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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) of the SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-25098
FAMILY GOLF CENTERS, INC.
(NAME OF REGISTRANT AS SPECIFIED)
Delaware 11-3223246
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
538 Broadhollow Road
Melville, New York 11747
(Address of principal executive offices)
(516) 694-1666
(Registrant's telephone number)
Securities registered pursuant to 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value Nasdaq Stock Market
$.01 per share
Preferred Stock Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Exchange Act during the past
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's voting stock (based upon the
closing sales price of such stock) held by nonaffiliates of the Registrant was
$13,870,244 on April 10, 2000. (For purposes of this report, the number of
shares of Common Stock of the Registrant held by non-affiliates was determined
by aggregating the number of shares beneficially held by officers and directors
of the Registrant and by others who, to the Registrant's knowledge, own 10% or
more of the Common Stock, and subtracting such shares from the total number of
shares outstanding).
The Registrant had 26,039,272 shares of Common Stock outstanding as of
April 10, 2000.
Documents incorporated by reference: NONE.
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THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE
CERTAIN RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS.
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PART I
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ITEM 1. BUSINESS
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GENERAL
We operate golf centers in North America. Our golf centers provide a wide
variety of practice and play opportunities, including facilities for driving,
chipping, putting, pitching and sand play. 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. We also operate other sports and family entertainment facilities,
including ice rinks and "Family Sports Supercenters," which have two or more
sports-related attractions, such as golf, ice rinks, bowling centers, soccer
facilities and batting cages, as well as a variety of family entertainment
activities. As of December 31, 1999, we owned, operated, managed or had under
construction 115 golf facilities and 25 ice rink and family entertainment
facilities in 23 states and three Canadian provinces.
BUSINESS STRATEGY
From 1994 through 1998, we rapidly expanded, growing from one golf facility
in 1992 to 115 golf facilities as of December 31, 1999, most 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 fiscal year has been extremely disappointing and below
our expectations.
We have completed an analysis of our business and have determined, that
given our extreme liquidity crisis and highly leveraged capital structure, we
must dispose of sufficient operating assets, primarily non-core and under
performing assets, in order to raise sufficient proceeds to meet our working
capital and debt service requirements. In addition, we may close underperforming
sites. 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, a partner of Zolfo, Cooper LLC who is our
Acting Chief Financial Officer and, Stephen Cooper, a partner of Zolfo, Cooper
LLC who is our Chief Restructuring Officer.
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Given our liquidity constraints, we will not acquire additional facilities
over the near-term, but instead will focus on disposing of operating assets,
primarily non-core and under performing assets, which may result in additional
losses, and strengthening the operations of our remaining 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 throughout
fiscal year 2000. We also believe that revenues will be negatively impacted by
a reduced level of advertising and promotions and that merchandise sales will
continue to be negatively impacted by our inability to obtain current
merchandise due to trade credit restrictions.
RECENT ACQUISITIONS AND DISPOSITIONS
During the first quarter of 1999, we acquired three golf facilities in
Lodi, California; El Cajon, California; and Portland, Oregon, for an aggregate
purchase price of $2.4 million. We did not make any other acquisitions in 1999.
During the fourth quarter of 1999, we sold the assets of four golf
facilities located in Arlington, Texas; Austin, Texas; Dallas, Texas and Fort
Worth, Texas for $3.9 million in aggregate gross sales proceeds. Also, during
the fourth quarter of 1999, we sold the assets of a golf course in Leesburg,
Virginia for a gross sale price of $3.8 million. As required under our $130
million credit facility, a portion of the aggregate gross sales proceeds was
used to repay a portion of such debt for each of these dispositions.
Subsequent to December 31, 1999 we sold the assets of three golf facilities
in Tucson, Arizona; Mesa, Arizona, and Olympia, Washington as well as an ice
rink facility in Simsbury, Connecticut. We also sold a golf school located in
Hilton Head, South Carolina. The aggregate gross proceeds for these transactions
was $9.5 million.
GOLF FACILITIES
We believe that we attract customers to our golf centers due to the
quality, convenience and comfort of our facilities and their appeal to the whole
family. The golf centers are designed to provide a wide variety of practice
opportunities, including facilities for driving, chipping, putting, pitching and
sand play, and typically offer full-line pro shops, golf lessons instructed by
PGA-certified golf professionals and other amenities to encourage family
participation. They are designed around a driving range with target greens,
bunkers and sand traps to simulate golf course conditions. Generally, our ranges
are lighted to permit night play and the hitting tees are enclosed or sheltered
from above and from the rear in a climate-controlled environment. In certain
cases, all or a portion of the range is enclosed under an air inflated dome to
permit all-weather play. There are approximately 80 to 100 hitting tees in
facilities with the two-tier design and approximately 30 to 60 hitting tees at
smaller golf centers. In addition to a driving range, our golf centers typically
include a number of amenities designed to appeal to golfers and their families,
such as a 4,000-6,000 square foot clubhouse (including a full-line pro shop,
locker facilities, a restaurant or snack bar and video games), PGA-certified
golf instructors, landscaped 18-hole miniature golf courses and a short game
practice area (including putting green and sand traps). Our pro shops are
stocked with clubs, bags, shoes, apparel and
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videos and related accessories from a number of suppliers, including brand-name
manufacturers such as Nike Corporation, Callaway Golf Company, Karsten
Manufacturing Corporation (Ping), Tommy Armour Golf, Wilson Golf Company, Mizuno
Golf Company, Spalding Sports Worldwide, Titleist and Footjoy Worldwide
(Divisions of Fortune Brands, Inc.), Ashworth Clothing Company and Nicklaus Golf
Equipment Company. We also sell private label products at our pro shops,
including balls, gloves and other merchandise bearing the "Family Golf" logo. In
December 1997, we acquired Confidence Golf, Inc., a designer and assembler of
premium-grade golf clubs. Confidence golf clubs are sold at our golf facilities
as well as independent pro shops and retailers. In some limited instances, as
with certain plastic golf shoe spikes, we act as a distributor of golf
merchandise both to our facilities and to non-affiliated third parties.
As of December 31, 1999, we operated three regulation 18-hole golf courses of
which we owned two and leased one. As of December 31, 1999, we operated 30 par-3
or executive golf courses. Most of the courses have a clubhouse, a pro shop, a
driving range and PGA-certified golf instructors on site and banquet facilities
or a restaurant.
As of December 31, 1999, we owned, leased or managed 115 golf facilities (five
of which were under construction) in 23 states and three Canadian provinces. As
of December 31, 1999, we owned 34 of such facilities, leased 77 of such
facilities and managed five of such facilities.
Of our facilities, 21 are operated under the name "Golden Bear" pursuant to a
non-exclusive license agreement (the "License Agreement") with a subsidiary (the
"Licensor") of Golden Bear Golf, Inc. ("GBGI"). Under the License Agreement, we
are licensed to use the trademark "Golden Bear" and related trademarks and trade
names in the operation of certain of our golf facilities. We do not have the
right to open additional Golden Bear golf centers. The License Agreement expires
on December 31, 2008, except that we have the right to terminate the agreement
effective December 31, 2000. The License Agreement is also subject to
termination by the Licensor or us under certain other circumstances. Pursuant to
the License Agreement, we will pay the Licensor $795,000 per year (based on 21
Golden Bear golf centers in operation). In addition, if such 21 centers generate
Adjusted Gross Revenues (as defined in the License Agreement) in excess of $30.0
million a year, the Licensor will receive incentive compensation ranging from 1%
to 3% of such excess revenue. During the term of the License Agreement, we will
have the exclusive right to operate golf centers under the name "Golden Bear"
within a 10-mile radius of our Golden Bear golf centers, except with respect to
the Golden Bear golf center located in Carrollton, Texas for which the exclusive
territory is reduced. On April 13, 2000 we received a letter from the Licensor
terminating the License Agreement as a result of our failure to pay royalty fees
for the first and second quarter of 2000. As a result of such termination, we
have 30 days from April 13, 2000 to remove all "Golden Bear" signage from our
sites and to cease using the "Golden Bear" trademark and related trademarks and
trade names at our golf facilities.
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SPORTS AND FAMILY ENTERTAINMENT FACILITIES
In order to generate additional sources of revenue, attract a more diverse
customer base and offset the seasonality of our core golf business, we operate
sports and family entertainment facilities, including ice rinks and Family
Sports Supercenters. As of December 31, 1999,we operated eight stand-alone ice
rink facilities, managed eight additional ice rink facilities and operated four
Family Sports Supercenters.
Our ice rink facilities are typically designed with the rinks as the main
attraction, but with amenities at the facility to provide family entertainment
and generate additional revenues. Such amenities include a pro shop, video
games, a supervised play area for young children, restaurants and snack bars.
The pro shops are stocked with skates, hockey sticks, jerseys, protective
equipment such as helmets and pads and other skating, hockey and figure
skating-related items. We generate revenues at our ice rink facilities by
renting the rinks to hockey leagues, teams and figure skaters, charging
admission to our skating facilities for public skating, providing lessons
through USFSA-certified instructors, skate and equipment rentals and pro shop
sales. We also generate revenues from food and beverage sales, video games and
birthday and private party rentals.
We acquired our first ice rink in July 1997 as part of our acquisition (the
"LCI Acquisition") of Leisure Complexes, Inc. ("LCI"). In September 1997, we
acquired a 47,000 square foot skating facility in Syosset, New York, which has a
NHL regulation-size ice rink and an additional half rink, as well as a pro shop
and snack bar. It is used as a practice facility by the NHL's New York
Islanders. In December 1997, we acquired an indoor family sports and
entertainment center, located in Evendale, Ohio, which includes two
regulation-sized ice rinks, two soccer fields and additional family amusements.
In February 1998, we acquired an ice rink facility and family entertainment
center in Raleigh, North Carolina. On December 2, 1998, we consummated the
acquisition of SkateNation, Inc. ("SkateNation"), which operated six ice rink
facilities and managed an additional 16 ice rink facilities throughout the
United States. As of December 31, 1999, we owned two ice rink facilities,
leased six ice rink facilities and managed an additional eight ice rink
facilities.
In October 1998, we completed the conversion of a golf center in Denver,
Colorado into a Family Sports Supercenter by adding two NHL-regulation size ice
rinks (which are currently being used as practice facilities by the NHL's
Colorado Avalanche) and other family entertainment amenities. In August 1999, we
opened our newly constructed Supercenter in a mall located in New Rochelle, New
York. The Supercenter includes two ice rinks (one of which is NHL - regulation
size and the other is a free-form themed rink), a restaurant and family
entertainment center. As of December 31, 1999, we owned one Family Sports
Supercenter and leased three Family Sports Supercenters.
In April 1998, we entered into agreements with the Township of Woodbridge,
New Jersey, to lease, construct and operate an ice rick facility with two sheets
of ice and a family entertainment center. The Township of Woodbridge recently
served us with a Notice to Quit - Termination of Tenancy and Demand for
Possession based upon our alleged breach of the agreements. We are currently in
settlement discussions with the Township, however no assurance can be given that
a settlement will be reached. In the event that a settlement is not reached, we
intend to vigorously contest the lawsuit.
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OPERATIONS
Each golf facility has a general manager who reports to an area or
divisional manager, one to two assistant managers, a head golf professional, up
to four PGA-certified professionals who instruct golfers, approximately five
full-time staff members and approximately 13 to 20 part-time employees,
depending on the season. Each ice rink facility has a general manager, one
assistant manager, a hockey director, a figure skating director, approximately
four to six other full-time employees and approximately 25 to 35 part-time
employees, depending on the season. Currently, each of our Family Sports
Supercenters employs approximately 280 to 350 people, depending on the season,
of which approximately 75 are full-time and the balance of which are part-time
or seasonal.
A majority of the golf instructors are PGA-certified and the skating
instructors are USFSA-certified. In addition, a majority of the general managers
have managed or were assistant managers at other golf centers, golf courses, ice
rinks or Family Sports Supercenters, as the case may be, prior to being hired by
us. General managers, as well as other management personnel, are provided
performance incentives such as stock options and bonuses.
Our corporate policies relating to personnel, labor, cash management and
budgets are formulated at our headquarters and provided to each of our
facilities. All purchasing, accounting, insurance, cash management, finance and
human resource functions are managed centrally at our headquarters.
We utilize a number of internal controls and procedures to monitor and
safeguard the cash generated by our facilities. The primary control is a
computer system at each facility that can be monitored from corporate
headquarters and that provides point of sale and inventory controls and
management reports on a daily basis. The primary control of all cash accounts is
centralized at corporate headquarters.
MARKETING AND ADVERTISING
As a result of our recent liquidity restraints, we have significantly
reduced our advertising and promotions. Currently our advertising and promotions
are limited to the local level, primarily advertising in print media.
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COMPETITION
The golf center, ice rink and family entertainment industries are each
highly competitive and include competition from other golf centers, golf
courses, other ice rinks and family entertainment outlets and other recreational
pursuits. In addition, our pro shop business faces competition from other pro
shops, specialty retailers and department stores. We may face imitation and
other forms of competition and we cannot prevent others from utilizing a similar
operational strategy. Many of our competitors and potential competitors may have
considerably greater financial and other resources, experience and customer
recognition than we do. We operate 21 of our golf centers under the name "Golden
Bear" pursuant to the License Agreement with the Licensor. GBGI, the parent of
the Licensor, is one of our competitors. The Licensor is permitted to establish,
or license others to establish, Golden Bear golf centers that compete with our
golf centers, including our Golden Bear golf centers, provided that, we have the
exclusive right to operate Golden Bear golf centers within a 10-mile radius of
our Golden Bear golf centers (except with respect to the Golden Bear golf center
located in Carrollton, Texas for which the exclusive territory is reduced).
There can be no assurance that competition will not adversely affect our
business.
EMPLOYEES
We had, as of December 31, 1999, approximately 3205 employees, of which 977
were full-time employees and 2,228 were part-time employees. None of the
employees are represented by a collective bargaining agreement. We have never
experienced a strike or work stoppage. We believe that our relationship with our
employees is good.
GOVERNMENTAL REGULATION
Operations at our golf facilities involve the use and limited storage of
various hazardous materials such as pesticides, herbicides, motor oil, gasoline,
heating oil and paint as well as various chemicals used to create, refrigerate
and maintain the ice at our ice rinks. Under various federal, state and local
laws, ordinances and regulations (which are administered, in the case of federal
laws and regulations, primarily by the United States Environmental Protection
Agency), an owner or operator of real property is generally liable for the costs
of removal or remediation of hazardous substances that are released on or in our
property regardless of
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whether the property owner or operator knew of, or was responsible for, the
release of hazardous materials. We have not been informed by any governmental
authority or instrumentality of any material non-compliance or violation by us
of any environmental laws, ordinances or regulations. However, we are aware of
one notice of violation issued by the New York State Department of Environmental
Conservation (the "DEC") against the owner of the land leased by us in Elmsford,
New York alleging that certain hazardous materials were placed on the site. The
owner has taken remedial action and we do not believe we will be affected by the
alleged violation. Although we usually hire environmental consultants to conduct
environmental studies, including invasive procedures such as soil sampling or
ground water analysis on golf facilities we own or operate in some cases only
limited invasive procedures are conducted on such properties and in a limited
number of instances no environmental studies are conducted. Even when invasive
procedures are used, environmental studies may fail to discover all potential
environmental problems. Accordingly, there may be potential liabilities or
conditions of which we are not aware.
We are subject to the Fair Labor Standards Act and various state laws
governing such matters as minimum wage requirements, overtime and other working
conditions and citizenship requirements. Restaurants at certain of our
facilities serve alcoholic beverages and are subject to certain state
"dram-shop" laws, which provide a person injured by an intoxicated individual
the right to recover damages from an establishment that wrongfully served such
beverages to the intoxicated individual.
RISK FACTORS
IF WE ARE UNABLE TO MODIFY OUR LOAN COVENANTS OR IF WE ARE UNABLE TO SELL
ENOUGH ASSETS ON A TIMELY BASIS TO REDUCE OUR OUTSTANDING DEBT AND TRADE
PAYABLES, WE MAY BE FORCED TO FILE FOR BANKRUPTCY PROTECTION.
In August, 1999, we announced that we were not in compliance with the
requirements of our principal credit facility and that unless we restructured
such facility we would be forced to file for bankruptcy. Although the credit
facility was restructured, we have been unable to meet certain financial
covenants under the restructured credit facility and under other loan
agreements, for which we have received temporary waivers. If we are unable to
modify our loan covenants or extend the waivers, we will likely file for
bankruptcy protection. In addition, we remain highly leveraged and illiquid and,
if we cannot generate income and cash flow, we may be unable to remain in
operation. In order to meet our debt service and operating capital needs, we
must sell assets. We cannot assure you that we will operate profitably in the
near future or at all or that we will continue as a going concern.
WE HAVE CHANGED OUR SHORT-TERM BUSINESS STRATEGY FROM A GROWTH MODE TO A SALE OF
ASSETS MODE, IN ORDER TO INCREASE LIQUIDITY, REDUCE DEBT LEVELS, AND RETURN TO
PROFITABILITY.
From 1994 through 1998, we rapidly expanded, growing from one golf facility
in 1992 to 115 golf facilities and 25 ice skating and family entertainment
centers as of December 31, 1999, most of which were acquired through
acquisition. Our strategy was to quickly reach critical mass to achieve
economies of scale. Although we achieved certain economies, our performance
during 1999 has been substantially below our expectations. Accordingly, we have
adjusted our business strategy and, rather than seeking to acquire new
facilities, we will focus our attention on selling sufficient operating assets,
primarily non-core and under performing assets, to meet our liquidity needs and
improving
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operations. We can not assure you that we will be able to sell such operating
assets on favorable terms, if at all, or that our change in strategy will prove
successful. We may also experience additional losses from the sale of these
assets which may adversely affect our results of operations and stock prices.
CASH CONSTRAINTS HAVE, AND WILL CONTINUE TO, NEGATIVELY IMPACT OUR BUSINESS
As a result of our liquidity crisis, we have been forced to conserve cash
by: (i) significantly reducing advertising, (ii) retaining only minimum staff at
our sites and at our corporate headquarters, (iii) stretching out and delaying
payments to our vendors, (iv) performing only necessary capital expenditures and
construction projects; and (v) delaying payment for certain services. Such steps
have and will continue to negatively impact our revenues, our ability to obtain
goods and services from our vendors and employee morale. It has also resulted in
additional lawsuits and liens being filed against us and our assets and
increased our legal fees and expenses.
THERE ARE RISKS ASSOCIATED WITH INTEGRATING NEW FACILITIES AND WE HAVE NOT
SUCCESSFULLY INTEGRATED OUR MOST RECENTLY ACQUIRED FACILITIES.
We made a large number of acquisitions during 1998 (we started the year
with approximately 60 golf centers in operation or under construction and ended
the year with 119 golf centers in operation or under construction). Significant
facility enhancements were made during 1998 and the first half of 1999, retail
merchandise was added to pro shops, and additional employees and management were
hired to integrate these facilities and prepare for the 1999 golf season. The
results for the 1999 season for the newly acquired centers were disappointing
and did not meet expectations. We cannot assure you that we will be able to
improve their performance significantly in the near future, especially in light
of our current liquidity problems.
WE WILL NEED ADDITIONAL FINANCING TO MEET OUR FUTURE CAPITAL REQUIREMENTS.
As of December 31, 1999, we had cash, cash equivalents and short-term
investments of $3.5 million and a working capital deficit of $297 million (of
which $265.1 million is debt that according to its original terms would have
been classified as long term) as compared to $21.6 million and $30.1 million at
December 31, 1998. Unless we are able to consummate the sale of sufficient
operating assets, primarily non-core and underperforming assets, on a timely
basis, we will not have adequate capital to meet all our obligations. Moreover,
under our principal credit facility, a portion of the proceeds from asset sales
must be used to pay down the credit facility and will not be available for
operations. In addition, we will need additional financing sources to meet our
long-term needs. We have not determined the amount we may seek to raise or
whether such financing will consist of debt or equity. In light of the fact that
substantially all of our assets are pledged as collateral for existing loans and
in light of our substantial leverage, obtaining additional debt financing may be
difficult and costly. We cannot assure you that we will obtain additional
financing for future operations or capital needs on favorable terms or at all.
WE ARE SUBSTANTIALLY LEVERAGED.
As of December 31, 1999, we had approximately $308.2 million aggregate
principal amount of indebtedness outstanding, including $115 million aggregate
principal amount of our 5 3/4% convertible subordinated notes issued by us
during the fourth quarter of 1997 (the "Notes") and $125.3 million of
indebtedness under our principal credit facility. In addition, our principal
credit facility provides for borrowings of up to $130 million, subject to
compliance with certain financial tests and ratios. Our ability to meet our debt
service obligations, to reduce our total indebtedness and to comply with terms
of our credit facilities will be dependent upon our ability to timely dispose of
assets to generate cash and on our future performance, which will be
subject to general economic conditions, industry cycles and financial, business
and other factors, many of which are beyond our control. We can not assure you
that we will be able to generate sufficient cash flow to service our debt and,
if we are not so able, we may be required, among other things, to seek
additional financing in the debt or equity markets, to refinance all or a
portion of our debt, to sell assets, to reduce or delay planned capital
expenditures or to file for
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bankruptcy. We can not assure you that any such financing, restructuring, or
sale of assets would be available on satisfactory terms, if at all.
IT HAS BEEN DIFFICULT TO OBTAIN INVENTORY FROM OUR VENDORS AND MAY CONTINUE TO
NEGATIVELY IMPACT PRO SHOP SALES.
As a result of our financial condition, it has been more difficult and may
continue to be difficult to obtain adequate inventory supplies from our vendors.
This has adversely affected the performance of our pro shops, and may continue
to negatively impact pro shop sales.
OUR PRINCIPAL CREDIT FACILITY IMPOSES CERTAIN RESTRICTIONS ON US.
Our $130 million credit facility and certain other instruments governing
our indebtedness include covenants that, among other things, restrict our
ability to incur additional indebtedness, dispose of assets, merge or
consolidate with another entity, create liens, pay dividends or make
investments, acquisitions or capital expenditures. Under the $130 million credit
facility, we are also required to maintain compliance with certain financial
tests and ratios and borrowings under the credit facility will be limited by
such tests. Accordingly, we can not assure you that all or a portion of the $130
million will be available when required by us. In addition, the credit facility
requires mandatory prepayments under certain circumstances, including upon the
sale of assets, and restricts our ability to prepay other indebtedness. Our
ability to comply with such provisions may be affected by events that are beyond
our control. Our failure to comply with certain covenants would, among other
things, permit our lenders to accelerate the maturity of the obligations
thereunder and could result in cross-defaults permitting the acceleration of
debt under other loan agreements. Moreover, as a result of these covenants, our
ability to respond to changing business and economic conditions and to secure
additional financing, if needed, may be restricted significantly, and we may be
prevented from engaging in transactions that might otherwise be considered
beneficial to us.
OUR ABILITY TO DEFEND AGAINST RECENTLY COMMENCED CLASS ACTION SUITS IS
UNCERTAIN.
As described under "legal proceedings," several class action suits have
recently been commenced against us and certain of our executive officers. While
we intend to vigorously contest these actions, we cannot assure you that we will
prevail in such litigation or that such litigation will be settled on terms
favorable to us or at all. In addition, we cannot assure you that similar
actions will not be commenced or that such litigation will not negatively impact
our reputation or stock price. Moreover, the costs of litigation may further
restrain our liquidity and may negatively impact our ability to meet working
capital needs.
WE ARE DEPENDENT ON THE POPULARITY OF GOLF AND DISCRETIONARY CONSUMER SPENDING.
Although we have expanded our business outside the golf industry, we are
highly dependent on the golf industry and the public's interest in utilizing
golf practice centers, for the generation of our revenues and
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earnings. Activities such as golf have, in the past, been susceptible to
increases and decreases in popularity that have materially affected the
financial condition and results of operations of companies dependent on such
activities, and we can not assure you that the golf industry will not suffer a
material decrease in popularity, which would result in a material adverse effect
on our financial condition and results of operations. The amount spent by
consumers on discretionary items, such as the family entertainment activities
offered by us, have historically been dependent upon levels of discretionary
income, which may be adversely affected by general economic conditions. A
decrease in consumer spending on golf and other family entertainment activities
could have a material adverse effect on our financial condition and results of
operations.
WE HAVE ONLY RECENTLY ENTERED INTO THE ICE RINK AND FAMILY SPORTS SUPERCENTER
INDUSTRIES AND HAVE A LIMITED OPERATING HISTORY IN SUCH INDUSTRIES.
Although we have been operating since 1992, we did not enter into the ice
rink and family entertainment industries until 1997. Accordingly, we have a
limited operating history in these segments upon which you can evaluate our
business. In addition, we only have limited experience in these industries and
face the risks commonly associated with the establishment of new lines of
business. We can not assure you that we will be able to gain the experience
necessary to operate profitably in the ice rink and family entertainment
industries.
OUR BUSINESS IS SEASONAL AND OUR OPERATING RESULTS FLUCTUATE.
Although our expansion into ice rink facilities and Family Sports
Supercenters has partially offset the seasonality of our business, the second
and third quarters of the calendar year typically account for a greater portion
of our revenues than the first and fourth quarters of the year. This is
primarily due to an outdoor playing season limited by weather. Although most of
our driving ranges are designed to be all-weather facilities, portions of our
facilities, including the miniature golf courses, are outdoors and vulnerable to
weather conditions. In addition, golfers are less inclined to practice when
weather conditions limit their ability to play golf on outdoor courses. The
timing of closings and dispositions may also 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. In addition, variability in our results of
operations could cause the price of our securities to fluctuate following the
release of interim results of operations or other information and may have a
material adverse effect on the price of our securities.
WE FACE COMPETITION FROM OTHER PROVIDERS OF FAMILY ENTERTAINMENT AND RETAIL
OUTLETS.
The golf center, ice rink and family entertainment industries are each
highly competitive and include competition from other golf centers, golf
courses, other ice rinks and family entertainment outlets and other recreational
pursuits. In addition, our pro shop business faces competition from other pro
shops, specialty retailers and department stores. We may face imitation and
other forms of competition and we cannot prevent others from utilizing a similar
operational strategy. Many of our competitors and potential competitors may
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<PAGE>
have considerably greater financial and other resources, experience and customer
recognition than do we. In addition, we operate 21 of our golf centers under the
name "Golden Bear" pursuant to a non-exclusive license agreement with a
subsidiary of Golden Bear Golf, Inc., one of our competitors. The licensor is
permitted to establish, or license others to establish, Golden Bear golf centers
that compete with our golf centers, including our Golden Bear golf centers,
provided that we have the exclusive right to operate Golden Bear golf centers
within a 10-mile radius of each of our Golden Bear golf centers except with
respect to the Golden Bear golf center located in Carrollton, Texas for which
the exclusive territory is reduced. We cannot assure you that competition will
not adversely affect our total revenues or profitability.
OUR BUSINESS IS DEPENDENT ON CERTAIN AGREEMENTS, INCLUDING REAL PROPERTY LEASES,
MANAGEMENT AGREEMENTS AND LICENSES.
The future success of our business and operations is dependent, in part,
upon certain key operating agreements, including our real property leases and
management agreements with respect to certain municipal facilities. Certain of
these agreements are terminable at will and others may be terminated prior to
their scheduled expiration should we default in our obligations under them. The
termination or non-renewal of any of these agreements could have a material
adverse effect on our results of operations if we were unable to enter
comparable agreements.
Certain of our management agreements with municipalities require us to make
capital improvements to the facilities under management. In most cases, upon
termination of these management agreements, the municipality may retain and is
not obligated to pay us for the value of any capital improvements. Unless
reimbursed, we would immediately have to write-off, for accounting purposes, the
undepreciated value of these capital improvements (which aggregate approximately
$53 million as of December 31, 1999), which are currently being depreciated and
amortized over the life of the applicable management agreement.
After giving effect to renewal options, as of December 31 1999, none of our
real property leases are scheduled to expire until December 31, 2002. However,
the leases may be terminated prior to their scheduled expiration should we
default in our obligations under them. The termination of any of our leases
could have an adverse effect on our operations if we are unable to enter into
leases for comparable properties on substantially similar or more favorable
terms. We have received letters from landlords at four of our leased sites
claiming that as a result of our alleged breach of certain covenants contained
in the leases, such leases are terminated. Landlords at two of these sites have
filed lawsuits seeking to evict us from their properties. We have, or are in the
process of, responding to these termination letters and contesting each of the
lawsuits.
WE MAY BE SUBJECT TO POTENTIAL ENVIRONMENTAL LIABILITIES OF WHICH WE ARE NOT
AWARE.
Operations at our facilities involve the use and limited storage of various
hazardous materials such as pesticides, herbicides, motor oil, gasoline, heating
oil and paint, as well as various chemicals used to create, refrigerate and
maintain the ice at our ice rinks. Under various federal, state and local laws,
ordinances and regulations, an owner or operator of real property is generally
liable for the costs of removal or remediation of hazardous substances that are
released on or in our property regardless of whether the property owner or
11
<PAGE>
operator knew of, or was responsible for, the release of hazardous materials.
We have not been informed by any governmental authority of any non-compliance or
violation by us of any environmental laws, ordinances or regulations and we
believe that we are in substantial compliance with all such laws, ordinances and
regulations applicable to our properties or operations. As of the date hereof,
we have not incurred material costs of remediation and we know of no material
environmental liability to which we may become subject. Although we usually hire
environmental consultants to conduct environmental studies, including invasive
procedures such as soil sampling or ground water analysis on facilities we own
or operate, in some cases only limited invasive procedures are conducted on such
properties and in a limited number of instances no environmental studies are
conducted. Accordingly, there may be potential environmental liabilities or
conditions of which we are not aware.
THERE MAY BE ANTI-TAKEOVER EFFECTS ASSOCIATED WITH THE ISSUANCE OF RIGHTS AND
PREFERRED STOCK AND CERTAIN BY-LAW AND CONTRACT PROVISIONS.
Family Golf declared a dividend distribution payable on April 30, 1999 to
shareholders of record on April 29, 1999 of one preferred share purchase right
on each outstanding share of our common stock. The holder of any such right is
entitled to buy one one-thousandth of a share of our series A junior
participating preferred stock at an exercise price of $75.00. The rights will
become exercisable if a person or group acquires 15% or more of our common stock
(or with respect to a person who held 15% or more of the common stock at the
time of the dividend distribution, if such person acquires an additional 1% of
the common stock) or announces a tender offer for 15% or more of our common
stock, and at such time, each right will entitle our holder (other than the
person who has acquired the threshold amount) to purchase, at the right's
exercise price, a number of shares of common stock having a market value at that
time of twice the right's exercise price. If we are acquired in a merger or
other business combination transaction after a person acquires 15% or more of
our common stock or the rights are otherwise triggered, each right will entitle
our holder to purchase, at the right's then-current exercise price, a number of
the acquiring company's common shares having a market value at that time of
twice the right's exercise price. Our certificate of incorporation authorizes
our board of directors to issue up to 2,000,000 shares of "blank check"
preferred stock, $0.10 par value per share (including the series A participating
preferred stock mentioned above). The preferred stock may be issued in one or
more series, the terms of which may be determined at the time of issuance by the
board of directors, without further action by stockholders. The issuance of such
stock could, among other results, negatively affect the voting power of the
holders of common stock. The rights, and, under certain circumstances, the
issuance of the preferred stock would make it more difficult for a third party
to gain control of us, discourage bids for the common stock at a premium, or
otherwise adversely affect the market price of the common stock. Such provisions
may discourage attempts to acquire us.
We have no current arrangement, commitment or understanding with respect to
the issuance of our preferred stock, other than with respect to the rights. We
cannot assure you, however, that we will not, in the future, issue more shares
of preferred stock.
In addition, Family Golf's by-laws contain provisions:
o authorizing the board of directors to set the date for any
special meeting of stockholders,
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<PAGE>
o requiring advance notice of stockholder nominations and
stockholder proposals;
o authorizing the board of directors to postpone or cancel a
scheduled meeting of stockholders, and
o authorizing the Chairman of the board of directors to adjourn any
meeting of stockholders and to establish the procedures for
conducting a stockholder meeting.
The rights together with the ability of the board of directors to issue
preferred stock and these by-laws provisions could have the effect of delaying,
deferring or preventing a change of control of Family Golf or the removal of
existing management and, as a result, could prevent the stockholders of Family
Golf from being paid a premium over the market value for their shares of common
stock.
A Change of Control, as defined in our $130 million credit facility, is an
event of default under our credit facility. It is also an event of default under
certain other instruments of indebtedness if Dominic Chang is not Chairman of
the Board, Chief Executive Officer and beneficial owner of at least 5% of our
outstanding common stock. In addition, the indenture with respect to the $115
million principal amount of our convertible subordinated notes requires Family
Golf to redeem the notes, at the option of each noteholder, if there is a Change
of Control, as defined in the indenture. Accordingly, such provisions could
discourage possible future attempts to gain control of Family Golf (which
attempts, if stockholders were offered a premium over the market value of their
common stock, might be viewed as beneficial to stockholders).
DOMINIC CHANG IS A SIGNIFICANT STOCKHOLDER AND IS ABLE TO EXERCISE CONTROL OVER
US.
As of December 31, 1999, Mr. Dominic Chang beneficially owned 3,949,001
shares of our common stock, constituting approximately 15.2% of outstanding
shares. Mr. Chang is, therefore, able to exercise significant influence with
respect to the election of our board of directors and all matters submitted to a
vote of the stockholders, including the acquisition or disposition of material
assets.
THE LOSS OF THE SERVICES OF DOMINIC CHANG OR FAILURE TO RETAIN OTHER QUALIFIED
PERSONNEL COULD HARM OUR BUSINESS.
Our success depends to a significant extent on the performance and
continued service of Dominic Chang, our Chairman of the Board and Chief
Executive Officer. Family Golf has entered into an employment agreement with Mr.
Chang which expires on December 31, 2001. We carry key person life insurance in
the amount of $7.25 million on the life of Mr. Chang. In addition, it is an
event of default under certain debt instruments if Mr. Chang is not the Chairman
of the Board and Chief Executive Officer of Family Golf and if he does not own
at least 5% of our outstanding common stock. In addition, we are required to
hire and retain personnel and professionals to staff our facilities. We cannot
assure you that we will be able to retain the services of Mr. Chang or that we
will be able to attract and retain qualified personnel.
FUTURE SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD ADVERSELY AFFECT
OUR STOCK PRICE.
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<PAGE>
Future issuances of common stock pursuant to outstanding options, warrants
and convertible notes or to reduce indebtedness may dilute the value of our
common stock.
As of December 31, 1999, options to purchase a total of 2.9 million shares
of our common stock are outstanding, of which 1.4 million are currently
exercisable. In addition, warrants were issued to our senior lenders to purchase
a total of 2,993,142 shares of our common stock at an exercise price of $.50 per
share, of which 1,496,571 are currently exercisable. Our $115 million aggregate
principal amount of convertible subordinated notes are convertible into
4,631,494 shares of our common stock. Based on the price per share of $.781 on
April 10, 2000, such issuances may be very dilutive to current stockholders.
THE TRADING PRICE OF OUR COMMON STOCK IS VOLATILE.
The trading price of our common stock has been volatile, with a 52-week
high of 19.8125 and a low of .7187 per share. The trading price of our common
stock may continue to fluctuate in response to variations in quarterly operating
results, the gain or loss of significant contracts, the disposition of
significant assets, changes in management, future announcements concerning
Family Golf, general trends in the industry and other events or factors.
WE DO NOT ANTICIPATE PAYING ANY DIVIDENDS.
We have never paid any cash dividends on our common stock. Moreover, our
$130 million credit facility prohibits us from paying dividends. At present, we
do not anticipate paying dividends on our common stock in the foreseeable future
and intend to devote any earnings to the development of our business. Investors
who anticipate the need for immediate income from their investment should
refrain from purchasing our common stock.
WE INDEMNIFY OUR DIRECTORS AND OFFICERS AGAINST CERTAIN EXPENSES AND
LIABILITIES.
So far as permitted by the Delaware General Corporation Law, Family Golf's
certificate of incorporation and by-laws provide that we will indemnify our
directors and officers against expenses and liabilities they incur to defend,
settle or satisfy any civil or criminal action brought against them on account
of their being or having been directors or officers unless, in any such action,
they are adjudged to have acted with gross negligence or to have engaged in
willful misconduct. As a result of such provisions, stockholders may be unable
to recover damages against our directors and officers for actions taken by them
which constitute negligence or a violation of their fiduciary duties, which may
reduce the likelihood of stockholders instituting derivative litigation against
directors and officers and may discourage or deter stockholders from suing our
directors, officers, employees and agents for breaches of their duty of care,
even though such action, if successful, might otherwise benefit us and our
stockholders. In addition, each of our named executive officers have indemnity
agreements, contractually obligating the Company to indemnify such officers.
14
<PAGE>
WE HAVE INCLUDED FORWARD-LOOKING STATEMENTS IN THIS DOCUMENT BASED ON
EXPECTATIONS INVOLVING RISKS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS.
Certain statements included or incorporated by reference into this
prospectus constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, and include statements made in
press releases and oral statements made by our officers, directors or employees
acting on our behalf. All such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of Family Golf, or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, market demand for our products and services, successful
implementation of our products and services, competitive factors, the ability to
manage our growth, the ability to recruit additional personnel and other factors
referenced in this prospectus and in our filings with the Securities and
Exchange Commission. In addition to statements which explicitly describe such
risks and uncertainties, you are urged to consider statements labeled with the
terms "believes," "belief," "expects," "plans," "anticipates" or "intends," to
be uncertain and forward-looking.
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<PAGE>
ITEM 2. PROPERTIES
- -------------------------------------------------------------------------------
We maintain our executive offices in approximately 16,874 square feet of
space in Melville, New York pursuant to a lease expiring in June 2008. As of
December 31, 1999, we owned land, subject to mortgages, on which 36 of our
facilities, are located. Information concerning such properties is set forth
below.
APPROXIMATE DATE OPENED
FACILITY LOCATION ACRES OWNED OR ACQUIRED
- ----------------- ------------- ------------
Queensbury, NY 200 May 1995
Greenville, SC 24 May 1995
Glen Allen, VA 10 Aug. 1995
Duluth, GA 56 Aug. 1995
Valley View, OH 5 Nov. 1995
Mesa, AZ 39 Feb. 1996
Flemington, NJ 17 March 1996
Yorktown Heights, NY 14 April 1996
Tucson, AZ 18 June 1996
West Palm Beach, FL 32 June 1996
Fountain Inn, SC 283 Aug. 1996
South Easton, MA 70 Sept. 1996
Margate, FL 14 Oct. 1996
Milwaukee, WI 65 Nov. 1996
Mainville, OH 32 Dec. 1996
Southampton, PA 12 June 1997
Palm Royale, CA 25 June 1997
Federal Way, WA (1) 22 Oct. 1997
Evendale, OH 16 Dec. 1997
Elk Grove, CA 20 Dec. 1997
Kansas City, KS 25 Jan. 1998
Wichita, KS 25 Jan. 1998
Holbrook, MA (1) 76 Feb. 1998
Carlsbad, CA 12 April 1998
Kent, WA 13 June 1998
Tacoma, WA 15 June 1998
Douglasdale, AB 96 June 1998
Nanaimo, BC 35 June 1998
Pittsburgh, PA 27 July 1998
Kansas City, MO 25 Sept. 1998
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Coyote Creek, BC 72 Oct. 1998
Voorhees, NJ 18 Oct. 1998
Thunder Bay, ON 3 Dec. 1998
Vaughan, ON 39 Dec. 1998
Richmond, VA 2.5 Dec. 1998
Glen Allen, VA 3 Dec. 1998
______________
(1) Under construction or being held for construction.
As of December 31, 1999, we leased the land on which 75 of our facilities
are located. None of such leases are with our affiliates. Information concerning
such leases is set forth below.
FACILITY APPROXIMATE LEASE DATE OPENED
LOCATION ACRES LEASED EXPIRATION DATE OR ACQUIRED
- -------- ------------- --------------- -----------
Farmingdale, NY 13 February 28, 2002 (1) March 1992
Wayne, NJ 16 February 28, 2003 July 1993
Elmsford, NY 27 February 27, 2019 (2) July 1994
Utica, NY 18 December 31, 2019 (1) Dec. 1994
Clay, NY 23 June 30, 2005 (3) Jan. 1995
Alpharetta, GA 26 June 28, 2024 (25) Aug. 1995
Gilroy, CA 36 October 31, 2002 (4) Nov. 1995
Valley View, OH 14 November 8, 2010 (2) Nov. 1995
Henrietta, NY 28 October 10, 2020 (1) Jan. 1996
Virginia Beach, VA 81 March 20, 2027 (5) March 1996
Indian River, VA 14 December 2002 (6) May 1996
Fairfield, OH 24 October 17, 2002 (2) June 1996
St. Louis, MO 42 February 28, 2002 (1) June 1996
San Jose, CA 25 March 31, 2013 (2) July 1996
Westminster, CA 17 February 28, 2008 (2) July 1996
Englewood, CO 55 June 30, 2017 (7) Aug. 1996
Flanders, NJ 25 June 28, 2024 (25) Aug. 1996
Glen Burnie, MD 38 December 31, 2012 Sept. 1996
Palm Desert, CA 17 July 31, 2000 (8) Feb. 1997
Raleigh, NC 20 March 11, 2022 (4) March 1997
Olney, MD 150 March 25, 2007 March 1997
Rio Salado, AZ 70 December 8, 2015 (2) April 1997
San Bruno, CA 15 December 31, 2003 (10) April 1997
Milpitas, CA 16 August 5, 2009 June 1997
Carver, MA 19 December 31, 2002 June 1997
Lake Grove, NY 54 May 31, 2042 July 1997
Columbus, OH 37 March 21, 2005 (1) Sept. 1997
Commack, NY 18 February 28, 2010 (10) Sept. 1997
Greenville, SC 29 May 24, 2007 (11) Sept. 1997
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<PAGE>
Syosset, NY 3 March 31, 2010 (16) Sept. 1997
County Line, CO(24) 25 May 1, 2018 Oct. 1997
Warrenville, IL 59 October 21, 2015 (12) Dec. 1997
Stuart, FL 26 June 28, 2002 (17) Jan. 1998
Raleigh, NC 6 December 9, 2047 Feb. 1998
Colorado Springs, CO 24 December 31, 2022 Feb. 1998
Chicago, IL 23 July 14, 2008 Feb. 1998
Palms, San Diego CA 5 December 16, 2002 (1) Feb. 1998
Rocky Point, NY 17 December 31, 2007 (4) Feb. 1998
San Diego, CA 4.63 April 30, 2002 (4) Feb. 1998
Suisin, CA 20 August 1, 2030 (13) Feb. 1998
New Rochelle, NY(24) 3 October 19, 2024 (2) March 1998
Fort Worth, TX 23 April 30, 2000 (2) June 1998
Houston, TX (Westheimer)20 October 31, 2002 (2) June 1998
Houston, TX 25 May 16, 2007(2) June 1998
Kingwood, TX 65 May 15, 2010 (20) June 1998
San Antonio, TX 21 November 30, 2007 (13) June 1998
San Antonio, TX 25 December 31, 2028 (1) June 1998
Olympia, WA 35 August 31, 2002 (2) June 1998
Tumwater, WA 36 August 1, 2025 June 1998
Calgary, AB 2 June 30, 2000 (21) June 1998
Kelowna, BC 13 August 8, 2021 (22) June 1998
Vancouver, BC 57 April 30, 2038 June 1998
Moreno Valley, CA 17 September 10, 2006 (22) July 1998
Markham, Ontario 8 August 31, 2005 July 1998
Lake Park, FL 28 December 31, 2006 July 1998
North Lauderdale, FL 18 December 31, 2015 (13) July 1998
College Park, MD 21 December 23, 2015 July 1998
Plymouth, MI 42 January 31, 2017 July 1998
Royal Oaks, MI 13 December 31, 2003 (23) July 1998
Toms River, NJ 7 August 5, 2016 (2) July 1998
Williamsville, NY 16 February 28, 2007 (2) July 1998
Dayton, OH 48 September 8, 2016 July 1998
Polaris, OH 33 December 31, 2008 July 1998
Beaverton, OR 20 December 31, 2016 July 1998
Monroeville, PA 27 April 14, 2025 July 1998
Carrollton, TX 22 September 10, 2011 (2) July 1998
Sacramento, CA 14 September 28, 2015 (2) Sept. 1998
Shelton, CT 18 April 30, 2008 (9) Dec. 1998
Simsbury, CT 17 March 31, 2019 (7) Dec. 1998
Odenton, MD 9 November 30, 2020 (18) Dec. 1998
Reston, VA 4 December 1, 2003 (7) Dec. 1998
Dale City, VA 7 March 7, 2025 (19) Dec. 1998
Portland, OR 21 January 13, 2019 Jan. 1999
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<PAGE>
El Cajon, CA 12 April 30, 2004 (24) March 1999
Lodi, CA 13 March 31, 2019 March 1999
(1) We have the option to extend the lease term for three additional five-year
periods.
(2) We have the option to extend the lease term for two additional five-year
periods.
(3) We have the option to extend the lease term for one ten-year period plus
four additional five-year periods.
(4) We have the option to extend the lease term for one five-year period.
(5) This lease is for land on which part of the Virginia Beach, Virginia golf
center is located.
(6) We have the option to extend the lease term of six additional ten-year
periods and one three year, six-month period.
(7) We have the option to extend the lease term for two ten-year periods.
(8) We have the option to purchase the sublandlord's right to the leased
premises. The original lease expires on July 31, 2000 with three five-year
renewal options.
(9) We have the option to purchase sublandlords right to the leased premises.
The original lease expires on March 31, 2012 with one fifteen-year renewal
option.
(10) We have the option to extend the lease term for four five-year periods.
(11) We have the option to extend the lease term for three ten-year periods.
(12) We have the option to extend the lease term for one one-year period.
(13) We have the option to extend the lease term for one twelve-year six-month
period.
(14) We have the option to extend the lease term for six five-year periods.
(15) We have the option to extend the lease for one period of twelve years.
(16) We are required to purchase the leased premises prior to expiration of the
lease.
(17) We have the option to extend the lease for two additional 15 year periods.
(18) We have the option to extend the lease for one additional ten year period.
(19) We have the option to purchase the leased premises prior to expiration of
the lease.
(20) We have the option to extend the lease for three additional three year
periods.
(21) We have the option to extend the lease for an additional 30 year period.
(22) We have the option to extend the lease for one period of ten years and two
five year periods.
(23) We have the option to extend the lease through August 16, 2005.
(24) We have the option to extend the lease for five additional five year
periods.
After giving effect to renewal options, none of our current leases is
scheduled to expire until December 31, 2002. However, the leases may be
terminated prior to their scheduled expiration should we default in our
obligations thereunder. The termination of any of our leases could have an
adverse effect on
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<PAGE>
us. If any of our leases were to be terminated, there can be no assurance that
we would be able to enter into leases for comparable properties on favorable
terms, or at all. We have received letters from landlords at four of our leased
sites claiming that as a result of our alleged breach of certain covenants
contained in the leases, such leases are terminated. Landlords at two of these
sites have filed lawsuits seeking to evict us from their properties. We have, or
are in the process of, responding to these termination letters and contesting
each of these lawsuits.
We operate fourteen facilities for municipalities pursuant to concession
licenses. These facilities are located at Douglaston, New York; El Segundo,
California; Denver, Colorado; Mahwah, New Jersey; Randall's Island, New York;
Bronx, New York; Miami, Florida; Fremont, California; Encino, California;
Evergreen, Colorado; Overland Park, Colorado; Seattle, Washington; Tacoma Firs,
Washington and Coquitlam, British Columbia. In addition, we have agreed to
construct three facilities at the following locations for municipalities
pursuant to concession licenses: Brooklyn, New York; New York City, New York and
Woodbridge, New Jersey. The Township of Woodbridge, New Jersey recently served
us with a Notice to Quit--Termination of Treasury and Demand for Possession
based upon our alleged breach of our lease and redevelopment agreement. We are
currently in settlement discussion with the Township, however, no assurance can
be given that a settlement will be reached. Our concession license for the
Douglaston, New York golf center, the concession license for the Randall's
Island, New York golf center, and the concession license for the Bronx, New York
golf center are terminable at will. Our management agreement with the City of El
Segundo for the El Segundo golf facility terminates on February 4, 2001.
Many of the eight management agreements which were in effect as of December
31, 1999 and pursuant to which we manage municipally-owned ice arenas, have a
term of one year or less, or are terminable by either the municipality or us
upon 30 days written notice.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
On or about February 22, 2000 Jerrold Schaffer filed a class action in the
United States District Court for the Eastern District of New York alleging that
Family Golf and certain of our executive officers violated federal securities
laws in connection with the sale of our common stock during the period July,
1998 through August, 1999. The complaint seeks an unspecified amount of
compensatory damages, as well as attorneys' fees. The allegations against us and
our officers arise out of public statements during the relevant period
concerning our financial health and expected future earnings. The complaint
alleges that while management stated that our rapid growth through acquisitions
was progressing smoothly and achieving economies of scale, in reality we were
experiencing increased operating expenses and insufficient working capital. The
complaint further alleges that when the true facts regarding our financial
health and expected future earnings became known in August, 1999, our stock
price dropped. Several other complaints have also been filed in the same court
alleging virtually identical facts and securities law violations, at least one
of which seeks punitive damages. We believe that the allegations lack merit and
intend to vigorously contest such claims.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
- --------------------------------------------------------------------------------
There were no matters submitted to a vote of stockholders during the fourth
quarter of the fiscal year ended December 31, 1999.
21
<PAGE>
===================
PART II
===================
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
Our common stock, par value $.01 per share, commenced trading on the Nasdaq
National Market on November 17, 1994 under the symbol "FGCI". The following
table sets forth, for the periods indicated, the high and low last sales prices
for common stock as reported by the Nasdaq National Market and as retroactively
adjusted for a three-for-two stock split effected in the form of a stock
dividend paid on May 4, 1998 to holders of record as of April 20, 1998.
STOCK PRICE
CALENDAR YEAR 1998: HIGH LOW
----- -----
First Quarter 27 3/4 9 3/16
Second Quarter 31 9 16 23 1/4
Third Quarter 27 15
Fourth Quarter 24 1/2 10
CALENDAR YEAR 1999:
First Quarter 19 13/16 5 13/16
Second Quarter 10 3/16 5 7/8
Third Quarter 9 0 23/32
Fourth Quarter 3 1 1/4
As of April 10, 2000, there were approximately 437 holders of record of our
common stock. We believe there were in excess of 400 beneficial owners of our
common stock. As of April 10, 2000, the last sales price for our common stock as
reported by the Nasdaq National Market was $.781.
Except for a three-for-two stock split effected in the form of a stock
dividend paid on May 4, 1998 to holders of record as of April 20, 1998, we have
neither declared nor paid dividends on our common stock and do not intend to
declare or pay any dividends in the foreseeable future. We currently intend to
retain earnings, if any, for the repayment of indebtedness and the operation of
our business. The declaration of dividends in the future will be at the election
of the Board of Directors and will depend upon the earnings, capital
requirements and our financial position, general economic conditions and other
pertinent factors. In addition, our principal credit facility prohibits the
payments of any dividends, unless we would be in compliance with such credit
facility, including certain financial ratios, after giving effect to such
dividends.
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<PAGE>
During the year ended December 31, 1999, we issued an aggregate of 64,961
shares of our common stock as part of the consideration for 4 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;
(iii) March 15, 1999, 8000 shares, Carl and Judith Fink, Lodi Golf Center,
located in Lodi, California; and (iv) July 7, 1999, 1,585 Ron and Linda Reif,
termination of a management agreement. Such issuances were not registered under
the Securities Act of 1933 (the "Act") in reliance on the exemptions provided by
Section 4(2) or Regulation S of the Act. None of such issuances involved any
general solicitation and each of the recipients of our common stock has
represented that such recipient understands that our 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.
On April 6, 1999, the Board of Directors of the Company declared a dividend
of one preferred share purchase right (a "Right") for each outstanding share of
common stock, par value .0001 per share, of the Company (the "Common Stock").
The dividend was payable on April 30, 1999 to stockholders of record on April
20, 1999. Each Right entitles the registered holder to purchase from the Company
one one-thousandth of a share of Series A Junior Participating Preferred Stock,
par value $.10 per share, of the Company (the "Preferred Stock") at a price of
$75.00 subject to adjustment. The description and terms of the Rights are set
forth in a Rights Agreement dated as of April 6, 1999, as the same may be
amended from time to time, between the Company and Continental Stock Transfer &
Trust Co., as Rights Agent.
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ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------------------------------------------------------
The following selected financial data for the five years ended December 31,
1995, 1996, 1997, 1998 and 1999 were derived from audited financial statements
of Family Golf.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Total revenue ............................. $ 12,432 $ 28,052 $ 72,997 $ 122,164 $ 154,869
Operating expense ......................... 6,614 13,335 37,386 62,451 133,223
Cost of merchandise sold .................. 1,779 4,540 12,366 20,330 33,559
Selling, general and
administrative expenses ............... 1,242 4,760 12,630 11,723 19,644
Merger, acquisition, integration and other
related charges ......................... 7,752
Impairment and other related
charges ................................ 61,529
--------- ---------- ------------ ----------- ----------
Operating income (loss) ................ 2,797 5,417 10,615 19,908 93,086
Interest expense and related charges ... (939) (383) (3,863) (11,309) (22,007)
Other income ........................... 66 2,172 1,659 1,938 687
--------- ---------- ------------ ----------- ----------
Income (loss) before income
taxes (benefit) minority interest,
extraordinary item and cumulative effect
of a change in accounting principal ..... 1,924 7,206 8,411 10,537 (114,406)
Income tax expenses (benefit) ............. 669 2,884 5,142 8,600 (16,468)
--------- ---------- ------------ ----------- ----------
Income (loss) before extraordinary items
and cumulative effect of a change in
accounting principle .................... 1,255 4,332 3,269 1,937 (97,938)
Extraordinary item - loss on disposition
of Pre-Combination
Facilities............. (181)
- loss on extinguishment
of debt................ (4,890) (42,461)
Cumulative effect of a change in accounting
principal ............................... (2,035)
--------- ---------- ------------ ----------- ----------
Net income (loss) .......................... $ 1,074 $ 4,322 $ 3,269 $( 4,988) $(140,399)
========== ========== ============ ========== ===========
Income (loss) per share before
extraordinary item and cumulative effect
of a change in accounting principle...... 0.16 0.27 0.16 0.08 (3.75)
Extraordinary item (net of tax effect) ..... (0.02) (0.21) (1.63)
Cumulative effect of a change in accounting
principal ............................... (0.08)
--------- ---------- ------------ ----------- ----------
Net income (loss) per share - diluted....... $ 0.14 $ 0.27 $ 0.16 $ (0.21) $ (5.38)
========== ========== ============ ========== ==========
Weighted average number of
common shares outstanding - diluted...... 7,907,000 15,905,000 19,814,000 23,855,000 26,088,000
========== ========== ============ ========== ===========
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA::
Cash and cash equivalents and short
term investments .................. $ 23,121 $ 39,313 $ 62,278 $ 21,556 $ 2,852
Working capital (deficiency) ...... 20,598 36,643 61,618 30,115 (296,951)
Total assets ...................... 61,582 171,698 363,036 572,040 491,386
Total long-term debt,
including current maturity ... 8,193 21,983 $ 165,836 249,571 305,755
Total stockholders' equity ......... $ 49,388 $ 144,356 $ 178,273 289,283 152,583
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
The following discussion and analysis should be read in conjunction with
our Financial Statements and the notes thereto appearing elsewhere in this
document.
GENERAL
We operate golf centers in North America. Our golf centers provide a wide
variety of practice and play opportunities, including facilities for driving,
chipping, putting, pitching and sand play. 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. We have grown from one golf facility in 1992 to 115 as of
December 31, 1999, including five facilities under construction. In addition, in
order to generate additional sources of revenue, attract a more diverse customer
base and offset the seasonality of our core golf business, we also operate
sports and family entertainment facilities, including ice rinks and "Family
Sports Supercenters," which have two or more sports-related attractions, such as
golf, ice rinks, bowling centers, soccer facilities and batting cages, as well
as a variety of family entertainment activities. As of December 31, 1999, we
owned, operated, managed or had under construction 115 golf facilities and 25
ice rink and family entertainment facilities in 23 states and three Canadian
provinces.
Our inability to comply with the financial covenants under our various
credit facilities because of our poor financial performance in 1999 has resulted
in an extreme liquidity crisis.
25
<PAGE>
We have opened or acquired facilities at varying times over the past
several years. As a result of changes in the number of facilities open from
period to period, the seasonality of operations, the timing of acquisitions and
dispositions, the completion of our initial public offering of common stock in
November 1994 (the "Initial Public Offering"), the public offering of our common
stock in December 1995 (the "1995 Public Offering"), the public offering of our
common stock in July 1996 (the "1996 Offering"), the private placement of $115.0
million aggregate principal amount of our 5 3/4% Convertible Subordinated Notes
(the "Notes") in the fourth quarter of 1997 (the "Note Offering"), the public
offering of our common stock in July 1998 (the "1998 Offering") 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 revenue from our 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 revenue from our golf centers from food and
beverage sales, video games and batting cages. We derive revenue from our golf
courses from golf club membership fees, fees for rounds of golf and golf
lessons, pro shop merchandise sales and from food and beverage sales at the
clubhouses. We derive revenue from our ice rinks by renting the rinks to hockey
leagues and teams and figure skaters, charging admission to our skating
facilities for public skating, providing lessons through USFSA-certified
instructors, skate equipment rentals and pro shop merchandise sales, as well as
from food and beverage sales and video games. We derive revenue from our Family
Sports Supercenters from substantially the same sources as described above. As a
result of their greater size and number of attractions, our Family Sports
Supercenters generate significantly more revenue than individual golf centers,
and generate a majority of their revenue in the first and fourth quarters of
each calendar year.
On June 30, 1998, we issued 1,384,735 shares of our common stock in
exchange for all outstanding common stock, options and warrants of Eagle Quest
Golf Centers, Inc. ("Eagle Quest"). This exchange, which qualified as a tax-free
reorganization for federal income tax purposes, has been accounted for as a
pooling-of-interests combination and, accordingly, the consolidated financial
statements for periods prior to the combination have been restated to include
the combined results of operations, financial position and cash flows of Eagle
Quest (which was incorporated in February 1996) as though it had been a part of
Family Golf since inception. Under the pooling-of-interests method, the assets
and liabilities of Eagle Quest are carried at their historical amounts and the
historical operating results of Eagle Quest are combined with those of Family
Golf for all periods presented. All information presented below reflects such
combination.
26
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected operations data of Family Golf as a
percentage of total revenue (except for operating expenses which is expressed as
a percentage of operating revenue and cost of merchandise sold which is
expressed as a percentage of merchandise sales) for the periods indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
<S> <C> <C> <C>
Operating revenues ............................................................ 74.8% 75.7% 77.1%
Merchandise sales ............................................................. 25.2 24.3 22.9
Total revenue ................................................................. 100.0 100.0 100.0
Operating expenses ............................................................ 68.5 67.5 111.6
Cost of merchandise sold ...................................................... 67.2 68.6 94.6
Selling, general and administrative expenses .................................. 17.3 9.6 12.7
Merger, acquisition, integration and other related charges .................... -- 6.3
Impairment and other related charges .......................................... 39.7
Income from operations ........................................................ 14.5 16.3 (60.1)
Interest expense .............................................................. (5.3) (9.3) (14.2)
Other income .................................................................. 2.3 1.6 .4
Income (loss) before income taxes extraordinary item and cumulative effect of a
change in accounting principle ................................................ 11.5 8.6 (73.9)
Income tax expense ............................................................ 7.0 7.0 (10.6)
Income (loss) before extraordinary items and cumulative effect of a change in
accounting principle .......................................................... 4.5 1.6 (63.0)
Extraordinary item ............................................................ -- 4.0 27.0
Preopening expenses (net of tax effect) ....................................... -- 1.7
Net income (loss) ............................................................. 4.5 % 4.1% (91.0)%
</TABLE>
TWELVE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1998
At varying times during 1999 and in 1998, we opened or acquired golf
centers, ice rinks and family entertainment centers. Notably, we completed the
acquisition of (i) MetroGolf, Inc. an owner and operator
27
<PAGE>
of eight golf centers, in February 1998; (ii) Eagle Quest, an owner and operator
of 18 golf centers, in June 1998; (iii) Golden Bear Golf Centers, Inc ("Golden
Bear"), an owner and operator of 14 golf centers, in July 1998; and (iv)
SkateNation, an owner and operator of six ice rink facilities and a manager of
16 ice rink facilities, in December 1998. As a result of these and other
acquisitions, significant renovations to acquired facilities subsequent to their
purchase by us and new facility openings, the comparison between 1999 and 1998
may not be meaningful.
As outlined above, we acquired a large number of golf facilities during
1998 (we started the year with approximately 60 golf centers in operation or
under construction and ended the year with 119 golf centers in operation or
under construction). Significant facility enhancements were made during 1998 and
the first half of 1999, retail merchandise was added to the pro shops, and
additional employees and management were hired to integrate these facilities and
prepare for the 1999 golf season. The results for the 1999 season for the newly
acquired centers were disappointing and did not meet expectations.
Total revenue for the twelve months ended December 31, 1999 was $154.9
million as compared to $122.2 for the same period in 1998, an increase of $32.7
million (or 26.8%). Total revenue for the full year in 1999 of $154.9 million
was comprised of $86.0 million in golf operating revenues, $33.4 million in non-
golf operating revenues and $35.5 million of merchandise sales. Total revenue
for 1998 of $122.2 million was comprised of $71.8 million in golf operating
revenues, $20.7 million in non-golf operating revenues and $29.7 million of
merchandise sales. The overall increase in revenue was attributable to having
additional golf centers, ice rinks and family Sports Supercenters in operation
during the 1999 period. Total revenue for the 62 golf centers operating for the
full twelve months ended December 31, 1999 and 1998 decreased 5% to $68.2
million in the 1999 period from $71.6 million in the 1998 period. The increase
in non-golf revenue in 1999 from 1998 resulted primarily from having additional
ice skating and Family Entertainment Centers in operation in 1999. Total revenue
in 1999 for the sites disposed of in 1999 and 2000 aggregated $ 8.9 million.
Comparison of non-golf revenue between 1999 and 1998 may not be meaningful,
because of the acquisition of SkateNation in December 1998.
The liquidity crisis faced by the Company during the second half of 1999
negatively impacted revenues in the period as follows: the inability to obtain
current product from vendors significantly affected merchandise sales and
driving range sales; lack of funds for advertising contributed to lower sales,
particularly at the Family Entertainment Centers and newly renovated golf
centers; and customer concern resulting from negative publicity about our
financial condition impacted reservations for parties and other functions at the
Family Entertainment Centers.
Operating revenue, consisting of all sales except merchandise sales,
amounted to $119.4 million for the twelve months ended December 31, 1999, as
compared to $92.5 million for the comparable 1998 period, an increase of $26.9
million (29.1%). The increase in operating revenue was primarily attributable to
having additional golf centers, ice rinks and Family Sports Supercenters in
operation during the 1999 period. Total operating revenue for the 62 golf
centers operating for the full twelve months ended December 31, 1999 and 1998
decreased 3% to $46.8 million in the 1999 period from $48.4 million in the 1998
period. Non-golf revenue from our Family Sports Supercenters and ice rinks
totaled $33.4 million for the twelve months ended December 31, 1999 and $21.4
million in the comparable 1998 period.
Merchandise sales, consisting of golf clubs, balls, bags, gloves, videos,
apparel and related accessories, amounted to $35.5 million for the twelve months
ended December 31, 1999 as compared to $29.7 million for the comparable 1998
period, an increase of $5.8 million (19.7%). The increase in merchandise sales
was primarily due to having additional golf center, ice rinks and family Sports
Supercenters in operation during the 1999 period. Merchandise sales were
affected by the Company's inability to obtain sufficient fresh product at its
pro shops due to its liquidity problems. Total merchandise sales for the 62 golf
centers operating for the full twelve months ended December 31, 1999 and 1998
decreased 8% to $21.4 million in the 1999 period from $23.2 million in the 1998
period.
Operating expenses, consisting of operating wages and employee costs, land
rent, depreciation of golf driving range facilities and equipment, utilities and
all facility operating costs, increased to $133.2 million (112% of operating
revenue) in the 1999 period from $62.5 million (67.5% of operating revenue) in
the 1998 period, an increase of $70.7 million (115%). The increase in operating
expenses was primarily due to the full year impact in 1999 of all of the
acquisitions made during 1998 (a substantial number of which occurred during
the second half of 1998), as well as the newly constructed facilities that
opened during 1999.
28
<PAGE>
The increase in operating expenses as a percent of operating revenues
resulted from several factors, including increased staff expenses at our golf
centers which was incurred to focus on improving pro shop revenues, without
achieving, however, the expected revenue improvement; training and related
expenses incurred in connection with the implementation of our MIS system; the
opening of several new facilities later than anticipated which resulted in
significant expenses without corresponding revenues; and higher rent expenses
since a greater proportion of the golf facilities acquired since January 1998
were leased properties (approximately 75% compared to approximately 67% before
1998). Operating expenses in 1999 also includes a charge of $3.9 million in the
third quarter from management's review and revaluation of certain assets.
The cost of merchandise sold increased to $33.6 million (94.6 % of
merchandise sales) in the 1999 period from $20.3 million (68.4% of merchandise
sales) in the comparable 1998 period. The overall increase in the cost of
merchandise sold of $13.3 million (65.5%) was primarily due to the higher level
of merchandise sales. The increase in cost of merchandise sold as a percentage
of merchandise sales includes the effects of the Company's liquidation of
inventory to raise cash, inability to purchase current product from major
manufacturers, and the write-down to the lower of cost or market for obsolete,
slow moving and excess inventory of $3.5 million in the 3rd quarter.
Selling, general and administrative expenses for the twelve months ended
December 31, 1999 amounted to $19.6 million (12.7% of total revenue) compared to
$11.7 million (9.6% of total revenue) in 1998, an increase of $7.9 million. The
increase in selling, general and administrative expenses from 1998 to 1999 was
primarily due to the expenses associated with opening and operating additional
golf centers and skating and entertainment facilities.
We incurred $7.8 million (6.3% of total revenue) of merger, acquisition,
integration and other related charges relating to the acquisition of Eagle Quest
by us on June 30, 1998. Included in these costs were: $3.7 million of fees and
professional expenses, $1.4 million of severance and compensation expenses, $2.7
million of costs related to the integration of Eagle Quest sites and other
write-offs.
Impairment and other related charges, incurred as a result of the
evaluation of the ongoing business operations, amounted to $61.5 million (39.7%
of total revenue) for the year ended December 31, 1999.
Interest expense increased to $22.0 million for the twelve months ended
December 31, 1999 from $11.3 million for the comparable 1998 period. Other
income, primarily interest income, decreased to $687,000 in the 1999
period from $1.9 million in the 1998 period. The increase in interest expense
was primarily due to having additional debt outstanding during the 1999 period.
An increase in interest rates may have a material impact on earnings due to
our high level of floating rate debt. The level of debt may be impacted by our
ability to dispose of assets on a timely basis.
In 1999, we incurred an extraordinary charge of $42.5 million related to
the disposition of assets held separately by Family Golf Centers, Inc. and
Eagle Quest Golf Centers, Inc., prior to our business combination in
June 1998.
TWELVE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1997
At varying times during 1998 and in 1997, we opened or acquired golf
centers, ice rinks and family entertainment centers. Notably, we completed the
acquisition of (i) MetroGolf, an owner and operator of eight
29
<PAGE>
golf centers, in February 1998; (ii) Eagle Quest, an owner and operator of
18 golf centers, in June 1998; (iii) Golden Bear, an owner and operator of 14
golf centers, in July 1998; and (iv) SkateNation, an owner and operator of six
ice rink facilities and a manager of 16 ice rink facilities, in December 1998.
As a result of these and other acquisitions, significant renovations to acquired
facilities subsequent to their purchase by us and new facility openings, the
comparison between 1998 and 1997 may not be meaningful.
Total revenue for the twelve months ended December 31, 1998 was $122.2
million as compared to $73.0 million for the same period in 1997, an increase of
$49.2 million (or 67.4%). Total revenue for the full year in 1998 of $122.2
million was comprised of $71.8 million in golf operating revenues, $20.7 million
in non-golf operating revenues and $29.7 million of merchandise sales. Total
revenue for 1997 of $73.0 million was comprised of $46.3 million in golf
operating revenues, $8.3 million in non-golf operating revenues and $18.4
million in merchandise sales. The overall increase in revenue was attributable
to having additional golf centers, ice rinks and Family Sports Supercenters in
operation during the 1998 period, as well as an overall increase in revenue at
those sites owned in both 1997 and 1998. Total revenue for the 38 golf centers
operating for the full twelve months ended December 31, 1998 and 1997 increased
6.1% to $50.5 million in the 1998 period from $47.7 million in the 1997 period.
The increase in revenue for these golf centers was primarily due to stronger
merchandise and golf instruction sales and better winter weather conditions in
the Northeast and Southeast regions, partially offset by adverse weather
attributed to the El Nino effect on the West Coast. Revenue for the four golf
centers operated by Eagle Quest for the full twelve month period decreased by
30.6%, while revenue for the 34 golf centers operated by Family Golf increased
by 9.2%. The increase in non-golf revenue in 1998 from 1997 resulted primarily
from an increase in the number of facilities owned or operated. Comparison of
non-golf revenue between 1998 and 1997 may not be meaningful.
Operating revenue, consisting of all sales except merchandise sales,
amounted to $92.5 million for the twelve months ended December 31, 1998, as
compared to $54.6 million for the comparable 1997 period, an increase of $37.9
million (69.4%). The increase in operating revenue was primarily attributable to
having additional golf centers, ice rinks and Family Sports Supercenters in
operation during the 1998 period, as well as an overall increase in revenue at
those sites owned in both 1997 and 1998. Total operating revenue for the 38 golf
centers operating for the full twelve months ended December 31, 1998 and 1997
increased 2.9% to $30.6 million in the 1998 period from $29.5 million in the
1997 period. Operating revenue for the four Eagle Quest golf centers decreased
by 15.3% while operating revenue for the 34 Family Golf centers increased by
4.1%. Non-golf revenue from our Family Sports Supercenters and ice rinks totaled
$21.4 million for the twelve months ended December 31, 1998 and $8.3 million in
the comparable 1997 period.
Merchandise sales, consisting of golf clubs, balls, bags, gloves, videos,
apparel and related accessories, amounted to $29.7 million for the twelve months
ended December 31, 1998 as compared to $18.4 million for the comparable 1997
period, an increase of $11.3 million (or 61.2%). The increase in merchandise
sales was primarily due to having additional golf centers, ice rinks, and Family
Sports Supercenters in operation during the 1998 period, as well as an overall
increase in revenue at those sites owned in both 1997 and 1998. Total
merchandise sales for the 38 golf centers operating for the full twelve months
ended December 31, 1998 and 1997 increased 46.4% to $18.3 million in the 1998
period from $12.5 million in the 1997 period, due to the increased emphasis
placed by us on improving pro shop sales, improved purchasing procedures and
increased promotion. Merchandise sales for the four Eagle Quest golf centers
decreased by
30
<PAGE>
46.7% primarily due to lack of pro shop inventory in the first half of 1998 as a
result of Eagle Quest's working capital shortage. Merchandise sales for the 34
Family Golf centers increased by 19.7% for the twelve month period ended
December 31, 1998.
Operating expenses, consisting of operating wages and employee costs, land
rent, depreciation of golf driving range facilities and equipment, utilities and
all facility operating costs, increased to $62.5 million (67.5% of operating
revenue) in the 1998 period from $37.4 million (68.5% of operating revenue) in
the 1997 period, an increase of $25.1 million (67.0%). The increase in operating
expenses was primarily due to the operating costs of locations that were
operated by us during the 1998 period which were not owned in the 1997 period.
The cost of merchandise sold increased to $20.3 million (68.6% of
merchandise sales) in the 1998 period from $12.4 million (67.2% of merchandise
sales) in the comparable 1997 period. The overall increase in the cost of
merchandise sold of $7.9 million (64.4%) was primarily due to the higher level
of merchandise sales. The increase in cost of merchandise sold as a percentage
of merchandise sales is primarily due to the higher cost of goods sold at the
Eagle Quest locations in 1997.
Selling, general and administrative expenses for the twelve months ended
December 31, 1998 amounted to $11.7 million (9.6% of total revenue) compared to
$12.6 million (17.3% of total revenue) in 1997, a decrease of $900,000. The
decrease in selling, general and administrative expenses from 1997 to 1998 and
as expressed as a percentage of total revenue was a result of the elimination of
duplicative overhead expenses at Eagle Quest and due to the substantial increase
in revenues and a relatively low corresponding incremental increase in certain
selling, general and administrative costs at Family Golf.
We incurred $7.8 million (6.3% of total revenue) of merger, acquisition,
integration and other related charges relating to the acquisition of Eagle Quest
by the us on June 30, 1998. Included in these costs were: $3.7 million of fees
and professional expenses, $1.4 million of severance and compensation expenses,
$2.7 million of costs related to the integration of Eagle Quest sites and other
write-offs.
Interest expense increased to $11.3 million for the twelve months ended
December 31, 1998 from $3.9 million in the comparable 1997 period. Other income,
primarily interest income, increased to $1.9 million in the 1998 period from
$1.7 million in the 1997 period. The increase in interest expense was primarily
due to the increase in debt in 1998 from the sale of $115.0 million of the Notes
in October 1997 and indebtedness incurred in 1998 in conjunction with the
acquisitions of MetroGolf, Eagle Quest, Golden Bear and SkateNation.
Inclusive of the acquisition related charges, income before income taxes,
extraordinary item and cumulative effect of a change in accounting principle for
the twelve months ended December 31, 1998 was $10.5 million. Earnings before
income taxes, extraordinary item and cumulative effect of change in accounting
principle, excluding merger, acquisition, integration and other
31
<PAGE>
related expenses, for the twelve months ended December 31, 1998 amounted to
$18.3 million, as compared to $8.4 million in the comparable 1997 period.
In the third quarter of 1998, we incurred a loss on the extinguishment of
debt and recorded an extraordinary item of $4.9 million. The extraordinary
charge consisted principally of the write-off of debt discounts, loan
acquisition costs and prepayment penalties incurred.
In the third quarter of 1998, we adopted SOP 98-5 effective as of January
1, 1998 and recorded a cumulative effect of a change in accounting principle
amounting to a charge of $2.0 million (net of tax effect). The change relates to
the treatment of pre-opening costs associated with newly developed facilities.
32
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had cash and cash equivalents of $3.5 million
compared to $21.6 million at December 31, 1998. The decrease was due principally
to operating losses, construction expenditures exceeding cash flow and
restructuring costs in connection with the restructuring of our credit facility.
Our outstanding indebtedness as of December 31, 1999, including the Notes
and other indebtedness of $308.2 million, bears interest at fixed and variable
rates currently ranging from 5 3/4% to 11.5% per annum.
As a result of our financial performance in the second quarter of 1999, we
were not in compliance with several covenants under our then existing $100
million credit facility with the Chase Manhattan Bank (the "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 an additional 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.
33
<PAGE>
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 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
34
<PAGE>
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 may 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 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.
On or about January 28, 2000, we received a waiver from our lenders under
the New Credit facility, waiving among other things, our compliance with certain
financial tests for the period commencing December 31, 1999 through March 31,
2000. Then again on March 31, 2000, we received a waiver from our lenders
waiving, among other things, our compliance with certain financial tests for the
period commencing April 1, 2000 through May 5, 2000. As of December 31, 1999,
$125.3 million was outstanding under the New Credit Facility. There can be no
assurance that on or prior to May 5, 2000 our lenders' will either extend the
waiver of our non-compliance with the financial tests or enter into an amendment
to the New Credit Facility to modify the financial tests. Until the New Credit
Facility is amended or the waiver is extended for a period of one year or
longer, $308.2 million of principal outstanding under the Credit Facility as
well as substantially all other debt for borrowed money which would otherwise be
classified as long-term debt has been classified as a current liability. If the
covenants are not amended or the waiver extended on or prior to May 5, 2000, the
payment of all $126.6 million of principal currently outstanding under the New
Credit Facility could be declared immediately due and payable. In such event, or
sooner if such event appeared inevitable, we would likely file a voluntary
petition seeking protection under the bankruptcy laws.
During the fourth quarter of 1997, the Company issued $115 million
aggregate principal amount of 5 3/4% convertible subordinated notes (the
"Notes"). The Notes mature on October 15, 2004 and bear interest at the rate of
5 3/4% per annum, payable semi-annually. The Notes are unsecured and
subordinated to all present and future senior indebtedness (as defined in the
Indenture) of the Company. The Notes are redeemable at the option of the Company
at any time after October 15, 2000, in whole or in part, at declining premiums
together with accrued and unpaid interest. The Notes are convertible at the
option of the holder into Common Stock at any time prior to maturity, unless
previously redeemed or repurchased, at a conversion price of $24.83 per share,
subject to adjustment under certain circumstances. Upon a Change of Control (as
defined in the Indenture), subject to certain conditions, each holder of Notes
shall have the right, at the holder's option, to require the Company to
repurchase such holder's Notes at a repurchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest to the Repurchase Date
(as defined in the Indenture), if any. The current waiver we have from our
lenders under our New Credit Facility requires
35
<PAGE>
that the Company operate through May 5, 2000 in strict accordance with a
budget. The budget does not provide for the payment of interest under the Notes,
which is due and payable on April 15, 2000, subject to a 30-day grace period.
There can be no assurance that our lenders will not, upon expiration of the
waiver, prohibit the payment of interest on the Notes prior to the end of such
grace period, or that we will have funds available to make such payment, in
which event we would be in default under such Notes, which would cross- default
our other debt instruments. In such event, or sooner if such event appeared
inevitable, we would likely file a voluntary petition seeking protection under
the bankruptcy laws.
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. We recently received, in exchange for a
$25,000 fee, a waiver from ChinaTrust (U.S.A.) waiving our compliance with
certain financial tests for the year ended December 31, 1999. Such waiver
expires on May 5, 2000. There can be no assurance that on or prior to May 5,
2000 ChinaTrust (U.S.A.) will either extend the waiver of our non-compliance
with the financial tests or enter into an amendment to the loan agreement to
modify the financial tests. If the covenants are not amended or the waiver
extended on or prior to May 5, 2000, ChinaTrust (U.S.A.) would have the right to
declare a default under the loan agreement and require all amounts outstanding
to be immediately due and payable, which default would trigger a cross- default
under our other debt instruments. In such event, or sooner if such even appear
inevitable, we would likely file a voluntary petition seeking protection under
the bankruptcy laws. As of December 31, 1999, we had drawn down $6 million
available under the ChinaTrust (U.S.A.) 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 31, 2000. As
36
<PAGE>
of December 31, 1999, $5.9 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 provided for interest at the LIBOR rate plus 1.75%, a guaranty of
Family Golf Centers, Inc., or in lieu thereof, a $150,000 payment into cash
escrow account by June 30, 2000 and a maturity date of August 8, 2001. As of
December 31, 1999, $2.8 million was outstanding under the loan with Fleet Bank.
Subsequent to December 31, 1999, all amounts outstanding under the Fleet Bank
loan were repaid with a portion of the proceeds from the sale of the Simsbury
ice skating facility.
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%. We recently received, in
exchange for a $35,000 fee, a waiver from ChinaTrust Commercial waiving our
compliance with certain financial tests for the year ended December 31, 1999.
Such waiver expires on May 5, 2000. There can be no assurance that on or prior
to May 5, 2000 ChinaTrust Commercial will either extend the waiver of our
non-compliance with the financial tests or enter into an amendment to the loan
agreement to modify the financial tests. If the covenants are not amended or the
waiver extended on or prior to May 5, 2000, ChinaTrust Commercial would have the
right to declare a default under the loan agreement and require all amounts
outstanding to be immediately due and payable, which default would trigger a
cross-default under our other debt instruments. In such event, or sooner if such
event appeared inevitable, we would likely file a voluntary petition seeking
protection under the bankruptcy laws. As of December 31, 1999, $10 million was
outstanding under our loan with ChinaTrust Commercial.
Unless asset sales occur on a timely and regular basis, we do not have
sufficient capital to meet our capital commitments and fund our debt service and
working capital requirements. Under the New Credit Facility, a portion of the
proceeds of asset sales is required to be applied to the repayment of
indebtedness. There can be no assurance that we will consummate asset sales in a
timely manner or that such asset sales will yield the capital necessary to meet
our needs. In addition, May 16, 2000 is the maturity date of our loan with Orix
U.S.A. wherein we are required to repay $2.7 million in principal which is
currently outstanding. Although we have requested a one-year extension of the
Orix loan, there can be no assurance that such an extension will be obtained. If
such an extension is not obtained, or if asset sales do not yield adequate
capital to meet our capital commitments and fund our debt service, we would
likely file a voluntary petition seeking protection under the bankruptcy laws.
TRENDS
From 1994 through 1998, we rapidly expanded, growing from one golf facility
in 1992 to 115 golf facilities as of December 31, 1999, most of which were
acquired through acquisition. Our strategy was
37
<PAGE>
to quickly reach critical mass to achieve economics of scale. Although we
achieved certain of such economies, our performance over the last fiscal year
has been extremely disappointing and below our expectations.
We have completed an analysis of our business and have determined, that
given our extreme liquidity crisis and highly leveraged capital structure, we
must dispose of operating assets, primarily non-core and underperforming assets,
in order to raise sufficient proceeds to meet our working capital and debt
service requirements. In addition, we may close underperforming sites. 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, a partner of Zolfo, Cooper LLC who is our
Acting Chief Financial Officer and, Stephen Cooper, a partner of Zolfo,
Cooper LLC who is 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 operating assets,
primarily non-core and underperforming sites, which may result in additional
losses, and assimilating and strengthening the operations of our remaining
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 throughout
fiscal year 2000. We also believe that revenues will be negatively impacted by
the reduced level of advertising and promotions and that merchandise sales will
continue to be negatively impacted by our inability to obtain current
merchandise. As a result of the disposition of various facilities, total
revenues will be reduced in 2000. Our ability to attract and retain personnel
may also be negatively impacted by our current financial condition.
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 dispositions 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.
38
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132 "Employer's Disclosures about Pension and Other Post Retirement Benefits."
The statement is effective for the fiscal years beginning after December 15,
1997. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
after December 15, 1997. In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires an entity to recognize all derivatives as
either assets or liabilities in the financial statements and measure those
instruments at fair value. The statement also establishes accounting and
reporting standards for hedging activities. The statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000, earlier
application is permitted in any fiscal quarter beginning after June 1998. In
October 1998, the Financial Accounting Standards Board issued SFAS No. 134
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for sale by a Mortgage Banking Enterprise," amending
previously issued SFAS No. 65, effective for the fiscal quarter beginning after
December 15, 1998. The Company believes that the above pronouncements either are
not applicable or will not have a significant effect on the information
presented in the financial statements.
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<PAGE>
The financial statements reflect the adoption of Statements of Financial
Accounting Standards No. 129, "Disclosure of Information about Capital
Structure" and No. 131, "Disclosure about Segments of an Enterprise and Related
Information".
The financial statements also reflect the adoption of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" which is
effective January 1, 1998 and requires application of the provisions of the
statement to comparative financial statements for earlier periods. Comprehensive
income (loss), which represents all changes in equity that result from
recognized transactions and other economic events of the period other than
transactions with owners in their capacity as owners, is being reported in the
statement of changes in stockholders' equity.
INFLATION
There was no significant impact on our operations as a result of inflation
during the nine months ended December 31, 1999.
YEAR 2000 ISSUES
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<PAGE>
The total cost for our year 2000 program through December 31, 1999 was
approximately $190,000, which was funded from our working capital. We have not,
as of this date, experienced any significant equipment or system problems as a
result of the year 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------------------
The Company does not invest in securities which are subject to market risk.
ITEM 8. FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The financial statements of the Company are included herein commencing on
page 51 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- -------------------------------------------------------------------------------
None.
41
<PAGE>
=================
PART III
=================
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT
- -------------------------------------------------------------------------------
The following table sets forth certain information concerning our executive
officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- ---------
<S> <C> <C>
Dominic Chang .............. 50 Chairman of the Board and Chief Executive Officer
James Ganley ............... 63 Director
Jimmy C.M. Hsu ............. 50 Director
Donald R. Monks ............ 52 Director
Krishnan P. Thampi ......... 51 President, Chief Operating Officer, Assistant Secretary,
Treasurer and Director
Yupin Wang ................. 67 Director
Richard W. Hasslinger ...... 49 Senior Vice President
William A. Schickler, III .. 51 Senior Vice President
Pamela S. Charles .......... 37 Vice President, Secretary and General Counsel
Rodger P. Potocki .......... 56 Vice President
Margaret M. Santorufo ...... 34 Vice President and Controller
</TABLE>
Dominic Chang has been our Chairman of the Board and Chief Executive
officer since 1991. Prior to March 1998, Mr. Chang also held the title of
President. Mr. Chang is currently serving as a director of the National Golf
Foundation, Stonybrook University Foundation, and Hsing Lung Farm. He is also a
member of the Metropolitan Regional Advisory Board of The Chase Manhattan
Corporation. From 1989 to 1992, Mr. Chang was a Senior Vice President and Sector
Executive for Corporate Real Estate and General Services for The Bank of New
York. He was responsible for the acquisition, management and disposition of the
Bank of New York's properties worldwide, facilities design and construction,
security and centralized administrative services. Mr. Chang previously had over
15 years banking experience with Bankers Trust and Irving Trust Company. He has
a Masters Degree in Industrial Engineering from New York University and a
Bachelors Degree from the State University of New York at Stonybrook.
James Ganley has been a member of our board of directors since 1994. From
October 1988 until his retirement in 1990, Mr. Ganley was a Senior Executive
Vice President of The Bank of New York. Mr. Ganley was a member o the Senior
Management Steering Committee at The Bank of New York and was directly
responsible for the mergers of the systems, products and operations of The Bank
of New
42
<PAGE>
York with Irving Trust Company. Prior to 1988, Mr. Ganley had held various
executive positions at Irving Trust Company and was Group Executive responsible
for Banking Operations activities, which comprised 13 divisions. He was also a
member of Irving Trust Company and was Group Executive responsible for Banking
Operation activities, which comprised 13 divisions. He was also a member of
Irving Trust Company's Senior Executive Management Committee. Mr. Ganley
received a Bachelors Degree in Economics from New York University and was a
participant in Harvard University's program for management development.
Jimmy C.M. Hsu has been a member of our board of directors since 1994. From
1995 until 1996, Mr. Hsu was the Vice Chairman of Russ Berrie and Company, Inc.
("Russ Berrie"), a New York Stock Exchange listed company which manufactures and
distributes toys and gifts to retail stores. Mr. Hsu joined Russ Berrie in 1979
as Vice President, Far East Operations. In 1987, he was appointed Senior Vice
President and Director of World-Wide Marketing of Russ Berrie. In 1991, he was
elected to the board of Russ Berrie and was appointed the position of Executive
Vice President. In 1995, Mr. Hsu became Vice Chairman of Russ Berrie. Mr. Hsu is
currently an independent investor.
Krishnan P. Thampi is our President, Chief Operating Officer, Assistant
Secretary, and Treasurer and is also a member of our board of directors. Prior
to March 1998 and since 1992, Mr. Thampi was our Chief Financial Officer, Chief
Operating Officer, Executive Vice President, Assistant Secretary and Treasurer.
He became a director in 1994. From 1989 to 1992, he was a Senior Vice President
for Administrative Services at The Bank of New York. From 1988 to 1989, he was a
Senior Vice President for Systems Services at Irving Trust Company. He also
performed controller and personnel management functions while at Irving Trust
Company. Mr. Thampi has a Masters Degree in Business Administration from
Columbia University and a Bachelors Degree in Engineering from McGill
University.
Donald R. Monks has been a director of the Company since April 1999. Mr.
Monks is currently the Senior Vice President of The Bank of New York where he is
a manager of the Banking Operations and Technology Sector as well as a member of
the bank's Senior Policy Committee. Mr. Monks also serves on the Board of
Directors of the Depository Trust Company and as a member, and past chairman, of
the New York Clearing House Steering Committee and the CHIPCo Operating
Committee. He is also Chairman of the Federal Reserve Bank's Payments Risk
Advisory Committee. Mr. Monks holds a Masters Degree in Economics from the
University of Delaware and a Bachelors Degree in Business Administration from
Rider University.
Yupin Wang has been a member of our board of directors since 1994. Mr. Wang
is currently the President of W W International, a worldwide management
consulting firm. Prior to establishing W W International in 1992, Mr. Wang was a
member of the executive management team of International Business Machines Corp.
("IBM") from 1962 to 1992. He had held various positions at IBM, including
Director of Marketing Operations, Director of Marketing Strategy and Director of
Customer Satisfaction. As Director of Customer Satisfaction, he established
IBM's Customer Satisfaction Management System, which contributed to IBM
Rochester winning the Malcolm Baldrige Award. Mr. Wang received a Bachelors
Degree in Economics from National Taiwan University and Masters Degrees from
Oklahoma State University and New York University.
43
<PAGE>
Richard W. Hasslinger joined our predecessor in November 1992 as a Site
Manager and has been a Senior Vice President since January 1995. From May 1992
to November 1992, he served us as a consultant. From May 1988 until May 1992, he
was Vice President and Division Head for Facilities Management at The Bank of
New York. His responsibilities there included leasing and acquisitions, design
and construction, and property management. From 1973 to 1988, he managed several
operational activities at Irving Trust Company. Mr. Hasslinger has a Bachelors
Degree in Business Administration from Hope College.
William A. Schickler, III is a Senior Vice President of Family Golf and
President of The Practice Tee, Inc. ("TPT"), one of our subsidiaries. Mr.
Schickler is responsible for our operations in the West Coast Region. Prior to
joining TPT in 1992, Mr. Schickler was a founding general partner with The
Waterford Group, a partnership involved in the development and marketing of golf
course related real estate projects. Mr. Schickler is a certified public
accountant and holds a Bachelors Degree in Business Administration.
Pamela S. Charles joined us as Vice President, Secretary and General
Counsel in January 1997. From February 1994 until January 1997, she was an
associate at the law firm of Squadron, Ellenoff, Plesent & Sheinfeld, LLP where
she specialized in federal securities law, mergers and acquisitions. From 1987
to 1994, Ms. Charles was an associate at the law firm of Schulte, Roth & Zabel.
Ms. Charles has a Law Degree from Hofstra University of Law and a Bachelors
Degree from the State University of New York at Binghamton.
Rodger P. Potocki was the Northern District Director for us from September
1994 until he was appointed Vice President--Regional Manager, Northern Region,
in February 1995. From October 1979 to September 1994, he was Executive Vice
President of Oneida County Industrial Development Corporation, a non-profit
development corporation ("Oneida Industrial"). At Oneida Industrial, Mr. Potocki
was responsible for new investment and job creation projects in Oneida County,
New York, and implemented New York State's first direct loan fund for new
businesses. Previously, he served as Director of Planning and Development for
the City of Rome, New York. Mr. Potocki has a Masters Degree in Political
Science from the Graduate School of Public Affairs in Albany, New York and a
Bachelors Degree from Syracuse University.
Margaret M. Santorufo joined us as Controller in June 1995. From January
1990, until she joined the us in 1995, she was an audit supervisor with Richard
A. Eisner & Company, LLP. Ms. Santorufo received a Bachelors Degree in
Accounting from St. John's University.
There are no family relationships among any of our the directors or
executive officers. Our executive officers serve in such capacity at the
pleasure of the Board of Directors.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires our directors and executive officers, and persons who
beneficially own more than ten percent of a registered class of our equity
securities, to file with the Securities and Exchange Commission initial reports
of ownership and reports of changes in ownership of our common stock and the
other equity
44
<PAGE>
securities. Officers, directors, and persons who beneficially own more than ten
percent of a registered class of our equities are required by the regulations of
the Securities and Exchange Commission to furnish the Company with copies of all
Section 16(a) forms they file. To our knowledge, based solely on review of the
copies of such reports furnished to us and written representations that no other
reports were required, during the fiscal year ended December 31, 1999, all
Section 16(a) filing requirements applicable to its officers, directors, and
greater than ten percent beneficial owners were complied with; except one report
was filed late by Mr. Ganley.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------------------------------------------------------
All share and per share numbers included herein have been retroactively
adjusted to give effect to a three-for-two stock split in the form of a stock
dividend which was paid on May 4, 1998 to holders of record as of April 20,
1998.
The following table sets forth the annual and long-term compensation for
services in all capacities paid to Dominic Chang, our Chairman of the Board and
Chief Executive Officer, Krishnan P. Thampi, our President, Chief Operating
Officer, Assistant Secretary, Treasurer and Director, Pamela S. Charles, a Vice
President, Secretary and General Counsel, William A. Schickler, a Senior Vice
President and Richard W. Hasslinger, a Senior Vice President (the "Named
Executives") during 1997, 1998 and 1999.
45
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
Long-
term
Name and Restricted Securities Incentive
Principal Other Annual Stock Underlying Plan All other
Position Year Salary Bonus Compensation Awards Options Payouts Compensation
- ----------- ---- ---------- ------ --------------- ------------ ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dominic Chang, 1999 $ 175,000 -- $12,000(1) -- -- -- --
Chairman of the Board 1998 $ 175,000 -- $12,000(1) -- -- -- --
Chief Executive Officer 1997 $ 140,000 -- $ 9,000(1) -- -- -- --
Krishnan P. Thampi, 1999 $ 165,000 -- $ 7,200(1) -- 250,000 -- --
President 1998 $ 150,000 -- $ 7,200(1) --(2) 30,000 -- --
Chief Operating Officer, 1997 $ 120,000 -- $ 7,200(1) -- 90,132 -- --
Assistant Secretary,
Treasurer and Director
Pamela S. Charles, 1999 $ 125,000 -- $ 4,800(1) -- 50,000 -- --
Vice President 1998 $ 110,000 -- $ 4,800(1) $36,986(3) 15,000 -- --
Secretary and 1997 $ 95,000 -- $ 4,800(1) -- 22,500 -- --
General Counsel
William A. Schickler, III 1999 $ 110,000 -- $ 4,800(1) -- 50,000 -- --
Senior Vice President 1998 $ 100,000 -- $ 4,800(1) $73,971(4) 15,000 -- --
1997 $ 99,000 -- $ 4,800(1) -- 20,250 -- --
Richard W. Hasslinger, 1999 $ 110,000 -- -- -- 50,000 -- --
Senior Vice President 1998 $ 100,000 -- -- $61,643(5) 15,000 -- --
1997 $ 90,000 -- -- -- 13,500 -- --
</TABLE>
____________
(1) Includes amounts paid to lease a car.
(2) A restricted stock award of 170,250 shares of our common stock was granted
in December 1998 which award was terminated in February 1999.
(3) Represents a restricted stock award of 2,250 shares of common stock granted
in December 1998, all of which shares have vested. The value of such award
as of December 31, 1999 was $3,163.50.
(4) Represents a restricted stock award of 4,5000 shares of our common stock
granted in December 1998, of which 3,000 shares have vested and 1,500
shares vest in January 2001. The value of such award as of December 31,
1999 was $6,327.00.
(5) Represents a restricted stock award of 3,750 shares of our common stock
granted in December 1998, of which 2,500 shares have vested and 1,250
shares vest in January 2001. The value of such award as of December 31,
1999 was $5,275.50.
46
<PAGE>
The following table sets forth certain information concerning options
granted to the Named Executives during the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATED FOR
INDIVIDUAL GRANTS (1) OPTION TERM
--------------------------------------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS EXERCISE
SECURITIES GRANTED TO OR BASE
UNDERLYING OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (1) FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
- ---- ------------------ -------------- --------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Dominic Chang -- -- -- -- -- --
Krishnan P.
Thampi 250,000 30% $1.188 Aug. 13, 2009 $210,500 $550,500
Pamela S.
Charles 50,000 6% $1.188 Aug. 13, 2009 $ 42,100 $110,100
William A.
Schickler, III 50,000 6% $1.188 Aug. 13, 2009 $ 42,100 $110,100
Richard W.
Hasslinger 50,000 6% $1.188 Aug. 13, 2009 $ 42,100 $110,100
</TABLE>
47
<PAGE>
AGGREGATED OPTION EXERCISES DURING THE FISCAL YEAR ENDED DECEMBER 31, 1999 AND
FISCAL YEAR END OPTION VALUES.
The following table sets forth certain information concerning each exercise
of stock options during the last completed fiscal year by each Named Executive
and the number and value of securities underlying exercisable and unexercisable
stock options as of the fiscal year ended December 31, 1999 by the Named
Executives.
<TABLE>
<CAPTION>
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING
SHARES UNEXERCISED OPTIONS AT FISCAL YEAR VALUE OF UNEXERCISED IN-THE-MONEY
ACQUIRED VALUES END OPTIONS AT FISCAL YEAR END
ON EXERCISE REALIZED -------------------------------------- ------------------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ -------- ----------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Dominic Chang 0 -- 15,000 -- 0 --
Krishnan P. Thampi 0 -- 307,632 287,500 0 $54,500
Pamela S. Charles 0 -- 42,500 65,000 0 $10,900
William A. Schickler, III 0 -- 125,250 65,000 0 $10,900
Richard W. Hasslinger 0 -- 57,250 61,500 0 $10,900
</TABLE>
The following table sets forth certain information concerning the grant of
restricted stock to each of the Named Executives during the fiscal year ended
December 31, 1999.
LONG-TERM INCENTIVE PLANS--AWARDS
IN LAST FISCAL YEAR
NUMBER OF SHARES, PERFORMANCE OR OTHER PERIOD
NAME UNITS OR OTHER RIGHTS (#) UNTIL MATURATION OR PAYOUT
- ---- ------------------------- ---------------------------
Dominic Chang............ -- --
Krishnan P. Thampi....... -- --
Pamela S. Charles........ -- --
William A. Schickler, III -- --
Richard W. Hasslinger -- --
48
<PAGE>
STOCK OPTION AND AWARD PLANS
On July 19, 1994, our Board of Directors and our stockholders adopted our
1994 Stock Option Plan (the "1994 Plan"). The 1994 Plan provides for the grant
of options to purchase up to 450,000 shares of our common stock to our
employees, officers, directors and consultants. Options may be either "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), or non-qualified options. Incentive stock options
may be granted only to our employees, while non-qualified options may be issued
to non-employee directors, consultants and others, as well as to our employees.
On March 6, 1996, our Board of Directors adopted, and on June 7, 1996, our
stockholders approved, our 1996 Stock Incentive Plan (the "1996 Plan"). The 1996
Plan is identical to the 1994 Plan, except that the 1996 Plan provided (i) for
the grant of options to purchase up to 750,000 shares of our common stock and
(ii) an automatic grant of non-qualified stock options to purchase 15,000 shares
to each non-employee director upon his election or appointment to the Board of
Directors and annual grants (commencing on the date the 1996 Plan was approved
by stockholders) to each non- employee director of non-qualified stock options
to purchase 15,000 shares of our common stock at the fair market value of our
common stock on the date of the grant. On April 25, 1997, our Board of Directors
adopted, and on June 24, 1997 our stockholders approved, our 1997 Stock
Incentive Plan (the "1997 Plan"). The 1997 Plan is identical to the 1996 Plan.
On April 23, 1998, our Board of Directors adopted, and on June 26, 1998 our
stockholders approved, our 1998 Stock Option and Award Plan (the "1998 Plan").
The 1998 Plan is identical to the 1997 Plan except that (i) it provides for the
grant of stock awards (either outright or for a price determined) as well as
options, (ii) it provides for grants of stock awards and options for up to
1,5000,000 shares of our common stock to those employees, officers, directors,
consultants or other individuals or entities eligible under the 1998 Plan to
receive stock awards or options (each, a "Plan Participant") and (iii) no Plan
Participant may receive more than an aggregate of 500,000 shares of our common
stock by grant of options and/or stock awards during the term of the 1998 Plan.
The 1994 Plan, the 1996 Plan, the 1997 Plan and the 1998 Plan
(collectively, the "Plans") are administered by the Stock Option and Award
Committee, which determines, among other things, those individuals who receive
options, the time period during which the options may be partially or fully
exercised, the number of shares of our common stock issuable upon the exercise
of each option and the option exercise price. The 1994 Plan also provided for an
automatic grant of non-qualified stock options to purchase 7,500 shares of our
common stock to each non-employee director upon his election or appointment to
the Board of Directors and annual grants of non-qualified stock options to
purchase 3,000 shares of our common stock at the fair market value of our common
stock on the date of such grant. Effective on June 7, 1996, such automatic
grants ceased and were replaced by the automatic grants under the 1996 Plan
consisting of an automatic grant of non-qualified stock options to purchase
15,000 shares of our common stock to each non-employee director upon his or her
election or appointment to the Board of Directors and annual grants of
non-qualified stock options to purchase 15,000 shares of our common stock at the
fair market value on the date of such grant. Effective upon the exhaustion of
all options authorized under the 1996 Plan, such automatic grants ceased and
were replaced by the automatic grants under the 1997 Plan consisting of an
automatic grant of non-qualified stock options to purchase 15,000 shares of our
common stock to each non-employee director upon his or her election or
appointment to
49
<PAGE>
the Board of Directors and annual grants of non-qualified stock options to
purchase 15,000 shares of our common stock at the fair market value on the date
of such grant. Effective upon the exhaustion of all options authorized under the
1997 Plan, such automatic grants will cease and will be replaced by automatic
grants under the 1998 Plan consisting of an automatic grant of non-qualified
stock options to purchase 15,000 shares of our common stock to each non-employee
director upon his or her election or appointment to the Board of Directors and
annual grants of non-qualified stock options to purchase 15,000 shares of our
common stock at the fair market value on the date of such grant.
The exercise price per share of our common stock subject to an incentive
stock option may not be less than the fair market value per share of our common
stock on the date the option is granted. The per share exercise price of our
common stock subject to a non-qualified option may be established by the Board
of Directors. The aggregate fair market value (determined as of the date the
option is granted) of our common stock for which any person may be granted
incentive stock options which first become exercisable in any calendar year may
not exceed $100,000. No person who owns, directly or indirectly, at the time of
the granting of an incentive stock option to such person, 10% or more of the
total combined voting power of all classes of our capital stock (a "10%
Stockholder") shall be eligible to receive any incentive stock options under the
Plans, unless the exercise price is at least 110% of the fair market value of
the shares of our common stock subject to the option, determined on the date of
grant. Non-qualified options are not subject to such limitation.
No stock option may be transferred by a Plan Participant other than by will
or the laws of descent and distribution, and, during the lifetime of a Plan
Participant, the option will be exercisable only by the Plan Participant. In the
event of termination of employment other than by death or disability, the Plan
Participant will have no more than three months after such termination during
which the Plan Participant shall be entitled to exercise the option, unless
otherwise determined by the Stock Option and Award Committee. Upon termination
of employment of a Plan Participant by reason of death or permanent disability,
such Plan Participant's options remain exercisable for one year thereafter to
the extent such options were exercisable on the date of such termination.
Options under the Plans must be issued within 10 years from their
respective effective dates which is July 19, 1994 in the case of the 1994 Plan,
June 7, 1996 in the case of the 1996 Plan, April 25, 1997 in the case of the
1997 Plan, and April 23, 1998 in the case of the 1998 Plan. Incentive stock
options granted under the Plans, cannot be exercised more than 10 years from the
date of the grant. Incentive stock options issued to a 10% Stockholder are
limited to five-year terms. All options granted under the Plans provide for the
payment of the exercise price in cash or by delivery to us of shares of our
common stock having a fair market value equal to the exercise price of the
options being exercised, or by a combination of such methods. Therefore, a Plan
Participant may be able to tender shares of our common stock to purchase
additional shares of our common stock and may theoretically exercise all of such
Plan Participant's stock options with no investment.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by us become available again for issuance under the 1994
Plan, the 1996 Plan, the 1997 Plan or the 1998 Plan, as the case may be.
50
<PAGE>
As of December 31, 1999, options to purchase 2.9 million shares of our
common stock have been granted under the Plans, of which options to purchase 1.6
million shares have been exercised. In addition, on March 8, 1995, Messrs. Chang
and Thampi were each granted options outside of the 1994 Plan to purchase 15,000
shares of our common stock at $4.50 per share (the fair market value of the our
common stock on the date of such grant) in connection with an amendment to their
respective employment agreements. These options became exercisable in March 1996
and are still outstanding. In addition, on March 7, 1996, certain of our
employees were granted options outside the Plans to purchase an aggregate of
80,250 shares of our common stock at $13.25 (the fair market value of our common
stock on the date of such grant), which options vest ratably over three years.
On September 22, 1997, 18,750 options were granted outside of the Plans to a
consultant at an exercise price of $15.083. On March 16, 1998 we made an award
outside the 1998 Plan of 22,500 shares of restricted stock to Jeffrey Key, which
award was forfeited when Mr. Key resigned from the Company.
EMPLOYMENT AGREEMENTS
We entered into employment agreements, each expiring on December 31, 2001,
with each of Mr. Chang and Mr. Thampi, pursuant to which each will devote at
least 95% of his business time to our affairs. Pursuant to his employment
agreement, Mr. Chang received a base salary of $140,000, $175,000 and $190,000
in 1997, 1998 and 1999, respectively, and will receive a base salary of $205,000
and $220,000 in 2000 and 2001, respectively. Such base salaries are subject to
additional increase within the discretion of the Board of Directors which will
take into account, among other things, the performance of Family Golf and the
performance, duties and responsibilities of Mr. Chang. Mr. Chang also receives
use of a company-leased automobile and will receive such bonuses as may be
determined by the Board of Directors throughout the term of his employment
agreement. The employment agreement also provides that Mr. Chang will not
compete with us for two years after the termination of his employment.
Pursuant to his employment Mr. Thampi received a base salary of $120,000,
$150,000 and $165,000 in 1997, 1998 and 1999, respectively, and will receive a
base salary of $180,000 and $195,000 in 2000 and 2001, respectively. Such base
salaries are subject to additional increases within the discretion of the Board
of Directors which will take into account, among other things, the performance
of Family Golf and the performance, duties and responsibilities of Mr. Thampi.
Mr. Thampi also receives use of a company-leased automobile and will receive
such bonuses as may be determined by the Board of Directors throughout the term
of his employment agreement. The employment agreement also provides that Mr.
Thampi will not compete with us for two years after the termination of his
employment.
51
<PAGE>
We do not have written employment agreements with Messrs. Hasslinger,
Schickler, or Potocki or with Ms. Charles or Ms. Santorufo.
SERVERAGE AGREEMENTS
In April 1999 the Board of Directors authorized the Company to enter into
Severance Agreements with each of the following Named Executives: Dominic
Chang, Chief Executive Officer; Krishnan P. Thampi, President, Chief Operating
Officer, Assistant Secretary and Treasurer; Pamela S. Charles, Vice President,
Secretary and General Counsel; William Schickler, III, Senior Vice President
and Richard W. Hasslinger, Senior Vice President.
In general, the Severance Agreements provide that, upon termination of
employment or other specified adverse change in the employment of any Named
Executive following a Change of Control (as defined therein), the Company shall
provide to each such Named Executive certain rights and benefits, including (i)
a lump sum payment in cash in an amount equal to three times such Named
Executive's yearly earnings, (ii) acceleration of all unvested stock options and
restricted stock awards, and (iii) certain additional retirement and welfare
benefits.
DIRECTOR'S COMPENSATION
Our employee directors do not receive any additional compensation for their
services as directors. Non-employee directors do not receive a fee for serving
as such, but are reimbursed for expenses. In addition, non-employee directors
participate in our stock option and award plans. The Plans currently provide for
the automatic grant of non-qualified stock options to purchase 15,000 shares of
our common stock to each non-employee director upon his or her election or
appointment to the Board of Directors and annual grants of non-qualified stock
options to purchase 15,000 shares of our common stock at the fair market value
on the date of such grant.
REPORT ON REPRICING OF STOCK OPTIONS
We did not adjust or amend the exercise price of stock options previously
awarded to the Named Executives during the last fiscal year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Compensation Committee consists of Dominic Chang, James Ganley, Yupin
Wang and Jimmy Hsu, each of whom is a non-employee member of our Board of
Directors, with the exception of Mr. Chang, who is also our Chief Executive
Officer and Chairman of the Board. Mr. Wang is the Chairman of the Compensation
Committee.
52
<PAGE>
COMPENSATION COMMITTEE REPORT TO STOCKHOLDERS
The Compensation Committee of the Board of Directors is responsible for
determining the compensation of our executive officers, other than compensation
awarded pursuant to the Plans which are administered by the Stock Option and
Award Committee of the Board of Directors. Mr. Chang abstains from any vote
regarding his compensation.
The Stock Option and Award Committee is responsible for granting and
setting the terms of stock option and awards under the 1994 Plan, the 1996 Plan,
the 1997 plan and the 1998 Plan. Messrs. Ganley, Wang, Monks and Hsu serve on
the Stock Option and Award Committee.
GENERAL POLICIES REGARDING COMPENSATION OF EXECUTIVE OFFICERS
Our executive compensation policies are intended (1) to attract and retain
high quality managerial and executive talent and to motivate these individuals
to maximize stockholder returns, (2) to afford appropriate incentives for
executives to produce sustained superior performance, and (3) to reward
executives for superior individual contributions to the achievement of our
business objectives. Our compensation structure typically consists of base
salary and stock options or awards. Together, these components link each
executive's compensation directly to individual and our performance.
Salary. Base salary levels reflect individual positions, responsibilities,
experience, leadership and potential contribution to our success. Actual
salaries vary based on the Compensation Committee's assessment of the
individuals executive's performance and our performance.
Stock Option and Stock Awards. Stock options, which are granted at the fair
market value of the our common stock on the date of grant, and stock awards,
which typically vest over time, are currently our sole long-term compensation
vehicle. Such stock options and awards are intended to provide employees with
sufficient incentive to manage from the perspective of an owner with an equity
stake in the business.
In determining the size of individual options or stock grants, the Stock
Option and Award Committee considers the aggregate number of shares available
for grant, the number of individuals to be considered for an award, and the
range of potential compensation levels that the options and stock awards may
yield. The number and timing of grants to executive officers are decided by the
Stock Option and Award Committee based on its subjective assessment of the
performance of each grantee. In determining the size and timing of options and
stock awards, the Stock Option and Award Committee weighs any factors it
considers relevant and gives such factors the relative weight it considers
appropriate under the circumstances then prevailing. While an ancillary goal of
the Stock Option and Award Committee in awarding stock options and stock awards
is to increase the stock ownership of our management, the Stock Option and Award
Committee does not, when determining the amount of awards, consider the amount
of stock already owned by an officer (except as required by the terms of the
1998 Plan). The Stock Option and Award Committee believes that to do so could
have the effect of inappropriately or inequitably
53
<PAGE>
penalizing or rewarding executives based upon their personal decision as to
stock ownership and option exercises.
In 1993, the Internal Revenue Code was amended to limit the deductibility
of compensation paid to certain executives in excess of $1 million. Compensation
not subject to the limitation includes certain compensation payable solely
because an executive attains performance goals ("performance-based
compensation"). We intend that stock options granted under the Plans with an
exercise price equal to or greater than the fair market value of the shares at
the time of the grant will qualify as performance-based compensation. Stock
awards will not qualify as performance-based compensation. Our compensation
deduction for a particular executive's total compensation, including
compensation realized with respect to stock awards, will be limited to $1
million. The Compensation Committee's philosophy with respect to the $1 million
cap on the tax deductibility of executive compensation is to maximize the
benefit of tax laws by seeking performance-based exemptions and related
stockholder approval where consistent with our compensation policies and
practices.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
Mr. Chang's base salary for the fiscal year ended December 31, 1998 was
determined by the terms of his employment agreement with us which is described
elsewhere in this report. The members of the Compensation and Stock Option and
Award Committees believe that Mr. Chang's base salary level and stock option
grants are reasonable.
Compensation Committee Stock Option and Award Committee
- ---------------------- --------------------------------
Dominic Chang James Ganley
James Ganley Jimmy C. M. Hsu
Jimmy C. M. Hsu Donald R. Monks
Yupin Wang Yupin Wang
54
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of March 31, 1999
regarding the beneficial ownership of our common stock by (i) each person known
by us to own beneficially more than 5% of our common stock, (ii) each of our
directors, including Messrs. Chang and Thampi, and (iii) all directors and
executive officers of the Company as a group. Except as otherwise indicated and
subject to community property laws where applicable, the persons named in the
table below have sole voting and dispositive power with respect to the shares of
our common stock shown as beneficially owned by them. Information as to West
Highland Capital, Inc., Jerry Zucker, Warburg Pincus Asset Management, Inc., and
Wells Fargo Bank, N.A. was derived from the Schedule 13G filed by each such
stockholder, and, except for the percentage of ownership, reflects the
information contained in the Schedule 13G as of the date such Schedule 13G was
filed.
PERCENT OF
NUMBER OF SHARES OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED SHARES
- ------------------------------------ ------------------ -------------
West Highland Capital, Inc. (1). . . . . . 3,837,000 (2) 14.7%
Dominic Chang (3). . . . . . . . . . . . . 3,949,001 (4) 15.2%
Warburg Pincus Asset Management, Inc. (5). 2,159,500 8.3%
Wells Fargo Bank, N.A. (6) . . . . . . . . 1,294,830 5.0%
Jerry Zucker (7) . . . . . . . . . . . . . 1,432,000 5.5%
Krishnan P. Thampi (3) . . . . . . . . . . 465,557 (8) 1.8%
Jimmy C.M. Hsu (3) . . . . . . . . . . . . 212,375 (9) *
James Ganley (3) . . . . . . . . . . . . . 118,250 (10) *
Donald R. Monks (3). . . . . . . . . . . . 62,845 (11) *
Yupin Wang (3) . . . . . . . . . . . . . . 35,000 (12) *
All directors and executive officers of the
Company as a group (11 persons) . . . . 5,140,553 (4)(8) 19.7%
(9)(10)
(11)(12)
(13)
- ---------------
* Less than 1%
(1) The address of West Highland Capital, Inc. ("West Highland") is 300 Drakes
Landing Road, Suit 290, Greenbrae, CA 94904. West Highland is a registered
investment adviser whose clients have the right to receive or the power to
direct the receipt of dividends from, or the proceeds from the sale of
shares of our common stock. Lang H. Gerhard is the sole
55
<PAGE>
shareholder of West Highland and the Manager of Estero Partners, LLC
("Estero"). West Highland, Estero and Mr. Gerhard are the general partners
of West Highland Partners, L.P. ("West Highland Partners") and Buttonwood
Partners, L.P. ("Buttonwood"), which are investment limited partnerships.
No single client of West Highland, other than West Highland Partners,
holds more than five percent of our common stock.
(2) West Highland shares the voting and dispositive power with respect to
certain of such shares with Mr. Gerhard, Estero, West Highland Partners
and Buttonwood.
(3) The address of the stockholder is: c/o Family Golf Centers, Inc., 538
Broadhollow Road, Melville, New York 11747.
(4) Includes 101,000 shares of Common Stock owned by Mr. Chang's children.
Includes 15,000 shares of Common Stock issuable upon exercise of options
which are currently exercisable. Includes an aggregate of 800,000 shares
pledged to banks to secure personal loans to Mr. Chang.
(5) The address of Warburg Pincus Asset Management, Inc. ("WPAM") is 466
Lexington Avenue, New York, New York 10017. WPAM is an Investment Advisor
registered with the Securities and Exchange Commission (the "SEC") under
Section 208 of the Investment Advisors Act of 1940, as amended (the
"Investment Advisors Act"). WPAM serves as investment advisor to many
accounts including various registered investment companies. 2,159,500
share of Common Stock listed above are owned by WPAM's accounts.
(6) The address of the Wells Fargo Bank, N.A. is 343 Sansome Street, 3rd Fl.,
San Francisco CA 94163.
(7) The address of Jerry Zucker is P.O. Box 5205, North Charleston, SC 29405.
(8) Includes 307,632 shares of our common stock issuable upon the exercise of
options which are currently exercisable. Excludes 170,250 restricted
shares of common stock which were awarded under the 1998 Plan and which
were terminated in February 1999.
(9) Does not include 66,250 shares of our common stock beneficially owned by
Mr. Hsu's brother. Mr. Hsu disclaims beneficial ownership of his brother's
shares. Includes 33,000 shares of Common Stock issuable upon exercise of
options which are currently exercisable and 9,000 shares owned by
Mr. Hsu's daughter.
(10) Includes 40,500 shares of our common stock issuable upon the exercise of
options which are currently exercisable.
(11) Includes 2,999 shares of common stock owned by Mr. Monks' daughter.
(12) Includes 30,000 shares of our common stock issuable upon the exercise of
options which are currently exercisable.
(13) Includes (i) 271,774 shares of our common stock issuable upon the exercise
of options which are currently exercisable, (ii) 12,750 restricted shares
of common stock awarded under the 1998 Plan, and (iii) 1,000 shares of
common stock beneficially owned by the spouse of one of our officers.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Chang is a guarantor of $3.0 million principal amount loaned to us by
Orix in May 1995. Such loan matures in May 2000. Although we have recently
requested a one-year extension of such loan, no assurance can be given that such
an extension will be obtained.
The Company paid $122,484 during fiscal year 1999 to Executive Fliteways,
Inc., a company which manages, maintains and charters aircraft, including an
aircraft owned by OAI Air, L.L.C., a company of which Mr. Chang is a principal.
Amounts paid to Executive Fliteways, Inc. were in consideration for use of OAI
Air's aircraft by the Company's executives for business purposes.
56
<PAGE>
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS FORM 10-K:
(1) Financial Statements. The following Financial Statements of Family
Golf Centers, Inc. and report of independent public accountants
relating thereto are filed with this report on Form 10-K.
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the Years ended December
31, 1999, 1998, and 1997
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the Years ended December
31, 1999, 1998, and 1997
Notes to Financial Statements
(2) Financial Statement Schedules. None
(3) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
<S> <C> <C>
3.1* Certificate of Incorporation as amended
3.2* Amended and Restated By-laws.
4.1** Form of Stock Certificate
4.2**** Indenture, dated October 16, 1997, between
United States Trust Company of New York, as Trustee
and Family Golf Centers, Inc.
10.1* Employment Agreement, dated as of September 11, 1994,
between Family Golf Centers, Inc. and Dominic Chang.
10.1.1***** Amendment No. 1, dated March 8, 1995, to the
Employment Agreement, dated as of September 11, 1994,
between Family Golf Centers, Inc. and Dominic Chang,
filed as Exhibit 10.1.
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<PAGE>
10.1.2# Amendment No. 2 to Employment Agreement, dated as of
April 1, 1998, to Employment Agreement, dated as of September
11, 1994, as amended by Amendment No. 1, dated March 8, 1995,
between Family Golf Centers, Inc. and Dominic Chang, filed as
Exhibit 10.1 and 10.1.1, respectively.
10.2* Employment Agreement, dated as of September 11, 1994, between
Family Golf Centers, Inc. and Krishnan P. Thampi.
10.2.1**** Amendment No. 1, dated March 8, 1995, to the Employment
Agreement, dated as of September 11, 1994, between Family Golf
Centers, Inc. and Krishnan P. Thampi.
10.2.2# Amendment No. 2 to Employment Agreement, dated as of
April 1, 1998, to Employment Agreement, dated as of September
11, 1994, as amended by Amendment No. 1, dated March 8, 1995,
between Family Golf Centers, Inc. and Krishnan P. Thampi, filed
as Exhibit 10.1 and 10.2.1, respectively.
10.3* Family Golf Centers, Inc. 1994 Stock Incentive Plan.
10.4+ Family Golf Centers, Inc. 1996 Stock Incentive Plan.
10.5++ Family Golf Centers, Inc. 1997 Stock Incentive Plan.
10.6+++ Family Golf Centers, Inc. 1998 Stock Option and Award Plan.
10.7++++ Mortgage and Security Agreement, dated May 15, 1995, between
Family Golf Centers, Inc., as Mortgagor and Orix USA Corporation,
as Mortgagee.
10.8++++ Purchase Money Note, dated May 15, 1995, made by Family Golf
Centers, Inc. in favor of Orix USA Corporation in the principal
amount of $3,000,000.
10.9*** Guaranty, dated March 7, 1996, by Family Golf Centers, Inc., in
favor of Flemington Equities VII.
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<PAGE>
10.10*** Mortgage Note, dated March 7, 1996, in the principal amount of
$1,700,000 made by Flemington Family Golf Centers, Inc. in favor
of Flemington Equities VII and related Mortgage Deed.
10.11**** Form of 5 3/4 % Convertible Subordinated Promissory Note due 2004
of Family Golf Centers, Inc.
10.12!! Agreement and Plan of Merger, dated as of December 23, 1997, by
and among Family Golf Centers, Inc., Family Golf Acquisition,
Inc. and MetroGolf Incorporated.
10.13!!! Merger Agreement, dated April 2, 1998, by and among Eagle Quest
golf Centers Inc. and Family Golf Centers, Inc.
10.14!!!! Stock Purchase Agreement, dated June 16, 1998, as amended,
between Family Golf Centers, Inc. and Golden Bear Golf, Inc.
10.15!!!!! Amendment No. 3 to the Stock Purchase Agreement, dated July 20,
1998, between Family Golf Centers, Inc. and Golden Bear Golf,
Inc.
10.16!!!! Form of Sublicense Agreement between Family Golf Centers, Inc.
and Golden Bear Golf, Inc.
10.17!!!!! Stock Purchase Agreement, dated November 27, 1998, by and among
Family Golf Centers, Inc. and TrizecHahn (USA) Corporation.
10.17.1!!!!!! Amendment No. 1 to the Stock Purchase Agreement, dated December
2, 1998, by and among Family Golf Centers, Inc., Eagle Quest
Golf Centers (U.S.), Inc. and TrizecHahn (USA) Corporation.
10.18!!!!!! Credit Agreement, dated as of December 2, 1998, by and among
Family Golf Centers, Inc., The Chase Manhattan Bank, as Agent
and as Lender, and the Lenders which are parties thereto.
10.18.1## Amended and Restated Credit, Security, Guaranty and Pledge
Agreement, dated as of December 2, 1998 as Amended and Restated
as of October 15, 1999 by and among Family Golf Centers, Inc.,
the Guarantors named therein, the Lenders named therein and The
Chase Manhattan Bank, as Agent and as a Lender.
10.18.2### Amendment No. 2 to the Credit Agreement.
10.18.3#### Amendment No. 3 to the Credit Agreement.
10.19^ Rights Agreement, dated as of April 6, 1999, between Family
Golf Centers, Inc. and Continental Stock Transfer & Trust Co.,
as Rights Agent.
11.1 Statement re: Computation of Earnings Per Share.
21.1 Subsidiaries of Family Golf Centers, Inc.
23.1 Consent of Richard A. Eisner & Company, L.L.P.
27.1 Financial Data Schedule
</TABLE>
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- -------------------
* Incorporated by reference to the Company's Registration
Statement on Form SB-2, dated Se September 12, 1994
(Registration No. 33.83910).
** Incorporated by reference to the Company's Pre-Effective
Registration Statement on Form S-3, dated September 25, 1998
(Registration No. 333-64363).
*** Incorporated by reference to the Company's current Report on
Form 8-K/A (Amendment No. 1), dated march 6, 1996 and filed May
20, 1996 amending Reports on Form 8-K dated March 6, 1996 and
April 8, 1996.
**** Incorporated by reference to the Company's Registration
Statement on Form S-3, dated January 13, 1998 (Registration No.
333-44165).
***** Incorporated by reference to the Company's Registration
Statement on Form SB-2, dated October 3, 1995 (Registration No.
33-97686).
****** Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
+ Incorporated by reference to the Company's Registration
Statement on Form SB-2, dated May 24, 1996 (Registration No.
333-4541).
++ Incorporated by reference to Annex A of the Company's Proxy
Statement on Schedule 14A, dated April 30, 1997.
+++ Incorporated by reference to Annex A of the Company's Proxy
Statement on Schedule 14A, dated May 15, 1998.
++++ Incorporated by reference to the Pre-Effective Amendment No. 2
to Company's Current Report on Form 8- K/A (Amendment No. 1),
dated June 6, 1995.
+++++ Incorporated by reference to the Company's Current Report on
Form 8-K, dated October 11, 1995.
++++++ Incorporated by reference to the Pre-Effective Amendment No. 1
the Company's Registration Statement on Form SB-2, dated
November 9, 1995 (Registration No. 33-97686).
! Incorporated by reference to the Company's current Report on
Form 8-K, dated September 25, 1996 and filed October 9, 1996.
!! Incorporated by reference to the Company's Tender Offer
Statement on Schedule 14D-1, dated December 31, 1997.
!!! Incorporated by reference to the Company's Pre-Effective
Registration Statement on Form S-3, dated May 22, 1998
(Registration No. 333-53503).
!!!! Incorporated by reference to the Company's Current Report on
Form 8-K, dated June 16, 1998 and filed July 8, 1998.
!!!!! Incorporated by reference to the Company's current Report on
Form 8-K, dated July 20, 1998 and filed July 31, 1998.
60
<PAGE>
!!!!!! Incorporated by reference to the Company's Current Report on
Form 8-K, dated December 2, 1998 and filed December 15, 1998.
# Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 21, 1998.
## Incorporated by reference to the Company's Current Report on Form
8-K, dated October 18, 1999 and filed on November 4, 1999.
### Incorporated by reference to the Company's Current Report on Form
8-K, dated January 28, 2000, and filed on February 4, 2000.
#### Incorporated by reference to the Company's Current Report on
Form 8-K, dated March 31, 2000, and filed on that same date.
^ Incorporated by reference to the Company's Form 8-A filed
April 13, 1999.
(b) REPORTS ON FORM 8-K:
Our Current Report on Form 8-K, dated December 2, 1998, and filed on
January 14, 1999, reporting an Item 2 event and Item 7 financial statements and
information.
Our Current Report on Form 8-K, dated April 7, 1999, and filed on April
13, 1999, reporting an Item 5 event.
Our Current Report on Form 8-K, dated October 18, 1999, and filed on
November 4, 1999, reporting an Item 5 event.
Our Current Report on Form 8-K, dated January 28, 2000, and filed on
February 4, 2000, reporting an Item 5 event.
Our Current Report on Form 8-K, dated February 16, 2000, and filed on
February 28, 2000, reporting an Item 5 event.
Our Current Report on Form 8-K, dated March 31, 2000 and filed on the same
date, reporting an Item 5 event.
61
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FAMILY GOLF CENTERS, INC.
Dated: April 14, 2000 By: /s/ Dominic Chang
___________________
Name: Dominic Chang
Title: Chairman of the Board and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
NAME TITLE DATE
- ---- ----- ----
/s/ Dominic Chang
Dominic Chang Chairman of the Board and Chief April 14, 2000
Executive Officer (Principal Executive
Officer)
/s/ Krishnan P. Thampi
Krishnan P. Thampi President, Chief Operating Officer, April 14, 2000
Assistant Secretary, Treasurer and
Director (Principal Financial Officer)
/s/ James Ganley
James Ganley Director April 14, 2000
/s/ Jimmy C.M. Hsu
Jimmy C.M. Hsu Director April 14, 2000
/s/ Donald R. Monks
Donald R. Monks Director April 14, 2000
/s/ Yupin Wang
Yupin Wang Director April 14, 2000
62
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Family Golf Centers, Inc.
Melville, New York
We have audited the accompanying consolidated balance sheets of Family Golf
Centers, Inc. and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the management
of Family Golf Centers, Inc. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. We did not audit
the consolidated financial statements of Eagle Quest Golf Centers, Inc. and
subsidiaries which statements reflect a net loss of $7,255,000 for 1997 included
in the related consolidated financial statement totals. These statements were
audited by other auditors, whose report has been furnished to us, and our
opinion insofar as it relates to data included for Eagle Quest Golf Centers,
Inc. and subsidiaries, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of Family Golf Centers,
Inc. and subsidiaries at December 31, 1999 and 1998 and the consolidated results
of their operations and their consolidated cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has experienced net losses, has a negative
working capital position, and has received a temporary waiver for its
non-compliance with certain financial covenants under various credit facilities,
including its principal credit facility, that raises substantial doubt about the
ability of the Company to continue as a going concern. Management's plans in
regard to these matters are also described in Note B. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Richard A. Eisner & Company, LLP
New York, New York
April 6, 2000, with respect to
Note L, April 14, 2000
F-1
<PAGE>
AUDITORS' REPORT
To The Directors
Eagle Quest Golf Centers Inc.
We have audited the consolidated statements of operations, shareholders'
equity (deficit) and cash flows for the year ended December 31, 1997 (not
presented separately herein) of Eagle Quest Golf Centers Inc. and subsidiaries.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects the results of the operations and cash flows for the year
ended December 31, 1997 of Eagle Quest Golf Centers Inc. in accordance with
generally accepted accounting principles in the United States.
KPMG LLP
Chartered Accountants
Vancouver, Canada
March 13, 1998, except as to note 16(a)
which is as of April 2, 1998
COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA-U.S.
REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
note 1 to the financial statements. Our report to the directors dated March 13,
1998, except as to note 16(a) which is as of April 2, 1998, is expressed in
accordance with Canadian reporting standards which do not permit a reference to
such events and conditions in the auditors' report when these are adequately
disclosed in the financial statements.
KPMG LLP
Chartered Accountants
Vancouver, Canada
March 13, 1998, except as to note 16(a)
which is as of April 2, 1998
F-2
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS (NOTE L)
Current assets:
Cash and cash equivalents $ 2,852 $ 3,878
Restricted cash deposits 689 314
Short-term investments 17,374
Inventories 10,755 26,220
Prepaid expenses and other current assets 4,858 10,277
Prepaid and refundable income taxes 9,780
-------- --------
Total current assets 28,934 58,063
Property, plant and equipment net 381,066 444,280
Assets held for sale 41,471
Loan acquisition costs (net of accumulated amortization of $1,689 and $1,183 at
December 31, 1999 and 1998, respectively) 7,795 6,269
Other assets 5,511 11,201
Excess of cost over fair value of assets acquired (net of accumulated amortization of
$4,043 and $2,851 at December 31, 1999 and 1998, respectively) 26,609 52,227
-------- --------
$491,386 $572,040
======== ========
LIABILITIES
Current liabilities:
Accounts payable, accrued expenses and other current liabilities $ 26,053 $ 21,408
Income taxes payable 2,590
Current portion of long-term obligations (net of unamortized debt discount
of $2,422 in 1999) 184,832 3,950
Convertible subordinated notes 115,000
-------- --------
Total current liabilities 325,885 27,948
Long-term obligations (less current portion) 5,923 130,621
Convertible subordinated notes 115,000
Deferred rent 2,359 1,193
Deferred tax liability 3,217
Other liabilities 4,614 4,738
-------- --------
Total liabilities 338,781 282,717
-------- --------
Minority interest 22 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; 26,039,000 and
26,117,000 outstanding at December 31, 1999 and 1998, respectively 260 261
Additional paid-in capital 291,671 292,040
Retained earnings (Accumulated deficit) (138,838) 1,561
Accumulated other comprehensive income (loss:
Foreign currency translation adjustment (251) (667)
Unearned compensation (212) (3,865)
Treasury shares (47) (47)
-------- --------
Total stockholders' equity 152,583 289,283
-------- --------
$491,386 $572,040
======== ========
See notes to financial statements F-3
</TABLE>
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating revenues $ 119,384 $ 92,509 $ 54,599
Merchandise sales 35,485 29,655 18,398
--------- --------- ---------
Total revenues 154,869 122,164 72,997
--------- --------- ---------
Operating expenses 133,223 62,451 37,386
Cost of merchandise sold 33,559 20,330 12,366
Selling, general and administrative expenses 19,644 11,723 12,630
Merger, acquisition, integration and other related charges 7,752
Impairment and other related charges 61,529
--------- --------- ---------
Total expenses 247,955 102,256 62,382
--------- --------- ---------
Operating income (loss) (93,086) 19,908 10,615
Interest expense and related charges (22,007) (11,309) (3,863)
Other income - net (includes interest income of $581, $1,905 and $1,570
for the years ended December 31, 1999, 1998 and 1997,
respectively 687 1,938 1,659
--------- --------- ---------
Income (loss) before income taxes (benefit), extraordinary items and
cumulative effect of a change in accounting principle (114,406) 10,537 8,411
Income tax expense (benefit) (16,468) 8,600 5,142
--------- --------- ---------
Income (loss) before extraordinary items and cumulative effect of a
change in accounting principle (97,938) 1,937 3,269
Extraordinary items - loss on disposition of Pre-Combination Facilities,
net of tax effect (42,461)
- loss on extinguishment of debt, net of tax effect (4,890)
Cumulative effect of a change in accounting principle:
Pre-opening expenses, net of tax effect (2,035)
--------- --------- ---------
NET INCOME (LOSS) $(140,399) $ (4,988) $ 3,269
========= ========= =========
Basic earnings (loss) per share:
Income before extraordinary items and cumulative effect of a change in
accounting principle $ (3.75) $ .08 $ .17
Extraordinary items (1.63) (.21)
Cumulative effect of a change in accounting principle (.08)
--------- --------- ---------
NET INCOME (LOSS) (5.38) (.21) .17
--------- --------- ---------
Diluted earnings (loss) per share:
Income before extraordinary items and cumulative effect of a change in
accounting principle (3.75) .08 $ .16
Extraordinary items (1.63) (.21)
Cumulative effect of a change in accounting principle (.08)
--------- --------- ---------
NET INCOME (LOSS) (5.38) $ (.21) $.16
========= ========= =========
Weighted average shares outstanding - basic (000's) 26,088 23,009 19,344
Effect of dilutive securities (000's) 0 846 470
--------- --------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING - diluted (000'S) 26,088 23,855 19,814
========= ========= =========
See notes to financial statements F-4
</TABLE>
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
(COMMON STOCK - COMPREHENSIVE
PAR VALUE $.01) INCOME (LOSS)
----------------------- -------------
NUMBER OF
SHARES (ACCUMULATED FOREIGN
ISSUED ADDITIONAL DEFICIT) CURRENCY
AND PAID-IN RETAINED TRANSACTION
OUTSTANDING AMOUNT CAPITAL EARNINGS ADJUSTMENT
----------- ------ ------- -------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1996 18,589,246 $186 $ 140,428 $ 4,280
Issuance of stock and warrants:
For cash and in connection with acquisitions 1,657,111 17 26,751
For repayment of debt 133,764 1 2,029
For services rendered 11,956 419
Exercise of warrants 3,324 127
Exercise of employee options 90,047 1 502
Exercise of options issued in connection with acquisitions 15,000 250
Preferential distribution to stockholders of The Practice
Tee, Inc. (1,000)
Income tax benefit upon exercise of stock options 355
Deferred stock compensation due to options granted 680
Unearned compensation (net) of amortization
Net income for the year 3,269
Translation adjustment $195
---------- ---- --------- ------- ------
Comprehensive income
BALANCE - DECEMBER 31, 1997 20,500,448 205 171,541 6,549 195
Issuance of stock:
For cash 2,462 38
In connection with acquisitions 313,572 3 4,904
For compensation 246,166 3 4,202
In exchange for Eagle Quest options, warrants and
redeemable equity securities 209,785 2 2,851
Net proceeds from public offering 4,600,000 46 106,490
Public offering expenses (2,000)
Warrants issued in connection with debt 700
Exercise of warrants issued in connection with acquisition 2,535 50
Exercise of warrants 108,819 1 1,458
Exercise of employee options 133,572 1 1,326
Income tax benefit upon exercise of stock options 480
Unearned compensation (net)
Net (loss) for the year (4,988)
Translation adjustment (862)
---------- ---- --------- ------- ------
Comprehensive loss
BALANCE - DECEMBER 31, 1998 26,117,359 $261 $ 292,040 $ 1,561 $(667)
Issuance of stock:
In connection with acquisitions and other transactions 116,763 1 524
Warrants issued in connection with debt 2,686
Cancellation of restricted stock grants (195,250) (2) (3,579)
Exercise of employee options 400
Unearned compensation (net)
Net (loss) for the year (140,399)
-
Translation adjustment 416
Comprehensive loss
BALANCE - DECEMBER 31, 1999 26,039,272 260 291,671 (138,838) (251)
========== ==== ========= ======= ======
</TABLE>
<TABLE>
<CAPTION>
COMPREHENSIVE
SUBSCRIPTION UNEARNED TREASURY INCOME
RECEIVABLE COMPENSATION SHARES (LOSS) TOTAL
---------- ------------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1996 $ (491) $(47) $ 144,356
Issuance of stock and warrants:
For cash and in connection with acquisitions 491 27,259
For repayment of debt 2,030
For services rendered 419
Exercise of warrants 127
Exercise of employee options 503
Exercise of options issued in connection with acquisitions 250
Preferential distribution to stockholders of The Practice
Tee, Inc. (1,000)
Income tax benefit upon exercise of stock options 355
Deferred stock compensation due to options granted 680
Unearned compensation (net) of amortization $(170) (170)
Net income for the year $3,269 3,269
Translation adjustment 195 195
------- ---------- ----- -------- ---------
Comprehensive income $3,464
========
BALANCE - DECEMBER 31, 1997 0 (170) (47) 178,273
Issuance of stock:
For cash 38
In connection with acquisitions 4,907
For compensation 4,205
In exchange for Eagle Quest options, warrants and
redeemable equity securities 2,853
Net proceeds from public offering 106,536
Public offering expenses (2,000)
Warrants issued in connection with debt 700
Exercise of warrants issued in connection with acquisition 50
Exercise of warrants 1,459
Exercise of employee options 1,327
Income tax benefit upon exercise of stock options 480
Unearned compensation (net) (3,695) (3,695)
Net (loss) for the year $(4,988) (4,988)
Translation adjustment (862) (862)
------- ---------- ----- -------- ---------
Comprehensive loss $(5,850)
========
Balance - December 31, 1998 $ 0 $(3,865) $(47) $289,283
Issuance of stock: 525
In connection with acquisitions and other transactions
Warrants issued in connection with debt 2,686
cancellation of restricted stock grants 3,337 (244)
Exercise of employee options
Unearned compensation (net) 316 316
---
Net (loss) for the year (140,399) (140,399)
Translation adjustment 416 416
------- ---------- ----- -------- ---------
Comprehensive loss (139,983) -
========
BALANCE - DECEMBER 31, 1999 - (212) (47) 152,583
======= ========== ===== =========
See notes to financial statements F-5
</TABLE>
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(140,399) $ (4,988) $ 3,269
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Cumulative effect of a change in accounting principle (net of tax effect) 2,035
Non cash impairment and extraordinary charges 96,221
Inventory valuation adjustment 3,485
Amortization of debt discount 264
Loss on sale of assets 9,983
Depreciation and amortization 22,477 11,138 7,101
Deferred tax expense (benefit) (3,217) 321 (153)
Minority interest (18)
Noncash expenses 304 316 929
Issuance of stock for compensation 73 509
Issuance of warrants for consulting services 80
Extraordinary charge - early extinguishment of debt 4,890
Changes in:
Inventories 8,314 (11,365) (7,643)
Prepaid expenses and other current assets 544 (4,075) (6,614)
Prepaid income taxes (9,780) 600
Other assets 3,677 (2,211) (6,094)
Accounts payable, accrued expenses and other current liabilities 3,630 7,526 4,703
Deferred rent 1,166 543 417
Other liabilities (124) 10 61
Income taxes payable (2,590) 444 2,626
--------- -------- --------
Net cash provided by (used in) operating activities (5,990) 5,093 (718)
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (81,736) (166,602) (82,731)
Proceeds from sale of assets 12,615
Acquisition of goodwill (28,662) (15,768)
Restricted cash deposit (375) 76 (58)
Net sales (purchase) of short-term investments 17,374 38,472 (22,008)
--------- -------- --------
Net cash (used in) investing activities (52,122) (156,716) (120,565)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan acquisition costs (1,526) (6,299) (1,346)
Proceeds from convertible subordinated notes net of expenses 110,550
Proceeds from subordinated debentures 6,500
Repayment of subordinated debentures (4,981)
Proceeds from loans and issuance of warrants; bank and others 78,239 133,058 44,295
Repayment of loans, bank and others (19,631) (79,728) (44,709)
Net proceeds from issuance of common stock 4 104,574 6,092
Proceeds from the exercise of warrants and options 2,835 800
--------- -------- --------
Net cash provided by financing activities 57,086 149,459 122,182
--------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,026) (2,164) 899
Cash and cash equivalents - beginning of period 3,878 6,042 5,143
-------- -------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 2,852 $ 3,878 $ 6,042
======== ======== ========
SUPPLEMENTAL AND NONCASH DISCLOSURES:
Acquisition of property in exchange for common stock and warrants $ 525 $ 5,607 $ 21,167
Acquisition of property in exchange for redeemable equity securities $ 514
Acquisition of property subject to loans payable $ 35,286 $ 22,285
Acquisition of property in exchange for loans from selling stockholder $ 2,589 $ 2,053
Increase in capital leases $ 4,520
Issuance of stock in connection with repayment of debt $ 2,030
Exchange of redeemable equity securities for common stock $ 2,853
Income tax benefit for exercise of stock options $ 480 $ 355
Accrued for preferential distribution to stockholders of The Practice Tee, Inc. $ 1,000
Property additions accrued but not paid $ 1,012 $ 2,725 $ 254
Interest paid $17,090 $ 11,011 $ 4,303
Taxes paid $ 3,325 $ 8,325 $ 6,774
See notes to financial statements F-6
</TABLE>
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] THE COMPANY:
Family Golf Centers, Inc. (the "Parent") and its wholly-owned subsidiaries
(together with the Parent, ("FGC")) operates golf centers designed to
provide a wide variety of practice opportunities, including facilities for
driving, chipping, putting, pitching and sand play. In addition, FCG's golf
centers typically offer golf lessons instructed by PGA-certified golf
professionals, full-line pro shops and other amenities to encourage family
participation. As of December 31, 1999, FCG owned, leased or managed 115
golf facilities comprised of 89 golf centers and 26 combination golf center
and golf course facilities located in 23 states. Of the golf centers, 21
were operated under the name "Golden Bear" pursuant to a license agreement
with Golden Bear Golf Centers, Inc. ("GBGC"). (See Notes D and M[3]).
In addition to its golf business, the Company operates sports and family
entertainment facilities, including ice rinks and family sports
supercenters. As of December 31, 1999, the Company owned, leased or managed
24 ice rink facilities, including 16 managed facilities. As of December 31,
1999 the Company owned one family sports supercenter and leased three
family sports supercenters.
[2] PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of FCG and Eagle
Quest Golf Centers, Inc. and its wholly owned subsidiaries ("Eagle Quest")
(collectively the "Company"). All significant intercompany transactions and
accounts have been eliminated. These financial statements give retroactive
effect to the acquisition of Eagle Quest on June 30, 1998, which has been
accounted for as a pooling-of-interests. As of June 30, 1998 Eagle Quest
operated 20 golf facilities, two of which were under construction.
[3] FOREIGN CURRENCY TRANSLATION:
The functional currency of Eagle Quest's Canadian operations is the
Canadian dollar. Assets and liabilities are translated into United States
dollars at the rates of exchange in effect at the balance sheet date and
revenues and expenses are translated at the average rates of exchange for
the period. Translation adjustments are included in the foreign currency
translation adjustment section of stockholders' equity and represent a
component of other comprehensive income.
Eagle Quest will periodically undertake transactions in a currency other
than its specific functional currency. Such transactions are translated
into the functional currency using exchange rates at the date of the
transaction. Gains and losses arising on settlement of foreign currency
denominated transactions or balances are included in the determination of
income. FCG does not enter into derivative instruments to offset the impact
of foreign exchange fluctuations. Foreign exchange gains and losses
included in the determination of operations are not significant for any
period presented.
[4] CASH EQUIVALENTS:
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.
[5] SHORT-TERM INVESTMENTS:
Short-term investments classified as "held to maturity" are reported at
cost plus accrued income which approximated market value.
F-7
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[6] INVENTORIES:
Inventory consists primarily of merchandise for sale in the pro shop at
each facility and food and beverage in the restaurants and is valued at the
lower of cost, principally determined on a first-in, first-out basis or
market. Adequate allowances, aggregating $3.5 million for 1999 have been
made for slow moving, excessive and obsolete inventories.
[7] PROPERTY, EQUIPMENT AND OTHER LONG LIVED ASSETS:
Property, equipment and other long lived assets are stated at cost.
Depreciation and amortization of the respective assets is computed using
the straight-line method over their estimated lives or the term of the
lease, including expected renewal options, if shorter. Leasehold
improvements are amortized using the straight-line method over the
remaining life of the lease, including expected renewal options.
Excess of cost over fair value of assets acquired ("goodwill") arising on
the acquisition of businesses is amortized on a straight-line basis over
its estimated useful life of up to 20 years.
The carrying amount of all long lived assets including goodwill is
evaluated periodically to determine if adjustment to the useful life or to
the unamortized balance is warranted. Such evaluation is based principally
on the expected utilization of the long lived assets and the projected
undiscounted cash flows of the operations in which the long lived assets
are used. An impaired asset is written down to its estimated fair market
value. Estimated fair market value is generally measured by discounting
estimated future cash flows or by analysis of other currently available
information. Considerable management judgment is necessary to estimate
fair market value.
The depreciation or amortization periods for long-lived assets to be held
and used are periodically evaluated to determine whether events or
circumstances have occurred that warrant revision.
Capitalized costs of long-term improvements to existing sites, newly
acquired sites and newly constructed sites, include certain internally
generated costs.
Costs incurred in connection with the development of internal-use software
are capitalized in accordance with the criteria set forth in Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use.
[8] LOAN ACQUISITION COSTS:
Loan acquisition costs incurred in connection with debt financing are
amortized over the life of the applicable loan weighted in accordance with
the amount of debt outstanding.
[9] INCOME TAXES:
The Company accounts for income taxes utilizing the asset and liability
approach requiring the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between
the bases of assets and liabilities for financial reporting purposes and
tax purposes and operating loss carryforwards. FGC files a consolidated
federal income tax return with its eligible domestic subsidiaries.
[10] PER SHARE DATA:
Earnings (loss) per basic share are calculated by dividing net income
(loss) by the weighted average outstanding shares during the period. Net
income (loss) per diluted share are calculated to include the effect of all
dilutive securities including options where there is income before
extraordinary item and cumulative effect of a change in accounting
principle. Earnings (loss) per diluted share do not include the impact of
potential common shares which would be antidilutive.
F-8
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[11] USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates and those differences may be material. Estimates are used when
accounting for asset impairments, and such items as inventory reserves,
depreciation and taxes.
[12] CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents and
short-term investments. The Company places its temporary cash investments
in short-term, investment grade, interest bearing securities and, by
policy, limits the amount of credit exposure in any one investment.
[13] STOCK BASED COMPENSATION:
The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). The
provisions of SFAS No. 123 allow companies to either expense the estimated
fair value of stock options or to continue to follow the intrinsic value
method set forth in APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") but disclose the pro forma effects on net income
(loss) had the fair value of the options been expensed. The Company has
elected to continue to apply APB 25 in accounting for its stock option
incentive plans.
[14] RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 requires an entity to recognize all derivatives as either assets or
liabilities in the financial statements and measure those instruments at
fair value. The statement also establishes accounting and reporting
standards for hedging activities. The statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. In October 1998,
the Financial Accounting Standards Board issued SFAS No. 134 "Accounting
for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for sale by a Mortgage Banking Enterprise," amending
previously issued SFAS No. 65, effective for the fiscal quarter beginning
after December 15, 1998. The Company believes that the above pronouncements
either are not applicable or will not have a significant effect on the
information presented in the financial statements.
The financial statements reflect the adoption of Statements of Financial
Accounting Standards No. 129, "Disclosure of Information about Capital
Structure" and No. 131, "Disclosure about Segments of an Enterprise and
Related Information".
The financial statements also reflect the adoption of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
which became effective January 1, 1998 and requires application of the
provisions of the statement to comparative financial statements for earlier
periods. Comprehensive income (loss), which represents all changes in
equity that result from recognized transactions and other economic events
of the period other than transactions with owners in their capacity as
owners, is being reported in the statement of changes in stockholders'
equity.
F-9
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[15] MERGER, ACQUISITIONS AND INTEGRATION EXPENSES:
For the year ended December 31, 1998, the Company incurred $7,800 of
merger, acquisition, integration and other related charges relating to the
acquisition of Eagle Quest by the Company on June 30, 1998. Included in
these costs were: $3,700 of fees and professional expenses, $1,400 of
severance and compensation expenses and $2,700 of costs related to the
integration of Eagle Quest sites and asset write-offs.
[16] EXTRAORDINARY ITEMS:
Early Extinguishment of Debt:
From the proceeds of the public offering of 4.6 million shares of common
stock in July 1998, the Company paid off approximately $26,000 of debt
incurred through the acquisition of Eagle Quest. In connection with the
early extinguishment of debt the Company recorded extraordinary charges of
$4,900. The extraordinary charges consisted principally of the write off of
debt discounts, loan acquisition costs and prepayment penalties incurred.
No income tax benefit was recognized in connection with this
extinguishment.
Disposition of Pre-Combination Facilities:
In 1999, as a result of operating losses and in connection with the
restructuring of the Company's indebtedness and the strategic review of
its ongoing operations a decision was made to sell various operating
assets. Certain of such assets were owned by FGC and Eagle Quest,
separately, prior to the Business Combination in June of 1998 (the
"Pre-Combination Facilities"). In accordance with the provisions of
Accounting Principles Board Opinion No. 16 - Accounting for Business
Combinations ("APB #16") relating to the disposition of assets of the
previously separate entities in a pooling of interests combination, the
Company recorded an extraordinary charge of $42,461. No income tax
benefit was recognized with this charge.
[17] CHANGE IN ACCOUNTING PRINCIPLE:
On April 13, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, reporting on the Costs of Start-Up
Activities (SOP 98-5). In the third quarter of 1998, the Company adopted
SOP 98-5 effective as of January 1, 1998. The impact of this change in
accounting principle on the Company relates to the treatment of pre-opening
costs associated with newly developed facilities. SOP 98-5 requires that
these costs be expensed as incurred as compared to the Company's previous
policy to capitalize these costs and amortize them over a twelve month
period.
NOTE B - BASIS OF PRESENTATION
The Company's financial statements have been prepared assuming the Company will
continue as a going concern which assumes the realization of assets and the
satisfaction of liabilities in the normal course of business. During the year
ended December 31, 1999, the Company sustained a net loss of $140,399, was not
in compliance with the terms of certain covenants under various loan agreements
including its principal credit facility and had a working capital deficit
of $296,951.
As of December 31, 1999, the company had approximately $305,755 aggregate
principal amount of indebtedness outstanding, including $115,000 aggregate
principal amount of 5% convertible subordinated notes and $125,300 of
indebtedness under its principal credit facility. The Company has received
temporary waivers from its lenders for such non-compliance. The waivers expire
on May 5, 2000. There can be no assurance that either the Company will comply
with these covenants after May 5, 2000 or the lenders will extend the waivers
for an additional period. Hence, substantially all the debt has been classified
as current liability.
The Company is focusing on selling operating assets, primarily non-core and
underperforming assets, to meet its debt service and working capital
requirements and improving the operations of its remaining facilities. The
Company may suffer additional losses from the sale of these assets. Unless the
Company is able to consummate the sale of assets on a timely basis, the Company
will not have adequate capital to meet all its obligations. Moreover, under the
credit facility, a portion of the proceeds from asset sales must be used to pay
down the facility, and accordingly will not be available for operations. In
addition, the Company will need additional financing to meet its long-term
needs. The Company has not determined the amount it may seek to obtain or
whether such financing will consist of debt or equity. In light of the fact that
substantially all of the assets are pledged as collateral for existing loans and
in light of the Company's substantial leverage, obtaining additional debt
financing may be difficult and costly. There is no assurance that the Company
will generate sufficient cash flows from operations to service its debt or meet
its obligations or obtain additional financing for future operations, on
favorable terms or at all. In the event of a failure to do so, the Company may
be forced to file for bankruptcy protection.
These factors raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments
relating to the recoverability or classification of recorded asset amounts or
the amount and classification of liabilities that might be necessary as a result
of this uncertainty.
NOTE C - COMBINATION WITH EAGLE QUEST GOLF CENTERS, INC.
On June 30, 1998, FGC issued 1,384,735 shares of its common stock in exchange
for all outstanding common stock, options, warrants and put rights of Eagle
Quest, the "Business Combination". Eagle Quest, which was incorporated in
British Columbia, Canada on February 5, 1996, acquires, develops and operates
golf practice centers incorporating a driving range, a retail golf shop, and a
learning academy and, in some locations, a short/executive course. This
exchange, which qualified as a tax-free reorganization for federal income tax
purposes, has been accounted for as a pooling-of-interests combination and,
accordingly, the consolidated financial statements for periods prior to the
combination have been restated to include the combined results of operations,
financial position and cash flows of Eagle Quest as though it had been a part of
FGC since inception. The results of operations prior to the combination,
previously reported by the separate companies and the combined amounts presented
in the consolidated financial statements follow:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
Total revenue:
FGC $50,090 $64,825
Eagle Quest 6,031 8,172
------- -------
Combined $56,121 $72,997
======= =======
Net income (loss):
FGC $ 5,697 $10,524
Eagle Quest (11,267) (7,255)
------- -------
Combined $(5,570) $ 3,269
======= =======
</TABLE>
F-10
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
NOTE D - ACQUISITION OF GOLF FACILITIES
[1] FGC ACQUISITIONS:
In 1997, FGC acquired a golf recreational facility in Philadelphia,
Pennsylvania and a combination golf center and 18-hole golf course in Palm
Royale, California. In 1997, FGC also acquired leasehold interests and (i)
the related existing golf recreational facilities in Palm Desert,
California; Carver, Massachusetts; Raleigh, North Carolina; Arlington,
Texas; San Bruno, California; Milpitas, California; Warrenville, Illinois;
Elk Grove, California; Columbus, Ohio; Commack, New York and Lake Grove,
New York; (ii) the existing 18-hole golf courses in Olney, Maryland and
Greenville, South Carolina; and (iii) an existing golf recreational
facility on which there is a 9-hole executive course in Rio Salado,
Arizona. FGC also acquired a concession license with the City of New York
to operate an existing golf recreational facility in Randalls Island, New
York and a management contract from Bergen County, New Jersey to operate an
existing golf-recreational facility.
In addition to the golf facilities, in 1997 FGC acquired LCI, a New York
corporation that owns and operates a 170,000 square-foot family sports
supercenter including a golf center, an 18-hole executive golf course, an
ice rink, additional family amusements such as video and virtual reality
games and conference center, in Lake Grove, New York; the Golf Academy of
Hilton Head, Inc. which operates a golf school and designs and manages
corporate golf events located in Hilton Head, South Carolina; Long Island
Skating Academy located in Syosset, New York; a family sports and
entertainment supercenter with two ice rinks, two soccer fields and
additional family amusements located in Cincinnati, Ohio; and a designer
and assembler of premium grade golf clubs located in Palm Desert,
California. LCI also owned and operated seven stand alone bowling centers,
six of which were sold shortly after FGC acquired them at FGC 's cost.
During the first quarter of 1998 the Company acquired: MetroGolf
Incorporated ("Metro"), the operator of eight golf facilities, through the
successful completion of a tender offer; Blue Eagle Golf Centers, Inc., the
operator of three golf facilities; an ice rink facility in Raleigh, North
Carolina; and a golf facility in Holbrook, Massachusetts. In addition, in
March 1998, the Company signed a long-term lease to construct and operate
an ice rink facility consisting of two NHL regulation-size ice rinks and
family entertainment center in New Rochelle, New York.
In addition to the combination with Eagle Quest, during the second quarter
of 1998, the Company also acquired a golf facility in Carlsbad, California
and the right to operate existing golf facilities in Overland Park and
Evergreen, Colorado under concession agreements with the City of Denver. In
addition, the Company entered into a concession license with the City of
New York to build a golf center in Brooklyn, New York, a long-term lease to
construct and operate a golf facility in Shelton, Connecticut and a
concession license to construct and operate a golf facility in Green Valley
Ranch, Colorado. In addition, in the second quarter of 1998, the Company
signed a long-term lease to construct and operate an ice rink facility with
two sheets of ice and a family entertainment center in Woodridge, New
Jersey.
F-11
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
NOTE D - ACQUISITION OF GOLF FACILITIES (CONTINUED)
[1] FGC ACQUISITIONS: (CONTINUED)
In July 1998, the Company acquired Golden Bear Golf Centers, Inc. and a
related subsidiary (together "Golden Bear") for $32,000, less certain
indebtedness, capital leases and other liabilities, subject to certain
post-closing adjustments (the "Golden Bear Acquisition"). The Golden Bear
Acquisition included 14 golf centers in California, Florida, Maryland,
Michigan, New Jersey, New York, Ohio, Oregon, Pennsylvania and Texas.
The Company entered into a new license agreement with respect to the
existing Golden Bear Golf Centers and the newly acquired centers. See
Note K[3]).
In addition to the acquisition of Golden Bear, during the third quarter of
1998, the Company also acquired a 9-hole golf course in Kansas City,
Missouri, leasehold interests in golf facilities in Markham, Ontario,
Canada, Sacramento, California and all of the outstanding stock of Pinnacle
Entertainment, Inc.
In December 1998, the Company acquired SkateNation, Inc., a wholly-owned
subsidiary of TrizecHahn (USA) Corporation ("SkateNation"), for $29,000,
including certain indebtedness, subject to certain adjustments. SkateNation
leases, operates or manages 16 commercial ice rinks in the United States.
In addition to the acquisition of SkateNation, during the fourth quarter of
1998, the Company also acquired a golf facility in Vaughan, Canada and
leasehold interests and the related golf recreational facilities in Thunder
Bay, Canada and Vorhees, New Jersey.
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"). The aggregate purchase price of the 1999
acquisitions was approximately $2,000 consisting of cash, common stock,
assumption of liabilities or a combination thereof. The operations were
not material to the operation of the Company for the year ended
December 31, 1999.
[2] EAGLE QUEST ACQUISITIONS:
In 1997 Eagle Quest acquired thirteen golf centers comprised of thirteen
driving ranges and four executive courses. In the six months ended June 30,
1998, Eagle Quest acquired one additional golf center.
F-12
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
NOTE D - ACQUISITION OF GOLF FACILITIES (CONTINUED)
The acquisitions by FGC and Eagle Quest were accounted for using the
purchase method of accounting. The purchase prices paid for the various
facilities consisted of cash, common stock, warrants, notes or assumption
of liabilities or a combination thereof. Assets acquired and liabilities
assumed and the consideration paid is summarized as follows:
<TABLE>
<CAPTION>
FACILITIES ACQUIRED
----------------------
YEAR ENDED
DECEMBER 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Property, plant, equipment and leasehold interests $120,969 $ 72,558
Other current assets 7,627 3,788
Excess of cost over fair value 23,254 20,939
-------- --------
Total assets 151,850 97,285
Assumption of mortgage payable (21,315) (22,285)
Assumption of other liabilities (24,629) (9,648)
-------- --------
Net assets acquired $105,906 $ 65,352
======== ========
Cash $ 83,739 $ 41,617
Fair value of common stock and warrants issued 5,607 21,168
Redeemable equity securities 514
Loan from selling stockholder 2,589 2,053
Mortgage 13,971
-------- --------
$105,906 $ 65,352
======== ========
</TABLE>
The operating results of companies acquired under the purchase method of
accounting are included in the Company's results of operations from dates
of acquisition.
F-13
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
NOTE D - ACQUISITION OF GOLF FACILITIES (CONTINUED)
[3] FGC AND EAGLE QUEST ACQUISITIONS: (CONTINUED)
The following unaudited pro forma information for the year ended December
31, 1998 assumes that the acquisitions in 1998 had taken place at the
beginning of 1998 and that the acquisitions in 1998 and 1997 had taken
place at the beginning of 1997.
Year Ended December 31,
1998 1997
---- ----
Total revenue $145,533 $120,800
Loss before extraordinary item and
cumulative effect of a change in
accounting principle (3,143) (10,630)
Net loss per share - basic $(.15) $(.55)
Net loss per share - diluted $(.15) $(.55)
Unaudited pro forma results do not include acquisitions which were not
material to the operations of the Company.
In addition, FGC purchased land and in certain locations was awarded
municipal contracts, to construct and operate golf facilities in Norwalk,
California; Bronx, New York; Broward County, Florida; Seattle, Washington
and Denver, Colorado. In 1998, the Company opened its facilities in Broward
County, Florida and Seattle, Washington.
Under certain purchase agreements entered into by Eagle Quest, the sellers
are entitled to additional consideration based on the achievement of
certain profitability or performance targets. Upon achievement of the
contingency target, the obligations are accrued with an offsetting increase
to the purchase price (generally by an increase to goodwill). In the
aggregate, Eagle Quest has agreed to a maximum additional contingent
consideration in the next three calendar years which has not been
recognized in the consolidated financial statements at December 31, 1999
are as follows:
2000 460
2001 250
2002 250
F-14
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
NOTE E - SHORT-TERM INVESTMENTS
Short-term investments including accrued interest, were as follows:
<TABLE>
<CAPTION>
AT
COST PLUS
ACCRUED FAIR UNREALIZED
HELD TO MATURITY INTEREST VALUE GAIN
---------------- -------- ----- ----
<S> <C> <C> <C>
December 31, 1998:
Commercial paper and corporate bonds $17,374 $ 17,374 $0
======= ======== ==
</TABLE>
At December 31, 1999 the Company did not have any unrestricted short-term
investments.
NOTE F - RESTRICTED CASH DEPOSITS
Restricted cash deposits represent short-term investments and cash pledged as
collateral primarily for letters of credit on certain properties and mortgage
indebtedness.
NOTE G - PROPERTY, PLANT AND EQUIPMENT
[1] Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
Land $ 47,763 $ 69,112
Leasehold interests, buildings and improvements 300,749 327,852
Machinery and equipment 34,152 31,212
Furniture and fixtures 15,601 13,256
Construction in progress 13,345 17,667
-------- --------
411,610
459,099
Accumulated depreciation and amortization (30,544) (14,819)
-------- --------
$381,066 $444,280
======== ========
</TABLE>
Substantially all of the Company's property, plant and equipment is pledged as
collateral for various loans at December 31, 1999. Interest of $2,382 and $3,565
has been capitalized during the years ended December 31, 1999 and 1998,
respectively, which amounts are included in property, plant and equipment.
Included in property, plant and equipment at December 31, 1999 and 1998 are
$8,054 and $5,672 , respectively of accumulated capitalized interest.
[2] Disposition of Golf and Other Facilities
During 1999, the Company sold the assets of four golf facilities located in
Arlington, Texas, Austin, Texas, Dallas, Texas and Fort Worth, Texas for $3,900
in aggregate gross sales proceeds. Also, during the fourth quarter of 1999, the
Company sold the assets of a golf course in Leesburg, Virginia for a gross sale
price of $3,825. Revenues for these facilities in 1999 through the date of
dispositon aggregated $3.4 million. As required under the Company's $130 million
credit facility, a portion of the aggregate gross sales proceeds was used to
repay a portion of such debt for each of these disposition. The Company also
terminated the lease agreement at San Diego, California in December 1999. The
disposition of these facilities resulted in a loss of $11,706 in 1999,
which is included in the extraordinary charge (see Note I).
Subsequent to December 31, 1999, the Company sold the assets of three golf
facilities in Tucson, Arizona, Mesa, Arizona and Olympia, Washington as well as
one ice rink facility in Simsbury, Connecticut. The Company also sold a golf
school located in Hilton Head, South Carolina. The aggregate gross proceeds for
these transactions was $9,545. The Company also terminated the lease agreement
at Colorado Springs, Colorado in March 2000. As of December 31, 1999, the net
carrying value of these facilities is included in the accompanying balance
sheet in assets held for sale. Revenues for these facilities for the year ended
December 31, 1999 aggregated $5.4 million. In connection with these
dispositions, in 1999 the Company recorded a loss of $3,679, of which $2,279 is
included in the extraordinary charge (see Note I) and $1,400 is included in
impairment and other related charges.
F-15
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
[H] ASSET IMPAIRMENT AND OTHER CHARGES:
In 1999, as a result of operating losses and in connection with the
restructuring of the Company's indebtedness 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 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 estimated fair values, net of estimated disposal costs, and the
carrying amounts of the assets.
In connection with such review a decision was made to sell various operating
assets. As of December 31, 1999, the Company identified 6 golf facilities which
had been carried at a value of $28,899 consisting of property plant and
equipment of $26,399, intangible assets of $1,581 and other assets of $919 that
it intends to dispose of or sell. The Company has recorded an impairment charge
of $13,106 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 25 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
$42,375. In addition, the Company incurred legal, consulting and other
incremental fees and costs aggregating approximately $1,700 relating to
implementing its restructuring efforts, including retaining a business advisory
firm. In connection with the sale and leaseback of 2 golf facilities, the
Company recorded a loss of $2,110 (see Note L(3)). In addition the Company
recorded a loss of $2,238 in connection with the abandonment of fixed assets. In
the aggregate the Company recorded $61,529 in charges for write-downs of
long-lived assets and related costs in the year ended December 31, 1999.
Included in operating expenses in the accompanying Consolidated Statement of
Operations for the year ended December 31, 1999 are additional charges of $3,900
relating to write downs of accounts receivable and other operating assets in
connection with the strategic decision to exit certain operating 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 the Company has incurred in connection with 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.
F-16
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
[I] EXTRAORDINARY CHARGE - LOSS ON DISPOSITION OF ASSETS HELD BY FGC AND EAGLE
QUEST PRIOR TO THE BUSINESS COMBINATION
In 1999, as a result of operating losses and in connection with the
restructuring of the Company's indebtedness and the strategic review of its
ongoing operations a decision was made to sell various operating assets. Certain
of such assets were owned by FGC and Eagle Quest, separately, prior to the
Business Combination in June of 1998 (the "Pre-Combination Facilities"). During
1999, the Company sold 5 Pre-Combination Facilities, consisting of 4 golf
facilities and one golf course for aggregate gross proceeds of $7,725, and
terminated the lease agreement on another Pre-Combination Facility. In
accordance with the provisions of Accounting Principles Board Opinion #16 -
Accounting for Business Combinations ("APB #16") relating to the disposition of
assets of the previously separate entities in a pooling of interests
combination, the Company recorded an extraordinary charge of $13,353.
Subsequent to December 31, 1999, the Company sold 4 Pre-Combination Facilities,
consisting of 3 golf facilities and a golf school for gross proceeds of $4,445.
These facilities were classified as assets held for sale at December 31, 1999.
In accordance with APB #16, in 1999 the Company recorded an extraordinary charge
of $2,411 based on the estimated realizable value of these facilities. In
addition, as of December 31, 1999, the Company identified 14 additional
Pre-Combination Facilities, all of which were golf facilities, which had been
carried at a value of $43,985 consisting of property, plant and equipment of
$33,317, intangible assets of $6,337 and other assets of $4,331 that it intends
to dispose of or sell. In accordance with the provisions of APB #16 the Company
has recorded an extraordinary charge of $26,697 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 ultimate sale or disposition.
Impairment related to long lived assets and other assets held for sale reduced
the related asset balances on the balance sheet.
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 if
they occur within two years of the Business Combination may result in the
Company incurring additional extraordinary charges relating to Pre-combination
Facilities.
F-17
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
NOTE J - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Prepaid insurance $ 573 $ 576
Accounts receivable and interest receivable 1,884 7,638
Accounts receivable - employees 73 243
Other receivable and prepaids 2,328 1,820
-------- --------
$ 4,858 $ 10,277
======== ========
</TABLE>
NOTE K - LEASING ARRANGEMENTS
Operating leases, which expire at various dates through 2051, are for
principally land at the facilities and for office space and, in some cases
provide for the payment of real estate taxes and other operating costs and are
subject to annual increases based on changes in the Consumer Price Index.
Certain leases require contingent rent payments based on a percentage of
revenues.
Future annual minimum lease payments, including expected renewal options, under
operating lease agreements that have initial annual or remaining noncancellable
lease terms in excess of one year are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 14,943
2001 15,197
2002 15,284
2003 15,325
2004 15,552
Thereafter 316,574
--------
Total minimum lease payments $392,875
========
</TABLE>
Operating lease rent expense for the years ended December 31, 1999, 1998 and
1997, was $16,694, $11,949 and $4,569, respectively.
Pursuant to certain of the Company's land leases, rent expense charged to
operations differs from rent paid because of the effect of free rent periods and
scheduled rent increases. Accordingly, the Company has recorded deferred rent
payable of $2,359, $1,193 and $650 at December 31, 1999, 1998 and 1997,
respectively. Rent expense is calculated by allocating total rental payments,
including those attributable to scheduled rent increases, on a straight-line
basis, over the lease term.
The Company has received termination letters from landlords at four sites. The
landlords allege that the Company has breached certain covenants under such
leases. Two of these landlords have filed lawsuits seeking to evict the Company.
The Company is in the process of responding to these termination letters and is
countering each of the lawsuits.
F-18
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
[L] LONG-TERM OBLIGATIONS:
[1] Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Revolving credit facility of up to $100,000 with a bank bearing interest at Alternative Base
Rate + 3% expiring on December 31, 2002 (a) 97,799 67,698
Revolving credit facility of up to $30,000 with a bank bearing interest at Alternative Base
Rate plus 11/2% expiring on December 29, 2000 (net of Debt discount of $2,422 at December 31, 1999)(a) 25,048
Term loan bearing interest at the prime rate less 0.5% during the drawdown period and at the
Prime rate during the paydown period. Borrowings under the loan mature in April 2003,
collateralized by a mortgage on certain properties (c) 10,000 10,000
Term loan bearing interest the prime rate less 1% through June 30, 2001 and at prime rate
through maturity. (c) 6,000
Term loan bearing interest at prime rate less 1% through June 30, 2001 and at prime rate through
maturity (b) 10,000
Mortgage payable bearing interest at LIBOR plus 3.5% (capped at 10.5%), payable
in monthly Installments through May 2000 (the loan is personally guaranteed
by the Chairman of the Board) $2,730 $2,802
Mortgage payable due March 7, 2001 bearing interest at 5.25% 1,700 1,700
Mortgage note payable due August 1, 2002 bearing interest at LIBOR as adjusted, payable in
Monthly installments and an additional payment of $5,000 due on or before
May 1, 1998 (6.314% at December 31, 1998 and 7.65% at December 31, 1999). The
loan includes certain covenants covering operational and financial requirements 9,562 10,746
Mortgage note payable due November 1, 2009 bearing interest at 9.875%, payable in monthly
Installments. The mortgage is based on a twenty year amortization payout with a balloon
Payment that calls for the entire principal balance to be due and payable on November 1, 2009 3,347 3,435
Mortgage note payable in monthly installments with a balloon payment on July 1, 2006 bearing
Interest at 8.5% 2,156 2,261
Mortgage note payable in monthly installments with a balloon payment on June 13, 2001 bearing
Interest at 8% 1,544 1,630
Note payable due June 1, 2005 bearing interest at 6% 1,446 1,688
Other debts bearing interest at rates varying from 6% to 10% 3,753 3,800
------
Promissory note bearing interest at 7%, payable in monthly installments through May 1, 2003 1,587 1,662
Note payable due August 1, 2003, bearing interest at prime plus .75% payable in monthly
principal installments of $10 plus interest 1,386 1,516
Promissory note payable due September 2002, bearing interest at prime plus 1.25% payable
in monthly installments plus $50 in September of each year 1,471 1,618
Mortgage note payable in monthly installments with a balloon payment on April 1, 2001 bearing
interest at 8.5% 1,844 1,899
Mortgage note payable in monthly installments with a balloon payment on August 8, 2001
bearing interest at 8.5% (d) 2,833 3,267
Mortgage note payable in monthly installments with a balloon payment on March 1, 2001 bearing
interest at LIBOR plus 3.25% (e) 775 1,339
Mortgage note payable in monthly installments with a balloon payment on June 1, 2001 bearing
interest at LIBOR plus 3.25% (e) 1,192 1,772
Mortgage note payable in monthly installments with a balloon payment on October 1, 2002
bearing interest at LIBOR plus 3.25% (e) 1,871 2,464
Mortgage note payable in monthly installments with a balloon payment on March 1, 2001 bearing
interest at LIBOR plus 3.25% (e) 2,026 2,654
Term loan bearing interest at either LIBOR plus 2.25% or the prime rate and maturing on
July 19, 2003, collateralized by a mortgage on certain properties. (f) - 9,914
Mortgage note payable in monthly installments bearing interest at 6.75% 685 706
------- --------
190,755 134,571
184,832 3,950
------- --------
Noncurrent portion 5,923 $130,621
======= ========
</TABLE>
(a) On June 30, 1997, FGC entered into a two-year collateralized revolving
credit facility of up to $20,000 with a bank convertible into a four year
term loan at the end of the first two years. After conversion to a term
loan, the loan was payable in 16 substantially equal quarterly
installments. Borrowings were at variable rates of interest. The loan was
collateralized by the pledge of the stock of most of FGC's subsidiaries and
such subsidiaries also guaranteed the obligations. The agreement included
certain covenants covering operational and financial requirements.
On December 2, 1998, and as amended, the credit facility was replaced with
a syndicated $100,000 secured two (2) year revolving credit facility
converting to a four year term loan (the Old Facility") in December 2000.
The Old Facility was secured by the pledge of the stock of most of
the Company's subsidiaries and such subsidiaries also guaranteed such
obligations. Interest under the Old Facility was to be either (i) the
greater of the Bank's prime rate or the federal funds rate plus .5% per
annum plus a margin of .75% per annum or (ii) the LIBOR, plus between 1.50%
and 2.75% per annum depending on a specific financial ratio.
As a result of our financial performance in 1999, the Company was not in
compliance with several covenants under the Old Facility including all the
financial covenants which were based on earnings before interest, taxes,
depreciation and amoriization. In exchange for a fee of $250,000 and an
increase in the interest rate to the prime rate plus 2%, received a waiver
and an additional line from the lenders under the Old Facility, while the
Company restructuring the Old Facility. Pursuant to a new agreement
(the "Credit Agreement") the restructuring was completed on October 18,
1999 and the Old Facility was expanded to a $130 million New Credit
Facility ("New Credit Facility").
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 B 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 interests 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 to principal
based on the net proceeds of such sales or issuance.
The payment and performance of obligations under the New Credit Facility
have been guaranteed by substantially all of the Company's subsidiaries.
The New Credit Facility is secured by substantially all of the Company's
assets and
F-19
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
the assets of the Company's 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 receivable, inventory and equipment. In addition,
the Company has pledged all of the stock of its domestic subsidiaries and
66% of the stock of its foreign subsidiaries.
In connection with the New Credit Facility, the Company 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 a 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 may be exercised prior
to June 30, 2002. As a condition to the closing of the New Credit Facility,
the Company 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. The Company valued
those warrants which were immediately exercisable at $2,686 using the
Black-Scholes valuation model. The fair value of the warrants was recorded
as additional paid-in capital and as a discount on the related debt. The
discount will be amortized over the term of the loan. The remaining
warrants will be accounted for in a similar manner as they become
exercisable.
In addition to certain customary covenants, the New Credit Facility
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 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) of the Company from our lenders under the New Credit
facility.
On or about January 28, 2000, the Company received a waiver waiving among
other things, compliance with certain financial tests for the period
commencing December 31, 1999 through March 31, 2000. Then again on March
31, 2000, the Company received a waiver from our lenders waiving among
other things our compliance with certain financial tests for the period
commencing April 1, 2000 through May 5, 2000.
There can be no assurance that on or prior to May 5, 2000 the Company's
lenders will either extend the waiver of the Company's non-compliance with
the financial tests or enter into an amendment to the Credit Facility to
modify the financial tests. Until the New Credit Facility is amended or the
waiver is extended for a period of one year or longer, $125.3 million of
principal outstanding under the New Credit Facility as well as
substantially all other debt for borrowed money which would otherwise be
classified as long-term debt has been classified as current liability. If
the covenants are not amended or the waiver extended on or prior to May 5,
2000, the payment of all $126.6 million could be declared immediately due
and payable. In such event, or sooner if such event appeared inevitable, we
would likely file a voluntary petition seeking protection under the
bankruptcy laws.
F-20
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
(b) In July 1999, the Company 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 the Englewood, Colorado site. The loan
matures in July 2004 and bears interest at the prime rate less .5%
On April 12, 2000, the Company received a waiver from ChinaTrust
Commercial waiving compliance with certain financial tests for the year
ended December 31, 1999. Such waiver expires on May 5, 2000. There can be
no assurance that on or prior to May 5, 2000 ChinaTrust Commercial will
either extend the waiver of non-compliance with the financial tests or
enter into an amendment to the loan agreement to modify the financial
tests. If the covenants are not amended or the waiver extended on or prior
to May 5, 2000, ChinaTrust Commercial, would have the right to declare a
default under the loan agreement and require all amounts outstanding to be
immediately due and payable, which default would trigger a cross-default
under our other debt instruments. In such event, or sooner if such event
appeared inevitable, the Company would likely file a voluntary petition
seeking protection under the bankruptcy laws.
(c) In June 1999, the Company entered into a loan agreement with ChinaTrust
Bank (U.S.A.) providing for up to a $10 million term loan, secured by a
mortgage on two 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. In April 2000, the Company
received a waiver from ChinaTrust U.S.A. waiving compliance with certain
financial tests for the year ended December 31, 1999 covering this term
loan as well as the $10 million term loan borrowed in 1998. Such waiver
expires on May 5, 2000. There can be no assurance that on or prior to May
5, 2000 ChinaTrust U.S.A. will either extend the waiver of non-compliance
with the financial tests or enter into an amendment to the loan agreement
to modify the financial tests. If the covenants are not amended or the
waiver extended on or prior to May 5, 2000, ChinaTrust U.S.A. would have
the right to declare a default under the loan agreement and require all
amounts outstanding to be immediately due and payable, which default would
trigger a cross-default under the Company's other debt instruments. In such
event, or sooner if such event appeared inevitable, the Company would
likely file a voluntary petition seeking protection under the bankruptcy
laws. As of December 31, 1999, the Company had drawn down $6 million
available under the loan.
(d) On July 29, 1999, the Company obtained a waiver from Fleet Bank whereby
in exchange for 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 the Company's ice facility in Simsbury,
Connecticut. The Company also agreed that within 60 days of the waiver,
which was later extended to November 19, 1999, the Company would work
toward a mutually satisfactory loan restructuring agreement. On
November 19, 1999, the Company restructured the term loan. As of
December 31, 1999, $2,833 million was outstanding under the loan with
Fleet Bank. Subsequent to December 31, 1999, all amounts outstanding under
the Fleet Bank Loan were repaid from a portion of the proceeds from the
sale of the Simsbury facility.
(e) On June 30, 1999 the Company 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,
the Company 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 terms loans to October 5, 1999
which was later extended to November 12, 1999. On November 12, 1999, the
Company 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, the Company issued to Bank of America warrants to
purchase up to 100,000 share 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 the loans are
satisfied in full on or prior to June 30, 2000 and, if not, fifty percent
may be canceled by the Company if the Company satisfies the loans in full
on or prior to December 21, 2000. As of December 31, 1999, $5,864 million
was outstanding under the Amended and Restated Master Loan Agreement.
(f) As a condition of this loan, FGC entered into an interest rate protection
agreement with a bank. Under this Swap Transaction Agreement the LIBOR rate
is fixed at 5.93%. in the event LIBOR exceeds such fixed rate, the bank is
required to pay such excess to FGC, and in the event that LIBOR is less
than such fixed rate, FGC is required to pay the bank such differences.
F-21
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
[L] LONG-TERM OBLIGATIONS: (CONTINUED)
2) Convertible Subordinated Debentures:
During the fourth quarter of 1997, the Company issued $115 million
aggregate principal amount of 5 3/4% convertible subordinated notes (the
"Notes"). The Notes mature on October 15, 2004 and bear interest at the
rate of 5 3/4% per annum, payable semiannually. The Notes are unsecured and
subordinated to all present and future senior indebtedness (as defined in
the Indenture) of the Company. The Notes are redeemable at the option of
the Company at any time after October 15, 2000, in whole or in part, at
declining premiums together with accrued and unpaid interest. The Notes are
convertible at the option of the holder into Common Stock at any time prior
to maturity, unless previously redeemed or repurchased, at a conversion
price of $24.83 per share, subject to adjustment under certain
circumstances. Upon a Change of Control (as defined in the Indenture),
subject to certain conditions, each holder of Notes shall have the right,
at the holder's option, to require the Company to repurchase such holder's
Notes at a repurchase price equal to 101% of the principal amount thereof
plus accrued and unpaid interest to the Repurchase Date (as defined in the
Indenture), if any. The current waiver the Company has from its lender
under its Credit Facility requires that the Company operate through May 5,
2000 in strict accordance with a budget. The budget does not provide for
the payment of interest under the Notes, which is due and payable on
April 15, 1999, subject to a 30-day grace period. There can be no assurance
that the Company's lenders will not, upon expiration of the Waiver,
prohibit the payment of interest on the Notes prior to the end of such
grace period, or that the Company will have funds available to make such
payment, in which event the Company would be in default under such Notes,
which would cross-default its other debt instruments.
(3) Other
In June 1999, the Company entered into two sale leaseback transactions with
Realty Income Corp. ("RIC"). The Company sold the real property located at
it Flanders, New Jersey site and Alpharetta, Georgia site for $2.2 million
and $3.3 million, respectively. Simultaneously with such sales, the Company
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.
The Company recorded a loss of $2,110 for the portion of the sale
attributable to the value of the land, which is leased back under the
portion of the lease which is treated as an operating lease. The Company
recorded a deferred loss of $1,571 attributable to the value of the
improvements, which will be amortized over the life of the capitalized
lease.
F-22
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
Unless asset sales occur on a timely and regular basis, the Company does
not have sufficient capital to meet its capital commitments and fund its
debt service. Under the New Credit Facility a portion of the proceeds of
asset sales is required to be applied to the repayment of indebtedness.
There can be no assurance that the Company will consummate asset sales in a
timely manner or that such asset sales will yield the capital necessary to
meet our needs. In addition, May 16, 2000 is the maturity date of the
Company's loan with Orix U.S.A. wherein the Company is required to repay
$2.7 million in principal which is currently outstanding. Although the
Company has requested a one-year extension there can be no assurance that
such an extension will be obtained. If such an extension is not obtained or
if asset sales do not yield adequate capital to meet the Company's capital
commitments or fund its debt service, the Company would likely file a
voluntary petition seeking protection under the bankruptcy laws.
NOTE M - COMMITMENTS AND CONTINGENCIES
[1] EMPLOYMENT AND SEVERANCE AGREEMENTS:
The Company has employment agreements, as amended, expiring in March 2001
with two of its officers, who are also stockholders of the Company, which
provide for aggregate annual base salaries of $385,000 in 2000 and $415,000
in 2001.
The Company has severance agreements with certain executives.
In general, the severance agreements provide that, upon termination of
employment or other specified adverse change in the employment the
executive following a Change of Control (as defined therein), the Company
shall provide to each such executive certain rights and benefits, including
(i) a lump sum payment in cash, (ii) acceleration of all unvested stock
options and restricted stock awards, and (iii) certain additional
retirement and welfare benefits.
[2] CONCESSION LICENSES:
The Company manages several facilities for municipalities pursuant to
concession licenses, four of which are terminable at will by the licensor.
The Company's concession license with the City of New York (the "City") for
the Douglaston, New York golf center, which was entered into in 1994 and
which expires on December 31, 2006, the concession license with the City
for the Randall's Island, New York golf center, which was assumed in 1997
and which expires on March 1, 2007, the concession license with the city
for the Dreier-Offerman Park, Brooklyn, New York golf center, currently
under construction, which was entered into in April 1998 and which expires
on March 30, 2019 and the concession license with the Metropolitan
Transportation Authority for the Bronx, New York golf center which opened
in 1999 which was entered into in 1997 and which expires on December 31,
2009 (respectively, the "Douglaston License," the "Randall's Island
License," the "Brooklyn License" and the "Bronx License"), are terminable
at will. Pursuant to the Douglaston License and the Randall's Island
License, the Brooklyn License and the Bronx License the Company has made
approximately $3,933, $2,556, $3,300 and $4,000, respectively, of capital
F-23
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
improvements. Pursuant to the Brooklyn License, the Company is obligated to
make $4,000 of capital improvements prior to March 1, 1999. If any of these
concession licenses are terminated, the licensor may retain, except within
the first eight years of the Bronx License, and is not obligated to pay the
Company, for the value of such capital improvements.
The Douglaston License provides for payment of fees to New York City of the
greater of $900 or up to 50% of gross revenues (as defined) on an annual
basis. The Randall's Island license requires a fee of the greater of $500
or a percentage of revenue as defined in the agreement on an annual basis.
The Bronx License provides for annual minimum payments ranging from $500 in
1999 to $990 in 2009, or a percentage of gross revenue (as defined)
whichever is greater.
[3] LICENSE AGREEMENT:
Pursuant to its original license agreement with Golden Bear Golf, Inc. (the
"Licensor"), the Company paid a one-time facility development fee for each
Golden Bear golf center. In addition, the Company is required to pay annual
royalty fees for each Golden Bear golf center it operates based on Adjusted
Gross Revenues ("AGR") as defined, equal to 3% of AGR less than $2,000 plus
4% of AGR between $2,000 and $3,000, plus 5% of AGR over $3,000. The
minimum royalty fee for each Golden Bear golf center ranges up to $50 per
year.
F-24
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
NOTE M - COMMITMENTS AND CONTINGENCIES (CONTINUED)
[3] LICENSE AGREEMENT: (CONTINUED)
Royalty fees incurred for the years ended December 31, 1999, 1998 and 1997
amounted to $795, $400 and $301, respectively.
In connection with the acquisition of Golden Bear, the Company entered into
a new license agreement covering all 21 Golden Bear golf facilities. The
agreement provides for minimum royalty payments of $795 per year plus 1% of
AGR in excess of $30,000, and additional 1% each, for revenue in excess of
$40,000 and $50,000.
In January 2000, the Company received a letter from the Licensor that the
Company was in default as a result of the Company's failure to pay the
quarterly royalty fee for the first quarter of 2000. In April 2000,
the Company received a letter of termination from the Licensor.
[4] OTHER COMMITMENTS:
At December 31, 1999, the Company had commitments for various construction
projects, aggregating approximately $8,000 to be completed within 12 to
24 months.
[5] CLASS ACTION SUIT
In February, 2000 a class action suit was filed in the United States
District Court for the Eastern District of New York alleging that the Company
and certain of its officers violated the federal securities laws in connection
with the sale of company stock during the period July, 1998 through August,
1999. The complaint seeks an unspecified amount of compensatory damages, as well
as attorneys' fees. The allegations against the Company and its officers arise
out of public statements during the relevant period concerning the Company's
financial health and expected future earnings, including statements made in
connection with a July 27, 1998 secondary offering. The complaint alleges that
while management stated that the Company's rapid growth through acquisitions was
progressing smoothly and achieving economies of scale, in reality the Company
was experiencing increased operating expenses and insufficient working capital.
The complaint further alleges that when the true facts regarding the Company's
financial health and expected future earnings became known in August, 1999,
company stock price droped. Several other complaints also have been filed in the
same court alleging virtually identical facts and securities law violations, at
leaset one of which seeks punitive damages. The Company plans to vigorously
defend the claims asserted against it.
[6] OTHER
In April 1998, the Company entered into agreements with the Township of
Woodbridge, New Jersey, to lease, construct and operate an ice rink facility
with two sheets of ice and a family entertainment center. The Township of
Woodbridge recently served the Company with a Notice to Quit - Termination of
Tenancy and Demand for Possession based upon an alleged breach of the
agreements. The Company is currently in settlement discussions with the Township
and intends to vigorously defend the lawsuit. The book value of leasehold
improvements and other related assets for this site as at December 31, 1999 was
$5,500.
NOTE N - BUSINESS SEGMENT INFORMATION
Information concerning operations by industry segment is as follows:
<TABLE>
<CAPTION>
GOLF NON-GOLF
OPERATIONS OPERATIONS CONSOLIDATED
---------- ---------- ------------
<S> <C> <C> <C>
Year ended December 31, 1999:
Total revenue 119,110 35,759 154,869
Operating income (loss) before,
interest expense (98,433) 5,347 (93,086)
Depreciation and amortization 17,769 4,705 22,474
Identifiable assets 363,362 128,024 491,386
Capital expenditures 74,289 21,310 95,599
Year ended December 31, 1998:
Total revenue $100,734 $ 21,430 $122,164
Operating income before interest
expense 15,267 4,641 19,908
Depreciation and amortization 8,954 2,184 11,138
Identifiable assets 454,199 117,841 572,040
Capital expenditures 172,832 65,052 237,884
Year ended December 31, 1997:
Total revenue $ 64,688 $ 8,309 $ 72,997
Operating income before interest
expense 8,213 2,402 10,615
Depreciation and amortization 6,569 532 7,101
Identifiable assets 309,001 54,035 363,036
Capital expenditures 92,362 52,156 144,518
</TABLE>
Non-golf operations relate to sports and family entertainment facilities which
includes ice rink facilities, soccer fields and other indoor family sports and
amusements.
NOTE O - STOCKHOLDERS' EQUITY
[1] STOCK SPLIT:
The Board of Directors approved a three for two stock split which was
distributed in May 1998. Stockholder's equity has been restated to give
retroactive recognition to the stock split for all the periods presented by
reclassifying from additional paid-in capital to common stock, the par
value of additional shares arising from the split. In addition, all
references to number of shares and per share amounts have been restated to
reflect the stock split.
F-25
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
[2] STOCK OPTION PLANS:
The Company has stock-based compensation plans, which provide for the
granting of stock options to employees for the purchase of common stock at
the fair value of the stock on the date of grant.
The Company has elected to continue to account for stock option grants in
accordance with APB 25 and related interpretations. Accordingly, no
compensation cost has been recognized for fixed options because the
exercise prices of the stock options on the date of grant equal the market
values of the Company's common stock.
Had the compensation costs for the plans been determined based upon the
fair value at the grant date consistent with SFAS No. 123, the Company's
net income (loss) and net income (loss) per share on a pro forma basis
would have been the amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net income (loss):
As reported $(140,399) $(4,988) $3,269
Pro forma $(145,960) (11,028) (1,074)
Net income (loss) per share:
As reported:
Basic (5.38) (0.21) 0.17
Diluted (5.38) (0.21) 0.16
Pro forma:
Basic (5.59) (0.48) (0.06)
Diluted (5.59) (0.48) (0.06)
</TABLE>
The Company has not included potential common shares in the pro forma
diluted loss per share computations, since the result would be
antidilutive.
F-26
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
NOTE O - STOCKHOLDERS' EQUITY (CONTINUED)
[2] STOCK OPTION PLANS: (CONTINUED)
These pro forma amounts may not be representative of future disclosures due
to, among other things: (i) the estimated fair value of stock option is
amortized over the vesting period, (ii) additional options may be granted
in future years and (iii) options granted in 1995 and prior thereto are not
included.
The weighted average fair value at date of grant for options granted during
the years 1999, 1998 and 1997 were $.81, $10.46 and $10.33, respectively,
using the Black-Scholes option-pricing model with the following
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 0.78% 0.62 0.76 - 0.82
Risk-free interest rate 6.6% 4.37% - 5.59% 5.60% - 6.58%
Expected life in years 5 5 5
</TABLE>
FGC Stock Option Plans
FGC's 1994 Stock Option Plan (the "Plan") provides for the grant of options
to purchase up to 450,000 shares of common stock to employees, officers,
directors and consultants of the FGC's. Options may be either "incentive
stock options" within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), or nonqualified options. Incentive
stock options may be granted only to employees of the Company, while
nonqualified options may be issued to nonemployee directors, consultants
and others, as well as to employees of the Company. The Company's 1996
Stock Incentive Plan (the "New Plan") is identical to the Plan, except that
the New Plan provides (i) for the grant of options to purchase up to
750,000 shares of common stock and (ii) an automatic grant of nonqualified
stock options to purchase 15,000 shares to each nonemployee director upon
his election or appointment to the Board of Directors and (iii) annual
grants (commencing on the date the New Plan was approved by stockholders)
to each nonemployee director of nonqualified stock options to purchase
15,000 shares of common stock at the fair market value of the common stock
on the date of the grant.
FGC's 1997 Stock Incentive Plan (the "1997 Plan"), which provides for the
grant of options to purchase up to 750,000 shares of common stock, is
identical to the New Plan. FGC will grant options under the 1997 Plan, once
no more options are available under the New Plan.
FGC's 1998 Stock Option and Award Plan (the "1998 Plan"), adopted by the
Board of Directors on April 23, 1998 and approved by the stockholders on
June 26, 1998, is identical to the 1997 Plan except that (i) it provides
for the grant of stock awards (either outright or for a price to be
determined) as well as options, (ii) it provides for grants of stock awards
and options for up to 1,500,000 shares of common stock to those employees,
officers, directors, consultants or other individuals or entities eligible
under the Plan (as defined) to receive stock awards or options (each, a
"Plan Participant") and (iii) no plan participant may receive more than an
aggregate of 500,000 shares of common stock by grant of options and/or
stock awards during the term of the 1998 Plan.
The exercise price per share of common stock subject to an incentive option
may not be less than the fair market value per share of common stock on the
date the option is granted. The per share exercise price of common stock
subject to a nonqualified option may be established by the Board of
Directors.
F-27
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
NOTE O - STOCKHOLDERS' EQUITY (CONTINUED)
[2] STOCK OPTION PLANS: (CONTINUED)
FGC Stock Option Plans (continued)
Incentive stock options granted under the Plan cannot be exercised more
than 10 years from the date of grant.
The following summarizes the stock option activity for the years ended
December 31:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 2,045,102 15.284 1,429,236 $13.391 1,018,290 $11.737
Options granted 896,750 1.19 749,438 18.016 498,185 15.399
Options exercised (400) 14.00 (133,572) 10.359 (87,239) 5.542
----------- ----------- -----------
Outstanding at end
of year 2.941,452 10.99 2,045,102 15.284 1,429,236 13.391
--------- ----------- -----------
Options exercisable
at end of year 1,365,892 13.05 799,558 13.049 439,590 9.965
========= =========== ===========
Options available
for the grant at
end of year 914,750
===========
</TABLE>
In December 1998, the Company issued 220,000 restricted shares of common
stock under the 1998 Plan, of which 195,250 unvested shares were cancelled
in February 1999. The fair value of the remaining restricted shares is
being charged against operations over their vesting periods.
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE NUMBER LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING REMAINING PRICE EXERCISABLE PRICE
------ ----------- --------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$1.19 896,750 10.00 $1.19 0 $1.19
$2.33 87,756 4.50 2.33 154,000 2.33
4.00 - $5.92 6,750 5.52 5.70 16,900 5.70
$9.92 - $14.63 847,518 7.66 12.09 11.42
$15.17 - $20.00 795,803 7.15 16.25 1,193,117 438,722
$23.75 - $27.00 305,000 8.39 25.30
$68.00 1,875 6.92 68.00 1,875 68.00
--------- ---- ------ --------- -------
2,941,452 8.43 $15.28 1,365,892 799,558
========= ==== ====== ========= =======
</TABLE>
F-28
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
NOTE O - STOCKHOLDERS' EQUITY (CONTINUED)
[2] STOCK OPTION PLANS: (CONTINUED)
FGC Stock Option Plans (continued)
Additionally, in connection with the purchase of certain golf facilities,
FGC granted the sellers options to acquire up to an aggregate of 81,000
shares of common stock at prices ranging from $0.01 to $26.67 per share,
with a weighted average exercise price per share of $20.77. As of
December 31, 1999, options to purchase 64,888 shares of common stock were
outstanding all of which were exercisable.
Eagle Quest Stock Option Plans:
At December 31, 1997, Eagle Quest had a stock option plan (the "Eagle Quest
Plan") which provided for the issuance of options to key employees,
consultants and directors. Prior to the acquisition, shareholders had
authorized the issuance of stock options up to an aggregate of the
equivalent of 82,068 FGC shares under the Eagle Quest Plan. The Board of
Directors of Eagle Quest, and subsequently the shareholders, approved an
increase in the authorized number of stock options to the equivalent of
164,136 FGC shares.
The following table summarize the transactions in the Eagle Quest Plan
since the incorporation of Eagle Quest on February 5, 1996:
<TABLE>
<CAPTION>
THE
EQUIVALENT
FGC
WEIGHTED
EQUIVALENT AVERAGE
NUMBER OF EXERCISE
FGC SHARES PRICE
---------- -----
<S> <C> <C>
Year ended December 31, 1997:
Options granted 64,321 $11.70
Options exercised (2,808) 7.07
Options forfeited (4,103) 13.16
------
Deemed to be granted at December 31, 1997 and
June 30, 1998, being maximum number of options
authorized under the Eagle Quest Plan 57,410 $11.70
======
Exercisable options:
December 31, 1997 21,598 $10.48
======
</TABLE>
Of granted options at December 31, 1997, the equivalent of 20,517 FGC
options have been granted to certain officers and become exercisable only
upon the occurrence of specified future events. As these events cannot be
considered to be more likely than not to occur, no compensation expense has
been recorded for these options. In addition, through March 13, 1998, the
Board of Directors has granted options exercisable into the equivalent of
81,079 FGC common shares, which options are exercisable to February 12,
2008, provided that the exercise of any of these options were subject to
the receipt of shareholder approval to increase the number of authorized
stock options under the Eagle Quest Plan. These options include the grant
on February 12, 1998 of options to certain key employees to purchase the
equivalent of 32,827 FGC common shares at an exercise price of $24.37 per
share, expiring ten years from the date of grant.
On March 31, 1998, the Board of Directors granted additional options
exercisable into the equivalent of 12,146 FGC common shares, which options
are exercisable until March 2008.
F-29
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
NOTE O - STOCKHOLDERS' EQUITY (CONTINUED)
[2] STOCK OPTION PLANS: (CONTINUED)
Eagle Quest Stock Option Plans: (continued)
Upon consummation of the acquisition of Eagle Quest, all of the then
outstanding Eagle Quest stock options were redeemed for 67,189 common
shares of FGC based on the agreed fair value.
[3] WARRANTS:
FGC:
In connection with the public offering in December 1995, FGC has granted
warrants to the representatives of the underwriters to purchase from the
Company up to 450,000 shares of common stock at $13.50 per share
exercisable through December 2000, of which warrants to purchase 108,068
and 3,324 shares were exercised in the years ended December 31, 1998 and
December 31, 1997, respectively. As of December 31, 1999, warrants purchase
338,608 shares of common stock were outstanding.
In connection with the purchase of LCI in July 1997, the FGC issued
warrants to the sellers to purchase an aggregate of 83,306 shares of common
stock at $18.33 per share exercisable through July 2002, of which warrants
to purchase 1,476 were exercised in the year ended December 31, 1998. As of
December 31, 1999 warrants to purchase 81,830 shares of common stock were
outstanding.
NOTE P - INCOME TAXES
Income or (loss) before income taxes, extraordinary items and cumulative effect
of a change in accounting principle for each of the periods presented by
jurisdiction is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
United States (103,575) $ 20,695 $ 11,570
Canada (10,831) (10,158) (3,159)
--------- -------- --------
$(114,406) $ 10,537 $ 8,411
========= ======== ========
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current $(13,251) $ 8,279 $ 3,900
Deferred (3,217) 321 1,242
-------- -------- --------
Total provision
(benefit) (16,468) $ 8,600 $ 5,142
========= ======== ========
</TABLE>
Temporary differences arise due to differences between reporting for financial
statement purposes and for federal income tax purposes relating primarily to
impairment losses for long lived assets, writedown of inventory, deferred rent
expense and depreciation and amortization methods.
F-30
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
NOTE P - INCOME TAXES (CONTINUED)
Expected tax expense based on the United States statutory rate is reconciled
with the actual expense as follows:
<TABLE>
<CAPTION>
PERCENT OF PRE-TAX EARNINGS
----------------------------
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected tax expense (35.0)% 35.0% 35.0%
Canadian and United States operating losses and other
expenses for which no tax benefit has been recognized 10.4 45.5 22.8
Impairment losses not recognized 14.7
State income tax (benefit), net of federal tax effect (.2) 5.8 5.6
Utilization of net operating loss carryforwards - (4.7)
Change in valuation allowance (2.8)
Other (1.5) (2.3)
------ ---- ----
(14.4)% 81.6% 61.1%
==== ==== ====
</TABLE>
The deferred tax assets (liabilities) are recorded as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Deferred rent 920 $ 437
Tax basis of assets in excess of book basis 714 714
Loss carryforwards 22,241 8,800
Inventory reserve 1,404
Impairment losses 35,111
Valuation allowance (53,201) (6,908)
------- -------
7,189 3,043
Deferred tax liabilities:
Book basis of assets in excess of tax basis (7,189) (6,260)
------- -------
Net deferred tax (liability) $ 0 $(3,217)
======= =======
</TABLE>
At December 31, 1999, the Company has estimated net operating loss
carryforwards available for income tax purposes as follows:
<TABLE>
<CAPTION>
Expiring
Amount Through
------ -------
<S> <C> <C>
FGC 34,000 2019
Eagle Quest:
Canada 15,000 2005
United States 7,000 2019
</TABLE>
Section 382 of the Internal Revenue Code contains provisions which may limit the
loss carryforwards available if significant changes occur in stockholder
ownership interests. Management believes that such limitations may apply as a
result of changes in stockholder ownership interests during 1999. Accordingly,
the Company may be subject to a significant annual limitation on the utilization
of its net operating losses.
F-31
<PAGE>
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except share data)
NOTE Q - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial statements:
Cash and cash equivalents approximate fair value. The cost and fair value of
short-term investments are disclosed in Note C.
Short-term loan payable - the carrying amount approximates fair value due to the
short-term maturities of these instruments.
Long-term and other debt - fair value is estimated based on borrowing rates
offered to the Company.
The carrying amounts and fair value of the Company's financial instruments as of
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
------ -----
<S> <C> <C>
December 31, 1999:
Cash and cash equivalents 983 983
Restricted cash deposits 689 689
Long-term debt (classified as current) 193,177 193,177
Convertible subordinated notes 115,000
December 31, 1998:
Cash and cash equivalents $3,878 $3,878
Restricted cash deposits 314 314
Long-term debt 134,571 134,571
Convertible subordinated notes 115,000 107,000
</TABLE>
NOTE R - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
-------------------- -------------------- -------------------------------- -----------------
1999 1999
1999 1998 1999 1998 As Reported As Restated* 1998 1999 1998
-------- -------- -------- -------- ----------- ----------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue $35,149 $21,497 $47,498 $34,624 $44,147 $44,147 $38,613 $28,075 $27,430
Operating income (loss) before
interest expense 4,009 844 1,558 2,658 (74,580) (45,597) 12,809 (53,056) 3,597
Net income (loss) 752 (3,724) (1,524) (3,881) (63,532) (63,532) 1,841 (76,095) 776
Net income (loss) per share:
Basic $0.03 $(0.18) $(0.06) $(0.19) $(2.44) $ (2.44) $0.07 $(2.92) $0.03
Diluted 0.03 (0.18) (0.06) (0.19) (2.44) (2.44) 0.07 (2.92) 0.03
</TABLE>
*Restated to reclassify the loss on disposition of Pre-Combination Facilities as
an extraordinary item.
F-32
<PAGE>
(Insert Document Here)
<PAGE>
EXHIBIT 11.1
FAMILY GOLF CENTERS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Income (loss) before extraordinary
items and cumulative effect of
a change in accounting principle ...... $ (97,938,000) $ 1,937,000 $ 3,269,000
Extraordinary item ..................... (42,461,000) (4,890,000)
Cumulative effect of a change in
accounting principle .................. (2,035,000)
------------- ------------ -----------
Net income (loss) ...................... $(140,399,000) $ (4,988,000) $ 3,269,000
============= ============ ===========
Weighted average number of common
shares outstanding
- Basic ............................. 26,088,000 23,009,000 19,344,000
Shares issuable upon exercise of
dilutive options and warrants ......... - 2,237,000 1,859,000
Less shares assumed repurchased ........ - (1,391,000) (1,389,000)
------------- ------------ -----------
Weighted average number of common
shares outstanding
- Diluted ........................... 26,088,000 23,855,000 19,814,000
============= ============ ===========
Basic earnings (loss) per share:
Income (loss) before extraordinary
item and cumulative effect of a
change in accounting principle ...... $(3.75) $ .08 $ .17
Extraordinary item .................... (1.63) (.21)
Cumulative effect of a change in
accounting principle ................ (.08)
------ ------ ------
Net income (loss) ..................... $(5.38) (.21) $ .17
====== ====== ======
Diluted earnings (loss) per share:
Income (loss) before extraordinary
item and cumulative effect of a
change in accounting principle ...... $(5.38) $ .08 $ .16
Extraordinary item .................... (1.63) (.21)
Cumulative effect of a change in
accounting principle ................ (.08)
------ ------ ------
Net income (loss) ..................... $(5.38) $(.21) $ .16
====== ====== ======
</TABLE>
<PAGE>
WHOLLY-OWNED SUBSIDIARIES OF
FAMILY GOLF CENTERS, INC.
<TABLE>
<CAPTION>
SUBSIDIARY STATE OF
---------- INCORPORATION
-------------
<S> <C> <C>
1. Orient Associates International, Inc. New York
2. Skydrive Alley Pond Company, Inc. New York
3. Skydrive Greenburgh Co., Inc. New York
4. Skycon Construction Co., Inc. New York
5. Skydrive Willowbrook NJ, Inc. New Jersey
6. Skydrive Co., Inc. New York
7. Pelham Family Golf Centers, Inc. Delaware
8. Richmond Family Golf Centers, Inc. Delaware
9. Peachtree Family Golf Centers, Inc. Delaware
10. Alpharetta Family Golf Centers, Inc. Delaware
11. Valley View Family Golf Centers, Inc. Delaware
12. Mesa Family Golf Centers, Inc. Delaware
13. Virginia Beach Family Golf Centers, Inc. Delaware
14. Flemington Family Golf Centers, Inc. Delaware
15. Yorktown Family Golf Centers, Inc. Delaware
16. The Practice Tee, Inc. California
17. TPT El Segundo, Inc. California
18. Global/Golf Gavilan California
19. Indian River Family Golf Centers, Inc. Delaware
20. Tucson Family Golf Centers, Inc. Delaware
21. Cincinnati Family Golf Centers, Inc. Ohio
22. St. Louis Family Golf Centers, Inc. Delaware
23. West Palm Beach Family Golf Centers, Inc. Delaware
24. San Jose Family Golf Centers, Inc. California
<PAGE>
25. Easton Family Golf Centers, Inc. Delaware
26. Randall's Island Family Golf Centers, Inc. Delaware
27. Privatization Plus, Inc. Maryland
28. Westminster Family Golf Centers, Inc. Delaware
29. Carolina Springs Family Golf Centers, Inc. Delaware
30. Denver Family Golf Centers, Inc. Delaware
31. Flanders Family Golf Centers, Inc. Delaware
32. Margate Family Golf Centers, Inc. Delaware
33. The Seven Iron, Inc. Colorado
34. C.B. Family Golf Centers, Inc. Delaware
35. Darlington Family Golf Centers, Inc. Delaware
36. Maineville Family Golf Centers, Inc. Delaware
37. Milwaukee Family Golf Centers, Inc. Delaware
38. Olney Family Golf Centers, Inc. Delaware
39. Palm Desert Family Golf Centers, Inc. Delaware
40. Broward Family Golf Centers, Inc. Delaware
41. Englewood Family Golf Centers, Inc. Delaware
42. Raleigh Family Golf Centers, Inc. Delaware
43. Tempe Family Golf Centers, Inc. Delaware
44.
45. Bronx Family Golf Centers, Inc. Delaware
46. Milpitas Family Golf Centers, Inc. Delaware
47. San Bruno Family Golf Centers, Inc. Delaware
48. Interbay Family Golf Centers, Inc. Delaware
49. Carver Family Golf Centers, Inc. Delaware
50. Palm Family Golf Centers, Inc. Delaware
51. Cerritos Family Golf Centers, Inc. Delaware
52. Philadelphia Family Golf Centers, Inc. Delaware
53. Encino/Balboa Family Golf Centers, Inc. Delaware
54. Brooklyn Family Golf Centers, Inc. Delaware
<PAGE>
55. Lake Grove Family Golf Centers, Inc. New York
56. Golden Spikes, Inc. Delaware
57. Whitehall Family Golf Centers, Inc. Delaware
58. Sports Plus Properties, Inc.(2) New York
59. Sports Plus Properties, LLC(2) New York
60. Genprop, LLC(2) New York
61. Iceworks of America, Inc. Delaware
62. Commack Family Golf Centers, Inc. Delaware
63. Greenville Family Golf Centers, Inc. Delaware
64.
65. Chicago Family Golf Centers, Inc. Delaware
66. Federal Way Family Golf Centers, Inc. Delaware
67. County Line Family Golf Centers, Inc. Delaware
68. Fairfield Family Golf Centers, Inc Delaware
69. Confidence Golf, Inc. California
70. Kansas Family Golf Centers, Inc. Delaware
71. Elk Grove Family Golf Centers, Inc. Delaware
72. Sports Plus Cincinnati, Inc. Delaware
73. Wichita Family Golf Centers, Inc. Delaware
74. Stuart Family Golf Centers, Inc. Delaware
75. Holbrook Family Golf Centers, Inc. Delaware
76. Sports Plus Raleigh, Inc. Delaware
77. Shelton Family Golf Centers, Inc. Delaware
78. Sports Plus Woodbridge, Inc. Delaware
79. Sports Plus New Rochelle, Inc. Delaware
80. MetroGolf Incorporated Colorado
81. MetroGolf San Diego, Inc. Colorado
82. MetroGolf Virginia, Inc. Colorado
83. MetroGolf Illinois Center, Inc. Colorado
84. MetroGolf New York, Inc. Colorado
<PAGE>
85. MetroGolf Management, Inc. Colorado
86. Family Golf Acquisition, Inc. Delaware
87. Carlsbad Family Golf Centers, Inc. Delaware
88. Family Golf Vending, Inc. Delaware
89. Evergreen Family Golf Centers, Inc. Delaware
90. Evergreen Golf Course, L.L.C. Colorado
91. Overland Family Golf Centers, Inc. Delaware
92. Overland Park, L.L.C. Colorado
93. Green Valley Family Golf Centers, Inc. Delaware
94. Green Valley Ranch Golf Course, L.L.C. Colorado
95. Pardoc Vending Corp. New York
96. Eagle Quest Golf Centers, Inc. British Columbia
97. Fiddler's Green Golf Centers, Inc. British Columbia
98. Musqueam Golf Centers, Inc. British Columbia
99. Eagle Quest Golf Centers (Alberta II), Inc. Alberta
100. Eagle Quest Golf (Coquitlam), Inc. British Columbia
101. Tee to Green Golf Range (1993), Inc. British Columbia
102. Musqueam Recreations, Ltd. British Columbia
103. Eagle Quest Golf Centers (Alberta), Inc. Alberta
104. EagleQuest Golf (Ontario), Inc. Ontario
105. Eagle Quest Golf Centers (Texas), Inc. Texas
106. Eagle Quest Golf Centers (Texas II), Inc. Texas
107. Precision Courses, Inc. Texas
<PAGE>
108. Eagle Quest Golf Centers (California), Inc. California
109. IMG Properties, Inc. Michigan
110. Eagle Quest Golf Centers (H.P.), Inc. Texas
111. Eagle Quest Golf Centers Entertainment, Inc. Texas
112. Eagle Quest Golf Centers (Washington), Inc. Washington
113. Eagle Quest Golf Centers (U.S.), Inc. Delaware
114. Golf Park, Inc. Washington
115. Solano Golf Center, L.P. California
116. Goose Creek Golf Partners, L.P. Virginia
117. Illinois Center Golf Partners, L.P. Illinois
118. Vintage New York, L.L.C. New York
119. GBGC Family Golf Centers, Inc. Florida
120. Sacramento Family Golf Centers, Delaware
Inc.
121. Voorhees Family Golf Centers, Inc. Delaware
122. Portland Family Golf Centers, Inc. Delaware
123. Kansas City Family Golf Centers, Delaware
Inc.
124. Blue Eagle of Kansas, Inc. Kansas
125. Blue Eagle of Florida, Inc. Florida
126. Blue Eagle (OP), Inc. Kansas
127. Pinnacle Entertainment, Inc. Missouri
128. SkateNation Inc. Delaware
129. International Skating Center of Connecticut, L.L.C. Delaware
130. SkateNation of Piney Orchard, L.L.C Delaware
131. SkateNation of Prince William, L.L.C Virginia
132. SkateNation of Reston, L.L.C. Delaware
133. SkateNation of Richmond South, L.L.C Delaware
134. SkateNation of Richmond West, LLC Delaware
<PAGE>
135. Recreational Management Services Corporation Pennsylvania
136. Recreational Management Services of New Jersey, Inc. New Jersey
137. Recreational Management Services Corporation New Jersey
138. 82nd Avenue Golf Range, Inc. Oregon
139. RMSC of California, Inc. California
140. El Cajon Family Golf Centers, Inc. Delaware
141. Lodi Family Golf Centers, Inc. Delaware
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference into the Registration Statements on
Form S-8 (nos. 333-17275 and 33-38192) and on Form S-3 (Nos. 333-15753,
333-2716, 333-40693, 333-44165, 333-64363 and 333-53503) of Family Golf Centers,
Inc. (the "Company") of our report dated April 6, 2000, with respect to Note L,
April 14, 2000, relating to our audit of the consolidated financial statements
of the Company appearing in the 1999 Annual Report on Form 10-K of the Company.
Such report contains an explanatory paragraph indicating that substantial doubt
exists about the Company's ability to continue as a going concern.
/s/ RICHARD A. EISNER & COMPANY, LLP
RICHARD A. EISNER & COMPANY, LLP
New York, New York
April 13, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains Summary Financial Information extracted from the
Consolidated Balance Sheet and the Consolidated Statement of Income for the year
ended December 31, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,541,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 10,755,000
<CURRENT-ASSETS> 28,934,000
<PP&E> 381,066,000
<DEPRECIATION> 22,474,000
<TOTAL-ASSETS> 491,386,000
<CURRENT-LIABILITIES> 325,885,000
<BONDS> 0
0
0
<COMMON> 260,000
<OTHER-SE> 152,323,000
<TOTAL-LIABILITY-AND-EQUITY> 491,386,000
<SALES> 154,869,000
<TOTAL-REVENUES> 154,869,000
<CGS> 33,559,000
<TOTAL-COSTS> 214,396,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,007,000
<INCOME-PRETAX> (114,406,000)
<INCOME-TAX> (16,468,000)
<INCOME-CONTINUING> (97,938,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (42,461,000)
<CHANGES> 0
<NET-INCOME> (140,399,000)
<EPS-BASIC> (5.38)
<EPS-DILUTED> (5.38)
</TABLE>
