ITEM 1. BUSINESS
a) General Development of Business
National Golf Properties, Inc. (the "Company") was incorporated under the General Corporation Law of Delaware in April 1993 and commenced operations effective with the completion of its initial public stock offering (the "Offering") of 9,716,000 shares of common stock, par value $.01 per share (the "Common Stock"), on August 18, 1993. On August 31, 1995, the Company was reincorporated as a Maryland corporation, which was also named National Golf Properties, Inc., pursuant to a merger of the Company into a wholly-owned Maryland subsidiary and the conversion of each outstanding share of Common Stock of the Company into one share of Common Stock of the surviving corporation. The Company qualifies as a Real Estate Investment Trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code").
The Company became the general partner in National Golf Operating Partnership, L.P. (the "Operating Partnership") when the Operating Partnership was formed as a Delaware limited partnership in June 1993. On July 8, 1994, the Operating Partnership acquired an 89% general partner interest in Royal Golf, L.P. II ("Royal Golf"). Royal Golf owns four golf courses on Hilton Head Island, South Carolina. Unless the context otherwise requires, all references to the Company's business and properties include the business and properties of the Operating Partnership and Royal Golf.
The Company is the sole general partner in the Operating Partnership with a 58.3% interest therein. David G. Price, the Chairman of the Board of Directors of the Company, and entities controlled by him and approximately seven other individuals and personal trusts are the only limited partners of the Operating Partnership (the "OP Limited Partners").
In 1996, the Company purchased 35 golf courses for an aggregate initial investment of approximately $155 million (including the $60 million purchase of 20 golf courses from Golf Enterprises, Inc. and the $31.6 million purchase of four golf courses upon which the Company previously held participating mortgages), which investment was financed by $27.4 million of cash from operations; $57.6 million of advances under the Company's credit facility; $2.5 million of the $40 million first note series issued in July 1996; the issuance of $1.5 million (61,339) of units of limited partnership interest in the Operating Partnership (the "OP Units"); the assumption of approximately $25.2 million of debt; and the issuance of $40.8 million (1,577,820 shares) of Common Stock. Subsequent to December 31, 1996, the Company purchased two golf courses for an aggregate initial investment of approximately $14.7 million.
The following diagram depicts the beneficial ownership of the Company, the Operating Partnership and Royal Golf as of February 18, 1997:
[CHART OF NATIONAL GOLF PROPERTIES AND ITS SUBSIDIARIES APPEARS HERE]
b) Narrative Description of Business
The Company is a self-administered REIT specializing in the acquisition and ownership of golf course properties. As of February 18, 1997, the Company's portfolio consisted of the ownership of 116 golf courses (the "Golf Courses") in 106 separate locations in 27 states.
The Golf Courses include facilities such as clubhouses with restaurants, banquet space, locker rooms and retail pro shops, driving ranges, pools and tennis courts. Services provided at such properties include golf cart rentals, golf and tennis lessons, banquets and tournaments. In order to maintain qualification as a REIT, the Company's income must be derived from certain sources, including rents from real property (and generally excluding income from the operation of a golf course). Accordingly, the Company is generally precluded from operating golf courses and, as a consequence, leases the Golf Courses to experienced and creditworthy golf course operators.
BUSINESS OBJECTIVES AND OPERATING STRATEGIES
The Company's primary business objective is to maximize stockholder return through the aggressive acquisition of quality golf courses and the subsequent lease of such properties to experienced and creditworthy operators. The Company focuses on the ownership and acquisition of golf course properties that have strong cash flow growth potential and expects to hold such properties for long-term investment and capital appreciation. The Company's business and operating strategies include:
.Increasing income and portfolio value by continuing the strategic expansion of its golf course portfolio through the selective acquisition of golf course properties in urban areas or resort locations that demonstrate potential for significant revenue and cash flow increases. For the period August 18, 1993 to December 31, 1996, the Company purchased 70 Golf Courses for an aggregate initial investment of approximately $356.9 million. For the period January 1, 1997 to February 18, 1997, the Company purchased two Golf Courses for approximately $14.7 million.
.Working with golf course operators on strategies to improve and enhance golf course holdings through proper maintenance and capital improvements.
.Selecting the best golf course operators for specific locations and course types and structuring favorable leases with those operators under which the operators pay minimum base rent and percentage rent based on revenues and pay substantially all expenses in connection with the operation of the property such as real estate taxes, insurance, utilities and services, maintenance and other operating expenses.
.Investing in participating mortgages or other appropriate equity-linked financing vehicles in circumstances where the acquisition of ownership is not otherwise possible.
.Monitoring on an ongoing basis the operating performance of the Golf Courses, compliance by its operators with their lease obligations and other market factors that could affect the financial performance of its courses.
.Maintaining a ratio of debt-to-total market capitalization (i.e., total debt of the Company as a percentage of the market value of issued and outstanding shares of Common Stock and interests in the Operating Partnership that are exchangeable for shares of Common Stock plus total debt) of 50% or less. At December 31, 1996, the Company's total debt constituted approximately 26% of its total market capitalization.
SEASONALITY
Although the results of operations of the Company and its predecessors have not been significantly impacted by seasonality, the Company generally expects that its results of operations may be adversely affected as a function of reduced payments of percentage rent in the first and fourth quarters of each year due to adverse weather conditions and the scheduled closure of the Golf Courses located in harsh winter climates.
TENANT AND LEASES
All but five of the Golf Courses in the Company's portfolio are currently leased to American Golf Corporation ("AGC") pursuant to long-term triple net leases (the "Leases"). AGC is one of the largest and
most experienced operators of golf courses and related facilities in the world and currently manages 241 golf courses and related facilities in 30 states. In addition, AGC, through its subsidiary American Golf (U.K.) Limited, manages ten golf courses and related facilities in the United Kingdom. AGC operates a diverse portfolio of golf courses for a variety of golf course owners including municipalities, counties and others. AGC was founded in 1973 by David G. Price, its Chairman and principal shareholder. Including the Golf Courses, AGC manages 150 daily fee golf courses, 64 private club courses, 30 resort courses and 7 golf practice centers. AGC oversees the management and operations of championship golf courses throughout the United States and manages municipal golf courses for such cities as Atlanta, New York and San Diego and for the County of Los Angeles.
AGC does not own any golf courses, but rather manages and operates golf courses either as a lessee under leases, generally triple net, or pursuant to management agreements. AGC derives revenues from the operation of golf courses principally through the receipt of green fees, membership initiation fees, membership dues, golf cart rentals, driving range charges and sales of food, beverages and merchandise.
Each Lease is for an initial term, depending upon the Golf Course, ranging between 15 and 20 years. The Leases are triple net leases which require AGC to pay substantially all expenses associated with the operation of the Golf Courses, such as real estate taxes, insurance, utilities and services, maintenance and other operating expenses. In addition, AGC has options to extend the term of each Lease for one to three five-year terms. Each Lease permits AGC to operate the leased property as a golf course, along with a clubhouse and other activities customarily associated with or incidental to the operation of a golf course.
The minimum base rent for the first year for each Golf Course under the Leases is initially set at a fixed amount. Thereafter, with respect to the Leases for the initial portfolio of 45 golf courses at the time of the Offering (the "Initial Golf Courses"), minimum base rent is increased each year by 4% or, if lower, 150% of the annual percentage increase in the Consumer Price Index ("CPI") (the "Base Rent Escalation"). In addition, percentage rent is paid each year in the amount, if any, by which the sum of 35% of Course Revenue in excess of a baseline amount and 5% of Other Revenue in excess of a baseline amount exceeds the cumulative Base Rent Escalation since the commencement date of such Leases. Course Revenue is generally defined in the Leases to include all revenue received from the operation of the applicable Golf Course, including revenues from memberships, initiation fees, dues, green fees, guest fees, driving range charges and golf cart rentals, but excluding those revenues described as Other Revenue. Other Revenue is generally defined in the Leases to include all revenue received from food and beverage and merchandise sales and other revenue not directly related to golf activities. Generally, the baseline amounts for the Initial Golf Courses were established based on revenues for each of such Golf Courses for the twelve months ended February 28, 1993. Payment of percentage rent based upon the revenues of the Golf Courses will enable the Company to participate in growth in revenues at the Golf Courses.
Generally, for the Leases entered into subsequent to the Offering, the rent is based upon the greater of (a) the minimum base rent or (b) a specified percentage of Course Revenue and Other Revenue. The minimum base rent under these Leases is increased for specified years during the Lease term based upon increases in the CPI, provided that each such annual CPI increase shall not exceed five percent.
Pursuant to the Leases for the Initial Golf Courses, AGC is required to post and maintain an irrevocable letter of credit in an amount equal to six monthly installments of annual minimum rent (approximately $13.6 million) to collateralize its obligations under such Leases. AGC's obligation to post and maintain such letter of credit will be suspended, subject to reinstatement, at such time as AGC achieves: (i) a Fixed Charge Coverage Ratio, as defined, of not less than 1.5 to 1.0 for two consecutive fiscal quarters and (ii) a minimum Tangible Net Worth, as defined, of at least $30,000,000 or, following a change in control, $30,000,000 increased by 4% per annum compounded annually from the commencement date of the Leases to the date of a change in control of AGC.
The obligations of AGC under each Lease are cross-defaulted to each of the other Leases with respect to monetary defaults and all other defaults except those not within the reasonable control of AGC. The Company has general recourse to AGC under the Leases, but such Leases are not collateralized by any assets of AGC. The stockholders of the Company have no recourse to AGC under the Leases.
The Independent Committee, comprised of all four independent Directors of the Company, oversees the selection of operators and approves transactions between the Company and David G. Price and his affiliates.
The Company continues to explore the use of experienced and creditworthy operators other than AGC for certain of its new acquisitions. Such operators must have a history of successful operation and meet appropriate financial standards for creditworthiness. In addition to AGC, the Company has four leases (with respect to five Golf Courses) with three other operators: Cobblestone Golf Group, Inc. ("CGG"); The Links Group, Inc. ("TLG"); and Evergreen Alliance Golf Limited ("EAGL"). Unless the context otherwise requires, all references to the Leases include the leases with CGG, TLG and EAGL.
CGG operates Carmel Mountain Ranch Country Club in San Diego, California, and Sweetwater Country Club (two courses) near Houston, Texas. CGG is a golf course acquisition and operating company with 22 properties under ownership or management primarily in the southwestern United States.
TLG operates Colonial Charters Golf Course near Myrtle Beach, South Carolina. TLG is a golf course operating company that operates 11 golf courses in the southeastern United States.
EAGL operates San Geronimo Golf Course near San Francisco, California. EAGL is a golf course acquisition and operating company with 25 properties under ownership or management in nine states.
COMPETITIVE CONDITIONS
The Golf Courses are, and any additional golf courses and related facilities acquired by the Company will be, subject to competition for players and members from other golf courses located in the same geographic areas, including golf courses owned by municipalities or third parties that are operated by the lessees. The number and quality of golf courses in a particular area could have a material effect on the revenues of the Golf Courses. In addition, revenues of the Golf Courses will be affected by a number of factors including the demand for golf and the availability of other forms of recreation.
According to the National Golf Foundation, an independent industry organization, the number of golfers in the United States has remained stable at approximately 25 million for the last several years. In addition, favorable demographic trends offer encouraging growth prospects for the golf course industry. The National Golf Foundation reports that the annual average rounds played per golfer increases significantly as golfers age. Golfers in their fifties generally play twice as many rounds annually as golfers in their thirties. Golfers age 65 and older generally play three times as many rounds annually as golfers in their thirties. Currently, approximately 75% of all golfers are less than 50 years old and approximately 45% of all golfers are between the ages of 30 and 49. Accordingly, the Company expects an increase in the demand for golf as this segment of the golfing population reaches its prime golfing age over the next 20 years. In addition, the children of the baby boom generation are entering their twenties and thirties, an age range in which they are most likely to begin playing golf.
The Company is also subject to competition for the acquisition of golf courses and related facilities with other purchasers of golf course properties, including other golf course acquisition companies. According to the National Golf Foundation, there are approximately 15,700 golf courses in the United States. Of this total, approximately 3,500 satisfy the Company's investment criteria. Ownership of these courses is extremely fragmented. The Company believes that the nation's 15 largest golf course owners and operators collectively own or lease less than five percent of the courses in the United States. This fragmented ownership provides an excellent opportunity for aggressive acquisition of quality golf course properties.
In certain markets, construction of new golf courses has increased in the last several years. Although such construction activity may add excess capacity to some local markets, the Company's experience indicates that well- managed and properly located facilities should continue to generate stable revenue growth. The Company's courses are generally located in communities with populations sufficient to absorb additional course development or in areas with significant barriers to new course construction (i.e., limited supply of suitable land, governmental restrictions, etc.). Consequently, new course development has not adversely affected the Company's portfolio. In addition, the Company expects that new course development will provide numerous acquisition opportunities. Moreover, the new courses offer improved access for golfers, particularly beginners, women and juniors, which should ultimately increase the pool of golf customers.
EMPLOYEES
As of February 18, 1997, the Company and the Operating Partnership had 14 full-time employees including two regional vice presidents who are dedicated on a full-time basis to the identification of golf courses to be acquired or financed.
Certain employees are employed and compensated by both the Operating Partnership and the Company. The Company believes that the allocation of such persons' compensation as between the Company and the Operating Partnership reflects the services provided by such persons with respect to each entity. The remainder of the employees are employed solely by the Operating Partnership. Royal Golf has no employees.
The Company and the Operating Partnership have entered into a services agreement pursuant to which the Operating Partnership provides the Company with administrative, accounting and other services relating to the operations and administration of the Company at a rate equal to the cost (including allocable overhead) to the Operating Partnership of providing such services plus 15% of such costs.
GOVERNMENT REGULATION
Environmental Matters. Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. The presence of such substances, or the failure to remediate such substances properly when released, may adversely affect the owner's ability to sell such real estate or to borrow using such real estate as collateral. The Company has not been notified by any governmental authority of any material non-compliance, liability or other claim in connection with any of the Golf Courses. The Company is not aware of any other environmental condition with respect to any of the Golf Courses that is likely to be material to the Company. All of the Golf Courses have been subjected to a preliminary environmental investigation. Such investigation generally involves an examination of public records for ownership, use and current permitting status, site visits, visual inspections for indications of contamination or potential contamination and interviews with the on-site managers. Such investigation generally does not involve invasive procedures, such as soil sampling or ground water analysis. No assurance can be given that such investigation would reveal all potential environmental liabilities, that no prior owner or adjacent landowner created any material environmental condition not known to the Company or that future uses or conditions (including, without limitation, changes in applicable environmental laws and regulations) will not result in imposition of environmental liability. The Leases provide that the lessees will indemnify the Company for certain potential environmental liabilities at the Golf Courses.
Americans with Disabilities Act. The Golf Courses are subject to the Americans with Disabilities Act of 1990 (the "ADA"). The ADA has separate compliance requirements for "public accommodations" and "commercial facilities" but generally requires that public facilities such as clubhouses and recreation areas be made accessible to people with disabilities. These requirements became effective in 1992. Compliance with the ADA requirements could require removal of access barriers and other capital improvements at the Golf Courses. Noncompliance could result in imposition of fines or an award of damages to private litigants. Under the Leases,
the lessees are required to make any necessary modifications or improvements to comply with the ADA. The lessees and the Company have undertaken, where necessary, a capital improvement program to cause the public facilities at the Golf Courses to comply with the ADA. The expenditures for the modifications and improvements have not been material.
ITEM 2.
ITEM 2. PROPERTIES
As of February 18, 1997, the Golf Courses consisted of 116 golf courses that are geographically diversified and located in 27 states, with 20 Golf Courses in California, 18 in Texas, 13 in Arizona, six in South Carolina, five in each of Florida, Ohio and Pennsylvania, four in each of Colorado and Kansas, three in each of Georgia, Illinois, Nevada, Virginia and Washington, two in each of Louisiana, Maryland, Missouri, New Jersey, New Mexico, North Carolina, Oklahoma and Oregon and one in each of Idaho, Indiana, Minnesota, Nebraska and Tennessee. The distribution of the Golf Courses reflects the Company's belief that geographic diversification helps insulate the portfolio from regional economic and climatic influences. Substantially all of the Golf Courses are located in Standard Metropolitan Statistical Areas with populations in excess of 250,000 people.
Of the 116 Golf Courses, 53 are daily fee courses, 43 are private club courses and 20 are resort courses. All of the Golf Courses are owned 100% in fee by either the Company, the Operating Partnership or Royal Golf except for the three Golf Courses at Bear Creek Golf World, which are leased by the Company under a ground lease expiring in 2022, and Mesquite Golf & Country Club, of which approximately 14 acres are under various ground leases expiring between 2041 and 2043.
Daily Fee Courses. Daily fee courses are open to the public and related amenities generally include practice facilities, small clubhouses with pro shops offering limited merchandise and a moderate food and beverage operation. Daily fee courses generate revenues principally through green fees, golf cart rentals and food, beverage and merchandise sales. The average golf revenue per round at the Company's daily fee courses in 1996 was $25.42, a 7.8% increase from $23.58 in 1995. Daily fee courses generated $24.2 million of rent revenues to the Company in 1996 compared to $19.8 million in 1995.
Private Club Courses. Private club courses are generally closed to the public and related amenities typically include practice facilities, large clubhouses with pro shops offering extensive merchandise, locker room facilities and multiple food and beverage outlets, including grills, restaurants and banquet facilities. Private club courses generate revenues principally through initiation fees, membership dues, and food, beverage and merchandise sales. As of December 31, 1996, the Company's private club courses had more than 30,000 members. Private club courses generated $19.8 million of rent revenues to the Company in 1996 compared to $12.7 million in 1995.
Resort Courses. Resort courses are generally higher-quality daily fee courses that draw a high percentage of players from outside the immediate area in which the course is located. The average golf revenue per round at the Company's resort courses was $42.38 in 1996, a 3.7% increase from $40.87 in 1995. Resort courses generated $14.9 million of rent revenues to the Company in 1996 compared to $13.5 million in 1995.
The following table sets forth certain information regarding the Golf Courses as of February 18, 1997. As of that date, the Company owned 116 Golf Courses in 27 states. The number of locations (106) differs from the number of Golf Courses because in some cases there is more than one Golf Course at a specific location. The number of courses at each location is indicated for locations with more than one course.
THE GOLF COURSES--DAILY FEE COURSES
- -------- * Sold in 1996
** Acquired in 1997
THE GOLF COURSES--PRIVATE CLUB COURSES
THE GOLF COURSES--RESORT COURSES
- -------- * Sold in 1996 ** Acquired in 1997
CAPITAL IMPROVEMENTS
Under the Leases, the lessees are required to maintain each Golf Course in good order, repair and appearance. For the Golf Courses acquired through February 18, 1997, the Company is required under the applicable Leases to pay for various remaining capital improvements totaling approximately $21.3 million, of which approximately $20.6 million will be paid during the next two years. Upon completion of such capital improvements, the base rent payable under the Leases with respect to these Golf Courses will be adjusted to reflect, over the initial term of the Leases, the Company's investment in such improvements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Owners and operators of golf courses are subject to a variety of legal proceedings arising in the ordinary course of operating a golf course, including proceedings relating to personal injury and property damage. Such proceedings are generally brought against the operator of a golf course, but may also be brought against the owner. Although neither the Company nor the predecessor owners of the Golf Courses are currently parties to any legal proceedings relating to the Golf Courses, it is possible that in the future the Company could become a party to such proceedings. The lessees are a party to certain litigation relating to the Golf Courses arising in the ordinary course of operations. The lessees have advised the Company that they do not believe that such litigation, if resolved against the lessees, would have a material adverse effect upon their business or financial position. The Leases provide that the lessees are responsible for claims based on personal injury and property damage at the Golf Courses and require the lessees to maintain insurance for such purposes.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a) Market Information
The following table sets forth for periods shown the high and low sales price for the Company's Common Stock on the New York Stock Exchange and distributions declared.
b) Holders
The number of record holders of the Company's Common Stock was 700 as of February 18, 1997. The number of street name stockholders is estimated at 15,500.
c) Distributions
The Company paid distributions to stockholders of $1.65 per share in 1996, of which $1.45 represents ordinary income and $0.20 represents return of capital on a tax basis. On a book basis, $0.48 per share represents return of capital. In 1995, the Company paid distributions to stockholders of $1.59 per share, of which $1.34 represents ordinary income and $0.25 represents return of capital on a tax basis. On a book basis, $0.34 per share represents return of capital. In order to maintain its qualification in 1996 and 1995 as a REIT for federal income tax purposes, the Company was required to make distributions to its stockholders of at least $1.25 and $1.18 per share, respectively. In addition, on January 14, 1997, the Company declared a quarterly distribution for the fourth quarter of 1996 of $0.42 per share to stockholders of record on January 31, 1997, which was paid on February 17, 1997.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data included in this table by the Company is derived from the Company's consolidated financial statements and the Company's predecessors' (Golf Properties Group ("GPG")) combined financial statements for those years, which have been audited by Coopers & Lybrand L.L.P. Historical operating results of GPG may not be comparable to future operating results of the Company because: (i) the Leases with AGC have materially different terms from the terms of the leases with GPG; (ii) historical operating revenues and operating expenses include revenues and expenses relating to five courses that were operated by AGC pursuant to management agreements (under which GPG received revenues and bore expenses and paid the operator a fee) rather than leases; and (iii) management fee expense reflects consulting services provided by AGC to GPG, which were not continued following the Offering.
- -------- (1) The Company believes that to facilitate a clear understanding of the historical consolidated and combined operating results, funds from operations should be examined in conjunction with net income. Funds from operations is considered by management as an appropriate measure of the performance of an equity REIT because it is predicated on cash flow analyses, which management believes is more reflective of the value of real estate companies such as the Company rather than a measure predicated on generally accepted accounting principles which gives effect to non-cash expenditures such as depreciation. Funds from operations is generally defined as net income (loss) plus certain non-cash items, primarily depreciation and amortization. Funds from operations should not be considered as an alternative to net income as an indication of the Company's performance or as an alternative to cash flow, as defined by generally accepted accounting principles, as a measure of liquidity. The National Association of Real Estate Investment Trusts, Inc. ("NAREIT") adopted revisions to the definition of funds from operations as set forth in the NAREIT "White Paper on Funds From Operations" dated March 1995. The Company has adopted the new definition of funds from operations and intends to present both the old and new definitions of funds from operations to assist in comparisons with prior periods of the Company. The funds from operations presented may not be comparable to funds from operations for other REITs. The following table summarizes the Company's funds from operations, based on the old and new definitions, for the years ended December 31, 1996, 1995 and 1994, and the period August 18, 1993 through December 31, 1993, and GPG's funds from operations for the period January 1, 1993 through August 17, 1993 and the year ended December 31, 1992.
In order to maintain its qualification as a REIT for federal income purposes, the Company is required to make distributions to its stockholders. The Company's distributions to stockholders have been less than the total funds from operations because the Company is obligated to make certain payments with respect to principal debt and capital improvements. Management believes that to continue the Company's growth, funds from operations in excess of distributions, principal reductions and capital improvement expenditures should be invested in assets expected to generate returns on investment to the Company commensurate with the Company's investment objectives and policies.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto. The forward-looking statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") relating to certain matters involve risks and uncertainties, including anticipated financial performance, business prospects, anticipated capital expenditures and other similar matters, which reflect management's best judgement based on factors currently known. Actual results and experience could differ materially from the anticipated results or other expectations expressed in the Company's forward- looking statements as a result of a number of factors, including but not limited to those discussed in MD&A.
The discussion of the results of operations compares the year ended December 31, 1996 with the year ended December 31, 1995 and the year ended December 31, 1995 with the year ended December 31, 1994.
RESULTS OF OPERATIONS
Comparison of year ended December 31, 1996 to year ended December 31, 1995
Net income increased by $126,000 to $13,412,000 for the year ended December 31, 1996 compared to $13,286,000 for the year ended December 31, 1995. The increase was primarily attributable to (i) an increase in rent revenues of approximately $12,967,000; (ii) an increase in general and administrative expenses of approximately $476,000; (iii) an increase in depreciation and amortization expense of approximately $5,097,000; (iv) a decrease in interest income from affiliates of approximately $1,201,000; (v) a decrease in interest income of approximately $833,000; and (vi) an increase in interest expense of approximately $5,274,000.
The increase in rent revenues is due to (i) the acquisition of 35 golf course properties during 1996, which accounted for approximately $7,248,000 of the increase; (ii) a full year of rent in 1996 on 11 golf course properties acquired in 1995, which accounted for approximately $4,854,000 of the increase; (iii) an increase in base rent of approximately $625,000; and (iv) an increase in percentage rent of approximately $240,000. The increase in general and administrative expenses in 1996 was primarily due to (i) implementation of an investor relations program; (ii) payments made to former employees; and (iii) relocation of the Company's corporate office. The increase in depreciation and amortization expense is due to an increase in depreciation expense of approximately $5,403,000, which was offset by a decrease in amortization expense of approximately $306,000. The increase in depreciation expense is primarily due to (i) the acquisition of 35 golf course properties during 1996, which accounted for approximately $3,237,000 of the increase and (ii) a full year of depreciation expense in 1996 on 11 golf course properties acquired in 1995, which accounted for approximately $2,266,000 of the increase. The decrease in amortization expense is primarily due to certain covenants and loan costs becoming fully amortized.
The decrease in interest income from affiliates is due to the retirement of the participating mortgage loans. The decrease in interest income is due to less available cash during the year because the Company purchased 35 golf courses for an aggregate initial investment of approximately $155 million. The increase in interest expense was primarily attributable to (i) the $50 million fixed-rate, unsecured notes issued by the Operating Partnership in June 1995; (ii) the $75 million fixed-rate, unsecured notes issued by the Operating Partnership in 1996 ($40 million in July and $35 million in December); and (iii) the increase in outstanding advances under the $40 million credit facility.
Comparison of year ended December 31, 1995 to year ended December 31, 1994
Net income increased by $1,410,000 to $13,286,000 for the year ended December 31, 1995 compared to $11,876,000 for the year ended December 31, 1994. The increase was primarily attributable to (i) an increase in rent revenues of approximately $9,294,000; (ii) a decrease in general and administrative expenses of approximately $451,000; (iii) an increase in depreciation and amortization expense of approximately $3,614,000; (iv) an increase in interest income of approximately $560,000; (v) an increase in interest expense of
approximately $6,581,000; (vi) a gain on sale of property of approximately $1,893,000; and (vii) an increase in income applicable to minority interest of approximately $654,000.
The increase in rent revenues is due to (i) the acquisition of 11 golf course properties during 1995; (ii) a full year of rent in 1995 on 20 golf course properties acquired in 1994; and (iii) an increase in percentage rent of approximately $1,074,000. The decrease in general and administrative expenses in 1995 was due to the Company's continued efforts to reduce expenses. The increase in depreciation and amortization expense is due to (i) the acquisition of 11 golf course properties during 1995 and (ii) a full year of depreciation expense in 1995 on 20 golf course properties acquired in 1994.
The increase in interest income is due to (i) interest earned on the proceeds from the Operating Partnership's sale of $100 million of fixed-rate, unsecured notes due 2004 and 2005 before the proceeds from such sale were invested in golf course properties and (ii) interest income earned on a $2.2 million mortgage loan made by the Operating Partnership. The notes issued by the Operating Partnership were issued in two series of $50 million. The first note series was issued with a fixed interest rate of 8.68%, and the second note series was issued with a fixed interest rate of 8.73%. With respect to the $50 million first note series, the Operating Partnership received $30 million in December 1994 and $20 million in January 1995. With respect to the $50 million second note series, the Operating Partnership received $50 million in June 1995. On March 13, 1995, the Company sold Hidden Hills Country Club for approximately $3.2 million. The Company provided seller financing in the form of a mortgage loan in the amount of $2.2 million at an initial interest rate of 11% per annum. The increase in interest expense is primarily due to the $100 million notes issued. The gain on the sale of property is due to the sale of Hidden Hills Country Club.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had approximately $11.5 million in cash and investments, mortgage loans of approximately $3 million, mortgage indebtedness of approximately $25.4 million and unsecured indebtedness of approximately $204.6 million. The $230 million principal amount of mortgage and unsecured indebtedness bears interest at a weighted average rate of 8.10%, is payable either monthly, quarterly or semi-annually and matures between 1997 and 2008. Of the $230 million of debt, $205.1 million is fixed-rate debt.
In order to maintain its qualification as a REIT for federal income tax purposes, the Company is required to make substantial distributions to its stockholders. The following factors, among others, will affect cash flow from operations and will influence the decisions of the Board of Directors regarding distributions: (i) reduction in debt service resulting from the repayment of certain mortgage indebtedness relating to the Golf Courses; (ii) scheduled increases in base rent under the Leases with respect to the Golf Courses; (iii) any payment to the Company of percentage rent under the Leases with respect to the Golf Courses; and (iv) returns from short-term investments. Although the Company receives most of its rental payments on a monthly basis, it has and intends to continue to pay distributions quarterly. Amounts accumulated for distribution will be invested by the Company in short- term money market instruments and marketable securities.
The Company anticipates that its cash from operations and its bank line of credit, described below, will provide adequate liquidity to conduct its operations, fund administrative and operating costs, interest payments, capital improvements and acquisitions and allow distributions to the Company's stockholders in accordance with the Code's requirements for qualification as a REIT and to avoid any corporate level federal income or excise tax. Capital improvements for which the Company is responsible would be limited to mandated projects or initial capital improvement projects intended to add value to the property and reposition the facility for enhanced revenue growth. For the Golf Courses acquired through February 18, 1997, the Company is required under the Leases to pay for various remaining capital improvements totaling approximately $21.3 million, of which approximately $20.6 million will be paid during the next two years. The Company believes these improvements will add value to the Golf Courses and bring the quality of the Golf Courses up to the Company's expected standards in order to enhance revenue growth. Any subsequent capital improvements are the responsibility of the lessees. Upon completion of the capital improvements, the base rent payable under the Leases with respect to these Golf Courses will be adjusted to reflect, over the initial term of the Leases, the Company's investment in such improvements.
Future acquisitions will be made subject to the Company's investment objectives and policies established to maximize both current income and long- term growth in income. The Company's liquidity requirements with respect to future acquisitions may be reduced to the extent the Company uses common stock or OP Units as consideration for such purchases. In 1996, the Operating Partnership placed $75 million of fixed-rate, unsecured notes due 2006 with a group of institutional investors. The notes were issued in two series. The first note series in the amount of $40 million was issued in July 1996 with a fixed interest rate of 7.9%, and the second note series in the amount of $35 million was issued in December 1996 with a fixed interest rate of 8%. The Operating Partnership applied the net proceeds from the $75 million notes to repay bank debt of $72.5 million and to partially finance the acquisition of Sweetwater Country Club. The Company currently has a $40 million credit facility from a commercial bank, which terminates on April 1, 1997, bearing interest at a floating rate (which was 8.25% at February 18, 1997), that may be used to finance working capital, acquisitions and capital improvements. There were outstanding advances of $26.7 million and $24.9 million under this credit facility as of February 18, 1997 and December 31, 1996, respectively. To replace the expiring credit facility, the Company has obtained a commitment from a group of commercial banks for a $75 million credit facility (the "New Credit Facility"). It is expected that borrowings under the New Credit Facility would bear maximum interest at a floating rate equal to LIBOR plus a spread of 1.125%. The spread will be reduced based upon the Company improving certain Company ratios. Consummation of the New Credit Facility arrangement is subject to completion of the lenders' due diligence and completion of documentation satisfactory to the Company and such lenders.
In 1996, the Company purchased 35 golf courses for an aggregate initial investment of approximately $155 million (including the $60 million purchase of 20 golf courses from Golf Enterprises, Inc. and the $31.6 million purchase of four golf courses upon which the Company previously held participating mortgages), which investment was financed by $27.4 million of cash from operations; $57.6 million of advances under the Company's credit facility; $2.5 million of the $40 million first note series issued in July 1996; the issuance of $1.5 million (61,339) of OP Units; the assumption of approximately $25.2 million of debt; and the issuance of $40.8 million (1,577,820 shares) of Common Stock.
OP Limited Partners have the right, exercisable once in any twelve-month period, to sell up to one-third of their OP Units or exchange up to the greater of 75,000 OP Units or one-third of their OP Units to the Company. If the OP Units are sold for cash, the Company will have the option to pay for such OP Units with available cash, borrowed funds or from the proceeds of an offering of Common Stock. If the OP Units are exchanged for shares of Common Stock, the OP Limited Partner will receive the number of shares of Common Stock having a market value at the time of exercise equal to the fair market value of the OP Units being exchanged. On January 17, 1996, the Company purchased 5,000 OP Units from one unaffiliated limited partner for cash of approximately $116,000.
Comparison of cash flow statement for year ended December 31, 1996 to year ended December 31, 1995
Net cash provided by operating activities increased by $7,834,000 to $44,217,000 for the year ended December 31, 1996 compared to $36,383,000 for the year ended December 31, 1995. The increase was primarily attributable to an increase in rent revenues of approximately $12,967,000, which was offset by an increase in interest expense of approximately $5,274,000.
Net cash used by investing activities decreased by $7,538,000 to $68,481,000 for the year ended December 31, 1996 compared to $76,019,000 for the year ended December 31, 1995. The decrease was primarily attributable to (i) an increase in proceeds from mortgage loans of approximately $25,472,000; (ii) an increase in purchase of property of approximately $10,140,000; and (iii) a decrease in net proceeds from sale of investments of approximately $8,628,000.
Net cash provided by financing activities decreased by $14,240,000 to $28,399,000 for the year ended December 31, 1996 compared to $42,639,000 for the year ended December 31, 1995. The decrease was primarily attributable to an increase in principal payments on notes payable of approximately $97,793,000, which was offset by an increase in proceeds from notes payable of approximately $84,799,000.
Comparison of cash flow statement for year ended December 31, 1995 to year ended December 31, 1994
Net cash provided by operating activities increased by $2,142,000 to $36,383,000 for the year ended December 31, 1995 compared to $34,241,000 for the year ended December 31, 1994. The increase was primarily attributable to an increase in rent revenues of approximately $9,294,000, which was offset by an increase in interest expense of approximately $6,581,000.
Net cash used by investing activities increased by $44,016,000 to $76,019,000 for the year ended December 31, 1995 compared to $32,003,000 for the year ended December 31, 1994. The increase was primarily attributable to (i) a decrease in net proceeds from sale of investments of approximately $37,235,000 and (ii) an increase in purchase of property of approximately $6,781,000.
Net cash provided by financing activities of $42,639,000 for the year ended December 31, 1995 represents a decrease of net cash used by financing activities of $42,691,000, compared to net cash used by financing activities of $52,000 for the year ended December 31, 1994. The change was primarily attributable to proceeds from additional notes payable in the amount of $42,000,000.
OTHER DATA
The Company believes that to facilitate a clear understanding of the historical consolidated operating results, funds from operations should be examined in conjunction with net income as presented in the audited Consolidated Financial Statements. Funds from operations is considered by management as an appropriate measure of the performance of an equity REIT because it is predicated on cash flow analyses, which management believes is more reflective of the value of real estate companies such as the Company rather than a measure predicated on generally accepted accounting principles which gives effect to non-cash expenditures such as depreciation. Funds from operations is generally defined as net income (loss) plus certain non-cash items, primarily depreciation and amortization. Funds from operations should not be considered as an alternative to net income as an indication of the Company's performance or as an alternative to cash flow, as defined by generally accepted accounting principles, as a measure of liquidity.
The National Association of Real Estate Investment Trusts, Inc. ("NAREIT") adopted revisions to the definition of funds from operations as set forth in the NAREIT "White Paper on Funds From Operations" dated March 1995. The Company has adopted the new definition of funds from operations and intends to present both the old and new definitions of funds from operations to assist in comparisons with prior periods of the Company. The primary difference between the old and new definitions of funds from operations is the exclusion from funds from operations of amortization of assets that are not uniquely significant to the real estate industry. The funds from operations presented may not be comparable to funds from operations for other REITs. The following table summarizes the Company's funds from operations, based on the old and new definitions, for the years ended December 31, 1996, 1995 and 1994.
In order to maintain its qualification as a REIT for federal income tax purposes, the Company is required to make distributions to its stockholders. The Company's distributions to stockholders have been less than the total funds from operations because the Company is obligated to make certain payments with respect to principal debt and capital improvements. Management believes that to continue the Company's growth, funds from operations in excess of distributions, principal reductions and capital improvement expenditures should be invested in assets expected to generate returns on investment to the Company commensurate with the Company's investment objectives and policies.
Comparison of funds from operations for year ended December 31, 1996 to year ended December 31, 1995
Funds from operations increased by $5,650,000 to $43,278,000 for the year ended December 31, 1996 compared to $37,628,000 for the year ended December 31, 1995. The increase was primarily attributable to an increase in rent revenues of approximately $12,967,000, which was offset by an increase in interest expense of approximately $5,274,000.
Comparison of funds from operations for year ended December 31, 1995 to year ended December 31, 1994
Funds from operations increased by $3,369,000 to $37,628,000 for the year ended December 31, 1995 compared to $34,259,000 for the year ended December 31, 1994. The increase was primarily attributable to an increase in rent revenues of approximately $9,294,000, which was offset by an increase in interest expense of approximately $6,581,000.
INFLATION
All the Leases of the Golf Courses provide for base and participating rent features. All of such Leases are triple net leases requiring the lessees to pay for all maintenance and repair, insurance, utilities and services, and, subject to certain limited exceptions, all real estate taxes, thereby minimizing the Company's exposure to increases in costs and operating expenses resulting from inflation.
SEASONALITY
Although the results of operations of the Company and its predecessors have not been significantly impacted by seasonality, the Company generally expects that its results of operations may be adversely affected as a function of reduced payments of percentage rent in the first and fourth quarters of each year due to adverse weather conditions and the scheduled closure of Golf Courses located in harsh winter climates.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of National Golf Properties, Inc.
We have audited the consolidated financial statements and financial statement schedule of National Golf Properties, Inc. (the "Company") as listed in Item 14(a)(1) and (2) of this Form 10-K. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Golf Properties, Inc. as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Los Angeles, California March 4, 1997
NATIONAL GOLF PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes are an integral part of these financial statements.
NATIONAL GOLF PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The accompanying notes are an integral part of these financial statements.
NATIONAL GOLF PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The accompanying notes are an integral part of these financial statements.
NATIONAL GOLF PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these financial statements.
NATIONAL GOLF PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Organization
National Golf Properties, Inc. (the "Company") commenced operations effective with the completion of its initial public stock offering (the "Offering") of 9,716,000 shares of common stock (the "Common Stock"), on August 18, 1993. The Company acquires and owns golf courses primarily located throughout the United States. At December 31, 1996, the Company leased all but five of its golf courses to American Golf Corporation ("AGC") pursuant to long-term triple net leases (the "Leases"). David G. Price, the Chairman of the Board of Directors of the Company, owns approximately 5.5% of the Company's outstanding Common Stock and approximately 38.3% of National Golf Operating Partnership, L.P. (the "Operating Partnership") and a controlling interest in AGC. The Company owns substantially all of the golf courses through its 58.3% general partner interest in the Operating Partnership. On July 8, 1994, the Operating Partnership acquired an 89% general partner interest in Royal Golf, L.P. II ("Royal Golf"). Royal Golf owns four golf courses on Hilton Head Island, South Carolina. Royal Golf's results of operations for the period July 8, 1994 to December 31, 1994 have been included in the Company's consolidated financial statements. Unless the context otherwise requires, all references to the Company's business and properties include the business and properties of the Operating Partnership and Royal Golf.
In conjunction with the formation of the Company and the Operating Partnership, the partners of the entities transferring their interest in the initial portfolio of golf courses (the "Initial Golf Courses") to the Operating Partnership became limited partners in the Operating Partnership (the "OP Limited Partners") and received units of limited partnership interest in the Operating Partnership (the "OP Units"). An OP Unit and a share of Common Stock of the Company have the same economic characteristics inasmuch as they effectively share equally in the net income or loss and any distributions of the Operating Partnership.
The consolidated financial statements include the accounts of the Company, the Operating Partnership and Royal Golf. All significant intercompany transactions and balances have been eliminated.
b) Cash Equivalents
The Company considers all money market funds with an original maturity of three months or less at the date of purchase to be cash equivalents with cost approximating market.
c) Investments
Debt securities that the Company expects to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Debt securities not classified as either held-to-maturity securities or bought and held principally for the purpose of selling them in the near term are classified as available-for-sale securities and reported at fair value. Cost of investments sold is determined on the average cost method.
Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The adoption of SFAS No. 115 had no effect on net income for the year ended December 31, 1994. SFAS No. 115 requires the Company to report available-for-sale securities at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity.
d) Concentration of Credit Risk
Concentration of credit risk with respect to the Company's portfolio of 114 golf courses is limited due to the golf courses being geographically diversified and located in 27 states. The distribution of the golf courses reflects the Company's belief that geographic diversification helps insulate the portfolio from regional economic and climatic influences. As of December 31, 1996, the Company had no significant concentration of credit risk.
NATIONAL GOLF PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d) Concentration of Credit Risk (continued)
The Company has cash in financial institutions which is insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000 per institution. At December 31, 1996 and 1995, the Company had cash accounts in excess of FDIC insured limits.
e) Property
Property is carried at the lower of cost or net realizable value. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows:
The Leases presently provide that at the end or termination of the existing Leases, all improvements and fixtures placed on the rental property become the property of the Company.
The Company assesses whether there has been a permanent impairment in the value of rental property by considering factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Such factors include a lessee's ability to perform its duties and pay rent under the terms of the lease. If the property was leased at a significantly lower rent, the Company may recognize a permanent impairment loss if the income stream were not sufficient to recover its investment. Such a loss would be determined as the difference between the carrying value, including any allocated goodwill, and the fair value of the property, with the carrying value of the intangible asset reduced first. Management believes no permanent impairment has occurred in its net property carrying values.
When assets are sold or retired, the asset and related depreciation allowance is eliminated from the records and any gain or loss on disposal is included in operations.
f) Income Taxes
The Company qualifies as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). A REIT will generally not be subject to federal income taxation to the extent that it distributes at least 95% of its taxable income to its stockholders and complies with other requirements. The Company paid distributions to stockholders of $1.65 per share in 1996 of which $1.45 represents ordinary income and $0.20 represents return of capital on a tax basis. On a book basis $0.48 per share represents return of capital. In addition, on January 14, 1997, the Company declared a quarterly distribution for the fourth quarter of 1996 of $0.42 per share to stockholders of record on January 31, 1997, which was paid on February 17, 1997. The Company was subject to federal alternative minimum tax in 1994 and may be subject to such tax in 1996. The Company is also subject to United Kingdom income taxes and state income and franchise taxes in certain states in which it operates. Therefore, a tax provision has been reflected for these income, franchise, and alternative minimum taxes.
g) Revenue Recognition
The Company recognizes rental revenue on an accrual basis over the terms of the Leases.
NATIONAL GOLF PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
h) Intangible Assets
Included in other assets are intangible assets which consist of covenants not to compete, goodwill and other intangibles. Intangible assets are carried at cost less accumulated amortization and are amortized on a straight-line basis. The covenants are amortized over their contractual lives which range from three to 30 years. Goodwill, arising from golf course acquisitions, is amortized over the life of the Leases (15 to 20 years). Other intangibles are amortized over periods from one to ten years. The Company assesses whether there has been a permanent impairment in the value of intangible assets by considering factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Such factors include a lessee's ability to perform its duties and pay rent under the terms of the lease. If the property was leased at a significantly lower rent, the Company may recognize a permanent impairment loss if the income stream is not sufficient to recover its investment. Such a loss would be determined as the difference between the carrying value, including any allocated goodwill, and the fair value of the property, with the carrying value of the intangible asset reduced first. Management believes no permanent impairment in the carrying value of its intangible assets has occurred. Accumulated amortization at December 31, 1996 and 1995, was approximately $4,310,000 and $3,211,000, respectively.
i) 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.
j) Fair Value of Financial Instruments
To meet the reporting requirements of SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," the Company calculates the fair value of financial instruments and includes this additional information in the notes to the consolidated financial statements when the fair value is different than the carrying value of those financial instruments. When the fair value reasonably approximates the carrying value, no additional disclosure is made. The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
k) Earnings Per Share
The computation of primary earnings per share is based on the weighted average number of outstanding common shares during the period and the incremental shares, using the treasury stock method, from stock options.
The computation of fully diluted earnings per share is less than 3% dilutive and accordingly has not been presented.
NATIONAL GOLF PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
l) Impairment of Long-Lived Assets
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
m) Accounting for Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." This Statement encourages entities to adopt a fair value based method of accounting for all employee stock compensation, as well as transactions in which an entity issues its equity instruments to acquire goods or services from nonemployees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reasonably determinable. The Statement allows an entity to continue measuring compensation cost for the plans using the accounting principles prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." In that case, however, companies must also include pro forma disclosures of net income and earnings per share, as if the fair value based method of accounting defined in SFAS No. 123 had been applied. SFAS No. 123 is effective for fiscal years beginning after December 15, 1995. The Company adopted SFAS No. 123 during 1996, and elected to continue to apply the accounting rules contained in APB Opinion No. 25.
NATIONAL GOLF PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) PROPERTY ACQUISITIONS
In 1996, the Company purchased 35 golf courses for an aggregate initial investment of approximately $155 million (including the $60 million purchase of 20 golf courses from Golf Enterprises, Inc. ("GEI") and the $31.6 million purchase of four golf courses upon which the Company previously held participating mortgages). All but four golf courses were purchased from unaffiliated third parties. The acquisitions have been accounted for utilizing the purchase method of accounting and, accordingly, the acquired assets are included in the statement of operations from the date of acquisition. The initial investment amount includes purchase price, closing costs and other direct costs associated with the purchase. The aforementioned golf courses, except for Sweetwater Country Club, Colonial Charters Golf Course and San Geronimo Golf Course, are leased to AGC pursuant to long-term triple net leases. Sweetwater Country Club, Colonial Charters Golf Course and San Geronimo Golf Course are leased to Cobblestone Golf Group, Inc., The Links Group, Inc. and Evergreen Alliance Golf Limited, respectively, pursuant to long-term triple net leases.
- ------- * Company previously held participating mortgages.
NATIONAL GOLF PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) PROPERTY ACQUISITIONS (CONTINUED)
On January 19, 1996, the Company sold Wootton Bassett Golf Club in Wiltshire, United Kingdom for approximately $2 million. The Company provided seller financing in the form of a mortgage loan in the amount of approximately $900,000 at an interest rate of 6% per annum and a maturity date of January 1999 (the "Wootton Bassett Mortgage"). The Company recognized a gain of approximately $25,000, net of payment to American Golf (U.K.) Limited, subsidiary of AGC, of approximately $166,000.
On December 30, 1996, the Company sold Kendale Lakes Golf Course in Miami, Florida for $3.5 million. For financial statement purposes, the Company recognized a gain of approximately $1.2 million. However, for tax purposes, the Company accounted for the sale as part of a Code section 1031 tax-free exchange.
(3) MORTGAGE NOTES RECEIVABLE
The Company had fixed-term options to acquire four golf courses (the "Option Golf Courses") in exchange for OP Units. The Operating Partnership made participating mortgage loans of approximately $25.2 million at the time of the Offering (the "Participating Mortgage Loans") to David G. Price and one of his affiliates (the other partner in the affiliate is Richard C. Price, the President of the Company) that owned the Option Golf Courses and were collateralized by first mortgage liens on such Option Golf Courses. AGC, the current operator of the Option Golf Courses, had guaranteed the repayment of each Participating Mortgage Loan. Interest was payable monthly and the interest rate for 1996 was 9.28%. The interest rate was subject to annual increases in an amount equal to the greater of (a) 4% of the rate applicable for the prior year or (b) an amount corresponding to a percentage of growth in revenues over a specified baseline amount from each Option Golf Course. All principal, together with 50% of any appreciation in each Option Golf Course, was payable to the Operating Partnership at the end of the tenth year. Each Participating Mortgage Loan contained customary representations and warranties, covenants and indemnities, and was cross-defaulted to, and cross- collateralized with, the other Participating Mortgage Loans. During 1996, the Participating Mortgage Loans were paid off and the Company exercised the options on the Option Golf Courses on terms that were different from the original terms of such options. The changes to the terms included, among others, reducing the option prices and base rent payable by AGC and modifying the percentage rents payable by AGC so as to comport generally with the leases currently entered into with AGC.
On March 13, 1995, the Company sold Hidden Hills Country Club in Stone Mountain, Georgia for approximately $3.2 million. The Company provided seller financing in the form of a mortgage loan in the amount of $2.2 million at an initial interest rate of 11% per annum and a maturity date of March 2000 (the "Hidden Hills Mortgage"). Interest income from the Hidden Hills Mortgage for the year ended December 31, 1996 and the period March 13, 1995 through December 31, 1995 was $242,000 and approximately $194,000, respectively. Interest income from the Wootton Bassett Mortgage for the period January 19, 1996 through December 31, 1996 was approximately $47,000.
The market value of mortgage notes receivable at December 31, 1996 and 1995 is estimated to be approximately $3,200,000 and $31,397,000, respectively, based on current interest rates for comparable loans.
(4) INVESTMENTS
NATIONAL GOLF PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) INVESTMENTS (CONTINUED)
In 1996 and 1995, available-for-sale securities were sold resulting in proceeds of $6,167,000 and approximately $21,811,000, respectively. There were no gross realized gains or losses in 1996 and 1995.
(5) NOTES PAYABLE
Notes payable consist of the following:
The following is a schedule of maturities on notes payable for the next five years ending December 31 and in total thereafter:
The note agreements contain, among other things, covenants restricting the sale of property and certain financial ratios and reporting requirements.
In 1996, the Operating Partnership placed $75 million of fixed-rate, uncollateralized notes due 2006 with a group of institutional investors. The notes were issued in two series. The first note series in the amount of $40 million was issued in July 1996 with a fixed interest rate of 7.9%, and the second note series in the amount of $35 million was issued in December 1996 with a fixed interest rate of 8%.
NATIONAL GOLF PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) NOTES PAYABLE (CONTINUED)
The Operating Partnership applied the net proceeds from the $75 million notes to repay bank debt and to partially finance the acquisition of Sweetwater Country Club.
In 1994, the Operating Partnership placed $100 million of fixed-rate, uncollateralized notes due 2004 and 2005 with a group of institutional investors. The notes were issued in two series of $50 million. The first note series was issued with a fixed interest rate of 8.68%, and the second note series was issued with a fixed interest rate of 8.73%. With respect to the $50 million first note series, the Operating Partnership received $30 million in December 1994 and $20 million in January 1995. With respect to the $50 million second note series, the Operating Partnership received $50 million in June 1995. The Operating Partnership applied the net proceeds from the $100 million notes to repay bank debt, to finance future acquisitions of golf courses and related facilities and properties, and for general partnership purposes.
The Company has a $40 million credit facility, which terminates on April 1, 1997, bearing interest at a floating rate (which was 8.25% at December 31, 1996), from a commercial bank that may be used to finance working capital, acquisitions and capital improvements. There were outstanding advances of approximately $24.9 million under this credit facility as of December 31, 1996.
In connection with the combined purchase of Monterey Country Club and Palm Valley Country Club, the Company entered into an eleven-year, non-interest bearing, uncollateralized note for $4,000,000 with the seller of the properties. Based on the borrowing rates available to the Company for debt with similar terms and average maturities, the interest rate used to discount the note is 7.75%. The discount is being amortized over the life of the loan using the effective interest method. The discounted note balance at December 31, 1996 was approximately $2,579,000. The unamortized discount balance at December 31, 1996 was approximately $1,421,000.
An OP Limited Partner, who owns or controls 75,003 OP Units, is the holder of a promissory note for approximately $2.1 million that the Company assumed at the time of the Offering in connection with the Company's acquisition of four golf courses from a corporation that previously had been 50% owned by such OP Limited Partner. The Company made interest payments in 1996 and 1995 of approximately $175,000 and $184,000, respectively.
The market value of notes payable at December 31, 1996 and 1995 is estimated to be approximately $235,095,000 and $147,882,000, respectively, based on current interest rates for comparable loans. The net book value at December 31, 1996 of the assets collateralizing the notes payable is $49 million.
(6) COMMITMENTS AND CONTINGENCIES
The Company is required under the Leases to pay for various remaining capital improvements totaling approximately $20.6 million, of which approximately $19.9 million will be paid during the next two years. Any subsequent capital improvements to these golf courses are the responsibility of the Lessees.
In addition, the Company leases the land associated with Bear Creek Golf World from a local municipality pursuant to a ground lease. At December 31, 1996, there was a net book value of approximately $3,241,000 of improvements at this property included in buildings, ground improvements and furniture, fixtures and equipment on the balance sheet. At the termination of the lease in June 2022, all fixed improvements are surrendered to the local municipality. Under the terms of the ground lease, the Company remits a percentage of the green fees and net profits from the sale of food and beverages to the local municipality. For the years ended December 31, 1996, 1995 and 1994, the ground lease expense was approximately $351,000, $369,000 and $341,000, respectively.
Also, the Company leases approximately 14 acres of land associated with Mesquite Golf & Country Club from various landowners. The leases for this property expire between 2041 and 2043. AGC, as the lessee under the Lease, is required to make all ground lease payments.
NATIONAL GOLF PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) LEASE RENTAL AGREEMENTS
Future minimum rents to be received by the Company under the Leases for the next five years ending December 31 and in total thereafter are as follows:
The minimum rent for the first year for each golf course under the Leases is initially set at a fixed amount. Thereafter, with respect to the Leases for the Initial Golf Courses, minimum rent is increased each year by 4% or, if lower, 150% of the annual percentage increase in the Consumer Price Index ("CPI") (the "Base Rent Escalation"). For these Leases, percentage rent is paid to the Company each year in the amount, if any, by which the sum of 35% of Course Revenue in excess of a baseline amount plus 5% of Other Revenue in excess of a baseline amount exceeds the cumulative Base Rent Escalation since the commencement date of such Leases. Course Revenue is generally defined in the Leases to include all revenue received from the operation of the applicable golf course, including revenues from memberships, initiation fees, dues, green fees, guest fees, driving range charges and golf cart rentals, but excluding those revenues described as Other Revenue. Other Revenue is generally defined in the Leases to include all revenue received from food and beverage and merchandise sales and other revenue not directly related to golf activities. AGC has options to extend the term of each lease for one to three five-year terms. Generally, for the Leases entered into subsequent to the Offering, the rent is based upon the greater of (a) the minimum base rent or (b) a specified percentage of Course Revenue and Other Revenue. The minimum base rent under these Leases is increased for specified years during the Lease term based upon increases in the CPI, provided that each such annual CPI increase shall not exceed five percent. Percentage rent income for the years ended December 31, 1996, 1995 and 1994 was approximately $4,289,000, $3,731,000 and $2,657,000, respectively.
(8) STOCK OPTIONS AND AWARDS
The Company has established a Stock Incentive Plan, under which executive officers and other key employees of the Company and AGC may be granted stock options or restricted stock. Restricted stock is subject to restrictions determined by the Company's Compensation Committee. The Compensation Committee, comprised of Directors who are not officers of the Company, determines compensation, including awards under the Stock Incentive Plan, for the Company's executive officers. The shares of restricted stock will be sold at a purchase price equal to $.01 and will vest 20% per year over a five year period. Restricted stock has the same dividend and voting rights as other common stock and is considered to be currently issued and outstanding. Compensation expense is determined by reference to the market value on the date of grant and is being amortized on a straight-line basis over the five year vesting period. Such expense amounted to approximately $1,089,000, $943,000, and $893,000 for the years ended December 31, 1996, 1995, and 1994, respectively.
NATIONAL GOLF PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) STOCK OPTIONS AND AWARDS (CONTINUED)
Stock options vest at 25% per year over four years and are exercisable at the market value on the date of grant. The options' maximum term is ten years. The following table summarizes the restricted stock and stock option transactions pursuant to the Company's Stock Incentive Plan for the years ended December 31, 1996, 1995 and 1994:
The range of exercise prices for the options outstanding at December 31, 1996 is $18.50 through $25.875 with a weighted average remaining contractual life of seven years. The range of exercise prices for options exercisable at December 31, 1996 is $18.50 through $20.375 with a weighted average remaining contractual life of 6.7 years.
As of December 31, 1996, a total of 790,475 additional shares remain reserved for issuance under the Stock Incentive Plan. There were 1,600,000 shares originally reserved for issuance under the Stock Incentive Plan.
NATIONAL GOLF PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) STOCK OPTIONS AND AWARDS (CONTINUED)
The Company also has adopted the 1995 Independent Director Equity Participation Plan, pursuant to which directors of the Company may be granted stock options and restricted stock. The shares of restricted stock will be sold at a purchase price equal to $.01 and will vest at the earlier of (i) the fifth anniversary of the date of grant or (ii) the directors' normal retirement at or after age 65. Restricted stock has the same dividend and voting rights as other common stock and is considered to be currently issued and outstanding. Stock options vest on the first anniversary of the date on which the option was granted and are exercisable at the market value on the date of grant. The options' maximum term is ten years. The following table summarizes the restricted stock and stock option transactions pursuant to the Company's 1995 Independent Director Equity Participation Plan for the year ended December 31, 1996:
The range of exercise prices for the options outstanding at December 31, 1996 is $19.75 through $28.375 with a weighted average remaining contractual life of nine years. The range of exercise prices for options exercisable at December 31, 1996 is $19.75 through $22.125 with a weighted average remaining contractual life of 8.6 years.
As of December 31, 1996, a total of 112,000 shares remain reserved for issuance under the 1995 Independent Director Equity Participation Plan. There were 148,000 shares originally reserved for issuance under the 1995 Independent Director Equity Participation Plan.
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and will continue to use the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in 1996 and 1995 consistent with the provisions of SFAS No. 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below:
The weighted average fair value of options granted during 1996 and 1995 are $6.19 and $2.08, respectively. The fair value of each option grant issued in 1996 and 1995 is estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: (a) dividend yield of 1.3%,
NATIONAL GOLF PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) STOCK OPTIONS AND AWARDS (CONTINUED)
(b) expected volatility of the Company's stock of 19.6%, (c) a risk free interest rate based on U.S. Zero Coupon Bonds with time to maturity approximately equal to the options' expected time to exercise and (d) expected option lives of four years for options granted in 1996 and one year for options granted in 1995.
(9) 401(K) PLAN
The Company established a qualified retirement plan designed to qualify under Section 401(k) of the Code (the "401(k) Plan"). The 401(k) Plan allows participants to defer up to 10% of their eligible compensation on a pre-tax basis subject to certain maximum amounts. Matching contributions may be made in amounts and at times determined by the Company. The 401(k) Plan provides for matching contributions by the Company in an amount equal to fifty-cents for each one dollar of participant contributions up to a maximum of three percent of the participant's salary per year. Participants received credit for employment with the predecessors of the Company and affiliates. Amounts contributed by the Company for a participant will vest over five years. Employees of the Company will be eligible to participate in the 401(k) Plan if they meet certain requirements concerning minimum age and period of credited service.
For the years ended December 31, 1996, 1995 and 1994 the Company's contributions to the 401(k) Plan were approximately $14,000, $13,000 and $12,000, respectively.
(10) RELATED PARTY TRANSACTIONS
The Company has in the past and will continue to identify golf courses it seeks to acquire for the purpose of leasing such courses to AGC and other golf course operators. The Company evaluates potential golf course acquisitions based on a golf course's ability to generate cash flows sufficient to enable an operator to operate the course profitably and provide the Company its desired rate of return on its capital investment. Such evaluation is integral to the Company's determination of the price it is willing to pay for a particular course. The Company's acquisition of a course is recorded in the Company's financial statements at cost and the value of such course then is evaluated periodically to determine its carrying value based on the cash flow from the lease of such property. Because AGC may be deemed to be an affiliate of the Company, the Company's leases with AGC may not reflect arms-length transactions. As a result, there is a risk that the terms of such leases are not as favorable to the Company as the terms would have been if the Company leased its golf courses to unaffiliated operators and, if the Company could have obtained more favorable terms, that the Company's financial statements understate the returns that the Company could obtain on leases of such properties. It is management's belief, however, that the terms and conditions of its leases with AGC are no less favorable to the Company than the terms and conditions that the Company could obtain if it leased its golf courses to operators other than AGC.
(11) STATEMENT OF CASH FLOWS--SUPPLEMENTAL DISCLOSURES
Non-cash transactions for the year ended December 31, 1996 include (i) approximately $40.8 million of golf course acquisitions which were financed by the issuance of 1,577,820 shares of Common Stock; (ii) the assumption of approximately $25.2 million of debt; (iii) approximately $1.3 million in capital improvements accrued but not paid; (iv) approximately $1.5 million of golf course acquisitions which were financed by the issuance of 61,339 OP Units; and (v) approximately $900,000 in seller financing related to the sale of Wootton Bassett Golf Club by the Company.
Non-cash transactions for the year ended December 31, 1995 include approximately $2.3 million of golf course acquisitions which were financed by a note payable and approximately $2.2 million in seller financing related to the sale of a golf course by the Company.
Non-cash transactions for the year ended December 31, 1994 include approximately $28.2 million of golf course acquisitions which were financed by notes payable and a capital contribution from an unaffiliated limited partner.
NATIONAL GOLF PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) OTHER DATA
AGC is the lessee of all but five of the golf courses in the Company's portfolio. AGC is a golf course management company that operates a diverse portfolio of golf courses for a variety of golf course owners including municipalities, counties and others. AGC does not own any golf courses, but rather manages and operates golf courses either as a lessee under leases, generally triple net, or pursuant to management agreements. AGC derives revenues from the operation of golf courses principally through receipt of green fees, membership initiation fees, membership dues, golf cart rentals, driving range charges and sales of food, beverages and merchandise.
The following table sets forth certain condensed financial information concerning AGC.
(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for the years ended December 31, 1996 and 1995 is as follows (in thousands, except per share amounts):
NATIONAL GOLF PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The pro forma financial information set forth below is presented as if the 1996 acquisitions (Note 2) had been consummated as of January 1, 1996 and 1995.
The pro forma financial information is not necessarily indicative of what actual results of operations of the Company would have been assuming the acquisitions had been consummated as of January 1, 1996 and 1995, nor does it purport to represent the results of operations for future periods (in thousands, except per share amounts).
The pro forma financial information includes the following adjustments: (i) an increase in depreciation and amortization expense; (ii) a decrease in interest income; (iii) an increase in interest expense; and (iv) an increase for 1996 and a decrease for 1995 in income applicable to minority interest.
(15) SUBSEQUENT EVENTS (UNAUDITED)
On January 2, 1997 the Company purchased Stonecreek Golf Course located in Phoenix, Arizona for approximately $9.4 million.
On January 10, 1997 the Company purchased Tamarack Golf Club located in Naperville, Illinois for approximately $5.3 million.
On January 14, 1997, the Company declared a quarterly distribution for the fourth quarter of 1996 of $0.42 per share to stockholders of record on January 31, 1997, which was paid on February 17, 1997.
In the first quarter of 1997, the Company obtained a commitment from a group of commercial banks for a $75 million credit facility (the "New Credit Facility"). It is expected that borrowings under the New Credit Facility would bear maximum interest at a floating rate equal to LIBOR plus a spread of 1.125%. The spread will be reduced based upon the Company improving certain Company ratios. Consummation of the New Credit Facility arrangement is subject to completion of the lenders' due diligence and completion of documentation satisfactory to the Company and such lenders.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the sections entitled (i) "Nominees for Election as Director;" (ii) "Directors Continuing in Office;" and (iii) "Executive Officers" contained in the Company's Proxy Statement to be filed pursuant to Regulation 14A.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the section entitled "Executive Compensation" contained in the Company's Proxy Statement to be filed pursuant to Regulation 14A.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the section entitled "Security Ownership of Certain Beneficial Owners and Management" contained in the Company's Proxy Statement to be filed pursuant to Regulation 14A.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the section entitled "Certain Relationships and Related Transactions" contained in the Company's Proxy Statement to be filed pursuant to Regulation 14A.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SCHEDULE III
NATIONAL GOLF PROPERTIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION(1) (IN THOUSANDS)
DECEMBER 31, 1996
SCHEDULE III (CONTINUED)
NATIONAL GOLF PROPERTIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION(1)
(IN THOUSANDS)
DECEMBER 31, 1996
SCHEDULE III (CONTINUED)
NATIONAL GOLF PROPERTIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION(1) (IN THOUSANDS)
DECEMBER 31, 1996
- ------- (1) Corporate assets are not included within the amounts.
(2) Combined encumbrance for Port Royal and Shipyard golf courses.
Depreciation of the Company's investment in Buildings and Improvements reflected in the statements of operations are calculated over the estimated useful lives of the assets as follows:
The changes in total real estate assets and accumulated depreciation (excluding corporate assets and related accumulated depreciation) for the three years ended December 31, are as follows:
3. EXHIBITS
- -------- *Management contract or compensatory plan or arrangement.
ANALYSIS OF AMERICAN GOLF CORPORATION'S FINANCIAL INFORMATION
This financial analysis should be read in conjunction with the consolidated financial statements of American Golf Corporation and Subsidiaries ("AGC") for the years ended December 31, 1996, 1995 and 1994.
RESULTS OF OPERATIONS
Comparison of the year ended December 31, 1996 to the year ended December 31,
Total revenues from golf course operations and management agreements for AGC increased by $80.6 million, or 22.5%, to $439.6 million for the year ended December 31, 1996 as compared to $359 million for the year ended December 31, 1995. The increase in revenues was primarily attributable to the net increase of 48 new leased courses and 6 new courses under management agreements. Green fees for the year ended December 31, 1996, $157.8 million, increased by $23.7 million, or 17.7%, as compared to $134.1 million for the year ended December 31, 1995. Cart rental revenues for the year ended December 31, 1996, $57.8 million, increased by $6 million, or 11.6%, from $51.8 million for the year ended December 31, 1995. Member dues and initiation fees for the year ended December 31, 1996, $74.1 million, increased by $24 million, or 47.9%, from $50.1 million for the year ended December 31, 1995. Food and beverage revenues for the year ended December 31, 1996, $70.3 million, increased by $15.3 million, or 27.8%, from $55 million for the year ended December 31, 1995. Merchandise sales were $37.8 million, an increase of $6.9 million or 22.3% from $30.9 million for the year ended December 31, 1995. Other operating income, which includes range income, increased by $4.6 million, or 14%, to $37.4 million for the year ended December 31, 1996, from $32.8 million for the year ended December 31, 1995. Management fee revenue of $4.4 million was unchanged for the year ended December 31, 1996 when compared to the year ended December 31, 1995. Each revenue category rose in reasonable proportion to the overall increase in revenues due to the new acquisitions, with the exception of member dues and initiation fees. This revenue category increased as a result of the acquisition of a number of large private clubs.
Total operating expenses increased by $75.2 million or 21.6%, to $423.7 million for the year ended December 31, 1996 as compared to $348.5 million for the year ended December 31, 1995. Rent expense increased by $16.5 million, or 21.2%, to $94.3 million for the year ended December 31, 1996, from $77.8 million for the year ended December 31, 1995. General and administrative expenses for the year ended December 31, 1996, $42.2 million, increased by $7 million, or $19.9%, from $35.2 million for the year ended December 31, 1995. These expenses increased primarily due to additional lease agreements.
Net income increased by $4.6 million to $14.3 million for the year ended December 31, 1996, from $9.7 million for the year ended December 31 1995. The increase in net income is primarily due to the seasonal nature of AGC's business in that the weather during the year ended December 31, 1996, was less severe than the year ended December 31, 1995.
Comparison of the year ended December 31, 1995 to the year ended December 31,
Total revenues from golf course operations and management agreements for AGC increased by $52.5 million, or 17.1%, to $359 million for the year ended December 31, 1995 as compared to $306.5 million for the year ended December 31, 1994. The increase in revenues was primarily attributable to the addition of 14 new leased courses and 6 new courses under management agreements. Greens fees for the year ended December 31, 1995 were $134.1 million, an increase of $14.9 million, or 12.5%, from $119.2 million for the year ended December 31, 1994. Cart rental revenues for the year ended December 31, 1995 were $51.8 million, an increase of $6.8 million, or 15.1%, from $45 million for the year ended December 31, 1994. Member dues and initiation fees for the year ended December 31, 1995 were $50.1 million, an increase of $11.2 million, or 28.9%, from $38.9 million for the year ended December 31, 1994. Food and beverage revenues for the year ended December 31, 1995 were $55 million, an increase of $8.7 million, or 18.8%, from $46.3 million for the year December 31, 1994. Merchandise sales were $30.9 million, an increase of $7.9 million, or 34.3%, from $23 million for the year ended December 31, 1994. Other revenue, which includes range income, increased by
$3.6 million, or 12.3%, to $32.8 million for the year ended December 31, 1995, from $29.2 million for the year ended December 31, 1994. Each revenue category rose in reasonable proportion to the overall increase in revenues due to the new acquisitions, with the exception of member dues and initiation fees. This revenue category increased as a result of the acquisition of a number of large private clubs.
Total operating expenses increased by $52 million or 17.5%, to $348.5 million for the year ended December 31, 1995 as compared to $296.5 million for the year ended December 31, 1994. The margin on merchandise sold increased from 29.7% in 1994 to 34.8% in 1995 due to the greater use of national contracts which provide the Company with more favorable purchasing terms. The margin on food and beverage sales remained relatively constant. Rent expense increased by $9.7 million or 14.2% to $77.8 million for the year ended December 31, 1995, from $68.1 million for the year ended December 31, 1994. General and administrative expenses of $35.2 million (which include, among other things, personal and property taxes, insurance and advertising), increased by $4.8 million, or 15.8% for the year ended December 31, 1995, from $30.4 million for the year ended December 31, 1994. These expenses increased primarily due to additional lease agreements. Depreciation and amortization increased by approximately $1.9 million due, in part, to the completion of significant capital improvements as well as AGC entering into capital leases for the purchase of approximately $4.7 million of machinery and equipment.
Net income decreased by $.6 million to $9.7 million for the year ended December 31, 1995, from $10.3 million for the year ended December 31, 1994. This decrease is due to a $2.4 million increase in interest expense offset by increases in operating income of approximately $.7 million, interest income of $.6 million and minority interest in loss of $.5 million. The increase in interest expense is due to increased borrowings of approximately $20.3 million during 1995. Interest income increased primarily due to a full year of interest earned on the receivable from officers and directors. The income attributable to the minority interest in loss is due to the consolidation of the Company with its majority owned entities American Golf of Atlanta, American Golf of Detroit, American Golf (UK) Limited and CW Golf Partners.
Liquidity and Capital Resources
On July 30, 1996, the Company entered into two $15 million credit facilities with a commercial bank that bear interest at prime or Libor based rate. Letters of credit issued under these credit facilities are charged a 1.5% annual letter of credit fee. The $15 million facility is used to finance working capital requirements and expires on August 1, 1997. At December 31, 1996, there was $3 million advanced against this line of credit and the standby letters of credit outstanding totaled $4.2 million. At December 31, 1995, the outstanding cash balance advanced against this line of credit was $8.5 million and the standby letters of credit outstanding totaled $7.2 million. The first $15 million credit facility, which expires on August 15, 1997, supports $13.6 million of letters of credit issued in favor of National Golf Properties ("NGP"), pursuant to the terms of the leases between NGP and AGC.
AGC had working capital of approximately $6.5 million as of December 31, 1996. AGC believes it will be able to satisfy its liquidity requirements, including capital expenditures and rental payments under the leases with cash flow available from operations and available borrowings. AGC has capital expenditure commitments related to acquiring and renewing leases. These commitments are typically satisfied over several years. The material capital commitments are clubhouse renovations, building and course improvements and irrigation systems. At December 31, 1996, AGC's capital expenditure commitment was approximately $1.8 million. The improvements will be funded form AGC's operating cash flow and from available borrowings under the bank credit facilities.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors American Golf Corporation
We have audited the accompanying consolidated balance sheets of American Golf Corporation and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Golf Corporation and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Los Angeles, California February 25, 1997
AMERICAN GOLF CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
AMERICAN GOLF CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
AMERICAN GOLF CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
AMERICAN GOLF CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
AMERICAN GOLF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
The consolidated financial statements include the accounts of American Golf Corporation ("AGC"), a California subchapter S Corporation, and its subsidiaries, American Golf of Atlanta ("Atlanta"), a Georgia general partnership, American Golf of Detroit ("Detroit"), a Michigan general partnership, American Golf (UK) Limited ("AG(UK)"), a United Kingdom limited liability company, and CW Golf Partners ("CWP"), a California limited partnership (collectively, the "Company"). AGC was formed in 1973 for the purpose of operating public and private golf and tennis facilities on leased premises. The Company is 71% owned by David G. Price. The following table lists AGC's subsidiaries and selected information:
The remaining 25% interest in AG(UK) is owned by European Golf Corporation, an affiliate of AGC.
The term "affiliate", as used in these financial statements, refers to any entity in which David G. Price has a controlling interest.
At December 31, 1996, the Company leases 109 golf courses from National Golf Properties, Inc. ("NGP"). David G. Price is the Chairman of the Board of Directors of NGP and owns 5.5% of NGP's outstanding stock and 38.3% of National Golf Operating Partnership, L.P. ("NGOP").
On July 30, 1996, NGP purchased 20 golf courses from Golf Enterprises, Inc. ("GEI") for a purchase price of $58 million. All of the courses acquired were leased to the Company on a triple net basis. NGP receives minimum base rent equal to 10% of its investment. The minimum base rent will be adjusted in specific years based on increases in CPI. Additionally, a percentage rent feature allows NGP to participate in growth in revenues.
PRINCIPLES OF CONSOLIDATION
All material intercompany transactions and balances have been eliminated in consolidation.
RISKS AND UNCERTAINTIES
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.
INVENTORIES
Inventories are stated at the lower of cost (using the first-in, first-out method) or market. Inventories consist primarily of food, beverage, golf and tennis equipment, and clothing and accessories.
REVENUE RECOGNITION
Revenue from green fees, cart rentals, food and beverage sales, merchandise sales and range income are generally recognized at the time of sale.
AMERICAN GOLF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Revenue from membership dues are generally billed monthly and recognized in the month earned. The monthly dues are structured to cover the club operating costs and membership services. Initiation fees are generally refundable in 30 years. Accordingly, the difference between the amount of the fees and the net present value of the future obligation is recognized as revenue at the time of sale, unless uncertainty surrounding collectability exists.
PROPERTY, EQUIPMENT, CAPITAL LEASES AND LEASEHOLD RIGHTS
Property, equipment and leasehold rights are carried at the lower of cost or net realizable value. Property and equipment under capital leases are stated at the lower of the present value of the future minimum lease payments at the beginning of the lease term or the fair value at the inception of the lease.
Depreciation of property and equipment is computed using the straight-line method over the lesser of the estimated useful life of the asset (3 to 30 years) or the remaining term of the lease. Property and equipment held under capital leases and leasehold rights are amortized using the straight-line method over the lesser of the lease term or the estimated useful life of the asset. Leasehold rights are recorded at cost and amortized over the term of the lease.
When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation and amortization account are relieved, and any gain or loss is included in operations. Expenditures for maintenance and repairs are charged to operations. Significant expenditures which extend the useful life of existing assets are capitalized.
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Certain long-lived assets and certain identifiable intangibles to be disposed of must be reported at the lower of carrying amount or fair value less cost to sell. The Company assessed whether there had been an impairment in the value of long-lived assets and certain identifiable intangibles by considering factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Management believes no impairment has occurred.
STOCK-BASED EMPLOYEE COMPENSATION AWARDS
Statement of Financial Accounting Standards No. 123, "Accounting for the Awards of Stock-Based Compensation to Employees" ("SFAS No. 123") encourages, but does not require companies to record compensation cost for stock-based compensation plans at fair value. The Company has adopted the disclosure requirements of SFAS No. 123, which involves proforma disclosure of net income under SFAS No. 123, detailed descriptions of plan terms and assumptions used in valuing stock option grants. The Company has chosen to continue to account for stock-based employee compensation awards in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of trade receivables.
AMERICAN GOLF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Concentration of credit risk with respect to trade receivables, which consists primarily of membership dues and charges, is limited due to the large number of club members comprising the Company's customer base, and their dispersion across many different geographic areas. The trade receivables are billed and due monthly, and all probable bad debt losses have been appropriately considered in establishing an allowance for doubtful accounts. As of December 31, 1996 the Company had no significant concentration of credit risk.
The Company has cash in financial institutions which is insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000 per account. At various times throughout the year and as of December 31, 1996, the Company had cash in financial institutions which was in excess of the FDIC insurance limit.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with the reporting requirements of SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", the Company calculates the fair value of financial instruments and includes this additional information in the notes to the consolidated financial statements when the fair value is different than the carrying value of those financial instruments. When the fair value reasonably approximates the carrying value, no additional disclosure is made. The Company uses quoted market prices to calculate these fair values.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising costs for the years ended December 31, 1996, 1995 and 1994 were approximately $5,531,000, $4,521,000 and $3,562,000, respectively.
FOREIGN CURRENCY TRANSLATION
The Company translates foreign currency financial statements by translating balance sheet accounts at the year-end exchange rate and income statement accounts at the average exchange rate for the year. Translation gains and losses are recorded in shareholders' equity, and realized gains and losses are included in operations. The effect of realized gains and losses is not material to the consolidated financial statements.
(2) RECEIVABLES FROM AFFILIATES, NET:
The receivables from affiliates, net, is uncollateralized and due within one year.
AMERICAN GOLF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) PROPERTY, EQUIPMENT AND CAPITAL LEASES:
Property, equipment and capital leases consist of the following:
Equipment under capital leases includes golf carts, turf and maintenance equipment, computers, and other office equipment.
Interest capitalized for the years ended December 31, 1996, 1995 and 1994 was approximately $347,000, $416,000 and $418,000 respectively.
(4) NOTE RECEIVABLE FROM SHAREHOLDER:
The note receivable from shareholder is due in 2004 with principle payments beginning in 1999. The note bears interest at 9.35% and is payable semi- annually.
(5) STATE INCOME TAXES:
The Company has elected to be taxed as an S corporation under the Internal Revenue Code of 1986, as amended. Accordingly, corporate income is taxed directly to the shareholders for federal income tax reporting purposes. The Company therefore has no provision in its consolidated financial statements for federal income taxes. The following is the provision for state franchise and income taxes for the years ended December 31, 1996, 1995 and 1994:
AMERICAN GOLF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) NOTES PAYABLE--SHAREHOLDERS:
Notes payable to shareholders consist of the following:
Interest expense to the shareholders for the years ended December 31, 1996, 1995 and 1994 was approximately $40,000, $75,000 and $44,000, respectively.
Annual maturities on notes payable to shareholders are as follows:
(7) NOTES PAYABLE--OTHERS:
Notes payable to others consist of the following:
At December 31, 1996 and 1995 the bank prime and reference rate was 8.25% and 8.50%, respectively.
AMERICAN GOLF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) NOTES PAYABLE--OTHERS (CONTINUED):
Annual maturities on notes payable to others are as follows:
The note agreements contain, among other covenants, working capital maintenance, fixed charge and debt to net worth ratios, minimum tangible net worth amounts, and certain restrictions regarding indebtedness to others.
On July 30, 1996, the Company entered into two $15 million credit facilities with a commercial bank that bear interest at prime or a Libor based rate. Letters of credit issued under these credit facilities are charged a 1.5% annual letter of credit fee. The first $15 million facility is used to finance working capital requirements and expires on August 1, 1997. At December 31, 1996, there was $3,000,000 outstanding and the standby letters of credit outstanding totaled $4,181,000. The second $15 million credit facility, which expires on August 15, 1997, supports $13,555,000 of letters of credit issued in favor of NGP, pursuant to the terms of the leases between NGP and AGC. The Company is also required to maintain specified financial ratios and levels of net worth.
Loans are collateralized by equipment, accounts receivable and inventory. The net book value at December 31, 1996 and 1995 of the assets collateralizing the notes payable was approximately $76.5 million and $61.4 million, respectively.
The Company placed $41.5 million of fixed rate senior collateralized notes due 2004 with a group of institutional investors. The net proceeds from the private placement were used to repay bank debt and provide a $29 million loan to David G. Price. The private placement loan is collateralized by the issued and outstanding stock of an affiliate.
(8) NOTES PAYABLE--CAPITAL LEASES:
Future minimum payments, by year and in the aggregate, under noncancelable capital leases with initial remaining terms of one year or more consist of the following at December 31, 1996:
AMERICAN GOLF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) EMPLOYEE BENEFITS:
In 1994, the Company established the 1994 Equity Participation Plan, as amended (the "1994 Plan"). Under the 1994 Plan, 1,200,000 shares may be awarded to key employees as either nonqualified stock options, Performance Awards, as defined, or the right to purchase common stock. During 1994, the Company issued 198,677 shares of common stock at $24.86 per share and received notes receivable totaling $4,533,000. During 1995, the Company issued 15,820 shares of common stock at $24.86 per share and received notes receivable totaling $368,000. On December 1, 1996, the stock grants were amended to adjust the formula for determining the initial share value, and as a result the price per share was reduced to $22.05 and the notes receivable were reduced to $3,975,000 for the 1994 grants and $324,000 for the 1995 grant. The stock options vest over a three to five year period and are subject to continued employment as well as the Company achieving certain financial performance targets. There were no shares exercisable at December 31, 1996 and 1995.
The fair value of stock options granted is estimated using the minimum value pricing method with the following assumptions: (i) risk-free interest rate of 7.0%, (ii) expected option life of seven years, (iii) forfeiture rate of zero, (iv) no expected volatility and (v) expected dividends of $1.41 per share annually.
The summary of stock option activity with executives, key employees and AGC Board of Directors is as follows:
The following table summarizes information about stock options outstanding at December 31, 1996:
AMERICAN GOLF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) EMPLOYEE BENEFITS (CONTINUED):
The Company adopted the disclosure only provision of SFAS No. 123 and accordingly, no compensation expense has been recognized for stock option grants to executives, key employees and AGC Board of Directors. Had compensation expense for such grants been determined based on the fair value of the award, at the grant date, consistent with the provisions of SFAS No. 123, the Company's net income would have been reduced to the proforma amounts indicated below:
In 1995, Performance Shares were granted to key members of management who were not awarded the right to purchase common stock or nonqualified stock options. The 1994 Plan provides that holders of Performance Shares have the right to receive an amount equal to the appreciation in share value (as measured by a predetermined formula based on the Company's earnings). All Performance Shares mature on December 31, 1998 with the appreciation in share value payable in three equal annual installments, beginning in January, 1999. Performance Shares vest based on achieving certain revenue and earnings targets of the Company and are subject to continued employment. Performance Shares outstanding totaled 159,686 and 159,886, as of December 31, 1996 and 1995, respectively. There were 475,222 and 475,022 shares available under the 1994 Plan as of December 31, 1996 and 1995, respectively. There was no compensation expense with respect to the 1994 Plan for the years ended December 31, 1996, 1995 and 1994.
The Company has a long-term share appreciation plan (phantom stock plan) for key members of management. The plan is administered by the Board of Directors of AGC and provides that the participants have the right to receive an amount equal to the appreciation in share value (as measured by a predetermined formula based on cash flow) at a date five years following the date of grant. The appreciation in share value is payable 50% after the exercise period, and the remainder, with interest in three equal installments, on the last day of the succeeding three years. There were 138,000 and 157,000 outstanding share appreciation rights as of December 31, 1996 and 1995, respectively. The share appreciation expense for the years ended December 31, 1996 and 1994 was approximately $620,000. There was no share appreciation expense for the year ended December 31, 1995. The Company does not intend to grant any additional share appreciation rights.
The Company has a 401(k) Employee Savings Plan available to all employees who have earned one year of vesting service and are at least 21 years of age. Participants may contribute from 1% to 10% of their earnings, in whole percentages, on a before-tax basis. The Company contributes to participants' accounts based on the amount the participant elects to defer and a matching contribution equal to $0.50 on each dollar contributed by a participant up to 3% of the participant's gross pay. The Company's expense for the plan for the years ended December 31, 1996, 1995 and 1994 was approximately $635,000, $523,000 and $524,000, respectively.
AMERICAN GOLF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) COMMITMENTS AND CONTINGENCIES:
The Company is the lessee under long-term operating leases for golf courses and equipment. At December 31, 1996, future minimum rental payments required pursuant to the terms of all lease obligations are as follows:
In addition to minimum rental payments, certain leases require payment of the excess of various percentages of gross revenue over the minimum rental payments. During the years ended December 31, 1996, 1995 and 1994, percentage rentals paid to unrelated parties were approximately $9,430,000, $7,789,000, and $7,604,000, respectively.
Under the terms of certain leases, the Company is committed to make improvements at golf courses. At December 31, 1996, approximately $1,828,000 of such improvements remain to be made.
At December 31, 1996, the Company was contingently liable for outstanding letters of credit in the amount of approximately $17,736,000.
The Company has continuing litigation matters and other contingencies incurred in the ordinary course of business and has recorded allowances for the payment of these contingencies when such amounts can be estimated and are considered material to the results of operations. Where no allowance has been recorded, the Company does not consider the contingencies material to either its consolidated financial position or results of operations.
(11) RELATED PARTY TRANSACTIONS:
The Company rents golf and tennis facilities from David G. Price and related entities in which he has a controlling interest. Rent expense paid to David G. Price and related entities was approximately $58,643,000, $47,600,000 and $42,492,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
The Company recorded net management fees from related entities in the amount of approximately $1,332,000, $554,000 and $1,240,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
The Company has accumulated costs in other receivables relating to construction in progress at certain golf and tennis facilities owned by NGP. Periodically, a portion of these costs are reimbursed by NGP. At December 31, 1996 and 1995, these accumulated costs amounted to approximately $6,456,000 and $3,106,000, respectively.
The Company earns interest on receivables from affiliates at a prime based rate. Interest income from affiliates was approximately $818,000, $873,000 and $753,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
AMERICAN GOLF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) STATEMENT OF CASH FLOWS--SUPPLEMENTAL DISCLOSURES:
Interest paid for the years ended December 31, 1996, 1995 and 1994 was approximately $1,950,000, $2,213,000 and $511,000, respectively.
State income taxes paid for the years ended December 31, 1996, 1995 and 1994 was approximately $223,000, $149,000 and $269,000, respectively.
Capital lease obligations of approximately $4,707,000 were incurred when the Company entered into leases for new equipment in 1995. In 1996, capital lease obligations incurred of $2,877,000 were assumed from GEI courses.
(13) SHAREHOLDERS' EQUITY:
As discussed in Note 9 to the consolidated financial statements, the Company has issued 214,497 shares of common stock to key employees for notes receivable with a balance at December 31, 1996 of $4,299,000. The notes receivable bear interest ranging from six to seven percent and the principal is due in 2004. The notes are collateralized by the common stock issued and are shown on the balance sheets as a reduction in shareholders' equity. Interest income accrued on the notes receivable was approximately $300,000 for the years ended December 31, 1996 and 1995.
Interest is paid with proceeds from shareholder distributions and, in part, their annual bonus. To the extent these amounts are insufficient to cover the current year interest, the unpaid interest may be added to the principal of the note. No amounts were added to principal for the years ended December 31, 1996 and 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL GOLF PROPERTIES, INC.
By: /s/ Edward R. Sause _________ Edward R. Sause Executive Vice President, Chief Financial Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.