.8%, operating revenues decreased by 5.0% and merchandise sales decreased by
11.2%. Total revenues for the 17 Eagle Quest centers increased by 9.5%,
operating revenues increased by 5.8% and merchandise sales increased by 23.5%
from 1998. Total revenues for the 10 Metro Golf and Blue Eagle locations
decreased by 8.3%, operating revenues decreased by 6.3% and merchandise sales
decreased by 15.0%. The liquidity crisis faced by the Company during the third
quarter negatively impacted revenues in the period as follows: merchandise sales
were significantly affected by the inability of the Company to obtain current
product from its vendors, lack of funds for advertising also contributed to
lower sales, particularly at new golf and Super Centers locations.
Operating revenue, consisting of all sales except merchandise sales, amounted to
$34.0 million for the three months ended September 30, 1999 as compared to $29.5
million for the comparable 1998 period, an increase of $4.5 million (15.2%). The
increase in operating revenue was attributable to having additional golf centers
in operation during the 1999 period, as well as the revenue generated by our ice
rinks and Family Sports Supercenters. Operating revenues increased by 15.2 % and
merchandise sales increased by 11.4%. Non golf revenues from our Sports
Supercenters and ice rinks amounted to $7.9 million in the 1999 period versus
$4.5 million in 1998 due mainly to the new Denver Supercenter and the
SkateNation acquisition. The Company believes that revenues were negatively
impacted by the lack of available funds for advertising and promotion, as well
as record breaking heat throughout much of our operating regions.
Merchandise sales, consisting of golf clubs, balls, bags, gloves, videos,
apparel and related accessories, amounted to $10.1 million for the three months
ended September 30, 1999 as compared to $9.1 million for the comparable 1998
period, an increase of $1.0 million (11.4%). The increase in merchandise sales
was due to the contribution of new locations.
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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
$41.1 million (121% of operating revenue) in the 1999 period from $17.1 million
(58%) of operating revenue) in the 1998 period, an increase of $24.0 million.
The increase in operating expenses was primarily due to having additional golf
and family entertainment centers in operation during the 1999 period. The
increase in operating expenses as a percentage of revenues resulted from several
factors, including increased staff expense at our golf centers which was
incurred to focus on improving pro shop and lesson revenues, without achieving,
however, the expected revenue improvement; training and related expenses
incurred in connection with the implementation of our new MIS system; and the
delayed opening of several new facilities which resulted in significant expenses
without realizing the anticipated offsetting revenues. In addition, the
acquisition of the SkateNation ice skating centers and the new Denver and New
Rochelle Super Centers, for which operating expenses relative to operating
revenues are seasonally higher in the third quarter, also contributed to the
higher operating expense to operating revenue ratio for the Company.
Operating expenses also include a charge of $3.9 million from management's
review and revaluation of certain assets.
The cost of merchandise sold increased to $15.6 million (154.4% of merchandise
sales) in the 1999 period from $6.2 million (68.1% of merchandise sales) in the
comparable 1998 period. The overall increase in this cost of $9.4 million
(152.4%) due in part to the higher level of merchandise sales. The increase in
cost of merchandise sold as a percent of merchandise sales for the three months
ended September 30, 1999 includes the effects of the Company's need to liquidate
inventory to raise cash, the inability to purchase current inventory styles and
the write down to the lower of cost or market for obsolete, slow moving and
excess inventory of $3.5 million. The Company anticipates that gross margins in
the fourth quarter of 1999 and the first quarter of 2000 will continue to be
negatively impacted by the need to raise cash and the inability to obtain new
merchandise.
Selling, general and administrative expenses for the three months ended
September 30, 1999 amounted to $4.1 million (9.2% of total revenue) compared to
$2.5 million (6.5% of total revenue) in the comparable 1998 period. The increase
in selling, general and administrative expenses is attributed to the expenses
associated with opening and operating additional golf centers and skating and
entertainment facilities.
In the third quarter of 1999, the Company's management performed a review of
long-lived assets in accordance with Statement of Financial Accounting Standards
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS No. 121"), and determined that events and
changes in circumstances resulted in the carrying amount of the assets exceeding
the sum of the expected future cash flows associated with such assets. As a
result of the review, $56.4 million in charges were recorded for write-downs of
long-lived assets in the third quarter. The Company incurred legal, consulting
and other incremental fees and costs of $1.7 million relating to the
restructuring efforts, including retaining a business advisory firm.
Interest expense increased to $6.6 million for the three months ended September
30, 1999 from $2.4 million in the comparable 1998 period. The increase in
interest expense was due primarily to additional debt outstanding and an
increase in interest rates. Other income, including interest income, decreased
to $170,000 in the 1999 period as compared to $615,000 in the 1998 period.
We had a loss before income taxes and cumulative effect of a change in
accounting principle of $81.0 million for the three months ended September 30,
1999, as compared to income of $11.0 million in the comparable 1998 period. Net
loss for the three months ended September 30, 1999 was $63.5 million as compared
to net income of $1.8 million for the 1998 period.
We completed a restructuring of our Old Credit Facility with our lenders on
October 18, 1999, which provided for an additional $30.0 million of
availability. In addition, we are in the process of divesting ourselves of
certain golf and non-golf assets in order to raise capital, which together with
the additional capital available under the New Credit Facility, should allow the
Company to meet its obligations and commitments over the next twelve months.
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Our ability, however, to meet our cash requirements for operations and
construction is dependent upon the completion of these asset sales in a timely
manner.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, we had cash, cash equivalents and short-term investments
of $5.6 million compared to $21.2 million at December 31, 1998. The decrease was
due principally to construction costs of approximately $64.9 million and the
funding of operating losses, partially offset by the proceeds of certain
financing transactions described below.
The cash requirements of funding our construction expenditures and acquisition
costs have historically exceeded cash flow from operations. In the past, we have
satisfied our capital needs primarily through debt and equity financing.
Although we continually explore raising additional capital through such means,
equity financing would be extremely dilutive at our current stock price ($1.69
per share as of November 17, 1999) and debt financing may be difficult and
costly to obtain.
Our outstanding indebtedness as of September 30, 1999, including the Notes
(defined below) and other indebtedness of $288.8 million, bears interest at
fixed and variable rates currently ranging from 5.3% to 15.0% per annum.
During the nine months ended September 30, 1999, we borrowed an additional $37.5
million under the Old Credit Facility, $10.5 million of which was used to repay
all amounts outstanding under the mortgage loan with ORIX USA Corporation.
As a result of our financial performance in the second quarter of this year, we
were not in compliance with several covenants under our Old Credit Facility,
including all the financial covenants which were based on earnings before
interest, taxes, depreciation and amortization. In exchange for a fee of
$250,000 and an increase in the interest rate to the prime rate plus 2%, we
received a waiver and a swing line from the lenders under the Old Credit
Facility, while we worked with them to restructure the Old Credit Facility. The
restructuring was completed on October 18, 1999 and the Old Credit Facility was
expanded to a $130 million New Credit Facility. The New Credit Facility provides
for varying interest rates between Alternate Base Rate plus 1 1/2 % and
Alternate Base Rate plus 3%, is collaterized by substantially all of the
Company's assets and requires certain scheduled principal payments through its
maturity date on December 31, 2002. In addition, we successfully restructured
our debt with Bank of America on November 12, 1999, and with Fleet Bank on
November 19, 1999.
Given our receipt of additional liquidity under the New Credit Facility and the
successful restructuring of our debt with Bank of America and Fleet Bank, as
well as the anticipated proceeds from the planned sale of certain non-core and
underperforming assets, we believe that we will have adequate funding to meet
all of our commitments (including interest payments and other debt service) over
the next 12 months. There can be no assurance, however, that we will consummate
assets sales in a timely manner or that such asset sales will yield the capital
necessary to meet our capital needs. In addition, under the New Credit Facility,
a portion of the proceeds of asset sales is required to be applied to the
repayment of indebtedness. In the event asset sales do not yield adequate
capital or are not timely consummated, we will explore a variety of other
options, including, but not limited to (i) other sources of financing, (ii)
halting construction projects currently committed to or underway, (iii)
deferring capital improvements and maintenance, (iv) closing certain operations,
and (v) undertaking other measures to conserve our working capital. Such
measures could have a material adverse effect on our business and operations.
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The New Credit Facility consists of two tranches: "Tranche A" is a $30 million
revolving credit facility which converts into a term loan on December 29, 2000,
after which time amounts which are repaid may not be reborrowed; "Tranche B" is
a $100 million term loan.
Initially, principal amounts outstanding with respect to Tranche A loans bear
interest at a variable rate based on the Alternative Base Rate (as that term is
defined in the Credit Agreement to mean the greater of The Chase Manhattan
Bank's prime rate of lending or the Federal Funds Rate plus 1/2%) plus 1 1/2 %.
If the New Credit Facility is permanently repaid to $100 million or less on or
before June 30, 2000, from and after such repayment, the rate of interest with
respect to Tranche A loans shall be reduced to a variable rate based on the
Alternative Base Rate plus 1/2%. Initially, principal amounts outstanding with
respect to Tranche B loans shall bear interest at a variable rate based on the
Alternative Base Rate plus 3%. If the New Credit Facility is permanently repaid
to $100 million or less on or before June 30, 2000, from and after such
repayment, the rate of interest with respect to Tranche B loans shall be reduced
to the Alternative Base Rate, plus 2%. If the New Credit Facility is permanently
repaid to $80 million or less on or before December 29, 2000, from and after
such repayment, the rate of interest with respect to Tranche B loans shall be
reduced to the Alternative Base Rate, plus 1%. In addition, for each additional
$10 million by which the New Credit Facility is permanently repaid below $80
million through December 31, 2001, from and after such repayment, the rate of
interest with respect to Tranche B loans shall be reduced by 1/4% until such
time as the interest rate for all loans is the Alternative Base Rate plus 1/2%.
Interest payments on outstanding principal amounts of the New Credit Facility
will be payable monthly in arrears until such time as the New Credit Facility is
permanently reduced to $80 million after which time interest payments will be
payable quarterly. In addition, in the event that we sell certain specified
assets or issue debt or equity, we will be required to make certain mandatory
prepayments of principal based on the net proceeds of such sales or issuance.
The New Credit Facility also requires certain scheduled repayments of principal
through the New Credit Facility's maturity date on December 31, 2002.
The proceeds of the New Credit Facility are to be used to fund construction
projects and for other working capital purposes, including the payment of
interest on our outstanding 5 3/4% Convertible Subordinated Notes.
The payment and performance of our obligations under the New Credit
Facility have been guaranteed by substantially all of our subsidiaries. The
New Credit Facility is secured by substantially all of our assets and the assets
of our subsidiaries (subject to certain existing liens and other permitted
encumbrances and excluding certain non-assignable assets), including,
without limitation, real property, personal property, tangible property and
intangible property, partnership and joint venture interests, all accounts,
inventory and equipment. In addition, we have pledged all of the stock
of our domestic subsidiaries and 66% of the stock of our foreign subsidiaries.
In connection with the New Credit Facility, we issued to the lenders warrants
(the "Warrants") for 10% of the Company's outstanding common stock (on a fully
diluted basis). The Warrants are exercisable at an exercise price of $.50 per
share, subject to adjustment under certain circumstances, including sales of
equity at a price below fair market value or below the exercise price of the
Warrants. The Warrants may be canceled by the Company without penalty as
follows: (i) if we make the mandatory repayments of the New Credit Facility of
at least $30 million by December 29, 2000, 10% of the Warrants originally issued
may be canceled; (ii) if we make additional mandatory repayments of the New
Credit Facility of at least $25 million by December 31, 2001, an additional 10%
of the Warrants originally issued may be canceled; and (iii) if the outstanding
balance under the New Credit Facility is paid back on or before June 30, 2002,
an additional 30% of the Warrants originally issued may be canceled. Only the
portion of the Warrants not subject to cancellation my be exercised prior to
June 30, 2002. As a condition to the closing of the New Credit Facility, we
entered into a Registration Rights Agreement, pursuant to which we are required,
under certain circumstances, to register the shares of common stock issuable
upon exercise of the Warrants.
In addition to certain customary covenants, the Credit Agreement contains (i)
certain restrictive covenants, including, among others, covenants limiting
liens, indebtedness, acquisitions, asset sales, construction of new facilities,
capital expenditures, investments and the payment of dividends, and (ii)
covenants requiring continued
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<PAGE>
compliance with certain financial tests, including a net worth test, and several
financial ratios, including an interest coverage ratio and a consolidated EBITDA
ratio. Included among the events of default are any Change of Control (as
defined in the Credit Agreement) of the Company. As of September 30, 1999,
$105.2 million was outstanding under the New Credit Facility.
In June 1999, we entered into a loan agreement with ChinaTrust Bank (U.S.A.)
providing for up to an $8.0 million term loan, secured by a mortgage on two of
our existing properties. The loan matures in July, 2005 and bears interest at
the prime rate less 1.0% during the draw down period and at the prime rate
during the pay down period. As of September 30, 1999, we had drawn down $6.0
million available under the loan.
In June 1999, we entered into two sale leaseback transactions with Realty Income
Corp. ("RIC"). We sold the real property located at our Flanders, New Jersey
site and Alpharetta, Georgia site for $2.2 million and $3.3 million,
respectively. Simultaneously with such sales, we entered into a 25-year lease
for each site with five 5-year renewal options with an annual rent equal to
10.8% of the sale proceeds, which rent escalates every two years based on an
increase in the consumer price index.
On June 30, 1999 we entered into a Modification Agreement with Bank of America
N.A. (formerly known as NationsBank N.A) whereby in exchange for a $2 million
payment of principal and a $40,000 extension fee, Bank of America agreed to
extend the maturity of its four secured term loans aggregating $6.1 million
until August 31, 1999. On August 12,1999, we again entered into a Modification
Agreement with Bank of America whereby in exchange for an increase in the
interest rate to the prime rate plus 2% and a $15,000 extension fee, Bank of
America agreed to extend the maturity of its four secured term loans to October
5, 1999 which was later extended to November 12, 1999. On November 12, 1999, we
entered into an Amended and Restated Master Loan Agreement with Bank of America,
which provides for interest rates of the prime rate plus 2 1/2 %, a mandatory
prepayment of $250,000 due on or before September 30, 2000 and a maturity date
of March 1, 2001. In connection with the restructured loan, we issued to Bank of
America warrants to purchase up to 100,000 shares of the Company's common stock.
The warrants are exercisable at an exercise price of $.50 per share, subject to
adjustment under certain circumstances, including sales of equity at a price
below fair market value or below the exercise price of the warrants. All of the
warrants may be canceled by the Company if we satisfy the loans in full on or
prior to June 30, 2000 and, if not, fifty percent may be canceled by the Company
if we satisfy the loans in full on or prior to December 21, 2000. As of
September 30, 1999, $6.1 million was outstanding under the Amended and Restated
Master Loan Agreement.
On July 29, 1999, we obtained a waiver from Fleet Bank whereby in exchange for
our transferring $225,000 into a cash reserve account and paying a $6,000 waiver
fee, Fleet Bank agreed to waive a financial covenant applicable to the
performance of our ice facility in Simsbury, Connecticut. We also agreed that
within 60 days of the waiver, which was later extended to November 19, 1999, we
would work toward a mutually satisfactory loan restructuring agreement. On
November 19, 1999, we restructured our term loan with Fleet Bank. The amended
loan agreement provides for interest at the LIBOR rate plus 1.75%, a guaranty of
Family Golf Centers, Inc., or in lieu of thereof, a $150,000 payment into cash
escrow account by June 30, 2000 and a maturity date of August 8, 2001. As of
September 30, 1999, $2.8 million was outstanding under the loan with Fleet Bank.
In July 1999, we entered into a loan agreement with ChinaTrust Commercial Bank
(New York Branch) providing for a $10 million term loan secured by a leasehold
mortgage on our Englewood, Colorado site. The loan matures in July 2004 and
bears interest at the prime rate less .5%.
TRENDS
From 1994 through 1998, we rapidly expanded, growing from one golf facility in
1992 to 121 golf facilities as of September 30, 1999, a number of which were
acquired through acquisition. Our strategy was to quickly reach critical mass to
achieve economics of scale. Although we achieved certain of such economies, our
performance over the last three quarters has been extremely disappointing and
below our expectations.
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We have completed an analysis of our business and a review of a number of
strategic alternatives, including the potential disposition of the non-golf
operations and the disposition or closing of non-performing or underperforming
golf facilities. Zolfo, Cooper LLC, a business advisory firm, assisted in our
analysis and continues to advise us in connection with the implementation of our
business plan.
In addition, we have established an Office of the Chairman in order to oversee
the restructuring of our operations. The office of the Chairman is comprised of
Dominic Chang, our Chief Executive Officer, Krishnan P. Thampi, our Chief
Operating Officer, Philip Gund, our Acting Chief Financial Officer and, Stephen
Cooper, our Chief Restructuring Officer.
Given our liquidity constraints, we will not acquire additional facilities over
the near-term, but instead will focus on disposing of underperforming assets,
which may result in additional losses, and assimilating and strengthening the
operations of our recently acquired facilities and improving their cash flow.
We anticipate that we will continue to incur significant costs in connection
with the ongoing restructuring of our business operations for at least the
fourth quarter of 1999 and the first quarter of 2000. We also believe that
revenues will be negatively impacted by the reduced level of advertising and
promotions and that gross margins on merchandise sales will continue to be
negatively impacted by our inability to obtain current merchandise through at
least the next two quarters.
SEASONALITY
Historically, the second and third quarters have accounted for a greater portion
of our 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 our 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. We have 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 our 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 our
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 our operations as a result of inflation
during the nine months ended September 30, 1999.
YEAR 2000 ISSUES
In accordance with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, we note 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 our projected state of
readiness, our 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 our activities and
operations.
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We have formed a project team, comprised of our management information services
staff, to identify and correct Year 2000 compliance issues for our 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 our systems are industry standard software systems which are year
2000 compliant, we do not expect that significant modification or replacement
will be necessary.
Although there can be no assurance, the total projected cost associated with our
year 2000 program is not expected to be material to our financial position,
results of operations or cash flows. The total cost for the project (excluding
internal payroll costs) is currently expected to approximate $160,000 to
$175,000, which is being funded from working capital. As of September 30, 1999,
we had incurred approximately $150,000 relating to our year 2000 compliance
project.
The project team has defined a four-phase approach to determining the year 2000
readiness of our 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. We replaced older IBM systems to a year 2000 compliant
Windows(R) based system as part of our plans to upgrade our point-of-sales
merchandise control systems. We also adjusted rather than replaced our non-IT
systems to perform properly in the year 2000 and thereafter. This phase is
complete. Phase III, Testing, involves testing our systems, software, and
equipment for year 2000 readiness, or in certain cases, relying on test results
provided to us from suppliers. The project team has concluded testing of our
most critical software programs to ensure year 2000 compliance and has contacted
all major suppliers to review year 2000 compliance issues of their products.
This phase is complete. 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, we will rely on our 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 September 30, 1999, our overall progress by phase for all IT and non-IT
systems was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------- ------------------------------ -----------------------------------------
PHASE PERCENT COMPLETE TARGET COMPLETION DATE
- --------------------------------------------------- ------------------------------ -----------------------------------------
<S> <C> <C>
Phase I - Inventory Assessment 100% Complete
- --------------------------------------------------- ------------------------------ -----------------------------------------
Phase II - Remediation 100% Complete
- --------------------------------------------------- ------------------------------ -----------------------------------------
Phase III - Testing 100% Complete
- --------------------------------------------------- ------------------------------ -----------------------------------------
Phase IV- Implementation and Completion 95% November 30, 1999
- --------------------------------------------------- ------------------------------ -----------------------------------------
</TABLE>
The completion dates set forth above are based on our 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
our point-of-sales systems and billing systems could result in our inability to
timely post and record sales revenue and expenses. In addition, the aging of our
accounts payable would be inaccurate. In this unlikely event, we 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 us due to the numerous uncertainties and
variables associated with such scenarios. Management believes, however, that its
year 2000 program will significantly reduce our risks associated with the change
over to the year 2000.
At the present time, we have not deferred any IT projects nor do we anticipate
that such a deferral will be necessary as a result of our year 2000 efforts.
-19-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS NONE
ITEM 2. CHANGE IN SECURITIES
During the quarter ended September 30, 1999, we issued an aggregate of 1,585
shares of common stock on July 7, 1999 to Ron and Linda Reif (the "Managers"),
as part of the consideration for the termination of a management agreement with
the Managers. Such issuance was not registered under the Securities Act of 1933
(the "Act") in reliance on the exemption provided by Section 4(2). Such issuance
did not involve any general solicitation and the Managers have represented that
they understand 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 restrictive legend to such
effect.
ITEM 3. DEFAULT UPON SENIOR SECURITIES NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 9, 1999, we held our Annual Meeting of Stockholders. At such meeting
Dominic Chang, Krishnan P. Thampi, James Ganley, Jimmy C. M. Hsu, Yupin Wang and
Donald Monks were elected to continue to serve as directors of the Company by a
plurality of the votes cast in person or by proxy at the Meeting. In addition,
of an aggregate of 23, 353, 137 shares represented in person or by proxy at the
Meeting, there were 23,258,911 votes cast for, 41,529 votes against and 52,697
abstentions with respect to the ratification of the appointment of Richard A.
Eisner & Company, LLP, certified public accountants, as auditors of Family Golf
for the fiscal year ending December 31, 1999.
ITEM 5. OTHER INFORMATION
We have established an Office of the Chairman in order to oversee the
restructuring of our operations. The Office of the Chairman is comprised of
Dominic Chang, as our Chief Executive Officer, Krishnan P. Thampi, as our Chief
Operating Officer, Philip Gund, as our Acting Chief Financial Officer and,
Stephen Cooper, as Chief Restructuring Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
-20-
<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: November 19, 1999
Melville, NY
FAMILY GOLF CENTERS, INC.
(Registrant)
By: /s/ Krishnan P. Thampi
-------------------------------
KRISHNAN P. THAMPI
President,
Chief Operating Officer,
Assistant Secretary, Treasurer
and Chief Accounting Officer.
-21-
<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 SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,616,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 13,330,000
<CURRENT-ASSETS> 36,776,000
<PP&E> 424,463,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 550,896,000
<CURRENT-LIABILITIES> 34,570,000
<BONDS> 0
0
0
<COMMON> 260,000
<OTHER-SE> 225,381,000
<TOTAL-LIABILITY-AND-EQUITY> 225,641,000
<SALES> 126,794,000
<TOTAL-REVENUES> 126,794,000
<CGS> 29,320,000
<TOTAL-COSTS> 195,807,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,924,000
<INCOME-PRETAX> 82,273,000
<INCOME-TAX> (17,969,000)
<INCOME-CONTINUING> (64,304,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (64,304,000)
<EPS-BASIC> (2.47)
<EPS-DILUTED> (2.47)
</TABLE>
