U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Year Ended December 31, 1996 Commission File Number 001-12245
METROGOLF INCORPORATED
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(Exact name of registrant as specified in its charter)
COLORADO 84-1288480
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(State or other jurisdiction I.R.S. Employer Identification
No.
of incorporation or organization)
1999 Broadway, Suite 2435, Denver, Colorado 80202
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (303) 294-9300
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock (listed on the Boston Stock Exchange)
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Securities registered pursuant to section 12(g) of the Act:
None
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Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
X Yes No
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Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock of the Registrant
held by non-affiliates on March 31, 1997 was $3,676,863.
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DOCUMENTS INCORPORATED BY REFERENCE
The Company is incorporating as a part of Item 14, Exhibit Index, a
Prospectus filed pursuant to rule 424(b) on or about October 16,
1997.
METROGOLF INCORPORATED
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1. Business
ITEM 2. Properties
ITEM 3. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder
Matters
ITEM 6. Selected Financial Data
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation
ITEM 8. Financial Statements and Supplementary Data
ITEM 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
PART III
ITEM 10. Directors and Executive Officers of the Registrant
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management
ITEM 13. Certain Relationships and Related Transactions
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
SIGNATURES
PART I.
ITEM 1. BUSINESS
General
MetroGolf Incorporated (the "Company") is organized as a
corporation under the laws of the State of Colorado, and previously
operated under the name "The Vintage Group (USA) Ltd." See
"Corporate Information" for a description of the general
development of the Company.
The Company acquires, develops and operates golf centers designed
to provide a wide variety of practice and play opportunities in
major metropolitan areas. The Company's centers are located in
areas with high concentrations of office, urban residential and
hotel development that are convenient to time-constrained golfers.
The Company's golf centers typically offer: practice facilities;
instructional programs such as the David Leadbetter Golf Academy at
Illinois Center Golf; a full-line pro shop; restaurant, bar and
catering facilities; group meeting areas; and, in some cases, par-3
or executive-length (shorter than a regulation-length) golf
courses. The Company's golf centers are designed around a driving
range with target greens, bunkers and traps to simulate actual golf
course conditions. The Company's driving ranges, which typically
include substantially more hitting stations than the industry
average, are lighted to permit night play and are enclosed or
sheltered in a climate-controlled environment.
The Company's strategy is to become the leading owner and operator
of golf centers in major metropolitan areas. The Company intends to
accomplish this goal principally by acquiring existing golf
facilities that have the potential for revenue enhancement through
expansion of facilities, more efficient management and innovative
marketing strategies. The Company intends to develop new golf
centers in attractive markets where existing facilities are not
suitable for acquisition. The Company has capitalized on the
national media and industry recognition of its flagship
development, Illinois Center Golf, and has built a substantial
pipeline of attractive projects for acquisition and development.
See "Business Strategy." In addition to Illinois Center Golf, the
Company currently operates Goose Creek Golf Club ("Goose Creek"),
an 18-hole golf course in suburban Washington, D.C., Fremont Golf
Center in Fremont, California, Harborside Golf Center and Palms
Golf Center, each in San Diego, California and Rocky Point Golf
Center in Rocky Point, Long Island, New York.
Industry Overview
According to the National Golf Foundation ("NGF"), there were over
24 million golfers in the United States in 1995. The average age of
the golf driving range user was 37.1 years old, with an average
household income of $55,700 per year. Those with household income
in excess of $75,000 (approximately 35% of all stand-alone range
users) were the most likely to visit a stand-alone range, visiting
3.7 times more frequently than those with household income of less
than $30,000 (19% of all stand-alone range users) and 1.5 times
more frequently than those with household incomes between $30,000
and $75,000 (46% of all stand-alone range users).
The Company estimates that there are currently between 1,900 and
2,300 stand-alone driving ranges in the United States and that the
average number of tee stations per range in the industry in 1993
was 40, with 50% of all stand-alone ranges offering 35 or fewer tee
stations. Large stand-alone ranges, defined as ranges with more
than 50 tee stations, accounted for approximately 21% of all
facilities. The stand-alone range industry is highly fragmented.
The Company estimates that in 1995 over 90% of stand-alone ranges
were managed by independent owner operators. The Company believes
that many of these owner operated ranges are managed by individuals
who may lack the experience, expertise and financial resources to
compete effectively in a consolidating industry.
Driving ranges and golf practice and learning centers, have
experienced significant growth in recent years. Golf practice and
learning centers usually consist of a driving range with a minimum
of 50 tee stations (often covered and heated in areas of colder
climates), complete practice areas, including putting, chipping and
sand bunker areas and maintenance facilities. Indoor video and
other instructional analysis, in conjunction with a national golf
academy or other golf school, food and beverage services and golf
equipment retail operations, have become increasingly popular at
these facilities. Occasionally, such facilities are combined with
or incorporated into the full-length or executive-length course
facility types.
The ownership and operation of golf courses, driving ranges and
other golf facilities in the United States is highly fragmented,
with very few companies owning or operating substantial portfolios
of golf facilities. Over the last 10 years, however, there has been
an accelerating trend towards consolidation of ownership and
management of 18-hole golf courses. What had been an industry
characterized by fragmentation of ownership and management is
becoming increasingly concentrated. The ownership and operation of
driving ranges and golf practice and learning centers in the United
States, however, remains fragmented, with very few companies owning
or operating substantial golf facility portfolios. The Company
believes that there are very few companies who currently own and
operate more than one or two golf practice and learning centers and
only one that owns and operates more than ten golf practice and
learning centers in the United States.
Business Strategy
The Company's strategy is to become the leading owner and operator
of golf centers in major metropolitan areas. The Company intends to
accomplish this goal principally by acquiring existing golf
facilities that have the potential for revenue enhancement through
expansion of facilities, more efficient management and innovative
marketing strategies. The Company intends to develop new golf
centers in attractive markets where existing facilities are not
suitable for acquisition. The Company's golf centers are designed
around a driving range with target greens, bunkers and traps to
simulate actual golf course conditions. The Company's driving
ranges, which typically include substantially more hitting stations
than the industry average, are lighted to permit night play and are
enclosed or sheltered in a climate-controlled environment. The
Company has capitalized on the national recognition of its flagship
development, Illinois Center Golf, a golf center and par-3 golf
course in downtown Chicago, and has built a substantial pipeline of
attractive projects for acquisition and development. The Company
intends to incorporate Illinois Center Golf's features into its
renovation of existing golf facilities and development of new golf
centers.
Acquisition of Existing Golf Facilities. The Company believes
the ownership and operation of driving ranges and other golf
facilities is highly fragmented and presents numerous opportunities
for it to acquire, upgrade and renovate golf centers and driving
ranges. The Company's acquisition strategy is to target well-
located, stand-alone ranges or golf centers in major metropolitan
areas, some of which may be under performing. The Company will
either purchase the land and facilities or enter into long-term
leases for each project. In determining which facilities may be
suitable acquisition candidates, management principally considers
potential for improvement in revenue and operating cash flow
through capital improvements and efficiencies in management.
Capital improvements may include increasing the number of tee
stations, sheltering the hitting stations or enclosing the driving
range, installing lights to permit night play, adding or expanding
pro shop and clubhouse facilities and constructing other amenities
to encourage corporate, executive and business and leisure traveler
participation.
Developments of New Golf Centers. In desirable locations where
suitable acquisition opportunities are not available, the Company
intends to construct new facilities, often as an interim use for
valuable urban real estate under long-term leases. Such golf
centers, typically modeled after Illinois Center Golf, will be
designed to provide a mix of features uniquely focused on the
demographics and other characteristics of the specific market area.
The Company's golf centers typically include: instructional
programs such as the David Leadbetter Golf Academy at Illinois
Center Golf; enclosed heated hitting areas; putting, sand bunker
and chipping practice areas; full-line pro shop; restaurant, bar
and catering facilities; group meeting areas; and, in some cases,
par-3 or executive-length golf courses.
Economies of Scale. The Company believes that, in the course of
its acquisition and development activities, it will realize
efficiencies of management, purchasing and marketing unavailable to
independent owner-operators who manage the vast majority of stand-
alone golf facilities. It will also spread corporate overhead
costs, including accounting, insurance, cash management, strategic
marketing and financial reporting functions, over multiple
facilities.
Marketing Strategy. The Company believes it will achieve high
margins from strong demand and high utilization rates for golf
practice and learning facilities located in areas with few or
nonexistent locally available alternatives. It will accomplish this
by providing a unique recreational facility that is user-friendly
for the novice and intermediate golfer; by including
internationally recognized golf instruction programs such as the
David Leadbetter Golf Academy at Illinois Center Golf for golf
instruction; by designing facilities that provide unique venues for
corporate and business outings, meetings and other special events;
and by offering opportunities for major corporate sponsorship and
advertising.
Metropolitan Golf Centers
Metropolitan golf centers have several attractive characteristics,
including: (i) ease of access for time-constrained metropolitan
area residents and local businesspersons in under-served markets;
(ii) corporate entertainment facilities and unique membership and
entertainment opportunities for local and national businesses;
(iii) special appeal to women, beginning golfers and high-handicap
golfers because of the learning center and the shorter length golf
course; and (iv) availability of unique, outdoor recreation
amenities for the business and leisure traveler patronizing nearby
hotels.
Golf Access to Under-Served Market. Many major metropolitan areas
lack sufficient golf facilities to meet the increasing demand for
tee times. Golfers in densely populated areas frequently must drive
long distances to play or practice golf. In addition, the busy
professional may lack sufficient time for recreational activities.
By locating a multi-use golf facility close to the user's home or
job in metropolitan residential or business districts, the Company
provides a convenience for the metropolitan golfer. By offering
opportunities to play and practice golf requiring only one to two
hours, including travel time, the Company allows the golfer more
frequent outings and meets the needs of a larger constituency. The
metropolitan golf center is not designed to replace the suburban
country club or daily fee course, but rather to supplement regular
rounds and offer a high-quality practice medium.
Corporate Entertainment Center. As corporate entertainment
facilities, metropolitan golf centers offer unique venues with easy
access for client entertainment and employee benefit functions. As
highly visible outdoor recreation facilities, metropolitan golf
centers provide unique and attractive advertising and sponsorship
opportunities. Each metropolitan golf center has staff members
dedicated to corporate membership, group outings and consumer
products sponsorship sales. The presence of a par-3 or executive-
length golf course in many facilities allows the Company to offer
an enhanced opportunity to increase sales of both individual and
corporate memberships, host group outings and sponsor special
events.
Preferable Facility for Women and High-handicap Golfers. Women
tend to be consumers of golf lessons, specialized golf equipment
and golf apparel. The highly developed learning and practice
facilities and upscale retail merchandising of the Company's
metropolitan golf centers cater to these demands. The executive-
length or par-3 golf course holds specific appeal for women. High-
handicap golfers are also drawn to the shorter courses as a lower
cost alternative and as a means to improve their golf game before
playing a full-length course.
Travelers' Amenity. Metropolitan golf centers offer hotels an
outdoor recreational product for their guests. Both business and
leisure travelers may take advantage of the proximity of the center
to their hotel and of special packages that may be offered to hotel
guests. Hotels may be interested in block purchases and may pay
sponsorship fees to the metropolitan golf center, thereby
increasing the visibility of both the hotel and the golf facility.
Operational Structure
Generally, the Company's golf centers are open seven days per week.
The Company's revenues are derived from the sale of greens fees,
range balls, pro shop merchandise (golf clubs, balls, bags, gloves,
videos, apparel and related accessories) and food and beverages and
a portion of the revenue generated by instructional programs. Golf
facilities in general have seasonal attendance due to outdoor
facilities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations Seasonality."
An on-site general manager of each center has overall
administrative responsibility for his or her center's day-to-day
operation including, as applicable, the driving range, golf course,
instructional program, short-game practice area, pro shop,
restaurant, bar, as well as the condition of the facilities. In
addition, each general manager works with the Company's Chief
Financial Officer to prepare monthly and annual budgets and
marketing plans.
The Company emphasizes recruiting and training skilled personnel.
The Company seeks general managers with broad and extensive
business and management skills, preferably from service and
hospitality industries. General managers, as well as other
management personnel, are provided performance incentive bonuses.
The Company encourages each general manager to emphasize customer
service at his or her center. Employees undergo comprehensive
training and are required to be courteous, wear standardized
clothing and display a professional attitude.
The Company also emphasizes the availability of high-quality, all-
level golf instruction at its golf centers. Currently, the Company
has an agreement with the internationally recognized David
Leadbetter Golf Academy for instruction at Illinois Center Golf
(the "Golf Academy Agreement"). The Company is currently in
discussions with the David Leadbetter Golf Academy about operating
the instruction program at other Company golf facilities and
expects to expand its relationship with the David Leadbetter Golf
Academy to many of the Company's golf centers.
By virtue of operating a number of golf centers, the Company
believes it achieves economies of scale not available to
independent owner-operators. Typically, the Company can acquire
artificial turf, range balls, pro shop merchandise and other golf
center supplies and equipment at lower prices than any individual
owner-operator. The Company can also purchase insurance coverage at
a lower premium rate than would be charged for an individual golf
center. The Company's policies relating to personnel, labor, cash
management and budgets are formulated at the corporate level and
required to be observed by each of the Company's golf centers. The
Company's accounting, legal, insurance and finance functions and
management information systems are also centralized, which enables
personnel at each golf center to focus solely on operational
matters related to the particular golf center.
The Company advertises in newspapers and on radio and cable
television and uses direct mailings and other promotions, including
sponsoring certain charitable events and contests and giving free
clinics and equipment demonstrations, to increase public awareness
of its golf centers. Each golf center employs sales and marketing
employees who coordinate advertising and solicit group events and
memberships. The compensation of sales and marketing employees is
predominantly incentive based. Pursuant to the Golf Academy
Agreement, David Leadbetter Golf Academy is required to market and
promote the academy located at Illinois Center Golf.
MetroGolf Management
MetroGolf Management Inc. ("MGMI") is a wholly owned golf
management company formed to manage Illinois Center Golf and other
future projects of the Company and its affiliates. The Company,
through MGMI, manages the operations of Illinois Center Golf,
Goose Creek, Harborside Golf Center, Fremont Golf Center, Palms
Golf Center and Rocky Point Golf Center, and plans to similarly
manage operations of the New York Golf Center and other future
projects. Generally, all personnel employed at each facility are
employees of MGMI. The management contracts between each facility
and MGMI generally include provisions that the facility reimburse
MGMI for the costs of such employees as are required at each
facility.
Competition
On a national basis, the Company faces several major competitors
with sizable portfolios of golf facilities. However, while these
companies own or manage large numbers of golf facilities, overall
golf facilities ownership and management generally remains highly
fragmented. The ten largest golf course management companies own or
operate only approximately 3% of the over 14,000 privately owned
golf courses in the country. The vast majority of the remaining 97%
of privately owned courses are held by regional multi-course (three
to five) companies, small ventures and individuals who have limited
experience in operating a course to maximize profit. These smaller
operators tend to lack the access to capital and management
expertise enjoyed by large multi-course owners and operators. Some
of the multi-facility owners have recently completed public
offerings to increase their portfolios with opportunities to
acquire facilities which require professional ownership and
management to maximize the potential of the chosen facility. The
trend toward consolidation of 18-hole golf course facilities has
become very profitable, but increasingly competitive, over the past
few years. However, the consolidation trend recently evident for
18-hole golf courses is only in its infancy for the driving range
and practice and learning center segment of the industry.
The Company believes that there are very few companies that
currently own and operate more than one or two golf practice and
learning centers and that only Family Golf Centers Inc. ("FGCI")
owns and operates more than ten golf practice and learning centers
in the United States. FGCI recently recapitalized through a public
secondary offering, is the largest owner and operator of golf
driving ranges in the nation and is pursuing an aggressive
development and acquisition strategy that has already tripled the
number of ranges under its operation since January 1995. Its
substantial capital gives it a competitive advantage over the
Company in attempting to absorb weaker operations and provides it
with increasing economies of scale. However, FGCI is largely
focused on the family golf market and on operations in suburban and
smaller metropolitan areas, although it has competed, and may in
the future compete, directly with the Company in certain large
metropolitan areas. Other public and private companies, such as
Golden Bear Golf, Inc.; Michael Jordan Golf Co.; Eagle Quest,
(Tuition) Limited; Blue Eagle Golf Center, Inc.; Golf Centers of
America, Inc.; Senior Tour Players Development, Inc. and the
Professional Golfers' Association of America are pursuing
opportunities in the golf driving range and practice facility
segment and may compete directly or indirectly with the Company.
Several other large and well-financed companies are active in the
full-length golf course segment; however, none have focused on the
driving range, golf practice and learning center or executive-
length and par-3 courses segments or on larger metropolitan areas,
although there can be no assurance that they may not do so in the
future.
Employees
The Company has nine full-time employees at the corporate level,
and a variable number of additional full-time and part-time
employees at the facility level through its wholly owned
subsidiary, MGMI. Currently, MGMI has approximately 20 full-time
equivalent employees during the slow season, and 70 full-time
equivalent employees during the peak season. In addition, the
Company utilizes the services of various independent contractors,
primarily for computer, accounting and finance-related services.
Corporate Information
On February 21, 1992, Mr. Tourtellotte incorporated and became the
sole stockholder of The Vintage Group USA, Ltd. On May 26, 1993,
Mr. Tourtellotte incorporated and became the sole stockholder of
MetroGolf Illinois Center, Inc. ("IC"). On July 29, 1994, The
Vintage Group USA, Ltd. changed its name to TVG (Virginia) Inc.
(subsequently renamed MetroGolf Virginia, Inc. "VA")
Simultaneously, Mr. Tourtellotte formed the Company under the name
of The Vintage Group (USA) Ltd. and contributed his common stock of
VA and IC to the Company in exchange for 100% of its outstanding
Common Stock. Since such time, the Company has, as the managing
general partner in Illinois Center Golf Partners, L.P.("ICGP") and
Goose Creek Golf Partners Limited Partnership ("GCGP"), operated
Illinois Center Golf and Goose Creek. On October 21, 1996, the
Company purchased approximately 94% and 90% of the limited
partnership interests in ICGP and GCGP, respectively. On July 1,
1996, the Company purchased the leasehold interest for the Fremont
Golf Center. Also on such date, the Company's wholly owned
subsidiary, MetroGolf (San Diego) Incorporated, began operating
Harborside Golf Center. On December 31, 1996, the Company
purchased the leasehold interest in the Palms Golf Center. On
March 1, 1997, the Company assumed management of all operations at
the Rocky Point Golf Center.
The Company has recently changed its name to MetroGolf Incorporated
and intends to incorporate the name "MetroGolf" into the names of
its golf centers. The Company has applied for federal tradename
protection for the name "MetroGolf Incorporated," but there can be
no assurance that such protection will be granted. The Company is
aware of other users of the name "MetroGolf" in some of the markets
where the Company currently operates golf centers or may operate
golf centers in the future. The Company does not believe that any
such user is in direct competition with the Company; however, the
Company may choose not to use the name "MetroGolf" in certain
markets if it is inadvisable to do so because there is an existing
user of the name.
ITEM 2. PROPERTIES
The Company leases approximately 4,300 square feet of corporate
office space in Denver, Colorado for rent of approximately $64,400
per year.
Company Golf Centers
Date Opened,
No. of Acquired or
Location Type of Hitting Commenced
of Facility Facility Name Facility Tees Management
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Chicago, IL Illinois MetroGolf Center 92 July 1994
Center Golf
Fremont, CA Fremont Golf MetroGolf Center 36 July 1996
Center
San Diego, CA Harborside MetroGolf Center 80 July 1996
Golf Center
San Diego, CA Palms Golf MetroGolf Center 42 Dec. 1996
Center
Leesburg, VA Goose Creek 18 hole Course -- June 1992
Long Island, Rocky Point MetroGolf Center 70 March 1997
NY Golf Center
Illinois Center Golf. Illinois Center Golf opened in July 1994 on
an approximately 23-acre parcel in downtown Chicago. This golf
center features a 9-hole, par-3 golf course; a year-round, lighted,
92-stall driving range; and a complete, full-service clubhouse and
learning center. Illinois Center Golf is located in the heart of
Chicago's financial district adjacent to the Chicago Loop and is
designed to attract business people, travelers and residents in the
immediate and surrounding downtown area. There are more than 4,000
hotel rooms, 3,500 residences, and nine million square feet of
Class A office space located within two blocks of the facility. The
Hyatt, Sheraton, Fairmount and Swissotel hotels are located within
one block of Illinois Center Golf and contribute over 1,000,000
room nights per year to the site area. In the immediate vicinity,
there are over 12,000 residents with mean household incomes in
excess of $70,000. In addition, over 650,000 people are employed
within a 12-block radius of the site.
The 9-hole, par-3 course was designed by Dye Designs International,
Inc. ("Dye Designs") and features many of the trademark elements
that characterize Dye Designs courses. In particular, the 9th hole
features an island green which challenges the best golfers. Each
hole has oversized tee boxes to facilitate tee maintenance and
offer frequent players varied approaches to each green. The 350-
yard, double-ended driving range has a choice of grass or astroturf
at either end (with a portion covered and heated for winter use)
and target fairways and elevated greens at various distances. The
clubhouse serves as the focal point and includes restaurant, bar
and catering facilities, a full-line pro shop and a state-of-the-
art teaching center featuring a David Leadbetter Golf Academy with
its internationally recognized teaching programs.
Illinois Center Golf generated approximately $1.6 million of
revenue in its first full year of operations (1995). Over 580
individual memberships have been sold (generating both initiation
fees and recurring monthly fees), and both the course and driving
range have received significant public usage. Corporate membership
sales at all levels reflect high interest from the business
community. Corporate and consumer product sponsorship interest has
been strong, with several sponsorship programs, including an
agreement with Pepsico, Inc., having been sold. Additionally,
arrangements have been made with local hotels, including Swissotel,
for block purchases of tee times, range usage and other events.
Illinois Center Golf has been featured on the Today Show, CNN and
25 local and syndicated television programs and has appeared in
Sports Illustrated and 180 trade publications and daily newspapers
(including The Wall Street Journal and The New York Times). The
extensive media coverage of the Company's Chicago operation attests
to the innovative nature of its new metropolitan golf centers and
to the high level of public interest in metropolitan golf and
indicates the significant market potential for such facilities.
Illinois Center Golf is located on a property which is leased for
15 years, terminating in 2009. The lease may be extended by mutual
agreement between the lessor and lessee. The lease may be
terminated by the lessor under certain conditions. If the lease is
terminated prior to the end of the 15-year period, the lessor must
pay the lessee a termination fee of up to $4.4 million, reduced by
net earnings from the facility. Illinois Center Golf was financed
through a $3.5 million private placement of limited partnership
units in ICGP. The Company is the owner of 89% of the common stock
of IC which is the sole general partner of ICGP. The Company
purchased approximately 94% of the limited partnership interests in
ICGP on October 21, 1996 with a combination of cash and convertible
notes totaling $3.275 million.
Fremont Golf Center. On July 1, 1996, the Company purchased the
leasehold interest on an existing driving range and learning center
facility in Fremont, California for $1,350,000 (plus acquisition
costs of approximately $123,000). The existing golf facility
consists of a 36-tee station driving range, two practice putting
greens, a clubhouse and a maintenance area on approximately 15
acres of land. The current clubhouse includes a grill room and bar
area not currently in operation. The driving range has both natural
and artificial tee areas and lights for nighttime use.
In addition, the Company has been granted the exclusive right to
develop an adjacent 35-acre tract of land owned by the City of
Fremont into a 9-hole executive-length golf course with expanded
practice facilities and significantly improved clubhouse amenities.
The Company expects to commence construction of the 9-hole
executive-length golf course and begin modifications to the
existing facility in the summer of 1997, with the completion of the
golf center scheduled for the spring of 1998. The total acquisition
(including the driving range and learning center) and proposed
development budget is approximately $3.5 million.
The new Fremont Golf Center is planned to include an expanded, 80-
station tee area, practice putting green, chipping and short game
practice and sand bunker areas. Plans call for the clubhouse to be
redesigned and enhanced to include a full-line pro shop, locker
rooms and bar area and grill room with an outdoor patio. A
corporate entertainment and group event area will be located
adjacent to the patio. The 9-hole executive-length golf course is
to be designed by Dye Designs and will have many of the trademark
elements that characterize Dye Designs golf courses.
The Fremont Golf Center site is an urban, in-fill site in the east
San Francisco Bay area, located between Oakland and San Jose in the
heart of the Silicon Valley. An estimated two million people live
and work in the east Bay area. The site is adjacent to Fremont's
Central Park, which serves as a regional park for the east Bay area
and frequently experiences weekend crowds in excess of 50,000
people. The site provides a significant opportunity because of the
limited availability of golfing options in the Fremont area. The
Company believes, based on its market research in the area, that
there is significant undercapacity of golf facilities in the area.
The development budget for the new 9-hole executive-length golf
course, and modifications to the existing facility, is anticipated
to be approximately $2 million over a one-year development period.
The Company intends to fund the development through a combination
of equity and debt. The debt is to be provided by a commercial
bank, specialized golf lending institution or private lender.
Harborside Golf Center. On July 1, 1996, the Company commenced
operating the Harborside Golf Center located in downtown San Diego,
California. The golf center is located on a 4.63 acre site of land
in close proximity to the San Diego Convention Center and
International Airport and is adjacent to major hotels, restaurants
and approximately eight million square feet of commercial office
space. The facility includes a driving range which has 80 tee
stations, double-tiered and double-ended. There are 20 additional
grass practice tees, a putting green, chipping green and sand
bunker area. Multiple target greens and sand traps are located on
the driving range. The clubhouse covers approximately 10,000 square
feet and includes a pro shop, a sports bar/cafe and computerized
video swing analysis.
Palms Golf Center. On December 31, 1996, the Company purchased the
leasehold interest and related improvement on an approximately 2
year old 13-acre facility fronting on Interstate 5 approximately 10
miles south of downtown San Diego. The Palms Golf Center features
a 42 grass and mat tee station practice range; a 9-hole pitch-and-
putt golf course; an approximately 10,000 square foot putting
green, complete with chipping, short game and sand bunker areas;
and an approximately 2,000 square foot clubhouse that is complete
with a pro shop and snack bar. The facility is lighted for evening
use. As consideration for the acquisition, the Company paid
$71,584 in cash, issued $137,500 worth of Common Stock and executed
an $87,500 promissory note bearing interest at the rate of 8% per
annum that provides for payment of all principal and accrued
interest on April 21, 1997. The Company acquired its interest in
the property subject to approximately $460,000 of existing
indebtedness.
Rocky Point Golf Center. On March 1, 1997, the Company assumed the
management of all operations of Rocky Point Golf Center located in
Rocky Point, Long Island, New York. The center offers golfers 70
250 yard hitting stations which are covered and heated for cold and
rainy weather play. The double deck range offers a lighted landing
area for night play with seven target greens. An approximately
2,500 square foot grass putting green, complete with sand bunkers
and chipping areas, accommodates short game practice. Rocky Point
Golf Center also offers a full line pro shop and PGA accredited
instruction, including a full offering of lessons for individuals,
couples or groups.
Goose Creek. Goose Creek is a 20-year-old daily fee course located
in Leesburg, Virginia that was purchased by GCGP in June 1992. The
golf course is 6,800 yards in length and has a 5,000 square-foot
clubhouse. The club is located seven miles from Dulles
International Airport in the northern Virginia suburbs of
Washington, D.C. and logs in excess of 40,000 rounds annually at
current fees of as much as $30 per round. The facility has been
remodeled and repositioned in the market by the Company as a
higher-end, country club-type experience for daily fee golfers.
Since its acquisition in 1992, greens fees have been increased by
as much as 40%. In 1995, Goose Creek generated over $1.4 million in
total revenue. Goose Creek was purchased by GCGP for slightly more
than $4.3 million. Approximately $975,000 of equity was raised for
the purchase through a private limited partnership offering in
GCGP. The balance of the funds was provided by a mortgage loan and
$400,000 carryback financing from the seller. The Company owns
100% of the issued and outstanding stock of VA which is the
managing general partner of GCGP. The Company purchased
approximately 90% of the limited partnership interests in GCGP on
October 21, 1996 for a combination of cash and convertible notes
totaling $1.365 million.
Future Projects
New York Golf Center. The Company has fully negotiated a lease
(the "Port Authority Lease") with the Port Authority of New York
and New Jersey (the "Port Authority") to develop a driving range
and learning center on top of the Port Authority Bus Terminal in
midtown Manhattan, New York City. Construction is scheduled to
commence mid-1997, with the opening scheduled for mid-1998. The
proposed development budget is approximately $5.5 million. The
facility is planned to consist of a three-level facility occupying
a portion of the roof of the Port Authority Bus Terminal
(approximately three acres) and includes a 54-tee station area, a
practice putting green, a sand bunker practice area, a greenside
chipping area, a video instruction center, locker rooms, a David
Leadbetter Golf Academy and a club facility. The driving range will
include covered, heated tee stations. The golf instruction center,
video instruction center, golf practice areas and locker rooms will
be located in the clubhouse, together with a sports bar/cafe,
outdoor patio, corporate entertainment and group event area, pro
shop and offices. The Company is currently in discussions with the
David Leadbetter Golf Academy about operating the golf instruction
program at the New York Golf Center.
The Port Authority Bus Terminal site provides a development
opportunity that the Company believes is unparalleled in the golf
industry. In this midtown Manhattan location at 42nd Street and 8th
Avenue, approximately 200,000 daily commuters pass through the Port
Authority Bus Terminal, and approximately 60,000 daily transit
riders use the Times Square subway exit at 42nd Street. Peak
pedestrian traffic counts at the corner of 42nd Street and 7th
Avenue show an average of approximately 45,000 people per day and
are among the highest in all of Manhattan. Demographics show that
over 1.1 million employees work in the New York City midtown area,
and 525,000 permanent residents live in the same area. In addition,
over 20 million tourists visit New York City on an annual basis.
The site is adjacent to the Times Square Business Improvement
District, which includes 12,600 hotel rooms and accommodates 1.7
million visitors annually. Several leading entertainment and
service industry companies, including Disney Enterprises, Inc.;
Viacom Inc./MTV Networks Inc.; Sony Corp.; Virgin Records Inc.; and
American Multi-Cinema Inc. have recently announced or are
considering projects near the Port Authority Bus Terminal site.
Because of the interest in the area, several large corporations
have expressed interest in sponsorship and advertising
opportunities associated with the facility.
The Company has received conditional approval of the structural
feasibility report for the project. Upon the Company's completion
of certain design and engineering studies to the satisfaction of
the Port Authority staff, the Port Authority Lease will be
submitted to the Port Authority Board of Commissioners for its
final approval and the Port Authority's execution. Although the
Company believes that such studies will be approved and the Port
Authority Lease will be executed in mid-1997, there can be no
assurance as to such approval or lease execution.
For the purpose of developing the Port Authority site, the Company
has formed a limited liability company that is owned by the
Company's wholly owned subsidiary, MetroGolf New York, Inc.
("MGNY"), and several individual investors (the "Class B Members")
who assisted in the project presentation, concept development and
negotiations with the Port Authority. The Operating Agreement for
the limited liability company provides for distribution of cash to
the members (i) first, in return of capital contributed, plus a 15%
per annum cumulative compounded deferred return thereon (it is
anticipated that the Class B Members will provide 5% of the
contributed capital); (ii) second, 75% to MGNY and 25% to the Class
B Members until MGNY has received a 30% internal rate of return on
its investment; and (iii) third, 70% to MGNY and 30% to the Class B
Members. MGNY is to be paid a development fee of $250,000 for
development services during construction and management fee of 5%
per annum of gross revenues upon completion for delivery of
management services. The Company may offer to acquire the Class B
Members' current interests which could result in 100% Company
ownership of the New York Golf Center; however, there can be no
assurance upon what terms, if any, such acquisition may occur.
ITEM 3. LEGAL PROCEEDINGS
The Company knows of no material litigation or proceeding pending,
threatened or contemplated to which the Company is or may become a
party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The principal United States market for the Company's common
stock is the National Association of Securities Dealers, Inc.
Automated Quotation Systems SmallCap Market (the "NASDAQ Small
Cap"). The high and low sales prices for the common stock from
inception of trading (October 16, 1996) to December 31 1996 was
$6.50 and $5.25 per share, respectively.
As of March 31, 1997 there were 79 record holders of the Company's
common stock.
No dividends have been paid on the Company's common stock for the
years ended December 31, 1996, 1995 and 1994.
ITEM 6. SELECTED FINANCIAL DATA
Inception
Years Ended Dec. 31, to Dec. 31,
1996 1995 1994 1993 1992
- -----------------------------------------------------------------
Total revenues $1,080,936 $335,303 $291,237 $106,313 $76,250
Total operating
expenses 2,498,972 882,709 565,811 109,176 47,655
Operating income
(loss) (1,418,036) (547,406) (274,574) (2,863) 28,595
Other income
(expense) (526,757) 35,122 13,630 88 (1,263)
Equity in loss
of affiliates (2,278) (770) (309) (1,392) (1,010)
Minority interest
in (income) loss
of consolidated
subsidiaries 13,807 (19,058) (3,560) - -
Net income
(loss) ($1,933,264)$(532,112)$(264,813) $(4,167) $26,322
Net income
(loss)
applicable to
common
stockholders ($2,077,592)$(687,164)$(315,490) $(4,167) $26,322
Net income
(loss) per
common share $(1.79) $(.78) $(.36) ($0) $.03
December 31,
------------------------------------------------
1996 1995 1994 1993 1992
Total assets $16,703,910 $979,679 $812,725 $206,388 $8,218
Long-term
obligations 4,133,342 23,151 26,287 21,595 -
The Company acquired several operating properties during 1996. See
Note 1 to the financial statements contained in Item 8.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's financial statements and the notes thereto
appearing elsewhere in this report. This report contains forward-
looking statements, and actual results could differ materially from
those projected in the forward-looking statements.
Overview
On October 21, 1996, the Company completed the sale of 1,175,000
shares of its common stock in an IPO registered on Form S-1. The
Company received net proceeds of approximately $5.46 million after
paying offering costs of approximately $1.59 million. The
Company's strategy is to increase revenues and net income by
increasing the number of golf centers it owns, leases or manages by
(i) identifying and acquiring existing golf facilities that have
the potential for revenue enhancement through better management and
improved or expanded facilities, including the addition of enclosed
hitting areas, full-line pro shops and other amenities, (ii)
developing new golf centers in locations where suitable acquisition
opportunities are not available, and (iii) seeking to realize
economies of scale through centralized purchasing, accounting,
management information and cash management systems. Consistent with
this strategy, the Company acquired 94% and 90% of the limited
partnership interests in ICGP and GCGP, respectively, on October
21, 1996. The Company acquired Fremont Golf Center on July 1, 1996
and Palms Golf Center on December 31, 1996. The Company also
commenced operating the Harborside Golf Center on July 1, 1996. In
addition, the Company is actively pursuing acquisition or
development projects in major cities, including Atlanta, Denver,
Los Angeles, St. Louis, San Diego, San Francisco, Seattle and
Toronto. Consummation of any acquisition or development of these or
any other future sites is subject to the satisfaction of various
conditions, including the satisfactory completion of due diligence
by the Company and the negotiation of definitive agreements. As
consideration for any future acquisition or development, the
Company may pay cash, incur indebtedness or issue debt or equity
securities. Such acquisitions or developments could result in
material changes in the Company's financial condition and operating
results; however, there can be no assurance as to the occurrence of
any of these acquisitions or developments or, if they occur, as to
the timing of the consummation of any acquisitions or developments.
Results of Operations
Prior to July 1, 1996, the Company derived its revenue from two
major sources: development or acquisition fees and management fees.
On July 1, 1996 the Company commenced operations at Fremont and
Harborside. The Company commenced operations at Palms on September
1, 1996. The Company commenced operations at Illinois Center and
Goose Creek on October 22, 1996. Prior to the commencement of
operations, management fees are generated by three subsidiaries of
the Company: IC and VA, as managing general partners of ICGP and
GCGP, and MGMI as property manager of Illinois Center Golf, Goose
Creek, Harborside Golf Center, Fremont Golf Center and Palms Golf
Center. The Company initially used outside management companies to
manage its golf centers. In September 1995, the operations
management subcontract for Illinois Center Golf was terminated. In
March 1996, the Company terminated the third-party management
contract for Goose Creek. All Company properties are, and in the
future are expected to be, managed by MGMI.
Year Ended December 31, 1996, as Compared to Year Ended December
31, 1995
Total revenues increased 322%, to approximately $1,081,000 for the
year ended December 31, 1996, from approximately $335,000 for the
year ended December 31, 1995. In 1996, the Company earned
approximately $890,000 from golf course and learning center
operations, approximately $181,000 from management fees and $10,000
from consulting fees. In 1995, the Company earned approximately
$190,000 from management fees, $120,000 from an acquisition fee and
$25,000 from consulting fees
Operating expenses increased 283%, to approximately $2,499,000 for
the year ended December 31, 1996, from approximately $882,700 for
the year ended December 31, 1995. Operating costs increased to
$709,130 from $0 due to the addition of operating properties in
1996 and the acquisition of ICGP and GCGP during the fourth quarter
of 1996. Salaries increased to $634,584 in 1996 from $343,827 for
the year ended December 31, 1995 due to salary increases and the
addition of corporate personnel. In addition, other general and
administrative expenses for the year ended December 31, 1996
increased to $956,701 from $519,583 in 1995 due to property
acquisitions during 1996.
Depreciation expense increased to approximately $199,000 in 1996
from approximately $19,300 in 1995 due to the acquisition of
Fremont in July 1996 and ICGP and GCGP in the fourth quarter of
1996.
Interest expense increased to $567,253 in 1996 from $25,994 in 1995
primarily due to placement of $2,025,000 of convertible
subordinated notes ("PP Notes") in the second quarter of 1996 and
the ICGP and GCGP Notes in the fourth quarter of 1996.
Interest income decreased to $40,496 in 1996 from $61,116 in 1995
as a result of the interest-bearing notes receivable being
consolidated as a result of the acquisition of GCGP and ICGP.
Year Ended December 31, 1995, as Compared to Year Ended December
31, 1994
Total revenues for 1995 increased 15.1%, to approximately $335,000
from approximately $291,000 for 1994. In 1995, the Company earned
approximately $190,000 from management fees, $120,000 from an
acquisition fee and $25,000 from consulting fees. In 1994, the
Company earned approximately $160,000 from management fees,
$125,000 from development fees and $6,000 from consulting fees.
Each of these are discussed in more detail below.
VA, a wholly owned subsidiary, is the managing general partner of
GCGP, which is the owner of Goose Creek. VA earned a fee of
approximately $51,000 annually for managing GCGP. The Company
earned management fees of $51,000 for 1995, which increased by 5%
from the prior year in accordance with a contractual inflation
adjustment.
IC, an 89% owned subsidiary, is the managing general partner of
ICGP, which is the owner of Illinois Center Golf. IC earned a fee
of approximately $60,000 annually for managing ICGP. The Company
earned management fees of $60,000 for 1995 and $35,000 for 1994 as
IC began earning its management fee beginning June 1, 1994.
MGMI, a 51% owned subsidiary during 1995 (now wholly owned), earned
management fees of approximately $79,000 and $76,000 in 1995 and
1994, respectively, as the facility manager of Illinois Center
Golf.
In 1995, the Company did not earn any development fees. In 1995,
the Company earned a fee of $120,000 for assigning its rights to
purchase a golf course in South Carolina. In addition, the Company
earned a $25,000 fee in 1995 from the purchaser of a promissory
note held by the former owner of Goose Creek for negotiating the
purchase of the promissory note at a substantial discount. In 1994,
the Company earned a development fee of $125,000 upon completion of
the Illinois Center Golf facility. Each of these sources of revenue
are considered nonrecurring.
Operating expenses increased to approximately $883,000 in 1995 from
approximately $566,000 in 1994. Although salaries decreased to
$344,000 in 1995 from $374,000 in 1994, other general and
administrative expenses increased to $520,000 in 1995 from $181,000
in 1994. The primary reasons for the increase in general and
administrative expenses were an increase in legal and accounting
fees in 1995 associated with preparation of various securities
offering documents and the initial audit of the Company in 1995. In
addition, the Company paid a commission of $25,000 from the fees it
earned for assigning its rights to purchase the South Carolina
property and paid subcontract property management fees of $45,000.
These costs were not incurred in 1994. The Company also leased new
office space in September of 1994; accordingly, rent expense is
approximately $17,000 higher in 1995 than in 1994.
Depreciation expense increased to $19,000 in 1995 from $10,800 in
1994.
Interest income increased to $61,100 in 1995 from $15,500 in 1994
as a result of interest-bearing loans to ICGP and GCGP, starting in
September 1994 and November 1995, as well as interest-bearing loans
to its sole Common Stock holder.
Interest expense increased to $26,000 in 1995 from $1,800 in 1994,
primarily due to the Company's borrowings under its line of credit,
which were primarily used to make loans to ICGP and GCGP.
The equity in loss of affiliates represents the Company's
proportional share of the losses of ICGP and GCGP, which had larger
losses in 1995 than in 1994.
Liquidity and Capital Resources
At December 31, 1996, the Company had a working capital deficit of
approximately $7,530,700, as compared to a working capital deficit
of $506,000 at December 31, 1995. The increase in working capital
deficit is primarily due to the current portion of long term debt
resulting from property acquisitions. Increases in accounts
payable and accrued salaries resulting from continued losses from
operations, costs associated with the placement of the PP Notes in
May 1996 and negative cash flow contributed to the increase in
working capital deficit. The Company has approximately $6,111,000
of current liabilities relating to debts that come due within the
next 12 months. Of these $861,750 are convertible subordinated
notes that are convertible into common stock of the Company at 50
percent of the market value of the Company's common stock. Because
of the conversion discount, the Company believes that most, if not
all, of these notes will be converted by the noteholders prior to
the maturity date of June 1, 1997. $4,505,556 of these current
liabilities are mortgages on existing operating properties and are
fully collateralized by such properties. The Company is currently
negotiating to refinance or extend each of these mortgages and
expects to receive new mortgages with maturity dates that extend
beyond 12 months. In addition, the Company is currently offering
for sale in a private placement $5,000,000 in convertible
subordinated notes ("the Notes"). The Company intends to use the
proceeds for additional acquisitions which should further increase
the Company's cash flow from operations and for current working
capital needs. The Company believes that these funds will be
sufficient to meet its liquidity needs for the next year.
The cash used in operating activities increased to approximately
$1,213,000 in 1996 from $221,700 in 1995. The primary reason for
the increase has been the increase in the net loss to $1,933,300 in
1996 from $532,100 in 1995. Cash raised in debt and equity
financing in 1996 and 1995 was primarily used to pay for business
acquisitions, redeem the Company's preferred stock and fund
operating losses. In addition, the Company used accounts payable
as a source of financing. Trade accounts payable increased
$294,000 in 1996 and $260,000 in 1995.
Since its inception, the Company has been funded primarily through
loans, capital contributions and the sale of preferred stock. In
May 1996, the Company successfully completed the sale of $2,025,000
of PP Notes, resulting in net proceeds of approximately $1,757,100.
Some of the proceeds from the PP Notes were used to pay off the
Company's line of credit. In October, 1996, the Company
successfully completed the sale of 1,125,000 shares of common
stock. Some of the proceeds from the sale were utilized to redeem
the preferred stock and to acquire ICGP and GCGP. After these
transactions, the Company's primary liabilities are debt associated
with the operating properties. The Company intends to refinance
the current portion of the long term debt which matures in 1997.
The Company is currently offering a convertible debt placement with
a $500,000 minimum and $6,000,000 maximum. The working capital
provided from the sale of the common stock and the convertible
debt, in the opinion of management, is sufficient to fund the
Company's day-to-day operations through the end of 1997.
Fremont Golf Center The Company has signed a lease agreement with
the City of Fremont to develop an 35-acre tract of land into a 9-
hole executive-length golf course with expanded practice facilities
and significantly improved clubhouse amenities. The Company
expects to commence construction of the 9-hole executive-length
golf course and begin modifications to the existing facility in the
summer of 1997, with the completion of the golf center scheduled
for the spring of 1998. The development budget for the new 9-hole
executive-length golf course, and modifications to the existing
facility, is anticipated to be approximately $2 million over a one-
year development period. The Company intends to fund the
development through a combination of equity and debt, to be
provided by a commercial bank, specialized golf lending institution
or private lender.
New York Golf Center The Company has fully negotiated a lease (the
"Port Authority Lease") with the Port Authority of New York and New
Jersey (the "Port Authority") to develop a driving range and
learning center on top of the Port Authority Bus Terminal in
midtown Manhattan, New York City. Construction is scheduled to
commence mid-1997, with the opening scheduled for mid-1998. The
proposed development budget is approximately $5.5 million. The
facility is planned to consist of a three-level facility occupying
a portion of the roof of the Port Authority Bus Terminal
(approximately three acres) and includes a 54-tee station area, a
practice putting green, a sand bunker practice area, a greenside
chipping area, a video instruction center, locker rooms, a David
Leadbetter Golf Academy and a club facility. The driving range will
include covered, heated tee stations. The golf instruction center,
video instruction center, golf practice areas and locker rooms will
be located in the clubhouse, together with a sports bar/cafe,
outdoor patio, corporate entertainment and group event area, pro
shop and offices. The Company is currently in discussions with the
David Leadbetter Golf Academy about operating the golf instruction
program at the New York Golf Center. The total expected cost of
the New York Golf Center is expected to be approximately $5.5
million. The Company expects to utilize debt and equity financing
from banks and institutional or private lenders to fund such
amount.
At December 31, 1996, the Company had a deferred tax asset of
$961,000 that had a 100% valuation allowance recorded to reflect
management's evaluation that it is more likely than not that all of
the deferred tax asset will not be realized.
Seasonality
Historically, the second and third quarters have accounted for a
greater portion of the Company's revenue and operating income than
have the first and fourth quarters of the year. This is primarily
due to an outdoor playing season limited by inclement weather.
Although most of the Company's facilities are designed to be all-
weather, portions of the facilities tend to be vulnerable to
weather conditions. Also, golfers are less inclined to practice
when weather conditions limit their ability to play golf on outdoor
courses. This seasonal pattern, as well as the timing of new golf
facility acquisitions, developments and openings, may cause the
Company's results of operations to vary significantly from quarter
to quarter. Accordingly, period-to-period comparisons are not
necessarily meaningful and should not be relied upon as indications
of future results.
Trends
The Company plans to acquire or develop additional golf centers. As
such additional golf centers are acquired or developed, total
revenue should continue to increase. The Company is making capital
improvements at the Fremont Golf Center and Goose Creek and has
recently strengthened the on-site management teams at these golf
centers with an increased emphasis on sales and marketing. The
Company believes that, as its current golf centers mature, revenues
and operating income from such centers should increase due to
customer awareness, programs marketing the golf centers to various
special interest groups, expanded ties to local businesses and
golfing communities and marketing programs developed by the
Company. Such increases may be partially offset by initial losses
from pre-opening costs (and initial operating losses) associated
with new golf centers.
MetroGolf Incorporated
and Subsidiaries
Item 8. Financial Statements and
Financial Statement Schedule Contents
Report on Independent Certified Public Accountants
Consolidated and Combined Financial Statements
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity (Deficit)
Statements of Cash Flows
Summary of Accounting Policies
Notes to Financial Statements
Report of Independent Certified Public Accountants
on Supplemental Schedule
Schedule II - Valuation and Qualifying Accounts
Report of Independent Certified Public Accountants
Board of Directors
MetroGolf Incorporated
Denver, Colorado
We have audited the accompanying consolidated balance sheets of
MetroGolf Incorporated and subsidiaries (the "Company") as of
December 31, 1996 and 1995 and the related consolidated statements
of operations, stockholders' equity and cash flows for the years
ended December 31, 1996 and 1995 and the related combined statement
of operations, stockholders' equity and cash flows for the year
ended December 31, 1994. These consolidated and combined 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
consolidated and combined 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 and combined financial statements
referred to above present fairly, in all material respects, the
financial position of MetroGolf Incorporated and subsidiaries at
December 31, 1996 and 1995, and the results of their operations and
their cash flows for the years ended December 31, 1996, 1995 and
1994 in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Denver, Colorado
March 21, 1997
<TABLE>
<CAPTION>
MetroGolf Incorporated
and Subsidiaries
Consolidated Balance Sheets
December 31, 1996 1995
Assets (Note 8)
<S> <C> <C>
Current:
Cash and cash equivalents $ 904,146 $ 324
Restricted cash (Note 6) - 222,700
Management fee receivable,
related parties (Note 11) - 83,256
Inventories 157,577 -
Other current assets 100,206 15,452
----------------------------------
Total current assets 1,161,929 321,732
Property and equipment less
accumulated depreciation
of $205,342 and $24,025
(Note 3) 13,524,145 63,952
Other:
Excess of cost over net
assets acquired (Note 2) 1,537,239 -
Debt issue costs 133,939 -
Loan fees 106,205 -
Organization costs 89,744 -
----------------------------------
1,867,127 -
Less accumulated amortization 97,825 -
--------------------------------
1,769,302 -
Notes receivable, related
parties (Note 4) - 514,728
Other receivable 82,372 -
Deferred acquisitions costs 78,791 59,467
Deferred offering costs 15,000 -
Other assets 72,371 19,800
----------------------------------
Total other assets 2,017,836 593,995
----------------------------------
$ 16,703,910 $ 979,679
==================================
<FN>
See accompanying summary of accounting policies and notes to
consolidated
and combined financial statements.
<CAPTION>
December 31, 1996 1995
Liabilities and Stockholders' Equity
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,380,947 $ 380,217
Checks written against
future deposits 122,546 -
Accrued real estate taxes 479,507 -
Accrued liabilities 379,785 11,446
Accrued salaries - 145,784
Deferred revenue 218,633 -
Note payable, officer
(Note 7) - 26,827
Lines of credit (Note 6) - 246,937
Current portion of capital
lease obligations (Note 9) 87,772 -
Current portion of
long-term debt (Note 8) 6,023,401 16,489
------------------------------------
Total current liabilities 8,692,591 827,700
------------------------------------
Long-term liabilities:
Long-term debt, less
current portion (Note 8) 3,864,198 23,151
Capital lease obligations,
less current portion
(Note 9) 269,144 -
------------------------------------
Total long-term liabilities 4,133,342 23,151
------------------------------------
Investments in affiliates
(Note 5) - 3,689
------------------------------------
Minority interest in
consolidated subsidiaries 319,024 24,178
------------------------------------
Total liabilities 13,144,957 878,718
------------------------------------
Commitment and
contingencies (Note 10)
Stockholders' equity
(Note 12):
Preferred stock - $1 par
value; 1,000,000 shares
authorized; 0 and 45,500
shares issued and
outstanding; liquidation
value of $25 per share
plus dividends in arrears
of $0 and $205,729 (in the
aggregate $0 and $1,343,229) - 45,500
Additional paid-in capital - 940,609
Common stock-no par value;
9,000,000 shares authorized;
2,233,775 and 680,782 shares
issued and outstanding 6,792,487 (96,770)
Notes receivable,
stockholder (Note 4) (82,511) (120,300)
Accumulated deficit (3,151,023) (668,078)
------------------------------------
Total stockholders' equity 3,558,953 100,961
------------------------------------
$ 16,703,910 $ 979,679
====================================
<FN>
See accompanying summary of accounting policies and notes to
consolidated
and combined financial statements.
</TABLE>
<TABLE>
<CAPTION>
MetroGolf Incorporated
and Subsidiaries
Consolidated and Combined Statements of Operations
For the Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Revenues:
Green fees & driving range $ 487,366 $ - $ -
Membership 129,380 - -
Merchandise 135,662 - -
Food and beverage 45,044 - -
Instruction 63,717 - -
Management fees, related
party (Notes 5 and 11) 180,509 190,303 159,691
Administration 29,258 - -
Acquisition fee - 120,000 -
Development fees, related
party (Note 11) - - 125,000
Consulting fees 10,000 25,000 6,546
------------------------------------
Total revenues 1,080,936 335,303 291,237
------------------------------------
Operating expenses:
Range and course operation 560,641 - -
Food and beverage 63,167 - -
Membership 42,833 - -
Instruction expense 42,489 - -
Salaries 634,584 343,827 373,779
General and administrative 956,701 519,583 181,201
Depreciation and
amortization 198,557 19,299 10,831
------------------------------------
Total operating expenses 2,498,972 882,709 565,811
------------------------------------
Loss from operations (1,418,036) (547,406) (274,574)
------------------------------------
Other income (expenses):
Interest income 40,496 61,116 15,472
Interest expense (567,253) (25,994) (1,842)
------------------------------------
Total other income (expense) (526,757) 35,122 13,630
------------------------------------
Equity in loss of
affiliates (Note 5) (2,278) (770) (309)
------------------------------------
Minority interest in
(income) loss of
consolidated subsidiaries 13,807 (19,058) (3,560)
------------------------------------
Net loss (1,933,264) (532,112) (264,813)
Dividend requirements on
preferred stock 144,328 155,052 50,677
------------------------------------
Loss applicable to
common stock $(2,077,592) $ (687,164) $ (315,490)
Net loss per common share $ (1.79) $ (0.78) $ (0.36)
-------------------------------------
Weighted average number of
common shares outstanding 1,163,471 877,142 877,142
-------------------------------------
<FN>
See accompanying summary of accounting policies and notes to
consolidated and combined financial statements.
</TABLE>
<TABLE>
<CAPTION>
MetroGolf Incorporated
and Subsidiaries
Consolidated and Combined Statements of Stockholders'
Equity (Deficit)
For the Years Ended December 31, 1996, 1995 and 1994
Additional
Notes Rec-
Preferred Stk Paid-In Common
Stock eivable Accumulated
Shares Amount Capital Shares
Amount Stkholder Deficit
<S> <C> <C> <C> <C> <C>
<C> <C> -
Balance, January 1, 1994 - $ - $ - 587 $
190 $(119,625) $ 18,387
Issuance of IC's common
stock for cash - - - 65
15,000 - -
Business reorganization
as of July 29, 1994 - - - (652)
(15,190) - -
Issuance of common stock
in connection with
business reorganization - - - 680,782
13,690 - -
Reclassification of VA's
and IC's subchapter S
income and losses from
accumulated deficit to
common stock - - - -
(110,460) - 110,460
Issuance of preferred
stock for cash in
private offering, net
of stock issuance costs
of $150,895 37,500 37,500 749,105 -
- - - -
Change in notes
receivable, stockholder - - - -
- - 54,822 -
Combined net loss - - - -
- - - (264,813)
-----------------------------------------
- ------------------------------
Balance, December 31, 1994 37,500 37,500 749,105 680,782
(96,770) (64,803) (135,966)
Issuance of preferred
stock for cash 8,000 8,000 191,504 -
- - - -
Change in notes
receivable, stockholder - - - -
- - (55,497) -
Net loss - - - -
- - - (532,112)
-----------------------------------------
- ------------------------------
Balance, December 31, 1995 45,500 45,500 940,609 680,782
(96,770) (120,300) (668,078)
Increase in ownership of
subsidiary for
no consideration
8,642
Discount on debt - - - -
243,600 - -
Issuance of common stock,
net of offering costs
of $1,589,436 - - - 1,175,000
5,460,564 - -
Conversion of convertible
subordinated notes net of
debt issue costs of
$71,050 - - - 356,168
1,047,475 - -
Redemption of
preferred stock (45,500)(45,500)(940,609) -
- - - (558,323)
Issuance of underwriter
warrants - - - -
118 - -
Issuance of common stock
in connection with
purchase of
Palms Golf Center - - - 21,825
137,500 - -
Change in notes
receivable, stockholder - - - -
- - 37,789 -
Net loss - - - -
- - - (1,933,264)
-----------------------------------------
- ------------------------------
Balance, December 31, 1996 - $ -$ - 2,233,775
$6,792,487 $ (82,511) $ (3,151,023)
===================================================================
====
<FN>
See accompanying summary of accounting policies and notes to
consolidated and combined financial
statements.
</TABLE>
<TABLE>
<CAPTION>
MetroGolf Incorporated
and Subsidiaries
Consolidated and Combined Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
For the Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Operating activities:
Net loss $(1,933,264) $ (532,112) $ (264,813)
Adjustments to reconcile
net loss to net cash (used
in) operating activities:
Depreciation 181,317 19,299 10,831
Amortization 17,240 - -
Interest expense 244,188 - -
Salary expense - - 125,000
Write off of deferred
offering costs - 5,000 -
Deferred revenue - - (125,000)
Equity in loss of affiliates 2,278 770 309
Minority interest in income
(loss) of consolidated
subsidiaries (13,807) 19,058 3,560
Changes in operating assets
and liabilities net of
business acquisitions:
Management fee receivable,
related party 17,165 (42,193) (41,063)
Commission advances to
officer - 13,500 (13,500)
Inventories (63,412) - -
Other current assets 19,786 2,967 (17,837)
Accounts payable 293,997 259,804 103,916
Accrued real estate taxes 52,857 - -
Accrued salaries (145,784) 76,079 69,705
Accrued liabilities 70,697 (43,861) 45,307
Deferred revenue 43,753 - -
-------------------------------------
Net cash (used in)
operating activities (1,212,989) (221,689) (103,585)
-------------------------------------
Investing activities:
Payments for business
acquisitions (2,929,584) - -
Restricted cash 222,700 (22,700) (200,000)
Payments for notes
receivable, related parties (252,398) (239,004) (166,099)
Proceeds from notes
receivable, stockholder 37,789 - -
Payments for notes
receivable, stockholder - (55,497) (189,803)
Purchase of furniture
and equipment (110,719) (38,807) (8,437)
Payments for deferred
acquisition costs (190,951) (59,467) -
Other assets (126,092) (1,000) (18,800)
-------------------------------------
Net cash used in
investing activities (3,349,255) (416,475) (583,139)
-------------------------------------
Financing activities:
Checks written against
future deposits 122,546 - -
Proceeds from (payments)
on lines of credit (206,937) 208,074 38,863
Proceeds from convertible
subordinated notes payable 2,025,000 - -
Proceeds from long-term debt - 22,971 10,000
Proceeds from notes
payable, officer - 48,827 -
Payments for long-term debt (91,518) (14,665) (4,557)
Payments on note
payable, officer (26,827) (22,000) -
Payments for debt
issue costs (257,448) - -
Payments for deferred
offering costs (15,000) - (5,000)
Proceeds from issuance
of common stock, net
of offering costs 5,460,564 - 15,000
Proceeds from issuance
of preferred stock, net
of stock issuance costs - 199,504 786,605
Payments for redemption
of preferred stock (1,544,432) - -
Proceeds from issuance
of warrants 118 - -
-------------------------------------
Net cash provided by
financing activities 5,466,066 442,711 840,911
-------------------------------------
Increase (decrease) in
cash and cash equivalents 903,822 (195,453) 154,187
Cash and cash equivalents,
beginning of year 324 195,777 41,590
-------------------------------------
Cash and cash equivalents,
end of year $ 904,146 $ 324 $ 195,777
=====================================
See accompanying summary of accounting policies and notes to
consolidated
and combined financial statements.
</TABLE>
MetroGolf Incorporated
and Subsidiaries
SUMMARY OF ACCOUNTING POLICIES
Organization and Business
- -------------------------
MetroGolf Incorporated (the "Company"), a Colorado corporation, was
incorporated on July 29, 1994 by its sole common stockholder. The
Company was formed for the purpose of acquiring and consolidating
its stockholder's ownership of two pre-existing corporations, as
described below and, therefore, it is a continuation of these pre-
existing corporations. The Company acquires, develops and manages
urban golf centers and other golf facilities.
On July 29, 1994, the Company acquired all of the issued and
outstanding common stock of MetroGolf Virginia, Inc. ("VA"), a
Colorado corporation incorporated on February 21, 1992. Prior to
the formation of the Company, VA was the primary operating entity
in the business of golf course management, development and
acquisition. VA is the managing general partner of Goose Creek
Golf Partners Limited Partnership ("Goose Creek"), a Virginia
Limited Partnership formed on June 1, 1992. Also on July 29, 1994,
the Company acquired 90 percent of the issued and outstanding
common stock of MetroGolf Illinois Center, Inc. ("IC"), a Colorado
corporation incorporated on May 26, 1993. IC is the managing
partner of Illinois Center Golf Partners, L.P. ("Illinois Center"),
an Illinois Limited Partnership formed on May 28, 1993. The
Company issued 680,782 shares of its common stock to an individual
for 100 percent of his interest in VA and 90 percent of his
interest in IC. This exchange of ownership with entities under
common control has been accounted for at historical cost in a
manner similar to that of a pooling of interest. As of December
31, 1996 and 1995, the Company held 89 percent of the issued and
outstanding common stock of IC. Prior to the July 29, 1994
business reorganization, VA and IC were entities under common
control and management.
On March 30, 1994, the Company formed and acquired 51 percent of
the issued and outstanding common stock of MetroGolf Management,
Inc. ("MGM"), a Colorado corporation. MGM provides golf management
services to Illinois Center. During April 1996, the Company
acquired the remaining 49 percent of MGM for no consideration.
On May 24, 1995, the Company formed and acquired 100 percent of the
issued and outstanding common stock of MetroGolf New York, Inc.
("NY"), a New York corporation. NY is the 100 percent Class A
member of Vintage New York Golf L.L.C., a limited liability company
formed to develop and operate an urban golf center facility.
On June 27, 1996, the Company formed and acquired 100 percent of
the issued and outstanding common stock of MetroGolf (San Diego),
Inc. ("SD"), a Colorado corporation.
On October 21, 1996, the Company purchased 93.6 percent of the
limited partnership interests in Illinois Center and 89.7 percent
of the limited partnership interests in Goose Creek (see Note 2).
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned and majority-owned
subsidiaries as of December 31, 1996 and 1995 and for the years
then ended. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Combined Financial Statements
- -----------------------------
The combined statement of operations, stockholders' equity and cash
flows include the accounts of the Company for the period from July
29, 1994 (inception) to December 31, 1994, the accounts of VA and
IC for the year ended December 31, 1994 and the accounts of MGM for
the period from March 30, 1994 (inception) to December 31, 1994.
All significant intercompany accounts and transactions have been
eliminated in combination.
Cash and Cash Equivalents
- -------------------------
The Company considers all money market accounts and highly liquid
debt instruments purchased with original maturities of three months
or less to be cash equivalents.
Property and Equipment
- ----------------------
Property and equipment are stated at cost and are depreciated and
amortized on a straight-line method over the estimated useful lives
of the assets which range from 3 to 37 years or over the term of
the lease, whichever is shorter. Equipment under capital leases is
stated at cost and is amortized over the estimated useful life of
the equipment or over the term of the lease, whichever is shorter.
Upon sale or other retirement of property and equipment, the costs
and accumulated depreciation or amortization are removed from the
related accounts and any gain or loss is reflected in operations.
Deferred Offering Costs
- -----------------------
Deferred offering costs include professional fees directly related
to the Company's proposed private offering. If the offering is
successful, costs incurred will be offset against the proceeds of
the offering. If the offering is unsuccessful, such costs will be
expensed.
Deferred Acquisition Costs
- --------------------------
Deferred acquisition costs include professional fees and other
direct costs related to evaluation of prospective property
acquisitions. If the acquisitions are completed, these costs are
included as property costs. If a prospective property is not
acquired, the costs are expensed.
Debt Issue Costs and Loan Fees
- ------------------------------
Debt issue costs are being amortized using the straight-line method
over the term of the convertible subordinated notes payable (see
Note 8). Loan fees are recorded at cost and are amortized using
the straight-line method over the term of Illinois Center's long-
term debt with Textron (see Note 8).
Excess Cost Over Net Assets Acquired
- ------------------------------------
The excess of costs over net assets acquired, which relates to the
acquisitions discussed at Note 2, is being amortized over a 20 year
period for Goose Creek and a 13 year period for Illinois Center
using the straight-line method. Permanent impairments are
evaluated periodically based upon expected future cash flows in
accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets". The
adoption of this standard did not have an effect on the financial
statements for the year ended December 31, 1996.
Investment in Affiliates
- ------------------------
The Company recorded its investments in limited partnerships using
the equity method of accounting prior to the Company acquiring a
majority interest in Goose Creek and Illinois Center (see Note 2).
Under such method, the Company's share of net income (loss) is
included as a separate item in the statement of operations.
Revenue Recognition
- -------------------
Green fees, driving range fees, golf cart rental, merchandise and
food and beverage revenue are recognized as revenue immediately
upon sale to the customer. Instruction revenue is recognized when
the lessons are provided. Membership fees are recognized as
revenue ratably over the life of the membership, usually 12 months.
Concentration of Risk
- ---------------------
The Company's financial instruments that are exposed to
concentration of credit risk consist primarily of cash and cash
equivalents. The Company's cash and cash equivalents are in demand
deposit accounts placed with federally insured financial
institutions. Such deposit accounts at times may exceed federally
insured limits. The Company has not experienced any losses on such
amounts.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with
generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates.
Financial Instruments
- ---------------------
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate that value:
Receivables from Related Parties
Due to the related party nature and terms of the receivables from
related parties, the Company cannot estimate the fair market value
of such financial instruments.
Notes Payable and Long-Term Debt
Substantially all of these notes bear interest at a floating rate
of interest based upon the lending institutions prime lending rate.
Accordingly, the fair value approximates their reported carrying
amount at December 31, 1996 and 1995.
Loss Per Share
- --------------
Primary loss per share is computed using the weighted average
number of common and common equivalent shares outstanding during
each period. Pursuant to the requirements of the Securities and
Exchange Commission (SEC) Staff Accounting Bulletin No. 83 (SAB
83), common shares issued by the Company during the twelve months
immediately preceding the initial public offering at a price below
the initial public offering price plus the number of common
equivalent shares which result from the grant of common stock
options and warrants having exercise prices below the initial
public offering price during the same period have been included in
the calculation of the shares used in computing loss per share as
if they were outstanding for all periods presented.
Stock Option Plans
- ------------------
The Company applied APB Opinion 25, "Accounting for Stock Issued to
Employees", and the related Interpretation in accounting for all
stock option plans. Under APB Opinion 25, no compensation cost has
been recognized for stock options issued to employees as the
exercise price of the Company's stock options granted equals or
exceeds the market price of the underlying common stock on the date
of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation", requires
the Company to provide pro forma information regarding net income
as if compensation cost for the Company's stock options plans had
been determined in accordance with the fair value based method
prescribed in SFAS No. 123. To provide the required pro forma
information, the Company estimates the fair value of each stock
option at the grant date by using the Black-Scholes option-pricing
model.
Reclassifications
- -----------------
Certain reclassifications have been made to the 1995 financial
statements in order for them to conform to the 1996 presentation.
Such reclassifications have no impact on the Company's financial
position or results of operations.
Income Taxes
- ------------
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"). Temporary
differences are differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements
that will result in taxable or deductible amounts in future years.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. Company Liquidity
The Company has approximately $6,111,173 of current liabilities
relating to debts that come due within the next 12 months. Of
these $861,750 are convertible subordinated notes that are
convertible into common stock of the Company at 50 percent of the
market value of the Company's common stock (see Note 8). Because
of this conversion discount, the Company believes that most, if not
all, of these notes will be converted by the noteholders prior to
the maturity date of June 1, 1997. $4,505,556 of these current
liabilities are mortgages on existing operating properties and are
fully collateralized by such properties. The Company is currently
negotiating to refinance or extend each of these mortgages and
expects to receive new mortgages with maturity dates that extend
beyond 12 months. In addition, the Company is currently offering
for sale in a private placement $5,000,000 in convertible
subordinated notes ("the Notes"). The Company intends to use the
proceeds for additional acquisitions which will further increase
the Company's cash flow from operations and for current working
capital needs. The Company believes that these funds will be
sufficient to meet its liquidity needs for the next
year.
2. Acquisitions
MetroGolf Fremont
On July 2, 1996 the Company purchase the leasehold interest on the
Fremont Park Golf Center ("Fremont"), an existing driving
range/learning center facility for $1,473,377. The Company paid
$650,000 in cash, issued a promissory note to the Seller for
$700,000 and acquisitions costs of $123,377. The existing golf
facility consists of a 35-tee station driving range, two practice
putting greens, a clubhouse and a maintenance area on approximately
15 acres of land. The current clubhouse design will require
modification to re-incorporate a grill room and bar area with an
outdoor patio after the acquisition.
The Company plans to expand Fremont to include an 80-station tee
area, practice putting green, chipping/short game practice and sand
bunker area. The clubhouse redesign will also include a pro shop
and locker rooms. A corporate entertainment and group area will be
located adjacent to the patio.
The acquisition was recorded using the purchase method of
accounting, by which the assets are value at fair market value at
the date of acquisition. The operating results of this acquisition
have been included in the accompanying consolidated financial
statements from the date of acquisition. The allocation of the
purchase price was as follows:
Current assets $ 35,000
Property and equipment 1,438,377
----------
Total purchase price $1,473,377
==========
Acquisition of Goose Creek Golf Partners Limited Partnership
On October 21, 1996 the Company purchased 89.7% of the limited
partnership interest in Goose Creek for cash of $620,500,
convertible notes of $570,520 (net or original issue discount of
$173,980) and acquisition costs of $18,679. The acquisition was
recorded using the purchase method of accounting, by which the
assets are valued at fair market value at the date of acquisition.
The operating results of this acquisition have been included in the
accompanying consolidated financial statements from the date of
acquisition.
The allocation of the purchase price is as follows:
Current assets $ 88,514
Property and equipment 5,425,000
Excess of cost over net assets acquired 571,842
Other assets 32,491
----------
6,117,847
----------
Less:
Current liabilities 4,115,714
Long-term liabilities 665,220
Minority interest 127,214
----------
4,908,148
----------
Total purchase price $1,209,699
==========
Acquisition of Illinois Center Golf Partners, L.P.
On October 21, 1996, the Company purchased 93.6% of the limited
partnership interests in Illinois Center for cash of $1,587,500,
convertible notes of $1,293,152 (net of original issue discount of
$394,398) and acquisition costs of $20,864. The acquisition was
recorded using the purchase method of accounting, by which the
assets are value at fair market value at the date of acquisition.
The operating results of this acquisition have been included in the
accompanying consolidated financial statements from the date of
acquisition.
The allocation of the purchase price is as follows:
Current assets $ 77,524
Property and equipment 5,900,000
Excess of cost over net assets acquired 897,843
Other assets 172,310
----------
7,047,677
----------
Less:
Current liabilities 2,034,346
Long-term liabilities 1,916,002
Minority interest 195,813
----------
4,146,161
----------
Total purchase price $2,901,516
==========
Acquisition of Palms Golf Center
On December 31, 1996, the Company purchased Palms Golf Center
("Palms") in downtown San Diego, California for $765,081. The
Company issued notes payable to the seller for $547,290, issued
21,825 shares of common stock of the Company for $137,500, paid
cash of $71,584 and acquisitions costs of $8,707. The existing
golf facility was completed approximately two years ago and
consists of a 40 tee station driving range, practice putting green,
chipping, short game and sand bunker areas, a 9-hole pitch and putt
golf course, a clubhouse and a maintenance area on approximately 13
acres of land. The acquisition was recorded using the purchase
method of accounting, by which the assets are value at the fair
market value at the date of acquisition. The operating results of
this acquisition have been included in the accompanying
consolidated financial statements from the date of acquisition.
The allocation of the purchase price is as follows:
Property and equipment $ 765,081
---------
Total purchase price $ 765,081
=========
Pro Forma Information
The following unaudited pro forma information presents the
consolidated results of operations of the Company as if the
acquisition of Fremont, Goose Creek, Illinois Center and Palms had
occurred at the beginning of each period presented. The unaudited
pro forma financial data does not purport to be indicative of the
results which actually would have been obtained had the purchases
been effected on the dates indicated or of the results which may be
obtained in the future.
Years Ended December 31, 1996 1995
- ---------------------------------------------------------
Revenues $ 3,505,685 $ 3,863,860
Operating expenses 5,134,091 4,962,172
Other expenses 1,564,130 1,260,816
Minority interest in (loss) (87,870) (61,516)
-----------------------------
Net loss from continuing
operations $ (3,104,666) $ (2,297,612)
Net loss per common share
from continuing operations $ (1.67) $ (1.33)
-----------------------------
3. Property and Equipment
Property and equipment consisted of the following:
December 31, 1996 1995
Land $3,669,253 $ -
Buildings and related improvements 4,767,726 -
Land improvements 4,222,443 -
Furniture, fixtures and equipment 980,313 52,262
Design and development costs 54,037 -
Automobile 35,715 35,715
--------------------------
13,729,487 87,977
Less accumulated depreciation and
amortization 205,342 24,025
--------------------------
$13,524,145 $ 63,952
==========================
4. Notes Receivable
Notes Receivable, Related Parties
On September 1, 1994, IC entered into a $500,000 note agreement
with Illinois Center. Advances under the agreement accrued
interest at two percent over Citibank's prime rate. The note was
unsecured and due on the earlier of demand or September 1, 1996.
The balance outstanding on the note was $459,739 as of December 31,
1995. As of December 31, 1996, the note eliminates in
consolidation.
On November 21, 1995, VA entered into a $100,000 note agreement
with Goose Creek. Advances under the agreement accrued interest at
two percent over Citibank's prime rate. The note was unsecured and
due on the earlier of demand or November 21, 1996. The balance
outstanding on the note was $54,989 as of December 31, 1995. As of
December 31, 1996, the note eliminates in consolidation.
Notes Receivable, Stockholder
During 1994, the Company entered into two note agreements and in
1995 the Company entered into one note agreement with its sole
common stockholder. The notes bear interest at eight percent per
annum and are due on demand. The balances outstanding on the notes
are $82,511 and $120,300 as of December 31, 1996 and 1995.
5. Investments in Affiliates
Investment in Goose Creek
VA is the managing general partner of Goose Creek in which it holds
a 0.5 percent general partnership interest. As the managing
general partner of Goose Creek, VA is responsible for the day-to-
day management and operation of the business and property of Goose
Creek. The administrative general partner of Goose Creek, an
unaffiliated corporation also having a 0.5 percent interest in
Goose Creek, holds joint authority with VA over annual budgets,
significant capital expenditures, significant deposits into and
withdrawals from the Goose Creek reserve account, as defined, and
replacement of the management company, as hired by Goose Creek.
The general partners do not have the authority to sell or refinance
all or any material portion of the property without the consent of
51 percent of the Class A limited partners. Both general partners
contributed their expertise to Goose Creek's formation and other
consideration in exchange for an interest in Goose Creek.
In addition to its 0.5 percent general partnership interest, VA
holds a 10.33 percent Class B limited partnership interest in Goose
Creek. The Company accounts for its 10.33 percent Class B limited
partnership interest using the cost method of accounting. The
Class B limited partnership interest entitles the Company to share
in cash distributions and profit or loss allocations, as described
below, subsequent to the Class A limited partners receiving a
preferred return of 12 percent on their capital contributions and
certain other funding requirements.
Goose Creek's partnership agreement allows for cash distributions
to the general and limited partners from available net cash flow,
at the discretion of the managing general partner. Net cash flow
is defined as the excess of operating cash receipts over operating
cash disbursements after the funding of reasonable reserves for
anticipated expenses and capital replacement.
Profits and losses are allocated to the partners in the same
proportion as net cash flow is distributed subject to the provision
of Section 704(b) of the Internal Revenue Code of 1986 relating to
substantial economic effect. As of December 31, 1995, the Company
had recorded an investment in Goose Creek of ($3,731). As of
December 31, 1996, the investment in Goose Creek eliminates in
consolidation.
In addition to the above, VA as managing general partner, receives
an asset management fee from Goose Creek of $45,000 per annum that
started June 1, 1992 and increased by a factor of five percent per
annum on June 1st of each year. The Company is also be entitled to
receive a fee equal to one percent of the gross proceeds upon any
disposition of Goose Creek's property. Asset management fees for
the years ended December 31, 1996, 1995 and 1994 are $42,228,
$51,059 and $48,628. The 1996 amount represents fees earned from
January 1, 1996 to October 21, 1996, the date of the Company's
acquisition of the partnership interest in Goose Creek (see Note
2). The fees for the remainder of the year eliminate in
consolidation as of December 31, 1996.
Investment in Illinois Center
IC is the managing general partner of Illinois Center in which it
holds a 40 percent general partnership interest. As the managing
general partner, IC has the responsibility to make all decisions
affecting the day-to-day business of Illinois Center. The general
partner does not have the authority, except under certain
conditions as provided for in the partnership agreement, to cause
Illinois Center to secure certain indebtedness of Illinois Center
with a mortgage, deed of trust or similar lien on the property, nor
shall the general partner have the authority to sell or transfer
all or substantially all of the assets of Illinois Center, unless
the general partner first obtains the majority consent of the
limited partners. The general partner contributed $90, its
agreement to develop and acquire the Illinois Center's ground lease
and expertise to Illinois Center's formation in exchange for its
interest in Illinois Center.
Illinois Center's partnership agreement allows for cash
distributions to the general and limited partners from available
net cash flow. Net cash flow is defined for any period as the
excess, if any, of revenues over expenses. Net cash flow is to be
distributed not less frequently than quarterly, commencing after
the first full calendar quarter following the opening to the public
of Illinois Center. Profits and losses are allocated to the
partners as defined in the partnership agreement. As of December
31, 1995, the Company has recorded an investment in Illinois Center
of $42. As of December 31, 1996, the investment in Illinois Center
eliminates in consolidation.
In addition to the above, IC, as managing general partner, is
entitled to receive an asset management fee from Illinois Center of
$60,000 per annum increased by a factor of five percent per annum.
Asset management fees for the years ended December 31, 1996, 1995
and 1994 were approximately $50,806, $60,000 and $35,000. The 1996
amount represents fees earned from January 1, 1996 to October 21,
1996, the date of the Company's acquisition of the majority
partnership interest in Illinois Center (see Note 2). The fees for
the remainder of the year eliminate in consolidation as of December
31, 1996.
Prior to October 21, 1996, the Company, as general partner of Goose
Creek, did not have the authority to sell or refinance all or any
material portion of the property without the consent of 51 percent
of the Class A limited partners. The Company, as general partner
of Illinois Center, did not have the authority except under certain
conditions as provided for in the partnership agreement, to cause
Illinois Center to secure certain indebtedness of Illinois Center
with a mortgage, deed of trust or similar lien on the property, nor
did the general partner have the authority to sell or transfer all
or substantially all of the assets of Illinois Center, unless the
general partner first obtains the majority consent of the limited
partners. Accordingly, the Company had recorded its investments in
affiliates using the equity method of accounting.
6. Lines of Credit
The Company entered into a $225,000 line of credit agreement dated
December 20, 1994 and a $22,000 line of credit dated November 28,
1995. Borrowings under the lines accrued interest at the National
Prime Lending Rate and were due on March 25, and May 28, 1996,
respectively. The $225,000 line was collateralized by the
Company's note receivable from a related party, a $200,000 money
market account and was personally guaranteed by the sole common
stockholder of the Company. The $225,000 line of credit was paid
in full during May 1996, and the Company redeemed its $200,000
money market account. The $22,000 line of credit was
collateralized by a $22,700 certificate of deposit. The $22,000
line of credit was paid in full during June 1996, and the Company
redeemed its $22,700 certificate of deposit. The balance
outstanding on the lines are $0 and $246,937 as of December 31,
1996 and 1995.
7. Note Payable, Officer
During 1995, an officer of the Company advanced funds to the
Company. The advances were due on demand and accrued interest at
two percentage points over Citibank's prime rate. The balance
outstanding as of December 31, 1995 including accrued interest was
$26,827. The note was paid in full during 1996.
8. Long-Term Debt
The following is a summary of the Company's long-term debt:
December 31, 1996 1995
Note payable with Textron (1) $ 3,258,266 $ -
Note payable with Textron (2) 1,553,663 -
Convertible debt (3) 1,300,339 -
Convertible subordinated
notes (4) 861,750 -
Note payable, bank (5) 700,000 -
Note payable (6) 630,720 -
Convertible debt (7) 573,712 -
Notes payable, seller (8) 547,290 -
Convertible notes (9) 380,000 -
Notes payable, other 81,859 39,640
-------------------------
9,887,599 39,640
Less current portion 6,023,401 16,489
-------------------------
$ 3,864,198 $ 23,151
=========================
(1) On June 1, 1992, Goose Creek was advanced $3.6 million
under a loan agreement whereby Goose Creek may borrow up to $4.2
million. The loan agreement bears interest at 10.05 percent and
has a five-year term which may be extended for an additional five-
year term under certain conditions of the loan agreement.
Principal and interest payments are due under a seasonal payment
structure with a balloon payment of principal due on June 1, 1997,
unless Goose Creek exercises its right to extend the maturity date.
The loan agreement allows for subsequent advances in amounts of at
least $100,000 each until total advances reach $4.2 million, so
long as no more than one advance occurs in any 12-month period.
The amount of additional advances are tied to a formula involving
certain net operating income levels and debt-coverage ratios. The
loan is collateralized by all property of Goose Creek and is
personally guaranteed by the president of the Company.
(2) On January 31, 1996, Illinois Center entered into a
$2,000,000 promissory note with Textron. Textron advanced
$1,750,000 to Illinois Center. Illinois Center may be entitled to
receive additional advances up to $250,00 from Textron pursuant to
the terms of the note agreement. The note bears interest at 10.75%
and is due on or before December 31, 2002. Principal and interest
payments are due under a seasonal payment structure. The note is
collateralized by substantially all of the assets of Illinois
Center and is personally guaranteed by the president of the
Company.
(3) On October 21, 1996, in conjunction with proceeds raised
from the Company's initial public offering ("IPO"), the Company
acquired 93.6% of the limited partnership interests in Illinois
Center for $2,901,516; with $1,587,500 paid in cash and the
issuance of $1,293,152, net of original issue discount of $394,398,
in convertible notes and acquisition costs of $20,864 (see Note 2).
Each convertible note is due on June 1, 2005 and bear interest at
6% per annum. Interest payments are payable semi-annually on June
1 and December 1 of each year, commencing on October 21, 1996;
provided, however, that interest only will be payable for the first
24 months. Thereafter, interest will continue to be paid semi-
annually and principal will be amortized evenly over the remaining
seven years to maturity. The notes shall be convertible into a
warrant to purchase 2,500 shares of common stock of the Company
for each $25,000 principal amount of convertible notes at an
exercise price equal to 120% of the IPO price ($6.00). The
conversion may take place anytime after November 20, 1997 and prior
to full payment of principal by the Company.
The market rate on the convertible notes payable has been
determined to be greater than the stated interest rate which
results in an original issue discount ("OID") on the face of the
convertible note payable in the amount of $394,398 based on an
effective rate of 12%. The OID is being charged to interest over
the life of the convertible notes payable under the effective
interest method.
(4) On May 30, 1996, the Company completed its offer for sale
in a private placement $2,025,000 in convertible subordinated notes
("Notes"). The Notes were offered by Laidlaw Equities, Inc.
("Laidlaw") on a best efforts basis. Net proceeds from the
offering, after paying commissions and offering costs were
approximately $1,757,122. The Notes bear interest at 12 percent,
with interest payable June 1 and December 1 of each year commencing
on December 1, 1996. The Notes are due on June 1, 1997. The
Notes, including any accrued but unpaid interest, are convertible,
at the option of the holder, at any time upon the earlier of (i)
the closing of the Company's IPO or (ii) November 30, 1996, into
shares of common stock of the Company at either 50 percent of the
IPO price, if converted simultaneously with the closing of the IPO,
or 50 percent of the market price, if converted after the IPO. On
October 21, 1996, $1,062,500 of the Notes including $56,025 in
accrued interest, were convertible into 356,168 shares of the
Company's common stock.
The market interest rate on the convertible subordinated notes
payable has been determined to be greater than the stated interest
rate which results in OID on the face amount of the convertible
subordinated notes payable in the amount of $243,600 based on an
effective rate of 24%. The OID is being charged to interest over
the life of the convertible subordinated notes payable under the
effective interest method.
(5) On July 1, 1996, Fremont Center was purchased for
approximately $1,350,000 (see Note 2). The Company paid $650,000
in cash and entered into a $700,000 promissory note with the
seller. The note bears interest at 9% per annum and had an
original maturity date of November 15, 1996. The note was extended
to January 15, 1997, for a one time extension fee and a default
interest rate of 10% from the inception of the note. On January
15, 1997 the note was refinanced through March 3, 1997 with a bank
at an interest rate of 2% over the Norwest Bank prime rate. The
note was subsequently extended to June 3, 1997. All principal and
accrued interest amounts are due on June 3, 1997. The note is
collateralized by all leasehold improvements on the property and a
$100,000 certificate of deposit issued to the bank on January 15,
1997.
(6) On January 31, 1996, Illinois Center purchased its
clubhouse facility and various items of equipment which were
previously under operating leases for $1,434,000. Illinois Center
paid $850,000 in cash and entered into a $584,000 promissory note.
The note bears interest at eight percent per annum and is due June
1, 2005. Principal and interest payments on the note commence
January 1, 1998. The note is collateralized by its clubhouse
facility and various items of equipment. The note is subordinate
to Illinois Center's Textron note payable.
(7) On October 21, 1996, in conjunction with proceeds raised
from the Company's IPO, the Company acquired all of the limited
partnership interests in Goose Creek for $1,209,699; with $620,500
paid in cash and the issuance of $570,520, net of OID of $173,980,
in convertible notes and acquisition costs of $18,679 (see Note 2).
Each convertible note is due on June 1, 2005 and bears interest at
6% per annum. Interest payments are payable semi-annually on June
1 and December 1 of each year, commencing on October 21, 1996;
provided, however, that interest only will be payable for the first
24 months. Thereafter, interest will continue to be paid semi-
annually and principal will be amortized evenly over the remaining
seven years to maturity. The notes shall be convertible, in whole
or in part, into fully paid and nonassessable shares of common
stock of the Company, at the option of the holder. The share
conversion shall be the principal of the note being converted, plus
accrued and unpaid interest divided by the IPO price ($6.00). The
conversion may take place anytime after November 20, 1997 and prior
to full payment of principal by the Company.
The market rate on the convertible notes payable has been
determined to be greater that the stated interest rate which
results in an OID on the face of the convertible note payable in
the amount of $173,980 based on an effective rate of 12%. The OID
is being charged to interest over the life of the convertible notes
payable under the effective interest method.
(8) On December 31, 1996, the Company entered into two notes
payable with the seller of Palms in the amounts of $459,700 and
$87,500 (see Note 2). The $459,790 note payable accrues interest
at 10.5% and is due on July 1, 1997. The $87,500 note payable
accrues interest at 8% and is due on April 21, 1997. Both notes
are collateralized by all property of Palms.
(9) During August 1995, Goose Creek entered into three
unsecured convertible note agreements. The notes accrue interest
at 8 percent per annum through August 1, 1996. Thereafter, the
notes accrue interest at 15 percent per annum. Interest-only
payments are due on the first of each month. The notes are due on
August 1, 1997. The note agreements are subordinate to Goose
Creek's note payable with Textron. The note agreements contain a
conversion provision whereby the noteholders may convert no less
than all of the then outstanding principal and accrued interest
into limited partnership interests.
Future maturities of long-term debt as of December 31, 1996 are as
follows:
December 31,
1997 $ 6,023,401
1998 277,908
1999 565,430
2000 613,724
2001 666,510
Thereafter 1,740,626
------------
$ 9,887,599
============
9. Capital Lease Obligations
Goose Creek has various lease agreements for irrigation system,
maintenance equipment and golf carts. These obligations extend
through 2001 with unexpired terms ranging from one to five years.
Included in property and equipment in the accompanying balance
sheet are the following assets held under capital leases:
December 31,1996
Irrigation system $ 330,747
Turf and maintenance equipment 51,688
Golf carts 38,883
------------
Assets under capital lease 421,318
Less accumulated amortization 25,370
------------
Assets under capital lease, net $ 395,948
============
Future minimum lease payments and the present value of the minimum
lease payments under the capital lease obligations as of December
31, 1996 are as follows:
Total future minimum lease payments $ 660,839
Less amount representing interest 303,923
-----------
Present value of minimum lease payments 356,916
Current portion of capital lease obligations 87,772
-----------
Long-term portion of
capital lease obligations $ 269,144
===========
As of December 31, 1996, annual maturities of the capital lease
obligations for each of the next five years and in the aggregate
are as follows:
1997 $ 87,772
1998 26,804
1999 27,628
2000 35,368
2001 40,728
Thereafter 138,616
----------
$ 356,916
==========
10. Commitments and Contingencies
Employment Agreements
During 1994, the Company entered into employment agreements with
its President through December 1996 and with its Executive Vice
President through September 1997. The employment agreements set
forth annual compensation of $180,000 to the President and $120,000
to the Executive Vice President plus bonuses as the board of
directors of the Company may from time to time approve. Effective
January 1, 1996, both agreements were extended until December 31,
1998 with annual salaries of $250,000 and $175,000, respectively.
Operating Leases
The Company currently has lease, sublease and ground lease
agreements obligations for the various golf operating facilities
which run through the year 2022. The leases generally call for the
Company to be responsible for all facility operational expenses and
be entitled to receive income generated from the facility. The
monthly lease payments due to the lessors vary from monthly base
rental amounts, to percentages of gross monthly revenues or
available operational proceeds as defined in the lease agreements.
The leases call for the Company to maintain certain general
liability insurance levels and provide golf professionals to teach
lessons to the public.
The Company also leases office space and equipment under
noncancelable leases with terms that expire at various dates
through April 2002.
Below is a summary of future minimum lease payments:
1997 $ 332,500
1998 175,500
1999 208,500
2000 208,500
2001 247,700
Thereafter 3,845,000
-----------
Total $ 5,017,700
===========
Rent expense for the years ended December 31, 1996, 1995 and 1994
totaled approximately $277,000, $25,000 and $8,000.
The Company has contingent payments in conjunction with the ground
sublease and sublicense agreements for Illinois Center for tax
contribution and land rent as of December 31, 1996 of approximately
$479,500 and $438,000. As of December 31, 1996, Illinois Center
paid no tax contribution or land rent to the lessor. As of
December 31, 1996, Illinois Center has accrued tax contributions of
approximately $479,500. As of December 31, 1996, Illinois Center
was not obligated to pay land rent under the provisions of the
agreement.
11. Related Party Transactions
Development Fees
During 1994, the Company earned $125,000 for land acquisition,
concept planning design and development services provided to
Illinois Center. The Company earned no development fees for the
years ended December 31, 1996 and 1995.
Property Management Agreement
On December 31, 1993, MGM entered into a property management
agreement with Illinois Center. The management agreement expires
on January 1, 1997. The terms of the management agreement provide
for a management fee of $5,000 per month plus a membership
incentive fee of ten percent of the gross proceeds received from
membership initiation fees and the equivalent on one month's
membership dues as received by Illinois Center. The membership
incentive fee for renewal memberships will be reduced to four
percent of annual dues for renewal members. In addition, the
management agreement provides for annual incentive fee of five
percent of the amount of annual net operating income in excess of
$1,600.000.
MGM initially was operated by Club Sports International ("CSI").
On October 1, 1994, CSI was removed as operator of MGM. On
November 17, 1994, Billy Casper Golf Management, Inc. ("BCGM") was
engaged as the new operator of MGM. From the period June 1, 1994
through September 30, 1994, MGM's base fee was split between CSI
and the Company with CSI receiving $4,000 and the Company receiving
$1,000. From October 1, 1994 through November 18, 1994, the
Company earned the full amount of MGM's fee. From November 18,
1994 through November 30, 1995, BCGM earned the entire fee. During
1995, BCGM was removed as operator of MGM. In addition, MGM has
agreed to waive 80 percent of the deferred $5,000 per month fees
that it had earned under its contract from the period December 1,
1993 to May 31, 1994. For the years ended December 31, 1996, 1995
and 1994, property management fees, including incentive fees, are
$57,475, $79,244 and $76,063. The 1996 amount represents fees
earned from January 1, 1996 to October 21, 1996. As of December
31, 1995, Illinois Center owed MGM $83,256.
During 1996, MGM earned $30,000 in property management fees from
Goose Creek.
12. Stockholders' Equity (Deficit)
Preferred Stock Offering
During 1994, the Company offered to sell 50,000 Units in a private
offering of up to $1.25 million in redeemable preferred stock and
warrants at $25 per Unit. Each Unit consists of one share of
preferred stock and one warrant to purchase 3.58 shares of the
Company's common stock at an exercise price of $2.23 per share
subject to antidilution adjustments. The warrants expire five
years from the date of issuance. During 1995, the Company sold
8,000 shares of preferred stock resulting in net proceeds of
$199,504 and during 1994, the Company issued 37,500 shares of its
preferred stock resulting in net proceeds to the Company after
paying offering costs of $786,605. As of December 31, 1996 and
1995, the Company has 163,029 warrants outstanding which expire on
July 29, 1999.
The underwriter received warrants entitling the underwriter to
purchase 11,107 shares of common stock at an exercise price of
$2.23 per share on a fully diluted basis. At the closing of the
offering, two directors of the Company received, as compensation,
16,304 warrants equal to five percent of the number of Units sold
in the offering entitling them to purchase one percent of the
outstanding common stock at an exercise price of $2.23 per share on
a fully diluted basis. Twenty-five percent of the warrants issued
to the directors vested on August 28, 1995 and an additional 25
percent will vest every six months thereafter. The warrants issued
to the underwriters and directors expire on July 29, 1999.
Preferred Stock
During August 1995, the Company amended its articles of
incorporation to increase the authorized shares of preferred stock
from 100,000 to 1,000,000 shares. Of the 1,000,000 shares, 100,000
shares have been designated as redeemable preferred stock. The
holders of redeemable preferred stock are entitled to receive,
when, and if declared by the Board of Directors and out of funds
legally available for the payment of dividends or if mandatorily
redeemable as discussed below, dividends at the annual dividend
rate of 15 percent per annum ($3.75) on each outstanding share of
preferred stock, commencing upon issuance and thereafter through
the end of the eighth complete calendar quarter after the date of
issuance. Thereafter, the annual dividend rate on the redeemable
preferred stock is 18 percent per annum ($4.50) on each outstanding
share of preferred stock. Dividends on shares of the redeemable
preferred stock are payable in four equal quarterly installments on
the last day of March, June, September and December beginning
September 30, 1994. The dividends shall accrue and become
cumulative not compounded from the date of issuance. Accumulated
dividends do not bear interest. Whenever dividends on the
redeemable preferred stock are in arrears for eight consecutive
quarters or in an amount equal to at least 12 quarterly dividends,
the holders of such stock (voting as a class) have the right to
elect one director of the Company until all cumulative dividends
have been paid in full. Dividends in arrears on the outstanding
preferred shares totalled $205,729 as of December 31, 1995.
Shares of the redeemable preferred stock are redeemable, at the
Company's election, in whole or in part. However, if IC declares a
dividend, the Company is contractually obligated to use those
proceeds, subject to sufficient legally available funds to redeem,
in whole or in part, the preferred stock, to the extent such cash
dividends are not applied to payment of accrued dividends on
redeemable preferred stock. The shares are redeemable at $26.25
per share together with accrued and unpaid dividends, if any.
Shares of the redeemable preferred stock have a liquidation value
of $25 per share plus accrued dividends, including cumulative
dividends.
On November 21, 1996, the Company completed the redemption of its
45,500 shares of preferred stock at an aggregate cost of
$1,544,432, including dividends in arrears of $350,057.
Common Stock
During August 1995, the Company amended its articles of
incorporation to increase the authorized shares of common stock
from 1,000,000 shares to 9,000,000 shares.
On October 21, 1996, the Company completed the sale of 1,175,000
shares of its common stock in an IPO registered on Form S-1. The
Company received net proceeds of approximately $5,460,600 after
paying offering costs of $1,589,436.
Simultaneously with the completion of the Company's IPO on October
21, 1996, $1,062,500 of the Company's convertible subordinated
notes payable and accrued interest of $56,025 were converted into
356,168 shares of common stock in accordance with the provisions of
the convertible subordinated notes (see Note 8).
Underwriters Warrants
On October 16, 1996, the Company sold warrants for $118 to the
underwriters of the IPO entitling the underwriters to purchase an
aggregate of 117,500 shares of the Company's common stock ("the
Representatives' Warrants"). The Representatives' Warrants are
exercisable for a period of 4 years commencing November 16, 1997 at
an exercise price per share of 120% of the IPO price ($17.20). The
Representatives' Warrants contain anti-dilution provisions
providing for adjustment of the exercise price and number of shares
issuable upon exercise upon the occurrence of certain events,
including stock dividends, stock splits, recapitalizations and
sales of common stock below the exercise price thereof.
Officers' Warrants
On December 1, 1995, the Company issued warrants to its officers to
purchase an aggregate of 97,720 shares of common stock at an
exercise price of $2.23 per share. Twenty-five percent of the
warrants vested on December 1, 1995 and an additional 25% will vest
every six months thereafter. The warrants expire on December 1,
2000.
Stock Split
During August 1995, the Company declared a 5.5 to 1.0 forward stock
split. During September 1996, the Company declared a 1.535 to 1
reverse stock split. All share information herein reflects both
such stock adjustments.
Stock Option Plan
In connection with the IPO, the Board of Directors adopted the
Company's stock option plan (the "Stock Option Plan"). The Stock
Option Plan provides for an initial authorization of 250,000 shares
of Common Stock for issuance thereunder at exercise prices no less
than 85% of the fair market value of the common stock at the time
of grant The options will vest over a five-year period, except
that up to 10% of the options may be subject to a shorter vesting
period at the discretion of the Company's board of directors.
Options may not be exercised more than three months after an
employees' termination of employment with the Company unless such
termination was a result of death, disability or retirement, in
which case the exercise period is extended to one year. The
exercise price may be paid in cash, by tendering shares of the
common stock (valued at fair market value on the date of exercise)
if so provided in the applicable stock option agreement, or by a
combination of such means of payment, as may be determined by the
Stock Option Committee. As of December 31, 1996 the Company has
the following stock options outstanding under this plan.
Grant Expiration Exercise Options
Date Date Price Granted
- ---------------------------------------------------------------
October 16, 1996 October 15, 2006 $6.00 5,000
November 25, 1996 November 24, 2006 $6.00 43,000
November 25, 1996 November 24, 2006 $5.10 35,000
- ---------------------------------------------------------------
Options outstanding 83,000
- ---------------------------------------------------------------
The options' exercise price was equal to the common stock's market
price at the date of grant.
Senior Executive Incentive Stock Option Plan
On September 16, 1996, the Company granted options to each of its
President and Executive Vice President to purchase 125,000 shares
of common stock pursuant to the Senior Executive Stock Option Plan
(the "Executive Option Plan") at an exercise price equal to $6.00.
None of these options vest prior to March 31, 1997. Thereafter,
they vest in accordance with the Executive Option Plan. The
options expire on September 16, 2006.
SFAS No. 123, "Accounting for Stock-Based Compensation", requires
the Company to provide pro forma information regarding net income
as if compensation for the Company's stock option plans had been
determined in accordance with the fair value based method
prescribed in SFAS No. 123. The Company estimated the fair value
of each stock option at the grant date by using the Black-Scholes
option-pricing model with the following weighted-average
assumptions used for the 1996 and 1995 grants: dividend yield of
0%; expected volatility of 16% and 20%; risk free interest rate of
6.6% and 5.4%; and expected life of five years.
The impact of the accounting provisions of SFAS No. 123 is not
significant to the Company's net loss and net loss per share and
therefore has not been disclosed.
During the initial phase-in period of SFAS 123, the effects on pro
forma results are not likely to be representative of the effects on
pro forma results in future years since options vest over several
years and additional awards could be made each year.
A summary of the status of the Company's stock option plans and
outstanding warrants as of December 31, 1996 and 1995 and changes
during the years ended on those dates is presented below:
1996 1995
----------------- ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Prices Shares Price
- -----------------------------------------------------------------
Outstanding, beginning
of year 114,024 $2.23 - $ -
Granted 333,000 5.91 114,024 2.23
Expired - - - -
-----------------------------------------
Outstanding, end of year 447,024 $4.97 114,024 $2.23
-----------------------------------------
Options and warrants
exercisable, end of year 86,516 $2.23 28,506 $2.23
-----------------------------------------
Weighted average fair
value of options and
warrants granted
during the year - $1.85 - $0.67
-----------------------------------------
The following table summarize information about stock options and
warrants outstanding at December 31, 1996:
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/96 Life Price at 12/31/96 Price
- -----------------------------------------------------------------
$2.23-$6.00 447,024 5 $4.97 86,516 $2.23
- -----------------------------------------------------------------
13. Income Taxes
At December 31, 1996, the Company has available net operating loss
carry forwards of approximately $2,611,000 for tax reporting
purposes which expire through 2011. These operating loss carry
forwards are subject to various limitations imposed by the rules
and regulations of the Internal Revenue Service.
The Company has deferred tax assets fully reserved as of December
31, 1996 and 1995. The tax effect on the components is as follows:
December 31,
1996 1995
Net operating loss carry forward $ 979,000 $ 205,000
Basis differences in investments in
Goose Creek and Illinois Center (18,000) -
Salary accrual - 54,000
Basis difference in property
and equipment - 1,000
--------------------------
961,000 260,000
Valuation allowance (961,000) (260,000)
--------------------------
$ - $ -
==========================
A 100 percent valuation allowance has been established to reflect
management's evaluation that it is more likely than not that all of
the deferred tax assets will not be realized. For the years ended
December 31, 1996 and 1995, the valuation allowance increased by
$701,000 and $168,000.
VA and IC are Subchapter S Corporation for income tax purposes
through July 27, 1994. Under provisions of the Internal Revenue
Code, the net income or loss of VA and IC are to be included in the
Federal income tax returns of the individual stockholders. Since
VA and IC incurred losses while Subchapter C corporations, no pro
forma income tax provision is required.
For income tax purposes, the Company has recorded its percentage of
the taxable losses generated by Goose Creek and Illinois Center as
both entities are limited partnerships. The net difference between
the tax basis and the reported amounts of Goose Creek's and
Illinois Center's assets and liabilities as of December 31, 1996 is
$48,000.
14. Supplemental Data to Statement of Cash Flows
Years Ended December 31, 1996 1995 1994
-----------------------------------
Cash payments for interest $ 166,954 $ 25,994 $ 1,842
Excluded from the consolidated and combined statement of cash flows
were the effect of certain noncash investing and financing
activities as follows:
Increase in common stock for
discount on debt $ 243,600 $ - $ -
Conversion of convertible
subordinated notes and
accrued interest into
common stock $1,047,475 $ - $ -
Acquisition of limited
partnership interests in
Goose Creek and Illinois
Center with
convertible debt $1,863,672 $ - $ -
Acquisition of Fremont and
Palms with debt $1,247,290 $ - $ -
Other $ 179,791 $ - $120,460
- ----------------------------------------------------------------
15. Subsequent Event
Convertible Subordinated Note Offering
The Company is offering for sale in a private placement $5,000,000
in convertible subordinated notes ("the Notes"). The Notes are
offered by Prime Charter Ltd. ("Prime") on a best efforts basis.
The notes will bear interest at 8% and will mature on June 30,
2004.
Report of Independent Certified Public Accountants
Board of Directors
MetroGolf, Incorporated
Denver, Colorado
The audits referred to in our report dated March 21, 1997 relating
to the consolidated financial statements of MetroGolf,
Incorporated, which is contained in Item 8 of this Form 10-K
included the audits of the financial statement schedule listed in
the accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is
to express an opinion on this financial statement based on our
audits.
In our opinion, such schedule presents fairly, in all material
respects, the information set forth therein.
BDO Seidman, LLP
Denver, Colorado
March 21, 1997
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Balance at
Beginning of Costs and End of
Year Expenses Deductions Year
- -----------------------------------------------------------------
Year Ended
December 31, 1996;
Deferred tax
asset valuation
allowance $ 260,000 $ 701,000 $ - $ 961,000
Year Ended
December 31, 1995;
Deferred tax
asset valuation
allowance $ 92,000 $ 168,000 $ - $ 260,000
Year Ended
December 31, 1994;
Deferred tax
asset valuation
allowance $ - $ 92,000 $ - $ 92,000
- -----------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers and Directors
The names and ages, along with certain biographical information, of
the executive officers, Directors, and Director Nominee of the
Company are as follows:
Name Age Position
- -----------------------------------------------------------------
Charles D. Tourtellotte 42 Chairman of the Board;
President
J.D. Finley 39 Executive Vice President;
Chief Financial Officer and
Secretary
Craig M. Sloan 50 Vice President - Operations
James K. Dignan 39 Vice President - Acquisitions
Ernie Banks 65 Director
Jack F. Lasday 40 Director
Michael S. McGetrick 36 Director
Robert Winsor IV 41 Director
The members of the Board of Directors hold office until the next
annual meeting of stockholders or until their successors have been
elected and qualified. Officers are appointed by, and serve at the
pleasure of, the Board of Directors. The following is a
description of the Company's current Directors, executive officers
and key employees.
Charles D. Tourtellotte. Mr. Tourtellotte is the President and
Chairman of the Board. Mr. Tourtellotte directs the development,
acquisition and management of the golf assets of the Company and
the raising of debt and equity capital for the Company's golf
facilities portfolio. Prior to forming the Company in 1992, Mr.
Tourtellotte co-founded and served as a director and president of
Dye Equity Incorporated ("DEI"), the golf course acquisition and
development subsidiary of Dye Designs, from January 1989 to
December 1991. Dye Designs is a golf course design and development
firm headed by Perry Dye, son of renowned golf course architect
Pete Dye. During his tenure at DEI, Mr. Tourtellotte was
responsible for acquisition and development of golf and related
real estate assets and sourced debt, equity, and joint venture
financing for DEI's and its clients' portfolios. From 1984 to 1989,
Mr. Tourtellotte served as Senior Vice President of Acquisitions
for Johnstown American Companies, then one of the nation's largest
real estate investment and property management firms. Earlier, he
served as senior acquisition/investment officer at two national
real estate companies, Consolidated Capital Corporation and Robert
A. McNeil Corporation.
J.D. Finley. Mr. Finley, Executive Vice President and Chief
Financial Officer, coordinates all financial functions of the
Company, including management and disbursement of development and
acquisition funds for the Company and its affiliated entities. Mr.
Finley also provides due diligence analysis and assistance in
structuring proposed asset acquisitions and development projects.
In addition, Mr. Finley assists Mr. Tourtellotte in managing the
day-to-day affairs of the Company. Prior to joining the Company in
September 1994, Mr. Finley, a CPA, was a stockholder and director
of Mitchell Finley and Company, P.C. ("Mitchell Finley"), a Denver-
based certified public accounting firm. A portion of Mr. Finley's
time while with Mitchell Finley was devoted to servicing the
Company's account as a tax consultant. Prior to joining Mitchell
Finley in 1990, Mr. Finley was a stockholder and director of the
accounting firm of Shenkin Kurtz Baker and Company, P.C. Previous
to his employment with Shenkin Kurtz Baker and Company, P.C. from
1985 to 1990, Mr. Finley was a manager with the international
accounting firm of Deloitte Haskins & Sells (now Deloitte & Touche)
from 1979 to 1985.
Craig M. Sloan. Mr. Sloan is a Class A member of the PGA of
America with more than 28 years experience in all phases of golf
facility management. from 1991 through joining the Company in
1997, Mr. Sloan was the Vice President/Director of Golf Facilities
Management of First Golf Corporation headquartered in Tempe,
Arizona where he headed up the Management Division. He is the
former Head Golf Professional of Leisure World Country Club in
Mesa, Arizona, and the Dobson Ranch Municipal Golf Course in Mesa.
He was Director of Golf at Apache Wells Resort and Country Club in
Mesa, Arizona for six years. Mr. Sloan has served on the Board of
Directors of the Southwest Section of the PGA of America for
twenty-one years and as its President for six years. He is a two-
time winner of the Professional of the Year Award for the Southwest
Section and a member of the Golf Course Superintendents Association
and the Club Managers Association of America.
James K. Dignan. Mr. Dignan, Vice President Acquisitions, joined
the Company in July 1993 to facilitate the acquisition and
development of golf assets for the Company's portfolio. Mr. Dignan
assists in the acquisition, development and management of
metropolitan golf facilities for the Company. From 1986 to 1993,
Mr. Dignan was an Associate Director for Cushman and Wakefield
where he was responsible for the leasing and management of
commercial real estate properties for several Fortune 500
companies. From 1982 to 1986, Mr. Dignan served as Vice President
for Heliconian, Ltd., a company which specializes in real estate
investment services. Mr. Dignan was a member of the Professional
Golfers Association (PGA) for several years.
Ernie Banks. Ernie Banks is a Director of the Company and was an
all-star shortstop and first baseman for the Chicago Cubs Baseball
Club for 19 years, retiring in 1971. Mr. Banks was elected to the
Baseball Hall of Fame in 1977. Since 1991, Mr. Banks has been the
owner and chief executive officer of Ernie Banks International,
Inc., a sports marketing and promotions firm located in Chicago,
and Community Relations Director for the Chicago Cubs.
Jack F. Lasday. Mr. Lasday is a Director of the Company and Senior
Vice President - Investments of Prudential Securities. Prior to
joining Prudential Securities in September 1994, he was a Senior
Vice President at Rodman & Renshaw, Inc., where he was employed
from 1982 to 1994. Mr. Lasday is director of Gateway Foundation and
a member of the Illinois C.P.A. Society and the American Institute
of Certified Public Accounts.
Michael S. McGetrick. Mr. McGetrick is a Director of the Company.
Mr. McGetrick, a PGA Class A Member, has been the Director of
Instruction at the Meridian Golf Learning Center in Denver,
Colorado since 1993. From 1991 to 1993, he was the head teaching
professional at Cherry Hills Country Club in suburban Denver,
Colorado. He has also served as head teaching professional at a
number of other country clubs or golf facilities and coaches a
number of players on the PGA and LPGA Tours. Mr. McGetrick has
published several instructional articles in national golf
magazines. He was named by Golf Magazine as one of the top 100
teaching professionals in America in 1996.
Robert Winsor IV. Mr. Winsor is a Director of the Company. Mr.
Winsor is Director and Executive Producer of Broadcast Publicity at
The CBS Broadcast Group in New York. In addition to his
responsibilities with CBS, Mr. Winsor has produced a number of
corporate sales programs for national and regional companies and
has produced national satellite media tours that help companies
deliver their messages or products to targeted areas. Before
joining CBS in 1991 to produce news stories, Mr. Winsor worked for
ABC News in Boston for eight years where he produced over 150
sports features and profiles.
The following forms were filed late:
J.D. Finley Form 3 and Form 5 relating to such Form 3 for a
single transaction.
James Dignan Form 3 and Form 5 relating to such Form 3 for a
single transaction.
Ernie Banks Form 3 and Form 5 relating to such Form 3 for a
single transaction.
Jack Lasday Form 3 and Form 5 relating to such Form 3 for a
single transaction.
Michael McGetrick Form 3 and Form 5 relating to such Form 3 for a
single transaction.
Robert Winsor IV Form 3 and Form 5 relating to such Form 3 for a
single transaction.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by
the Company to the Chief Executive Officer and the only other
officer of the Company who received compensation in excess of
$100,000 for services rendered to the Company in all capacities
during the three fiscal years ended December 31, 1996, 1995 and
1994.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
Long-Term
Compensation
- -----------
Annual Compensation
Shares of
--------------------------------------
- --------- Common Stock
Other Annual Underlying All
Name and Principal Fiscal Year Salary ($)Bonus
($)Compen- Other
Position
sation Warrants(#) Comp.
<S> <C> <C> <C> <C>
<C> <C>
Charles D. Tourtellotte 1996 250,000 ---
- --- 125,000(3) ---
Chairman of the Board 1995 180,000 ---
- --- 48,860(4) 125,000 (1)
and President 1994 180,000 ---
- --- --- ---
J.D. Finley 1996 175,000 ---
- --- 125,000(3) ---
Executive Vice President 1995 120,000 ---
- --- 48,860(4) ---
and Chief Financial Officer1994 30,000 (2) ---
- --- --- ---
<FN>
(1) Mr. Tourtellotte is entitled to receive $125,000 of
compensation upon receipt by the Company
of the $125,000 contingent portion of its fee in connection with
the development of Illinois Center
Golf. This $125,000 is payable by ICGP upon the complete repayment
of capital to the limited
partner investors, plus a preferred return of 15% per annum.
Because of this financial structure,
this payment is not expected to be received before 1999, if at all.
(2) Mr. Finley joined the Company in September 1994.
(3) See table "Warrant/Option/SAR Grants in Last Fiscal Year"
below.
(4) Of these warrants, 36,645 shares are vested as of December 31,
1996. The remaining 12,215
shares will vest on February 28, 1997.
</TABLE>
<TABLE>
<CAPTION>
WARRANT/OPTION/SAR GRANTS IN LAST
FISCAL YEAR
Individual
Grants
------------------------------------------
- --------------------------------
Percentage of Total
Number of Warrants/Options
Securities Underlying Granted to Employees
Exercise
Warrants/Options in
of Base Expiration
Name Granted Fiscal Year
Price ($/sh) Date
<S> <C> <C>
<C> <C>
Charles D. Tourtellotte 125,000 38%
$6.00 September 15, 2006
J.D. Finley 125,000 38%
$6.00 September 15, 2006
</TABLE>
None of Mr. Tourtellotte's or Mr. Finley's warrants described above
are vested and exercisable (subject to an Underwriters' lock-up) as
of the date hereof. These warrants vest and are exercisable as
follows: the first 20% upon the closing market price of the Common
Stock exceeding $7.20 per share for a period of five consecutive
trading days; the next 20% upon the closing market price of the
Common Stock exceeding $8.40 per share for a period of five
consecutive trading days; the next 20% upon the closing market
price of the Common Stock exceeding $9.60 per share for a period of
five consecutive trading days; the next 20% upon the closing market
price of the Common Stock exceeding $10.80 per share for a period
of five consecutive trading days; and the last 20% upon the closing
market price of the Common Stock exceeding $12.00 per share for a
period of five consecutive trading days. The vesting schedule
described above is referred to herein as the "Executive Option Plan
Vesting Schedule".
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Unexercised Options at Options at
Dec. 31, 1996 Dec. 31, 1996
Exercisable / Exercisable /
Name Unexercisable Unexercisable
- ---- ------------- -------------
Charles Tourtellotte 6,645 / 137,215 $147,312 / $80,354
J.D. Finley 40,228 / 137,215 $161,717 / $80,354
The members of the Company's Board of Directors are not presently
compensated directly by the Company for their service to the
Company. Messrs. Lasday and Banks have received warrants to
purchase 8,152 shares each of Common Stock at an exercise price of
$2.23 per share. The Company has issued Misters. McGetrick and
Winsor options to purchase 5,000 shares each of Common Stock under
the Stock Option Plan, at an exercise price equal $6.00 per share.
In addition, outside directors will be compensated for their
reasonable expenses in attending meetings of the Board of
Directors.
Employment Contracts
Charles D. Tourtellotte. Effective January 1, 1996, Mr.
Tourtellotte entered into a three-year employment agreement to
serve as President of the Company, which expires December 31, 1998.
Such agreement provides for an annual salary of $250,000, payable
semi-monthly in arrears, plus such bonuses as the Board of
Directors of the Company may from time to time approve. The
agreement provides for certain athletic club memberships and
allowances for an automobile, parking and other perquisites as from
time to time are made available to the Company's executive
officers. The agreement is terminable by the Company for "Cause,"
which includes conduct which causes material harm to the Company,
willful and continued absence of employee (other than by reason of
disability or death), employee's abandonment of his duties and
responsibilities, conviction of the employee for a felony involving
moral turpitude or fraud, misappropriation or embezzlement of
corporate funds. The agreement also has a noncompete clause for a
period of one-year immediately following the cancellation or
termination of the agreement for any reason. In the event of
termination by reason of death or disability and provided the
Company has not otherwise provided Mr. Tourtellotte with life or
disability insurance or other benefit plan for such occurrence, the
Company is required to pay Mr. Tourtellotte or his estate severance
pay equal to six months' salary.
J.D. Finley. Effective January 1, 1996, Mr. Finley entered into a
three-year employment agreement to serve as Executive Vice
President and Chief Financial Officer of the Company, which expires
December 31, 1998. Such agreement provides a salary to Mr. Finley
of $175,000 per year, plus such bonuses as the Board of Directors
of the Company may from time to time approve. The agreement
provides for payment of monthly dues for membership at a country
club and an allowance for a cellular phone, parking and other
perquisites as from time to time are made available by the Company
to its executive officers. The agreement is terminable by the
Company for "Cause" as described above. The agreement also has a
noncompete clause effective for a period of one year immediately
following the cancellation or termination of the agreement. In the
event of termination by reason of death or disability and provided
the Company has not otherwise provided Mr. Finley with life or
disability insurance or other benefit plan for such occurrence, the
Company is required to pay Mr. Finley or his estate severance pay
equal to six months' salary.
James K. Dignan. Effective January 1, 1996, Mr. Dignan entered
into a three-year employment agreement to serve as Vice President _
Acquisitions of the Company, which expires December 31, 1998. The
agreement provides for a base salary of $66,000 per year, plus such
bonuses as the Board of Directors of the Company may from time to
time approve. The agreement is terminable by the Company for
"Cause" as described above. The agreement also has a noncompete
clause for a period of one year immediately following the
cancellation or termination of the agreement for any reason. In the
event of termination by reason of death or disability and provided
the Company has not otherwise provided Mr. Dignan with life or
disability insurance or other benefit plan for such occurrence, the
Company is required to pay Mr. Dignan or his estate severance pay
equal to six months' salary.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following information is as of March 31, 1997.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Title Name and address Amount and nature Percent of
of Class of beneficial owner of beneficial ownership class(1)
- -------------------------------------------------------------------
- ---
Common Charles Tourtellotte 734,482 shares (2) 27.7%
MetroGolf Incorporated
1999 Broadway, #2435
Denver, CO 80202
Common Alex Brown & Sons Inc. 661,402 shares 24.9%
PO Box 1346
Baltimore MD 21203
Common Donaldson Lufkin &
Jenrette Securities Corp 185,100 shares 7.0%
1 Pershing Plaza
Jersey City, NJ 07399
Common Bear Stearns Securities
Corp 123,390 shares 4.7%
Dept C - Cashiers Dept
One Metrotech Center North
Brooklyn, NY 11201-3862
(1) Does not include (i) the 567,875 shares issuable upon
conversion of the notes and warrants issued in connection with the
acquisition of the limited partnership interests in ICGP and GCGP,
(ii) the 117,500 shares issuable upon conversion of the
Representative's Warrants, (iii) $962,500 aggregate principal
amount of PP Notes convertible at 50% of then market price, (iv)
167,000 shares of Common Stock available for future grant under the
Stock Option Plan, or (v) the stock options for 250,000 ahares
issued to Messrs. Tourtellotte and Finley under the Executive
Option Plan which vest according to the Executive Option Vesting
Schedule.
(2) Includes 685,622 primary shares and 48,860 vested warrants.
<TABLE>
<CAPTION>
SECURITY OWNERSHIP OF
MANAGEMENT
-----------------------------
- ---
Percentage of
Primary Warrants/Options
Total Common
Beneficial Owner Shares Held Vested Unvested
Holdings Stock Owned (1)
<S> <C> <C> <C>
<C> <C>
Charles Tourtellotte, 685,622 48,860 125,000
859,482 29.6%
President
J.D. Finley, 6,050 52,443 125,000
183,493 7.0%
Executive Vice President
Craig Sloan 2,420
2,420 0.1%
Vice President - Operations
James Dignan, 20,000
20,000 0.7%
Vice President - Acquisitions
Mike McGetrick, Director 5,000
5,000 0.2%
Robert Winsor, IV, Director 5,000
5,000 0.2%
Ernie Banks, Director 8,152
8,152 0.3%
Jack F Lasday, Director 13,206
13,206 0.5%
-------------------------------------
- ------------------------------
All Officers and Directors
as a Group 694,092 94,155 278,506
1,096,753 37.8%
===================================================================
<FN>
(1) Does not include (i) the 567,875 shares issuable upon
conversion of the notes and warrants issued in connection with the
acquisition of the limited partnership interests in ICGP and GCGP,
(ii) the 117,500 shares issuable upon conversion of the
Representative's Warrants, (iii) $962,500 aggregate principal
amount of PP Notes convertible at 50% of then market price, or (iv)
167,000 shares of Common Stock available for future grant under the
Stock Option Plan. Includes the stock options issued to Messrs.
Tourtellotte and Finley under the Executive Option Plan.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Charles Tourtellotte, President of the Company is indebted to the
Company in the amount of $82,511 as of December 31, 1996. From
time to time, the Company has made loans to Mr. Tourtellotte
against deferred compensation or in anticipation, but in advance,
of Mr. Tourtellotte earning bonus or other extraordinary
compensation. Such loans were made for the bona fide business
purposes of inducing Mr. Tourtellotte to continue to devote
substantial time to the Company and allowing the Company to
continue to defer payment of his compensation thus increasing the
Company's available cash. These loans are evidenced by a note
agreement. The note bears interest at 8% per annum and is due on
demand. The total original principal amount of these loans is
$152,638 and as of December 31, 1996, the outstanding balance on
the note was $82,511. Mr. Tourtellotte has paid the required
amounts under the loans when due. Mr. Tourtellotte's employment
contract also specifies that any unpaid balance on the note must be
repaid from the $125,000 Mr. Tourtellotte may receive upon receipt
of the contingent portion of the Company's development fee for
Illinois Center Golf described under "Executive Compensation."
This $125,000 is payable by ICGP upon the complete repayment of
capital to the limited partner investors, plus a preferred return
of 15% per annum. Because of this financial structure, this payment
is not expected to be received before 1999, if at all. Any further
loans to Mr. Tourtellotte will be approved by the Board of
Directors and will be made only if the aggregate of all outstanding
loans do not exceed the amount of reasonably anticipated
compensation owed to him, which may include the balance of the
$125,000 of deferred compensation referred to above. Mr.
Tourtellotte has personally guaranteed $5.12 million of
indebtedness of ICGP and GCGP.
ITEM 14. EXHIBITS
(a) The following documents are filed as part of this
Annual Report on Form 10-K.
1. Financial Statements: The financial statements of the
Company are included in item 8 of this report. See Index to
Financial Statements on page F-1.
2. Financial Statement Schedules: Financial statement
schedules required under the related instructions are applicable
for the years ended December 31, 1996, 1995 and 1994, and are
therefore included in Item 8.
3. Exhibits: The exhibits which are filed with this
Report or which are incorporated herein by reference are set forth
below.
3.1 Articles of Incorporation, as amended, incorporated
herein by reference from the Registrant's Offering Statement on
Form 1-A (File No. 24D-3840)("Form 1-A") with June 3, 1996
amendment filed as Exhibit 3.1 to Registrant's Form S-1 (Reg. No.
333-06151) as filed with as filed with the Securities and Exchange
Commission on June 17, 1996 (together with Amendments 1, 2, and 3
thereto , the "Form S-1")
3.2 Bylaws, incorporated herein by reference from the Form
1-A
4 Specimen Common Stock Certificate of MetroGolf
Incorporated (incorporated by reference to Exhibit 4 to Form S-1)
4.1 Form of Note Purchase Agreement dated May 8, 1996
between The Vintage Group USA, Ltd. and the Purchasers of its 12%
Convertible Subordinated Notes due 1997 (the PP Notes)
(incorporated by reference to Exhibit 4.2 to Form S-1)
10.1 Employment Agreement between the Company and Charles
D. Tourtellotte effective as of January 1, 1996 (incorporated by
reference to Exhibit 10.1 to Form S-1)
10.2 Employment Agreement between the Company and J.D.
Finley effective as of January 1, 1996 (incorporated by reference
to Exhibit 10.2 to Form S-1)
10.3 Employment Agreement between the Company and James K.
Dignan effective as of July 1, 1996 (incorporated by reference to
Exhibit 10.3 to Form S-1)
10.4(a) Form of outstanding Warrant Certificates, incorporated
herein to Form 1-A
10.4(b) Warrant Agreement, incorporated herein by reference to
Form 1-A
10.7 Agreement of Limited Partnership of Illinois Center
Golf Partners L.P., incorporated herein by reference to Form 1-A
10.8 Ground Sublease and Sublicense Agreement for Illinois
Center Golf Facilities between Illinois Center Golf Partners L.P.
and Illinois Center Plaza Venture, as amended, incorporated herein
by reference to Form 1-A
10.9 Agreement of Limited Partnership of Goose Creek Golf
Partners Limited Partnership, incorporated herein by reference to
Form 1-A
10.10 Credit Line Deed of Trust for the benefit of Textron
Financial Corporation, incorporated herein by reference to Form 1-A
10.11 Port Authority Letter Agreement, incorporated herein
by reference to Form 1-A
10.12 Operating Agreement of Vintage New York Golf L.L.C.,
incorporated herein by reference to Form 1-A
10.13 Agreement of Purchase and Sale between Robert Selleck
and Fremont Golf Partnership and The Vintage Group USA Ltd. dated
as of March 19, 1996 (incorporated by reference to Exhibit 10.13 to
Form S-1)
10.14 Letter of Intent relating to Harborside Golf Center
from The Vintage Group USA Ltd. to Shapery Enterprises dated March
18, 1996 (incorporated by reference to Exhibit 10.14 to Form S-1)
10.15 Management Agreement between MetroGolf Management,
Inc. and Illinois Center Golf, incorporated herein by reference to
Form 1-A
10.16 Settlement Agreement relating to 15% interest in
Illinois Center Golf and Goose Creek, incorporated herein by
reference to Form 1-A
10.17 Company's 1996 Stock Option and Stock Bonus Plan
(incorporated by reference to Exhibit 10.17 to Form S-1)
10.18 Management Agreement between MetroGolf Management,
Inc. and the Company dated July 1, 1996 relating to Fremont Golf
Center (incorporated by reference to Exhibit 10.18 to Form S-1)
10.19 Management Agreement between MetroGolf Management,
Inc. and MetroGolf (San Diego) Incorporated dated July 1, 1996
relating to Harborside Golf Center (incorporated by reference to
Exhibit 10.19 to Form S-1)
10.20 Form of Note from the Company to the limited partners
of ICGP that accept the Offer to Purchase (incorporated by
reference to Exhibit 10.20 to Form S-1)
10.21 Form of Warrant from the Company to the limited
partners of ICGP that accept the Offer to Purchase (incorporated by
reference to Exhibit 10.21 to Form S-1)
10.22 Form of Note from the Company to the limited partners
of GCGP that accept the Offer to Purchase (incorporated by
reference to Exhibit 10.22 to Form S-1)
10.23 Company's Senior Executive Incentive Stock Option Plan
(incorporated by reference to Exhibit 10.23 to Form S-1)
10.24 Golf Facility Lease by and between The City of Fremont
California and MetroGolf Incorporated dated April 2, 1997 **
10.25 Fifth Amendment to Ground Sublease and Sublease
Agreement for Illinois Center Golf Facilities dated January 31,
1996 amending Exhibit 10.8 (incorporated by reference to Exhibit
10.25 to Form S-1)
11 Statement re Computation of per share earnings
21 Subsidiaries of the Registrant (incorporated by
reference to Exhibit 21 to Form S-1)
27.1 Financial Data Schedules (incorporated by reference to
Exhibit 27.1 to Form S-1)
(I) MetroGolf Incorporated and Subsidiaries
Report of Independent Certified Public
Accountants
Schedule II - Valuation and Qualifying Accounts
** - filed herewith
(b) The following Form 8-K's were filed during the fourth
quarter of the Company's fiscal year:
(1) On November 12, 1996, the Company filed a Form 8-K
announcing the successful completion of its Initial Public Offering
(2) On November 13, 1996, the Company filed a Form 8-K
incorporating a press release issued October 23, 1996 by the
Company
MetroGolf Incorporated
Exhibit 11
Statement Re: Computation of Earnings Per Share
Historical weighted average number of shares outstanding is
summarized as follows:
1996 1995 & 1994
------- -------------
Common stock outstanding 982,055 680,782
--------- ---------
Warrants outstanding 288,160 288,160
Less treasury stock that
could be repurchased with
proceeds of exercised
warrants (106,744) (91,800)
--------- ---------
Assumed exercise of warrants 181,416 196,360
--------- ---------
Historical weighted average
number of common shares
outstanding 1,163,471 877,142
========== =========
Primary and Fully Diluted Earnings Per Share
For the Years Ended Dec. 31,
1996 1995 1994
Loss applicable to
common stock $(2,077,592) $(687,164) $(315,490)
============ ========== ==========
Weighted average
number of common
shares outstanding 1,163,471 877,142 877,142
============ ========== ==========
Primary and Fully
Diluted Earnings
Per Share $ (1.79) $ (0.78) $ (0.36)
============ ========== ==========
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.
MetroGolf Incorporated
By: /s/ Charles D. Tourtellotte
----------------------------
Charles D. Tourtellotte
Chairman, Chief Executive Officer, and President
Date: April 28, 1997
----------------
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.
MetroGolf Incorporated
DATE: April 28, 1997 /s/ Charles D. Tourtellotte
---------------- -----------------------------
Charles D. Tourtellotte
Chairman, Chief Executive Officer,
President, (Principal Executive Officer),
and Director
DATE: April 28, 1997 /s/ J.D. Finley
---------------- -----------------
J.D. Finley
Exec. Vice President and Chief Financial
Officer (Principal Financial Officer)
DATE: April 28, 1997 /s/ Jack F. Lasday
---------------- --------------------
Jack F. Lasday
Director
DATE: April 28, 1997 /s/ Michael McGetrick
---------------- -----------------------
Michael McGetrick
Director
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 904
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 158
<CURRENT-ASSETS> 1162
<PP&E> 13729
<DEPRECIATION> 205
<TOTAL-ASSETS> 16704
<CURRENT-LIABILITIES> 8693
<BONDS> 0
<COMMON> 6792
0
0
<OTHER-SE> (3234)
<TOTAL-LIABILITY-AND-EQUITY> 16704
<SALES> 1071
<TOTAL-REVENUES> 1081
<CGS> 0
<TOTAL-COSTS> 2499
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 567
<INCOME-PRETAX> (1933)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1933)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1933)
<EPS-PRIMARY> (1.79)
<EPS-DILUTED> (1.79)
</TABLE>
