<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1996
REGISTRATION NO. 333-9437
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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COBBLESTONE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7997 330597600
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION
ORGANIZATION) CODE NUMBER)
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3702 VIA DE LA VALLE, SUITE 202
DEL MAR, CALIFORNIA 92014
(619) 794-2602
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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MR. JAMES A. HUSBAND
CHIEF EXECUTIVE OFFICER
COBBLESTONE HOLDINGS, INC.
3702 VIA DE LA VALLE, SUITE 202
DEL MAR, CALIFORNIA 92014
(619) 794-2602
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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COPIES TO:
ELIZABETH A. BLENDELL, ESQ.
ANDREW D. HUTTON, ESQ.
LATHAM & WATKINS
633 W. FIFTH STREET, SUITE 4000
LOS ANGELES, CALIFORNIA 90071
(213) 485-1234
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 17, 1996
PROSPECTUS
OFFER TO EXCHANGE
13 1/2% SERIES B SENIOR ZERO-COUPON NOTES
DUE 2004 FOR ALL OUTSTANDING 13 1/2% SERIES A
SENIOR ZERO-COUPON NOTES DUE 2004
OF
COBBLESTONE HOLDINGS, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M, NEW YORK CITY TIME ON , 1996,
UNLESS EXTENDED.
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Cobblestone Holdings, Inc., a Delaware corporation ("Holdings"), is hereby
offering (the "Exchange Offer"), upon the terms and subject to the conditions
set forth in this Prospectus and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), to exchange $1,000 principal amount of its 13 1/2%
Series B Senior Zero-Coupon Notes due 2004 (the "Exchange Notes"), which
exchange has been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a registration statement of which this
Prospectus is a part (the "Registration Statement"), for each $1,000 principal
amount of its outstanding 13 1/2% Series A Senior Zero-Coupon Notes due 2004
(the "Private Notes"), which Private Notes were issued on June 4, 1996 at a
discount from their principal amount to generate gross proceeds of $28,964,000
and will accrete at a rate of 13 1/2%, compounded semi-annually, to an
aggregate principal amount of $86,000,000 at stated maturity. The form and
terms of the Exchange Notes are the same as the form and terms of the Private
Notes except that (i) the exchange will have been registered under the
Securities Act, and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof and (ii) holders of the Exchange Notes will
not be entitled to certain rights of holders of the Private Notes under the
Registration Rights Agreement (as defined in "The Exchange Offer--Registration
Rights Agreement"), which rights will terminate upon the consummation of the
Exchange Offer. The Exchange Notes will evidence the same indebtedness as the
Private Notes (which they replace) and will be entitled to the benefits of an
indenture dated as of June 4, 1996 governing the Private Notes and the Exchange
Notes. The Private Notes and the Exchange Notes are sometimes referred to
herein collectively as the "Notes." See "The Exchange Offer" and "Description
of Notes."
The Exchange Notes will accrete interest at the same rate and on the same
terms as the Private Notes. Consequently, the Exchange Notes will accrete
interest at the rate of 13 1/2% per annum, compounded semi-annually, to an
aggregate principal amount of $86,000,000 at their June 1, 2004 maturity date.
There will be no periodic cash interest payments on the Exchange Notes. The
Exchange Notes will accrete interest from and including the date of issuance of
the Private Notes (June 4, 1996). Holders whose Private Notes are accepted for
exchange will be deemed to have waived the right to receive any interest
accreted on the Private Notes.
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SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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HOLDINGS WILL ACCEPT FOR EXCHANGE ANY AND ALL VALIDLY TENDERED PRIVATE NOTES
NOT WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON , 1996, UNLESS
THE EXCHANGE OFFER IS EXTENDED BY HOLDINGS IN ITS SOLE DISCRETION (THE
"EXPIRATION DATE"). TENDERS OF PRIVATE NOTES MAY BE WITHDRAWN AT ANY TIME
PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
THE EXCHANGE OFFER IS NOT CONDITIONED UPON ANY MINIMUM PRINCIPAL AMOUNT OF
PRIVATE NOTES BEING TENDERED FOR EXCHANGE. PRIVATE NOTES MAY BE TENDERED
ONLY IN INTEGRAL MULTIPLES OF $1,000. IN THE EVENT HOLDINGS TERMINATES THE
EXCHANGE OFFER AND DOES NOT ACCEPT FOR EXCHANGE ANY PRIVATE NOTES,
HOLDINGS WILL PROMPTLY RETURN ALL PREVIOUSLY TENDERED PRIVATE NOTES TO
THE HOLDERS THEREOF.
-----------
The date of this Prospectus is , 1996.
<PAGE>
The Exchange Notes will be senior unsecured general obligations of Holdings
and will rank pari passu in right of payment to all other senior indebtedness
of Holdings, including Holdings' guarantee of borrowings under the New Credit
Facility (which New Credit Facility has an aggregate availability of $50
million, all of which was available at June 30, 1996) (as defined in
"Description of New Credit Facility"), which guarantee is secured by a pledge
of all of the common stock of Cobblestone Golf Group, Inc., a Delaware
corporation ("Cobblestone" or the "Company"). The Exchange Notes will be
structurally subordinated to all indebtedness (including trade payables and
capitalized lease obligations) of Holdings' Subsidiaries (as defined). As of
June 30, 1996, Holdings had $29.0 million of senior indebtedness, and the
Company and its Subsidiaries on a consolidated basis had outstanding $121.4
million of indebtedness (including trade payables and capitalized lease
obligations) to which the Exchange Notes would have been structurally
subordinated. The Indenture and the New Credit Facility contain certain
covenants which restrict the ability of Holdings and its Subsidiaries to incur
additional indebtedness. See "Risk Factors--Restrictive Covenants and
Financial Ratios Under New Credit Facility," "Description of Notes" and
"Description of New Credit Facility."
On or after June 1, 1999, Holdings may redeem the Exchange Notes, in whole
or in part, at the redemption prices set forth herein, plus Liquidated Damages
(as defined in "The Exchange Offer--Liquidated Damages"), if any, to the date
of redemption. Notwithstanding the foregoing, at any time on or before June 1,
1999, Holdings may, at its option and subject to certain requirements, use the
net cash proceeds from one or more Public Equity Offerings or issuances of
Qualified Capital Stock to Strategic Investors (each as defined in
"Description of Notes--Certain Definitions") to redeem all of the Exchange
Notes originally issued at a redemption price equal to 113.5% of the Accreted
Value (as defined in "Description of Notes--Certain Definitions") thereof,
plus Liquidated Damages, if any, to the date of redemption. In addition, upon
a Change of Control (as defined in "Description of Notes--Certain Covenants"),
each holder of Exchange Notes will have the right to require Holdings to
repurchase all or any part of such Holder's Exchange Notes at a price equal to
101% of the Accreted Value thereof, plus Liquidated Damages, if any, to the
date of purchase.
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, Holdings believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes may be offered for resale, resold
and otherwise transferred by a holder thereof (other than (i) a broker-dealer
who purchases such Exchange Notes directly from Holdings to resell pursuant to
Rule 144A or any other available exemption under the Securities Act or (ii) a
person that is an affiliate of Holdings within the meaning of Rule 405 under
the Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act; provided that the holder is
acquiring the Exchange Notes in the ordinary course of its business and is not
participating, and had no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. Holders of Private
Notes wishing to accept the Exchange Offer must represent to Holdings, as
required by the Registration Rights Agreement, that such conditions have been
met. Each broker-dealer that receives Exchange Notes for its own account in
exchange for Private Notes, where such Private Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. Holdings believes that none of the
registered holders of the Private Notes is an affiliate (as such term is
defined in Rule 405 under the Securities Act) of Holdings.
The Private Notes were originally issued as part of an offering (the "Unit
Offering") by Holdings of 86,000 units (the "Units"), each consisting of
$1,000 principal amount at stated maturity of the Private Notes and one share
(collectively, the "Shares") of common stock, par value $.01 per share, of
Holdings ("Holdings Common Stock"). The Private Notes and the Shares included
in the Units are not transferable separately until the Separation Date (as
defined in "The Offerings").
Prior to the Exchange Offer, there has been no public market for the Notes.
Holdings does not intend to list the Notes on any securities exchange or to
seek approval for quotation through any automated quotation system. There can
be no assurance that an active market for the Notes will develop. To the
extent that a market for the Notes does develop, the market value of the Notes
will depend on market conditions (such as yields on
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alternative investments), general economic conditions, Holdings' financial
condition and certain other factors. Such conditions might cause the Notes, to
the extent that they are traded, to trade at a significant discount from face
value. See "Risk Factors--Absence of Public Market."
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Private Notes where
such Private Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities. Holdings has indicated its
intention to make this Prospectus (as it may be amended or supplemented)
available to any broker-dealer for use in connection with any such resale for
a period of 180 days after the Expiration Date. See "Plan of Distribution."
Holdings will not receive any proceeds from, and has agreed to bear the
expenses of, the Exchange Offer. No underwriter is being used in connection
with this Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL HOLDINGS ACCEPT SURRENDERS
FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN WHICH THE
EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY HOLDINGS. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE
ACCOMPANYING LETTER OF TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL
UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1996 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
OFFERING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN
THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS IN CONNECTION
THEREWITH. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
The Exchange Notes will be available initially only in book-entry form.
Holdings expects that the Exchange Notes issued pursuant to the Exchange Offer
will be issued in the form of one or more fully registered global notes that
will be deposited with, or on behalf of, the Depository Trust Company ("DTC"
or the "Depositary") and registered in its name or in the name of Cede & Co.,
as its nominee. Beneficial interests in the global note representing the
Exchange Notes will be shown on, and transfers thereof will be effected only
through, records maintained by the Depositary and its participants. After the
initial issuance of such global note, Exchange Notes in certificated form will
be issued in exchange for the global note only in accordance with the terms
and conditions set forth in the Indenture. See "Description of Notes--Book
Entry, Delivery and Form."
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SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data, including
the financial statements and notes thereto, included elsewhere in this
Prospectus. Market data used throughout this Prospectus were obtained from
internal Company surveys and industry publications, including publications by
the National Golf Foundation, a non-profit industry organization ("NGF"). The
industry publications consulted generally indicate that the information
contained therein has been obtained from sources believed to be reliable.
Unless otherwise stated in this Prospectus or the context otherwise requires,
references to "Holdings" include Holdings, the Company, and each of the
Company's Subsidiaries and references to the "Company" include the Company and
each of its Subsidiaries. Unless otherwise indicated, references to a fiscal
year mean the twelve months ended September 30 of the year indicated.
THE COMPANY
Cobblestone is one of the leading golf course owners and operators in the
United States, with a current portfolio of 22 golf properties including both
private country clubs and public (or daily fee) courses. The Company's courses
are concentrated in clusters near metropolitan areas in the Sunbelt states
(including Arizona, California and Texas) which have large golfing populations
and attractive climates. This clustering strategy enables the Company to
efficiently manage its portfolio of courses and improve the profitability of
its courses by sharing many administrative functions and capitalizing on joint
marketing opportunities and economies of scale.
The Company's business consists primarily of operating golf courses and
related facilities, with revenue generated from membership fees and membership
dues at private country clubs, greens fees, food and beverage concessions, golf
cart rentals, retail merchandise sales, driving range fees and lodging fees.
The Company owns and operates 16 courses, leases four courses (subject to long-
term leases in excess of 20 years, including extension options), leases one
driving range and pro shop facility and manages one additional course. The
Company's portfolio includes nine private country clubs, eight public
facilities and five semi-private facilities.
There are approximately 15,000 golf courses in the United States, which
generate approximately $15 billion in annual revenue. The ownership and
operation of golf courses in the United States is highly fragmented, with less
than 5% of golf courses owned and operated by multi-course management
companies. The Company believes that the majority of golf course operators,
including real estate developers and municipalities, are generally involved in
golf course management because the golf course is an important component of
their development or community, but that such operators frequently do not have
professional golf course management experience. As a result, owners are often
interested in selling the golf facilities to third-party operators such as the
Company. These owners frequently place significant emphasis on experience and
reputation for quality management in selecting an owner/operator, and the
Company believes that its reputation in these areas has provided it with a
steady supply of attractive acquisition opportunities.
The Company believes certain demographic characteristics of the United States
will increase the demand for golf in the future, thereby benefitting golf
course operators. The Company believes that total rounds played will increase
as the golfing population ages. The highest golf participation rates (defined
as the percentage of individuals within a given demographic segment who played
golf during the survey year) are found among individuals aged 18 to 49, which
had average participation rates of approximately 13.6% in 1995, as compared to
11.6% for the population, as a whole. However, individuals over 50 played a
substantially greater number of rounds of golf per year relative to individuals
in younger age brackets. Accordingly, assuming that golf participation rates
remain at current levels, the Company believes that these 18 to 49 year old
golfers will increase the number of rounds played per year as they age. See
"Risk Factors--Factors Affecting Golf Participation" and "Business--Industry
Overview." The Company believes that, despite recent golf course
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construction in some of its markets, golf course construction in its markets
generally has been constrained as a result of several factors, including the
lack of capital available for real estate development, the significant land
required to build a golf course and related facilities (approximately 150
acres) and increasing environmental regulation, particularly with regard to the
availability of water in Arizona and California, two of the Company's primary
markets.
The Company's strategy is to grow its revenue and cash flows by (i)
continuing to improve the financial performance of its existing courses and
(ii) acquiring courses located in attractive markets which management believes
will benefit from the Company's golf course management expertise. Key elements
of the Company's operating strategy include:
. INCREASING MEMBERSHIP REVENUES/IMPROVING UTILIZATION OF THE
FACILITIES. The Company increases its golf-related revenue through
several means, including (i) increasing membership through aggressive
marketing and innovative membership programs, (ii) raising membership
dues and greens fees to market levels, (iii) implementing premium prices
for prime time play and discounting prices for less utilized times (e.g.,
twilight play), (iv) starting golfers on both the first and tenth tee
simultaneously, thereby increasing the number of rounds played per day
and (v) booking tournaments into less popular time slots. At its private
courses, the Company positions the golf course and related facilities as
an integral social center of the surrounding community in order to
attract non-golfing members. The Company frequently offers a number of
ancillary services in an effort to appeal to every member of the
household, such as meeting, tennis and fitness facilities for those who
do not play golf.
. CONTROLLING OPERATING COSTS. As its golf course portfolio has grown, the
Company has improved its cash flow margins by consolidating
administrative functions, capitalizing on its increased buying power and,
within clusters, sharing certain services and capital equipment. In
addition, the Company closely monitors its course level operations in
order to manage expenses.
. UPGRADING GOLF COURSE AND RELATED FACILITIES. Following its acquisition
of a golf course, the Company generally upgrades or improves a facility
in order to enhance its appeal to customers and members and to generate
additional revenues and cash flow. Where appropriate, the Company adds
additional courses (including nine hole additions) to existing facilities
to increase capacity and invests in major clubhouse renovations to
support increased dues and fees. These expenditures are generally
non-recurring. In addition, the Company implements strategic capital
expenditure programs which enable it to reduce course level operating
costs and improve the efficiency of the operations, such as improving the
irrigation system and acquiring more efficient maintenance equipment.
. APPEAL TO CORE GOLFING POPULATION. The Company targets core golfers
(defined by the NGF to be golfers who play more than eight rounds per
year). These golfers represent approximately 46% of the golfers in the
United States but play approximately 87% of the total rounds. The Company
believes that core golfers represent a stable demand for golf and are
generally more willing to make a significant investment in a golf club
membership and pay higher greens fees than the golfing population as a
whole. These golfers also tend to spend more time at a golf facility and
therefore generate higher ancillary revenues.
Key elements of the Company's acquisition strategy include:
. CLUSTERING OF COURSES. The Company seeks to acquire golf courses in
clusters near densely populated metropolitan markets. This strategy
enables the Company to more efficiently manage its portfolio of courses
and to improve the profitability of its courses by sharing many
administrative expenses and capital equipment and by capitalizing on
joint marketing opportunities and economies of scale.
. FOCUS ON PRIVATE COUNTRY CLUBS AND HIGH-END DAILY FEE COURSES. The
Company focuses on acquiring private country clubs and high-end daily fee
courses which attract core golfers in middle and
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upper income brackets who are less price sensitive than the typical public
course player. Revenue and cash flows of private country clubs are
generally more stable and predictable than those of public courses because
the receipt of membership dues is independent of the level of course
utilization. In addition, private courses have an easily identifiable
target population which permits a highly-focused marketing effort,
particularly if the course is part of a larger residential development.
The Company's daily fee courses typically command higher greens fees than
the average municipal course in its markets and provide the golfer a
higher level of service and better playing conditions than do standard
municipal courses.
. REPUTATION WITH REAL ESTATE DEVELOPERS. The Company has focused on
acquiring courses from developers who have built golf courses primarily
as an enhancement to their residential real estate developments. The
Company believes that its experience and reputation for quality
management provide it with a steady supply of attractive acquisition
opportunities from developers seeking third party owner/operators to
professionally manage the facilities.
. FOCUS ON FAVORABLE GOLF MARKETS. The Company targets golf courses in
markets with characteristics which it believes are favorable to golf
course ownership and management. For example, the Company concentrates on
acquiring courses convenient to metropolitan areas with dense populations
but with relatively few golf courses in relation to the size of the
golfing population. In addition, the Company focuses on markets with a
high number of playable days per year, enabling the Company to maximize
revenue and course utilization and thereby capitalize on the operating
leverage inherent in golf course management.
CORPORATE BACKGROUND
The Company was formed in 1992 by Brentwood Golf Partners, L.P. (the
"Partnership"), a partnership organized by Brentwood Associates ("Brentwood"),
and James A. Husband, to build a leading golf course ownership and management
company. See "Certain Relationships and Related Transactions." In its
approximately four years of operation, the Company has become one of the
leading golf course management companies in the United States. Mr. Husband, the
Company's President and Chief Executive Officer, has more than 20 years
experience in the golf industry, and prior to joining the Company, had been
Chairman and Chief Executive Officer of GolfCorp. (a subsidiary of Club
Corporation International), which he founded and built into one of the largest
public-course management companies in the United States.
Founded in 1972, Brentwood is a private investment firm specializing in
private equity and growth-oriented venture capital investments. Other than the
Partnership, Holdings' stockholders include The Northwestern Mutual Life
Insurance Company and Wilmington Interstate Corporation, an indirect wholly-
owned subsidiary of The Hillman Company. See "Principal Stockholders."
Holdings was formed in 1994 as a holding company whose sole asset is 100% of
the capital stock of the Company. Holdings is incorporated in Delaware; its
executive offices are located at 3702 Via de la Valle, Suite 202, Del Mar,
California, 92014; and its telephone number is (619) 794-2602.
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[CORPORATE STRUCTURE CHART]
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* Except as otherwise noted, all Subsidiaries are wholly-owned.
7
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THE EXCHANGE OFFER
The Exchange Offer.......... Holdings is hereby offering to exchange $1,000
principal amount of Exchange Notes for each
$1,000 principal amount of Private Notes that are
properly tendered and accepted. Holdings will is-
sue Exchange Notes on or promptly after the Expi-
ration Date. The Exchange Notes will be issued at
a discount from their principal amount and will
accrete at a rate of 13 1/2%, compounded semi-
annually, to an aggregate principal amount of
$86,000,000 at stated maturity. See "The Exchange
Offer."
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued
to third parties, Holdings believes that the Ex-
change Notes issued pursuant to the Exchange Of-
fer in exchange for Private Notes may be offered
for resale, resold and otherwise transferred by a
holder thereof (other than (i) a broker-dealer
who purchases such Exchange Notes directly from
Holdings to resell pursuant to Rule 144A or any
other available exemption under the Securities
Act or (ii) a person that is an affiliate of
Holdings within the meaning of Rule 405 under the
Securities Act), without compliance with the reg-
istration and prospectus delivery provisions of
the Securities Act; provided that the holder is
acquiring Exchange Notes in the ordinary course
of its business and is not participating, and had
no arrangement or understanding with any person
to participate, in the distribution of the Ex-
change Notes. Each broker-dealer that receives
Exchange Notes for its own account in exchange
for Private Notes, where such Private Notes were
acquired by such broker-dealer as a result of
market-making activities or other trading activi-
ties, must acknowledge that it will deliver a
prospectus in connection with any resale of such
Exchange Notes. See "The Exchange Offer--Resale
of the Exchange Notes."
Registration Rights
Agreement.................. The Private Notes were sold by Holdings on June
4, 1996 (the "Closing Date") to Donaldson, Lufkin
& Jenrette Securities Corporation (the "Initial
Purchaser") pursuant to a Purchase Agreement,
dated May 29, 1996, by and between Holdings and
the Initial Purchaser (the "Purchase Agreement").
The Initial Purchasers subsequently sold the Pri-
vate Notes to third parties. See "The Exchange
Offer--Purpose of the Exchange Offer." Pursuant
to the Purchase Agreement, Holdings and the Ini-
tial Purchaser entered into a Registration Rights
Agreement, dated as of May 29, 1996 (the "Regis-
tration Rights Agreement"), which grants the
holders of the Private Notes certain exchange and
registration rights. The Exchange Offer is in-
tended to satisfy such rights, which will termi-
nate upon the consummation of the Exchange Offer.
The holders of the Exchange Notes will not be en-
titled to any exchange or registration rights
with respect to the Exchange Notes. See "The Ex-
change Offer--Termination of Certain Rights."
Expiration Date............. The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1996, unless the Exchange
Offer is extended by Holdings in its sole discre-
tion for up to an additional ten business days,
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in which case the term "Expiration Date" shall
mean the latest date and time to which the Ex-
change Offer is extended. See "The Exchange Of-
fer--Expiration Date; Extensions; Amendments."
Accreted Interest on the
Exchange Notes and the
Private Notes.............. The Exchange Notes will accrete from and includ-
ing the date of issuance of the Private Notes
(June 4, 1996). Holders whose Private Notes are
accepted for exchange will be deemed to have
waived the right to receive any interest accreted
on the Private Notes. See "The Exchange Offer--
Interest on the Exchange Notes."
Conditions to the Exchange
Offer...................... Unless waived by Holdings, the Exchange Offer is
subject to the condition that, in the reasonable
judgment of Holdings, it does not violate appli-
cable law, rules or regulations or an applicable
interpretation of the staff of the Commission.
The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Private
Notes being tendered for exchange. See "The Ex-
change Offer--Conditions."
Procedures for Tendering
Private Notes.............. Each holder of Private Notes wishing to accept
the Exchange Offer must complete, sign and date
the Letter of Transmittal, or a facsimile there-
of, in accordance with the instructions contained
herein and therein, and mail or otherwise deliver
such Letter of Transmittal, or such facsimile,
together with such Private Notes and any other
required documentation to Norwest Bank Minnesota,
National Association, as exchange agent (the "Ex-
change Agent"), at the address set forth herein.
By executing the Letter of Transmittal, the
holder will represent to and agree with Holdings
that, among other things, (i) the Exchange Notes
to be acquired by such holder of Private Notes in
connection with the Exchange Offer are being ac-
quired by such holder in the ordinary course of
its business, (ii) such holder has no arrangement
or understanding with any person to participate
in a distribution of the Exchange Notes, (iii)
that if such holder is a broker-dealer registered
under the Exchange Act or is participating in the
Exchange Offer for the purposes of distributing
the Exchange Notes, such holder will comply with
the registration and prospectus delivery require-
ments of the Securities Act in connection with a
secondary resale transaction of the Exchange
Notes acquired by such person and cannot rely on
the position of the staff of the Commission set
forth in no-action letters (see "The Exchange Of-
fer--Resale of Exchange Notes"), (iv) such holder
understands that a secondary resale transaction
described in clause (iii) above and any resales
of Exchange Notes obtained by such holder in ex-
change for Private Notes acquired by such holder
directly from Holdings should be covered by an
effective registration statement containing the
selling securityholder information required by
Item 507 or Item 508, as applicable, of Regula-
tion S-K of the Commission and (v) such holder is
not an "affiliate," as defined in Rule 405 under
the Securities Act, of Holdings. If the holder is
a broker-dealer that will receive Exchange Notes
for its own account in exchange for Private Notes
that were acquired as a result of market-making
activities or other trading activities, such
holder will be required to acknowledge
9
<PAGE>
in the Letter of Transmittal that such holder
will deliver a prospectus in connection with any
resale of such Exchange Notes; however, by so ac-
knowledging and by delivering a prospectus, such
holder will not be deemed to admit that it is an
"underwriter" within the meaning of the Securi-
ties Act. See "The Exchange Offer--Procedures for
Tendering."
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Private Notes are reg-
istered in the name of a broker, dealer, commer-
cial bank, trust company or other nominee and who
wishes to tender such Private Notes in the Ex-
change Offer should contact such registered
holder promptly and instruct such registered
holder to tender on such beneficial owner's be-
half. If such beneficial owner wishes to tender
on such owner's own behalf, such owner must,
prior to completing and executing the Letter of
Transmittal and delivering such owner's Private
Notes, either make appropriate arrangements to
register ownership of the Private Notes in such
owner's name or obtain a properly completed bond
power from the registered holder. The transfer of
registered ownership may take considerable time
and may not be able to be completed prior to the
Expiration Date. See "The Exchange Offer--Proce-
dures for Tendering."
Guaranteed Delivery
Procedures................. Holders of Private Notes who wish to tender their
Private Notes and whose Private Notes are not im-
mediately available or who cannot deliver their
Private Notes, the Letter of Transmittal or any
other documentation required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Private Notes
according to the guaranteed delivery procedures
set forth under "The Exchange Offer--Guaranteed
Delivery Procedures."
Acceptance of the Private
Notes and Delivery of the
Exchange Notes............. Subject to the satisfaction or waiver of the con-
ditions to the Exchange Offer, Holdings will ac-
cept for exchange any and all Private Notes that
are properly tendered in the Exchange Offer prior
to the Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be delivered
within five business days following the Expira-
tion Date. See "The Exchange Offer--Terms of the
Exchange Offer."
Withdrawal Rights........... Tenders of Private Notes may be withdrawn at any
time prior to the Expiration Date. See "The
Exchange Offer--Withdrawal of Tenders."
Certain Federal Income Tax
Considerations............. Based upon an opinion of counsel to Holdings,
Holdings has determined that the exchange of Pri-
vate Notes for Exchange Notes will be treated as
a "non-event" for federal income tax purposes be-
cause the Exchange Notes will not be considered
to differ materially in kind or extent from the
Private Notes. As a result, no material federal
income tax consequences will result to holders
exchanging Private Notes for Exchange Notes. See
"Certain Federal Income Tax Considerations."
Exchange Agent.............. Norwest Bank Minnesota, National Association is
serving as the Exchange Agent in connection with
the Exchange Offer.
10
<PAGE>
THE EXCHANGE NOTES
The Exchange Offer applies to the entire aggregate principal amount at stated
maturity of the Private Notes. The form and terms of the Exchange Notes are the
same as the form and terms of the Private Notes except that (i) the exchange
will have been registered under the Securities Act and, therefore, the Exchange
Notes will not bear legends restricting the transfer thereof and (ii) holders
of the Exchange Notes will not be entitled to certain rights of holders of the
Private Notes under the Registration Rights Agreement, which rights will
terminate upon consummation of the Exchange Offer. The Exchange Notes will
evidence the same indebtedness as the Private Notes (which they replace) and
will be issued under, and be entitled to the benefits of, the Indenture. For
further information and for definitions of certain capitalized terms used
below, see "Description of Notes."
Maturity Date............... June 1, 2004.
Interest.................... The Exchange Notes will be issued at a discount
from their principal amount and will accrete at a
rate of 13 1/2%, compounded semi- annually, to an
aggregate principal amount of $86,000,000 at
stated maturity. There will be no periodic cash
interest payments on the Exchange Notes.
Optional Redemption......... On or after June 1, 1999, Holdings may redeem the
Exchange Notes, in whole or in part, at the re-
demption prices set forth herein, plus Liquidated
Damages, if any, to the date of redemption. Not-
withstanding the foregoing, at any time on or be-
fore June 1, 1999, Holdings may, at its option
and subject to certain requirements, use the net
cash proceeds from one or more Public Equity Of-
ferings or issuances of Qualified Capital Stock
to Strategic Investors to redeem all of the Ex-
change Notes originally issued at a redemption
price equal to 113.5% of the Accreted Value
thereof, plus Liquidated Damages, if any, to the
date of redemption. See "Description of Notes--
Optional Redemption."
Change of Control........... Upon a Change of Control, each holder of Exchange
Notes will have the right to require Holdings to
repurchase all or any part of such holders' Ex-
change Notes at a price equal to 101% of the Ac-
creted Value thereof, plus Liquidated Damages, if
any, to the date of purchase. There can be no as-
surance that Holdings will have the financial re-
sources necessary to repurchase the Exchange
Notes upon a Change of Control.
Ranking..................... The Exchange Notes will be senior unsecured gen-
eral obligations of Holdings. The Exchange Notes
will rank equally and without preference ("pari
passu") in right of payment to all other senior
indebtedness of Holdings, including Holdings'
guarantee of borrowings under the New Credit Fa-
cility (which has an aggregate availability of
$50 million, all of which was available at June
30, 1996), which guarantee is secured by a pledge
of all of the common stock of the Company. Hold-
ings does not engage in any business operations
of its own, and its assets consist solely of 100%
of the outstanding capital stock of the Company.
The Exchange Notes will be structurally subordi-
nated to all indebtedness (including trade
payables and capitalized lease obligations) of
Holdings' Subsidiaries. As of June 30, 1996,
Holdings had $29.0 million of senior indebtedness
and the Company and the Subsidiaries on a consol-
idated basis had
11
<PAGE>
outstanding $121.4 million of indebtedness (in-
cluding trade payables and capitalized lease ob-
ligations) to which the Exchange Notes would have
been structurally subordinated.
Certain Covenants........... The Indenture contains covenants that will, among
other things, limit the ability of Holdings, the
Company and its Subsidiaries to (i) make
restricted payments, (ii) incur additional
indebtedness and issue disqualified capital
stock, (iii) create liens, (iv) enter into
agreements that would restrict the Company's
ability to make distributions, loans or other
payments to Holdings or the Subsidiaries' ability
to make distributions, loans and other payments
to the Company, (v) enter into consolidations or
mergers or sell all, or substantially all, of
their assets, (vi) make asset sales and
(vii) enter into transactions with affiliates.
See "Description of Notes--Certain Covenants."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by holders of the Private Notes in evaluating the Exchange Offer.
12
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
The consolidated financial data set forth below with respect to Holdings'
statements of operations for each of the years in the three-year period ended
September 30, 1995 are derived from the consolidated financial statements that
have been audited by Ernst & Young LLP, independent auditors, which are
included elsewhere in this Prospectus. The statement of operations data for the
nine months ended June 30, 1995 and 1996 and the balance sheet data at June 30,
1996 are derived from unaudited financial statements which contain all
adjustments, consisting only of normal recurring adjustments, which Holdings
considers necessary for a fair presentation of the financial position and
results of operations for such periods. Operating results for the nine months
ended June 30, 1996 are not necessarily indicative of the results that are
expected for the entire year ended September 30, 1996. The selected financial
data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Holdings' financial statements and notes thereto included herein.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
---------------------------- ----------------
1993 1994 1995 1995 1996
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(1):
Operating revenues............ $ 6,507 $ 24,893 $ 49,863 $32,946 $43,716
Course-level operating
expenses(2).................. 4,184 16,818 34,427 22,924 30,451
General and administrative
expenses..................... 1,620 1,997 2,517 1,808 2,596
Depreciation and amortization
expense...................... 825 3,469 6,145 4,207 5,353
-------- -------- -------- ------- -------
Income (loss) from
operations................... (122) 2,609 6,774 4,007 5,316
Interest expense, net......... (530) (3,515) (8,019) (5,541) (8,193)
Gain on insurance settlement.. -- -- 747 -- --
Minority interest............. (195) -- -- -- --
-------- -------- -------- ------- -------
Loss before income taxes and
extraordinary item........... (847) (906) (498) (1,534) (2,877)
Provision for income taxes.... 6 72 208 33 138
-------- -------- -------- ------- -------
Loss before extraordinary
item......................... (853) (978) (706) (1,567) (3,015)
Extraordinary item............ -- (428) -- -- (3,520)
-------- -------- -------- ------- -------
Net loss...................... $ (853) $ (1,406) $ (706) $(1,567) $(6,535)
======== ======== ======== ======= =======
OTHER OPERATING DATA:
EBITDA(3)..................... $ 703 $ 6,078 $ 12,919 $ 8,214 $10,669
Net cash flows provided by
(used in) operating
activities................... 154 1,883 2,294 2,437 (187)
Net cash flows used in
investing activities......... (25,454) (32,970) (57,020) (53,559) (12,931)
Net cash flows provided by
financing activities......... 26,659 31,027 54,247 50,624 14,139
Golf facility investments(4).. 41,212 34,623 55,643 51,017 11,480
Cumulative golf facility
investments(5)............... 41,212 75,835 131,478 126,852 142,958
Number of golf properties(6).. 7 12 19 19 21
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1996
----------------
<S> <C>
BALANCE SHEET DATA:
Cash........................................................... $ 1,841
Total assets................................................... 159,558
Total long-term debt and capital leases........................ 106,499
Total liabilities.............................................. 121,410
Total redeemable preferred stock............................... 42,241
Net capital deficiency......................................... (4,093)
</TABLE>
(Footnotes appear on the following page)
13
<PAGE>
- --------------------
(1) The Company acquired or leased seven courses in fiscal 1993, an additional
five in fiscal 1994, an additional seven in fiscal 1995 and an additional
one in the nine months ended June 30, 1996 (fiscal 1996). The Company also
entered into a management contract to operate one course in the nine months
ended June 30, 1996. Holdings' results of operations include the results of
acquired courses from their dates of acquisition and not for any periods
prior to acquisition. As a result, Holdings' historical results of
operations for any particular period do not generally represent the full
revenue and cash flow generating capability of its golf course portfolio as
of the end of such period. Holdings' results of operations for the year
ended September 30, 1995 include the results of three courses for six
months, one course for seven months, three courses for ten months and 12
courses for the full fiscal year.
(2) Course-level operating expenses include cost of golf course operations
(e.g., salaries, taxes, utilities), cost of food and beverages and cost of
pro shop sales.
(3) EBITDA represents net income before interest expense, income taxes,
extraordinary item, gain on insurance settlement, minority interest and
non-cash charges of depreciation and amortization. EBITDA is presented
because it is a widely accepted financial indicator of a company's ability
to service and/or incur indebtedness. However, EBITDA should not be
considered as an alternative to net income as a measure of Holdings'
operating results or to operating cash flow as a measure of liquidity. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Private Membership Clubs; Accounting Treatment of Initiation
Fees."
(4) Golf facility investments consist of the aggregate purchase price
(including cash and principal amount of promissory notes) paid by the
Company to acquire its golf course portfolio, including non-recurring
upgrade capital expenditures.
(5) Cumulative since the Company's formation in October 1992.
(6) Of such 21 properties at June 30, 1996, 16 courses were owned by the
Company, three courses were operated under long-term leases, one driving
range/pro shop facility was leased and one course was managed by the
Company pursuant to a management contract. In addition, the Company entered
into a long term lease with respect to a course subsequent to June 30,
1996. See "Business--Recently Completed Acquisitions."
14
<PAGE>
RISK FACTORS
Prospective investors should consider carefully the following factors in
addition to the other information contained in this Prospectus before making
an investment in any of the Exchange Notes offered hereby. The Company
believes that this Prospectus contains forward-looking statements within the
meaning of Section 27A of the Securities Act. Discussions containing such
forward-looking statements may be found in the material set forth under
"Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Business," as
well as within the Prospectus generally. In addition, when used in this
Prospectus, the words "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. Such
statements are subject to a number of risks and uncertanties. Actual results
in the future could differ materially from those described in the forward-
looking statements as a result of the risk factors set forth below and the
matters set forth in the Prospectus generally. Holdings undertakes no
obligation to publicly release the result of any revisions to these forward-
looking statements that may be made to reflect any future events or
circumstances. Holdings cautions the reader, however, that this list of risk
factors may not be exhaustive.
LEVERAGE AND ABILITY TO SERVICE DEBT
Holdings is highly leveraged. As of June 30, 1996, Holdings had consolidated
long-term debt and capital lease obligations of $106.5 million and a net
capital deficiency of $4.1 million. Holdings' earnings were insufficient to
cover its fixed charges for each of the fiscal years ended September 30, 1993,
1994 and 1995 and for the nine months ended June 30, 1996. See Note (7) to
Selected Consolidated Financial Information. In addition, the Company had an
additional $50 million of borrowing availability under the New Credit
Facility. See "Consolidated Capitalization" and "Description of New Credit
Facility."
The high degree of leverage of Holdings and the Company may (i) have an
adverse effect on Holdings' ability to obtain additional financing to fund
working capital, capital expenditures or other purposes, (ii) make Holdings
more vulnerable to extended economic downturns, (iii) restrict Holdings'
ability to make acquisitions, exploit new technologies or potential business
opportunities, and (iv) limit Holdings' flexibility to respond to changing
economic conditions.
Holdings' ability to make scheduled payments of principal of, or to pay
interest on, or to refinance its indebtedness (including the Notes) will
depend on the future performance of the Company, which, to a certain extent,
is subject to general economic, financial, competitive, legislative,
regulatory and other factors beyond its control. Based upon the current level
of operations and anticipated growth, the Company believes that cash flow from
operations, together with available borrowings under the New Credit Facility
and other sources of liquidity, will be adequate to meet the Company's
anticipated future requirements for working capital, capital expenditures and
scheduled payments of principal and interest on its indebtedness, including
the Notes. There can be no assurance, however, that the Company's business
will generate sufficient cash flow from operations or that future working
capital borrowings will be available in an amount sufficient to enable
Holdings to pay the principal amount at maturity of the Notes, or make
necessary capital expenditures. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
ACQUISITION STRATEGY AND RISKS RELATED TO RAPID GROWTH
The Company is continually involved in the investigation and evaluation of
potential golf course acquisitions and at any time may be discussing possible
transactions, conducting due diligence investigations or otherwise pursuing
acquisition opportunities. Since its inception in October 1992, the Company
has made acquisitions for an aggregate purchase price of approximately $142.9
million, including upgrade capital expenditures. The Company historically has
financed its acquisitions through a combination of the borrowings under bank
credit facilities, seller-provided financing, internally-generated cash flow
and the issuance of equity securities. The Company's future growth and
financial success will be dependent upon a number of factors, including, among
others, its ability to identify acceptable acquisition candidates, consummate
the acquisitions of such golf facilities on favorable terms, promptly and
profitably improve the financial performance of acquired properties and
integrate them into the Company's operations and attract and retain customers
and members. Managing this growth and
15
<PAGE>
integrating acquired businesses requires a significant amount of management
time and skill. There can be no assurance (i) that the Company will be
effective in managing its future growth or in assimilating acquisitions, or
(ii) that any failure to manage growth or assimilate an acquisition will not
have a material adverse effect on the Company's business, operating results or
financial condition. In addition, the Company has generally been able to
implement significant increases in initiation fees, membership dues and greens
fees to market levels following acquisition of a golf facility. The Company
believes that any subsequent increases in initiation fees, membership dues and
greens fees at acquired courses are likely to occur on a smaller magnitude.
The Company's ability to execute its growth strategy depends to a
significant degree on its ability to obtain additional long-term debt and
equity capital. Other than the New Credit Facility, the Company has no
commitments for additional borrowings or sales of equity, and there can be no
assurance that the Company will be successful in consummating any such future
financing transactions on terms favorable to the Company or that any such
acquisition will not result in the incurrence of additional indebtedness.
Holdings' ability to repay the Notes or any other indebtedness at maturity may
depend on refinancing, which could be adversely affected if Holdings does not
have access to the capital markets for the sale of additional debt or equity
through public offerings or private placements on terms acceptable to
Holdings. Factors which could affect Holdings' access to the capital markets,
or the cost of such capital, include changes in interest rates, general
economic conditions, the perception in the capital markets of the Company's
business, results of operations, leverage, financial condition and business
prospects. In addition, the New Credit Facility and the covenants with respect
to the Senior Notes significantly restrict the Company's ability to incur
additional indebtedness. See "Description of Principal Indebtedness."
COMPETITION
The Company intends to continue to acquire golf courses in order to expand
its operations and increase its portfolio. There can be no assurance that
suitable golf course acquisition opportunities will be available or that,
because of competition from other purchasers or other reasons, the Company
will be able to consummate acquisitions on satisfactory terms or to obtain
necessary acquisition financing. In addition, the acquisition of golf courses
may become more expensive in the future if demand for properties increases.
The Company competes for the purchase, lease and management of golf courses
with several national and regional golf course companies. Several of the
Company's national competitors have larger staffs and more golf courses
currently owned, leased or under management than does the Company. In
addition, several of the national competitors and certain of the smaller,
regional companies have significantly greater capital resources than the
Company.
Golf courses are also subject to competition for players and members from
other golf courses located in the same geographic areas. The number and
quality of golf courses in a particular area could have a material effect on
the revenue of a golf course. The availability of sufficient acreage often
limits the number of competing courses, particularly in metropolitan areas.
However, the parts of Arizona and Texas in which many of Cobblestone's
existing properties are clustered have significant open land available, and
there has been continued construction of both public and private golf
facilities in those areas. The Company carefully evaluates these and other
factors before acquiring a golf course, and tailors its marketing strategy to
fit the demographic and competitive characteristics of the community. In
addition, revenue will be affected by a number of factors including the demand
for golf and the availability of other forms of recreation.
RELIANCE ON KEY PERSONNEL
The success of the Company is dependent upon the experience and abilities of
its senior management as well as its ability to attract and retain qualified
golf course general managers and superintendents. Key senior management
include James A. Husband, who is responsible for the Company's strategic
planning, Gary L. Dee, who manages the Company's operations, and Joseph H.
Champ, who oversees the Company's acquisition strategy. There is significant
competition in the golf course management industry for qualified personnel,
and
16
<PAGE>
there can be no assurance that the Company will be able to retain its existing
senior management or golf course personnel or recruit new personnel to support
its acquisition plans. In particular, James "Bob" Husband has 22 years of
industry experience in all phases of the Company's business, ranging from
operations to acquisitions. He was founder, Chairman and CEO of a company that
ultimately became CCA Golf Corp which became a subsidiary of Club Corporation
of America (now known as Club Corporation International). The loss of Mr.
Husband could have an adverse impact on the future performance of the Company.
See "Management."
LIMITED OPERATING HISTORY; VARIABILITY OF QUARTERLY OPERATING RESULTS AND NET
LOSSES
Since its organization in October 1992, the Company has been in an early
development stage in which its activities have been concentrated on the
acquisition, lease and management of its golf course properties. Seasonal
weather conditions reduce the playing season at certain of the Company's golf
courses. As a result, the second half (April through September) of the
Company's fiscal year generally accounts for a greater portion of the
Company's operating revenue and EBITDA than does the first half. This seasonal
pattern, as well as the timing of new course purchases or leases may cause the
Company's results of operations to vary significantly from quarter to quarter.
The Company has experienced net losses since its inception. Net losses for the
fiscal years ended September 30, 1993, 1994 and 1995 were approximately $0.9
million, $1.4 million and $0.7 million, respectively, and the net loss for the
nine months ended June 30, 1996 was $6.5 million. There can be no assurance
that the Company's future operations will generate operating income or net
income or sufficient cash flow to pay its obligations. See "Selected
Consolidated Financial Information" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
HOLDING COMPANY STRUCTURE
Holdings is a holding company whose sole asset is 100% of the capital stock
of the Company. All of the operations of Holdings are conducted through
subsidiaries. Accordingly, Holdings' ability to repay the Notes at maturity
will be dependent upon (i) earnings and cash flows of the Company and its
Subsidiaries and payment of funds by the Company to Holdings in the form of
loans, dividends and otherwise and/or (ii) Holdings' ability to refinance the
Notes prior to maturity. The Notes will be structurally subordinated to all
indebtedness and other liabilities and commitments (including trade payables
and lease obligations) of Holdings' Subsidiaries. Any right of Holdings to
receive assets of any of its direct or indirect Subsidiaries upon the latter's
liquidation or reorganization (and the consequent right of the holders of the
Notes to participate in those assets) will be structurally subordinated to the
claims of that Subsidiary's creditors. The terms of the Senior Note Indenture
and the New Credit Facility will substantially restrict the ability of the
Company to make dividends or other distributions to Holdings. The Senior Note
Indenture and the New Credit Facility contain covenants which limit the
ability of the Company to make certain restricted payments, including
dividends and other distributions, to Holdings subject to certain financial
tests and ratios; provided, however, that such restrictions shall not prohibit
certain dividends and distributions by the Company to Holdings to the extent
applied by Holdings to pay liquidated damages due on the Notes, amounts due
upon the exercise of "put" rights held prior to the Issue Date by lenders
under the Old Credit Facility and reasonable general and administrative
expenses of Holdings not to exceed certain amounts in any consecutive four-
quarter period. See "--Restrictive Covenants and Financial Ratios Under Senior
Note Indenture and New Credit Facility," "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources--Financing Activities," "Description of Notes," "Description of New
Credit Facility" and "Description of Principal Indebtedness."
RESTRICTIVE COVENANTS AND FINANCIAL RATIOS UNDER SENIOR NOTE INDENTURE AND NEW
CREDIT FACILITY
The indenture pursuant to which the Company's 11 1/2% Senior Notes due 2003
(the "Senior Notes") were issued ("the Senior Note Indenture") and the New
Credit Facility contain covenants which limit the ability of Holdings, the
Company and its Subsidiaries to, among other things, (i) incur indebtedness or
issue guarantees, (ii) create or permit to exist liens, or enter into negative
pledge agreements, (iii) make investments, including by purchase of assets or
equity interests (unless, in the case of the New Credit Facility, the Company
meets certain
17
<PAGE>
financial tests and after such investment provides the lenders thereunder with
liens on the assets acquired and secured guarantees of any new Subsidiary),
(iv) pay dividends or make distributions (other than dividends to the
Company), repurchase equity interests or, in the case of the New Credit
Facility, prepay or redeem the Senior Notes, (v) make asset sales or merge or
consolidate with other entities, (vi) enter into transactions with affiliates,
or (vii) amend certain agreements, including the Notes, the Indenture, the
Senior Notes or the Senior Note Indenture. In addition, under the New Credit
Facility, the Company is required to comply with certain financial covenants,
including a minimum net worth, minimum interest and fixed charge coverage
ratios, maximum leverage ratios and maximum Funded Debt (as defined in the New
Credit Facility) to Adjusted EBITDA and Bank Debt (as defined in the New
Credit Facility) to Adjusted EBITDA ratios (calculated as provided therein).
Under the Senior Note Indenture and the New Credit Facility, the occurrence of
certain events (including, without limitation, failure to make payments when
due, breach of covenants or representations and warranties, default under
other indebtedness or obligations, bankruptcy, dissolution or insolvency,
change of control, the occurrence of a material adverse change and material
judgments) in certain cases after notice and/or grace periods would constitute
an event of default permitting the acceleration of the indebtedness and
exercise of remedies, including, in the case of the New Credit Facility,
foreclosure on the security interests granted to secure such indebtedness. The
limitations imposed on the Company by the Senior Note Indenture and the New
Credit Facility are substantial, and failure to comply with such limitations
or the occurrence of any event of default could have a material adverse effect
on the Company. See "Description of Principal Indebtedness."
ENVIRONMENTAL REGULATION; LEASES WITH MUNICIPALITIES
Operations at the Company's golf courses involve the use and storage of
various hazardous materials such as herbicides, pesticides, fertilizers, motor
oil and gasoline. Under various federal, state and local laws, ordinances and
regulations, an owner or operator of real property may become liable for the
costs of removing such hazardous substances that are released on or in its
property and for remediation of its property. Such laws often impose liability
regardless of whether a property owner or operator knew of, or was responsible
for, the release of hazardous materials. In addition, the presence of such
hazardous substances, or the failure to remediate the surrounding soil when
such substances are released, may adversely affect the ability of a property
owner to sell such real estate or to pledge such property as collateral for a
loan. See "Business--Governmental Regulation."
The Company's leases with municipalities at the Saticoy and Escondido
courses are subject to provisions which restrict the Company's ability to
increase greens fees and other charges. Such restrictions may have an adverse
effect on the Company's ability to increase revenue and improve operating cash
flow at those courses. It is probable that any new leases with municipalities
will also include similar restrictions.
FACTORS AFFECTING GOLF PARTICIPATION
The success of efforts to attract and retain members at a private country
club and the number of rounds played at a public golf course have historically
been dependent upon discretionary spending by consumers, which may be
adversely affected by general and regional economic conditions, particularly
those that affect southern California, Phoenix, Dallas and Houston. See
"Business--Summary of Golf Course Portfolio." Golf participation has increased
significantly since 1970. Although the Company believes that demographic
trends indicate that it is well positioned to grow its business and improve
its financial performance, a decrease in the number of golfers or their rates
of participation or in consumer spending on golf could have an adverse effect
on the Company's financial condition and results of operations.
FACTORS AFFECTING COURSE CONDITIONS
General turf grass conditions must be satisfactory to attract play on the
Company's courses. Severe weather or other factors, including disease, could
cause unexpected problems with turf grass conditions at any golf course or at
courses located in the same geographic region. Turf grass conditions at each
of the Company's golf courses also depend to a large extent on the quality and
quantity of available water. The availability of sufficient water is
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affected by various factors, many of which are not under the Company's
control. The Company believes that it has access to sufficient water to
operate its courses in the manner in which they are currently operated.
However, there can be no assurance that certain conditions, including weather,
government regulation or environmental concerns, which could adversely affect
the supply of water to a particular golf course, may not arise in the future.
The Company operates golf courses in four states and has experienced natural
conditions which are beyond its control (such as periods of extraordinarily
dry, wet, hot or cold weather, or unforeseen natural events such as storms,
hurricanes, fires, floods or earthquakes). These conditions may occur at any
time and may have a significant impact on the condition and availability of
one or more golf courses for play and on the number of customers a golf course
can attract. Except for fire insurance, the Company does not carry insurance
against the effect of such conditions, which the Company believes to be
consistent with standard practice in the industry. However, the occurrence or
re-occurrence of any such conditions may require increased capital
expenditures by the Company to the extent the Company is not insured and could
have a material adverse effect on the Company's financial condition and
results of operations.
LIMITATIONS ON REPURCHASE OF NOTES UPON CHANGE OF CONTROL
Upon a Change of Control (defined as (i) the voting power of the
stockholders of Holdings immediately prior to the Issue Date dropping to less
than 50% or (ii) any person or group obtaining greater voting power than
Brentwood and James A. Husband, collectively, as more fully described in
"Description of Notes--Certain Covenants--Repurchase of Notes at the Option of
the Holder Upon a Change of Control"), each holder of Notes will have certain
rights to require Holdings to repurchase all or a portion of such holder's
Notes. See "Description of Notes." If a Change of Control were to occur, there
can be no assurance that Holdings would have sufficient funds to pay the
repurchase price for all Notes, respectively, tendered by the holders thereof.
In addition, a Change of Control would constitute a default under the New
Credit Facility. Holdings' repurchase of Notes as a result of the occurrence
of a Change of Control is restricted by the New Credit Facility and may be
prohibited or limited by, or create an event of default under, the terms of
other agreements relating to borrowings which the Company or Holdings may
enter into from time to time, including other agreements relating to secured
indebtedness. As of the date hereof, the Company's repurchase of Notes as a
result of a Change of Control would not result in a default under any other
senior indebtedness (other than the New Credit Facility). If the Company's
obligations under the New Credit Facility were accelerated due to a default
thereunder, the lenders thereunder would have a priority claim on the proceeds
from the sale of the collateral securing the New Credit Facility. See
"Description of Principal Indebtedness."
FRAUDULENT TRANSFER RISKS
The obligations of Holdings under the Notes may be subject to review under
state or Federal fraudulent transfer laws in the event of the bankruptcy or
other financial difficulty of Holdings. Under those laws, if a court, in a
lawsuit by an unpaid creditor or representative of creditors of Holdings, such
as a trustee in bankruptcy or either of the Issuers as debtor in possession
were to find that at the time Holdings issued the Notes, it either (i) was
insolvent, (ii) was rendered insolvent, (iii) was engaged in a business or
transaction for which its remaining unencumbered assets constituted
unreasonably small capital, or (iv) intended to incur or believed that it
would incur debts beyond its ability to pay as such debts matured, such court
could avoid the Notes, as applicable, and Holdings' obligations thereunder,
and direct the return of any amounts paid thereunder to such Issuer or to a
fund for the benefit of its creditors. Moreover, regardless of the factors
identified in the foregoing clauses (i) through (iv), the court could avoid
the Notes and direct such repayment if it found that such Notes were issued
with actual intent to hinder, delay, or defraud Holdings' creditors.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction being applied. Generally, however, an entity
would be considered insolvent if the sum of its debts (including contingent or
unliquidated debts) is greater than all of its property at a fair valuation or
if the present fair salable value of its assets is less than the amount that
will be required to pay its probable liability on its existing debts as they
become absolute and matured.
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ABSENCE OF PUBLIC MARKET
There is currently no established trading market for the Notes and Holdings
does not intend to apply for listing of the Notes on any securities exchange
or on any automated dealer quotation system. Holdings has been advised by the
Initial Purchaser that it presently intends to make a market in the Notes, but
the Initial Purchaser is under no obligation to do so, and any such market-
making may be discontinued at any time without notice, at the sole discretion
of the Initial Purchaser. Accordingly, no assurance can be given as to the
prices or liquidity of, or trading markets for, the Notes. The liquidity of
any market for the Notes will depend upon the number of holders of the Notes,
the interest of securities dealers in making a market in the Notes, prevailing
interest rates, the market for similar securities and other factors, including
general economic conditions and the financial condition and performance of,
and prospects for, Holdings. The absence of an active market for the Notes
could adversely affect the market price and liquidity of the Notes. Although
Holdings does not intend to list the Notes on any securities exchange or to
seek approval for quotation of the Notes through any automated quotation
system, the Notes are expected to be eligible for trading in the Private
Offerings, Resales and Trading through Automatic Linkages ("PORTAL") market of
the National Association of Securities Dealers, Inc.
FAILURE TO EXCHANGE PRIVATE NOTES
Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes, a properly
completed and duly executed Letter of Transmittal and all other required
documentation. Therefore, holders of Private Notes desiring to tender such
Private Notes in exchange for Exchange Notes should allow sufficient time to
ensure timely delivery. Neither the Exchange Agent nor Holdings is under any
duty to give notification of defects or irregularities with respect to tenders
of Private Notes for exchange. Private Notes that are not tendered or are
tendered but not accepted will, following consummation of the Exchange Offer,
continue to be subject to the existing restrictions upon transfer thereof. In
addition, any holder of Private Notes who tenders in the Exchange Offer for
the purpose of participating in a distribution of the Exchange Notes will be
required to comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction. Each broker-
dealer that receives Exchange Notes for its own account in exchange for
Private Notes, where such Private Notes were acquired by such broker-dealer as
a result of market-making activities or any other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. To the extent that Private Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Private Notes could be adversely affected due to the limited
amount, or "float," of the Private Notes that are expected to remain
outstanding following the Exchange Offer. Generally, a lower "float" of a
security could result in less demand to purchase such security and could,
therefore, result in lower prices for such security. For the same reason, to
the extent that a large amount of Private Notes are not tendered or are
tendered and not accepted in the Exchange Offer, the trading market for the
Exchange Notes could be adversely affected. See "Plan of Distribution" and
"The Exchange Offer."
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Private Notes were sold by Holdings on the Closing Date to the Initial
Purchaser pursuant to the Purchase Agreement. The Initial Purchaser
subsequently sold the Private Notes to "qualified institutional buyers"
("QIBs"), as defined in Rule 144A under the Securities Act ("Rule 144A"), in
reliance on Rule 144A. As a condition to the sale of the Private Notes,
Holdings and the Initial Purchaser entered into the Registration Rights
Agreement on May 29, 1996. Pursuant to the Registration Rights Agreement,
Holdings agreed that, unless the Exchange Offer is not permitted by applicable
law or Commission policy, it would file with the Commission a registration
statement under the Securities Act (a "Registration Statement") with respect
to the Exchange Notes within 60 days after the Closing Date and use its best
efforts to cause such Registration Statement to become effective under the
Securities Act within 120 days after the Closing Date. A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement. The Registration Statement is intended to satisfy certain of
Holdings' obligations under the Registration Rights Agreement and the Purchase
Agreement.
RESALE OF THE EXCHANGE NOTES
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, Holdings believes that a holder (other than (i) a broker-dealer who
purchases such Exchange Notes directly from Holdings to resell pursuant to
Rule 144A or any other available exemption under the Securities Act or (ii)
any such holder that is an "affiliate" of Holdings within the meaning of Rule
405 under the Securities Act) who exchanges Private Notes for Exchange Notes
in the ordinary course of business and who is not participating, does not
intend to participate, and has no arrangement with any person to participate,
in a distribution of the Exchange Notes, will be allowed to resell Exchange
Notes to the public without further registration under the Securities Act and
without delivering to the purchasers of the Exchange Notes a prospectus that
satisfies the requirements of Section 10 of the Securities Act. However, if
any holder acquires Exchange Notes in the Exchange Offer for the purpose of
distributing or participating in the distribution of the Exchange Notes or is
a broker-dealer, such holder cannot rely on the position of the staff of the
Commission enumerated in certain no-action letters issued to third parties and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction, unless an exemption
from registration is otherwise available. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Private Notes, where such
Private Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such Exchange Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Private Notes where
such Private Notes were acquired by such broker-dealer as a result of market-
making or other trading activities. Pursuant to the Registration Rights
Agreement, Holdings has agreed to make this Prospectus, as it may be amended
or supplemented from time to time, available to broker-dealers for use in
connection with any resale for a period of 180 days after the Expiration Date.
See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, Holdings will accept any and all Private
Notes validly tendered and not withdrawn prior to the Expiration Date.
Holdings will issue $1,000 principal amount of Exchange Notes in exchange for
each $1,000 principal amount of outstanding Private Notes surrendered pursuant
to the Exchange Offer. Private Notes may be tendered only in integral
multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Private Notes except that (i) the exchange will be registered under the
Securities Act and, therefore, the Exchange Notes will not bear
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legends restricting the transfer thereof and (ii) holders of the Exchange
Notes will not be entitled to any of the rights of holders of Private Notes
under the Registration Rights Agreement, which rights will terminate upon the
consummation of the Exchange Offer. The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be issued
under, and be entitled to the benefits of, the Indenture, which also
authorized the issuance of the Private Notes, such that both series of Notes
will be treated as a single class of debt securities under the Indenture.
As of the date of this Prospectus, $86,000,000 in aggregate principal amount
at stated maturity of the Private Notes are outstanding and registered in the
name of Cede & Co., as nominee for DTC. Only a registered holder of the
Private Notes (or such holder's legal representative or attorney-in-fact) as
reflected on the records of the Trustee under the Indenture may participate in
the Exchange Offer. There will be no fixed record date for determining
registered holders of the Private Notes entitled to participate in the
Exchange Offer.
Holders of the Private Notes do not have any appraisal or dissenters' rights
under the Indenture in connection with the Exchange Offer. Holdings intends to
conduct the Exchange Offer in accordance with the provisions of the
Registration Rights Agreement and the applicable requirements of the
Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations of the Commission thereunder.
Holdings shall be deemed to have accepted validly tendered Private Notes
when, as and if Holdings has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Private Notes for the purposes of receiving the Exchange Notes from
Holdings.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. Holdings will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on ,
1996, unless Holdings, in its sole discretion, extends the Exchange Offer for
up to an additional ten business days, in which case the term "Expiration
Date" shall mean the latest date and time to which the Exchange Offer is
extended.
In order to extend the Exchange Offer, Holdings will (i) notify the Exchange
Agent of any extension by oral or written notice, (ii) mail to the registered
holders an announcement thereof and (iii) issue a press release or other
public announcement which shall include disclosure of the approximate number
of Private Notes deposited to date, each prior to 9:00 a.m., New York City
time, on the next business day after the previously scheduled Expiration Date.
Without limiting the manner in which Holdings may choose to make a public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, Holdings shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely
release to an appropriate news agency.
Holdings reserves the right, in its sole discretion, (i) to delay accepting
any Private Notes, (ii) to extend the Exchange Offer or (iii) if any
conditions set forth below under "--Conditions" shall not have been satisfied,
to terminate the Exchange Offer by giving oral or written notice of such
delay, extension or termination to the Exchange Agent. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly
as practicable by oral or written notice thereof to the registered holders. If
the Exchange Offer is amended in a manner determined by Holdings to constitute
a material change, Holdings will promptly disclose such amendment by means of
a prospectus supplement that will be distributed to the registered holders,
and Holdings will extend the Exchange Offer for a period of five to ten
business days, depending upon the significance of the amendment and the manner
of disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
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INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will accrete at a rate equal to 13 1/2% per annum,
compounded semi-annually, to an aggregate principal amount of $86,000,000 at
stated maturity. There will be no periodic cash interest payments on the
Exchange Notes. Interest on the Exchange Notes will accrete from the date of
initial issuance of the Private Notes. Holders of Private Notes that are
accepted for exchange will be deemed to have waived the right to receive any
interest accreted on the Private Notes.
PROCEDURES FOR TENDERING
Only a registered holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile
thereof, have the signatures thereon guaranteed if required by the Letter of
Transmittal, and mail or otherwise deliver such Letter of Transmittal or such
facsimile to the Exchange Agent at the address set forth below under "--
Exchange Agent" for receipt prior to the Expiration Date. In addition, either
(i) certificates for such Private Notes must be received by the Exchange Agent
along with the Letter of Transmittal, (ii) a timely confirmation of a book-
entry transfer (a "Book-Entry Confirmation") of such Private Notes, if such
procedure is available, into the Exchange Agent's account at the Depositary
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date or (iii) the
holder must comply with the guaranteed delivery procedures described below.
The tender by a holder that is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and Holdings in accordance
with the terms and subject to the conditions set forth herein and in the
Letter of Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR PRIVATE NOTES SHOULD
BE SENT TO HOLDINGS. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner(s) of the Private Notes whose Private Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in such owner's name
or obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution (as defined below) unless the Private Notes
tendered pursuant thereto are tendered (i) by a registered holder who has not
completed the box entitled "Special Issuance Instructions" or the box entitled
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter
of Transmittal or a notice of withdrawal, as the case may be, are required to
be guaranteed, such guarantee must be made by a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Exchange Act which is a member of
one of the recognized signature guarantee programs identified in the Letter of
Transmittal (an "Eligible Institution").
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If the Letter of Transmittal is signed by a person other than the registered
holder of any Private Notes listed therein, such Private Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Private
Notes.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and unless waived by Holdings,
evidence satisfactory to Holdings of their authority to so act must be
submitted with the Letter of Transmittal.
The Exchange Agent and the Depositary have confirmed that any financial
institution that is a participant in the Depositary's system may utilize the
Depositary's Automated Tender Offer Program to tender Private Notes.
All questions as to the validity, form, eligibility (including time of
receipt), compliance with conditions, acceptance and withdrawal of tendered
Private Notes will be determined by Holdings in its sole discretion, which
determination will be final and binding. Holdings reserves the absolute right
to reject any and all Private Notes not properly tendered or any Private Notes
Holdings' acceptance of which would, in the opinion of counsel for Holdings,
be unlawful. Holdings also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Private Notes.
Holdings' interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Private Notes must be cured within such time as
Holdings shall determine. Although Holdings intends to notify holders of
defects or irregularities with respect to tenders of Private Notes, neither
Holdings, the Exchange Agent nor any other person shall incur any liability
for failure to give such notification. Tenders of Private Notes will not be
deemed to have been made until such defects or irregularities have been cured
or waived.
While Holdings has no present plan to acquire any Private Notes that are not
tendered in the Exchange Offer or to file a registration statement to permit
resales of any Private Notes that are not tendered pursuant to the Exchange
Offer, Holdings reserves the right in its sole discretion to purchase or make
offers for any Private Notes that remain outstanding subsequent to the
Expiration Date or, as set forth below under "--Conditions," to terminate the
Exchange Offer and, to the extent permitted by applicable law, purchase
Private Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ from the
terms of the Exchange Offer.
By tendering, each holder of Private Notes will represent to Holdings that,
among other things, (i) Exchange Notes to be acquired by such holder of
Private Notes in connection with the Exchange Offer are being acquired by such
holder in the ordinary course of business of such holder, (ii) such holder has
no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iii) such holder acknowledges and agrees
that any person who is a broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purposes of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on
the position of the staff of the Commission set forth in certain no-action
letters, (iv) such holder understands that a secondary resale transaction
described in clause (iii) above and any resales of Exchange Notes obtained by
such holder in exchange for Private Notes acquired by such holder directly
from Holdings should be covered by an effective registration statement
containing the selling securityholder information required by Item 507 or Item
508, as applicable, of Regulation S-K of the Commission and (v) such holder is
not an "affiliate," as defined in Rule 405 under the Securities Act, of
Holdings. If the holder is a broker-dealer that will receive Exchange Notes
for such holder's own account in exchange for Private Notes that were acquired
as a result of market-making activities or other trading activities, such
holder will be required to acknowledge in the Letter of Transmittal that such
holder will deliver a prospectus in connection with any resale of such
Exchange Notes; however, by so acknowledging and by delivering a prospectus,
such holder will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
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RETURN OF PRIVATE NOTES
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are
withdrawn or are submitted for a greater principal amount than the holders
desire to exchange, such unaccepted, withdrawn or non-exchanged Private Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Private Notes tendered by book-entry transfer into the Exchange
Agent's account at the Depositary pursuant to the book-entry transfer
procedures described below, such Private Notes will be credited to an account
maintained with the Depositary) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at the Depositary for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depositary's systems may make book-
entry delivery of Private Notes by causing the Depositary to transfer such
Private Notes into the Exchange Agent's account at the Depositary in
accordance with the Depositary's procedures for transfer. However, although
delivery of Private Notes may be effected through book-entry transfer at the
Depositary, the Letter of Transmittal or facsimile thereof, with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at the address set forth
below under "--Exchange Agent" on or prior to the Expiration Date or pursuant
to the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by Holdings setting
forth the name and address of the holder, the certificate number(s) of such
Private Notes and the principal amount of Private Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or a facsimile thereof), together with the certificate(s)
representing the Private Notes in proper form for transfer or a Book-Entry
Confirmation, as the case may be, and any other documents required by the
Letter of Transmittal, will be deposited by the Eligible Institution with
the Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile thereof),
as well as the certificate(s) representing all tendered Private Notes in
proper form for transfer and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five New York Stock
Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Private Notes to be withdrawn (the "Depositor"), (ii) identify the Private
Notes to be withdrawn (including the certificate number
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or numbers and principal amount of such Private Notes) and (iii) be signed by
the holder in the same manner as the original signature on the Letter of
Transmittal by which such Private Notes were tendered (including any required
signature guarantees). All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by Holdings in
its sole discretion, whose determination shall be final and binding on all
parties. Any Private Notes so withdrawn will be deemed not to have been
validly tendered for purposes of the Exchange Offer and no Exchange Notes will
be issued with respect thereto unless the Private Notes so withdrawn are
validly retendered. Properly withdrawn Private Notes may be retendered by
following one of the procedures described above under "The Exchange Offer--
Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, Holdings shall not be
required to accept for exchange, or exchange the Exchange Notes for, any
Private Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of such Private Notes, if Holdings reasonably determines that
the Exchange Offer violates applicable law, rules or regulations or an
applicable interpretation of the staff of the Commission.
If Holdings reasonably determines that such condition (that the Exchange
Offer not violate applicable law, rules, regulations or interpretation of the
Staff) is not satisfied, Holdings may (i) refuse to accept any Private Notes
and return all tendered Private Notes to the tendering holders, (ii) extend
the Exchange Offer and retain all Private Notes tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of holders
to withdraw such Private Notes (see "--Withdrawal of Tenders") or (iii) waive
such unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Private Notes that have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, Holdings will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered holders of the Private Notes, and Holdings will
extend the Exchange Offer for a period of five to ten business days, depending
upon the significance of the waiver and the manner of disclosure to the
registered holders, if the Exchange Offer would otherwise expire during such
five to ten business day period.
LIQUIDATED DAMAGES
If (a) Holdings fails to file the Registration Statement or a shelf
registration statement covering resales of the Private Notes (a "Shelf
Registration Statement") on or before the date specified for such filing, (b)
neither of such registration statements is declared effective by the
Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), (c) the Registration Statement becomes
effective, and Holdings fails to consummate the Exchange Offer within 45 days
of the earlier of the effectiveness of the Registration Statement or the
Effectiveness Target Date, or (d) the Shelf Registration Statement is declared
effective but thereafter ceases to be effective or usable in connection with
resales of Private Notes during the period specified in the Registration
Rights Agreement (each such event referred to in clauses (a) through (d)
above, a "Registration Default"), Holdings is required to pay as liquidated
damages ("Liquidated Damages"), to each holder of Private Notes, with respect
to the first 90-day period immediately following the occurrence of such
Registration Default in an amount equal to $.05 per week per $1,000 principal
amount of Private Notes held by such holder. Upon a Registration Default,
Liquidated Damages will accrue at the rate specified above until such
Registration Default is cured, and the amount of the Liquidated Damages will
increase by an additional $.05 per week per $1,000 principal amount of Private
Notes for each subsequent 90-day period until all Registration Defaults have
been cured, up to a maximum amount of Liquidated Damages of $.25 per week per
$1,000 principal amount of Private Notes. All accrued Liquidated Damages will
be paid by Holdings on June 1 and December 1 of each year and on each other
payment date provided in the Indenture including, without limitation, whether
upon redemption, maturity (by acceleration or otherwise), purchase upon a
change of control or purchase upon a sale of assets to the holders of Private
Notes by wire transfer of immediately available funds or by mailing checks to
their registered addresses if no such accounts have been specified. Following
the cure of all Registration Defaults, the payment of Liquidated Damages will
cease. The filing and effectiveness of the Registration Statement of which
this Prospectus is a part and the consummation of the Exchange Offer within
26
<PAGE>
the time periods specified above will eliminate all rights of the holders of
Private Notes eligible to participate in the Exchange Offer to receive the
Liquidated Damages described in this section. Based on the total principal
amount of Private Notes currently outstanding, the amount of Liquidated
Damages that would be payable during the first 90-day period following a
Registration Default would be $45,123.95.
TERMINATION OF CERTAIN RIGHTS
All rights under the Registration Rights Agreement (including registration
rights) of holders of the Private Notes eligible to participate in the
Exchange Offer will terminate upon consummation of the Exchange Offer except
with respect to Holdings' continuing obligations (i) to indemnify such holders
(including any broker-dealers) and certain parties related to such holders
against certain liabilities (including liabilities under the Securities Act),
(ii) to provide, upon the request of any holder of a transfer-restricted
Private Note, the information required by Rule 144A(d)(4) under the Securities
Act in order to permit resales of such Private Notes pursuant to Rule 144A and
(iii) to provide copies of the latest version of the Prospectus to broker-
dealers upon their request for a period of up to 180 days after the Expiration
Date.
EXCHANGE AGENT
Norwest Bank Minnesota, National Association has been appointed as Exchange
Agent of the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
By Registered or Certified Mail: In Person:
Norwest Bank Minnesota, Northstar East Bldg.
National Association 608 2nd Ave S.
Corporate Trust Operations 12th Floor
P.O. Box 1517 Corporate Trust Ser.
Minneapolis, MN 55480-1517 Minneapolis, MN
By Hand or Overnight Courier: By Facsimile (for Eligible
Institutions only):
Norwest Bank Minnesota, (612) 667-4927
National Association
Corporate Trust Operations Confirm Receipt of Notice of
Norwest Center Guaranteed Delivery by Telephone:
Sixth and Marquette (612) 667-9764
Minneapolis, MN 55479-0113
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA A
FACSIMILE NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by Holdings. The principal
solicitation is being made by mail; however, additional solicitation may be
made by telegraph, telephone or in person by officers and regular employees of
Holdings and its affiliates.
Holdings has not retained any dealer-manager in connection with the Exchange
Offer and will not make any payments to brokers, dealers or others soliciting
acceptances of the Exchange Offer. Holdings, however, will pay the Exchange
Agent reasonable and customary fees for its services and will reimburse it for
its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by Holdings and are estimated in the aggregate to be approximately
$100,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and the Trustee, accounting and legal fees and printing costs,
among others.
Holdings will pay all transfer taxes, if any, applicable to the exchange of
Private Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Private
27
<PAGE>
Notes pursuant to the Exchange Offer, then the amount of any such transfer
taxes (whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with the Letter
of Transmittal, the amount of such transfer taxes will be billed directly to
such tendering holder.
CONSEQUENCE OF FAILURES TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Private
Notes are urged to consult their financial and tax advisors in making their
own decisions on what action to take.
The Private Notes that are not exchanged for the Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such
Private Notes may be resold only (i) to a person whom the seller reasonably
believes is a QIB in a transaction meeting the requirements of Rule 144A, (ii)
in a transaction meeting the requirements of Rule 144 under the Securities
Act, (iii) outside the United States to a foreign person in a transaction
meeting the requirements of Rule 904 under the Securities Act, (iv) in
accordance with another exemption from the registration requirements of the
Securities Act (and based upon an opinion of counsel if Holdings so requests),
(v) to Holdings or (vi) pursuant to an effective registration statement and,
in each case, in accordance with any applicable securities laws of any state
of the United States or any other applicable jurisdiction.
ACCOUNTING TREATMENT
For accounting purposes, Holdings will recognize no gain or loss as a result
of the Exchange Offer. The expenses of the Exchange Offer will be amortized
over the term of the Exchange Notes.
28
<PAGE>
THE OFFERINGS
On the Closing Date, Holdings consummated the offering of 86,000 units, each
consisting of $1,000 principal amount at stated maturity of Private Notes and
one share of Holdings Common Stock. Pursuant to the terms of the Unit
Offering, the Private Notes and the Shares are not separable until the earlier
of (i) 180 days after the date of issuance, (ii) such date as the Initial
Purchaser may in its discretion deem appropriate, (iii) in the event a Change
of Control occurs, the date Holdings mails notice thereof to holders of the
Private Notes and (iv) the date on which the Registration Statement is
declared effective by the Commission (such date, the "Separation Date"). The
Unit Offering was conducted concurrently with, and was conditioned upon, the
offering by the Company (the "Senior Note Offering," and together with the
Unit Offering, the "Offerings") of $70,000,000 aggregate principal amount of
its 11 1/2% Series A Senior Notes due 2003.
THE RECAPITALIZATION
In connection with the closing of the Unit Offering, Holdings issued
additional shares of its capital stock to its existing shareholders, pro rata,
pursuant to a recapitalization to eliminate the necessity of issuing
fractional shares of Holdings Common Stock to purchasers of the Units (the
"Recapitalization").
USE OF PROCEEDS
Holdings will not receive any proceeds from the Exchange Offer. In
consideration for issuing the Exchange Notes as contemplated in this
Prospectus, Holdings will receive in exchange Private Notes in like principal
amount, the terms of which are identical to the Exchange Notes except that (i)
the exchange will have been registered under the Securities Act, and,
therefore, the Exchange Notes will not bear legends restricting the transfer
thereof and (ii) holders of the Exchange Notes will not be entitled to certain
rights of holders of the Private Notes under the Registration Rights
Agreement, which rights will terminate upon the consummation of the Exchange
Offer. The Private Notes surrendered in exchange for Exchange Notes will be
retained by Holdings and the Exchange Offer will not result in any increase in
the indebtedness of Holdings.
29
<PAGE>
CONSOLIDATED CAPITALIZATION
The following table sets forth, as of June 30, 1996, the unaudited
consolidated cash and cash equivalents, long-term debt, stockholders' equity
and total consolidated capitalization of Holdings. This table should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical financial statements
of Holdings and the related notes thereto included elsewhere in this
Prospectus. See "The Offerings," "The Recapitalization" and "Selected
Consolidated Financial Information."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Cash and cash equivalents............................... $ 1,841
========
Long-term debt:
New Credit Facility(1)................................ --
11 1/2% Series A Senior Notes due 2003................ $ 70,000
13 1/2% Series A Senior Zero-Coupon Notes due 2004.... 28,964
Capital lease obligations............................. 1,267
Other indebtedness(2)................................. 6,268
--------
Total long-term debt................................ 106,499
Redeemable Series A Preferred Stock, $.01 par value;
430,757 shares issued and outstanding; 5,220,365 shares
as adjusted............................................ 42,241
Stockholders' equity (net capital deficiency):
Common Stock, $.01 par value; 134,829 shares issued
and outstanding;
1,720,000 shares as adjusted(3) ..................... 17
Additional paid-in capital............................ 5,389
Accumulated deficit................................... (9,500)
--------
Total stockholders' equity (net capital
deficiency)........................................ (4,094)
--------
Total capitalization.............................. $144,646
========
</TABLE>
- ---------------------
(1) Concurrently with the closing of the Offerings, the Company entered into
the New Credit Facility under which the Company has the ability to borrow
up to $50 million aggregate principal amount, consisting of $45 million
under a reducing revolving credit facility and up to $5 million under a
revolving working capital facility. No borrowings were outstanding under
the New Credit Facility as of June 30, 1996. See "Description of Principal
Indebtedness--The New Credit Facility."
(2) Excludes the deferred purchase price on golf courses acquired of $1.2
million. The amounts are payable upon the achievement of operating
milestones at the acquired courses.
(3) Excludes up to 46,054 shares of Holdings Common Stock reserved for
issuance upon exercise of outstanding options.
30
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
The consolidated financial data set forth below with respect to Holdings'
statements of operations for each of the years in the three-year period ended
September 30, 1995 and with respect to the balance sheets at September 30,
1994 and 1995, are derived from the consolidated financial statements that
have been audited by Ernst & Young LLP, independent auditors, which are
included elsewhere in this Prospectus. The balance sheet data at September 30,
1993 are derived from audited financial statements not included in this
Prospectus. The statement of operations data for the nine months ended June
30, 1995 and 1996 and the balance sheet data at June 30, 1996 are derived from
unaudited financial statements which contain all adjustments, consisting only
of normal recurring adjustments, which Holdings considers necessary for a fair
presentation of the financial position and results of operations for such
periods. Operating results for the nine months ended June 30, 1996 are not
necessarily indicative of the results that are expected for the entire year
ended September 30, 1996. The selected financial data set forth below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and Holdings' financial statements and
the notes thereto included herein.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
---------------------------- ------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(1):
Operating revenues.......... $ 6,507 $ 24,893 $ 49,863 $ 32,946 $ 43,716
Course-level operating
expenses(2)................ 4,184 16,818 34,427 22,924 30,451
General and administrative
expenses................... 1,620 1,997 2,517 1,808 2,596
Depreciation and
amortization expense....... 825 3,469 6,145 4,207 5,353
-------- -------- -------- -------- --------
Income (loss) from
operations................. (122) 2,605 6,774 4,007 5,316
Interest expense, net....... (530) (3,515) (8,019) (5,541) (8,193)
Gain on insurance
settlement................. -- -- 747 -- --
Minority interest........... (195) -- -- -- --
-------- -------- -------- -------- --------
Loss before income taxes and
extraordinary item......... (847) (906) (498) (1,534) (2,877)
Provision for income taxes.. 6 72 208 33 138
-------- -------- -------- -------- --------
Loss before extraordinary
item....................... (853) (978) (706) (1,567) (3,015)
Extraordinary item.......... -- (428) -- -- (3,520)
-------- -------- -------- -------- --------
Net loss.................... $ (853) $ (1,406) $ (706) $ (1,567) $ (6,535)
======== ======== ======== ======== ========
OTHER OPERATING DATA:
EBITDA(3)................... $ 703 $ 6,078 $ 12,919 $ 8,214 $ 10,669
Net cash flow provided by
(used in) operating
activities................. 154 1,883 2,294 2,437 (187)
Net cash flow used in
investing activities....... (25,454) (32,970) (57,020) (53,559) (12,931)
Net cash flow provided by
financing activities....... 26,659 31,027 54,247 50,624 14,139
Golf facility
investments(4)............. 41,212 34,623 55,643 51,017 11,480
Cumulative golf facility
investments(5)............. 41,212 75,835 131,478 126,852 142,958
Number of golf
properties(6).............. 7 12 19 19 21
Ratio of earnings to fixed
charges(7)................. -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------- AT JUNE 30,
1993 1994 1995 1996
------- ------- -------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.......................... $ 1,359 $ 1,299 $ 821 $ 1,841
Total assets.................. 46,258 86,097 146,990 159,558
Total long-term debt and
capital leases............... 14,412 45,301 86,918 106,499
Total liabilities............. 19,885 54,635 103,620 121,410
Total redeemable preferred
stock........................ 27,121 33,611 42,241 42,241
Total stockholders' equity
(net capital deficiency)..... 748 (2,150) 1,129 (4,093)
</TABLE>
(Footnotes appear on the following page)
31
<PAGE>
- ---------------------
(1) The Company acquired or leased seven courses in fiscal 1993, an
additional five in fiscal 1994, an additional seven in fiscal 1995 and an
additional one in the nine months ended June 30, 1996 (fiscal 1996). The
Company also entered into a management contract to operate one course in
the nine months ended June 30, 1996. Holdings' results of operations
include the results of acquired courses from their dates of acquisition
and not for any periods prior to acquisition. As a result, Holdings'
historical results of operations for any particular period do not
generally represent the full revenue and cash flow generating capability
of its golf course portfolio as of the end of such period. Holdings'
results of operations for the year ended September 30, 1995 include the
results of three courses for six months, one course for seven months,
three courses for ten months and 12 courses for the full year.
(2) Course-level operating expenses include cost of golf course operations
(e.g., salaries, taxes, utilities), cost of food and beverages and cost
of pro shop sales.
(3) EBITDA represents net income before interest expense, income taxes,
extraordinary item, gain on insurance settlement, minority interest and
non-cash charges of depreciation and amortization. EBITDA is presented
because it is a widely accepted financial indicator of a company's
ability to service and/or incur indebtedness. However, EBITDA should not
be considered as an alternative to net income as a measure of Holdings'
operating results or to operating cash flow as a measure of liquidity.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Private Membership Clubs; Accounting Treatment of
Initiation Fees."
(4) Golf facility investments consist of the aggregate purchase price
(including cash and principal amount of promissory notes) paid by the
Company to acquire its golf course portfolio, including non-recurring
upgrade capital expenditures.
(5) Cumulative since the Company's formation in October 1992.
(6) Of such 21 properties at June 30, 1996, 16 courses were owned by the
Company, three courses were operated under long-term leases, one driving
range/pro shop facility was leased and one course was managed by the
Company pursuant to a management contract. In addition, the Company
entered into a long term lease with respect to a course subsequent to
June 30, 1996. See "Business--Recently Completed Acquisitions."
(7) In calculating the ratio of earnings to fixed charges, earnings consist
of loss before income taxes and extraordinary item plus fixed charges.
Fixed charges consist of interest expense and amortization of debt
issuance costs. The ratio of earnings to fixed charges was less than 1.0
to 1.0 for each of Holdings' last three fiscal years, for the nine months
ended June 30, 1995 and June 30, 1996. Earnings available for fixed
charges were thus inadequate to cover fixed charges. The amount of the
coverage deficiencies for the years ended September 30, 1993, September
30, 1994 and September 30, 1995, were $846,102, $906,461 and $497,812,
respectively. The amount of the coverage deficiencies for the nine months
ended June 30, 1995 and June 30, 1996 were $1,534,186 and $2,877,117,
respectively. On a pro forma basis, the amount of coverage deficiencies
for the year ended September 30, 1995 was $5,697,709 and for the nine
months ended June 30, 1996 was $2,436,695.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Information" as well as the consolidated
financial statements of the Company and notes thereto contained elsewhere in
this Prospectus.
INTRODUCTION
The Company owns and operates 16 courses, leases four courses, leases one
driving range and pro shop facility and manages one additional course. Since
its inception in October 1992, the Company has acquired or leased seven
courses in fiscal 1993, five in fiscal 1994, seven in fiscal 1995 and one in
the nine months ended June 30, 1996. The Company also entered into a
management agreement to operate one course in the nine months ended June 30,
1996. In addition, the Company entered into a long term lease with respect to
a course subsequent to June 30, 1996. See "Business--Recently Completed
Acquisitions." The Company's audited financials include the results of
acquired courses from their dates of acquisition but not any period prior to
such acquisition. As a result, the Company's historical financials for any
particular period do not generally represent the full revenue and cash flow
generating capability of its golf course portfolio as of the end of such
period. At June 30, 1996, 19 of the Company's facilities had been owned or
leased by the Company for the prior twelve months.
The Company's portfolio includes nine private country clubs, eight public
facilities and five semi-private facilities. The Company seeks to achieve
continued growth in revenue and operating cash flow by continuing to improve
the financial performance of its existing courses and acquiring courses
located in attractive markets which management believes will benefit from the
Company's golf course management expertise. The Company's business consists
primarily of operating golf courses and related facilities, with revenues
generated from several golf and non-golf related activities. "Golf revenues"
primarily include initiation fees and membership dues at private country clubs
and semi-private courses, greens fees, golf cart rentals and driving range
fees. "Non-golf revenues" primarily include food and beverage concessions,
retail merchandise sales and lodging fees. Golf revenues tend to produce
higher operating income margins than non-golf revenues.
SEASONALITY
Seasonal weather conditions reduce the playing season at certain of the
Company's golf courses. As a result the second half of the Company's fiscal
year tends to account for a greater portion of the Company's operating revenue
and EBITDA than does the first half. This seasonal pattern, as well as the
timing of new course purchases or leases, may cause the Company's results of
operations to vary significantly from quarter to quarter.
CAPITAL INVESTMENT PROGRAMS
The Company frequently implements capital investment programs at its courses
in order to upgrade the facilities and complement its marketing strategy.
These programs generally consist of improvements to the golf course (e.g.
replacement of greens, remodeling, addition of nine holes) and related
facilities. These programs require up-front capital expenditures intended to
generate additional revenue and cash flow once the programs are complete.
During the last 21 months, the Company has invested approximately $21.2
million to upgrade its facilities. For example, at Morgan Run Resort and Club
(located in Rancho Santa Fe, CA), the Company has invested approximately $9.4
million to remodel the clubhouse, the lodge and 18 of the twenty-seven holes
at the facility. As a result, portions of this facility were closed from
December 1994 until April 1996. The Company completed this capital project in
April 1996, and as a result, expects to generate incremental revenues and cash
flows from this facility in the future.
PRIVATE MEMBERSHIP CLUBS; ACCOUNTING TREATMENT OF INITIATION FEES
The Company's private clubs generate revenues from initiation fees, monthly
membership dues and ancillary services such as golf carts, driving range, food
and beverage and lessons. As a club increases its membership base, the monthly
membership dues stream represents a significant percentage of its revenues and
profitability as there are no fixed cost increases and limited variable costs
associated with these incremental membership dues. During periods in which a
club is substantially increasing its members, initiation fees will represent a
greater percentage of revenues.
33
<PAGE>
The Company has designed its membership programs to maximize the long-term
profitability of its clubs. A key component of this strategy is structuring
the initiation fee to have a club's members make a meaningful investment in
the club. As a result, at five of the Company's private clubs, the Company has
designed a program under which a new member will make an initial minimum
deposit of at least 25% of the initiation fee upon joining a club, with the
remaining balance to be paid in equal monthly installments over a five-year
period pursuant to a note secured by the membership. The Company has full
recourse against the member under the note.
The Company recognizes as revenue the amount of the deposit plus the amount
of the note, less a provision for doubtful accounts at the time the membership
is sold. These promissory notes generally do not bear market interest rates
and are recorded at net present value using the effective interest method. The
Company periodically reviews the collectibility of these receivables and
provides an appropriate allowance for credit losses. As a result, as of June
30, 1996, the Company has estimated a reserve of $1.6 million for possible
future bad debts. For fiscal 1995 and the nine months ended June 30, 1996,
non-cash initiation fees constituted approximately 8.4% and 2.7%,
respectively, of revenues. See "--Sources of Revenue--Golf Related Revenue--
Initiation Fees."
SOURCES OF REVENUE
The following summarizes the primary components of the Company's revenue:
GOLF RELATED REVENUE
Membership Dues. The Company's private country clubs generate a significant
percentage of their revenue from the collection of monthly membership dues
from the members. These monthly membership dues (which vary by facility)
generally represent a stable and predictable source of income because they are
independent of golf course (or other facilities) utilization, do not vary
seasonally and are derived from a loyal customer base. The Company typically
offers several different memberships, including golf and non-golf programs.
For fiscal 1995, the Company had $13.5 million in revenue from membership
dues, representing approximately 27% of total fiscal 1995 revenue.
Initiation Fees. The Company also generates a significant percentage of its
revenue from initiation fees received from new members. For fiscal 1995, the
Company had $9.6 million in revenue from initiation fees, representing
approximately 19% of total fiscal 1995 revenue. See "--Private Membership
Clubs; Accounting Treatment of Membership Fees."
Daily Greens Fees. The Company derives revenue at public courses, semi-
private and private clubs (guest greens fees) from the payment of daily fees.
At public courses, these fees range from $11 to $100. At those private courses
where a daily greens fee is required, the fee ranges from $30 to $75. For
fiscal 1995, the Company had $9.2 million in revenue from greens fees,
representing approximately 18% of total fiscal 1995 revenue.
Golf Cart Rentals. At all of the Company's golf courses, golf carts are
available for rent for fees ranging from $9 to $12. For fiscal 1995, the
Company had $5.6 million in revenue from golf cart rentals, representing
approximately 11% of total fiscal 1995 revenue.
Driving Range Fees. The Company operates a driving range at 17 of its golf
facilities. For fiscal 1995, the Company had $1.0 million in revenue from
driving range fees, representing approximately 2% of total fiscal 1995
revenue.
NON-GOLF RELATED REVENUES
Food and Beverage Sales. The Company's golf facilities offer food and
beverage concessions (ranging from snack bars to dining rooms, catering and
meeting and banquet facilities). For fiscal 1995, the Company had $7.0 million
in revenue from food and beverage sales, representing 14% of total fiscal 1995
revenue. Gross operating margin from food and beverage sales was 63% for
fiscal 1995. The Company has no plans to make significant changes to its food
and beverage operations.
34
<PAGE>
Pro Shop Sales. At each of the Company's golf courses, the Company operates
a retail pro shop. For fiscal 1995, the Company had $3.3 million in revenue
from pro shop sales, representing approximately 7% of total fiscal 1995
revenue. Gross operating margin from pro shop sales was 33% for fiscal 1995.
The Company has no plans to make significant changes to its pro shop
operations.
Lodging Fees. The Company operates an 89-room lodge at Morgan Run Resort and
Club and a four-room lodge at Stonebridge Country Club (located in McKinney,
TX). For fiscal 1995, the Company had $0.7 million in revenue from lodging
fees, representing approximately 1% of total fiscal 1995 revenue. Gross
operating margin from lodging was 61% for fiscal 1995. The Company does not
intend to pursue additional lodging facility acquisitions unless they are in
conjunction with golf course facility acquisitions.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1996 COMPARED TO NINE MONTHS ENDED JUNE 30, 1995
Operating Revenue. Operating revenue increased to $43.7 million for the nine
months ended June 30, 1996 from $32.9 million for the comparable period, an
increase of $10.8 million or 33%. Of this increase, $5.9 million is
attributable to the effect of a full nine months of operations of the seven
courses acquired in the nine months ended June 30, 1995 and approximately $1.6
million is associated with the operation of Morgan Run Resort & Club which had
been closed for a significant portion of the comparable period. The addition
of nine holes at The Trophy Club (located in Trophy Club, TX) and a new
clubhouse at Pecan Grove Plantation Country Club (located in Richmond, TX)
during 1996 contributed $0.7 million of additional operating revenue at each
of the two clubs. The remaining $2.6 million is attributable to increased
revenue from the Company's other facilities.
Course-level Operating Expenses. Course-level operating expenses, which
include costs of golf course operations (e.g., salaries, taxes and utilities),
costs of food and beverage and costs of pro shop sales increased to $30.5
million for the nine months ended June 30, 1996 from $22.9 million for the
comparable period, an increase of $7.5 million or 33%. Course-level operating
expenses attributable to courses acquired in the nine months ended June 30,
1995 but owned for all of the nine month period ended June 30, 1996 accounted
for $4.3 million of this increase. Of the remaining $3.2 million,
approximately $0.9 million is attributable to costs associated with the
operation of Morgan Run Resort and Club (located in Rancho Santa Fe, CA), a
significant portion of which had been closed for most of the nine months ended
June 30, 1995, and approximately $0.4 million is attributable to increased
operating lease expense from the sale/leaseback of Carmel Mountain Ranch
Country Club (located in San Diego, CA) during the nine months ended June 30,
1996. In addition, operating the new nine holes at The Trophy Club and the new
clubhouse at Pecan Grove Plantation Country Club contributed $0.3 million and
$0.7 million, respectively, to course-level operating expenses. The remaining
$0.9 million is attributable to increased operating expenses at the Company's
other facilities.
General and Administrative Expenses. General and administrative expenses
primarily consist of corporate salaries and related expenses and legal and
accounting fees. General and administrative expenses increased to $2.6 million
for the nine months ended June 30, 1996 from $1.8 million for the comparable
period, an increase of $0.8 million or 44%. The increase in expense was
related to additional overhead to support the Company's expanded operations.
General and administrative expenses as a percentage of operating revenue was
6% for the nine months ended June 30, 1996 and 1995.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased to $5.4 million for the nine months ended June 30, 1996 from $4.2
million in the comparable period, an increase of $1.1 million or 27%. Of this
increase, approximately $0.9 million is attributable to the effect of a full
nine months of operations of the seven courses acquired in the nine months
ended June 30, 1995.
Income from Operations. Income from operations increased to $5.3 million in
the nine months ended June 30, 1996 from $4.0 million in the comparable
period, due primarily to the factors described above. Income from operations
as a percentage of operating revenue was 12% in the nine months ended June 30,
1996 and 1995.
35
<PAGE>
Interest Expense, Net. Interest expense, net, increased to $8.2 million for
the nine months ended June 30, 1996 from $5.5 million for the comparable
period, an increase of $2.7 million or 48% due to the increase in the level of
outstanding bank debt resulting from a full nine months of interest charges on
debt incurred to finance acquisitions during the nine months ended June 30,
1995.
Provision for Income Taxes. The Company recorded a $0.1 million provision
for income taxes, which reflects the fact that certain subsidiaries generate
taxable income in individual states and localities notwithstanding the
Company's consolidated loss for financial reporting purposes.
Net Loss. Net loss increased to $6.5 million for the nine months ended June
30, 1996 from $1.6 million for the nine months ended June 30, 1995 primarily
due to an extraordinary loss related to the write-off of previously deferred
issuance costs related to the debt that was paid off in June of 1996.
FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1994
Operating Revenues. Operating revenues increased to $49.9 million in fiscal
1995 from $24.9 million in fiscal 1994, an increase of $25.0 million or
100.3%. Of this increase, $18.2 million is attributable to the addition of
seven courses during fiscal 1995. The remaining $6.8 million increase is
attributable to the effect of a full year of operation of the five courses
acquired in fiscal 1994 and increased revenues from the Company's other
courses.
Course-level Operating Expenses. Course-level operating expenses increased
to $34.4 million in fiscal 1995 from $16.8 million in fiscal 1994, an increase
of $17.6 million or 104.7%. Of this increase, $11.9 million is attributable to
course-level operating expenses for the seven courses acquired by the Company
in fiscal 1995. Course-level operating expenses attributable to courses
acquired in fiscal 1994 but owned for all of fiscal 1995 accounted for $3.9
million of this increase. Of the remaining $1.8 million increase,
approximately $0.4 million is attributable to increased operating lease
expense from the sale/leaseback of Carmel Mountain Ranch Country Club (located
in San Diego, CA) during 1995 and approximately $0.8 million is attributable
to costs associated with the operation of Morgan Run Resort and Club (located
in Rancho Santa Fe, CA), portions of which had been closed for most of fiscal
1994.
General and Administrative Expenses. General and administrative expenses
increased to $2.5 million in fiscal 1995 from $2.0 million in fiscal 1994, an
increase of $0.5 million or 26.1%. This increase is primarily attributable to
added personnel costs and other costs associated with the acquisition of seven
courses during fiscal 1995. General and administrative expenses as a
percentage of operating revenues were 5.0% in fiscal 1995, a decrease from
8.0% in fiscal 1994.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased to $6.1 million in fiscal 1995 from $3.5 million in fiscal
1994, an increase of $2.7 million or 77.2%. Of this increase, $1.4 million is
attributable to the addition of seven courses during fiscal 1995 and $0.6
million is attributable to the inclusion of the five courses acquired during
fiscal 1994 for a full fiscal year.
Income from Operations. Income from operations increased to $6.8 million in
fiscal 1995 from $2.6 million in fiscal 1994, primarily due to the factors
described above. Income from operations as a percentage of operating revenues
was 13.6% in fiscal 1995, an increase from 10.5% in fiscal 1994.
Interest Expense, Net. Interest expense, net, increased to $8.0 million in
fiscal 1995 from $3.5 million in fiscal 1994, an increase of $4.5 million or
128.1%, due to the increase in the level of outstanding bank debt related to
expansion through the addition of seven new courses during fiscal 1995.
Provision for Income Taxes. The Company recorded a $0.2 million provision
for income taxes, which reflects the fact that certain subsidiaries generate
taxable income in individual states and localities notwithstanding the
Company's consolidated loss for financial reporting purposes.
Net loss. Net loss decreased to $0.7 million in fiscal 1995 from $1.4
million in fiscal 1994, primarily due to the factors described above and a
$0.7 million gain on insurance settlement, representing recoveries associated
with a fire at Pecan Grove Plantation C.C. in fiscal 1995.
36
<PAGE>
FISCAL YEAR ENDED SEPTEMBER 30, 1994 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1993
Operating Revenues. Operating revenues increased to $24.9 million in fiscal
1994 from $6.5 million in fiscal 1993, an increase of $18.4 million or 282.5%.
Of this increase, $8.7 million is attributable to the addition of five courses
during fiscal 1994. The remaining $9.7 million increase is attributable to the
effect of a full year of operation of the seven courses acquired in fiscal
1993.
Course-level Operating Expenses. Course-level operating expenses increased
to $16.8 million in fiscal 1994 from $4.2 million in fiscal 1993, an increase
of $12.6 million or 302.0%. Of this increase, $5.6 million is attributable to
course-level operating expenses for the five courses acquired by the Company
in fiscal 1994. Course-level operating expenses attributable to courses
acquired in 1993 but owned for all of fiscal 1994 accounted for $7.0 million
of this increase.
General and Administrative Expenses. General and administrative expenses
increased to $2.0 million in fiscal 1994 from $1.6 million in fiscal 1993, an
increase of $0.4 million or 23.3%. This increase is primarily attributable to
added personnel costs and other costs associated with the acquisition of five
courses during fiscal 1994. General and administrative expenses as a
percentage of operating revenues was 8.0% in fiscal 1994, a decrease from
24.9% in fiscal 1993.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased to $3.5 million in fiscal 1994 from $0.8 million in fiscal
1993, an increase of $2.6 million or 320.3%. Of this increase, $1.1 million is
attributable to the addition of five courses during fiscal 1994 and $1.2
million is attributable to the inclusion of the seven courses acquired during
fiscal 1993 for a full fiscal year.
Income from Operations. Income from operations increased to $2.6 million in
fiscal 1994 from a loss of $0.1 million in fiscal 1993, primarily due to the
factors described above. Income from operations as a percentage of operating
revenues was 10.5% in fiscal 1994.
Interest Expense, Net. Interest expense, net, increased to $3.5 million in
fiscal 1994 from $0.5 million in fiscal 1993, an increase of $3.0 million or
563.7%, due to the increase in the level of outstanding bank debt related to
expansion through the addition of five new courses during fiscal 1994.
Provision for Income Taxes. The Company recorded a $71,931 provision for
income taxes, which reflects the fact that the certain subsidiaries generate
taxable income in individual states and localities notwithstanding the
Company's consolidated loss for financial reporting purposes.
Net loss. Net loss increased to $1.4 million in fiscal 1994 from $0.9
million in fiscal 1993, primarily due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary uses of cash are to fund debt service and maintenance
capital expenditures at its existing facilities (such as landscaping and
purchasing golf cart fleets). The Company also implements one-time upgrade and
renovation capital expenditures at its existing facilities in order to enhance
its appeal to customers and members and to generate additional revenues and
cash flow. Examples of these expenditures are the addition of courses
(including nine hole additions) to existing facilities to increase capacity
and major clubhouse renovations to support increased dues and fees. These
expenditures are generally of a non-recurring nature. In addition, the Company
implements strategic capital expenditure programs which enable it to reduce
course level operating costs and improve the efficiency of operations, such as
improving the irrigation system, acquiring more efficient maintenance
equipment and other programs which enhance the marketability and/or reduce the
operating expenses of existing facilities. As part of its business strategy,
the Company will require cash to continue to acquire, lease or manage
additional golf courses and the related facilities and to complete any
targeted renovations. The Company expended $12.9 million on acquisitions and
capital improvements during the nine months ended June 30, 1996. As of June
30, 1996, the Company had approximately $3.0 million of long-term commitments
for one-time capital expenditures with respect to one recently acquired golf
course. The Company's capital expenditures budget for fiscal 1996 is $8.0
million, excluding acquisitions and related capital expenditures.
Based upon the current level of operations and anticipated growth, the
Company believes that cash flow from operations, together with available
borrowings under the New Credit Facility and other sources of liquidity, will
be adequate to meet the Company's anticipated future requirements for working
capital, capital expenditures
37
<PAGE>
and scheduled payments of principal and interest on its indebtedness,
including the Senior Notes. There can be no assurance, however, that the
Company's business will generate sufficient cash flow from operations or that
future working capital borrowings will be available in an amount sufficient to
enable Holdings to pay the principal amount at maturity of the Notes, or make
necessary capital expenditures.
The Company intends to fund these expenditures primarily with operating cash
flow and borrowings under the New Credit Facility. The New Credit Facility
provides for borrowings of up to $50.0 million, of which $45.0 million is
available to fund future acquisitions of golf courses and capital expenditures
at such courses and certain capital improvements at existing courses, and $5.0
million of which is available for general working capital purposes. The total
borrowing availability under the $45.0 million portion of the New Credit
Facility will decrease over the term of the facility beginning September 30,
1998. The New Credit Facility provides that the Company may not make any
acquisitions or upgrade capital expenditures when Funded Debt plus certain
project upgrade capital expenditures is greater than 6.5x of Adjusted EBITDA
(each as defined in the New Credit Facility), with certain adjustments for
notes receivable, reducing over time. This 6.5x Funded Debt to Adjusted EBITDA
test is reduced in subsequent years. The New Credit Facility also imposes
other limitations on the ability of the Company with respect to borrowings. In
addition, as set forth under "Consolidated Capitalization," as of June 30,
1996, the Company had $1.8 million of cash on hand to meet its working capital
and other needs. See "Description of New Credit Facility" and "Consolidated
Capitalization."
Historically, the Company has financed its operations through borrowings
under the Old Credit Facility and equity contributions by its stockholders. As
of June 30, 1996, the Partnership and Holdings' other stockholders have
invested a total of $46.3 million of equity to fund the expansion of the
Company and its golf course portfolio. Proceeds of the Unit Offering were
contributed by Holdings to the Company as equity, increasing the total equity
raised by the Company and Holdings since inception to approximately $75.1
million.
For the nine months ended June 30, 1996, net cash used by operating
activities was $0.2 million versus $2.4 million provided from operations in
the prior period. The primary component of this change is the payment of
accrued property taxes, income taxes and other accounts payable. The Company
generated $2.3 million, $1.9 million and $0.2 million of cash from operations
in fiscal 1995, 1994 and 1993, respectively. During fiscal 1995, changes in
notes receivable and accounts receivable resulted in a $5.2 million use of
funds. Approximately $4.2 million is attributable to increases in notes
receivable, and the remainder is due to increases in accounts receivable. See
"--Private Membership Clubs; Accounting Treatment of Initiation Fees." In
fiscal 1994, the largest non-cash charges were depreciation and amortization
and the loss resulting from the Company's early retirement of debt. In fiscal
1993, non-cash charges of depreciation and amortization and increases in
accounts payable, accrued liabilities and deferred revenue contributed to net
cash provided by operating activities.
During the nine months ended June 30, 1996, net cash used in investing
activities was $12.9 million versus $53.6 million in the prior comparable
period. Expenditures for the nine months ended June 30, 1996 consisted of $6.7
million in capital expenditures and $6.2 million in acquisition expenditures
related to the acquisition of Eagle Crest Golf Club (located in Escondido, CA)
which was acquired on June 28, 1996. The acquisition was funded with proceeds
from the Offerings. In the nine months ended June 30, 1995 and fiscal 1995,
the Company expended $41.2 million on the acquisition of a total of seven
facilities. In addition, the Company expended $17.7 million and $7.7 million
in fiscal 1995 and fiscal 1994, respectively, for one-time upgrades at courses
designed to generate increases revenue and cash flow. The Company expended
over $23.9 million in fiscal 1994 on the acquisition of five facilities. In
fiscal 1993, the Company expended $19.7 million to acquire eight facilities
and expended $5.8 million on improvements to those facilities.
During the nine months ended June 30, 1996, net cash provided by financing
activities was $14.1 million versus $50.6 million in the prior comparable
period. The Company used $94.1 million of the $108.6 million in proceeds from
long term debt and equity investments to repay its bank revolver and pay
financing fees associated with the New Credit Facility. At June 30, 1996, the
Company had no borrowings under the New Credit Facility. The Company relied
upon bank borrowings of $33.6 million, $37.6 million and $46.3 million to
finance its expansion in the nine months ended June 30, 1995, fiscal 1995 and
fiscal 1994, respectively. A private placement of equity securities in March
1995 contributed $8.6 million in proceeds in fiscal 1995. The Company also
relies upon capital leases when consistent with its financing objectives. In
fiscal 1993, the Company received $26.7 million in equity financing from the
Partnership.
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<PAGE>
BUSINESS
GENERAL
Cobblestone is one of the leading golf course owners and operators in the
United States, with a current portfolio of 22 golf properties including both
private country clubs and public (or daily fee) courses. The Company's courses
are concentrated in clusters near metropolitan areas in the Sunbelt states
(including Arizona, California and Texas) which have large golfing populations
and attractive climates. This clustering strategy enables the Company to
efficiently manage its portfolio of courses and improve the profitability of
its courses by sharing many administrative functions and capitalizing on joint
marketing opportunities and economies of scale.
The Company's business consists primarily of operating golf courses and
related facilities, with revenue generated from membership fees and dues at
private country clubs and semi-private courses, greens fees, food and beverage
concessions, golf cart rentals, retail merchandise sales, driving range fees
and lodging fees. The Company owns and operates 16 courses, leases four
courses (subject to long-term leases in excess of 20 years, including
extension options), leases one driving/range and pro shop facility and manages
one additional course. The Company's portfolio includes nine private country
clubs, eight public facilities and five semi-private facilities.
There are approximately 15,000 golf courses in the United States, which
generate approximately $15 billion in annual revenue. The ownership and
operation of golf courses in the United States is highly fragmented, with less
than 5% of golf courses owned and operated by multi-course management
companies. The Company believes that the majority of golf course operators,
including real estate developers and municipalities, are generally involved in
golf course management because the golf course is an important component of
their development or community, but that such operators do not have
professional golf course management experience. As a result, owners are often
interested in selling the golf facilities to third-party operators such as the
Company. These owners frequently place significant emphasis on experience and
reputation for quality management in selecting an owner/operator, and the
Company believes that its reputation in these areas has provided it with a
steady supply of attractive acquisition opportunities.
INDUSTRY OVERVIEW
There are three general types of golf courses: daily fee courses, private
country clubs and resort courses. Approximately two-thirds of the courses in
the United States are public, or daily fee, courses, and approximately one-
third are private country club or resort courses. Public courses derive
revenue primarily from greens fees, golf cart rentals, retail (pro shop) sales
and food and beverage sales. Because the majority of golf course operating
costs are fixed, revenue and operating profit are generally maximized at
public courses by generating the maximum number of golf rounds played. Private
courses derive revenue primarily from initiation fees, monthly membership
dues, guest greens fees and food and beverage sales. Revenue and operating
profit are maximized at private courses by maximizing the number of membership
sales and the associated monthly dues cash flow stream. In addition, certain
semi-private courses offer limited access to the golf facilities to the public
in order to maximize revenue.
The Company believes certain demographic characteristics will increase the
demand for golf in the future, thereby benefitting golf course operators.
Accordingly, the Company believes that total rounds played will increase as
the golfing population ages. The highest golf participation rates are found
among individuals aged 18 to 49, which had average participation rates of
approximately 13.6% in 1995, as compared to 11.6% for the population as a
whole. However, individuals over 50 played a substantially greater number of
rounds of golf per year relative to individuals in younger age brackets.
Accordingly, assuming that golf participation rates of 18 to 49 year old
golfers remain at current levels, the Company believes that these 18 to 49
year old golfers will increase the number of rounds played per year as they
age. See "Risk Factors--Factors Affecting Golf
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<PAGE>
Participation." The following table summarizes the breakdown of all golfers
during 1995 by certain key demographic categories:
<TABLE>
<CAPTION>
ANNUAL
NUMBER OF GOLF AVERAGE
GOLFERS % OF TOTAL PARTICIPATION IN ROUNDS % OF TOTAL
AGE GROUP (YEARS) (IN THOUSANDS) GOLFERS CATEGORY PER GOLFER ROUNDS
----------------- -------------- ---------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
12-17 2,001 8.0% 8.6% 13.9 5.7%
18-29 5,263 21.0 12.1 11.8 12.7
30-39 6,748 27.0 15.2 13.3 18.3
40-49 4,762 19.0 13.0 17.1 16.6
50-59 2,694 10.8 11.1 25.3 13.9
60-64 933 3.7 9.2 38.4 7.3
65+ 2,621 10.5 7.8 47.8 25.5
</TABLE>
According to the NGF, the 25.0 million golfers in the United States played
approximately 490 million rounds of golf during 1995. A substantial majority
of these rounds were played by core golfers (those that play more than eight
rounds per year). Core golfers represented approximately 46% of total golfers
in 1995 but played approximately 87% of the total rounds. The Company targets
these core golfers. The following table summarizes the breakdown of the core
and other golfers during 1995:
<TABLE>
<CAPTION>
NUMBER OF
GOLFERS ROUNDS PLAYED
(IN THOUSANDS) (IN MILLIONS) ROUNDS/GOLFER
-------------- ------------- -------------
<S> <C> <C> <C>
Core Golfers................... 11,581 425.5 36.7
Other Golfers.................. 13,431 64.7 4.8
</TABLE>
Core golfer participation is also more constant across age categories. The
following table summarizes core golfer participation in 1995 by age category:
<TABLE>
<CAPTION>
NUMBER OF
CORE GOLFERS PERCENTAGE OF
AGE GROUP (YEARS) (IN THOUSANDS) CORE GOLFERS
----------------- -------------- -------------
<S> <C> <C>
18-29 2,126 18.4%
30-39 2,908 25.1
40-49 2,256 19.5
50-59 1,631 14.1
60-64 675 5.8
65+ 1,985 17.1
</TABLE>
The Company believes that, despite recent golf course construction in some
of its markets, golf course construction in its markets generally has been
constrained as a result of several factors, including the lack of capital
available for real estate development, the significant land required to build
a golf course and related facilities (approximately 150 acres) and increasing
environmental regulation, particularly with regard to the availability of
water in Arizona and California, two of the Company's primary markets.
BUSINESS STRATEGY
The Company's strategy is to grow its revenue and cash flow by (i) improving
operations and financial performance of its existing portfolio golf courses by
increasing revenue, controlling operating costs and selectively upgrading the
facilities and (ii) identifying and acquiring courses which will benefit from
the Company's management expertise. Key elements of the Company's operating
strategy include:
INCREASE REVENUE
Attracting New Members. The Company aggressively markets its courses within
the local community in order to increase memberships at its private clubs. The
Company positions the golf course and related facilities
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<PAGE>
as an integral social center of the surrounding community by hosting social,
educational and recreational events, in order to attract non-golfing members.
In order to attract these "social" members, the Company often provides
facilities for community events and charitable organizations, as well as
swimming, tennis and fitness facilities, particularly at those courses that
are part of a real estate development. The Company also tailors the membership
program to the facility, including offering multiple types of memberships
(e.g., senior, junior, weekday golf only, tennis, swimming, social, etc.). For
example, at the Hills of Lakeway, the Company created a new category of
membership called the "Premier Sports Membership," which allows the member to
use the facility for social purposes and limited golf play. This membership
entitles the member to 12 rounds of golf a year at non-prime tee times for a
reduced guest fee. The Premier Sports Membership is designed to appeal to the
occasional golfer who wants to join a private country club without paying the
full initiation fee and membership dues typically associated with such clubs.
Maximizing Tee Time Utilization. The Company seeks to increase revenue by
expanding the capacity of its public facilities. The Company frequently
implements several simple measures, such as opening seven days a week, opening
earlier in the morning or starting golfers on both the first and tenth holes
simultaneously. The Company also attempts to schedule tournament play into
less popular tee times; provide incentives for members of semi-private courses
to play on weekdays, thereby opening up prime weekend time for fully-priced
public play; and charge premium prices for prime tee times while discounting
prices for less utilized times (e.g., twilight play). For example, at Carmel
Mountain Ranch, the tournament salesperson has financial incentives to
schedule tournaments during non-prime tee times (e.g., weekend afternoon),
thereby increasing course utilization while minimizing inconvenience to
regular weekend golfers.
Market Positioning. The Company undertakes a comprehensive review of local
competition, identifying market rates for initiation fees and membership dues,
greens fees, guest and cart fees, private cart policies, and other key revenue
generators. In many cases, the Company is able to increase revenue merely by
raising prices to reflect market conditions and the course improvements
implemented by the Company's management. For example, at Morgan Run, the
Company has raised monthly dues from $195 to $300 over two years, resulting in
an increase in annual membership dues revenue of approximately $400,000.
Appeal to Core Golfing Population. The Company targets core golfers in its
markets (defined by the NGF to be golfers who play more than eight rounds per
year). These golfers represent approximately 46% of the golfers in the United
States but play approximately 87% of the total rounds. The Company believes
that core golfers represent a stable demand for golf and are generally more
willing to make a significant investment in a golf club membership and pay
higher greens fees than the golfing population as a whole. These golfers also
tend to spend more time at a golf facility and therefore generate higher
ancillary revenues.
Facilities Upgrades. Following its acquisition of a golf course, the Company
generally upgrades or improves the facility in order to significantly improve
its appeal to customers and members. Where appropriate, the Company adds
additional courses (including nine hole additions) to existing facilities to
increase course capacity and utilization and invests in major clubhouse
renovations to support increased dues and fees. These expenditures are
generally non-recurring. For example, the Company re-engineered the water flow
at Woodcrest Country Club so that heavy rains would not soak certain areas of
the course. In the past, a heavy rain could close Woodcrest for thirty days or
more, but since the re-engineering, rain has not closed the course for more
than four consecutive days. Additionally, in November 1994 the Company
completed the addition of nine holes to The Trophy Club, bringing the facility
to 36 holes. The Company believes that this addition increases golf membership
capacity from 900 to 1,200 members.
Focus on Non-Golf Operations. The Company also focuses significant effort on
non-golf operations. The Company offers non-golf memberships where additional
facilities (such as swimming, tennis or fitness facilities) are available,
promotes merchandise sales, provides on-course concessions to boost food and
beverage sales, and offers catering and meeting and banquet facilities for
members.
41
<PAGE>
REDUCE OPERATING COSTS
Reducing Administrative Overhead. The Company continually seeks
opportunities to improve its margins by consolidating administrative functions
and eliminating duplicative personnel at its courses in order to reduce
operating costs. For example, after acquiring Pecan Grove, the Company reduced
the general and administrative staff, thereby reducing operating expenses by
approximately $75,000 per year.
Economies of Scale. As a multi-course operator, the Company is able to
achieve overhead and operating savings not available to owners of individual
properties. For example, the Company employs regional marketing staffs to
serve the courses in a cluster group, and is often able to eliminate an
accounting position at the course level by substituting a corporate controller
who has responsibility for multiple courses. In addition, insurance policies
for many properties, particularly those that are part of a geographical
cluster, can be consolidated under a master insurance policy. The Company's
volume purchasing ability also enables it to achieve savings not available to
smaller buyers in the purchase of almost all retail merchandise and
maintenance equipment.
Facilities Upgrades. In addition to implementing facilities improvements in
order to generate increased revenues, the Company also makes capital versus
operating expense decisions based on known economic trade-offs. The Company
attempts to identify strategic opportunities to invest relatively small
amounts of capital in maintenance equipment in order to improve the facility
and simultaneously reduce labor or other operating expenses. For example, at
Carmel Mountain Ranch, the Company invested approximately $100,000 to upgrade
the irrigation control system, resulting in a better maintained course and the
realization of approximately $30,000 in annual operating savings.
Managing Water Costs. At many of its courses, water is a significant
component of operating costs. The Company ensures that its irrigation systems
are as efficient as possible, and explores alternatives to reduce the cost of
water. For example, where possible, the Company uses treated effluent water or
constructs wells, rather than utilize more expensive municipal water for
course irrigation. For example, concurrently with the closing of the
acquisitions of Foothills and Ahwatukee, the Company acquired additional water
rights that allow the Company to use wells to provide substantially all the
required water for such courses.
ACQUISITIONS
The Company is continually involved in the investigation and evaluation of
potential golf course acquisitions and at any time may be discussing possible
transactions, conducting due diligence investigations or otherwise pursuing
acquisition opportunities. The Company's growth strategy is partly driven by
its ability to expand its portfolio of courses.
The Company conducts extensive due diligence when considering acquisition
candidates in order to evaluate the potential financial performance of a given
golf course. The principal criteria considered in the evaluation include
course location, the population size and demographics of the surrounding area,
the number of tourists visiting a market per year and the number of rounds of
golf played by these tourists, course condition, reputation among customers
and/or members, current operating efficiency and local competition.
During the evaluation of a potential acquisition, the Company considers
carefully the ease of access to the course, the conditions and appeal of the
immediately surrounding land, the proximity of the competition and the
climatic conditions which affect both potential revenue as well as the cost of
maintaining the course. The population base of the surrounding metropolitan
area must be large enough to support both the potential acquisition as well as
its competition. If the acquisition candidate is a resort-oriented course, the
Company also evaluates the size of and trends in the tourist population. The
demographic make-up of the population must be such that a sufficient number
and density of golfers are present. In its evaluation of the operating
potential of a course, the Company looks for correctable operational
deficiencies, potential facility improvements which can be made with a
moderate amount of capital investment and which have a high likelihood of
enhancing revenue and reducing costs, as well as deficiencies in the course's
position and reputation in the market which can benefit
42
<PAGE>
from a cohesive marketing program. The competition is evaluated by examining
the condition and appeal of the local courses, the position and reputation in
the local market and the likely potential clientele, and finally, the price
points at which the competition operates. In addition, prior to acquiring a
given course, the Company meets with private club members or forms public
course focus groups to discuss the potential acquisition and major anticipated
changes in order to ensure a smooth transition in ownership.
In addition to the criteria outlined above, the Company incorporates
specific analyses which are dependent upon whether the course is private or
public. At a private course, the set of considerations revolves around the
type of members the course targets, and the potential to increase dues or
offer valuable additional facilities such as banquet rooms, meeting rooms,
tennis, fitness facilities and child-care in order to expand membership. At a
daily fee course, a course may be significantly improved by adjusting greens
fees to market level, by adding amenities such as golf cart rental facilities,
improving the pro shop, implementing marketing programs or by promoting
tournament play.
The following summarizes the primary components of the Company's acquisition
strategy:
Clustering of Courses. The Company seeks to acquire courses in its existing
geographic clusters, or to form new clusters near densely populated
metropolitan markets. The clustering strategy is designed to facilitate
management and marketing and improve the profitability of each course because
of the ability to share administrative and operating expenses. In addition,
clustering allows the Company to operate facilities with fewer on-site
management personnel by consolidating several course-level management jobs or
eliminating them altogether in favor of a single regional or headquarters
position. For example, a cluster provides cross-marketing opportunities such
as exchanging play privileges, advertising multiple properties in a single
campaign and promoting tournament play at a course within the cluster.
Focus on Private Country Clubs and High-End Daily Fee Courses. The Company
focuses on acquiring private country clubs and high-end daily fee courses
which attract core golfers in middle and upper-income brackets who are less
price sensitive than the typical public course player. Revenue and cash flows
of private country clubs are generally more stable and predictable than those
of public courses because the receipt of membership dues is independent of the
level of course utilization. In addition, private courses have an easily
identifiable target population which enables a targeted and efficient
marketing effort, particularly if the course is part of a larger residential
development. The typical Cobblestone daily fee course commands higher greens
fees than the average municipal course in its market.
Reputation with Real Estate Developers. Cobblestone has focused on acquiring
courses from real estate developers who have built golf courses primarily as
an enhancement to their residential real estate developments. The Company
believes that its experience and reputation for quality management provide it
with a steady supply of attractive acquisition opportunities from developers
seeking third party owner/operators to professionally manage the facilities.
Focus on Favorable Golf Markets. The Company targets golf courses in markets
with characteristics which it believes are favorable to golf course ownership
and management. For example, the Company concentrates on acquiring courses
convenient to metropolitan areas with dense populations but relatively few
golf courses in relation to the size of the golfing population. In addition,
the Company focuses on markets with a high number of playable days per year,
enabling the Company to maximize revenue and course utilization and thereby
capitalize on the operating leverage inherent in golf course management.
To date, the Company primarily has targeted acquisitions in the Sunbelt
markets. Maximizing revenue is an important component of profitability due to
the high fixed cost nature of golf course operation, and these markets
typically have minimal weather risks and a high number of playable days per
year (i.e. high capacity). For instance, the number of playable days in
Southern California averages approximately 350, as compared to approximately
200 in the upper Midwest. Thus, average rounds played per course in the
Arizona and California markets are substantially greater than the national
average of approximately 33,000 rounds. Additionally, greens
43
<PAGE>
fee pricing in these markets tends to be higher than the national average
because of shortages of supply relative to demand and the impact of tourists
on pricing. Seasonal tourists have fairly inelastic demand because greens fees
represent only a relatively small portion of overall vacation expenses.
Furthermore, age demographics in the Sunbelt markets and the abundance of
retirees with ample leisure time contribute to a high demand for golf.
RECENTLY COMPLETED ACQUISITIONS
The Company completed two acquisitions as a part of its ongoing acquisition
strategy. On June 28, 1996, the Company acquired Eagle Crest Golf Club in the
San Diego, California area. Eagle Crest is a daily fee golf facility with an
18-hole David Rainville-designed course, as well as a clubhouse, food and
beverage facilities and pro shop. Eagle Crest is located in a master plan
development which is expected to include over 700 single family homes at
completion. In addition, on July 1, 1996, the Company entered into a 15 year
lease of the Sweetwater Country Club near Houston, Texas. Sweetwater is a
private country club with a 36-hole Roger Packard-designed course, as well as
a clubhouse, food and beverage facilities, pro shop, indoor and outdoor
swimming pools, fitness center (including indoor basketball and squash courts)
and both indoor and outdoor tennis courts.
MARKETING/MEMBERSHIP PROGRAMS
The Company's marketing programs are designed to capitalize on the economies
of scale provided by its clustering strategy. Marketing efforts for daily fee
properties primarily consist of co-op advertising directed at maximizing tee-
time utilization. Special promotions such as junior programs and special event
sales are geared toward attracting new customers and maximizing utilization at
off-peak hours. The Company also utilizes on-line reservation systems to
create greater accessibility for its customers, including allowing a customer
to reserve a tee-time at any of the Company's public courses within a cluster
through a central reservation number. Additionally, the Company has created an
interactive web-site on the Internet that enables customers to e-mail tee-time
requests within a given cluster market.
Private country club marketing programs are implemented by professional
sales personnel focusing on goal-oriented sales plans. Proactive membership
sales efforts are targeted at local developers, realtors and corporations
within specific cluster markets together with more traditional member referral
sales programs. The Company also uses its initiation fee structure to target
residents of its golf communities. This initiation fee structure allows
members to make a meaningful investment in the club while amortizing the
payment of the balance of the membership fee over a five-year period. The
Company also strives to increase other private club revenues by positioning
the club as a center of social and recreational activity for the entire
family. For example, the Company provides extensive activities calendars to
ensure a wide range of activities and increased participation from family
members in all areas of the club.
COMPETITION
The Company competes for members and players with existing golf courses.
Where the Company's courses are membership courses which are part of a housing
development project, competition is often limited. At those courses where
there is significant competition from other golf courses, the Company believes
that it competes less on the basis of price than on the overall quality of its
facilities, which is a function of customer service, the quality and the state
of maintenance of the facilities as well as available amenities.
The Company believes it and its management enjoy a favorable reputation in
the industry. The Company principally competes for the acquisition of golf
courses on a national level with a small number of national golf course
management companies, which include National Golf Properties, Inc. (a
publicly-traded real estate investment trust) and Club Corporation
International and for the lease and/or management of golf courses on a
national level with American Golf Corporation and Club Corporation
International. The Company also competes on a local level with several
smaller, regional companies.
44
<PAGE>
SUMMARY OF GOLF COURSE PORTFOLIO
Market and Design Data. The following tables set forth certain information
regarding the Company's golf course properties, including a description of
each course, a summary of the facilities and services available and a
comparison of operations data for each course.
<TABLE>
<CAPTION>
DATE
ACQUIRED
TYPE OF GOLF COURSE BY
COURSE NAME LOCATION OPERATION TYPE OF COURSE ARCHITECT COBBLESTONE(1)
- ----------------------- ------------------- --------- -------------------- -------------------------- --------------
<S> <C> <C> <C> <C> <C>
Southern California
Courses
Balboa Park G.C. San Diego, CA Leased (2) William Park Bell 3/93
Carmel Mountain Ranch
C.C. San Diego, CA Leased 18 Hole public Ron Fream 7/93
Morgan Run Resort and
Club Rancho Santa Fe, CA Owned 27 Hole semi-private David Rainville/Jay Morish 6/93
El Camino C.C. Oceanside, CA Owned 18 Hole private William Park Bell 6/93
Red Hawk G.C. Temecula, CA Managed 18 Hole public Ron Fream 10/95
Saticoy Regional G.C. Ventura, CA Leased 9 Hole municipal George Thomas 3/93
The Vineyard at
Escondido Escondido, CA Leased 18 Hole municipal David Rainville 12/93(3)
Eagle Crest Golf Club Escondido, CA Owned 18 Hole public David Rainville 6/96
Phoenix Courses
Ahwatukee C.C. Phoenix, AZ Owned 18 Hole semi-private Gary Panks 7/94
The Lakes at Ahwatukee Phoenix, AZ Owned 18 Hole public Gary Panks 7/94
The Foothills G.C. Phoenix, AZ Owned 18 Hole public Tom Weiskopf/Jay Morish 1/93
Red Mountain Ranch C.C. Mesa, AZ Owned 18 Hole semi-private Pete Dye 12/94
Texas-Austin Courses
Hills of Lakeway(4) Austin, TX Owned 18 Hole private Jack Nicklaus 3/95
Live Oak Golf Course(4) Austin, TX Owned 18 Hole semi-private Leon Howard 3/95
Yaupon Golf Course(4) Austin, TX Owned 18 Hole semi-private Leon Howard 3/95
Texas-Dallas Courses
Stonebridge C.C. Mc Kinney, TX Owned 18 Hole private Pete Dye 12/94
The Ranch C.C. Mc Kinney, TX Owned 18 Hole private Arthur Hills 12/94
The Trophy Club Trophy Club, TX Owned 36 Hole private Ben Hogan/Arthur Hills 12/93
Woodcrest C.C. Dallas, TX Owned 18 Hole private Don January 3/93
Other Courses
Brandermill C.C. Richmond, VA Owned 18 Hole private Gary Player 2/95
Pecan Grove Plantation
C.C. Richmond, TX Owned 27 Hole private Carlton Gipson 2/94
Sweetwater C.C. Sugar Land, TX Leased 36 Hole private Roger Packard 7/96
</TABLE>
- ---------------------
(1) Represents the date acquired by Cobblestone or, if different, the date
Cobblestone commenced operations of the courses.
(2) The Company operates a driving range, pro shop and golf cart rental
facility in connection with an 18-hole public course operated by the City
of San Diego.
(3) The Vineyard at Escondido was constructed by the Company and commenced
operations in December 1993.
(4) The Company owns a tennis facility (the World of Tennis) and a golf
practice and instruction facility (the Academy of Golf) which are
components of these Austin facilities.
45
<PAGE>
Facilities and Services
<TABLE>
<CAPTION>
DRIVING FOOD & FITNESS
COURSE NAME RANGE CARTS CLUBHOUSE BEVERAGE PRO SHOP POOL TENNIS LODGING CENTER
- ----------------------- ------- ----- --------- -------- -------- ---- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Southern California
Courses
Balboa Park G.C. Yes Yes Yes Yes Yes
Carmel Mountain Ranch
C.C. Yes Yes Yes Yes Yes
Morgan Run Resort and
Club Yes Yes Yes Yes Yes Yes Yes Yes Yes
El Camino C.C. Yes Yes Yes Yes Yes Yes Yes Yes
Red Hawk G.C. Yes Yes Yes Yes
Saticoy Regional G.C. Yes Yes Yes Yes
The Vineyard at
Escondido Yes Yes Yes Yes Yes
Eagle Crest Golf Club Yes Yes Yes Yes Yes
Phoenix Courses
Ahwatukee C.C. Yes Yes Yes Yes Yes
The Lakes at Ahwatukee Yes Yes Yes
The Foothills G.C. Yes Yes Yes Yes Yes
Red Mountain Ranch C.C. Yes Yes Yes Yes Yes Yes Yes Yes
Texas-Austin Courses
Hills of Lakeway Yes Yes Yes Yes Yes Yes Yes Yes
Live Oak Golf Course Yes Yes Yes Yes Yes
Yaupon Golf Course Yes Yes Yes
Texas-Dallas Courses
Stonebridge C.C. Yes Yes Yes Yes Yes Yes Yes Yes Yes
The Ranch C.C. Yes Yes Yes Yes Yes Yes Yes
The Trophy Club Yes Yes Yes Yes Yes Yes Yes
Woodcrest C.C. Yes Yes Yes Yes Yes Yes
Other Courses
Brandermill C.C.,
Richmond, VA Yes Yes Yes Yes Yes Yes Yes
Pecan Grove Plantation
C.C., Richmond, TX Yes Yes Yes Yes Yes Yes Yes Yes
Sweetwater C.C., Sugar
Land, TX Yes Yes Yes Yes Yes Yes Yes Yes
</TABLE>
46
<PAGE>
ORGANIZATIONAL STRUCTURE
The Company generally owns and operates each of its facilities through a
separate subsidiary. All of the Company's subsidiaries are directly or
indirectly wholly-owned except for (i) Cobblestone Texas, Inc., (which owns
and operates the Trophy Club) which is 95% owned by the Company and 5% owned
by a former owner, (ii) Ocean Vista Land Company, (which is a holding company
whose sole assets are (a) 100% of the capital stock of Oceanside Golf
Management Corp., which owns and operates El Camino Country Club, and (b) a
50% equity interest in Whispering Palms Country Club Joint Venture, which owns
and operates Morgan Run Resort and Club) which is 96% owned by the Company and
4% owned by former owners, and (iii) Golf Course Inns of America Inc., (which
is a holding company whose sole asset is a 50% equity interest in Whispering
Palms Country Club Joint Venture ) which is 96% owned by the Company and 4%
owned by former owners.
Golf Course Holdings. The following table sets forth certain information
regarding the ownership and operational structure of the Company.
<TABLE>
<CAPTION>
NAME OF ENTITY GOLF COURSE/CLUB
-------------- ----------------
<C> <S>
Cobblestone Holdings, Inc.................... None
Cobblestone Golf Group, Inc.................. Balboa Park G.C.; Saticoy
Regional G.C.; Eagle Crest G.C.;
Redhawk G.C. (Management
Contract)
Escondido Consulting, Inc.................... The Vineyard at Escondido G.C.
Cobblestone Texas, Inc....................... The Trophy Club
Pecan Grove Golf Club, Inc................... Pecan Grove Plantation C.C.
The Liquor Club at Pecan Grove, Inc.......... None
Foothills Holding Company, Inc............... Red Mountain Ranch Country Club;
Ahwatukee C.C.; The Lakes at
Ahwatukee
Bellows Golf Group, Inc...................... The Foothills G.C.
Carmel Mountain Ranch Golf Club, Inc......... Carmel Mountain Ranch C.C.
OVLC Management Corp......................... None
Ocean Vista Land Company..................... None
Golf Course Inns of America, Inc............. None
Oceanside Golf Management Corp............... El Camino C.C.
Whispering Palms Country Club Joint Venture.. Morgan Run Resort and Club
OVLC Financial Corp.......................... None
CSR Golf Group, Inc.......................... Stonebridge C.C.; The Ranch C.C.
Lakeway Golf Clubs, Inc...................... The Hills of Lakeway; Live Oak
G.C.; Yaupon G.C.
Woodcrest Golf Club, Inc..................... Woodcrest C.C.
Virginia Golf Country Club, Inc.............. Brandermill C.C.
Lakeway Clubs, Inc........................... None
TGFC Corporation............................. None
C-RHK, Inc................................... None
CEL Golf Group, Inc.......................... None
SWC Golf Club, Inc........................... Sweetwater, C.C.
</TABLE>
EMPLOYEES
As of June 30, 1996, the Company employed approximately 1,538 persons. The
Company believes that its employee relations are good. None of the Company's
employees are represented by a labor union.
GOVERNMENTAL REGULATION
Environmental Matters. Operations at the Company's golf courses involve the
use and storage of various hazardous materials such as herbicides, pesticides,
fertilizers, motor oil and gasoline. Under various federal, state and local
laws, ordinances and regulations, an owner or operator of real property may
become liable for the costs
47
<PAGE>
of removing such hazardous substances that are released on or in its property
and for remediation of its property. Such laws often impose liability
regardless of whether a property owner or operator knew of, or was responsible
for, the release of hazardous materials. In addition, the presence of such
hazardous substances, or the failure to remediate the surrounding soil when
such substances are released, may adversely affect the ability of a property
owner to sell such real estate or to pledge such property as collateral for a
loan. Prior to acquiring golf courses, it is the Company's practice to
commission preliminary environmental assessments ("Phase I assessments") to
evaluate the environmental condition of, and potential environmental
liabilities associated with, such properties. Phase I assessments generally
consist of an investigation of environmental conditions at the subject
property (not including soil or groundwater sampling or analysis), as well as
a review of available information regarding the site and conditions at other
sites in the vicinity. The Phase I assessments have not revealed any
environmental liability that the Company's management believes would have a
material adverse effect on the Company's business, assets or results of
operation, and the Company believes that it is in material compliance with all
environmental laws, ordinances and regulations applicable to its properties
and operations. No assurance, however, can be given that the Phase I
assessments reveal all potential environmental liabilities or that such
environmental liabilities, whether or not material, may not arise in the
future.
General. The Company is subject to the Fair Labor Standards Act and various
state laws governing such matters as minimum wage requirements, overtime and
other working conditions and citizenship requirements. A significant number of
the Company's golf course personnel receive the federal minimum wage, and
increases in the minimum wage would increase the Company's labor costs. There
is currently an initiative to raise the minimum wage in California to $5.00
per hour effective March 1, 1997, and to $5.75 per hour effective March 1,
1998. The initiative will be voted upon in November 1996. Also, the Federal
minimum wage will increase from $4.25 per hour to $4.75 per hour on October 1,
1996 and again to $5.15 per hour on September 1, 1997. Employers must pay the
higher of the Federal or State minimum wage. The Company will attempt to
offset increases in the minimum wage through pricing and other cost control
efforts; however, there can be no assurance that the Company will be able to
pass such additional costs on to its customers and members. In addition, the
Company is subject to certain state "dram-shop" laws, which provide a person
injured by an intoxicated individual the right to recover damages from an
establishment that wrongfully served alcoholic beverages to the intoxicated
individual. The Company is also subject to the Americans with Disabilities Act
of 1990, which, among other things, may require certain minor renovations to
various clubhouses at the Company's properties to meet federally mandated
access and use requirements. The cost of these renovations is not expected to
be material to the Company. The Company believes it is operating in
substantial compliance with applicable laws and regulations governing its
operations.
LEGAL PROCEEDINGS; INSURANCE
From time to time, lawsuits are filed against the Company in the ordinary
course of business. The Company is not a party to any litigation that, in the
judgment of management after consultation with counsel, is likely to have a
material adverse effect on the Company or its business. The Company carries
property and casualty insurance and insurance under umbrella policies in such
amounts and with such coverages as the Company believes to be adequate.
48
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages as of September 1, 1996, and
a brief account of the business experience of each person who is a director or
executive officer of Holdings.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
James A. Husband........ 46 Director, President and Chief Executive Officer
Stefan C. Karnavas...... 33 Vice President, Chief Financial Officer, Treasurer and Secretary
Gary L. Dee............. 48 Vice President, Operations
Joseph H. Champ......... 38 Vice President, Acquisitions
Andrew Crosson.......... 36 Vice President, Acquisitions
Norm Goodmanson......... 47 Vice President, Development
Robert S. West, Jr. .... 53 Vice President, Golf Operations
Thomas Delaney, Jr. .... 38 Vice President, Design & Construction
Frederick J. Warren..... 57 Director
David H. Wong........... 32 Director
P.L. Davies III......... 34 Director
Martin R. Reid.......... 53 Director
John M. Sullivan........ 61 Director
</TABLE>
JAMES A. HUSBAND founded the Company in October 1992. From January 1994 to
the present, Mr. Husband has served as Holdings' President, Chief Executive
Officer and as a Director. Mr. Husband has 20 years of golf course operations
and acquisitions experience. Prior to founding the Company and since April
1977, Mr. Husband was a founder, Chairman and Chief Executive Officer of a
company which ultimately became known as CCA GolfCorp, which became the public
golf operations subsidiary of Club Corporation of America (now known as Club
Corporation International). Mr. Husband has been a Class A member of the PGA
of America since 1977 and was a PGA Tour member in 1978 and 1979. While at
GolfCorp, Mr. Husband served on the Board of Directors of ClubCorp of America.
Mr. Husband graduated from California State University in Northridge in 1972
with a Bachelor of Science degree in Business Administration.
STEFAN C. KARNAVAS joined Holdings as Vice President, Chief Financial
Officer, Treasurer and Secretary in April 1996. Prior to joining the Company
and since August 1993, Mr. Karnavas was Treasurer and Director of Development
of Horizon Cellular Telephone Company, L.P. ("Horizon"). From December 1992 to
August 1993, he served as Horizon's Assistant Treasurer. From April 1991 to
December 1992, he was Horizon's Manager of Mergers and Acquisitions. Prior to
that time, he was a Senior Loan Officer at Fidelity Bank.
GARY L. DEE has served as Vice President, Operations of Holdings since
January 1994. Mr. Dee has 18 years of golf course operations experience. From
February 1989 to November 1992, Mr. Dee was the Director of Operations for the
PGA Tour Public Golf, Inc. Prior to this position, Mr. Dee was a general
manager for the PGA tour at the TPC at Piper Glen in Charlotte, North
Carolina, from 1988-1989 and was a principal in GolfTexas, a golf facility
development and management company from 1986-1988. Mr. Dee also served as a
golf management professional at various facilities from 1974-1986. Mr. Dee
graduated from Drake University in 1972 with a Bachelor of Science in
management.
JOSEPH H. CHAMP has served as Vice President, Acquisitions of Holdings since
January 1994. From August 1993 to December 1993, Mr. Champ was Vice President,
Acquisitions for National Golf Properties, Inc., a real estate investment
trust. From September 1992 to August 1993, Mr. Champ was Vice President of
Acquisitions (Western Region) at American Golf Corporation. Prior to joining
American Golf, Mr. Champ was vice president of real estate and business
development for Interstate Hotels Corporation from January 1990 to August 1992
and was a director of development at Aircoa Hospitality Services, Inc. from
1987 to January 1990.
49
<PAGE>
ANDREW CROSSON has served as Vice President, Acquisitions of Holdings since
January 1994. From 1988 to 1992, Mr. Crosson was the head of the Development
and Acquisitions Department for GolfCorp, a subsidiary of Club Corporation
International. Mr. Crosson graduated from the University of Utah in 1986.
NORM GOODMANSON has served as Vice President, Development of Holdings since
January 1994. Mr. Goodmanson has over 25 years of experience in the golf
course industry. From January 1988 to June 1993, Mr. Goodmanson served as Vice
President of Development at CCA GolfCorp.
ROBERT S. WEST, JR. has served as Vice President, Golf Operations since
January 1994. From 1989 to 1993, Mr. West served as a Regional Manager with
Golf Enterprises, Inc. In addition to being involved in the golf business for
30 years and a PGA professional for 25 years, Mr. West owned and operated his
own golf course, retail golf clothing store and worked as an operations
consultant for several other courses. Additionally, from 1972 to 1980 Mr. West
served as the Director of Golf and was Tournament Chairman at Walt Disney
World in Orlando, Florida.
THOMAS L. DELANEY, JR. has served as Vice President, Design & Construction
of Holdings since January 1994. Prior to joining the Company, Mr. Delaney
worked in the real estate development industry as a construction manager for a
variety of commercial projects, including the Aventine Complex, a $250 million
multi-use development in La Jolla, California. Mr. Delaney received his
Bachelor of Building Construction degree from the University of Florida in
1984 and his MBA from the Wharton School at the University of Pennsylvania in
May 1993.
FREDERICK J. WARREN has served as a director of Holdings since January 1994.
He is presently a general partner of Brentwood Golf Partners, L.P., Brentwood
Buyout Management Partners, L.P. and Brentwood Buyout Partners, L.P. and has
been with Brentwood since co-founding it in 1972. Mr. Warren is a director of
Horizon Cellular Telephone Company, L.P., Rental Service Corporation,
Tuboscope Vetco International (a provider of oilfield-related inspection and
coating services) ("Tuboscope") and Digital Sound Corporation.
DAVID H. WONG has served as a director of Holdings since January 1994. He is
presently a general partner of Brentwood Golf Partners, L.P., Brentwood Buyout
Management Partners, L.P. and Brentwood Buyout Partners, L.P. Mr. Wong is a
director of Cardinal Business Media, Inc. ("Cardinal") and Horizon Finance
Corporation. Prior to joining Brentwood in July 1989, he attended Stanford
Business School from September 1987 to June 1989 and worked in the investment
banking division of Dillon, Read & Co., Inc. from August 1985 to August 1987.
P.L. DAVIES III has served as a director of Holdings since February 1995. He
is presently Managing Principal of Cambria Group, LLC, a private equity
investment firm. From January 1995 to December 1995, Mr. Davies served as a
Principal of Fremont Group, Inc. Mr. Davies also serves on the board of
Lakeside Corporation. Prior to joining Fremont, Mr. Davies was a Principal at
Brentwood from April 1993 to December 1994 and held a variety of positions at
Bechtel Group, Inc. from 1987 to 1993.
MARTIN R. REID has served as director of Holdings since January 1994. He is
presently Chairman of the Board and Chief Executive Officer of Rental Service
Corporation and has held such position since September 1995. From June 1994 to
September 1995, Mr. Reid was Chairman of the Board and Chief Executive Officer
of Acme Holdings, Inc., which filed a voluntary petition under Chapter 11 of
the United States Bankruptcy Code on July 13, 1995. Since October 1990, Mr.
Reid has been a director of Tuboscope. Mr. Reid also served as Chief Executive
Officer of Tuboscope from May 1991 to October 1993. Mr. Reid has been a
General Partner in MDR Associates, a private investment concern, since
November 1990. From September 1986 to June 1990, he was Chief Executive
Officer of Eastman Christensen Co., a provider of oil and gas drilling
systems. Mr. Reid was also Vice Chairman of Eastman Christensen Co. from
August 1989 to June 1990. Prior to September 1986, he was Senior Vice
President of Operations of Norton Christensen, the predecessor to Eastman
Christensen Co.
JOHN M. SULLIVAN has served as a director of Holdings since January 1994. He
is presently a director of The Scotts Company (a producer of lawncare
products) and Cardinal. From October 1987 to January 1993, Mr. Sullivan was
Chairman of the Board and Chief Executive Officer of Prince Holdings, Inc. (a
sportsgear and apparel company) ("Prince"). Prior to that and since September
1984, Mr. Sullivan was President of Prince and Vice President of Chesebrough-
Pond's, Inc.
50
<PAGE>
DIRECTOR COMPENSATION
Neither Holdings nor the Company pays any fees or remuneration to their
directors for service on their respective board of directors or any board
committee, but Holdings and the Company reimburse directors for their out-of-
pocket expenses incurred in connection with attending meetings of the board.
In addition, in connection with becoming a director, each of Messrs. Davies,
Reid and Sullivan was offered the opportunity to acquire shares (or options to
acquire shares) of Holdings' capital stock.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table provides certain summary
information concerning compensation paid or accrued by Holdings or the Company
to or on behalf of Holdings' President and Chief Executive Officer and the
four other most highly compensated executive officers of Holdings who earned
more than $100,000 (salary and bonus) (the "Named Executive Officers") for all
services rendered in all capacities to Holdings and the Company during the
fiscal year ended September 30, 1995:
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- ------------
FISCAL ALL OTHER LTIP
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) PAYOUTS(2)
- --------------------------- ------ -------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
James A. Husband......... 1995 $223,144 $135,638 $21,459 $370,000
(President and Chief
Executive Officer)
Steven L. Holmes(3)...... 1995 134,601 68,527 9,416 74,000
(Vice President,
Treasurer, Secretary and
Chief Financial Officer)
Gary L. Dee.............. 1995 120,556 60,458 10,812 37,000
(Vice
President/Operations)
Joseph H. Champ.......... 1995 127,652 65,352 9,898 55,500
(Vice
President/Acquisitions)
Robert S. West, Jr....... 1995 106,859 55,072 9,428 14,800
(Vice President/Golf
Operations)
</TABLE>
- ---------------------
(1) Represents (i) car allowance, (ii) dollar value of health benefits and
(iii) 401(k) matching contributions by the Company. The respective amounts
paid for Messrs. Husband, Holmes, Dee, Champ and West are as follows: (A)
car allowance: $16,560, $5,867, $8,207, $5,867 and $5,867; (B) health
benefits: $4,683, $3,336, $2,283, $3,336 and $3,336; and (C) 401(k)
matching contributions: $216, $213, $322, $695 and $225.
(2) Represents the dollar value of all the shares of Holdings Common Stock as
to which ownership vested in the fiscal year ended September 30, 1995. See
"Principal Stockholders."
(3) In April 1996, Mr. Holmes resigned his positions at Holdings.
51
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH BRENTWOOD ASSOCIATES
Corporate Development and Administrative Services Agreement. Pursuant to a
Corporate Development and Administrative Services Agreement, dated as of
September 30, 1992, as amended, between Brentwood Buyout Partners, L.P.
("BBP") (an affiliate of Brentwood Associates) and the Company (the "Brentwood
Agreement"), BBP has agreed to assist in the corporate development activities
of the Company by providing services to the Company, including (i) assistance
in analyzing, structuring and negotiating the terms of investments and
acquisitions, (ii) researching, identifying, contacting, meeting and
negotiating with prospective sources of debt and equity financing, (iii)
preparing, coordinating and conducting presentations to prospective sources of
debt and equity financing, (iv) assistance in structuring and establishing the
terms of debt and equity financing and (v) assistance and advice in connection
with the preparation of the Company's financial and operating plans. Pursuant
to the Brentwood Agreement, BBP is entitled to receive (i) a service fee in an
amount equal to 1% per annum of the aggregate amount of debt and equity
investment in the Company of or by BBP or any person or entity associated with
BBP, which is payable semi-annually in advance, (ii) financial advisory fees
equal to 1.5% of all amounts paid by the Company in connection with any
acquisition, payable at the closing of any such acquisition and (iii)
reimbursement of its reasonable fees and expenses incurred from time to time
(a) in performing the services rendered thereunder and (b) in connection with
any investment in, financing of, or sale, distribution or transfer of any
interest in the Company by BBP or any person or entity associated with BBP.
For the Company's fiscal year ended September 30, 1995, BBP was paid
compensation of $1,112,472 (including reimbursement of fees and expenses)
pursuant to the Brentwood Agreement.
TRANSACTIONS WITH JAMES A. HUSBAND
In connection with the formation of the Company in September 1992, Balboa
Park Management Co., Inc. ("Balboa"), a corporation owned by James A. Husband,
contributed to the Company the lease of the Balboa Park facility, associated
leasehold improvements and other assets, including driving range equipment,
golf carts, golf shop inventory and accounts receivable in exchange for (i)
25,292 shares of Series A Preferred Stock of Holdings and (ii) $235,270 in
cash, of which 25,292 shares and $160,270 have been paid. The consideration
paid to Balboa in exchange for the lease of the Balboa Park facility and the
associated assets acquired from Balboa was determined by the Company and
Balboa to represent the fair market value of such lease and assets. In
addition, if one of the Company's facilities meets certain financial
performance targets in a specified time frame, Mr. Husband shall receive the
remaining $75,000 from the Company.
The lease of the Balboa facility originally was acquired by Balboa in
January 1988 at no initial cost. However, rent is currently payable based upon
specified percentages of gross revenue, subject to a minimum rental floor.
In addition, in connection with the formation of the Company, Mr. Husband
contributed shares of stock representing his 50% interest in Escondido
Consulting, Inc. ("Escondido"), a corporation that held the lease of the
Escondido facility, associated contract rights, permits and other assets in
exchange for 29,813 shares of Series A Preferred Stock of Holdings.
Simultaneously, Escondido redeemed a portion of Mr. Husband's shares by
issuing him a subordinated promissory note in the principal amount of
$250,000, upon which interest accrues at a rate of 5% per annum and is payable
in arrears on the last date of each calendar quarter commencing December 31,
1992 and continuing through October 19, 1999. The Company also acquired the
remaining shares of Escondido from the other shareholder for $400,000 cash. In
all cases, the consideration paid for shares of Escondido stock was determined
by the Company, Mr. Husband and Escondido's other shareholder to represent the
fair market value of such stock.
Escondido was formed in 1990 by Mr. Husband and a partner. The lease of the
Escondido facility was acquired by Escondido in August 1990 at no initial
cost. However, rent is currently payable based upon specified percentages of
gross revenue, subject to a minimum rental floor.
In connection with the formation of the Company, Mr. Husband also agreed to
bring to the Company all future opportunities to acquire golf facilities of
which he became aware, including his then-existing options to acquire a
portion of the entity which owned the Foothills Country Club and to acquire
the leasehold interest in the Saticoy Regional Golf Club, as well as his
opportunity to acquire all or a portion of the entity which owned both El
Camino Country Club and an interest in Morgan Run Resort and Club. Mr. Husband
subsequently assigned all of such rights to the Company for no additional
consideration, and the Company completed such acquisitions.
52
<PAGE>
PRINCIPAL STOCKHOLDERS
The information in the following table sets forth, as of June 30, 1996,
certain information regarding the beneficial ownership of Holdings Common
Stock and Series A Preferred Stock by: (i) each person who to the knowledge of
Holdings owns 5% or more of Holdings' outstanding voting stock, (ii) each
person who is a director or named executive officer of Holdings and (iii) all
directors and officers of Holdings as a group. The following table assumes no
other changes in beneficial ownership since June 30, 1996.
<TABLE>
<CAPTION>
SERIES A
COMMON STOCK PREFERRED STOCK PERCENTAGE PERCENTAGE
-------------- ---------------- OF TOTAL OF ALL
NUMBER OF NUMBER OF VOTING OUTSTANDING
BENEFICIAL OWNER(1) SHARES % SHARES % POWER STOCK
------------------- --------- ---- --------- ---- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Brentwood Golf Partners,
L.P.(2)................ 1,075,081 62.5% 3,928,729 75.3% 72.1% 72.1%
11150 Santa Monica
Blvd.
Suite 1200
Los Angeles, California
90025
James A. Husband(3)(4).. 137,648 8.0% 55,106 1.1% 2.8% 2.8%
Stefan C. Karnavas...... -- -- -- -- -- --
Gary L. Dee(4).......... 12,725 * -- -- * *
Joseph H. Champ(4)...... 18,179 1.1% -- -- * *
Robert S. West, Jr.(4).. 4,848 * -- -- * *
P.L. Davies III(5)(6)... 24,445 1.4% 80,470 1.5% 1.5% 1.5%
Martin R. Reid(6)....... 5,745 * 12,119 * * *
John M. Sullivan(6)..... 9,066 * 24,238 * * *
The Northwestern Mutual
Life Insurance
Company(7)............. 116,053 6.7% 424,167 8.1% 7.8% 7.8%
720 E. Wisconsin Avenue
Milwaukee, Wisconsin
53202
HLH Trust(8)............ 81,234 4.7% 296,916 5.7% 5.4% 5.4%
1800 Grant Building
Pittsburgh,
Pennsylvania 16219
All directors and
officers as a group (13
persons)(2)............ 1,331,133 77.4% 4,100,662 78.6% 78.2% 78.2%
</TABLE>
- ---------------------
* Less than 1%
(1) Except as otherwise indicated, each beneficial owner has the sole power to
vote, as applicable, and to dispose of all shares of Holdings Common Stock
or Series A Preferred Stock owned by such beneficial owners.
(2) Frederick J. Warren and David H. Wong, directors of Holdings, are general
partners of the general partner of Brentwood Golf Partners, L.P., and as
such may be deemed to beneficially own the shares of stock held by
Brentwood Golf Partners, L.P.
(3) Includes 25,293 shares of Series A Preferred Stock owned of record by
Balboa Park Management Co., Inc., a corporation controlled by Mr. Husband.
See "Certain Relationships and Related Transactions--Transactions with
James A. Husband."
(4) Includes share of Holdings Common Stock that are subject to vesting based
on continued employment, subject to acceleration of the vesting of a
portion of such shares if performance targets are met. Unvested shares are
subject to repurchase by Holdings at their initial purchase price. The
number of shares indicated assumes that all shares are vested.
53
<PAGE>
(5) Includes 485 shares of Holdings Common Stock purchasable pursuant to
options held by Mr. Davies exercisable within 60 days of the date of the
Prospectus. Other than such 485 shares, the shares of Holdings Common
Stock beneficially owned by Mr. Davies are owned of record by Pacific Golf
Enterprises, L.P., a limited partnership of which Mr. Davies is general
partner.
(6) Includes shares of Holdings Common Stock that are subject to vesting based
on continued service as a director over a period of time. Unvested shares
are subject to repurchase by Holdings at their initial purchase price. The
number of shares indicated assumes that all shares are vested.
(7) Does not include any shares owned by Brentwood Golf Partners, L.P., of
which the Northwestern Mutual Life Insurance Company is a limited partner
but as to which it has no voting or dispositive power.
(8) Includes 14,919 shares of Holdings Common Stock and 54,536 shares of
Series A Preferred Stock owned by a trust for the benefit of Henry L.
Hillman (the "HLH Trust"), and 66,316 shares of Holdings Common Stock and
242,381 shares of Series A Preferred Stock owned by Wilmington Interstate
Corporation ("Wilmington Interstate"). Wilmington Interstate is a Delaware
private investment company indirectly owned by The Hillman Company, a
Pittsburgh, Pennsylvania firm engaged in diversified investments and
operations, which is controlled by the HLH Trust. The trustees of the HLH
Trust are Henry L. Hillman, Elsie Hilliard Hillman and C. G. Grefenstette
(the "HLH Trustees"). The HLH Trustees share voting power and dispositive
power of the stock of The Hillman Company. Does not include 19,900 shares
of Holdings Common Stock and 72,715 shares of Series A Preferred Stock
owned by four irrevocable trusts for the benefit of members of the Hillman
family, as to which shares the HLH Trustees disclaim beneficial ownership.
Does not include 14,919 shares of Holdings Common Stock and 54,536 shares
of Series A Preferred Stock owned by Venhill Limited Partnership
("Venhill"), as to which shares the HLH Trustees disclaim beneficial
ownership. Venhill is a Delaware limited partnership, of which the limited
partners are trusts for the benefit of members of the Hillman family.
Howard B. Hillman, a step-brother of Henry L. Hillman, is the general
partner of Venhill. Does not include any shares owned by Brentwood Golf
Partners, L.P., of which the HLH Trust, Wilmington Interstate and the four
irrevocable trusts for the benefit of members of the Hillman family are
limited partners, and as to which they disclaim beneficial ownership.
54
<PAGE>
DESCRIPTION OF NOTES
Set forth below is a summary of certain provisions of the Notes. The Private
Notes were issued pursuant to, and upon consummation of the Exchange Offer,
the Exchange Notes will be issued pursuant to the Indenture dated as of June
4, 1996, by and between Holdings and Norwest Bank Minnesota, National
Association, as trustee (the "Trustee"). The form and terms of the Exchange
Notes will be the same as the form and terms of the Private Notes except that
(i) the exchange will be registered under the Securities Act, and hence the
Exchange Notes will not bear legends restricting the transfer thereof, and
(ii) holders of the Exchange Notes will not be entitled to certain rights of
holders of the Private Notes under the Registration Rights Agreement, which
rights will terminate upon the consummation of the Exchange Offer. For
purposes of this summary, the term "Holdings" refers to Cobblestone Holdings,
Inc., exclusive of its subsidiaries. The terms of the Indenture are also
governed by certain provisions contained in the Trust Indenture Act of 1939,
as amended. The following summarizes certain material provisions of the
Indenture only, does not purport to be complete and is qualified in its
entirety by reference to all of the provisions of the Indenture. Capitalized
terms used herein and not otherwise defined shall have the meanings assigned
to them in the Indenture. Wherever particular provisions of the Indenture are
referred to in this summary, such provisions are incorporated by reference as
a part of the statements made and such statements are qualified in their
entirety by such reference. A copy of the form of Indenture is available upon
request.
GENERAL
The Notes are senior, unsecured, general obligations of Holdings, limited in
aggregate principal amount at maturity to $86.0 million. The Notes rank pari
passu in right of payment with all existing and future unsubordinated
Indebtedness of Holdings and rank senior in right of payment to all existing
and future subordinated Indebtedness of Holdings. The New Credit Facility is
guaranteed by Holdings on a senior basis which guarantee is secured by
substantially all of Holdings' assets. The Company's obligations under the New
Credit Facility are secured by substantially all of the Company's assets,
including substantially all of the stock of the Company's Subsidiaries. The
New Credit Facility is guaranteed on a senior basis by all of the Company's
Subsidiaries which guarantees are secured by substantially all of the
Company's Subsidiaries' assets. As of June 30, 1996, Holdings and its
Subsidiaries had outstanding $121.4 million of indebtedness on a consolidated
basis (including trade payables and capitalized lease obligations), all of
which, other than the Notes, would have been indebtedness of its Subsidiaries.
See "Risk Factors--Leverage and Ability to Service Debt" and "--Corporate
Structure; Effects of Asset Encumbrances." The Notes will be issued only in
fully registered form, without coupons, in denominations of $1,000 and
integral multiples thereof.
The Notes will mature on June 1, 2004. The Notes were issued at a
substantial discount from their principal amount, and the original issue
discount on the Notes will accrete from the date of issuance to the maturity
date, calculated on the basis of a 360-day year consisting of twelve 30-day
months.
Principal of and premium and Liquidated Damages (as defined), if any, on the
Notes will be payable, and the Notes may be presented for registration of
transfer or exchange, at the office or agency of Holdings maintained for such
purpose, which office or agency shall be maintained in the Borough of
Manhattan, The City of New York. No service charge will be made for any
registration of transfer or exchange of Notes, but Holdings may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith. Until otherwise designated by Holdings,
Holdings' office or agency will be the corporate trust office of the Trustee.
OPTIONAL REDEMPTION
Except as set forth below, Holdings will not have the right to redeem any
Notes prior to June 1, 1999. On or after June 1, 1999, the Notes will be
redeemable at the option of Holdings, in whole or in part, at the following
55
<PAGE>
redemption prices (expressed as percentages of the Accreted Value plus
Liquidated Damages, if any, at the redemption date) if redeemed during the 12-
month period commencing in each case on June 1 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
1999........................................................... 106.750%
2000........................................................... 104.500%
2001........................................................... 102.250%
2002 and thereafter............................................ 100.000%
</TABLE>
Notwithstanding the foregoing, until June 1, 1999, upon one or more Public
Equity Offerings or issuances of Qualified Capital Stock to Strategic
Investors, all of the outstanding Notes may be redeemed at the option of
Holdings within 120 days of such Public Equity Offering or issuance to
Strategic Investors with the Net Cash Proceeds thereof at 113.50% of Accreted
Value, together with Liquidated Damages, if any, to the date of redemption.
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption on a pro rata basis, by lot or in such other
manner it deems appropriate and fair. The Notes may be redeemed in part in
multiples of $1,000 only.
The Notes will not have the benefit of any sinking fund.
Notice of any redemption will be sent, by first class mail, at least 30 days
and not more than 60 days prior to the date fixed for redemption to the Holder
of each Note to be redeemed to such Holder's last address as then shown upon
the registry books of the Registrar. Any notice which relates to a Note to be
redeemed in part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must state that on and after the date of
redemption, upon surrender of such Note, a new Note or Notes in a principal
amount equal to the unredeemed portion thereof will be issued. On and after
the date of redemption, interest will cease to accrete on the Notes called for
redemption, unless Holdings defaults in the payment thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Repurchase of Notes at the Option of the Holder Upon a Change of Control
The Indenture provides that in the event that a Change of Control has
occurred, each Holder of Notes will have the right, at such Holder's option,
pursuant to an offer by Holdings (the "Change of Control Offer"), to require
Holdings to repurchase all or any part of such Holder's Notes (provided,
however, that the principal amount of such Notes must be $1,000 or an integral
multiple thereof) on a date (the "Change of Control Purchase Date") that is no
later than 90 days after the occurrence of such Change of Control, at a cash
price (the "Change of Control Purchase Price") equal to 101% of the Accreted
Value thereof at the Change of Control Purchase Date. The Change of Control
Offer shall be made within 30 days following a Change of Control and shall
remain open for 20 Business Days following its commencement (the "Change of
Control Offer Period"). Upon expiration of the Change of Control Offer Period,
Holdings shall purchase all Notes or portions thereof properly tendered in
response to the Change of Control Offer. If required by applicable law, the
Change of Control Purchase Date and the Change of Control Offer Period may be
extended as so required; however, if so extended, it shall nevertheless
constitute an Event of Default if the Change of Control Purchase Date does not
occur within 90 days of the Change of Control (or within 120 days of the
Change of Control, if during any such extension beyond 90 days following the
Change of Control, Holdings is diligently pursuing all commercially reasonable
steps to consummate the Change of Control Offer as promptly as practicable).
As used herein, a "Change of Control" means (i) the Investor Group is no
longer the "beneficial owner," directly or indirectly, of more than 50% of the
total voting power in the aggregate normally entitled to vote in
56
<PAGE>
the election of directors, managers, or trustees, as applicable, of Holdings
and (ii) any "person" or "group" (as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable) is or
becomes the "beneficial owner," directly or indirectly, of more of the total
voting power in the aggregate outstanding normally entitled to vote in
elections of directors of Holdings than is owned collectively by Brentwood and
James A. Husband.
On or before the Change of Control Purchase Date, Holdings will (i) accept
for payment Notes or portions thereof properly tendered pursuant to the Change
of Control Offer, (ii) deposit with the Paying Agent Cash sufficient to pay
the Change of Control Purchase Price of all Notes or portions thereof so
tendered and (iii) deliver to the Trustee Notes so accepted together with an
Officers' Certificate listing the Notes or portions thereof being purchased by
Holdings. The Paying Agent will promptly mail to the Holders of Notes so
accepted payment in an amount equal to the Change of Control Purchase Price
and the Trustee will promptly authenticate and mail or deliver to such Holders
a new Note equal in principal amount to any unpurchased portion of the Note
surrendered. Any Notes not so accepted will be promptly mailed or delivered by
Holdings to the Holder thereof. Holdings will publicly announce the results of
the Change of Control Offer on or as soon as practicable after the Change of
Control Purchase Date.
Holdings' ability to repurchase Notes upon a Change of Control may be
limited by, among other factors, the financial resources of Holdings at the
time of repurchase. See "Risk Factors--Limitations on Repurchase of Notes." If
a Change of Control occurs at a time when Holdings is prohibited from
purchasing the Notes, Holdings could seek the consent of its lender(s) and the
Company's lenders, as the case may be, to such purchase or could attempt to
refinance the borrowings that contain such prohibition. If Holdings does not
obtain such a consent or repay such borrowings, Holdings would remain
prohibited from purchasing Notes. In such case, Holdings' failure to purchase
tendered Notes would constitute an Event of Default under the Indenture.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under
the Exchange Act and the rules thereunder and all other applicable Federal and
state securities laws.
Limitation on Restricted Payments
The Indenture provides that Holdings will not, and (subject to the last
sentence of this paragraph) will not permit any of its Subsidiaries to,
directly or indirectly, make any Restricted Payment if, immediately prior
thereto or after giving effect to such Restricted Payment on a pro forma
basis, (1) a Default or an Event of Default shall have occurred and be
continuing, (2) Holdings is not permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Debt Incurrence Ratio in paragraph (a)
of the covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock," or (3) the aggregate amount of all Restricted
Payments made by Holdings and its Subsidiaries, including after giving effect
to such proposed Restricted Payment, from and after the Issue Date, would
exceed the sum of (a) the amount determined by subtracting (i) 2.0 times the
aggregate Consolidated Fixed Charges of Holdings and its Consolidated
Subsidiaries for the period (taken as one accounting period), commencing on
the first day of the first full fiscal quarter commencing after the Issue
Date, to and including the last day of the fiscal quarter ended immediately
prior to the date of each such calculation (the "Computation Period") from
(ii) Consolidated EBITDA of Holdings and its Consolidated Subsidiaries for the
Computation Period, plus (b) 100% of the aggregate Net Cash Proceeds received
by Holdings from the sale of its Qualified Capital Stock (other than (i) to a
Subsidiary or Unrestricted Subsidiary of Holdings and (ii) to the extent
applied in connection with a Qualified Exchange, but including the Net Cash
Proceeds received by Holdings upon the exercise, exchange or conversion of
securities into Qualified Capital Stock other than in connection with a
Qualified Exchange) after the Issue Date and on or prior to the date of such
Restricted Payment. The full amount of any Restricted Payment made pursuant to
the immediately following paragraph (other than clause (x) or (y) thereof),
however, will be deducted in the calculation of the aggregate amount of
Restricted Payments available to be made referred to in clause (3) of the
immediately preceding sentence. Notwithstanding the foregoing, the Company and
its Subsidiaries will be permitted to make any Restricted Payment not
prohibited by the indenture governing the Senior Notes, as in effect on the
Issue Date, so long as any Senior Notes remain outstanding.
57
<PAGE>
In addition, the provisions in the immediately preceding paragraph will not
prohibit (t) amounts due in respect of Capital Stock of Holdings required to
be repurchased upon the exercise of "put" rights held prior to the Issue Date
by lenders under the Old Credit Facility, (u) Investments by the Company or
its Subsidiaries in Unrestricted Subsidiaries in an aggregate amount not to
exceed the sum of (i) $5.0 million and (ii) to the extent not otherwise
applied to a Restricted Payment, 100% of the aggregate Net Cash Proceeds
received by Holdings or the Company from the sale of its Qualified Capital
Stock after the Issue Date (other than (i) to a Subsidiary or Unrestricted
Subsidiary of Holdings and (ii) to the extent applied in connection with a
Qualified Exchange, but including the Net Cash Proceeds received by the
Company upon the exercise, exchange or conversion of securities into Qualified
Capital Stock other than in connection with a Qualified Exchange), (x)
repurchases of Capital Stock from employees, officers and directors of
Holdings or its Subsidiaries upon the death, disability or termination of
employment in an aggregate amount to all employees not to exceed $300,000 per
year or $2.1 million in the aggregate on and after the Issue Date, (v)
payments by Ocean Vista Land Company of dividends on its preferred stock
outstanding prior to the Issue Date, in accordance with the terms thereof, (w)
Investments in non-wholly owned Subsidiaries of the Company not to exceed $5.0
million in the aggregate, (x) payments of up to $1.25 million in the aggregate
to repurchase Capital Stock of Subsidiaries of the Company held by minority
stockholders outstanding prior to the Issue Date and not beneficially owned by
the Company or any of its Affiliates, (y) a Qualified Exchange, or (z) the
payment of any dividend on Qualified Capital Stock within 60 days after the
date of its declaration if such dividend could have been made on the date of
such declaration in compliance with the foregoing provisions. Notwithstanding
any other provision hereof, the foregoing clauses (u), (x) and (z) will not be
deemed to permit the respective Restricted Payments otherwise contemplated to
be made pursuant thereto if, immediately prior thereto or after giving effect
to such Restricted Payment on a pro forma basis, a Default or Event of Default
shall have occurred or be continuing.
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that Holdings will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, assume or suffer to exist
any consensual restriction on the ability of any Subsidiary of Holdings to pay
dividends or make other distributions to, or to pay any obligation to, or
otherwise to transfer assets or property to, or make or pay loans or advances
to, Holdings or any Subsidiary of Holdings, except (a) restrictions imposed by
the Notes or the Indenture, (b) customary provisions restricting subletting or
assignment of any lease (including a Capitalized Lease Obligation), (c)
restrictions imposed by applicable law, (d) existing restrictions under
Indebtedness outstanding, (e) restrictions under any Acquired Indebtedness not
incurred in violation of the Indenture or under any agreement relating to any
property, asset, or business acquired by Holdings or any of its Subsidiaries,
which restrictions existed at the time of acquisition, were not put in place
in connection with or in anticipation of such acquisition and are not
applicable to any person, other than the person acquired, or to any property,
asset or business, other than the property, assets and business so acquired,
(f) restrictions with respect solely to a Subsidiary of Holdings imposed
pursuant to a binding agreement which has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Subsidiary, provided, such restrictions apply solely to the Capital Stock or
assets of such Subsidiary, (g) restrictions pursuant to the New Credit
Facility, the Senior Notes, the Senior Note Indenture or Indebtedness, other
than Subordinated Indebtedness, incurred in compliance with clause (a) of the
covenant "Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock" (including refinancings permitted to be incurred under clause
(d) thereof), (h) Liens specified under "Permitted Liens" other than clauses
(b), (c) and (e) thereof, and (i) in connection with and pursuant to permitted
Refinancings, replacements of restrictions that are not more restrictive than
those being replaced and do not apply to any other person or assets than those
that would have been covered by the restrictions in the Indebtedness so
refinanced.
Limitations on Liens
The Indenture provides that Holdings will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, suffer to exist or
become effective any Lien upon any of its property or assets, whether now
owned or hereafter acquired, or any income or profits therefrom, or assign or
convey any right to receive
58
<PAGE>
income therefrom, unless all payments due under the Indenture and the Notes
are secured on an equal and ratable basis with the obligations so secured
until such time as such obligation is no longer secured by a Lien, provided,
however, that Permitted Liens may be created or incurred or may exist or
become effective without any requirement that all payments under the Indenture
and the Notes be equally and ratably secured.
Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock
The Indenture provides that, except as set forth below in this covenant,
Holdings will not, and will not permit any of its Subsidiaries to, directly or
indirectly, issue, assume, guaranty, incur, become directly or indirectly
liable with respect to (including as a result of an Acquisition), extend the
maturity of, or otherwise become responsible for, contingently or otherwise
(individually and collectively, to "incur" or, as appropriate, an
"incurrence"), any Indebtedness or any Disqualified Capital Stock from and
after the Issue Date. Notwithstanding the foregoing:
(a) if (i) no Default or Event of Default shall have occurred and be
continuing at the time of, or would occur after giving effect on a pro
forma basis to, such incurrence of Indebtedness or Disqualified Capital
Stock and (ii) on the date of such incurrence (the "Incurrence Date"), the
Consolidated Cash Flow Ratio of Holdings for the Reference Period
immediately preceding the Incurrence Date, after giving effect on a pro
forma basis to such incurrence of such Indebtedness or Disqualified Capital
Stock and, to the extent set forth in the definition of Consolidated Cash
Flow Ratio, the use of proceeds thereof, would be no greater than 6 to l
for Incurrence Dates prior to June 1, 1998 and no greater than 5 to 1
thereafter (the "Debt Incurrence Ratio"), then Holdings and its
Subsidiaries may incur such Indebtedness or Disqualified Capital Stock;
(b) Holdings may incur Indebtedness evidenced by the Notes and
represented by the Indenture up to the amounts specified therein as of the
Issue Date, together with any accretion thereon;
(c) Holdings' Subsidiaries may incur Indebtedness evidenced by the Senior
Notes and the guarantees in respect thereof represented by the Senior Note
Indenture up to the amounts specified therein as of the Issue Date;
(d) Holdings and its Subsidiaries may incur Refinancing Indebtedness with
respect to any Indebtedness or Disqualified Capital Stock, as applicable,
described in clauses (a), (b) or (c) of this covenant or which is
outstanding on the Issue Date after giving effect to the implementation of
the New Credit Facility;
(e) the Company and its Subsidiaries may incur Permitted Indebtedness;
(f) Holdings and its Subsidiaries may incur Indebtedness pursuant to the
New Credit Facility on or after the Issue Date up to an aggregate amount
outstanding (including any Indebtedness issued to Refinance, refund or
replace such Indebtedness) at any time of $50.0 million, plus accrued
interest, fees incurred in connection with the New Credit Facility and such
additional amounts as may be deemed to be outstanding in the form of
Interest Swap and Hedging Obligations with lenders party to the New Credit
Facility, reduced by the amount of any such Indebtedness permanently
retired with Net Cash Proceeds from any Asset Sale (other than a sale of
Assets to Be Disposed of) or assumed by a transferee in an Asset Sale; and
(g) the Company and its Subsidiaries may incur Indebtedness on or after
the Issue Date up to an aggregate amount outstanding (including any
Indebtedness issued to Refinance, refund or replace such Indebtedness) at
any time of $7.5 million.
Notwithstanding the foregoing, (i) the Company and its Subsidiaries will be
permitted to incur any Indebtedness to the extent such incurrence is not
prohibited by the indenture governing the Senior Notes (the "Senior Note
Indenture"), as in effect on the Issue Date, so long as any Senior Notes
remain outstanding, (ii) Holdings may not incur any Indebtedness having a
scheduled principal, interest or other payment due in cash or Cash Equivalents
on or prior to the Stated Maturity, other than pursuant to its guarantee of
the New Credit Facility and (iii) Holdings may incur Indebtedness to the
extent such incurrence would not be prohibited if incurred by the Company and
its Subsidiaries under the Senior Note Indenture, so long as any Senior Notes
remain outstanding (for the purposes of this clause (iii) any debt incurred
pursuant to this clause shall be deemed to have been incurred under the Senior
Note Indenture only for the purposes of determining whether any additional
Indebtedness may be incurred under the Senior Note Indenture).
59
<PAGE>
Limitation on Sale of Assets and Subsidiary Stock
The Indenture provides that Holdings will not, and will not permit any of
its Subsidiaries to, in one or a series of related transactions, convey, sell,
transfer, assign or otherwise dispose of, directly or indirectly, any of its
property, business or assets, including by merger or consolidation and
including upon any sale or other transfer or issuance of any Capital Stock of
any Subsidiary of Holdings or any sale and leaseback transaction, whether by
Holdings or a Subsidiary or through the issuance, sale or transfer of Capital
Stock by a Subsidiary of Holdings (an "Asset Sale"), unless (l)(a) within 405
days after the date of such Asset Sale, the Net Cash Proceeds therefrom (the
"Asset Sale Offer Amount") are applied to the optional redemption of the Notes
in accordance with the terms of the Indenture or to the repurchase of the
Notes pursuant to an irrevocable, unconditional offer by Holdings (the "Asset
Sale Offer") to repurchase Notes at a purchase price (the "Asset Sale Offer
Price") of 100% of the Accreted Value thereof to the date of payment plus
Liquidated Damages, if any, made within 360 days of such Asset Sale or (b)
within 360 days of such Asset Sale, the Asset Sale Offer Amount is (i)
invested (or committed, pursuant to a binding commitment subject only to
reasonable, customary closing conditions, to be invested, and in fact is so
invested, within an additional 90 days) in fixed assets and real property
which in the good faith judgment of the Board constitute or are a part of a
Related Business of Holdings, or in 100% of the issued and outstanding Capital
Stock of a person the assets of which are principally comprised of such fixed
assets and real property, or (ii) used to redeem or repurchase Senior Notes or
other Indebtedness of the Company and its Subsidiaries (but not of Holdings)
or to retire Indebtedness outstanding under the New Credit Facility, except
with respect to the use of proceeds from the sale of Assets to Be Disposed of,
and to permanently reduce the amount of such Indebtedness permitted to be
incurred in compliance with paragraph (f) of the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock"
(including that in the case of a revolver or similar arrangement that makes
credit available, such commitment is so reduced by such amount), (2) with
respect to any transaction or related series of transactions of securities,
property or assets with an aggregate fair market value in excess of $1.0
million, at least 85% of the consideration for such Asset Sale (excluding the
amount of (A) any Indebtedness (other than Notes) that is required to be
repaid or assumed (and is either repaid or assumed by the transferee of the
related assets) by virtue of such Asset Sale and which is secured by a Lien on
the property or assets sold and (B) property received by Holdings or any such
Subsidiary from the transferee that within 30 days of such Asset Sale is
converted into Cash or Cash Equivalents) consists of Cash or Cash Equivalents,
(3) no Default or Event of Default shall have occurred and be continuing at
the time of, or would occur after giving effect, on a pro forma basis, to,
such Asset Sale, and (4) the Board of Directors of Holdings determines in good
faith that Holdings or such Subsidiary, as applicable, receives fair market
value for such Asset Sale. The Indenture will provide that an Asset Sale Offer
may be deferred until the accumulated Net Cash Proceeds from Asset Sales not
applied to the uses set forth in (1)(b) above (or committed for use as
permitted thereunder) exceeds $10.0 million and that each Asset Sale Offer
shall remain open for 20 Business Days following its commencement (the "Asset
Sale Offer Period"). Upon expiration of the Asset Sale Offer Period, Holdings
shall apply the Asset Sale Offer Amount, to the purchase of all Notes properly
tendered (on a pro rata basis if the Asset Sale Offer Amount is insufficient
to purchase all Notes so tendered) at the Asset Sale Offer Price. If required
by applicable law, the Asset Sale Offer Period may be extended as so required;
however, if so extended it shall nevertheless constitute an Event of Default
if within 90 days of its commencement the Asset Sale Offer is not consummated
or the properly tendered Notes are not purchased pursuant thereto (or within
120 days of the commencement of the Asset Sale Offer if, during any such
extension beyond 90 days following the commencement, Holdings is diligently
pursuing all commercially reasonable steps to consummate the Asset Sale Offer
or to purchase properly tendered Notes pursuant thereto as promptly as
practicable).
Notwithstanding clause (1)(a) above, if an Asset Sale Offer is commenced and
securities of Holdings ranking pari passu in right of payment with the Notes
are outstanding at the date of commencement thereof, the terms of which
provide that a substantially similar offer must be made with respect thereto,
then the Asset Sale Offer shall be made concurrently with such other offer,
and securities of each issue which the holders of securities of such issue
elect to have purchased will be accepted pro rata in proportion to the
aggregate principal amount thereof; provided, that in so repurchasing such
other securities Holdings is in compliance with the
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provisions of "Limitation on Restricted Payments." In addition,
notwithstanding the foregoing provisions of the prior paragraph:
(i) Holdings and its Subsidiaries may (A) convey, sell, lease, transfer,
assign or otherwise dispose of assets in the ordinary course of business or
(B) exchange assets for assets in a Related Business, provided, however, in
the case of this clause (B) that (1) Holdings, prior to the consummation of
any such proposed exchange or series of related exchanges having a fair
market value in excess of $2.5 million, obtains a written favorable opinion
as to the fairness of such transaction to Holdings from a financial point
of view from an independent investment banking firm of national reputation,
(2) no Default or an Event of Default shall have occurred and be continuing
and (3) after giving effect to such proposed exchange on a pro forma basis,
either (x) the Company is permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Debt Incurrence Ratio in paragraph (a) of the
covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock" or (y) the Company's Debt Incurrence Ratio is
no greater than it was immediately prior to such proposed exchange;
(ii) Holdings and its Subsidiaries may convey, sell, lease, transfer,
assign or otherwise dispose of assets pursuant to and in accordance with
the limitation on mergers, sales or consolidations provisions in the
Indenture;
(iii) Holdings and its Subsidiaries may (A) sell or dispose of damaged,
worn out or other obsolete property in the ordinary course of business so
long as such property is no longer necessary for the proper conduct of the
business of Holdings or such Subsidiary, as applicable, or (B) abandon such
property if it cannot, through reasonable efforts, be sold; and
(iv) Holdings and its Subsidiaries may convey, sell, lease, transfer,
assign or otherwise dispose of assets to Holdings or any of its wholly
owned Subsidiaries.
Any Asset Sale Offer shall be made in compliance with all applicable laws,
rules, and regulations, including, if applicable Regulation 14E of the
Exchange Act and the rules and regulations thereunder and all other applicable
Federal and state securities laws.
Limitation on Transactions with Affiliates
The Indenture provides that neither Holdings nor any of its Subsidiaries or
Unrestricted Subsidiaries will be permitted after the Issue Date to enter into
any contract, agreement, arrangement or transaction with any Affiliate (an
"Affiliate Transaction"), or any series of related Affiliate Transactions
unless (1) the terms of such Affiliate Transaction are fair and reasonable to
Holdings, such Subsidiary or such Unrestricted Subsidiary, as the case may be,
and no less favorable to Holdings, such Subsidiary or such Unrestricted
Subsidiary, as the case may be, than could have been obtained in comparable
arm's length transaction with a non-Affiliate, (2) involving consideration to
either party in excess of $1 million, unless such transaction is evidenced by
an Officers' Certificate addressed and delivered to the Trustee stating that
the terms of such Affiliate Transaction are fair and reasonable to Holdings,
such Subsidiary or such Unrestricted Subsidiary, as the case may be, and no
less favorable to Holdings, such Subsidiary or such Unrestricted Subsidiary,
as the case may be, than could have been obtained in comparable arm's length
transaction with a non-Affiliate, and (3) involving consideration to either
party in excess of $5.0 million, unless Holdings, prior to the consummation
thereof, obtains a written favorable opinion as to the fairness of such
transaction to Holdings from a financial point of view from an independent
investment banking firm of national reputation. The foregoing restriction will
not apply to (1) pro rata dividends or distributions paid in cash on any class
of Capital Stock and not prohibited under "Limitation on Restricted Payments,"
(2) indemnification payments on behalf of directors, officers or employees of
Holdings or its Subsidiaries made or incurred by such persons in such
capacities, (3) payments made in accordance with the Brentwood Agreement as in
effect on the Issue Date, so long as no Event of Default shall have occurred
and be continuing, (4) repurchases of Capital Stock not prohibited under
clause (x) of the "Limitation on Restricted Payments" covenant and (5)
transactions between the Company and any Wholly Owned Subsidiary of the
Company or between Wholly Owned Subsidiaries of the Company.
Limitation on Lines of Business
Neither Holdings nor any of its Subsidiaries or Unrestricted Subsidiaries
will directly or indirectly engage to any substantial extent in any line or
lines of business activity other than a Related Business.
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Limitation on Merger, Sale or Consolidation
The Indenture provides that Holdings will not, directly or indirectly,
consolidate with or merge with or into another person or sell, lease, convey
or transfer all or substantially all of its assets (computed on a consolidated
basis), whether in a single transaction or a series of related transactions,
to another Person or group of affiliated Persons, unless (i) either (a)
Holdings is the continuing entity or (b) the resulting, surviving or
transferee entity is a corporation organized under the laws of the United
States, any state thereof or the District of Columbia and expressly assumes by
supplemental indenture all of the obligations of Holdings in connection with
the Notes and the Indenture; (ii) no Default or Event of Default shall exist
or shall occur immediately after giving effect on a pro forma basis to such
transaction; and (iii) other than in the case of a transaction solely between
Holdings and any wholly owned Subsidiary, immediately after giving effect to
such transaction on a pro forma basis, the consolidated surviving or
transferee entity would immediately thereafter be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Debt Incurrence Ratio set
forth in paragraph (a) of the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock."
Upon any consolidation or merger or any transfer of all or substantially all
of the assets in accordance with the foregoing, the successor corporation
formed by such consolidation or into which Holdings is merged or to which such
transfer is made, shall succeed to, and be substituted for, and may exercise
every right and power of, Holdings under the Indenture with the same effect as
if such successor corporation had been named therein as such, and Holdings
shall be released from the obligations under the Notes and the Indenture
except with respect to any obligations that arise from, or are related to,
such transaction.
Restriction on Sale and Issuance of Subsidiary Stock
The Indenture provides that from and after the Issue Date, Holdings and will
not sell, and will not permit any of its Subsidiaries to issue or sell, any
shares of Capital Stock of any Subsidiary of Holdings to any person other than
Holdings or a wholly owned Subsidiary of Holdings. The Indenture provides that
all of the Capital Stock of a Subsidiary of Holdings may be sold if such Asset
Sale complies with the covenant "Limitation on Sale of Assets and Subsidiary
Stock."
Limitation on Status as Investment Company
The Indenture prohibits Holdings and its Subsidiaries from being required to
register as an "investment company" (as that term is defined in the Investment
Company Act of 1940, as amended), or from otherwise becoming subject to
regulation under the Investment Company Act.
REPORTS
The Indenture provides that whether or not Holdings is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, Holdings
shall deliver to the Trustee, to each Holder and to prospective purchasers of
Notes identified to Holdings by an Initial Purchaser, within 15 days after it
is or would have been required to file such with the Commission, (i) annual
and quarterly financial statements substantially equivalent to financial
statements that would have been included in reports filed with the Commission,
if Holdings were subject to the requirements of Section 13 or 15(d) of the
Exchange Act, including, with respect to annual information only, a report
thereon by Holdings' certified independent public accountants as such would be
required in such reports to the Commission, and, in each case, together with a
management's discussion and analysis of financial condition and results of
operations which would be so required; and (ii) all reports that would be
required to be filed with the Commission on Form 8-K. In addition, the Company
has agreed that, whether or not required by the rules and regulations of the
Commission, Holdings will file a copy of all such information and reports with
the Commission for public availability (unless the Commission will not accept
such a filing) and make such information available to securities analysts and
prospective investors upon request for so long as any Notes remain
outstanding. However, the Commission does not generally accept for filing any
Exchange Act reports submitted by registrants that are not subject to the
reporting requirements of that Act. Furthermore, Holdings has agreed that, for
so long as any Notes on Shares remain outstanding, it will furnish to the
Holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
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EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as (i) the failure by Holdings to
pay all or any part of the principal, or premium, if any, on the Notes when
and as the same becomes due and payable at maturity, redemption, by
acceleration or otherwise, including, without limitation, payment of the
Change of Control Purchase Price or the Asset Sale Offer Price, or otherwise,
(ii) the making by Holdings or any of its Subsidiaries of a Restricted Payment
not permitted by the Indenture, (iii) the failure by Holdings to observe or
perform any other covenant or agreement contained in the Notes or the
Indenture and, subject to certain exceptions, the continuance of such failure
for a period of 60 days after written notice is given to Holdings by the
Trustee or to Holdings and the Trustee by the Holders of at least 25% in
aggregate principal amount of the Notes outstanding, (iv) certain events of
bankruptcy, insolvency or reorganization in respect of Holdings or any of its
Significant Subsidiaries, (v) a default in any Indebtedness of Holdings or any
of its Subsidiaries with an aggregate principal amount in excess of $5.0
million (a) resulting from the failure to pay principal at maturity or (b) as
a result of which the maturity of such Indebtedness has been accelerated prior
to its stated maturity and (vi) final unsatisfied judgments not covered by
insurance aggregating in excess of $5.0 million, at any one time rendered
against Holdings or any of its Subsidiaries and not stayed, bonded or
discharged within 90 days. The Indenture provides that if a Default occurs and
is continuing, the Trustee must, within 90 days after the occurrence of such
default, give to the Holders notice of such default.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (iv) above, relating to Holdings or any
Significant Subsidiary), then in every such case, unless the principal of all
of the Notes shall have already become due and payable, either the Trustee or
the Holders of 25% in aggregate principal amount of the Notes then
outstanding, by notice in writing to Holdings (and to the Trustee if given by
Holders) (an "Acceleration Notice"), may declare all principal, determined as
set forth below, to be due and payable immediately. In the event a declaration
of acceleration resulting from an Event of Default described in clause (v)
above has occurred and is continuing, such declaration of acceleration shall
be automatically annulled if such default is cured or waived or the holders of
the Indebtedness which is the subject of such default have rescinded their
declaration of acceleration in respect of such Indebtedness within 60 days
thereof and the Trustee has received written notice of such cure, waiver or
rescission and no other Event of Default described in clause (v) above has
occurred that has not been cured or waived within 60 days of the declaration
of such acceleration in respect of such Indebtedness. If an Event of Default
specified in clause (iv), above, relating to Holdings or any Significant
Subsidiary occurs, all principal will be immediately due and payable on all
outstanding Notes and Liquidated Damages, if any, without any declaration or
other act on the part of the Trustee or the Holders. The Holders of a majority
in aggregate principal amount of Notes generally are authorized to rescind
such acceleration if all existing Events of Default, other than the non-
payment of the principal of and premium, if any, on the Notes which have
become due solely by such acceleration, have been cured or waived.
Prior to the declaration of acceleration of the maturity of the Notes, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding may waive on behalf of all the Holders any default, except a
default in the payment of principal of any Note not yet cured, or a default
with respect to any covenant or provision which cannot be modified or amended
without the consent of the Holder of each outstanding Note affected. Subject
to the provisions of the Indenture relating to the duties of the Trustee, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request, order or direction of any of the Holders,
unless such Holders have offered to the Trustee reasonable security or
indemnity. Subject to all provisions of the Indenture and applicable law, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that Holdings may, at its option and at any time,
elect to have its obligations discharged with respect to the outstanding Notes
("Legal Defeasance"). Such Legal Defeasance means that
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Holdings shall be deemed to have paid and discharged the entire indebtedness
represented, and the Indenture shall cease to be of further effect as to all
outstanding Notes, except as to (i) rights of Holders to receive payments in
respect of the principal of and premium, if any, on such Notes when such
payments are due from the trust funds; (ii) Holdings' obligations with respect
to such Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes, and the maintenance of an office
or agency for payment and money for security payments held in trust; (iii) the
rights, powers, trust, duties, and immunities of the Trustee, and Holdings'
obligations in connection therewith; and (iv) the Legal Defeasance provisions
of the Indenture. In addition, Holdings may, at its option and at any time,
elect to have the obligations of Holdings released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
Holdings must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Notes, U.S. legal tender, non-callable government
securities or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of and premium, if any, on such Notes on the stated date
for payment thereof or on the redemption date of such principal or installment
of principal of and premium, if any, on such Notes, and the holders of Notes
must have a valid, perfected, exclusive security interest in such trust; (ii)
in the case of the Legal Defeasance, Holdings shall have delivered to the
Trustee a written opinion of counsel in the United States reasonably
acceptable to Trustee confirming that (A) Holdings has received from, or there
has been published by the Internal Revenue Service, a ruling or (B) since the
date of the Indenture, there has been a change in the applicable Federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the holders of such Notes will not
recognize income, gain or loss for Federal income tax purposes as a result of
such Legal Defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, Holdings shall have delivered to the Trustee a written opinion of
counsel in the United States reasonably acceptable to such Trustee confirming
that the holders of such Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such Covenant Defeasance and will
be subject to Federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such Covenant Defeasance had
not occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit; (v) such Legal Defeasance or
Covenant Defeasance shall not result in a breach or violation of, or
constitute a default under the Indenture or any other material agreement or
instrument to which Holdings or any of its Subsidiaries is a party or by which
Holdings or any of its Subsidiaries is bound; (vi) Holdings shall have
delivered to the Trustee an Officers' Certificate stating that the deposit was
not made by Holdings with the intent of preferring the holders of such Notes
over any other creditors of Holdings or with the intent of defeating,
hindering, delaying or defrauding any other creditors of Holdings or others;
and (vii) Holdings shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
If the funds deposited with the Trustee to effect Legal Defeasance or
Covenant Defeasance are insufficient to pay the principal of and premium, if
any, on the Notes when due, then the obligations of Holdings under the
Indenture will be revived, and no such defeasance will be deemed to have
occurred.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting Holdings and the Trustee to
enter into a supplemental indenture for certain limited purposes without the
consent of the Holders. With the consent of the Holders of not less than a
majority in aggregate principal amount of the Notes at the time outstanding,
Holdings and the Trustee
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are permitted to amend or supplement the Indenture or any supplemental
indenture or modify the rights of the Holders; provided, that no such
modification may, without the consent of each Holder affected thereby:
(i) change the Stated Maturity of or the Change of Control Purchase Date or
the Asset Sale Offer Period on any Note, or reduce the principal amount
thereof (or extend the time for payment) or the accretion rate specified under
"Accreted Value" or any premium payable upon the redemption thereof, or change
the place of payment where, or the coin or currency in which, any Note or any
premium thereon is payable, or impair the right to institute suit for the
enforcement of any such payment on or after the Stated Maturity thereof (or,
in the case of redemption, on or after the Redemption Date), or reduce the
Change of Control Purchase Price or the Asset Sale Offer Price or alter the
redemption provisions or the provisions of the "Repurchase of Notes at the
Option of the Holder Upon a Change of Control" covenant in a manner adverse to
the Holders, or (ii) reduce the percentage in principal amount of the
outstanding Notes, the consent of whose Holders is required for any such
amendment, supplemental indenture or waiver provided for in the Indenture, or
(iii) change the ranking of the Notes to anything other than pari passu in
right of payment to all unsubordinated Indebtedness of Holdings or (iv) modify
any of the waiver provisions, except to increase any required percentage or to
provide that certain other provisions of the Indenture cannot be modified or
waived without the consent of the Holder of each outstanding Note affected
thereby.
NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS, DIRECTORS
The Indenture provides that no individual who serves as a direct or indirect
stockholder, partner, employee, officer or director, as such, past, present or
future of Holdings or any successor entity shall have any personal liability
in respect of the obligations of Holdings under the Indenture or the Notes by
reason of his or its status as such stockholder, partner, employee, officer or
director.
GOVERNING LAW
The Indenture and the Notes are governed by the laws of the State of New
York.
CERTAIN DEFINITIONS
"Accreted Value" means, as of any date of determination, the sum of (a) the
initial offering price of each Note and (b) the portion of the excess of the
principal amount of each Note over such initial offering price which shall
have been accreted thereon through such date, such amount to be so accreted on
a daily basis at the rate of 13 1/2% per annum of the initial offering price
of the Notes, compounded semi-annually on each June 1 and December 1 from the
date of issuance of the Notes through the date of determination.
"Acquired Indebtedness" means Indebtedness of any person existing at the
time such person becomes a subsidiary of such person or is merged or
consolidated into or with such person or one of its subsidiaries, and not
incurred in connection with or in anticipation of, such merger or
consolidation or of such person becoming a subsidiary of such person.
"Acquisition" means the purchase or other acquisition of any person or
substantially all the assets of any person by any other person, whether by
purchase, merger, consolidation, or other transfer, and whether or not for
consideration.
"Affiliate" means (i) any person directly or indirectly controlling or
controlled by or under direct or indirect common control with Holdings or any
of its Subsidiaries (ii) any spouse, immediate family member, or other
relative who has the same principal residence of any person described in
clause (i) above, and (iii) any trust in which any person described in clause
(i) or (ii) above has a beneficial interest. For purposes of this definition,
the term "control" means the power to direct the management and policies of a
person, directly or through one or more intermediaries, whether through the
ownership of voting securities, by contract, or otherwise, provided, that a
beneficial owner of 10% or more of the total voting power normally entitled to
vote in the election of directors, managers or trustees, as applicable, shall
for such purposes be deemed to constitute control. Notwithstanding the
foregoing, the term Affiliate shall not include with respect to Holdings
wholly owned Subsidiaries of Holdings.
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"Assets to Be Disposed of" means assets identified in an Officers'
Certificate at the time of an Acquisition as assets Holdings or the acquiring
Subsidiary intends to dispose of within 180 days of such Acquisition.
"Average Life" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (i) the sum of (a)
the product of the number of years from the date of determination to the date
or dates of each successive scheduled principal (or redemption) payment of
such security or instrument and (b) the amount of each such respective
principal (or redemption) payment by (ii) the sum of all such principal (or
redemption) payments.
"beneficial owner" for purposes of the definition of Change of Control, has
the meaning attributed to it in Rules 13d-3 and 13d-5 under the Exchange Act
(as in effect on the Issue Date), whether or not applicable, except that a
"person" shall be deemed to have "beneficial ownership" of all shares that any
such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time or (unless not within the
control of such person) upon the occurrence of certain events.
"Brentwood" means Brentwood Golf Partners, L.P. and/or any of its
Affiliates.
"Brentwood Agreement" means the Corporate Development and Administrative
Services Agreement dated September 29, 1992 between the Company and Brentwood
Buyout Partners, L.P, as amended as of the Issue Date.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Capital Stock" means, with respect to any person, any capital stock of such
person and shares, interests, participations or other ownership interests
(however designated) of any person and any rights (other than debt securities
convertible into corporate stock), warrants and options to purchase any of the
foregoing, including (without limitation) each class of common stock and
preferred stock of such person if such person is a corporation and each
general and limited partnership interest of such person if such person is a
partnership.
"Capitalized Lease Obligation" means rental obligations under a lease that
are required to be capitalized for financial reporting purposes in accordance
with GAAP, and the amount of Indebtedness represented by such obligations
shall be the capitalized amount of such obligations, as determined in
accordance with GAAP.
"Cash Equivalent" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), (ii) time deposits and
certificates of deposit and commercial paper issued by the parent corporation
of any domestic commercial bank of recognized standing having capital and
surplus in excess of $500 million and commercial paper issued by others rated
at least A-2 or the equivalent thereof by Standard & Poor's Corporation or at
least P-2 or the equivalent thereof by Moody's Investors Service, Inc. and in
each case maturing within one year after the date of acquisition and (iii)
investments in money market funds substantially all of whose assets comprise
securities of the types described in clauses (i) and (ii) above.
"Consolidated Cash Flow Ratio" of any person on any date of determination
(the "Transaction Date") means the ratio, on a pro forma basis, of (a) the
aggregate amount of consolidated Indebtedness of such person on the
Transaction Date to (b) the aggregate amount of Consolidated EBITDA of such
person (exclusive of amounts attributable to operations and businesses
permanently discontinued or disposed of) during the Reference Period;
provided, however, that for purposes of such calculation, (i) Acquisitions
which occurred during the Reference Period or subsequent to the Reference
Period and on or prior to the Transaction Date shall be assumed to have
occurred on the first day of the Reference Period, (ii) transactions giving
rise to the need to calculate the Consolidated Cash Flow Ratio shall be
assumed to have occurred on the first day of the Reference Period and (iii)
the incurrence of any Indebtedness or issuance of any Disqualified Capital
Stock during the Reference Period or subsequent to the Reference Period and on
or prior to the Transaction Date (and the application of the proceeds
therefrom to the extent used to refinance or retire other Indebtedness) shall
be assumed to have occurred on the first day of such Reference Period.
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"Consolidated EBITDA" means, with respect to any person, for any period, the
Consolidated Net Income of such person for such period adjusted to add thereto
(to the extent deducted from net revenues in determining Consolidated Net
Income), without duplication, the sum of (i) consolidated income tax expense,
(ii) consolidated depreciation and amortization expense (including any
accelerations thereof) and (iii) Consolidated Fixed Charges.
"Consolidated Fixed Charges" of any person means, for any period, the
aggregate amount (without duplication and determined in each case in
accordance with GAAP) of (a) interest expensed or capitalized, paid, accrued,
or scheduled to be paid or accrued (including, in accordance with the
following sentence, interest attributable to Capitalized Lease Obligations) of
such person and its Consolidated Subsidiaries during such period, including
(i) original issue discount and non-cash interest payments or accruals on any
Indebtedness, (ii) the interest portion of all deferred payment obligations,
and (iii) all commissions, discounts and other fees and charges owed with
respect to bankers' acceptances and letters of credit financings and currency
and Interest Swap and Hedging Obligations, in each case to the extent
attributable to such period, (b) one-third of rental expense for such period
attributable to operating leases of such person and its Consolidated
Subsidiaries, and (c) the amount of dividends accrued or payable by such
person or any of its Consolidated Subsidiaries in respect of Disqualified
Capital Stock (other than by Subsidiaries of such person to such person or
such person's wholly owned Subsidiaries). For purposes of this definition, (x)
interest on a Capitalized Lease Obligation shall be deemed to accrue at an
interest rate reasonably determined by Holdings to be the rate of interest
implicit in such Capitalized Lease Obligation in accordance with GAAP and (y)
interest expense attributable to any Indebtedness represented by the guarantee
by such person or a Subsidiary of such person of an obligation of another
person shall be deemed to be the interest expense attributable to the
Indebtedness guaranteed.
"Consolidated Net Income" means, with respect to any person for any period,
the net income (or loss) of such person and its Consolidated Subsidiaries
(determined on a consolidated basis in accordance with GAAP) for such period,
adjusted to exclude (only to the extent included in computing such net income
(or loss) and without duplication): (a) all gains (but not losses) which are
either extraordinary (as determined in accordance with GAAP) or are either
unusual or nonrecurring (including without limitation any gain from the sale
or other disposition of assets outside the ordinary course of business or from
the issuance or sale of any Capital Stock), (b) the net income, if positive,
of any person, other than a wholly owned Consolidated Subsidiary, in which
such person or any of its Consolidated Subsidiaries has an interest, except to
the extent of the amount of any dividends or distributions actually paid in
cash to such person or a wholly owned Consolidated Subsidiary of such person
during such period, but in any case not in excess of such person's pro rata
share of such person's net income for such period, (c) the net income or loss
of any person acquired in a pooling of interests transaction for any period
prior to the date of such acquisition and (d) the net income, if positive, of
any of such person's Consolidated Subsidiaries to the extent that the
declaration or payment of dividends or similar distributions is not at the
time permitted by operation of the terms of its charter or bylaws or any other
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Consolidated Subsidiary.
"Consolidated Subsidiary" means, for any person, each Subsidiary of such
person (whether now existing or hereafter created or acquired) the financial
statements of which shall be (or should have been) consolidated for financial
statement reporting purposes with the financial statements of such person in
accordance with GAAP.
"Consolidated Tangible Net Worth" of any person at any date means the total
assets of such person and its Consolidated Subsidiaries, as would be shown on
the consolidated balance sheet of such person prepared in accordance with
GAAP, less (a) the total liabilities appearing on such balance sheet, and (b)
intangible assets. For purposes hereof, "intangible assets" means the value
(net of any applicable reserves), as shown on or reflected in such balance
sheet, of: (i) all trade names, trademarks, licenses, patents, copyrights and
goodwill; (ii) organizational and development costs; and (iii) unamortized
debt discount and expense, less unamortized premium.
"Disqualified Capital Stock" means (a) except as set forth in (b), with
respect to any person, Capital Stock of such person that, by its terms or by
the terms of any security into which it is convertible, exercisable or
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exchangeable, is, or upon the happening of an event or the passage of time
would be, required to be redeemed or repurchased (including at the option of
the holder thereof) by such person or any of its Subsidiaries, in whole or in
part, on or prior to the Stated Maturity of the Notes and (b) with respect to
any Subsidiary of such person (including with respect to any Subsidiary of
Holdings), any Capital Stock other than any common stock with no special
rights and no preference, privileges, or redemption or repayment provisions.
"Existing Assets" means assets of Holdings and its Subsidiaries existing at
the Issue Date (other than cash, Cash Equivalents or inventory held for resale
in the ordinary course of business) and including proceeds of any sale of such
assets and assets acquired in whole or in part with proceeds from the sale
from any such assets.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession as in effect on the Issue Date.
"Indebtedness" of any person means, without duplication, (a) all liabilities
and obligations, contingent or otherwise, of any such person, (i) in respect
of borrowed money (whether or not the recourse of the lender is to the whole
of the assets of such person or only to a portion thereof), (ii) evidenced by
bonds, notes, debentures or similar instruments, (iii) representing the
balance deferred and unpaid of the purchase price of any property or services,
except (other than accounts payable or other obligations to trade creditors
which have remained unpaid for greater than 90 days past their original due
date, or for which adequate reserves have been established while such amounts
are being contested in good faith) those incurred in the ordinary course of
its business that would ordinarily constitute a trade payable to trade
creditors, (iv) evidenced by bankers' acceptances or similar instruments
issued or accepted by banks, (v) in respect of Capitalized Lease Obligations,
or (vi) evidenced by a letter of credit or a reimbursement obligation of such
person with respect to any letter of credit; (b) all net obligations of such
person under Interest Swap and Hedging Obligations; (c) all liabilities of
others of the kind described in the preceding clauses (a) and (b) that such
person has guaranteed or that is otherwise its legal liability and all
obligations to purchase, redeem or acquire any Capital Stock; (d) all
obligations secured by a Lien to which the property or assets (including,
without limitation, leasehold interests and any other tangible or intangible
property rights) of such person are subject, whether or not the obligations
secured thereby shall have been assumed by or shall otherwise be such person's
legal liability, provided, that the amount of such obligations shall be
limited to the lesser of the fair market value of the assets or property to
which such Lien attaches and the amount of the obligation so secured; and (e)
any and all deferrals, renewals, extensions, refinancings and refundings
(whether direct or indirect) of, or amendments, modifications or supplements
to, any liability of the kind described in any of the preceding clauses (a),
(b), (c) or (d), or this clause (e), whether or not between or among the same
parties.
"Interest Swap and Hedging Obligation" means any obligation of any person
pursuant to any interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate exchange agreement, currency
exchange agreement or any other agreement or arrangement designed to protect
against fluctuations in interest rates or currency values, including, without
limitation, any arrangement whereby, directly or indirectly, such person is
entitled to receive from time to time periodic payments calculated by applying
either a fixed or floating rate of interest on a stated notional amount in
exchange for periodic payments made by such person calculated by applying a
fixed or floating rate of interest on the same notional amount.
"Investment" by any person in any other person means (without duplication)
(a) the acquisition by such person (whether for cash, property, services,
securities or otherwise) of capital stock, bonds, notes, debentures,
partnership or other ownership interests or other securities, including any
options or warrants, of such other person or any agreement to make any such
acquisition; (b) the making by such person of any deposit with, or advance,
loan or other extension of credit to, such other person (including the
purchase of property from another person subject to an understanding or
agreement, contingent or otherwise, to resell such property from another
person subject to an understanding or agreement, contingent or otherwise, to
resell such property to such other
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person) or any commitment to make any such advance, loan or extension (but
excluding accounts receivable or deposits arising in the ordinary course of
business); (c) the entering into by such person of any guarantee of, or other
credit support or contingent obligation with respect to, Indebtedness or other
liability of such other person; (d) the making of any capital contribution by
such person to such other person; and (e) the designation by the Board of
Directors of Holdings of any person to be an Unrestricted Subsidiary. Holdings
shall be deemed to make an "Investment" in an amount equal to the fair market
value of the net assets of any person (or, if neither Holdings nor any of its
Subsidiaries has theretofore made an Investment in such person, in an amount
equal to the Investments being made), at the time that such person is
designated an Unrestricted Subsidiary or, if such designation is made pursuant
to clause (i)(c) of the definition of Unrestricted Subsidiary, in an amount
equal to the sum of the Investments being made and the consideration paid by
Holdings and its Subsidiaries to effect such Acquisition (excluding, for this
purpose only, Qualified Capital Stock of Holdings issued in connection
therewith). Any property transferred to an Unrestricted Subsidiary from
Holdings or any of its Subsidiaries shall be deemed an "Investment" valued at
its fair market value at the time of such transfer.
"Investor Group" means any one or more of the stockholders of Holdings
immediately prior to the Issue Date and any one or more Affiliates of such
persons.
"Issue Date" means the date of first issuance of the Notes under the
Indenture.
"Net Cash Proceeds" means the aggregate amount of Cash or Cash Equivalents
received by Holdings in the case of a sale of Qualified Capital Stock and by
the Company and its Subsidiaries in respect of an Asset Sale plus, in the case
of an issuance of Qualified Capital Stock upon any exercise, exchange or
conversion of securities (including options, warrants, rights and convertible
or exchangeable debt) of Holdings that were issued for cash on or after the
Issue Date, the amount of cash originally received by Holdings upon the
issuance of such securities (including options, warrants, rights and
convertible or exchangeable debt) less, in each case, the sum of all payments,
fees, commissions and (in the case of Asset Sales, reasonable and customary),
expenses (including, without limitation, the fees and expenses of legal
counsel and investment banking fees and expenses) incurred in connection with
such Asset Sale or sale of Qualified Capital Stock, and, in the case of an
Asset Sale only, less the amount (estimated reasonably and in good faith by
the Company) of income, franchise, sales and other applicable taxes required
to be paid by Holdings or any of its respective Subsidiaries in the current or
next succeeding taxable year of sale in connection with such Asset Sale.
"New Credit Facility" means the credit agreement dated as of June 4, 1996 by
and among Holdings, the Company and Bank of America NT & SA, individually and
as agent, and certain financial institutions, providing for (A) an aggregate
$45.0 million reducing revolving loan facility, and (B) an aggregate $5.0
million working capital revolving credit facility, including any related
notes, guarantees, collateral documents, instruments and agreements executed
in connection therewith, as such credit agreement and/or related documents may
be amended, restated, supplemented, renewed, replaced or otherwise modified
from time to time whether or not with the same agent, trustee, representative
lenders or holders, and, subject to the proviso to the next succeeding
sentence, irrespective of any changes in the terms and conditions thereof.
Without limiting the generality of the foregoing, the term "New Credit
Facility" shall include agreements in respect of Interest Swap and Hedging
Obligations with lenders party to the New Credit Facility and shall also
include any amendment, amendment and restatement, renewal, extension,
restructuring, supplement or modification to the New Credit Facility and all
refundings, refinancings and replacements of the New Credit Facility,
including any agreement (i) extending the maturity of any Indebtedness
incurred thereunder or contemplated thereby, (ii) adding or deleting borrowers
or guarantors thereunder, so long as borrowers and issuers include one or more
of Holdings and its Subsidiaries and their respective successors and assigns,
or (iii) increasing the amount of Indebtedness incurred thereunder or
available to be borrowed thereunder, provided, however, that on the date such
Indebtedness is incurred it would not be prohibited by the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock."
"Non-recourse Purchase Money Indebtedness" means Indebtedness of Holdings or
its Subsidiaries to the extent that (i) under the terms thereof or pursuant to
law, no personal recourse may be had against Holdings or
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its Subsidiaries for the payment of the principal of or interest or premium on
such Indebtedness (or such portion), and enforcement of obligations on such
Indebtedness (or such portion) (except with respect to fraud, willful
misconduct, misrepresentation, misapplication of funds, reckless damage to
assets and undertakings with respect to environmental matters or construction
defects) is limited only to recourse against interests in specified assets and
property (the "Subject Assets"), accounts and proceeds arising therefrom, and
rights under purchase agreements or other agreements with respect to such
Subject Assets; (ii) such Indebtedness is incurred in connection with the
acquisition of such Subject Asset for the business of Holdings or such
Subsidiaries, including Indebtedness assumed which Indebtedness existed at the
time of the acquisition of such Subject Asset; (iii) such Indebtedness was
incurred at the time of such acquisition of such Subject Asset; and (iv) no
proceeds from the sale of Existing Assets were used to acquire such Subject
Asset.
"Permitted Indebtedness" means any of the following:
(a) Holdings' Subsidiaries may incur Indebtedness in respect of
Capitalized Lease Obligations and Non-recourse Purchase Money Indebtedness
in the ordinary course of business, in amounts and for the purposes
customary in the Company's industry; provided, however, that the aggregate
principal amount outstanding of such Indebtedness (including any
Indebtedness issued to Refinance, refund or replace such Indebtedness)
shall at no time exceed $10.0 million;
(b) Holdings may incur Indebtedness to any wholly owned Subsidiary, and
any Subsidiary of Holdings may incur Indebtedness to any wholly owned
Subsidiary of Holdings or to Holdings; provided, that any such obligations
of Holdings shall be subordinated in all respects to Holdings' obligations
pursuant to the Indenture and the Notes; and
(c) Indebtedness outstanding on the Issue Date after giving effect to the
New Credit Facility.
"Permitted Liens" means any of the following:
(a) Liens existing on the Issue Date (including Liens in favor of the
Trustee arising under the Indenture and Liens securing Indebtedness
permitted to be incurred pursuant to the New Credit Facility in compliance
with paragraph (f) of the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock"), after giving effect to the
implementation of the New Credit Facility, and any extension, renewal,
replacement or refinancing, in whole or in part, of any such Lien so long
as (1) the amount of security is not increased thereby, (2) the aggregate
amount secured by such Lien after such extension, renewal, replacement or
refinancing does not exceed (after deduction of reasonable and customary
fees and expenses incurred in connection therewith) the aggregate amount
secured thereby prior thereto and (3) the Indebtedness secured by such
Lien, if any, is permitted under the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock";
(b) Liens for taxes, assessments or other governmental charges or claims
not yet due or which are being contested in good faith and by appropriate
proceedings by a person if adequate reserves or other appropriate
provisions with respect thereto are maintained on the books of such person
to the extent required in accordance with GAAP;
(c) statutory Liens of carriers, warehousemen, mechanics, landlords,
materialmen, repairmen or other like Liens arising by operation of law and
Liens on deposits made to obtain the release of such Liens if (i) the
underlying obligations are not overdue for a period of more than 60 days or
(ii) such Liens are being contested in good faith and by appropriate
proceedings by such person and adequate reserves with respect thereto are
maintained on the books of such person in accordance with GAAP;
(d) Liens securing the performance of bids, trade contracts (other than
in connection with any borrowing of money or any commitment to loan any
money or to extend any credit), leases, statutory obligations, surety and
appeal bonds and other obligations of a like nature, and pledges or
deposits in connection with workers' compensation, unemployment insurance
and other types of social security legislation, in each case made or
incurred in the ordinary course of business consistent with industry
practices;
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(e) easements, rights-of-ways, zoning and similar restrictions and other
similar encumbrances or title defects which, in the aggregate, are not
substantial in amount, and which do not in any case materially detract from
the value of the property subject thereto (as such property is used by such
person) or interfere with the ordinary conduct of the business of such
person; provided, that any such Liens are not incurred for the benefit of
any borrowing of money or any commitment to loan any money or to extend any
credit;
(f) Liens arising by operation of law in connection with judgments to the
extent, for an amount and for a period not resulting in an Event of Default
with respect thereto;
(g) Liens securing Non-recourse Purchase Money Indebtedness permitted to
be incurred under the Indenture, provided, that each such Lien relates only
to the property which is subject to such Non-recourse Purchase Money
Indebtedness;
(h) any customary retention of title by the lessor under a Capitalized
Lease Obligation incurred in compliance with the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock";
(i) Liens that secure Acquired Indebtedness, provided, in each case, that
such Liens do not secure any other property or assets and were not put in
place in connection with or in anticipation of such acquisition, merger or
consolidation, and any extension, renewal, replacement or refinancing, in
whole or in part, of any such Lien so long as (1) the amount of security is
not increased thereby, (2) the aggregate amount secured by such Lien after
such extension, renewal, replacement or refinancing does not exceed (after
deduction of reasonable and customary fees and expenses incurred in
connection therewith) the aggregate amount secured thereby prior thereto
and (3) the Indebtedness secured by such Lien, if any, is permitted under
the covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock;"
(j) Liens that secure Indebtedness incurred pursuant to clause (a) of the
"Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock" covenant, provided that (i) after giving effect on a pro-
forma basis to such Incurrence and the use of proceeds thereof, the Debt
Incurrence Ratio is no greater than 5 to 1 and (ii) that the aggregate
amount secured by any such Lien does not exceed the aggregate amount of
such Indebtedness; and
(k) Liens that secure Indebtedness incurred under the New Credit Facility
either (i) pursuant to clause (e) of the covenant "Limitation on Incurrence
of Additional Indebtedness and Disqualified Capital Stock" and/or (ii)
pursuant to clause (a) of the "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock" covenant, provided that after
giving effect on a pro forma basis to such Incurrence and the use of
proceeds thereof, the Debt Incurrence Ratio is no greater than 5 to 1.
"Public Equity Offering" means an underwritten offering of common stock of
Holdings pursuant to an effective registration statement under the Securities
Act after which the common stock of Holdings is listed on a national
securities exchange or quoted on the Nasdaq National Market.
"Qualified Capital Stock" means any Capital Stock of Holdings that is not
Disqualified Capital Stock.
"Qualified Exchange" means any defeasance, redemption, retirement,
repurchase or other acquisition of Capital Stock or Indebtedness of Holdings
issued on or after the Issue Date with the Net Cash Proceeds received by
Holdings from the substantially concurrent sale of Qualified Capital Stock.
"Reference Period" with regard to any person means the four full fiscal
quarters (or such lesser period during which such person has been in
existence) ended immediately preceding any date upon which any determination
is to be made pursuant to the terms of the Notes or the Indenture; provided,
however, that the Consolidated Fixed Charges of such person, to the extent
such person has been in existence for a shorter period than four full fiscal
quarters, shall be computed on an annualized basis.
"Refinancing Indebtedness" means Indebtedness or Disqualified Capital Stock
(a) issued in exchange for, or the proceeds from the issuance and sale of
which are used substantially concurrently to repay, redeem, defease, refund,
refinance, discharge or otherwise retire for value, in whole or in part, or
(b) constituting an amendment,
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modification or supplement to, or a deferral or renewal of ((a) and (b) above
are, collectively, a "Refinancing"), any Indebtedness or Disqualified Capital
Stock in a principal amount or, in the case of Disqualified Capital Stock,
liquidation preference, not to exceed (after deduction of reasonable and
customary fees and expenses incurred in connection with the Refinancing) the
lesser of (i) the principal amount or, in the case of Disqualified Capital
Stock, liquidation preference, of the Indebtedness or Disqualified Capital
Stock so Refinanced and (ii) if such Indebtedness being Refinanced was issued
with an original issue discount, the accreted value thereof (as determined in
accordance with GAAP) at the time of such Refinancing; provided, however, that
(A) such Refinancing Indebtedness of any Subsidiary of Holdings shall only be
used to Refinance outstanding Indebtedness or Disqualified Capital Stock of
such Subsidiary, (B) Refinancing Indebtedness shall (x) not have an Average
Life shorter than the Indebtedness or Disqualified Capital Stock to be so
refinanced at the time of such Refinancing and (y) in all respects, be no less
subordinated, if applicable, to the rights of Holders of the Notes than was
the Indebtedness or Disqualified Capital Stock to be refinanced and (C) such
Refinancing Indebtedness shall have no installment of principal (or redemption
payment) scheduled to come due earlier than the scheduled maturity of any
installment of principal of the Indebtedness or Disqualified Capital Stock to
be so refinanced which was scheduled to come due prior to the Stated Maturity.
"Related Business" means the business conducted by Holdings and its
Subsidiaries as of the Issue Date and any and all businesses that in the good
faith judgment of the Board of Directors of Holdings are materially related
businesses.
"Restricted Investment" means, in one or a series of related transactions,
any Investment, other than (a) in Cash Equivalents, (b) intercompany notes to
the extent permitted under "Permitted Indebtedness," (c) Investments in
existence on the Issue Date and (d) Investments in wholly owned Subsidiaries
(including Investments as a direct result of which the surviving entity is or
becomes Holdings or a direct wholly owned Subsidiary of Holdings).
"Restricted Payment" means, with respect to any person, (a) the declaration
or payment of any dividend or other distribution in respect of Capital Stock
of such person or any Subsidiary of such person, (b) any payment on account of
the purchase, redemption or other acquisition or retirement for value of
Capital Stock of such person or any Subsidiary of such person, (c) any
purchase, redemption, or other acquisition or retirement for value of, any
payment in respect of any amendment of the terms of or any defeasance of, any
Subordinated Indebtedness, directly or indirectly, by such person or a
Subsidiary of such person prior to the scheduled maturity, any scheduled
repayment of principal, or scheduled sinking fund payment, as the case may be,
of such Indebtedness and (d) any Restricted Investment by such person;
provided, however, that the term "Restricted Payment" does not include (i) any
dividend, distribution or other payment on or with respect to Capital Stock of
an issuer to the extent payable solely in shares of Qualified Capital Stock of
such issuer; (ii) any dividend, distribution or other payment to Holdings or
to any of its Subsidiaries by Holdings or any of its Subsidiaries, provided,
however, that such payment by a Subsidiary of Holdings which is not wholly
owned by Holdings and/or its wholly owned Subsidiaries shall constitute a
"Restricted Payment" to the extent not paid on a pro rata basis in accordance
with its organizational documents as in effect on the later of the Issue Date
and the time such person first became a Subsidiary of Holdings; or (iii) loans
or advances to any wholly owned Subsidiary of Holdings the proceeds of which
are used by such Subsidiary in a Related Business activity of such Subsidiary.
"Significant Subsidiary," with respect to any person, means a Subsidiary of
such person which, as of the end of such person's most recent fiscal quarter,
had a Consolidated Tangible Net Worth equal to at least 5% of the Consolidated
Tangible Net Worth of such person as of such date.
"Stated Maturity," when used with respect to any Note, means June 1, 2004.
"Strategic Investors" means any person whose principal line of business
activity is a Related Business and (a) whose total market capitalization is in
excess of $500.0 million as measured by the sum of the aggregate principal
dollar amount of its Indebtedness and the aggregate dollar value of its
Capital Stock (as measured by the per share price of its Capital Stock
multiplied by the number of outstanding shares of such Capital Stock or
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(b) in the case of a person without publicly traded Capital Stock whose
private market value, as determined by the Board of Directors of Holdings
consistent with advice obtained from an independent, nationally recognized
investment banking firm, is in excess of $500.0 million.
"Subordinated Indebtedness" means Indebtedness of Holdings that is
subordinated in right of payment to the Notes or has a stated maturity on or
after the Stated Maturity.
"Subsidiary," with respect to any person, means (i) a corporation a majority
of whose Capital Stock with voting power, under ordinary circumstances, to
elect directors is at the time, directly or indirectly, owned by such person,
by such person and one or more Subsidiaries of such person or by one or more
Subsidiaries of such person, (ii) a partnership in which a person or a
subsidiary of such person is, at the date of determination, a general partner
of such partnership and in which such person or a subsidiary of such person
has a majority of the economic interests or (iii) any other person (other than
a corporation) in which such person, one or more Subsidiaries of such person,
or such person and one or more Subsidiaries of such person, directly or
indirectly, at the date of determination thereof has at least majority
ownership interest. Notwithstanding the foregoing, an Unrestricted Subsidiary
shall not be a Subsidiary of Holdings or of any Subsidiary of Holdings.
"Unrestricted Subsidiary" means any subsidiary of Holdings that does not own
any Capital Stock of, or own or hold any Lien on any property of, Holdings or
any Subsidiary of Holdings and that, at the time of determination, shall be an
Unrestricted Subsidiary (as designated by the Board of Directors of Holdings);
provided, however, that such subsidiary shall not engage, to any substantial
extent, in any line or lines of business activity other than a Related
Business. Holdings may designate any person (other than the Company) to be an
Unrestricted Subsidiary if, immediately prior thereto and after giving pro
forma effect to such designation (i) either (a) Holdings could incur at least
$1.00 of Indebtedness pursuant to the Debt Incurrence Ratio in paragraph (a)
of the covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock," (b) such subsidiary, at the time of designation,
has no assets or (c) such subsidiary is designated an "Unrestricted
Subsidiary" at the time of Acquisition by Holdings or its Subsidiaries and
(ii) there would not exist a Default or Event of Default. The Board of
Directors of Holdings may designate any Unrestricted Subsidiary to be a
Subsidiary, provided, that (i) no Default or Event of Default is existing or
will occur as a consequence thereof and (ii) immediately after giving effect
to such designation, on a pro forma basis, Holdings could incur at least $1.00
of Indebtedness pursuant to the Debt Incurrence Ratio in paragraph (a) of the
covenant "Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock." Each such designation shall be evidenced by filing with the
Trustee a certified copy of the resolution giving effect to such designation
and an Officers' Certificate certifying that such designation complied with
the foregoing conditions.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the Exchange Notes will initially will be issued
in the form of a single, permanent global certificate in definitive, fully
registered form (the "Global Notes"). The Global Notes will be deposited on
the Issue Date of the Exchange Notes, with, or on behalf of, The Depository
Trust Company (the "Depositary"), and registered in the name of Cede & Co., as
nominee of the Depositary. Interests in Global Notes will be available for
purchase only by "qualified institutional buyers," as defined in Rule 144A
under the Securities Act ("QIBs").
Exchange Notes that are (i) originally issued to or transferred to
institutional "accredited investors," as defined in Rule 501(a)(1), (2), (3)
or (7) under the Securities Act, who are not QIBs or to any other persons who
are not QIBs or (ii) issued as described below under "Certificated
Securities," will be issued in registered form (the "Certificated
Securities"). Upon the transfer to a QIB of Certificated Securities, such
Certificated Securities will, unless the Global Notes have previously been
exchanged for Certificated Securities, be exchanged for an interest in the
Global Notes representing the principal amount of Exchange Notes and the
related shares, as applicable, being transferred. For a description of the
restrictions on the transfer of Certificated Securities, see "Plan of
Distribution."
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The Depositary is a limited-purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934. The Depositary holds securities that its participants
("Participants") deposit with the Depositary. The Depositary also facilitates
the settlement among Participants of securities transactions, such as
transfers and pledges, in deposited securities through electronic computerized
book-entry changes in Participants' accounts, thereby eliminating the need for
physical movement of securities certificates. Direct Participants include
securities brokers and dealers, banks, trust companies, clearing corporations,
and certain other organizations. The Depositary is owned by a number of its
Direct Participants and by the New York Stock Exchange, Inc., the American
Stock Exchange, Inc., and the National Association of Securities Dealers, Inc.
Access to the Depositary's system is also available to others such as
securities brokers and dealers, banks, and trust companies that clear through
or maintain a custodial relationship with a Direct Participant, either
directly or indirectly ("Indirect Participants"). The Rules applicable to the
Depositary and its Participants are on file with the Commission.
The issuance of Exchange Notes under the Depositary's system must be made by
or through Direct Participants, which will receive a credit for the Exchange
Notes on the Depositary's records. The ownership interest of each QIB that
purchases an Exchange Note ("Beneficial Owner") is in turn to be recorded on
the Direct and Indirect Participants' records. Beneficial Owners will not
receive written confirmation from DTC of their purchase, but Beneficial Owners
are expected to receive written confirmations providing details of the
transaction, as well as periodic statements of their holdings, from the Direct
or Indirect Participant through which the Beneficial Owner entered into the
transaction. Transfers of ownership interests in the securities are to be
accomplished by entries made on the books of Participants acting on behalf of
Beneficial Owners. Beneficial Owners will not receive certificates
representing their ownership interests in the Exchange Notes, except in the
event that use of the book-entry system for the Exchange Notes is
discontinued.
To facilitate subsequent transfers, all Exchange Notes deposited by
Participants with the Depositary are registered in the name of the
Depositary's partnership nominee, Cede & Co. The deposit of Exchange Notes
with the Depositary and their registration in the name of Cede & Co. effect no
change in beneficial ownership. The Depositary has no knowledge of the actual
Beneficial Owners of the Exchange Notes; the Depositary's records reflect only
the identity of the Direct Participants to whose accounts such Exchange Notes
are credited, which may or may not be the Beneficial Owners. The Participants
will remain responsible for keeping account of their holdings on behalf of
their customers.
Conveyance of notices and other communications by the Depositary to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed
by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the
Exchange Notes are being redeemed, the Depositary's practice is to determine
by lot the amount of the interest of each Direct Participant in such issue to
be redeemed.
Neither the Depositary nor Cede & Co. will consent or vote with respect to
the Exchange Notes. Under its usual procedures, the Depositary mails an
Omnibus Proxy to Holdings as soon as possible after the record date. The
Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the Securities are credited on the record date
(identified in a listing attached to the Omnibus Proxy).
Principal and premium payments on the Exchange Notes will be made to the
Depositary. The Depositary's practice is to credit Direct Participants
accounts on payable date in accordance with their respective holdings shown on
the Depositary's records unless the Depositary has reason to believe that it
will not receive payment on payable date. Payments by Participants to
Beneficial Owners will be governed by standing instructions and
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customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such Participant and not of the Depositary, Agent or
Holdings, subject to any statutory or regulatory requirements as may be in
effect from time to time. Payment of principal to the Depositary is the
responsibility of Holdings or Agent, disbursement of such payments to Direct
Participants shall be the responsibility of the Depositary, and disbursement
of such payments to the Beneficial Owners shall be the responsibility of
Direct and Indirect Participants.
A Beneficial Owner shall give notice to elect to have its Exchange Notes
purchased or tendered, through its Participant, to any Tender Agent, and shall
effect delivery of such Securities by causing the Direct Participant to
transfer the Participant's interest in the Exchange Notes, on the Depositary's
records, to the Tender Agent. The requirement for physical delivery of
Exchange Notes in connection with an optional tender or a mandatory purchase
will be deemed satisfied when the ownership rights in the Exchange Notes are
transferred by Direct Participants on the Depositary's records and followed by
a book-entry credit of rendered Securities to the Tender Agent's account.
The Depositary may discontinue providing its services as securities
depository with respect to the Exchange Notes at any time by giving reasonable
notice to Holdings or its Agent. Under such circumstances, in the event that a
successor securities depository is not obtained, Certificated Securities are
required to be printed and delivered.
Holdings may decide to discontinue use of the system of book-entry transfers
through the Depositary (or a successor securities depository). In that event,
Certificated Securities will be printed and delivered.
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that Holdings
believes to be reliable, but Holdings takes no responsibility for the accuracy
thereof.
Certificated Securities
If (i) Holdings notifies the Trustee in writing that the Depositary is no
longer willing or able to act as a depository and Holdings is unable to locate
a qualified successor within 90 days or (ii) Holdings, at its option, notifies
the Trustee in writing that it elects to cause the issuance of Exchange Notes
in definitive form under the Indenture, then, upon surrender by the Depositary
of its Global Notes, Certificated Securities will be issued to each person
that the Depositary identifies as the beneficial owner of the Exchange Notes
represented by the Global Notes. In addition, subject to certain conditions,
any person having a beneficial interest in a Global Notes may, upon request to
the Trustee, exchange such beneficial interest for Certificated Securities.
Upon any such issuance, the Trustee is required to register such Certificated
Securities in the name of such person or persons (or the nominee of any
thereof), and cause the same to be delivered thereto.
Neither Holdings nor the Trustee shall be liable for any delay by the
Depositary or any Participant or Indirect Participant in identifying the
beneficial owners of the related Exchange Notes and each such person may
conclusively rely on, and shall be protected in relying on, instructions from
the Depositary for all purposes (including with respect to the registration
and delivery, and the respective principal amounts, of the Exchange Notes to
be issued).
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources Holdings
believes to be reliable. Holdings will have no responsibility for the
performance by the Depositary or its Participants of their respective
obligations as described hereunder and under the rules and procedures
governing their respective obligations.
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Same-Day Funds Settlement and Payment
The Indenture requires that payments in respect of the Exchange Notes
represented by the Global Notes (including principal, premium, if any, and
Liquidated Damages, if any) be made by wire transfer of immediately available
funds to the accounts specified by the registered holder of the Global Notes.
With respect to Certificated Securities, Holdings will make all payments of
principal, premium, if any, and Liquidated Damages, if any, by wire transfer
of immediately available funds to the accounts specified by the holders
thereof or, if no such account is specified, by mailing a check to each such
holder's registered address. Secondary trading in long-term notes and
debentures of corporate issuers is generally settled in clearing-house or
next-day funds. In contrast, the Exchange Notes represented by the Global
Notes are expected to be eligible to trade in the PORTAL market and to trade
in the Depositary's Same-Day Funds Settlement System, and any permitted
secondary market trading activity in such Exchange Notes will, therefore, be
required by the Depositary to be settled in immediately available funds.
Holdings expects that secondary trading in the Certificated Securities will
also be settled in immediately available funds.
DESCRIPTION OF CAPITAL STOCK
RECAPITALIZATION
In connection with the closing of the Unit Offering, Holdings issued
additional shares of its capital stock to its existing stockholders, pro rata,
pursuant to a recapitalization to eliminate the necessity of issuing
fractional shares of Holdings Common Stock to purchasers of the Units.
HOLDINGS
As of the Issue Date, after giving effect to the Unit Offering and the
Recapitalization, the authorized capital stock of Holdings consisted of (i)
5,000,000 shares of Common Stock, $.01 par value per share, of which 1,720,000
shares was issued and outstanding and (ii) 10,000,000 shares of Series A
Preferred Stock, $.01 par value per share, of which 5,220,365 shares was
issued and outstanding. Such numbers exclude up to 46,054 shares of Holdings
Common Stock reserved for issuance upon the exercise of outstanding options.
Holdings Common Stock. There is no public trading market for the capital
stock of Holdings. Holders of Holdings Common Stock are entitled to dividends
when and as declared by the Board of Directors of Holdings from funds legally
available therefor, and upon liquidation, will be entitled to share ratably in
any distribution to holders of Holdings Common Stock. All holders of Holdings
Common Stock are entitled to one vote per share on any matter coming before
the stockholders for a vote.
Series A Preferred Stock. The Series A Preferred Stock ranks prior to the
Common Stock upon liquidation, dissolution or wind-up of Holdings. The Series
A Preferred Stock has a liquidation preference of $8.25 per share. The Series
A Preferred Stock may be redeemed, in whole or in part, at any time at the
election of the Board of Directors of Holdings at a redemption price of $8.25
per share. In addition, upon the consolidation or merger of Holdings with or
into another corporation or corporations, the sale of all or substantially all
of Holdings' assets or the sale of stock representing at least 80% of the
voting power of Holdings, Holdings shall redeem all outstanding shares of
Series A Preferred Stock at a redemption price of $8.25 per share. The holders
of Series A Preferred Stock vote together with the holders of Holdings Common
Stock as a single class on all matters submitted for stockholder vote.
STOCKHOLDERS' AGREEMENT
Holdings and each current holder of capital stock of Holdings, including
both Holdings Common Stock and Series A Preferred Stock, are parties to a
Stockholders' Agreement, dated as of January 31, 1994 (the "Stockholders'
Agreement").
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Pursuant to the Stockholders' Agreement, each holder of Holdings' capital
stock has certain piggy back registration rights, as well as certain tag-along
and drag-along rights with respect to the sale of capital stock of Holdings.
In addition, each holder of capital stock of Holdings has granted Holdings a
right of first refusal to purchase such holders' stock prior to the sale,
transfer or assignment or pledge (subject to certain exceptions) of such
capital stock or any beneficial interest therein. The Stockholders' Agreement
grants each holder tag-along rights which provide that should Brentwood or any
of its affiliates at any time enter into an agreement to transfer, sell or
otherwise dispose of any shares of Holdings Common Stock, then, subject to
certain conditions and limitations, each other holder of Holdings Common Stock
or Series A Preferred Stock shall have the right to participate in any such
sale on a pro rata basis with all other holders who elect to sell stock in
such sale. In addition, pursuant to the Stockholders' Agreement's drag-along
rights, in the event that Brentwood or any of its affiliates determines to
accept an offer from any person (other than an affiliate) to purchase 100% of
the outstanding shares of capital stock of Holdings, then each other holder of
Holdings Common Stock or Series A Preferred Stock shall sell all shares of
Holdings Common Stock or Series A Preferred Stock held by it or any affiliate
of it pursuant to such offer and shall receive the same consideration and be
subject to the same terms and conditions of sale, and otherwise be treated
equally or on a pro rata basis with Brentwood or its affiliates.
DESCRIPTION OF PRINCIPAL INDEBTEDNESS
THE NEW CREDIT FACILITY
Simultaneously with the consummation of the Offerings, the Company entered
into a credit agreement dated as of June 4, 1996 (the "New Credit Facility")
with a syndicate of financial institutions for whom Bank of America NT & SA is
acting as agent. The New Credit Facility provides for (i) a six-year reducing
revolving credit facility with aggregate availability of $45 million (the
"Reducing Revolver Commitment") and (ii) a $5 million six-year working capital
revolving credit facility (the "Working Capital Revolver"). The following
description is a summary of the material terms and conditions of the New
Credit Facility. This summary does not purport to be a complete description of
the New Credit Facility and is subject to the detailed provisions of the loan
agreement and various related documents entered into in connection with the
New Credit Facility.
Borrowings under the New Credit Facility will be secured by substantially
all of the assets of the Company and its Subsidiaries, including their equity
interests, and by the stock of the Company and are guaranteed by such
Subsidiaries and by Holdings. Borrowings under the Reducing Revolver
Commitment may be used to fund future acquisitions of golf courses and to fund
upgrade capital expenditures at such courses and certain capital improvements
at existing courses. Borrowings under the Working Capital Revolver may be used
for maintenance, upgrade capital expenditures and other general corporate
purposes, including working capital and certain dividends to Holdings. In
addition, the New Credit Facility provides that the Company may not make any
acquisitions or upgrade capital expenditures when Funded Debt plus certain
upgrade projected capital expenditures are initially greater than 6.5x of
Adjusted EBITDA (each term as defined in the New Credit Facility), calculated
as provided therein.
Amounts borrowed will bear interest at rates, selected at the Company's
option from time to time, based on a base rate or the Eurodollar rate, in each
case plus a fluctuating percentage based on the Company's ratio of Funded Debt
plus certain projected upgrade capital expenditures to Adjusted EBITDA (each
term as defined in the New Credit Facility), calculated as provided therein.
Beginning on September 30, 1998, the Reducing Revolver Commitment will
reduce quarterly, with annual reductions of approximately $4.4 million in
1998, approximately $12.1 million in 1999, approximately $15.4 million in
2000, approximately $15.4 million in 2001 and approximately $7.7 million in
2002. In addition, the New Credit Facility provides for mandatory prepayments
of (i) all net proceeds of certain asset sales, subject to certain exceptions,
(ii) all net proceeds of certain debt issuances, subject to certain exceptions
and (iii) 50% of the net proceeds from certain equity issuances. Such
mandatory prepayments will be applied first to permanently
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reduce the Reducing Revolver Commitment (and outstanding loans) and secondly
to permanently reduce the Working Capital Revolver (and outstanding loans).
The obligations of the lenders under the New Credit Facility to advance
funds are subject to certain conditions customary in secured credit
facilities. In addition, the Company is subject to certain customary
affirmative and negative covenants contained in the New Credit Facility,
including without limitation covenants that restrict, subject to specified
exceptions, (i) the incurrence of additional indebtedness and other
obligations, (ii) a merger or acquisition, (iii) asset sales, (iv) the
granting of liens, (v) prepayment or repurchase of other indebtedness, (vi)
the granting of guarantees, (vii) the payments of dividends and other
restricted payments, (viii) certain upgrade capital expenditures and (ix)
modifications of certain material agreements. Certain of these covenants may
be more restrictive than those in favor of holders of the Notes as described
herein and as set forth in the Indenture. In addition, the New Credit Facility
requires that the Company maintain certain specified financial covenants,
including a minimum net worth, minimum interest and fixed charge coverage
ratios and maximum Funded Debt plus certain projected upgrade capital
expenditures to Adjusted EBITDA and Bank Debt to Adjusted EBITDA ratios
(calculated as provided therein).
The New Credit Facility provides for customary events of default, including
without limitation events of default relating to (i) failure to pay principal,
interest or fees, (ii) breach of covenants, representations or warranties,
(iii) cross default to other indebtedness (including the Senior Notes) or
material contracts, (iv) bankruptcy, (v) change in control, (vi) material
adverse effect and (vii) material judgments. The occurrence of any of such
events of default could result in acceleration of the Company's obligations
under the New Credit Facility and foreclosure on the collateral securing such
obligations, which would have material adverse results to holders of the
Notes.
THE SENIOR NOTES
The Senior Notes were issued by the Company in an aggregate principal amount
of $70,000,000 and will mature on June 1, 2003. Interest on the Senior Notes
will be payable semi-annually in arrears on June 1 and December 1 of each
year, commencing December 1, 1996. On or after June 1, 1999, the Company may
redeem the Senior Notes, in whole or in part, at redemption prices beginning
at 105.750% of their principal amount for the twelve month period commencing
June 1, 1999, declining ratably to par on and after June 1, 2002, plus accrued
and unpaid interest and Liquidated Damages, if any, to the date of redemption.
Notwithstanding the foregoing, at any time on or before June 1, 1999, the
Company may, at its option and subject to certain requirements, use the net
cash proceeds from one or more Public Equity Offerings or issuances of capital
stock to Strategic Investors to redeem up to an aggregate of 25% of the
principal amount of the Senior Notes originally issued at a redemption price
equal to 110.50% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, to the date of redemption. In
addition, upon a Change of Control, each holder will have the right to require
the Company to repurchase all or any part of such holder's Senior Notes at a
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, to the date of purchase.
The Senior Notes are senior unsecured general obligations of the Company and
rank pari passu in right of payment to all other senior indebtedness of the
Company, including borrowings under the New Credit Facility. The Senior Notes
are guaranteed (the "Guarantees") by all of the Company's existing and future
Subsidiaries (the "Guarantors"). The Guarantees are senior unsecured general
obligations of the Guarantors and rank pari passu in right of payment to all
other senior indebtedness of the Guarantors, including the Guarantors'
guarantees of borrowings under the New Credit Facility.
The Senior Note Indenture contains covenants that, among other things, limit
the ability of the Company and its Subsidiaries to (i) make restricted
payments, (ii) incur additional indebtedness and issue disqualified capital
stock, (iii) create liens, (iv) enter into agreements that would restrict the
Subsidiaries' ability to make
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distributions, loans and other payments to the Company, (v) enter into
consolidations or mergers or sell all or substantially all of their assets,
(vi) make asset sales and (vii) enter into transactions with affiliates.
Pursuant to a registration rights agreement between the Company and the
initial purchasers of the Senior Notes, the Company has agreed to file with
the Commission, within 60 days after the Issue Date, a registration statement
under the Securities Act relating to an exchange offer for the Senior Notes
and will use its reasonable efforts to cause such registration statement to
become effective within 120 days after the Issue Date. If the Company fails to
satisfy these registration obligations, the Company will be required to pay
certain Liquidated Damages.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Latham & Watkins, counsel to Holdings, the following
discussion describes the material federal income tax consequences expected to
result to holders whose Private Notes are exchanged for Exchange Notes in the
Exchange Offer. Such opinion is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), applicable Treasury
regulations, judicial authority and administrative rulings and practice. There
can be no assurance that the Internal Revenue Service (the "Service") will not
take a contrary view, and no ruling from the Service has been or will be
sought with respect to the Exchange Offer. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter
or modify the statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders. Certain holders (including insurance companies, tax-
exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States) may be subject to special rules not discussed below. EACH HOLDER OF
PRIVATE NOTES SHOULD CONSULT ITS OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES OF EXCHANGING PRIVATE NOTES FOR EXCHANGE NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN LAWS.
The exchange of Private Notes for Exchange Notes will be treated as a "non-
event" for federal income tax purposes because the Exchange Notes will not be
considered to differ materially in kind or extent from the Private Notes. As a
result, no material federal income tax consequences will result to holders
exchanging Private Notes for Exchange Notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with the resales of Exchange Notes received in exchange for
Private Notes where such Private Notes were acquired as a result of market-
making activities or other trading activities. Holdings has agreed that for a
period of up to 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer that
requests such document in the Letter of Transmittal for use in connection with
any such resale.
Holdings will not receive any proceeds from any sale of Exchange Notes by
broker-dealers or any other persons. Exchange Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were
received by it for its own
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account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
Holdings has agreed to pay all expenses incident to Holdings' performance of,
or compliance with, the Registration Rights Agreement and will indemnify the
holders of Private Notes (including any broker-dealers), and certain parties
related to such holders, against certain liabilities, including liabilities
under the Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for
the Company by Latham & Watkins, Los Angeles, California. Certain partners of
Latham & Watkins, members of their respective families, related persons and
others have an indirect interest, through Brentwood, in less than 1% of the
outstanding stock of Holdings, but do not have the power to vote or dispose of
such interests.
EXPERTS
The consolidated financial statements of Cobblestone Holdings, Inc. as of
September 30, 1994 and 1995 and for each of the three years in the period
ended September 30, 1995, the statements of operations of the Lakeway Country
Club for the year ended December 31, 1993 and 1994 and for the three months
ended March 31, 1995, the combined statements of operations of the Stonebridge
Country Club and the Ranch Country Club for the year ended December 31, 1993
and the eleven and a half months ended December 31, 1994, the statements of
operations of the Brandermill Country Club for the year ended December 31,
1994 and the two months ended February 28, 1995, the statements of operations
of the Pecan Grove Country Club for the year ended December 31, 1993 and the
month ended January 31, 1994, the statement of operations of the Ocean Vista
Land Company for the five months ended May 31, 1993, and the statement of
operations of the Saticoy Regional Golf Course for the two and a half months
ended March 12, 1993, appearing in this Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of said firm as experts in accounting and
auditing.
The financial statements of Sweetwater Golf Partnership as of December 31,
1994 and 1995 and for each of the three years in the period ended December 31,
1995 included in this Prospectus have been so included in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of Brandermill Country Club, L.P. at December 31,
1993, and for the year then ended, included in this Prospectus and in the
Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, as set forth in their report appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon
such report given upon the authority of said firm as experts in auditing and
accounting.
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AVAILABLE INFORMATION
Holdings has filed with the Commission a Registration Statement on Form S-4
under the Securities Act with respect to the Exchange Notes offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus
omits certain information, exhibits and undertakings contained in the
Registration Statement. For further information with respect to Holdings and
the Exchange Notes offered hereby, reference is made to the Registration
Statement, including the exhibits thereto and the financial statements, notes
and schedules filed as a part thereof. As a result of the Exchange Offer,
Holdings will become subject to the informational requirements of the Exchange
Act. The Registration Statement (and the exhibits and schedules thereto), as
well as the periodic reports and other information filed by Holdings with the
Commission, may be inspected and copied at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, New York, New York 10048 and Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 6061-2511. Copies of such
materials may be obtained from the Public Reference Section of the Commission,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and its public reference facilities in New York, New York and Chicago,
Illinois at the prescribed rates. The Commission also maintains a web site
(located at http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. Statements contained in this Prospectus as
to the contents of any contract or other document are not necessarily
complete, and in each instance reference is made to the copy of such contract
or document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
Pursuant to the Indenture, Holdings has agreed to furnish to the Trustee and
to registered holders of the Notes, without cost to the Trustee or such
registered holders, copies of all reports and other information that would be
required to be filed by Holdings with the Commission under the Exchange Act,
whether or not Holdings is then required to file reports with the Commission.
As a result of this Exchange Offer, Holdings will become subject to the
periodic reporting and other informational requirements of the Exchange Act.
In the event that Holdings ceases to be subject to the informational
requirements of the Exchange Act, Holdings has agreed that, so long as any
Notes remain outstanding, it will file with the Commission (but only if the
Commission at such time is accepting such voluntary filings) and distribute to
holders of the Notes, copies of the financial information that would have been
contained in such annual reports and quarterly reports, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," that would have been required to be filed with the Commission
pursuant to the Exchange Act. However, the Commission does not generally
accept for filing any Exchange Act reports submitted by registrants that are
not subject to the reporting requirements of that Act. Holdings will also
furnish such other reports as it may determine or as may be required by law.
The principal address of Holdings is 3702 Via de la Valle, Suite 202, Del
Mar, California 92104, and Holdings' telephone number is (619) 794-2602.
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COBBLESTONE HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements of Cobblestone Holdings, Inc.
Report of Ernst & Young LLP, Independent Auditors....................... F-2
Consolidated Balance Sheets--September 30, 1994 and 1995 and June 30,
1996 (unaudited)....................................................... F-3
Consolidated Statements of Operations--for the years ended September 30,
1993, 1994 and 1995, and for the nine months ended June 30, 1995 and
1996 (unaudited)....................................................... F-4
Consolidated Statements of Stockholders' Equity (Net Capital
Deficiency)--for the years ended September 30, 1992, 1993, 1994, and
1995, and for the nine months ended June 30, 1996 (unaudited).......... F-5
Consolidated Statements of Cash Flows--for the years ended September 30,
1993, 1994 and 1995, and for the nine months ended June 30, 1995 and
1996 (unaudited)....................................................... F-6
Notes to Consolidated Financial Statements--September 30, 1995 and June
30, 1996 (unaudited)................................................... F-7
Financial Statements of Sweetwater Golf Partnership
Report of Independent Accountants....................................... F-17
Balance Sheet--December 31, 1994 and 1995 and June 30, 1996
(unaudited)............................................................ F-18
Statement of Operations--For the three years ended December 31, 1995,
and the six months ended June 30, 1995 and 1996 (unaudited)............ F-19
Statement of Partners' Capital (Deficit)--For the two years ended
December 31, 1995, and the six months ended June 30, 1996 (unaudited).. F-20
Statement of Cash Flows--For the three years ended December 31, 1995,
and the six months ended June 30, 1995 and 1996 (unaudited)............ F-21
Notes to Financial Statements........................................... F-23
Financial Statements of Lakeway Country Club
Report of Ernst & Young LLP, Independent Auditors....................... F-27
Statements of Operations--For the years ended December 31, 1993 and 1994
and for the three months ended March 31, 1995.......................... F-28
Note to Statements of Operations........................................ F-29
Combined Financial Statements of Stonebridge Country Club and The Ranch
Country Club
Report of Ernst & Young LLP, Independent Auditors....................... F-30
Statements of Operations--For the year ended December 31, 1993 and the
eleven and a half months ended December 15, 1994....................... F-31
Notes to Statements of Operations....................................... F-32
Financial Statements of Brandermill Country Club
Report of Ernst & Young LLP, Independent Auditors....................... F-33
Statements of Operations--For the year ended December 31, 1994 and the
two months ended February 28, 1995..................................... F-34
Note to Statements of Operations........................................ F-35
Financial Statements of Brandermill Country Club
Report of Independent Auditors.......................................... F-36
Balance Sheet--December 31, 1993........................................ F-37
Statement of Operations for the year ended December 31, 1993............ F-38
Statement of Partners' Deficit for the year ended December 31, 1993..... F-39
Statement of Cash Flows for the year ended December 31, 1993............ F-40
Summary of Accounting Policies.......................................... F-41
Notes to Financial Statements........................................... F-42
Financial Statements of Pecan Grove Plantation Country Club
Report of Ernst & Young LLP, Independent Auditors....................... F-44
Statements of Income--For the year ended December 31, 1993 and the month
ended January 31, 1994................................................. F-45
Notes to Statements of Income........................................... F-46
Financial Statements of Ocean Vista Land Company
Report of Ernst & Young LLP, Independent Auditors....................... F-48
Statement of Income--For the five months ended May 31, 1993............. F-49
Note to Statement of Income............................................. F-50
Financial Statements of Saticoy Regional Golf Course
Report of Ernst & Young LLP, Independent Auditors....................... F-51
Statement of Operations--For the two and a half months ended March 12,
1993................................................................... F-52
Note to Statement of Operations......................................... F-53
Unaudited Pro Forma Consolidated Financial Information.................... F-54
Unaudited Pro Forma Consolidated Statement of Operations--for the year
ended September 30, 1995............................................... F-55
Notes to Unaudited Pro Forma Consolidated Statement of Operations--for
the year ended September 30, 1995...................................... F-56
Unaudited Pro Forma Consolidated Statement of Operations--for the nine
months ended June 30, 1996............................................. F-57
Notes to Unaudited Pro Forma Consolidated Statement of Operations--for
the nine months ended June 30, 1996.................................... F-58
Unaudited Pro Forma Consolidated Balance Sheet--June 30, 1996........... F-59
Notes to Unaudited Pro Forma Consolidated Balance Sheet--June 30, 1996.. F-60
</TABLE>
F-1
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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Cobblestone Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Cobblestone
Holdings, Inc. as of September 30, 1994 and 1995, and the related consolidated
statements of operations, stockholders' equity (net capital deficiency) and
cash flows for each of the three years in the period ended September 30, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cobblestone
Holdings, Inc. at September 30, 1994 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1995, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Diego, California
December 8, 1995
F-2
<PAGE>
COBBLESTONE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------- JUNE 30,
1994 1995 1996
----------- ------------ -----------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 1,298,671 $ 820,608 $ 1,841,057
Accounts receivable, net of
allowance for doubtful accounts
of $67,000 and $76,000 at
September 30, 1994 and 1995 and
$162,000 at June 30, 1996
(unaudited)..................... 1,261,015 2,542,122 2,469,851
Current portion of notes
receivables, net................ -- 862,922 1,592,206
Inventory........................ 723,102 1,439,063 1,950,223
Prepaid expenses and other
current assets.................. 283,463 585,398 452,747
----------- ------------ ------------
Total current assets........... 3,566,251 6,250,113 8,306,084
Property, equipment and leasehold
interests, net................... 73,734,237 128,000,304 138,161,490
Notes receivable, net............. -- 3,315,393 3,745,263
Intangible assets, net of
accumulated amortization of
$508,000 and $910,000 at
September 30, 1994 and 1995 and
$831,000 at June 30, 1996
(unaudited)...................... 4,603,066 4,190,860 3,969,931
Other assets, net................. 4,193,215 5,233,473 5,374,963
----------- ------------ ------------
$86,096,769 $146,990,143 $159,557,731
=========== ============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable................. $ 1,182,439 $ 2,788,114 $ 1,349,985
Accrued payroll and related
expenses........................ 835,426 1,092,232 1,686,971
Accrued interest expense......... 154,576 628,344 1,011,432
Accrued property taxes........... 520,667 1,038,856 675,330
Deferred revenue................. 965,890 1,221,305 1,967,909
Current portion of long-term debt
and capital lease obligations... 895,406 1,686,275 441,552
Current portion of deferred
purchase price.................. -- 441,427 248,329
Income taxes payable............. -- 842,241 7,196
Other current liabilities........ 269,450 479,541 495,619
----------- ------------ ------------
Total current liabilities...... 4,823,854 10,218,335 7,884,323
Long-term debt and capital lease
obligations...................... 44,194,386 85,013,950 106,057,177
Note payable to
stockholder/officer.............. 211,310 217,754 222,971
Deferred purchase price........... -- 1,108,573 924,692
Long-term deferred revenue........ 790,000 2,777,481 2,481,326
Deferred income taxes............. 4,184,000 3,877,000 3,458,583
Minority interest................. 431,675 407,175 380,984
Commitments
Redeemable preferred stock, $.01
par value
Authorized shares--10,000,000
Issued and outstanding shares--
4,164,408 and 5,220,365 at
September 30, 1994 and 1995 and
5,220,365 at June 30, 1996
(unaudited)
Liquidation preference of
$43,075,700 at September 30,
1995 and June 30, 1996.......... 33,611,345 42,241,169 42,241,169
Stockholders' equity (net capital
deficiency):
Common stock, $.01 par value:
Authorized shares--5,000,000....
Issued and outstanding shares--
1,322,068 and 1,634,000 at
September 30, 1994 and 1995 and
1,720,000 at June 30, 1996
(unaudited).................... 13,221 16,340 17,200
Paid-in capital.................. 95,869 4,077,069 5,389,007
Accumulated deficit.............. (2,258,891) (2,964,703) (9,499,701)
----------- ------------ ------------
Total stockholders' equity (net
capital deficiency).............. (2,149,801) 1,128,706 (4,093,494)
----------- ------------ ------------
$86,096,769 $146,990,143 $159,557,731
=========== ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
COBBLESTONE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------------ ------------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenues:
Green fees, cart
rental fees, practice
facility fees, dues
and initiation fees.. $3,778,299 $18,512,784 $38,043,441 $24,721,671 $31,760,988
Food and beverage
revenues............. 1,553,739 3,677,988 7,034,407 5,015,078 6,886,496
Pro shop sales........ 617,958 1,758,423 3,311,062 2,368,947 3,403,735
Other................. 557,109 943,559 1,473,869 840,037 1,664,652
---------- ----------- ----------- ----------- -----------
Total operating
revenues........... 6,507,105 24,892,754 49,862,779 32,945,733 43,715,871
Operating expenses:
Golf course
operations........... 3,520,135 14,341,609 29,591,886 19,527,270 25,860,509
Cost of food and
beverage............. 531,252 1,312,960 2,613,295 1,850,041 2,331,328
Cost of pro shop
sales................ 132,704 1,163,546 2,221,330 1,546,929 2,259,311
General and
administrative....... 1,620,166 1,996,991 2,517,423 1,807,678 2,595,799
Depreciation and
amortization......... 825,245 3,468,357 6,144,430 4,206,584 5,353,224
---------- ----------- ----------- ----------- -----------
Total operating
expenses........... 6,629,502 22,283,463 43,088,364 28,938,502 38,400,171
---------- ----------- ----------- ----------- -----------
Income (loss) from oper-
ations................. (122,397) 2,609,291 6,774,415 4,007,231 5,315,700
Interest expense, net... (529,720) (3,515,752) (8,019,072) (5,541,417) (8,192,817)
Gain on insurance
settlement............. -- -- 746,845 -- --
Minority interest....... (193,985) -- -- -- --
---------- ----------- ----------- ----------- -----------
Loss before income taxes
and extraordinary
item................... (846,102) (906,461) (497,812) (1,534,186) (2,877,117)
Provision for income
taxes.................. 6,400 71,931 208,000 32,569 137,480
---------- ----------- ----------- ----------- -----------
Loss before extraordi-
nary item.............. (852,502) (978,392) (705,812) (1,566,755) (3,014,597)
Extraordinary item...... -- (427,997) -- -- (3,520,401)
---------- ----------- ----------- ----------- -----------
Net loss................ $ (852,502) $(1,406,389) $ (705,812) $(1,566,755) $(6,534,998)
========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
COBBLESTONE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------
TOTAL
STOCKHOLDERS'
EQUITY
PAID-IN ACCUMULATED (NET CAPITAL
SHARES AMOUNT CAPITAL DEFICIT DEFICIENCY)
--------- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at September 30,
1992................... -- $ -- $ -- $ -- $ --
Issuance of common
stock for cash........ 1,263,411 12,634 91,616 -- 104,250
Net loss............... -- -- -- (852,502) (852,502)
--------- ------- ---------- ----------- -----------
Balance at September 30,
1993................... 1,263,411 12,634 91,616 (852,502) (748,252)
Issuance of common
stock for cash........ 58,657 587 4,253 -- 4,840
Net loss............... -- -- -- (1,406,389) (1,406,389)
--------- ------- ---------- ----------- -----------
Balance at September 30,
1994................... 1,322,068 13,221 95,869 (2,258,891) (2,149,801)
Issuance of common
stock for cash........ 311,932 3,119 3,981,200 -- 3,984,319
Net loss............... -- -- -- (705,812) (705,812)
--------- ------- ---------- ----------- -----------
Balance at September 30,
1995................... 1,634,000 16,340 4,077,069 (2,964,703) 1,128,706
Issuance of common stock
for cash............... 86,000 860 1,311,938 -- 1,312,798
Net loss (unaudited)... -- -- -- (6,534,998) (6,534,998)
--------- ------- ---------- ----------- -----------
Balance at June 30, 1996
(unaudited)............ 1,720,000 $17,200 $5,389,007 $(9,499,701) $(4,093,494)
========= ======= ========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
COBBLESTONE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................ $ (852,502) $ (1,406,389) $ (705,812) $ (1,566,755) $ (6,534,998)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and amor-
tization.............. 830,652 3,840,186 6,728,092 4,455,167 5,995,262
Gain on insurance set-
tlement............... -- -- (746,845) -- --
Loss on disposal of as-
sets.................. -- -- 322,834 -- --
Loss on early extin-
guishment of debt..... -- 427,997 -- -- 3,520,401
Provision for doubtful
accounts.............. -- 12,084 2,125,458 803,207 (395,741)
Minority interest...... 193,985 -- -- -- --
Changes in assets and
liabilities:
Notes and accounts re-
ceivable.............. (252,133) (804,047) (7,321,947) (3,205,657) (691,142)
Inventory.............. (53,317) (246,253) (229,801) (213,426) (502,160)
Intangible assets...... (338,791) -- -- -- --
Prepaid expenses and
other assets.......... (340,936) 3,784 (57,476) (8,045) 89,959
Accounts payable,
accrued liabilities
and deferred revenue.. 967,139 55,511 2,179,909 2,173,005 (1,668,948)
------------ ------------ ------------ ------------ ------------
Net cash provided by
(used in) operating ac-
tivities............... 154,097 1,882,873 2,294,412 2,437,496 (187,367)
INVESTING ACTIVITIES
Acquisitions, net of
cash acquired.......... (19,691,733) (23,924,305) (41,245,470) (41,268,305) (6,195,718)
Additions to property,
equipment and leasehold
interests.............. (5,761,983) (7,708,037) (17,716,295) (13,413,690) (6,735,666)
Insurance proceeds...... -- -- 1,941,917 1,122,963 --
Due to affiliate........ -- (699,356) -- -- --
Intangibles and other
assets................. -- (638,305) -- -- --
------------ ------------ ------------ ------------ ------------
Net cash used in invest-
ing activities......... (25,453,716) (32,970,003) (57,019,848) (53,559,032) (12,931,384)
FINANCING ACTIVITIES
Proceeds from long-term
debt................... 72,532 46,338,471 37,560,573 33,560,573 107,262,650
Debt issuance costs and
other debt-related
costs.................. -- (4,008,901) (2,118,618) (2,066,533) (4,535,061)
Principal payments on
long-term debt and cap-
ital leases............ (258,417) (17,797,900) (1,219,252) (824,049) (89,524,208)
Payments on deferred
purchase price......... -- -- -- -- (376,979)
Proceeds from sale and
leaseback.............. -- -- 7,410,527 7,410,527 --
Proceeds from issuance
of redeemable preferred
stock.................. 26,740,545 6,490,000 8,629,824 -- --
Proceeds from issuance
of common stock........ 104,250 4,840 3,984,319 12,543,752 1,312,798
------------ ------------ ------------ ------------ ------------
Net cash provided by fi-
nancing activities..... 26,658,910 31,026,510 54,247,373 50,624,270 14,139,200
Net increase (decrease)
in cash and cash equiv-
alents................. 1,359,291 (60,620) (478,063) (497,266) 1,020,449
Cash and cash equiva-
lents at beginning of
period................. -- 1,359,291 1,298,671 1,298,671 820,608
------------ ------------ ------------ ------------ ------------
Cash and cash equiva-
lents at end of peri-
od..................... $ 1,359,291 $ 1,298,671 $ 820,608 $ 801,405 $ 1,841,057
============ ============ ============ ============ ============
SUPPLEMENTARY
DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the pe-
riod for:
Interest............... $ 549,956 $ 3,595,926 $ 6,464,811 $ 4,799,672 $ 6,583,722
============ ============ ============ ============ ============
Income taxes........... $ 800 $ 55,264 $ 48,417 $ 32,569 $ 1,393,137
============ ============ ============ ============ ============
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Redeemable preferred
stock issued for acqui-
sitions................ $ 380,800 $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
Capital leases entered
into................... $ 1,049,122 $ 2,342,870 $ 2,395,859 $ 1,303,001 $ 2,308,347
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1995 AND PERTAINING
TO THE NINE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Description of Business
Cobblestone Holdings, Inc. (the "Company"), a Delaware corporation, was
incorporated on January 18, 1994 by shareholders of Cobblestone Golf Group,
Inc. ("CGGI"). On January 31, 1994, the Company issued shares of its common
and preferred stock in exchange for all of the shares of CGGI. The transaction
has been accounted for at historical cost in a manner similar to a pooling of
interests and, accordingly, had no effect on the accompanying consolidated
financial statements.
The Company owns and operates golf courses in the United States, with a
current portfolio of 20 golf properties including private country clubs, semi-
private clubs and public (or daily fee) courses. The Company's courses are
concentrated in clusters near metropolitan areas in the Sunbelt states
(including Arizona, California and Texas) which have large golfing populations
and attractive climates.
The Company's business consists primarily of operating golf courses and
related facilities, with revenue generated from membership fees and dues at
private country clubs, greens fees, food and beverage services, golf cart
rentals, retail merchandise sales, driving range fees and lodging fees. The
Company owns 16 courses, leases three courses (subject to long-term leases in
excess of 20 years, including extension options), leases one driving range and
pro shop facility and manages one additional course. The Company's portfolio
includes eight private country clubs, eight public facilities and five semi-
private facilities.
Seasonal weather conditions as well as the timing of new course purchases or
leases may cause the Company's results of operations to vary significantly
from quarter to quarter. The second half (April through September) of the
Company's fiscal year tends to account for a greater portion of the Company's
operating revenue and operating income than does the first half.
Principles of Consolidation
The Company has acquired certain golf facilities through its wholly-owned
and majority-owned subsidiaries. The consolidated financial statements include
the accounts of the Company and such subsidiaries. Intercompany balances and
transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and time deposits with original
maturities of less than 90 days.
Concentration of Credit Risk
Management places the Company's cash investments with what they consider to
be high credit-quality financial institutions and routinely assesses the
financial strength of these institutions. Management believes no significant
concentration of credit risk exists with respect to these cash investments.
Concentration of credit risk with respect to accounts receivable is limited
due to the geographic dispersion of golf courses and the large number of golf
course members and others from whom the receivables are to be collected.
Inventories
Inventories are carried at lower of cost (first-in, first-out) or market.
F-7
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1995 AND PERTAINING
TO THE NINE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
Property, Equipment and Leasehold Interests
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets
which are generally as follows:
<TABLE>
<S> <C>
Depreciable land improvements................................ 20 years
Buildings and improvements................................... 30 years
Equipment, furniture and fixtures............................ 3 to 10 years
</TABLE>
Leasehold improvements, equipment recorded under capital leases and property
and equipment related to leased facilities are depreciated and amortized using
the straight-line method over the shorter of the lease term or the estimated
useful lives of the related assets. Costs associated with the acquisition of
leasehold interests in golf facilities have been capitalized and are amortized
over the remaining life of the related lease (4 to 35 years).
Golf course facility construction in progress is carried at cost. All costs
associated with, or allocable to golf course facility construction in progress
are capitalized until construction is completed.
Intangible Assets
Costs in excess of net assets of businesses acquired are amortized over 20
years which is consistent with the depreciation of land improvements. Other
intangible assets are amortized over their estimated useful lives (5 to 14
years).
Debt Issuance Cost
Costs associated with the issuance of long-term debt are capitalized and
amortized over the term of the related debt using the interest method. Such
costs and related accumulated amortization included in other assets totaled
$3,721,404 and $307,725, respectively, at September 30, 1994, $5,840,022 and
$1,168,155, respectively, at September 30, 1995, and $4,980,899 and $101,930,
respectively, at June 30, 1996.
Fair Value of Financial Instruments
To meet the reporting requirements of Statement of Financial Accounting
Standards ("SFAS") No. 107, Disclosures about Fair Value of Financial
Instruments, the Company calculates the fair value of financial instruments
and includes this additional information in the notes to financial statements
when the fair value is different than the carrying value of those financial
instruments. When the fair value reasonably approximates the carrying value,
no additional disclosure is made. The Company uses quoted market prices and
management's estimates to calculate these fair values.
Revenue and Deferred Revenue
Operating revenue is recognized when received except for dues and fees paid
in advance which are recognized over the period which the dues and fees allow
the members access to the facilities. The Company recognizes revenue on
initiation fees for the amount of the deposit and the amount of the note
receivable, less the provision for doubtful accounts and imputed interest, at
the time the membership is sold.
Long-term deferred revenue relates to the Company's obligation to provide
memberships to residential developers of properties adjacent to the golf
facility and is recognized when individual homeowners apply for membership.
Reliance on Estimates
The financial statements have been prepared in accordance with generally
accepted accounting principles and have required management to make estimates
and assumptions that affect the reported amounts of assets and
F-8
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1995 AND PERTAINING
TO THE NINE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of ("SFAS 121"), effective for fiscal years beginning after
December 15, 1995. SFAS 121 requires impairment losses to be recorded on long-
lived assets used in operations when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. SFAS 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company believes,
based on current circumstances, the effect of adopting SFAS 121 will not have
a material effect on the Company's financial position or results of
operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation ("SFAS 123"), effective for
fiscal years beginning after December 15, 1995. SFAS 123 established the fair
value-based method of accounting for stock-based compensation arrangements
under which compensation cost is determined using the fair value of the stock
option at the grant date and the number of options vested, and is recognized
over the periods in which the related services are rendered. The Company has
elected to continue with the current intrinsic value-based method, as allowed
by SFAS 123, and will disclose the pro forma effect of adopting the fair value
based method in future fiscal years beginning with the fiscal year ending
September 30, 1997.
Interim Financial Information
The financial statements for the nine months ended June 30, 1995 and 1996
are unaudited, but include all adjustments (consisting only of normal
recurring adjustments) which the Company considers necessary for a fair
statement of the financial position and the operating results and cash flows
for the interim periods. Results for the interim periods are not necessarily
indicative of results to be expected for the entire year.
2. ACQUISITIONS
Since inception, the Company has acquired the property and equipment or
leasehold interest in twenty golf course facilities in transactions that have
been recorded under the purchase method of accounting. Accordingly, the
acquired facilities have been reported in the consolidated financial
statements of the Company since the date of the respective acquisitions.
The 1993 acquisitions include: The Golf Course Construction and Lease
Agreement for The Vineyard at Escondido acquired in October, 1992 (lease
effective December 1993), The Foothills Golf Course acquired in January, 1993,
Balboa Park Municipal Golf Course, Saticoy Regional Golf Course and Woodcrest
Country Club acquired in February, 1993, Morgan Run Resort and Club and El
Camino Country Club acquired in June, 1993, and Carmel Mountain Ranch Country
Club acquired in July, 1993.
The 1994 acquisitions include: The Club at Trophy Club acquired in December,
1993, Pecan Grove Country Club acquired in January, 1994, and Ahwatukee
Country Club and The Lakes at Ahwatukee acquired in June, 1994.
The 1995 acquisitions include: The Ranch Country Club and Stonebridge
Country Club acquired in December, 1994, Red Mountain Ranch Country Club
acquired in January, 1995, The Hills of Lakeway, Live Oak Golf Course, Yaupon
Golf Course and Brandermill Country Club acquired in March, 1995.
F-9
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1995 AND PERTAINING
TO THE NINE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
In conjunction with the purchase of The Hills of Lakeway, the Company is
required to pay a deferred purchase price equal to the greater of $4,150 per
membership or 25% of Initiation Fees, as defined, collected for the first
three hundred memberships sold.
A summary of the aggregate acquisition costs and allocation of the purchase
price to the assets and liabilities assumed is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Total acquisition costs:
Cash paid and acquisition related costs.. $19,691,733 $23,924,305 $41,245,470
Long-term debt and assumption of
liabilities............................. 16,888,762 2,325,934 7,379,667
Minority interest........................ 401,379 344,175 --
----------- ----------- -----------
$36,981,874 $26,594,414 $48,625,137
=========== =========== ===========
Allocated to assets as follows:
Current assets........................... $ 747,428 $ 152,452 $ 775,622
Property, equipment and leasehold
interests............................... 34,488,661 26,441,962 47,849,515
Other assets............................. 1,745,785 -- --
----------- ----------- -----------
$36,981,874 $26,594,414 $48,625,137
=========== =========== ===========
</TABLE>
The following pro forma results for acquisitions consummated through
September 30, 1995 assume the acquisitions occurred at the beginning of the
fiscal year prior to the year in which the facility was acquired. The
unaudited pro forma results have been prepared utilizing the historical
financial statements of the Company and the acquired business.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Operating revenues....................... $23,481,269 $47,043,151 $54,407,767
Net loss................................. $ (910,992) $(1,158,708) $(1,153,012)
</TABLE>
This pro forma information is not necessarily indicative of the actual
results that would have been achieved had the acquisitions occurred at the
beginning of the fiscal year prior to the year in which the facility was
acquired, nor is it necessarily indicative of future results.
In October 1995, the Company entered into a management agreement for the Red
Hawk Golf Club. Cash paid and acquisition related costs totaled $40,843 and
are included as leasehold interest in the accompanying consolidated financial
statements.
In June, 1996, the Company acquired the Eagle Crest Golf Club for $6,195,718
in cash and acquisition related costs and assumed liabilities totalling
$87,756. Allocation of these costs were $6,273,682 to property and equipment
and $9,792 to current assets. The pro-forma effect of this acquisition on the
Company's interim results of operations is not material.
In June, 1996, the Company entered into a fifteen year lease of the
Sweetwater Country Club. Cash paid and acquisition related costs through June
30, 1996 are $52,830 and are included in other assets in the accompanying
consolidated financial statements.
3. NOTES RECEIVABLE
Notes receivable consists of promissory notes made by golf club members for
the payment of initiation fees. The notes carry below market or no interest
rates, amortize monthly and generally have a term of five years. Management
periodically analyzes the collectability of the notes receivable and reserves
for the portion that is
F-10
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1995 AND PERTAINING
TO THE NINE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
doubtful of being collected. The notes are secured by the underlying golf club
membership and the Company has full recourse against the member. The Company's
notes receivable balance was composed of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1995 1996
------------- -----------
(UNAUDITED)
<S> <C> <C>
Gross Receivables.................................... $ 7,538,182 $ 8,265,386
Less allowance for uncollectable accounts............ (2,117,000) (1,633,616)
Less valuation allowance for imputed interest........ (1,242,867) (1,294,301)
----------- -----------
4,178,315 5,337,469
Current portion...................................... 862,922 1,592,206
----------- -----------
$ 3,315,393 $ 3,745,263
=========== ===========
</TABLE>
4. PROPERTY, EQUIPMENT AND LEASEHOLD INTERESTS
Property, equipment and leasehold interests consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------- JUNE 30,
1994 1995 1996
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Land................................. $ 8,458,701 $ 14,258,104 $ 15,147,752
Land improvements.................... 43,471,346 74,172,889 82,463,650
Buildings and improvements........... 15,041,211 26,558,329 29,974,231
Equipment, furniture and fixtures.... 6,689,814 12,777,828 16,407,849
Golf course facility construction in
progress............................ 1,059,305 6,009,124 5,085,718
Leasehold interests.................. 2,799,714 2,799,714 2,840,556
----------- ------------ ------------
77,520,091 136,575,988 151,919,756
Less accumulated depreciation and
amortization........................ (3,785,854) (8,575,684) (13,758,266)
----------- ------------ ------------
Property, equipment and leasehold
interests, net...................... $73,734,237 $128,000,304 $138,161,490
=========== ============ ============
</TABLE>
Land improvements include $10,848,847, $21,214,449, and $23,392,707 at
September 30, 1994 and 1995, and June 30, 1996 respectively, of nondepreciable
golf course improvements consisting of tees, fairways, roughs, trees, greens,
bunkers and sandtraps.
F-11
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1995 AND PERTAINING
TO THE NINE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------- JUNE 30,
1994 1995 1996
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
8% note payable, due monthly through
2007.................................... $ 315,592 $ 301,104 $ 286,611
Variable rate note payable, effective
interest rate 11.02%, due monthly,
secured by the assets of The Vineyard
at Escondido............................ 6,067,673 5,978,847 5,807,725
10% imputed interest note payable January
2000.................................... -- 179,380 174,970
10% imputed interest note payable, due
monthly beginning January 1996.......... -- 2,693,873 --
11 1/2% Series A Senior Notes due 2003... -- -- 70,000,000
13 1/2% Series A Senior Zero-Coupon Notes
due 2004................................ -- -- 28,962,650
Bank term loan........................... 35,683,851 71,444,424 --
Bank revolving credit agreement.......... 500,000 2,300,000 --
Capital lease obligations, due at various
dates through 2000...................... 2,522,676 3,802,597 1,266,773
----------- ----------- ------------
45,089,792 86,700,225 106,498,729
Less current portion..................... 895,406 1,686,275 441,552
----------- ----------- ------------
$44,194,386 $85,013,950 $106,057,177
=========== =========== ============
</TABLE>
During 1994, certain loans were repaid in advance of maturity. Costs
associated with the early retirement of such loans amounted to $427,997 and
were recorded as an extraordinary item in the consolidated statement of
operations.
In 1994, the Company entered into a credit agreement (the "Credit
Agreement") with a consortium of banks. The Credit Agreement, amended in 1995,
provides for a $5 million revolving credit facility to be used primarily for
working capital and an $85 million term loan facility used for refinancing
existing debt, acquisitions and certain capital expenditures.
The revolving credit facility expires September 30, 2001 at which time any
outstanding unpaid principal is payable in full. The revolving credit facility
provides that borrowings bear interest, which is payable quarterly, at the
Eurodollar rate or a Floating Rate, as defined, plus spreads ranging from 1%
to 4% depending upon the extent of utilization by the Company (9.875% and
9.550% at September 30, 1995, respectively) and requires a non-use fee on the
unused portion equal to 1/2% per annum. The term loan facility provides that
borrowings are payable based on certain specified percentages (ranging from
9.813% to 9.875% as of September 30, 1995, respectively) in 20 quarterly
installments commencing December 1996 and ending September 2001.
The Credit Agreement requires mandatory reductions or prepayments of
principal as a result of certain events and provides for voluntary
prepayments. The Credit Agreement contains numerous covenants which, among
other things, require the Company to maintain defined leverage and interest
coverage ratios, as well as a minimum consolidated net worth and limits the
incurrance of debt, capital expenditures and payment of dividends. Borrowings
under the Credit Agreement are secured by substantially all assets of the
Company except for certain real property in Escondido, California and
equipment under capital leases. In addition, stock of CGGI and subsidiaries
has been pledged to the lenders.
In conjunction with the Credit Agreement, the Company issued warrants to
purchase 20,000 shares of the Company's Series A preferred stock at $100 per
share and 5,472 shares of the Company's common stock at $1 per share. As of
September 30, 1995, all warrants had been exercised.
F-12
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1995 AND PERTAINING
TO THE NINE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
Pursuant to the terms of the Credit Agreement and to reduce the impact of
interest-rate changes on future interest expense, the Company entered into
interest rate swap agreements during 1994 with one of the lender banks ("the
Bank"). The agreements effectively convert $20 million of the Company's
floating rate long-term debt to a fixed rate basis without an exchange of the
underlying principal amounts. At September 30, 1995, the Company was obligated
to pay a fixed rate of 5.72% on $10 million and 6.13% on $10 million and to
receive the three-month LIBOR (6.00% and 5.87%, respectively at September 30,
1995). The rate is reset every three months and the swap agreements expire in
March and April 1997, respectively. The differential to be paid or received is
accrued and recognized as an adjustment to, interest expense related to the
debt. The related amount payable to or receivable from the Bank is included in
other liabilities or assets. The fair values of the swap agreements are not
recognized in the financial statements. In June 1996, the swap agreements were
sold without a resulting significant gain or loss.
In conjunction with a purchase of two adjacent golf course facilities in
1995 (the "Clubs"), the Company issued a $3,500,000 non-interest bearing
promissory note (the "Note"). Interest on the Note has been imputed at a rate
of 10% and monthly principal payments on the Note are payable in an amount
equal to 50% of Initiation Fees (as defined) collected by the Clubs after
January 1, 1996. Any unpaid principal on the Note is payable on the earlier of
December 14, 2006 or upon the sale by the holder of the Note of a certain
number of residential homes in the communities adjacent to the golf courses.
Maturities of long-term debt (exclusive of capital lease obligations) for
each of the five years in the period ending September 30, 2000, are as
follows: 1996--$350,889; 1997--$7,778,119; 1998--$9,352,990; 1999--
$11,675,086; 2000--$13,738,176; thereafter--$40,002,368.
On June 4, 1996, the Company and CGGI completed two contemporaneous high
yield bond offerings (the "Offerings") totaling approximately $100 million.
CGGI offered $70 million aggregate principal amount 11 1/2% senior notes due
2003. The Company offered 86,000 Units, each consisting of $1,000 principal
amount at maturity of 13 1/2% senior zero-coupon notes due 2004 and one share
of common stock, par $.01 per share, of the Company. The net proceeds of the
offering by the Company of $28.7 million were contributed as equity to CGGI.
Concurrent with the Offerings, the Company repaid the bank term loan and the
bank revolving credit agreement of $77.4 million and $4.6 million,
respectively, and repaid obligations under capital leases totaling $4.1
million. The Company also paid the Note which had a balance of $2.9 million at
June 4, 1996, which resulted in a gain on early retirement of debt of $0.4
million. This gain and a $3.9 write-off of unamortized loan fees related to
the bank term loan and bank revolving credit agreement of have been recorded
as extraordinary items in the consolidated statement of operations.
Also, on June 4, 1996 the Company obtained a new $50 million a bank facility
(the "New Credit Facility") consisting of a $45 million bank revolver for
future acquisitions and capital projects and a $5 million working capital
facility to fund short term operating needs. The New Credit Facility has terms
similar to The Credit Agreement described above. There were no borrowings
under the New Credit Facility at June 30, 1996.
6. REDEEMABLE PREFERRED STOCK
The Company has two classes of redeemable preferred stock. Both series have
priority upon liquidation over the Company's common stock, but have equal
priority with respect to each other. Both series are also entitled to vote
along with the common stock on the basis of one vote per share of preferred
stock. Shares of Series A preferred stock are redeemable by the Company at any
time, at the discretion of the Board of Directors, for the
F-13
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1995 AND PERTAINING
TO THE NINE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
purchase price of $100 per share. Shares of Series B preferred stock are
redeemable by the Company at any time, at the discretion of the Board of
Directors, for the purchase price of $100 per share plus a pro-rata portion of
any federal income taxes paid prior to the redemption date as a result of any
gain recognized for federal income tax purposes upon sale of any golf
facilities or subsidiaries in which the tax basis of the property on the date
of acquisition is less than the price paid by the Company. Upon the sale,
consolidation or merger of the Company with or into another corporation, the
sale of all or substantially all of the Company's assets, or the sale or
exchange of stock representing at least 80% of the voting power of stock of
the Company, the Company must redeem all remaining outstanding shares of both
series of preferred stock at the redemption price as defined above. Redeemable
preferred stock consists of the following:
<TABLE>
<CAPTION>
SHARES AMOUNT
--------- -----------
<S> <C> <C>
Balance at September 30, 1992........................... -- --
Issuance of Series A preferred stock for cash, net of
issuance costs of $623,075............................. 3,080,395 $24,794,725
Issuance of Series A preferred stock for assets and for
ownership interest in consolidated subsidiary.......... 55,105 380,800
Issuance of Series B preferred stock for cash, net of
issuance costs of...................................... 242,381 1,945,820
--------- -----------
Balance at September 30, 1993........................... 3,377,881 27,121,345
Issuance of Series A preferred stock for cash........... 786,527 6,490,000
--------- -----------
Balance at September 30, 1994........................... 4,164,408 33,611,345
Issuance of Series A preferred stock for cash, net of
$83,376 in issuance costs.............................. 1,055,957 8,629,824
--------- -----------
Balance at September 30, 1995 and June 30, 1996
(unaudited)............................................ 5,220,365 $42,241,169
========= ===========
</TABLE>
In May, 1996, the Board of Directors approved a 12.11905-for-one stock split
of the Company's outstanding common stock and preferred stock. In connection
with this stock split, the Company's authorized shares of common stock and
preferred stock changed to 5,000,000 and 10,000,000, respectively. Also, the
Company converted all Series B preferred stock to Series A preferred stock.
7. INCOME TAXES
Income taxes are provided for in accordance with the provisions of SFAS No.
109, Accounting for Income Taxes. Under this method, the Company recognizes
deferred tax assets and liabilities for the expected future tax effects of
temporary differences between the carrying amounts and the tax bases of assets
and liabilities, as well as operating loss carryforwards.
The significant components of the Company's deferred tax assets and
liabilities are:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Accounting basis in excess of tax basis of golf
properties........................................ $(4,184,000) $(4,184,000)
Depreciation....................................... (224,000) (472,000)
----------- -----------
Total deferred tax liabilities....................... (4,408,000) (4,656,000)
Deferred tax assets:
Net operating loss carryforwards................... 767,000 --
Reserve for notes receivable....................... -- 1,062,000
Deferred gain on sale and leaseback................ -- 320,000
Accrued liabilities................................ 298,000 262,000
Other, net......................................... -- 63,000
----------- -----------
Total deferred tax assets............................ 1,065,000 1,707,000
Valuation allowance for deferred tax assets.......... (841,000) (928,000)
----------- -----------
Net deferred tax assets.............................. 224,000 779,000
----------- -----------
Net deferred tax liabilities......................... $ 4,184,000 $ 3,877,000
=========== ===========
</TABLE>
F-14
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1995 AND PERTAINING
TO THE NINE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1994 1995
------- ---------
<S> <C> <C>
Current:
Federal............................................... $ -- $ 307,000
State................................................. 71,931 208,000
------- ---------
71,931 515,000
Deferred:
Federal............................................... -- (307,000)
State................................................. -- --
------- ---------
-- (307,000)
------- ---------
Total provision......................................... $71,931 $ 208,000
======= =========
</TABLE>
The following is a reconciliation of the actual tax provision (benefit) to
the expected tax provision (benefit) computed by applying the statutory
federal income tax rate to income before income taxes:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Income tax provision at statutory rate....... $(296,136) $(467,060) $(174,234)
State income tax provision, net of federal
tax benefit................................. 4,160 46,755 135,200
Permanent differences........................ -- -- 177,938
Increase in valuation allowance.............. 319,076 435,000 87,000
Other........................................ (20,700) 57,236 (17,904)
--------- --------- ---------
Total provision for income taxes............. $ 6,400 $ 71,931 $ 208,000
========= ========= =========
</TABLE>
8. COMMITMENTS
In March 1995, the Company entered into a sale and leaseback transaction for
one of its golf course facilities. The Company received proceeds of
approximately $7.4 million and entered into a lease for fifteen years with two
five year renewal options. Minimum rent was $60,939 and $61,975 per month at
September 30, 1995 and June 30, 1996, respectively, and is subject to annual
increases based upon changes in the Consumer Price Index. The deferred gain on
the sale and leaseback transaction of $499,000 is being amortized over the
term of the lease. The Company recorded $407,000 and $559,000 of rent expense
for the year ended September 30, 1995 and the six months ended June 30, 1996,
respectively, related to the lease.
The Company also leases three other golf facilities from the city or county
in which the facility is located. The leases expire in the years 1997, 2016
and 2029. The Company recorded an aggregate of $99,000, $138,000 and $639,000
in rent expense related to leased golf course facilities for the years ended
September 30, 1993, 1994 and 1995, respectively and $362,968 and $772,175 for
the nine months ended June 30, 1995 and 1996, respectively.
The Company leases certain golf carts and maintenance equipment under
capital leases with terms of two to five years. Included in equipment,
furniture and fixtures in the accompanying consolidated balance sheets is
equipment under capital leases totaling $3,393,842, $5,806,693 and $1,065,070
at September 30, 1994 and 1995 and June 30, 1996, respectively. Accumulated
amortization of equipment under capital leases totaled $588,859, $1,490,214
and $385,736 at September 30, 1994 and 1995 and June 30, 1996, respectively.
F-15
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1995 AND PERTAINING
TO THE NINE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
Future minimum lease payments at September 30, 1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDING SEPTEMBER 30, LEASES LEASES
-------------------------- ---------- -----------
<S> <C> <C>
1996................................................. $1,655,582 $ 919,971
1997................................................. 1,202,848 815,265
1998................................................. 844,007 797,265
1999................................................. 569,326 797,265
2000................................................. 283,503 797,265
Thereafter........................................... -- 8,579,018
---------- -----------
Total minimum lease payments....................... 4,555,266 $12,706,049
===========
Amount representing interest......................... 752,669
----------
Present value of net minimum lease payments.......... 3,802,597
Current portion...................................... 1,335,386
----------
$2,467,211
==========
</TABLE>
In accordance with certain purchase agreements, the Company is required to
maintain the respective golf courses in good condition and make various capital
improvements. As of September 30, 1995, the Company had commitments to build an
additional nine holes at two facilities with an estimated aggregate cost of
approximately $5.5 million.
9. RELATED PARTY TRANSACTIONS
In connection with the formation of the Company, an officer of the Company
contributed his interests in the leases of two golf course facilities in
exchange for 55,105 shares of Series A preferred stock, $160,270 cash and a
$250,000 note due in 1999. The officer also contributed his options to acquire
certain other golf course facilities at no cost to the Company.
An affiliate of the majority stockholder provides investment banking and
consulting services to the Company. The Company is obligated to pay a service
fee to the affiliate semi-annually in advance in an amount equal to 1% per
annum of the affiliate's debt and equity investment in the Company and to
reimburse the reasonable fees and costs incurred by the affiliate in providing
services to the Company. The Company paid $677,255, $809,522, and $1,076,416 in
fees to the affiliate pursuant to these obligations during the year ended
September 30, 1993, 1994 and 1995; and $915,694 and $325,066 for the nine
months ended June 30, 1995 and 1996, respectively.
F-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Sweetwater Golf Partnership
In our opinion, the accompanying balance sheet and the related statements of
operations, of partners' capital (deficit) and of cash flows present fairly,
in all material respects, the financial position of Sweetwater Golf
Partnership (the Partnership), formerly a division of Sugarland Properties
Incorporated (SPI) known as Sweetwater Country Club (the Division), at
December 31, 1994 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As disclosed in the financial statements, there are extensive transactions
and relationships between the Partnership and SPI. Because of these
relationships, it is possible that the terms of these transactions are not the
same as those that would result from transactions among wholly unrelated
parties.
On July 1, 1996, essentially all of the assets and ongoing operations of the
Partnership were sold to a third party for approximately $12,100,000. The
third party also assumed certain current liabilities and the liability for
refundable member security deposits. In July 1996, the Partnership repaid the
notes payable and substantially all remaining current liabilities. The
partners intend to distribute the remaining net assets of the Partnership and
liquidate the Partnership.
PRICE WATERHOUSE LLP
Houston, Texas
July 26, 1996
F-17
<PAGE>
SWEETWATER GOLF PARTNERSHIP
(FORMERLY A DIVISION OF SUGARLAND PROPERTIES INCORPORATED)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................. $ 269,024 $ 586,971 $ 639,602
Restricted cash....................... 361,024 365,281 2,698
Accounts receivable................... 912,099 984,355 1,081,436
Inventories........................... 281,299 206,470 220,144
Prepaid and other assets, net......... 149,388 108,030 57,974
----------- ----------- -----------
Total current assets................ 1,972,834 2,251,107 2,001,854
Clubhouse, golf course and related
facilities, net of accumulated
depreciation........................... 20,947,134 17,656,030 17,571,980
Deferred loan costs, net of accumulated
amortization........................... 57,999 -- --
----------- ----------- -----------
$22,977,967 $19,907,137 $19,573,834
=========== =========== ===========
LIABILITIES AND PARTNERS' CAPITAL
(DEFICIT)
Current liabilities:
Notes payable......................... $ 7,955,965 $ 7,923,604 $ 7,852,080
Accounts payable...................... 273,265 159,163 163,035
Accrued interest expense.............. 36,939 37,193 33,571
Accrued property taxes................ 402,518 407,404 192,577
Other current liabilities............. 230,050 404,739 187,081
Deferred revenues..................... 424,257 457,068 651,315
----------- ----------- -----------
Total current liabilities........... 9,322,994 9,389,171 9,079,659
Advances from SPI, net.................. 7,378,179 7,263,652 7,156,899
Refundable member security deposits..... 6,260,601 6,102,651 6,075,638
----------- ----------- -----------
Total liabilities................... 22,961,774 22,755,474 22,312,196
Partners' capital (deficit)............. 16,193 (2,848,337) (2,738,362)
----------- ----------- -----------
$22,977,967 $19,907,137 $19,573,834
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-18
<PAGE>
SWEETWATER GOLF PARTNERSHIP
(FORMERLY A DIVISION OF SUGARLAND PROPERTIES INCORPORATED)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
---------------------------------- -----------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenues:
Membership dues....... $3,747,747 $3,889,271 $ 4,095,820 $2,007,058 $2,203,573
Initiation fees and
other................ 894,773 929,432 896,941 330,386 453,019
Food and beverage..... 1,687,086 1,723,432 1,891,668 830,856 930,196
Golf.................. 1,181,294 1,353,683 1,411,782 666,097 735,898
Merchandise........... 657,663 715,716 756,831 368,307 345,812
Other................. 722,795 598,397 555,339 279,204 296,414
---------- ---------- ----------- ---------- ----------
8,891,358 9,209,931 9,608,381 4,481,908 4,964,912
---------- ---------- ----------- ---------- ----------
Operating expenses:
Food and beverage..... 1,961,955 1,984,340 2,055,792 952,418 1,006,622
Golf.................. 1,589,170 1,750,181 1,955,559 995,622 1,002,050
Depreciation and
amortization......... 946,138 968,062 1,009,127 501,089 531,865
Merchandise........... 540,904 580,596 618,694 313,590 291,657
Property taxes........ 354,664 402,686 407,614 194,000 203,700
Membership............ 251,039 223,713 229,399 120,377 108,652
General and
administrative....... 1,570,385 1,560,970 1,608,071 764,362 767,935
Other................. 1,092,439 992,955 1,043,782 559,947 547,410
---------- ---------- ----------- ---------- ----------
8,306,694 8,463,503 8,928,038 4,401,405 4,459,891
---------- ---------- ----------- ---------- ----------
Income from operations.. 584,664 746,428 680,343 80,503 505,021
Loss on disposal of
assets................. 2,700,000
Interest expense........ 614,314 709,964 844,873 425,962 395,046
---------- ---------- ----------- ---------- ----------
Net income (loss)....... $ (29,650) $ 36,464 $(2,864,530) $ (345,459) $ 109,975
========== ========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-19
<PAGE>
SWEETWATER GOLF PARTNERSHIP
(FORMERLY A DIVISION OF SUGARLAND PROPERTIES INCORPORATED)
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
SUGARLAND FIRST COLONY
PROPERTIES SPORTS
INCORPORATED PROPERTIES, INC. TOTAL
------------ ---------------- -----------
<S> <C> <C> <C>
Balance at December 31, 1993...... $ -- $ -- $ --
Capital contribution.............. 1,000 1,000
Net income for the period August
19 through December 31, 1994
(see Note 2)..................... 15,041 152 15,193
----------- -------- -----------
Balance at December 31, 1994...... 15,041 1,152 16,193
Net loss for 1995................. (2,835,885) (28,645) (2,864,530)
----------- -------- -----------
Balance at December 31, 1995...... (2,820,844) (27,493) (2,848,337)
Net income for the six month
period ended June 30, 1996
(unaudited)...................... 108,875 1,100 109,975
----------- -------- -----------
Balance at June 30, 1996
(unaudited)...................... $(2,711,969) $(26,393) $(2,738,362)
=========== ======== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-20
<PAGE>
SWEETWATER GOLF PARTNERSHIP
(FORMERLY A DIVISION OF SUGARLAND PROPERTIES INCORPORATED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------- ---------------------------
1993 1994 1995 1995 1996
--------- --------- ----------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss).... $ (29,650) $ 36,464 $(2,864,530) $ (345,459) $ 109,975
Adjustments to
reconcile net income
(loss) to net cash
provided by
operating
activities:
Loan on disposal of
assets............ 2,700,000
Depreciation and
amortization...... 946,138 968,062 1,009,127 501,089 531,865
Provision for
doubtful
accounts.......... 23,903 17,092 11,725 795 2,905
Gain on disposal of
equipment......... (12,190) (2,733)
Changes in:
Operating accounts
with SPI.......... (331,494) (12,554) (114,527) (17,011) (106,753)
Accounts
receivable........ (6,204) (44,007) (83,981) (24,684) (99,986)
Inventories........ (16,751) (59,989) 74,829 40,790 (13,674)
Prepaid expenses
and other assets.. 1,604 (226,607) (75) (49,245) 343
Accounts payable
and accrued
liabilities....... 1,059 26,616 65,727 (202,675) (432,235)
Deferred revenues.. 178,177 (129,444) 32,811 106,105 194,247
Security deposits.. (164,789) (203,369) (157,950) (60,568) (27,013)
--------- --------- ----------- ------------ ------------
Net cash provided
(used) by
operating
activities...... 601,993 360,074 670,423 (50,863) 159,674
--------- --------- ----------- ------------ ------------
Cash flows from
investing activities:
Capital
expenditures........ (293,839) (464,417) (318,591) (139,542) (398,102)
Restricted cash,
net................. (361,024) (4,257) 327,248 362,583
Proceeds from sale of
fixed assets........ 2,733
--------- --------- ----------- ------------ ------------
Net cash used by
investing
activities...... (293,839) (825,441) (320,115) 187,706 (35,519)
--------- --------- ----------- ------------ ------------
Cash flows from financ-
ing activities:
Advances from SPI,
net................. 555,207 187,334
Proceeds from capital
contribution........ 1,000
Repayment of notes
payable............. (701,689) (549,094) (32,361) (71,524)
Proceeds from notes
payable............. 1,902 654,135 39,134
--------- --------- ----------- ------------ ------------
Net cash provided
(used) by financing
activities............ (144,580) 293,375 (32,361) 39,134 (71,524)
--------- --------- ----------- ------------ ------------
Net increase (decrease)
in cash............... 163,574 (171,992) 317,947 175,977 52,631
Cash at beginning of
period................ 277,442 441,016 269,024 269,024 586,971
--------- --------- ----------- ------------ ------------
Cash at end of period.. $ 441,016 $ 269,024 $ 586,971 $ 445,001 $ 639,602
========= ========= =========== ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-21
<PAGE>
SWEETWATER GOLF PARTNERSHIP
(FORMERLY A DIVISION OF SUGARLAND PROPERTIES INCORPORATED)
STATEMENT OF CASH FLOWS
(continued)
Supplemental disclosure of noncash transactions:
During 1994, the Partnership restructured a capital lease into an operating
lease resulting in the disposal of equipment with a net book value of $68,364
in lieu of the reduction of the remaining related note payable of $83,307.
Also during 1994, the Partnership refinanced its outstanding debt
commitments with various institutions, aggregating $7,343,799, with Texas
Commerce Bank.
The accompanying notes are an integral part of this statement.
F-22
<PAGE>
SWEETWATER GOLF PARTNERSHIP
(FORMERLY A DIVISION OF SUGARLAND PROPERTIES INCORPORATED)
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
Sweetwater Golf Partnership (the Partnership), formerly a division of
Sugarland Properties Incorporated (SPI) known as Sweetwater Country Club (the
Division), was formed on August 19, 1994 as discussed further in Note 2. The
Partnership owns and operates the clubhouse, golf course and related
facilities of the Sweetwater Country Club (the Club) located on 380 acres of
land in Sugar Land, Texas. The Club extends credit for merchandise and
services provided to its members who principally reside in Sugar Land and the
greater Houston Area. The Club commenced operations in June 1983.
On July 1, 1996, essentially all of the assets and ongoing operations of the
Partnership were sold to a third party for approximately $12,100,000. The
third party also assumed certain current liabilities and the liability for
refundable member security deposits. In July 1996, the Partnership repaid the
notes payable and substantially all remaining current liabilities. The
partners intend to distribute the remaining net assets of the Partnership and
liquidate the Partnership.
CLUBHOUSE, GOLF COURSE AND RELATED FACILITIES
Project development costs, including financing expenses, ad valorem taxes
and preoperating management fees incurred during the construction period of
the clubhouse, golf course and related facilities, were capitalized.
The clubhouse building, other buildings and improvements and land
development costs are depreciated using the straight-line method over 30
years. Furniture, fixtures and equipment are recorded at cost and are
depreciated using the straight-line method over their estimated useful lives
which range from three to eight years.
Effective January 1, 1996, the Partnership adopted Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). Since the
clubhouse, golf course and related facilities were written down to their sales
value at December 31, 1995 (see Note 4), adoption of SFAS 121 had no material
effect on the Partnership's financial position or results of operations.
RESTRICTED CASH
Restricted cash consists of cash deposited in an escrow bank account for the
payment of property taxes.
INVENTORIES
Inventories are valued at the lower of cost or market, cost being determined
on a first-in, first-out basis.
DEFERRED LOAN COSTS
Legal fees and other loan costs incurred in connection with the August 1994
refinancing of the Partnership's mortgages were capitalized and are being
amortized over the term of the related loans. For the year ended December 31,
1994 and 1995 and the six months ended June 30, 1996, amortization expense
relating to these costs equaled $41,429, $99,432 and $41,714, respectively.
MEMBERSHIP FEES AND DEPOSITS
Various membership classes are offered at the Club, all of which require
either a refundable security deposit or a nonrefundable initiation fee.
Refundable security deposits are recorded as liabilities when received;
nonrefundable initiation fees are recognized as income when received.
F-23
<PAGE>
SWEETWATER GOLF PARTNERSHIP
(FORMERLY A DIVISION OF SUGARLAND PROPERTIES INCORPORATED)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The by-laws of the Club outline the conditions under which refundable
security deposits are to be returned to members. For resigning members, these
conditions include 30 days' written notice, full payment of unpaid dues and
charges and the existence of a full membership complement in the resigning
member's class of membership. Upon existence of these conditions, one
resigning member's security deposit will be refunded for each new member
admitted. Notwithstanding these conditions, all membership deposits are
refundable to members 30 years from the date their respective membership
applications became effective.
INCOME TAXES
The Partnership is not subject to income tax as the individual partners are
responsible for reporting their pro rata share of the Partnership's taxable
income or loss. However, the Partnership's tax return is subject to
examination by the Internal Revenue Service. Consequently, the individual
partners' tax returns are subject to adjustment for any findings resulting
from such an examination.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management has determined that the fair value of the Partnership's financial
instruments is equivalent to the carrying amount of such instruments as
presented or disclosed in the financial statements.
ESTIMATES
The preparation of the Partnership's financial statements requires
management to make estimates and assumptions that affect the reported amounts
of certain assets and liabilities and disclosure of contingent asset and
liabilities at the date of the financial statements and the related reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates. The Partnership's management believes that
the estimates made in connection with these financial statements are
reasonable.
NOTE 2--CHANGE IN STRUCTURE OF ORGANIZATION:
The Partnership, a Texas general partnership, was established and assumed
ownership of the Division from SPI on August 19, 1994. SPI owns a 99%
interest, and First Colony Sports Properties, Inc., a wholly-owned subsidiary
of SPI, owns a 1% interest in the Partnership. Therefore, common control by
SPI continues to exist; additionally, virtually no change in the operations of
the Club, or in the basis of accounting for its assets and liabilities, has
occurred as a result of this change in the structure of the organization.
NOTE 3--INVENTORIES:
Inventories are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------- -----------
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Merchandise.................................... $211,209 $139,889 $154,831
Food and beverage.............................. 70,090 66,581 65,313
-------- -------- --------
$281,299 $206,470 $220,144
======== ======== ========
</TABLE>
F-24
<PAGE>
SWEETWATER GOLF PARTNERSHIP
(FORMERLY A DIVISION OF SUGARLAND PROPERTIES INCORPORATED)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--CLUBHOUSE, GOLF COURSE AND RELATED FACILITIES:
The clubhouse, golf course and related facilities are comprised of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1994 1995 1996
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Clubhouse building...... $10,330,357 $ 10,330,357 $ 10,330,357
Other buildings and
improvements........... 5,324,690 5,589,539 5,585,868
Land development........ 5,052,767 4,809,365 4,819,660
Furniture, fixtures and
equipment.............. 3,543,220 3,300,780 3,566,244
----------- ------------ ------------
24,251,034 24,030,041 24,302,129
Accumulated
depreciation........... (9,972,182) (10,342,293) (10,698,431)
----------- ------------ ------------
14,278,852 13,687,748 13,603,698
Land.................... 1,293,794 1,293,794 1,293,794
Golf course land........ 5,374,488 5,374,488 5,374,488
----------- ------------ ------------
20,947,134 20,356,030 20,271,980
Loss on disposal of
assets................. (2,700,000) (2,700,000)
----------- ------------ ------------
$20,947,134 $ 17,656,030 $ 17,571,980
=========== ============ ============
</TABLE>
On July 1, 1996, the partnership sold all of its operating assets to an
unrelated party. Under the terms of the sale, the price paid for the clubhouse,
golf course and related facilities was determined to be substantially lower
than their net book value at December 31, 1995; accordingly, these assets were
written down at December 31, 1995 to reflect their sales value.
During 1993, 1994 and 1995 and the six months ended June 30, 1995 and 1996,
depreciation expense amounted to $923,924, $926,633, $909,695, $451,375 and
$482,152, respectively. Accumulated depreciation was reduced by $512,217 and
$539,584 in connection with the retirement of certain fixed assets during 1994
and 1995, respectively, and by $126,014 for the six months ended June 30, 1996.
NOTE 5--NOTES PAYABLE:
Notes payable are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------- -----------
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Texas Commerce Bank, interest at prime
plus 1.75% payable monthly, principal
due August 24, 1996, secured by
substantially all of the Partnership's
assets.................................. $6,609,614 $6,609,614 $6,609,614
Texas Commerce Bank, interest at prime
plus 1.75% payable monthly, principal
reduced by monthly instalment payments
of $11,860, remaining principal due
August 24, 1996, secured by a second
lien on substantially all of the
Partnership's assets.................... 1,340,880 1,313,432 1,242,272
Other notes, various interest rates,
payable monthly, secured by equipment... 5,471 558 194
---------- ---------- ----------
$7,955,965 $7,923,604 $7,852,080
========== ========== ==========
</TABLE>
F-25
<PAGE>
SWEETWATER GOLF PARTNERSHIP
(FORMERLY A DIVISION OF SUGARLAND PROPERTIES INCORPORATED)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--ADVANCES FROM SPI, NET:
Advances from SPI, net are noninterest-bearing, unsecured and consist mainly
of reimbursable costs that are incurred by one party on behalf of the other in
addition to SPI's funding of cumulative working capital shortfalls. Management
of SPI has represented that repayment of these advances will not be required
within the next year, and accordingly, these obligations have been classified
as long-term on the balance sheet.
F-26
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Cobblestone Golf Group, Inc.
We have audited the accompanying statements of operations of Lakeway Country
Club for the years ended December 31, 1993 and 1994, and for the three months
ended March 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
statements of operations 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 statements of operations are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statements of
operations. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall statements of operations presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the statements of operations referred to above present
fairly, in all material respects, the results of operations of Lakeway Country
Club for the years ended December 31, 1993 and 1994, and for the three months
ended March 31, 1995, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Diego, California
July 3, 1996
F-27
<PAGE>
LAKEWAY COUNTRY CLUB
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------- THREE MONTHS ENDED
1993 1994 MARCH 31, 1995
---------- ---------- ------------------
<S> <C> <C> <C>
Operating revenues:
Green fees, cart rentals and
practice facility fees............ $4,592,525 $4,905,610 $1,250,549
Food and beverage.................. 589,293 621,563 152,099
Pro shop........................... 629,669 616,394 157,022
Other.............................. 389,195 376,833 50,812
---------- ---------- ----------
Total operating revenues............. 6,200,682 6,520,400 1,610,482
Operating expenses
Golf course and tennis center
operations........................ 3,548,790 3,650,040 865,257
Cost of food and beverage.......... 201,363 210,908 51,714
Cost of pro shop sales............. 436,529 425,400 108,345
General and administrative......... 1,783,988 1,627,991 307,572
Depreciation....................... 601,218 580,573 173,971
---------- ---------- ----------
Total operating expenses............. 6,571,888 6,494,912 1,506,859
---------- ---------- ----------
Income (loss) from operations........ (371,206) 25,488 103,623
Interest income, net................. 20,890 15,293 6,356
---------- ---------- ----------
Net income (loss).................... $ (350,316) $ 40,781 $ 109,979
========== ========== ==========
</TABLE>
See accompanying notes.
F-28
<PAGE>
LAKEWAY COUNTRY CLUB
NOTE TO STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND THREE MONTHS ENDED MARCH 31, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
In 1991, the Federal Depository Insurance Corporation ("FDIC") took
possession of the assets of Lakeway Company. On January 31, 1995, Hillwood
Development Company ("Hillwood") purchased Lakeway Company from the FDIC.
In April 1995, Cobblestone Holdings, Inc. ("Cobblestone") purchased Live Oak
Golf Course, Yaupon Golf Course, The Hills of Lakesway Golf Course and their
related assets and a tennis center and its related assets from Hillwood. The
assets purchased by Cobblestone were only a portion of Lakeway Company. These
assets are being referred to as Lakeway Country Club (the "Company") herein.
Lakeway Country Club is located north of Austin, Texas near Lake Travis.
The accompanying statements of operations reflect the results of operations
from the assets acquired by Cobblestone. The statements of operations for the
years ended December 31, 1993 and 1994, and for the three month period ended
March 31, 1995 are not necessarily indicative of those that would have been
achieved by the Company had it operated on a stand-alone basis.
REVENUE
Operating revenue is recognized when received except for dues and fees paid
in advance which is recognized over the period during which the dues and fees
allow the members access to the facilities. The Company recognizes revenue on
initiation fees at the time the membership is sold.
PROPERTY, PLANT AND EQUIPMENT
The Company's property, plant and equipment is depreciated using the
straight line over the estimated useful lives of the asset.
RELIANCE ON ESTIMATES
The financial statements have been prepared in accordance with generally
accepted accounting principles and have required management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
INCOME TAXES
Lakeway Country Club records income tax expense as if it would file tax
returns on a stand alone basis. No provision for income taxes has been made
due to the availability of the net operating loss carryforward to offset
taxable income.
F-29
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Cobblestone Golf Group, Inc.
We have audited the combined statements of operations of Stonebridge Country
Club, Inc. and The Ranch Country Club, Inc. for the year ended December 31,
1993 and the eleven and one-half months ended December 15, 1994. These
statements of operations 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 statements of operations are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statements of
operations. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall statement of operations presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the statements of operations referred to above present
fairly, in all material respects, the combined results of operations of
Stonebridge Country Club, Inc. and The Ranch Country Club, Inc. in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
June 21, 1996
F-30
<PAGE>
STONEBRIDGE COUNTRY CLUB, INC.
THE RANCH COUNTRY CLUB, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ELEVEN
AND ONE-
HALF
MONTHS
ENDED
YEAR ENDED DECEMBER
DECEMBER 31, 15,
1993 1994
------------ -----------
<S> <C> <C>
Operating revenues
Green fees, cart rental fees, practice facility
fees, dues and initiation fees.................... $3,319,483 $ 3,611,663
Food and beverage revenues......................... 1,149,343 1,151,130
Pro shop sales..................................... 672,279 658,308
Other.............................................. 344,256 189,881
---------- -----------
Total operating revenues............................. 5,485,361 5,610,982
Operating expenses:
Golf course operations............................. 1,451,871 1,551,028
Cost of food and beverage.......................... 1,553,489 1,543,889
Cost of pro shop sales............................. 1,262,266 1,145,852
General and administrative......................... 1,952,595 2,726,511
Depreciation and amortization...................... 104,532 104,530
---------- -----------
Total operating expenses............................. 6,324,753 7,071,810
---------- -----------
Net loss............................................. $ (839,392) $(1,460,828)
========== ===========
</TABLE>
See accompanying notes.
F-31
<PAGE>
STONEBRIDGE COUNTRY CLUB, INC.
THE RANCH COUNTRY CLUB, INC.
NOTES TO COMBINED STATEMENTS OF OPERATIONS
DECEMBER 31, 1993 AND THE ELEVEN AND ONE HALF MONTHS ENDED DECEMBER 15, 1994
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
Stonebridge Country Club, Inc. and The Ranch Country Club, Inc. (the
"Companies") own and operate two private country clubs. The Companies' main
activities include golf, tennis, swimming and dining. In December 1994,
Cobblestone Golf Group, Inc. purchased substantially all of the assets of the
Companies. Therefore, the accompanying statements of operations reflect the
results of operations from the assets acquired by Cobblestone. The statements
of operations for the years ended December 31, 1993 and the eleven and one
half months ended December 15, 1994 are not necessarily indicative of those
that would have been achieved by the Company had it operated on a stand-alone
basis.
REVENUE
Operating revenue is recognized when received except for dues and fees paid
in advance which is recognized over the period which the dues and fees allow
the members access to the facilities. The Company recognizes revenue on
initiation fees at the time the membership is sold.
PROPERTY, PLANT AND EQUIPMENT
The Company's property, plant and equipment is depreciated using the
straight-line method over the estimated useful lives of the assets.
2. INCOME TAXES
As a result of the Company's net loss, the accompanying statements of
operations does not include any provision for income taxes. The Company has
recorded a valuation allowance on its deferred tax assets since the
realization of such assets is uncertain.
F-32
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Cobblestone Golf Group, Inc.
We have audited the accompanying statements of operations of Brandermill
Country Club, L.P. for the year ended December 31, 1994 and the two months
ended February 28, 1995. These statements of operations are the responsibility
of the Partnership's management. Our responsibility is to express an opinion
on these statements of operations 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 statements of operations are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statements of
operations. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall statements of operations presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the statements of operations referred to above present
fairly, in all material respects, the results of operations of Brandermill
Country Club, L.P. for the year ended December 31, 1994 and the two months
ended February 28, 1995, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Diego, California
July 19, 1996
F-33
<PAGE>
BRANDERMILL COUNTRY CLUB, L.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TWO MONTHS
YEAR ENDED ENDED
DECEMBER 31, FEBRUARY 28,
1994 1995
------------ ------------
<S> <C> <C>
Operating revenues:
Membership dues and initiation fees................. $2,194,861 $359,939
Food and beverage................................... 647,297 50,872
Pro shop sales...................................... 693,820 46,646
Other............................................... 24,465 4,299
---------- --------
Total operating revenues.............................. 3,560,443 461,756
Operating expenses:
Golf course, tennis and swimming pool operations.... 776,614 52,373
Cost of food and beverage........................... 806,432 95,872
Cost of pro shop sales.............................. 701,161 63,862
General and administrative.......................... 710,676 119,563
Depreciation........................................ 83,308 13,885
---------- --------
Total operating expenses.............................. 3,078,191 345,555
Income from operations................................ 482,252 116,201
Interest expense, net................................. (486,794) (72,574)
---------- --------
Net income (loss)..................................... $ (4,542) $ 43,627
========== ========
</TABLE>
See accompanying notes.
F-34
<PAGE>
BRANDERMILL COUNTRY CLUB, L.P.
NOTES TO STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994 AND TWO MONTHS ENDED FEBRUARY 28, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
Brandermill Country Club, L.P. ("BCC"), a limited partnership, owns and
operates a private country club in Midlothian, Virginia. The club's main
activities include golf, tennis, swimming and dining.
In March 1995, BCC sold its land, inventory, receivables, and other selected
assets to Cobblestone Golf Group, Inc. The accompanying statements of
operations reflect the results of operations from the assets acquired by
Cobblestone. The statements of operations for the years ended December 31,
1993 and 1994, and for the three month period ended March 31, 1995 are not
necessarily indicative of those that would have been achieved by the Company
had it operated on a stand-alone basis.
REVENUE
Operating revenue is recognized when received except for dues and fees paid
in advance which are recognized over the period which the dues and fees allow
the members access to the facilities. The Company recognizes revenue on
initiation fees for the amount of the deposit and the amount of the note
receivable at the time the membership is sold.
PROPERTY, PLANT AND EQUIPMENT
The Company's property, plant and equipment is depreciated using the
straight-line method over the estimated useful lives of the asset.
RELIANCE ON ESTIMATES
The financial statements have been prepared in accordance with generally
accepted accounting principles and have required management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
2. INCOME TAXES
Under the provisions of the Internal Revenue Code, partnerships are not
subject to income taxes. For income tax purposes, any income or losses
realized are taxable to the individual partners.
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
Brandermill Country Club, L.P.
Richmond, Virginia
We have audited the balance sheet of Brandermill Country Club, L.P. as of
December 31, 1993, and the related statements of operations, partners'
deficit, and cash flows for the year then ended. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Brandermill Country Club,
L.P. at December 31, 1993, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Richmond, Virginia
April 12, 1994
F-36
<PAGE>
BRANDERMILL COUNTRY CLUB, L.P.
BALANCE SHEET
DECEMBER 31, 1993
<TABLE>
<S> <C>
ASSETS
Current assets
Cash............................................................ $ 96,312
Accounts receivable (Note 2).................................... 55,166
Prepaids and other assets....................................... 2,580
-----------
Total current assets............................................. 154,058
-----------
Property and equipment, net of accumulated depreciation (Notes 1
and 2).......................................................... 1,415,609
-----------
Other assets..................................................... 440
-----------
$ 1,570,107
===========
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities
Accounts payable................................................ $55,271
Current maturities of long-term debt (Note 2)................... 53,670
Other liabilities............................................... --
-----------
Total current liabilities........................................ 108,941
Long-term debt, less current maturities (Note 2)................. 4,541,874
-----------
Total liabilities................................................ 4,650,815
-----------
Commitments (Note 3).............................................
-----------
Partners' deficit
General partner................................................. (323,416)
Limited partners................................................ (2,757,292)
-----------
Total partners' deficit.......................................... (3,080,708)
-----------
$ 1,570,107
===========
</TABLE>
See accompanying independent auditors' report, summary of accounting policies
and notes to financial statements.
F-37
<PAGE>
BRANDERMILL COUNTRY CLUB, L.P.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
REVENUES
<S> <C>
Membership dues.................................................... $1,976,682
Initiation fees.................................................... 217,936
Golf course revenue................................................ 398,084
Other income....................................................... 20,657
----------
Total revenues..................................................... 2,613,359
----------
OPERATING EXPENSES
Management fees (Note 4)........................................... 1,038,933
Depreciation and amortization...................................... 131,137
Repairs and maintenance............................................ 199,012
Supplies........................................................... 112,182
Utilities and telephone............................................ 124,344
Insurance.......................................................... 45,703
Rent (Note 3)...................................................... 88,913
Real estate tax.................................................... 46,242
Other expenses..................................................... 292,140
----------
Total operating expenses............................................ 2,078,606
----------
Operating income.................................................... 534,753
INTEREST EXPENSE, NET............................................... 517,407
----------
NET INCOME.......................................................... $ 17,346
==========
</TABLE>
See accompanying independent auditors' report, summary of accounting policies
and notes to financial statements.
F-38
<PAGE>
BRANDERMILL COUNTRY CLUB, L.P.
STATEMENT OF PARTNERS' DEFICIT
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
--------- ----------- -----------
<S> <C> <C> <C>
PARTNERS' DEFICIT, December 31, 1992...... $(322,054) $(2,749,949) $(3,072,003)
Distributions to partners................. (4,071) (21,980) (26,051)
Net income for the year................... 2,709 14,637 17,346
--------- ----------- -----------
PARTNERS' DEFICIT, December 31, 1993...... $(323,416) $(2,757,292) $(3,080,708)
========= =========== ===========
</TABLE>
See accompanying independent auditors' report, summary of accounting policies
and notes to financial statements.
F-39
<PAGE>
BRANDERMILL COUNTRY CLUB, L.P.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income.......................................................... $ 17,346
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization...................................... 131,137
Decrease in accounts receivable.................................... 6,834
Decrease in prepaids and other assets.............................. --
Increase (decrease) in accounts payable............................ (22,773)
Other.............................................................. (12,826)
--------
Net cash provided by operating activities............................ 119,718
--------
INVESTING ACTIVITIES
Purchase of property and equipment.................................. (47,500)
--------
Net cash absorbed by investing activities............................ (47,500)
--------
FINANCING ACTIVITIES
Payments on long-term debt.......................................... (47,866)
Distributions to partners........................................... (26,051)
--------
Net cash absorbed by financing activities............................ (73,917)
--------
INCREASE (DECREASE) IN CASH.......................................... (1,699)
CASH, beginning of year.............................................. 98,011
--------
CASH, end of year.................................................... $ 96,312
========
</TABLE>
See accompanying independent auditors' report, summary of accounting policies
and notes to financial statements.
F-40
<PAGE>
BRANDERMILL COUNTRY CLUB, L.P.
SUMMARY OF ACCOUNTING POLICIES
<TABLE>
<C> <S>
NATURE OF Brandermill Country Club, L.P. ("BCC"), a limited
BUSINESS partnership, owns and operates a private country club
in Midlothian, Virginia. The club's main activities
include golf, tennis, swimming and dining.
OTHER ASSETS Other assets consist primarily of deferred financing
costs related to the note payable to Crestar Bank,
and are being amortized over the term of the note,
(five years).
PROPERTY AND Property and equipment is stated at cost.
EQUIPMENT Expenditures for ordinary maintenance and repairs are
charged to expense as incurred. Cost of betterments,
renewals and major replacements are capitalized. At
the time properties are retired or otherwise disposed
of, the related costs and allowances for depreciation
are eliminated from the accounts and any gain or loss
on disposition is reflected in income.
Depreciation is computed using accelerated methods
over the estimated useful lives of the assets.
INCOME TAXES BCC is a partnership and, consequently, each partner
will report their proportional share of the income,
losses and credits on their individual tax return.
SUPPLEMENTAL DISCLOSURE Cash payments for interest amounted to $518,310 for
OF CASH FLOW INFORMATION the year ended December 31, 1993.
</TABLE>
See accompanying independent auditors' report.
F-41
<PAGE>
BRANDERMILL COUNTRY CLUB, L.P.
NOTES TO FINANCIAL STATEMENTS
1. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1993
------------
<S> <C>
Land............................................................... $ 349,099
Buildings.......................................................... 823,579
Land improvements.................................................. 309,030
Furniture and fixtures............................................. 163,050
Machinery and equipment............................................ 151,331
Tennis courts...................................................... 29,070
Landscaping........................................................ 34,438
Shuffleboard courts................................................ 1,492
Parking lots....................................................... 10,229
----------
1,871,318
Less accumulated depreciation...................................... 455,709
----------
Net property and equipment......................................... $1,415,609
==========
</TABLE>
2. LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1993
------------
<S> <C>
Note payable to Crestar Bank (Crestar), with interest at 11%,
collateralized by property and equipment with a book value of
approximately $1,416,000 at December 31, 1993, a first security
interest in accounts receivable, and personal guarantees of the
limited partners, due in 59 monthly installments (amortized on a
25-year basis) through March 1, 1995, with the final installment
equal to an amount to pay the loan in full due on April 1, 1995
(See below)..................................................... $4,595,544
Less current maturities.......................................... 53,670
----------
$4,541,874
==========
</TABLE>
On January 28, 1994, the Partnership entered into a new note agreement with
NationsBank in the principal amount of $5,550,000; proceeds of which were used
primarily to pay off the Crestar note. The new note bears interest at 7.70%.
Principal and interest are payable by the Partnership in monthly installments
of $45,757 through February 1997, on which date the entire remaining principal
balance is due.
Amounts maturing under the new note during each of its remaining years are as
follows: 1994--$110,552; 1995--$129,085; 1996--$139,531; 1997--$5,170,832.
3. COMMITMENTS
BCC leases certain equipment under operating leases expiring at various dates
through 1998. Future minimum rental payments required that have initial or
remaining noncancelable terms in excess of one year as of December 31, 1993 are
approximately $61,521 in 1994; $58,514 in 1995; $58,514 in 1996; $43,952 in
1997; and $39,601 in 1998. Total rental expense amounted to $88,913 for the
year ended December 31, 1993.
See accompanying independent auditors' report.
F-42
<PAGE>
BRANDERMILL COUNTRY CLUB, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. RELATED PARTY TRANSACTIONS
For the year ended December 31, 1993 BCC paid $1,038,933 to East West
Partners of Virginia, Inc., a related entity to BCC, for management and
administrative fees. This amount relates primarily to salary and employee
benefit costs incurred by employees of East West.
See accompanying independent auditors' report.
F-43
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Cobblestone Golf Group, Inc.
We have audited the accompanying statements of income for Pecan Grove
Plantation Country Club, Inc. (the "Club") for the year ended December 31,
1993 and the month ended January 31, 1994. These statements of income are the
responsibility of the Club'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 statements of income are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statements of income. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall statement of
income presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the statements of income referred to above present fairly,
in all material respects, the results of operations of Pecan Grove Plantation
Country Club, Inc. for the year ended December 31, 1993 and the month ended
January 31, 1994, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
July 19, 1996
F-44
<PAGE>
PECAN GROVE PLANTATION COUNTRY CLUB, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED MONTH ENDED
DECEMBER 31, JANUARY 31,
1993 1994
------------ -----------
<S> <C> <C>
Operating revenues:
Green fees, cart rental fees, practice facility
fees, dues and initiation fees..................... $2,282,397 $182,064
Food and beverage revenues.......................... 408,847 20,067
Pro shop sales...................................... 283,230 5,980
Other............................................... 26,522 1,177
---------- --------
Total operating revenues.............................. 3,000,996 209,288
Operating expenses:
Golf course operations.............................. 2,380,405 171,304
Cost of food and beverage........................... 177,772 7,151
Cost of pro shop sales.............................. 265,547 11,606
Depreciation and amortization....................... 79,295 6,125
---------- --------
Total operating expenses.............................. 2,903,019 196,186
Income from operations................................ 97,977 13,102
Provision for income taxes............................ 25,404 4,000
---------- --------
Net income............................................ $ 72,573 $ 9,102
========== ========
</TABLE>
See accompanying notes.
F-45
<PAGE>
PECAN GROVE PLANTATION COUNTRY CLUB
NOTES TO STATEMENTS OF INCOME
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
Pecan Grove Plantation Country Club (the "Company") is located in Richmond,
Texas, and consists of a 27-hole private golf course, driving range, tennis
courts, pool, clubhouse and pro shop. In February, 1994 the Company sold its
land, inventory, receivables, and other selected assets to Cobblestone Golf
Group, Inc.
The accompanying statements of income reflect the results of operations from
the assets acquired by Cobblestone Golf Group, Inc.. The statements of
operations for the year ended December 31, 1993 and for the month ended
January 31, 1994 are not necessarily indicative of those that would have been
achieved by the Company had it operated on a stand alone basis.
REVENUE
Operating revenue is recognized when received except for dues and fees paid
in advance which are recognized over the period during which the dues and fees
allow the members access to the facilities. The Company recognizes revenue on
initiation fees at the time the membership is sold.
PROPERTY, PLANT AND EQUIPMENT
The Company's property, plant and equipment is depreciated using the
straight-line method over the estimated useful lives of the asset.
RELIANCE ON ESTIMATES
The statements of income have been prepared in accordance with generally
accepted accounting principles and have required management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the statements of income and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
2. INCOME TAXES
The provision (benefit) for income taxes at January 31, 1994 and December
31, 1993 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
1993 1994
------------ -----------
<S> <C> <C>
Current:
Federal........................................ $20,882 $3,280
State.......................................... 4,522 720
Deferred:
Federal........................................ -- --
State.......................................... -- --
------- ------
$25,404 $4,000
======= ======
</TABLE>
See accountants' review report.
F-46
<PAGE>
PECAN GROVE PLANTATION COUNTRY CLUB
NOTES TO STATEMENTS OF INCOME--(CONTINUED)
2. INCOME TAXES (CONTINUED)
A reconciliation of the effective tax rates and the statutory federal income
tax rates are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
1993 1994
------------ -----------
<S> <C> <C>
Tax at federal rate..... $ 35,174 $ 4,717
State income tax, net of
federal tax benefits... 2,939 469
Benefit of graduated
rates.................. (12,709) (1,186)
-------- -------
$ 25,404 $ 4,000
======== =======
</TABLE>
See accountants' review report.
F-47
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Cobblestone Golf Group, Inc.
We have audited the accompanying statement of income of Ocean Vista Land
Company for the five months ended May 31, 1993. This statement of income is
the responsibility of Ocean Vista Land Company's management. Our
responsibility is to express an opinion on this statement of income based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of income is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of income. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall statement of
income presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the statement of income referred to above presents fairly,
in all material respects, the results of operations of Ocean Vista Land
Company for the five months ended May 31, 1993, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
July 19, 1996
F-48
<PAGE>
OCEAN VISTA LAND COMPANY
STATEMENT OF INCOME
FIVE MONTHS ENDED MAY 31, 1993
<TABLE>
<S> <C>
Operating revenues:
Green fees, cart rental fees, practice facility fees,
dues and initiation fees......................................... $1,815,550
Food and beverage revenues........................................ 482,836
Other............................................................. 260,631
----------
Total operating revenues............................................ 2,559,017
Operating expenses:
Golf course operations............................................ 619,879
Cost of food and beverage......................................... 483,235
General and administrative........................................ 1,020,490
----------
Total operating expenses............................................ 2,123,604
----------
Net income.......................................................... $ 435,413
==========
</TABLE>
See accompanying notes.
F-49
<PAGE>
OCEAN VISTA LAND COMPANY
NOTE TO STATEMENT OF INCOME
FIVE MONTHS ENDED MAY 31, 1993
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
Ocean Vista Land Company owns and operates the El Camino Country Club ("El
Camino") and Whispering Palms Lodge and Country Club ("Whispering Palms"). El
Camino is located in Oceanside, California, and consists of an 18-hole private
golf course, driving range, tennis courts, pool, clubhouse and pro shop.
Whispering Palms is located in Rancho Santa Fe, California, and consists of a
27-hole semi-private golf course, lodge, tennis courts, swimming pool,
clubhouse and pro shop.
In June 1993, Cobblestone Golf Group, Inc. purchased substantially all of
the stock of Ocean Vista Land Company.
REVENUE
Operating revenue is recognized when received except for dues and fees paid
in advance which are recognized over the period during which the dues and fees
allow the members access to the facilities. The Company recognizes revenue on
initiation at the time the membership is sold.
RELIANCE ON ESTIMATES
The financial statements have been prepared in accordance with generally
accepted accounting principles and have required management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
INCOME TAXES
The effective rate for income tax differs from the statutory rate as a
result of the change in deferred taxes related to the write off of notes
receivable and investments.
F-50
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Cobblestone Golf Group, Inc.
We have audited the accompanying statement of operations of Saticoy Regional
Golf Course for the two and a half months ended March 12, 1993. This statement
of operations is the responsibility of Saticoy Regional Golf Course's
management. Our responsibility is to express an opinion on this statement of
operations based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of operations is free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of
operations. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall statement of operations presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the statement of operations referred to above presents
fairly, in all material respects, the results of operations of Saticoy
Regional Golf Course for the two and a half months ended March 12, 1993, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
July 19, 1996
F-51
<PAGE>
SATICOY REGIONAL GOLF COURSE
STATEMENT OF OPERATIONS
FOR THE TWO AND A HALF MONTHS ENDED MARCH 12, 1993
<TABLE>
<S> <C>
Operating revenues:
Green fees, golf cart and range revenue............................ $ 77,538
Food and beverage.................................................. 7,249
Pro shop sales..................................................... 4,050
Other.............................................................. 4,205
--------
Total operating revenues............................................. 93,042
Operating expenses:
Golf course operations............................................. 43,302
Cost of food and beverage.......................................... 4,415
Cost of pro shop sales............................................. 3,911
General and administrative......................................... 21,687
Depreciation....................................................... 15,824
--------
Total operating expenses............................................. 89,139
Income from operations............................................... 3,903
Interest expense, net................................................ (14,499)
--------
Net income (loss).................................................... $(10,596)
========
</TABLE>
See accompanying notes.
F-52
<PAGE>
SATICOY REGIONAL GOLF COURSE
NOTES TO STATEMENT OF OPERATIONS
FOR THE TWO AND HALF MONTHS ENDED MARCH 12, 1993
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
Saticoy Regional Golf Course (the "Company") is a public golf course located
in Ventura, California. The facility consists of a 9-hole municipal golf
course, driving range, and pro shop.
In March of 1993, Cobblestone Golf Group, Inc. acquired the leasehold
interest in the Company.
REVENUE
Operating revenue is recognized when received.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is depreciated using the straight-line method
over the estimated useful lives of the asset.
INCOME TAXES
As a result of the Company's net loss, the accompanying statement of
operations does not include any provision for income taxes. The Company has
recorded a valuation allowance on its deferred tax assets since the
realization of such assets is uncertain.
F-53
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information of the
Company presents the uanudited pro forma consolidated statements of operations
for the year ended September 30, 1995, and the nine months ended June 30,
1996, and the unaudited pro forma consolidated balance sheet at June 30, 1996.
The pro forma combined consolidated statements of operations for the year
ended September 30, 1995, and the nine months ended June 30, 1996, have been
adjusted to give effect to (i) the Company's acquisition of Red Mountain Ranch
Country Club (completed in January, 1995), the Hills of Lakeway (completed in
March, 1995), Live Oak Golf Course (completed in March, 1995), Brandermill
Country Club (completed in March, 1995), Yaupon Golf Course (completed in
March, 1995), the Ranch Country Club (completed in December, 1994),
Stonebridge Country Club (completed in December, 1994), (ii) the Company's
acquisition of Eagle Crest Country Club (completed in June, 1996), and
Sweetwater Country Club (completed in July, 1996), in each case as if such
transactions had occurred on October 1, 1994. The pro forma consolidated
balance sheet at June 30, 1996, has been adjusted to give effect to the
acquisition of Sweetwater Country Club, which occurred after June 30, 1996.
Pro forma adjustments relating to the 1995 Acquisitions and the 1996
Acquisitions are referred to herein collectively as the "Pro Forma Acquisition
Adjustments."
The pro forma as adjusted consolidated statements of operations for the year
ended September 30, 1995 and for the nine months ended June 30, 1996, give
additional effect to (i) the issuance by the Company of $70,000,000 aggregate
principal amount of its 11 1/2% Series A Senior Notes due 2003, (ii) the
issuance by Holdings of 86,000 units, each consisting of $1,000 principal
amount at maturity of its 13 1/2% Series A Senior Zero-Coupon Notes due 2004
and one share of its common stock, for $352.04 per unit, and the contribution
by Holdings to the Company of the net proceeds of $28.7 million, (iii) the
increase in interest expense as a result of the increase in indebtedness, (iv)
the write-off of the unamortized loan fees, in each case as if such
transactions had occurred on the first day of the period presented. The pro
forma adjustments relating to the transactions referred to in clauses (i)
through (iv) are referred to herein collectively as the "Pro Forma Offering
Adjustments."
The Pro Forma Acquisition Adjustments and Pro Forma Offering Adjustments
represent the Company's determination of all adjustments necessary to present
fairly the Company's pro forma results of operations and financial position
and are based upon available information and certain assumptions considered
reasonable under the circumstances. The pro forma consolidated financial
information presented herein does not purport to present what the Company's
financial position or results of operations would actually have been had such
events leading to the Pro Forma Acquisition Adjustments and Pro Forma Offering
Adjustments in fact occurred on the date or at the beginning of the periods
indicated or to project the Company's financial position or results of
operations for any future date or period.
The pro forma consolidated financial information should be read in
conjunction with the historical Consolidated Financial Statements of the
Company and the Notes thereto and management's discussion thereof contained
elsewhere in this Prospectus. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements and the Notes thereto.
F-54
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL 1995 1996 ACQUISITIONS PRO FORMA OFFERING PRO FORMA AS
HOLDINGS ACQUISITIONS (7) ACQUISITIONS (8) ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
----------- ---------------- ---------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating reve-
nues:
Green fees, cart
rental fees,
practice
facility fees,
dues and
initiation
fees........... $38,043,441 $4,263,175 $ 7,766,082 $ -- $50,072,698 $ -- $ 50,072,698
Food and
beverage
revenues....... 7,034,407 857,275 2,074,500 -- 9,966,182 -- 9,966,182
Pro shop sales.. 3,311,062 705,421 840,810 -- 4,857,293 -- 4,857,293
Other........... 1,473,869 172,703 557,146 -- 2,203,718 -- 2,203,718
----------- ---------- ----------- ---------- ----------- ----------- ------------
Total operating
revenues........ 49,862,779 5,998,574 11,238,538 -- 67,099,891 -- 67,099,891
Operating
expenses:
Golf course
operations..... 29,591,886 2,313,558 2,967,097 -- 34,872,541 -- 34,872,541
Cost of food and
beverage....... 2,613,295 799,046 2,124,723 -- 5,537,064 -- 5,537,064
Cost of pro shop
sales.......... 2,221,330 717,656 681,019 -- 3,620,005 -- 3,620,005
General and
administrative.. 2,517,423 2,329,720 3,623,606 1,168,375 (1) 9,639,124 -- 9,639,124
Depreciation and
amortization... 6,144,430 422,824 1,084,719 (597,704)(2) 7,054,269 -- 7,054,269
----------- ---------- ----------- ---------- ----------- ----------- ------------
Total operating
expense......... 43,088,364 6,582,804 10,481,164 570,671 60,723,003 -- 60,723,003
----------- ---------- ----------- ---------- ----------- ----------- ------------
Income (loss)
from
operations...... 6,774,415 (584,230) 757,374 (570,671) 6,376,888 -- 6,376,888
Interest expense,
net............. (8,019,072) (209,452) (844,873) (339,586)(3) (9,412,983) (3,408,459)(4) (12,821,442)
Loss on disposal
of assets....... -- -- (2,700,000) 2,700,000 (6) -- -- --
Gain on insurance
settlement...... 746,845 -- 746,845 -- 746,845
----------- ---------- ----------- ---------- ----------- ----------- ------------
Loss before
income taxes and
extraordinary
item............ (497,812) (793,682) (2,787,499) 1,789,743 (2,289,250) (3,408,459) (5,697,709)
Provision for
income taxes.... 208,000 -- -- -- 208,000 -- 208,000
----------- ---------- ----------- ---------- ----------- ----------- ------------
Loss before
extraordinary
item............ (705,812) (793,682) (2,787,499) 1,789,743 (2,497,250) (3,408,459) (5,905,709)
Extraordinary
item............ -- -- -- -- -- (2,998,986)(5) (2,998,986)
----------- ---------- ----------- ---------- ----------- ----------- ------------
Net loss......... $ (705,812) $ (793,682) $(2,787,499) $1,789,743 $(2,497,250) $(6,407,445) $ (8,904,695)
=========== ========== =========== ========== =========== =========== ============
</TABLE>
See accompanying notes.
F-55
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS AT SEPTEMBER
30, 1995
(1) Represents operating lease payments related to Sweetwater Country Club
assuming the lease on the property was acquired at the beginning of the
period.
(2) Represents the elimination of the historical depreciation and amortization
of 1995 and 1996 Acquisitions of $422,824 and $1,084,719, respectively,
and the Company's estimate for depreciation and amortization of $664,959
and $244,880, respectively, assuming the property, equipment and leasehold
interests acquired were stated at fair market value at the beginning of
the period.
(3) Represents the net effect from the elimination of historical interest
expense for the 1995 and 1996 Acquisitions of $209,452 and $844,873,
respectively and the effect on interest expense from the borrowings
required to fund the 1995 and 1996 Acquisitions as if the transactions
were consummated at the beginning of the period of $788,974 and $604,937,
respectively.
(4) Represents the net effect from the elimination of historical interest
expense of $9,447,651 assuming all existing debt was repayed by the use of
offering proceeds at the beginning of the period and the effects on
interest expense related to the debt offering of $12,856,110.
(5) Represents the write-off of the unamortized loan fees.
(6) Represents the elimination of the loss on disposal of assets related to
Sweetwater Country Club.
(7) The following is a summary of revenue and net income (loss) for the 1995
Acquisitions.
<TABLE>
<CAPTION>
REVENUE NET INCOME (LOSS)
---------- -----------------
<S> <C> <C>
Red Mountain Ranch C.C..................... $ 593,062 $ (52,877)
Stonebridge and The Ranch C.C.............. 1,084,880 (908,984)
Brandermill C.C............................ 1,308,880 142,351
The Hills of Lakeway, Live Oak Golf Course
and Yaupon Golf Course (a)................ 3,012,368 25,828
---------- ----------
$5,998,574 $ (793,682)
========== ==========
</TABLE>
(a) Facilities were acquired as part of the same acquisition, therefore,
amounts have been aggregated.
(8) The following is a summary of revenue and net income (loss) for the 1996
Acquisitions:
<TABLE>
<CAPTION>
REVENUE NET INCOME (LOSS)
----------- -----------------
<S> <C> <C>
Eagle Crest Golf Club...................... $ 1,630,157 $ 76,631
Sweetwater C.C............................. 9,608,381 (2,864,530)
----------- -----------
$11,238,538 $(2,787,899)
=========== ===========
</TABLE>
F-56
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL 1996 ACQUISITIONS PRO FORMA OFFERING PRO FORMA
HOLDINGS ACQUISITIONS (5) ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
----------- ---------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Green fees, cart rental
fees, practice
facility fees, dues
and initiation fees... $31,760,988 $6,094,034 $ -- $37,855,022 $ -- $37,855,022
Food and beverage
revenues.............. 6,886,496 1,723,726 -- 8,610,222 -- 8,610,222
Pro shop sales......... 3,403,735 618,550 -- 4,022,285 -- 4,022,285
Other.................. 1,664,652 393,791 -- 2,058,443 -- 2,058,443
----------- ---------- --------- ----------- ---------- -----------
Total operating
revenues............... 43,715,871 8,830,101 -- 52,545,972 -- 52,545,872
Operating expenses:
Golf course
operations............ 25,860,509 2,884,921 -- 28,745,430 -- 28,745,430
Cost of food and
beverage.............. 2,331,328 1,667,628 -- 3,998,956 -- 3,988,956
Cost of pro shop
sales................. 2,259,311 495,186 -- 2,754,497 -- 2,754,497
General and
administrative........ 2,595,799 1,913,122 876,281 (1) 5,385,202 -- 5,385,202
Depreciation and
amortization.......... 5,353,224 921,659 (737,998)(2) 5,536,885 -- 5,536,885
----------- ---------- --------- ----------- ---------- -----------
Total operating
expense................ 38,400,171 7,882,516 138,283 46,420,970 -- 46,420,970
----------- ---------- --------- ----------- ---------- -----------
Income (loss) from
operations............. 5,315,700 947,585 (138,283) 6,125,002 -- 6,125,002
Interest expense, net... (8,192,817) (604,786) 151,083 (3) (8,646,520) (84,823)(4) (8,731,343)
----------- ---------- --------- ----------- ---------- -----------
Income (loss) before
income taxes and
extraordinary item..... (2,877,117) 342,799 12,800 (2,521,518) (84,823) (2,606,341)
Provision for income
taxes.................. 137,480 -- -- 137,480 -- 137,480
----------- ---------- --------- ----------- ---------- -----------
Income (loss) before
extraordinary item..... (3,014,597) 342,799 12,800 (2,658,998) (84,823) (2,743,821)
Extraordinary item...... (3,520,401) -- -- (3,520,401) 3,520,401 --
----------- ---------- --------- ----------- ---------- -----------
Net income (loss)....... $(6,534,998) $ 342,799 $ 12,800 $(6,179,399) $3,435,578 $(2,743,821)
=========== ========== ========= =========== ========== ===========
</TABLE>
See accompanying notes.
F-57
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS AT JUNE 30,
1996
(1) Represents operating lease payments related to Sweetwater Country Club
assuming the lease on the property was acquired at the beginning of the
period.
(2) Represents the elimination of the historical depreciation and amortization
of 1996 Acquisitions of $921,659 and the Company's estimate for
depreciation and amortization of $183,661 assuming the property, equipment
and leasehold interests acquired were stated at fair market value at the
beginning of the period.
(3) Represents the net effect from the elimination of historical interest
expense for the 1996 Acquisitions of $604,786 and the effect on interest
expense from the borrowings required to fund the 1996 Acquisitions as if
the transactions were consummated at the beginning of the period of
$453,703.
(4) Represents the net effect from the elimination of historical interest
expense of $7,369,575 assuming all existing debt was repayed by the use of
offering proceeds at the beginning of the period and the effects on
interest expense related to the debt offering of $7,454,398.
(5) The following is a summary of revenue and net income for the 1996
Acquisitions:
<TABLE>
<CAPTION>
REVENUE NET INCOME
---------- ----------
<S> <C> <C>
Eagle Crest Golf Club.............................. $1,356,434 $ 97,479
Sweetwater C.C..................................... 7,473,667 245,320
---------- --------
$8,830,101 $342,799
========== ========
</TABLE>
F-58
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AT JUNE 30, 1996
<TABLE>
<CAPTION>
SWEETWATER
HISTORICAL C.C. PRO FORMA PRO FORMA AS
HOLDINGS (1) ACQUISITION ACQUISITION ADJUSTMENTS ADJUSTED
------------ ----------- ----------------------- ------------
DEBITS (CREDITS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 1,841,057 $ 642,300 $ (176,393)(3) $ 2,306,964
Accounts receivable,
net................... 2,469,851 1,081,436 (1,081,436)(3) 2,469,851
Current portion of
notes receivable,
net................... 1,592,206 -- -- 1,592,206
Inventory.............. 1,950,223 220,144 (34,278)(3) 2,136,089
Prepaid expenses and
other current assets.. 452,747 57,974 (44,015)(3) 466,706
------------ ----------- ------------ ------------
Total current assets.... 8,306,084 2,001,854 (1,336,122) 8,971,816
Property, equipment and
leasehold interest,
net.................... 138,161,490 17,571,980 (17,571,980)(2) 138,161,490
Notes receivable, net... 3,745,263 -- -- 3,745,263
Intangibles assets,
net.................... 3,969,931 -- -- 3,969,931
Other assets, net....... 5,374,963 -- -- 5,374,963
------------ ----------- ------------ ------------
$159,557,731 $19,573,834 $(18,908,102) $160,223,463
============ =========== ============ ============
LIABILITIES AND
PARTNERS' CAPITAL (NET
CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable....... $ 1,349,985 $ 163,035 $ 163,035 (4) $ 1,349,985
Accrued payroll and
related expenses...... 1,686,971 -- -- 1,686,971
Accrued interest
expense............... 1,011,432 -- -- 1,011,432
Accrued property
taxes................. 675,330 -- -- 675,330
Deferred revenue....... 1,967,909 651,315 179,570 (4) 2,439,654
Current portion of
long-term debt and
capital lease
obligations........... 441,552 -- -- 441,552
Current portion of
deferred purchase
price................. 248,329 -- -- 248,329
Income taxes payable... 7,196 -- -- 7,196
Other current
liabilities........... 495,619 413,229 219,242 (4) 689,606
------------ ----------- ------------ ------------
Total current
liabilities............ 7,884,323 1,227,579 561,847 8,550,055
Long term debt, security
deposits and capital
lease obligations...... 106,057,177 13,927,718 13,927,718 (4) 106,057,177
Note payable to
stockholder/officer.... 222,971 -- -- 222,971
Deferred purchase
price.................. 924,692 -- -- 924,692
Long-term deferred
revenue................ 2,481,326 -- -- 2,481,326
Deferred income taxes... 3,458,583 -- -- 3,458,583
Minority interest....... 380,984 -- -- 380,984
Commitments
Redeemable preferred
stock.................. 42,241,169 -- -- 42,241,169
Net partners' capital
(capital deficiency):
Common stock........... 2,208 -- -- 2,208
Paid in capital........ 5,403,999 7,157,899 7,157,899 (5) 5,403,999
Accumulated deficit.... (9,499,701) (2,739,362) 2,739,362 (5) (9,499,701)
------------ ----------- ------------ ------------
Net partners' capital
(capital deficiency)... (4,093,494) 4,418,537 4,418,537 (4,093,494)
------------ ----------- ------------ ------------
$159,557,731 $19,573,834 $ 18,908,102 $160,223,463
============ =========== ============ ============
</TABLE>
See accompanying notes.
F-59
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AT JUNE 30, 1996
(1) The purchase method of accounting has been used in preparing the
Unaudited Pro Forma Consolidated Financial Statements of Holdings with
respect to the Sweetwater C.C. Acquisition. Purchase accounting values
have been assigned to the Sweetwater C.C. Acquisition on a preliminary
basis in the Pro Forma Acquisition Adjustments. Management expects the
final purchase accounting valuation to be completed before September 30,
1996.
(2) The Sweetwater C. C. acquisition was made by the Company by entering into
a 15 year operating lease. As such, the historical cost of the golf
course facilities has been eliminated.
(3) Elimination of assets not acquired.
(4) Elimination of liabilities not assumed.
(5) Elimination of equity.
F-60
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER CON-
TAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY HOLDINGS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO
WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE NOTES OFFERED HEREBY TO ANY PERSON IN ANY JURISDIC-
TION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIV-
ERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF HOLDINGS SINCE SUCH DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary.................................................................. 4
Risk Factors............................................................. 15
The Exchange Offer....................................................... 21
The Offerings............................................................ 29
The Recapitalization..................................................... 29
Use of Proceeds.......................................................... 29
Consolidated Capitalization.............................................. 30
Selected Consolidated Financial Information.............................. 31
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 33
Business................................................................. 39
Management............................................................... 49
Certain Relationships and Related Transactions........................... 52
Principal Stockholders................................................... 53
Description of Notes..................................................... 55
Description of Capital Stock............................................. 76
Description of Principal Indebtedness.................................... 77
Certain Federal Income Tax Considerations................................ 79
Plan of Distribution..................................................... 79
Legal Matters............................................................ 80
Experts.................................................................. 80
Available Information.................................................... 81
Index to Financial Statements............................................ F-1
</TABLE>
UNTIL , 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES,
WHETHER OR NOT PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER
A PROSPECTUS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO OF COBBLESTONE HOLDINGS, INC.]
COBBLESTONE HOLDINGS, INC.
OFFER TO EXCHANGE
13 1/2% SERIES B SENIOR ZERO-COUPON NOTES DUE 2004
FOR ALL OUTSTANDING 13 1/2% SERIES A SENIOR ZERO-COUPON NOTES DUE 2004
----------------
PROSPECTUS
----------------
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Certificate of Incorporation and the Bylaws of Holdings provide for the
indemnification by Holdings of each director, officer, employee and agent of
Holdings to the fullest extent permitted by the Delaware General Corporation
Law, as the same exists or may hereafter be amended. Section 145 of the
Delaware General Corporation Law provides in relevant part that a corporation
may indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that such person
is or was a director, officer, employee,or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such person's conduct
was unlawful.
In addition, Section 145 provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if
such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the corporation and
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery
or the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper. Delaware law further provides that nothing in the
above-described provisions shall be deemed exclusive of any other rights to
indemnification or advancement of expenses to which any person may be entitled
under any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise.
The Certificate of Incorporation of Holdings further provides that a
Director of Holdings shall not be personally liable to Holdings or its
stockholders for monetary damages for any breach of fiduciary duty as a
Director. Section 102(b)(7) of the Delaware General Corporation Law provides
that a provision so limiting the personal liability of a director shall not
eliminate or limit the liability of a director for, among other things: breach
of the duty of loyalty, acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; unlawful payment of
dividends; and transactions from which the director derived an improper
personal benefit.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
A list of exhibits filed with this Registration Statement on Form S-4 is
set forth in the Index to Exhibits on page E-1 and is incorporated herein
by reference.
(b) Financial Statement Schedules:
Schedule II. Valuation of Qualifying Accounts.
II-2
<PAGE>
SCHEDULES OMITTED
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the information required
by such omitted schedules is set forth in the financial statements or the
notes thereto.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that insofar as
indemnification for liabilities arising under the Securities Act of 1933, as
amended (the "Act"), may be permitted to directors, officers and controlling
persons of the Registrants pursuant to the foregoing provisions, or otherwise,
the Registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim of
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or the registrant in the successful defense of
any action, suit paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into this prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d)(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement; (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the prospectus any facts or events arising after the effective date
of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration Statement; (iii) to
include any material information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any material change to
such information in the Registration Statement;
(2) That, for purposes of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Cobblestone Holdings, Inc. has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Los Angeles, State of California, on September 17, 1996.
COBBLESTONE HOLDINGS, INC.
/s/ Stefan C. Karnavas
By: _________________________________
Stefan C. Karnavas
Chief Financial Officer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
Chief Executive
* Officer and September 17,
- ------------------------------------- Director (Principal 1996
James A. Husband Executive Officer)
* Director September 17,
- ------------------------------------- 1996
David B. Wong
* Director September 17,
- ------------------------------------- 1996
Frederick J. Warren
* Director September 17,
- ------------------------------------- 1996
P.L. Davies III
* Director September 17,
- ------------------------------------- 1996
Martin R. Reid
* Director September 17,
- ------------------------------------- 1996
John M. Sullivan
/s/ Stefan C. Karnavas Chief Financial September 17,
- ------------------------------------- Officer (Principal 1996
Stefan C. Karnavas Financial and
Accounting Officer)
*Power of Attorney by
/s/ Stefan C. Karnavas
- -------------------------------------
Stefan C. Karnavas
Chief Financial Officer (Principal
Financial and Accounting Officer)
II-4
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
COBBLESTONE HOLDINGS, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1994 1995
----------- -----------
ASSETS
------
<S> <C> <C>
Investment in and net amounts due from wholly owned
subsidiary......................................... $31,461,544 $43,369,875
=========== ===========
REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
---------------------------------------------------
Redeemable preferred stock.......................... $33,611,345 $42,241,169
Stockholders' equity (net capital deficiency):
Common stock....................................... 13,221 16,340
Paid-in capital.................................... 95,869 4,077,069
Accumulated deficit................................ (2,258,891) (2,964,703)
----------- -----------
Total stockholders' equity (net capital
deficiency)........................................ (2,149,801) 1,128,706
----------- -----------
$31,461,544 $43,369,875
=========== ===========
</TABLE>
See accompanying notes.
S-1
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
COBBLESTONE HOLDINGS, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1993 1994 1995
--------- ----------- ---------
<S> <C> <C> <C>
Equity in net loss of wholly owned
subsidiary................................ $(852,502) $(1,406,389) $(705,812)
========= =========== =========
</TABLE>
See accompanying notes.
S-2
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
COBBLESTONE HOLDINGS, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1993 1994 1995
--------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................ $(852,502) $(1,406,389) $ (705,812)
Equity in net loss of wholly owned
subsidiary............................. 852,502 1,406,389 705,812
Change in accounts payable and accrued
expenses............................... -- -- --
--------- ----------- ------------
Net cash provided by operating
activities............................. -- -- --
INVESTING ACTIVITIES
Contribution to wholly owned
subsidiary............................. -- -- (12,614,143)
FINANCING ACTIVITIES
Proceeds from issuance of redeemable
preferred stock........................ -- -- 8,629,824
Proceeds from issuance of common stock.. -- -- 3,984,319
--------- ----------- ------------
Net cash provided by financing
activities............................. -- -- 12,614,143
--------- ----------- ------------
Net change in cash...................... $ -- $ -- $ --
========= =========== ============
NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of preferred stock in exchange
for common stock and preferred stock of
wholly owned subsidiary................ $ -- $33,611,345 $ --
========= =========== ============
Issuance of common stock in exchange for
preferred stock of wholly owned
subsidiary............................. $ -- $ 109,090 $ --
========= =========== ============
</TABLE>
See accompanying notes.
S-3
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
COBBLESTONE HOLDINGS, INC. (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
1. BASIS OF PRESENTATION
Cobblestone Holdings, Inc. (the "Company"), a Delaware corporation, was
incorporated on January 18, 1994 by shareholders of Cobblestone Golf Group,
Inc. ("CGGI"). On January 31, 1994, the Company issued shares of its common
and preferred stock in exchange for all of the shares of CGGI. The transaction
has been accounted for at historical cost in a manner similar to a pooling of
interests and, accordingly, had no effect on the accompanying consolidated
financial statements.
The Company owns and operates golf courses in the United States, with a
current portfolio of 20 golf properties including private country clubs, semi-
private clubs and public (or daily fee) courses. The Company's courses are
concentrated in clusters near metropolitan areas in the Sunbelt states
(including Arizona, California and Texas) which have large golfing populations
and attractive climates.
The Company's business consists primarily of operating golf courses and
related facilities, with revenue generated from membership fees and dues at
private country clubs, greens fees, food and beverage services, golf cart
rentals, retail merchandise sales, driving range fees and lodging fees. The
Company owns 16 courses, leases three courses (subject to long-term leases in
excess of 20 years, including extension options), leases one driving range and
pro shop facility and manages one additional course. The Company's portfolio
includes eight private country clubs, eight public facilities and five semi-
private facilities.
2. GUARANTEE
The wholly owned subsidiary of the Company, CGGI has $73.7 million of long-
term debt outstanding at September 30, 1995. Under the terms of the debt
agreement, the Company has guaranteed the payment of all principal and
interest.
3. SUBSEQUENT EVENTS
On June 4, 1996, the Company and CGGI completed two contemporaneous high
yield bond offerings (the "Offerings") totaling approximately $100 million.
CGGI offered $70 million aggregate principal amount of 11 1/2% senior notes
due 2003. The Company offered 86,000 Units, each consisting of $1,000
principal amount at maturity of 13 1/2% senior zero-coupon notes due 2004 and
one share of common stock, par $.01 per share, of the Company. The net
proceeds of the offering by the Company of $28.7 million were contributed as
equity to CGGI. CGGI also obtained a new $50 million bank facility (the "New
Credit Facility") consisting of a $45 million bank revolver for future
acquisitions and capital projects and a $5 million working capital facility to
fund short term operating needs. The Company is a guarantor of the New Credit
Facility which had no outstanding borrowings as of June 30, 1996.
The proceeds of the Offerings were primarily used to repay long-term debt of
CGGI, pay costs related to the Offerings and the New Credit Facility and to
fund the acquisition of Eagle Crest Golf Club, as described below.
In October, 1995, CGGI entered into a management contract for the Red Hawk
Golf Course located near San Diego. In June, 1996, CGGI acquired Eagle Crest
Golf Club located in San Diego. In July, 1996, CGGI entered into a fifteen
year lease of the Sweetwater Country Club located near Houston.
S-4
<PAGE>
COBBLESTONE HOLDINGS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO CHARGES TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
YEAR EXPENSES ACCOUNTS ACQUISITIONS DEDUCTIONS YEAR
------------ ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30,
1993
Deducted from asset
accounts:
Allowance for doubtful
accounts receivable.. $ -- $ -- $ -- $55,000 $ -- $ 55,000
======= ======= ========== ======= ======= ==========
YEAR ENDED SEPTEMBER 30,
1994
Deducted from asset
accounts:
Allowance for doubtful
accounts receivable.. $55,000 $68,797 $ -- $ -- $56,797 $ 67,000
======= ======= ========== ======= ======= ==========
YEAR ENDED SEPTEMBER 30,
1995
Deducted from asset
accounts:
Allowance for doubtful
accounts receivable.. $67,000 $58,550 $ -- $ -- $49,550 $ 76,000
Allowance for
uncollectable notes
receivable........... -- -- 2,117,000 -- -- 2,117,000
Valuation allowance
for imputed
interest............. -- -- 1,242,867 -- -- 1,242,867
------- ------- ---------- ------- ------- ----------
Total................... $67,000 $58,550 $3,359,867 $ -- $49,550 $3,435,867
======= ======= ========== ======= ======= ==========
</TABLE>
S-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
------- ----------- ------------
<C> <S> <C>
3.1 Certificate of Incorporation of Cobblestone Holdings,
Inc.+..................................................
3.2 Bylaws of Cobblestone Holdings, Inc.+..................
4.1 Indenture, dated as of June 4, 1996, between
Cobblestone Holdings, Inc. and Norwest Bank Minnesota,
National Association, as trustee, relating to
$86,000,000 aggregate principal amount at maturity of
13 1/2% Senior Zero-Coupon Notes due 2004+............
4.2 Specimen Certificate of 13 1/2% Senior Zero-Coupon
Notes due 2004 (included in Exhibit 4.1 hereto)+......
4.3 Indenture, dated as of June 4, 1996, among Cobblestone
Golf Group, Inc. and Norwest Bank Minnesota, National
Association, as trustee, relating to $70,000,000
aggregate principal amount of 11 1/2% Senior Notes due
2003 (incorporated by reference to Registration
Statement on Form S-4 of Cobblestone Golf Group, Inc.
(File No. 333-9441) filed on August 2, 1996)..........
5.1 Form of Opinion of Latham & Watkins regarding the
validity of the Exchange Notes........................
8.1 Form of Opinion of Latham & Watkins regarding certain
federal income tax matters............................
10.1 Second Amended and Restated Credit Agreement, dated as
of June 4, 1996, among Cobblestone Golf Group, Inc.,
Cobblestone Holdings, Inc., Bank of America NT & SA,
as agent and the various lending institutions
thereto+..............................................
10.2 Purchase Agreement, dated as of May 29, 1996, between
Cobblestone Holdings, Inc. and Donaldson, Lufkin &
Jenrette Securities Corporation+......................
10.3 Registration Rights Agreement, dated as of May 29,
1996, between Cobblestone Holdings, Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation+..
10.4 Stockholders' Agreement, dated as of January 31,
1994+.................................................
10.5 Form of Indemnification Agreement+.....................
10.6 Lease dated as of July 1, 1996 by and between National
Golf Operating Partnership, L.P., as Landlord, and
Cobblestone Golf Group, Inc.*.........................
10.7 Letter Agreement dated as July 1, 1996 by and between
National Golf Operating Partnership, L.P. and
Cobblestone Golf Group, Inc.*.........................
12.1 Statement of Computation of Ratio of Earnings to Fixed
Charges...............................................
21.1 Subsidiaries of Cobblestone Holdings, Inc. +...........
23.1 Consent of Latham & Watkins (included in its opinions
filed as Exhibit 5.1 and Exhibit 8.1).................
23.2 Consent of Ernst & Young LLP...........................
23.3 Consent of Price Waterhouse, LLP.......................
23.4 Consent of BDO Seidman, LLP............................
24.1 Power of Attorney of Cobblestone Holdings, Inc.
(included on the signature page to this Registration
Statement on Form S-4)+...............................
25.1 Statement of Eligibility and Qualification (Form T-1)
under the Trust Indenture Act of 1939 of Norwest Bank
Minnesota, National Association+......................
99.1 Letter of Transmittal+.................................
99.2 Notice of Guaranteed Delivery+.........................
99.3 Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9+........................
</TABLE>
- ---------------------
* To be filed by amendment.
+ Previously filed.
<PAGE>
EXHIBIT 5.1
FORM OF OPINION OF LATHAM & WATKINS
[LATHAM & WATKINS LETTERHEAD]
_____________, 1996
Cobblestone Holdings, Inc.
3702 Via de la Valle, Suite 202
Del Mar, California 92014
Re: Cobblestone Holdings, Inc.
Registration Statement on Form S-4
----------------------------------
Ladies/Gentlemen:
At your request, we have examined the Registration Statement on Form S-4
(the "Registration Statement") of Cobblestone Holdings, Inc., a Delaware
corporation (the "Company"), which you have filed with the Securities and
Exchange Commission on ______________, 1996 in connection with the exchange of
$1,000 principal amount of 13 1/2% Series B Senior Zero-Coupon Notes due 2004 of
the Company for each $1,000 principal amount of its outstanding 13 1/2% Series A
Senior Zero-Coupon Notes due 2004.
We have examined such matters of fact and questions of law as we have
considered appropriate for purposes of this opinion. We have examined, among
other things, the terms of the Notes, and the indenture pursuant to which the
Notes are to be issued. In our examination, we have assumed the genuineness of
all signatures, the authenticity of all documents submitted to us as originals,
and the conformity to authentic original documents of all documents submitted to
us as copies.
We are opining herein as to the effect on the subject transaction only of
the federal securities laws of the United States, the internal laws of the State
of New York and the General Corporation Law of the State of Delaware, and we
express no opinion with respect to the applicability thereto, or the effect
thereon, of any other laws.
Based upon the foregoing, we are of the opinion that, the Notes are legally
valid and binding obligations of the Company, except as may be limited by the
effect of bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to or affecting the rights or remedies
of creditors; the affect of general principles of equity, whether enforcement is
<PAGE>
considered in a proceeding in equity or at law, and the discretion of the court
before which any proceeding therefor may be brought; and the unenforceability
under certain circumstances under law or court decisions of provisions providing
for the indemnification of or contribution to a party with respect to a
liability where such indemnification or contribution is contrary to public
policy.
We consent to your filing this opinion as an exhibit to the Registration
Statement.
Very truly yours,
LATHAM & WATKINS
<PAGE>
EXHIBIT 8.1
FORM OF OPINION OF LATHAM & WATKINS
[LATHAM & WATKINS LETTERHEAD]
_______, 1996
Cobblestone Holdings, Inc.
3702 Via de la Valle, Suite 202
Del Mar, California 92014
Re: Cobblestone Holdings, Inc.
Registration Statement on Form S-4
----------------------------------
Ladies/Gentlemen:
You have requested our opinion concerning the material federal income tax
consequences of the exchange of $1,000 principal amount of 13 1/2% Series B
Senior Zero-Coupon Notes due 2004 of Cobblestone Holdings, Inc., a Delaware
corporation (the "Company"), for 13 1/2% Series A Senior Zero-Coupon Notes due
2004 of the Company, pursuant to the Registration Statement on Form S-4 filed
with the Securities and Exchange Commission (the "Commission") on
______________, 1996 (the "Registration Statement"). Capitalized terms used but
not otherwise defined herein shall have the meanings assigned to them pursuant
to the Registration Statement.
The facts, as we understand them, and upon which with your permission we
rely in rendering the opinion expressed herein, are set forth in the
Registration Statement. Based on such facts, and subject to the assumptions and
exceptions set forth under the heading "Certain Federal Income Tax
Considerations" in the Registration Statement, it is our opinion that (a) the
exchange of Private Notes for Exchange Notes will be treated as a "non-event"
for federal income tax purposes because the Exchange Notes will not be
considered to differ materially in kind or extent from the Private Notes and (b)
as a result, no material federal income tax consequences will result to holders
exchanging Private Notes for Exchange Notes. It is our opinion that the material
federal income tax consequences are accurately set forth under the heading
"Certain Federal Income Tax Considerations" in the registration Statement. No
opinion is expressed to any matter not discussed therein.
This opinion is based on various statutory provisions, regulations
promulgated thereunder and interpretations thereof by the Internal Revenue
Service and the courts having jurisdiction over such matters, all of which are
subject to change either prospectively or retroactively. Also, any variation or
difference in the facts from those set forth in the Registration Statement may
affect the conclusion stated herein.
<PAGE>
This opinion is rendered to you solely for use in connection with the
Registration Statement. We consent to your filing this opinion as an exhibit to
the Registration Statement and to the reference of our firm under the heading
"Certain Federal Income Tax Considerations."
Very truly yours,
LATHAM & WATKINS
<PAGE>
EXHIBIT 12.1
COMPUTATION OF DEFICIENCY OF EARNINGS TO COVER FIXED CHARGES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, JUNE 30, PRO FORMA
--------------------------------- ------------------------ -------------------------
FISCAL YEAR NINE MONTHS
ENDED ENDED
SEPTEMBER 30, JUNE 30,
1993 1994 1995 1995 1996 1995 1996
--------- ---------- ---------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Loss before income tax.. $(846,102) $ (906,461) $ (497,812) $(1,534,186) $(2,877,117) $(5,697,709) $(2,436,695)
Interest expense........ 529,720 3,515,752 8,019,072 5,541,417 8,192,817 12,821,442 8,561,697
--------- ---------- ---------- ----------- ----------- ----------- -----------
Earnings (Loss) to
cover fixed charges... (316,382) 2,609,291 7,521,260 4,007,231 5,315,700 7,123,733 6,125,002
========= ========== ========== =========== =========== =========== ===========
Interest expense........ 529,720 3,515,752 8,019,072 5,541,417 8,192,817 12,821,442 8,561,697
--------- ---------- ---------- ----------- ----------- ----------- -----------
Fixed Charges.......... 529,720 3,515,752 8,019,072 5,541,417 8,192,817 12,821,442 8,561,697
========= ========== ========== =========== =========== =========== ===========
Deficiency of Earnings
to Cover Fixed
Charges(1)............. $ 846,102 $ 906,461 $ 497,812 $ 1,534,186 $ 2,877,117 $ 5,697,709 $ 2,436,695
========= ========== ========== =========== =========== =========== ===========
</TABLE>
- ---------------------
(1) Represents the amount earnings are deficient to cover the fixed charges.
This was calculated by subtracting the earnings from fixed charges.
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated December 8, 1995 with respect to Cobblestone
Holdings, Inc., our report dated July 3, 1996 with respect to Lakeway Country
Club, our combined report dated June 21, 1996 with respect to Stonebridge
Country Club Inc, and The Ranch Country Club, Inc., our report dated July 19,
1996 with respect to Brandermill Country Club, L.P., our report dated July 19,
1996 with respect to Pecan Grove Plantation Country Club, Inc., our report
dated July 19, 1996 with respect to Ocean Vista Land Company, and our report
dated July 19, 1996 with respect to Saticoy Regional Golf Course, in Amendment
No. 1 to the Registration Statement (Form S-4) of Cobblestone Holdings, Inc.
ERNST & YOUNG LLP
San Diego, California
September 16, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to Registration Statement on Form S-4 of Cobblestone Holdings,
Inc. of our report dated July 26, 1996 relating to the financial statements of
Sweetwater Golf Partnership, which appears in such Prospectus. We also consent
to the reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Houston, Texas
September 16, 1996
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Cobblestone Holdings, Inc.
We hereby consent to the use in the Prospectus constituting a part of this
Amendment No. 1 to Registration Statement of our report dated April 12, 1994,
relating to the financial statements of the Brandermill Country Club, L.P.
which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO SEIDMAN, LLP
Richmond, Virginia
September 16, 1996
