<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON , 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
GOLF TRUST OF AMERICA, INC.
(Exact Name of Registrant as Specified in its Governing Instruments)
--------------------
190 King Street
Charleston, South Carolina 29401
(Address of Principal Executive Offices)
--------------------
W. Bradley Blair, II
Chief Executive Officer
Golf Trust of America, Inc.
190 King Street
Charleston, South Carolina 29401
(Name and Address of Agent for Service)
--------------------
COPIES TO:
PETER T. HEALY, ESQ. DAVID C. WRIGHT, ESQ.
O'Melveny & Myers LLP Hunton & Williams
275 Battery Street 900 South Gay Street
San Francisco, California 94111 Knoxville, Tennessee 37902
(415) 984-8833 (423) 549-7700
--------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / / _____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per share........ 3,191,250 Shares $21.00 $67,016,250 $20,308
</TABLE>
(1) Includes 416,250 shares of Common Stock which may be purchased by the
Underwriters to cover over-allotments, if any.
(2) Estimated based on a bona fide estimate of the maximum offering price of
$21.00 solely for the purpose of calculating the registration fee pursuant
to Rule 457(a) of the Securities Act of 1933.
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO RULE 501(a) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEMS AND CAPTIONS LOCATION OR HEADING IN PROSPECTUS
- ------------------------------------------------------- --------------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Inside Front Cover Page; Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ Outside Front Cover Page; Prospectus Summary; Risk
Factors; Distribution Policy; The Golf Courses;
Certain Relationships and Transactions
4. Determination of Offering Price................... Underwriting
5. Dilution.......................................... Dilution
6. Selling Security Holders.......................... Not Applicable
7. Plan of Distribution.............................. Underwriting
8. Use of Proceeds................................... Use of Proceeds
9. Selected Financial Data........................... Selected Historical Financial Information
10. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. Management's Discussion and Analysis of Financial
Condition and Results of Operations
11. General Information as to Registrant.............. Prospectus Summary; The Company; The Golf
Industry; The Golf Courses; Management;
Partnership Agreement; Principal Stockholders of
the Company and Principal Partners in the
Operating Partnership
12. Policy with Respect to Certain Activities......... Policies and Objectives With Respect to Certain
Activities
13. Investment Policies of Registrant................. Policies and Objectives With Respect to Certain
Activities
14. Description of Real Estate........................ Management's Discussion and Analysis of Financial
Condition and Results of Operations; The Golf
Courses
15. Operating Data.................................... The Golf Courses
16. Tax Treatment of Registrant and Its Security
Holders.......................................... Federal Income Tax Considerations
17. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters.... Risk Factors; Principal Stockholders of the
Company and Principal Partners in the Operating
Partnership; Distribution Policy; Shares
Available for Future Sale
18. Description of Registrant's Securities............ Capital Stock
19. Legal Proceedings................................. The Golf Courses -- Legal Proceedings
20. Security Ownership of Certain Beneficial Owners
and Management................................... Principal Stockholders of the Company and
Principal Partners in the Operating Partnership
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEMS AND CAPTIONS LOCATION OR HEADING IN PROSPECTUS
- ------------------------------------------------------- --------------------------------------------------
<C> <S> <C>
21. Directors and Executive Officers.................. Management
22. Executive Compensation............................ Management
23. Certain Relationships and Related Transactions.... Risk Factors; The Golf Courses; Management; The
Formation Transactions; Certain Relationships and
Transactions; Partnership Agreement; Principal
Stockholders of the Company and Principal
Partners in the Operating Partnership
24. Selection, Management and Custody of Registrant's
Investments...................................... Risk Factors; Policies and Objectives With Respect
to Certain Activities; The Golf Courses
25. Policies with Respect to Certain Transactions..... Risk Factors; The Golf Courses; Policies and
Objectives with Respect to Certain Activities;
Management; Certain Relationships and
Transactions; Partnership Agreement; Principal
Stockholders of the Company and Principal
Partners in the Operating Partnership
26. Limitations of Liability.......................... Capital Stock -- Limitation of Liability of
Directors; Indemnification Agreements
27. Financial Statements and Information.............. Index to Financial Statements
28. Interests of Named Experts and Counsel............ Experts; Legal Matters
29. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... Management
</TABLE>
<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.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 12, 1996
2,775,000 SHARES
[LOGO]
GOLF TRUST OF AMERICA, INC.
COMMON STOCK
------------
Golf Trust of America, Inc. (collectively with its subsidiaries, the
"Company") has been created to capitalize upon consolidation opportunities in
the ownership of golf courses in the United States. The principal business
strategy of the Company, which will be operated as a self-administered real
estate investment trust ("REIT"), will be to acquire high quality golf courses
and to lease the golf courses back to the seller or other qualified operators
through the Company's multiple independent lessee structure.
Upon completion of the offering (the "Offering") and the Formation
Transactions (as herein defined), the Company will be one of only two publicly
traded REITs in the United States focused on owning and acquiring golf courses
and will own 10 courses (the "Golf Courses") located in South Carolina (4),
Virginia (2), Alabama, Georgia, North Carolina and Texas. The Golf Courses will
be leased to independent lessees (the "Initial Lessees") affiliated with the
Prior Owners (as herein defined) under leases ("Participating Leases") which
provide for the payment of fixed base rent and participating rent based on
growth in revenue at the Golf Courses. The Company believes it will benefit from
the continuity of golf course management provided by the Initial Lessees, whose
affiliates developed and have operated each of the Golf Courses since their
completion. Neither the Company nor its executive officers will own any interest
in, or participate in the management of, the Initial Lessees. The Company
intends to make regular quarterly distributions beginning with the quarter
ending March 31, 1997.
All of the shares of common stock (the "Common Stock") offered hereby are
being sold by the Company. Upon completion of the Formation Transactions, the
Prior Owners of the Golf Courses will own an aggregate of approximately 59.9% of
the Company through partnership interests redeemable for Common Stock. Prior to
the completion of the Offering, there has been no public market for the Common
Stock. It is currently anticipated that the initial public offering price per
share of Common Stock will be between $19.00 and $21.00. See "Underwriting" for
a discussion of the factors to be considered in determining the initial public
offering price. The Company intends to apply to have its shares of Common Stock
listed on the New York Stock Exchange under the symbol "GTA".
SEE "RISK FACTORS" COMMENCING ON PAGE 16 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK INCLUDING:
- On a pro forma basis for the six months ended June 30, 1996, operations at
three of the Golf Courses, including the two recently opened Golf Courses,
would not have generated net operating income for the applicable Initial
Lessee;
- Risks associated with the fact that two of the Golf Courses recently
opened and have limited operating history;
- Dependence on Lease Payments (as herein defined) from the Initial Lessees
for substantially all of the Company's income and the risks associated
with the length of the Participating Leases, which with extensions may
have terms of up to 40 years;
- Risks associated with the fact that the holders of at least 66.7% of the
interests in the Operating Partnership (as herein defined), including the
Company, which initially will own only a 39.7% interest in the Operating
Partnership, must approve a sale of all or substantially all of the assets
of the Company or a merger or consolidation of the Operating Partnership;
- The lack of appraisals of the Golf Courses and the possibility that the
purchase prices paid by the Company for the Golf Courses may exceed the
fair market value of one or more of the Golf Courses;
- Risks associated with the Company's limited control over the day-to-day
management and operation of the Golf Courses due to the tax restrictions
that prevent a REIT from operating golf courses; and
- Risks affecting golf course operations generally, including competition,
uninsured losses, increases in operating costs, inclement weather and
seasonality, oversupply and decrease in demand, all of which could
adversely affect an Initial Lessee's ability to make its Lease Payment.
----------------------
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.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
<S> <C> <C> <C>
Per Share.......................... $ $ $
Total(2)........................... $ $ $
</TABLE>
(1) Before deducting expenses payable by the Company, estimated at $ .
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 416,250 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ ,
respectively.
----------------------
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order in
whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California on or about , 1997.
ROBERTSON, STEPHENS & COMPANY WHEAT FIRST BUTCHER SINGER
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
[MAP]
------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING, WITHOUT LIMITATION, STATEMENTS
CONTAINING THE WORDS "BELIEVES," "ANTICIPATES," "EXPECTS" AND WORDS OF SIMILAR
IMPORT. SUCH FORWARD-LOOKING STATEMENTS RELATE TO FUTURE EVENTS, THE FUTURE
FINANCIAL PERFORMANCE OF THE COMPANY, AND INVOLVE KNOWN AND UNKNOWN RISKS.
UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE
OR ACHIEVEMENTS OF THE COMPANY OR INDUSTRY RESULTS TO BE MATERIALLY DIFFERENT
FROM ANY FUTURE RESULTS. PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY
SUCH FORWARD-LOOKING STATEMENTS. PROSPECTIVE INVESTORS SHOULD SPECIFICALLY
CONSIDER THE VARIOUS FACTORS IDENTIFIED IN THIS PROSPECTUS WHICH COULD CAUSE
ACTUAL RESULTS TO DIFFER, INCLUDING THOSE DISCUSSED IN THE SECTIONS ENTITLED
"PROSPECTUS SUMMARY," "RISK FACTORS," "THE GOLF INDUSTRY," "THE GOLF COURSES"
AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." THE COMPANY DISCLAIMS ANY OBLIGATION TO UPDATE ANY SUCH FACTORS OR
TO PUBLICLY ANNOUNCE THE RESULT OF ANY REVISIONS TO ANY OF THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN TO REFLECT FUTURE EVENTS OR DEVELOPMENTS.
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY................................ 1
The Company..................................... 1
Risk Factors.................................... 5
The Golf Courses................................ 6
Business Strategies and Objectives.............. 8
The Formation Transactions...................... 10
Benefits to Officers and Directors.............. 11
Distribution Policy............................. 11
Tax Status...................................... 12
The Offering.................................... 12
Summary Financial Data.......................... 13
RISK FACTORS...................................... 16
Initial Lessee Pro Forma Net Income............. 16
Acquisition of Golf Courses with Limited
Operating History.............................. 16
Dependence on Payments under the Participating
Leases......................................... 16
Duration of Lease; No Right to Terminate
Participating Leases on a Sale................. 16
Lack of Appraisals.............................. 17
Lack of Control Over Day-to-Day Operations and
Management of the Golf Courses................. 17
Golf Industry Risks............................. 17
Lack of Operating History....................... 18
Risks Related to the Company's Growth
Strategy....................................... 18
Benefits to Officers and Directors.............. 19
Concentration of Investments in Myrtle Beach.... 19
Real Estate Investment Risks.................... 19
Immediate and Substantial Dilution.............. 20
Possible Conflicts of Interest.................. 20
Real Estate Investment Trust and Partnership
Qualification.................................. 21
Competition for Management Time for the Initial
Lessees........................................ 22
Risks of Leverage; No Limitations on
Indebtedness................................... 22
Market for Common Stock; Adverse Effect of
Increase in Market Interest Rates.............. 22
Changes in Investment and Financing Policies.... 22
Limits on Changes in Control.................... 22
Dependence on Acquisitions to Increase Cash
Available for Distribution..................... 23
<CAPTION>
PAGE
----
<S> <C>
Distribution to Stockholders.................... 23
Adverse Effect of Shares Available for Future
Issuance and Sale on Market Price of Common
Stock.......................................... 23
Ownership Limit................................. 24
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS....................................... 24
THE COMPANY....................................... 25
Business Strategy............................... 26
Acquisitions and Expansions..................... 26
Internal Growth................................. 27
The Operating Partnership....................... 28
USE OF PROCEEDS................................... 29
DISTRIBUTION POLICY............................... 30
CAPITALIZATION.................................... 32
DILUTION.......................................... 33
SELECTED HISTORICAL FINANCIAL INFORMATION......... 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............. 35
Overview........................................ 35
The Legends Group Prior Owners.................. 37
Northgate Country Club.......................... 39
The Woodlands................................... 41
Olde Atlanta.................................... 42
Inflation....................................... 43
Seasonality..................................... 43
THE GOLF INDUSTRY................................. 44
THE GOLF COURSES.................................. 47
Descriptions of the Golf Courses................ 49
The Participating Leases........................ 52
Competition..................................... 56
Employees....................................... 56
Legal Proceedings............................... 56
Government Regulation........................... 56
MANAGEMENT........................................ 58
Directors, Proposed Directors and Executive
Officers....................................... 58
Committees of the Board of Directors............ 58
Compensation of Directors....................... 59
Directors and Officers Insurance................ 59
Indemnification................................. 59
Executive Compensation.......................... 59
Stock Incentive Plan............................ 60
Directors' Plan................................. 61
Deferred Compensation Plan...................... 62
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Employment Agreements........................... 62
INITIAL LESSEES................................... 63
Golf Course Operations.......................... 64
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN
ACTIVITIES....................................... 64
Investment Objectives and Policies.............. 64
Dispositions.................................... 64
Financing....................................... 65
Working Capital Reserves........................ 65
Conflict of Interest Policies................... 66
Other Policies.................................. 66
THE FORMATION TRANSACTIONS........................ 67
Benefits to Officers and Directors.............. 67
Transfer Documents.............................. 68
CERTAIN RELATIONSHIPS AND TRANSACTIONS............ 68
Relationships Among Officers and Directors...... 68
Acquisition of Interests in Certain of the Golf
Courses........................................ 68
Repayment of Indebtedness....................... 68
Employment Agreements........................... 68
Option to Purchase and Right of First Refusal... 68
PARTNERSHIP AGREEMENT............................. 69
Management...................................... 69
Transferability of OP Units..................... 69
Pledge.......................................... 70
Redemption Rights............................... 70
Capital Contribution............................ 70
Term............................................ 71
Tax Matters..................................... 71
PRINCIPAL STOCKHOLDERS OF THE COMPANY AND
PRINCIPAL PARTNERS IN THE OPERATING
PARTNERSHIP...................................... 72
Issuance of Additional Shares................... 72
<CAPTION>
PAGE
----
<S> <C>
CAPITAL STOCK..................................... 73
General......................................... 73
Corporate Governance............................ 73
Restrictions on Ownership....................... 73
Business Combinations........................... 76
Limitations on Changes in Control............... 76
Limitation of Liability of Directors;
Indemnification Agreements..................... 76
Transfer Agent and Registrar.................... 76
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
COMPANY'S CHARTER AND BYLAWS..................... 77
Maryland Business Combination Law............... 77
Control Share Acquisitions...................... 77
Interested Director Transactions................ 78
Amendments to the Charter and Bylaws............ 78
SHARES AVAILABLE FOR FUTURE SALE.................. 79
Registration Rights............................. 79
FEDERAL INCOME TAX CONSIDERATIONS................. 79
Taxation of the Company......................... 80
Partnership Anti-Abuse Rule..................... 85
Failure to Qualify.............................. 86
Taxation of Taxable Domestic Stockholders....... 86
Backup Withholding.............................. 86
Taxation of Tax-Exempt Stockholders............. 86
Taxation of Foreign Stockholders................ 87
State and Local Taxes........................... 88
Tax Aspects of the Operating Partnership........ 88
UNDERWRITING...................................... 92
EXPERTS........................................... 93
LEGAL MATTERS..................................... 93
ADDITIONAL INFORMATION............................ 94
GLOSSARY.......................................... 95
FINANCIAL STATEMENTS.............................. F-1
</TABLE>
iii
<PAGE>
PROSPECTUS SUMMARY
THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE
RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS
AND THAT ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH
STATEMENTS, PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS
FACTORS IDENTIFIED IN THIS PROSPECTUS, INCLUDING THE MATTERS SET FORTH UNDER THE
CAPTION "RISK FACTORS," WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE INDICATED IN SUCH FORWARD-LOOKING STATEMENTS. THE FOLLOWING SUMMARY
IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL
INFORMATION AND STATEMENTS, AND THE NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS
PROSPECTUS ASSUMES THAT (i) THE INITIAL PUBLIC OFFERING PRICE PER SHARE OF
COMMON STOCK WILL BE $20.00 (WHICH IS THE MIDPOINT OF THE RANGE OF THE ESTIMATED
INITIAL PUBLIC OFFERING PRICE SET FORTH ON THE FRONT COVER OF THIS PROSPECTUS)
(THE "OFFERING PRICE"), AND (ii) THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT
EXERCISED. UNLESS OTHERWISE NOTED, REFERENCES HEREIN TO NATIONAL INDUSTRY
STATISTICS AND AVERAGES ARE BASED ON REPORTS OF THE NATIONAL GOLF FOUNDATION
("NGF"), AN INDUSTRY TRADE ASSOCIATION. TWO OF THE COMPANY'S GOLF COURSES WERE
RECENTLY OPENED AND, THEREFORE, ARE NOT INCLUDED IN AVERAGES FOR 1996 AND PRIOR
YEARS. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERM "COMPANY," AS USED
HEREIN, INCLUDES GOLF TRUST OF AMERICA, INC., GTA GP, INC. ("GTA GP"), GTA LP,
INC. ("GTA LP"), EACH OF WHICH IS A WHOLLY-OWNED SUBSIDIARY OF GOLF TRUST OF
AMERICA, INC., AND GOLF TRUST OF AMERICA, L.P., A DELAWARE LIMITED PARTNERSHIP
(THE "OPERATING PARTNERSHIP"). THE TERM "OP UNITS" MEANS UNITS OF PARTNERSHIP
INTEREST IN THE OPERATING PARTNERSHIP. SEE "GLOSSARY" FOR THE DEFINITIONS OF
CERTAIN TERMS USED IN THIS PROSPECTUS.
THE COMPANY
The Company has been created as a self-administered real estate investment
trust ("REIT") to capitalize upon consolidation opportunities in the ownership
of golf courses in the United States. The principal business strategy of the
Company will be to acquire high quality golf courses and to lease the golf
courses to an affiliate of the seller or other qualified operator. The Company
believes its multiple independent lessee structure, together with the
substantial industry knowledge, experience and relationships within the golf
community of management of the Company and the Initial Lessees (who collectively
will own a 60.3% equity interest in the Company upon completion of the Formation
Transactions (as herein defined)) will permit it to effectively target and
acquire high quality golf courses, including those which might not otherwise be
available for sale.
Upon completion of the offering of the Common Stock (the "Offering") and the
Formation Transactions, the Company will be one of only two publicly traded
REITs in the United States focused on owning and acquiring golf courses and will
own 10 courses (the "Golf Courses") located in South Carolina (4), Virginia (2),
Alabama, Georgia, North Carolina and Texas. The Golf Courses will be leased to
independent lessees (the "Initial Lessees") affiliated with the Prior Owners (as
herein defined) under leases (the "Participating Leases") which provide for the
payment of fixed base rent ("Base Rent") and participating rent based on growth
in revenue at the Golf Courses ("Participating Rent" and, together with Base
Rent, the "Lease Payment"). The Company believes it will benefit from the
continuity of golf course management provided by the Initial Lessees, whose
affiliates developed and have operated each of the Golf Courses since their
completion. Neither the Company nor its executive officers will own any interest
in or participate in the management of the Initial Lessees.
The Company's goal is to increase stockholder value by becoming the leading
owner of nationally or regionally recognized high quality golf courses in the
United States. Four of the Golf Courses were ranked among the Top Ten New
Courses by either GOLF DIGEST or GOLF MAGAZINE in the year the applicable Golf
Course opened, including the recently opened Stonehouse Golf Club, which in
November 1996 was named the Best New Upscale Course by GOLF DIGEST for 1996. The
Company believes that the quality of the Golf Courses is further reflected in
the average green fees at the Golf Courses, which significantly exceed national
industry averages. All of the Golf Courses were developed and have been
continuously operated by the entities contributing the Golf Courses to the
Company (the "Prior Owners"). The Initial Lessees will be special purpose
entities formed by the Prior Owners to lease the Golf Courses from the Company
pursuant to the Participating
1
<PAGE>
Leases. The Company believes the continuity of management provided by these
experienced operators will facilitate the Company's growth and profitability.
The Company believes that the substantial ownership interest of affiliates of
the Initial Lessees in the Company will align the interests of the Initial
Lessees with those of the stockholders of the Company. As security for an
Initial Lessee's obligations under its Participating Lease, each Prior Owner
will pledge to the Company for a minimum of two years OP Units having a value,
based on the Offering Price, equal to 15% of the Company's purchase price for
the applicable Golf Course, which approximates 16 months of the initial Base
Rent under the applicable Participating Lease.
The Chairman of the Board, Chief Executive Officer and President of the
Company, W. Bradley Blair, II, currently serves as the Executive Vice President
and Chief Operating Officer of The Legends Companies (together with its
affiliates, "The Legends Group"), a leading golf course owner, developer and
operator in the southeast and mid-Atlantic regions of the United States. Seven
of the eight golf courses currently owned by The Legends Group are being
contributed to the Company. The one course not being contributed by The Legends
Group to the Company is owned by The Legends Group pursuant to a ground lease
with a short remaining term, which does not presently meet the Company's
investment criteria. The Company will have an option and right of first refusal
to acquire any golf courses owned, developed or acquired by The Legends Group.
See "Certain Relationships and Transactions -- Option to Purchase and Right of
First Refusal." The initial Participating Leases with affiliates of The Legends
Group (the "Legends Lessees") will be cross-collateralized and cross-defaulted.
The Company will acquire the Golf Courses from the Prior Owners, and expects
to acquire additional golf courses from other sellers, utilizing an innovative
lease structure. This lease structure is designed to facilitate acquisitions of
golf courses with high growth potential which might not otherwise be available
for purchase, as well as to encourage aggressive growth in revenue at the Golf
Courses. During the first five years of each Participating Lease, each Prior
Owner will have the one-time right (the "Lessee Performance Option") to elect to
cause the Company to issue additional OP Units to the Prior Owner with a
corresponding increase in Base Rent. Upon the exercise of the Lessee Performance
Option, the Base Rent payable under the applicable Participating Lease will be
increased to take into account the value of the additional OP Units issued to
the Prior Owner. Any exercise of the Lessee Performance Option is designed to be
accretive to the Company's Funds From Operations (as herein defined) on a per
share basis. Following the exercise of the Lessee Performance Option, the then
applicable Base Rent will be increased so that the Initial Lessee's net
operating income for the prior year will exceed the increased Base Rent by at
least 13.5%. See "The Company -- Business Strategy -- Internal Growth."
Following the completion of the Offering, the Company expects to have access
to a variety of debt and equity financing sources to fund acquisitions,
including the ability to issue OP Units, which can provide a tax-deferred
structure for sellers. Upon completion of the Offering, the Company expects to
obtain a line of credit from a major bank (the "Line of Credit") which will be
utilized primarily for the acquisition of additional golf courses. The Company
will have approximately $4.3 million of outstanding indebtedness upon completion
of the Offering, which will be incurred in connection with the acquisition of
one of the Golf Courses. The Company believes its initial low level of debt,
coupled with the Line of Credit, will provide the Company with significant
financial flexibility in pursuing golf course acquisition opportunities. The
Company intends to maintain a capital structure which limits consolidated
indebtedness to no more than 50% of its total market capitalization.
THE GOLF INDUSTRY. The Company believes the United States golf industry is
entering into a period of significant growth. The Company expects that this
growth will contribute to an increase in the number of rounds played and Gross
Golf Revenues (as herein defined) at the Golf Courses and any golf courses
subsequently acquired by the Company. Golf course ownership in the United States
is highly fragmented, with relatively few multi-course owners or operators.
There are approximately 15,400 golf courses in the United States owned by
approximately 11,000 different entities. The Company believes that the 15
largest golf course owners in the United States collectively own or lease fewer
than 5% of the total number of golf courses and that fewer than 10 golf course
owners own more than 10 golf courses. The Company believes that this fragmented
ownership provides an excellent opportunity for consolidation of the ownership
high quality golf courses.
2
<PAGE>
The Company believes the relatively few number of multi-course owners in the
golf course industry has resulted from a variety of factors, including a
scarcity of capital, the entrepreneurial nature of many golf course owners and
operators and the associated pride of ownership. The Company believes that
economies of scale in owning and operating multiple golf courses, the growing
significance of professional financial management in the operation of golf
courses and the desire for liquidity by golf course owners will contribute to
the consolidation of the ownership of golf courses.
Largely in response to the increasing popularity of golf, the construction
of golf courses in the United States has increased significantly in recent
years. New golf course openings from the mid-1970's through 1987 averaged
approximately 150 golf courses per year. For the period 1987 through 1995 an
average of 275 new golf courses were opened each year, with a high of 336 new
golf course openings in 1995.
The golf industry generated approximately $15 billion in revenues in the
United States in 1995. The Company believes the game of golf has exhibited
strong growth in popularity as shown below.
<TABLE>
<CAPTION>
1980 1995 % CHANGE
---- ---- --------
(MILLIONS)
<S> <C> <C> <C>
Number of golfers............. 15 25 67%
Rounds played................. 358 490 37%
</TABLE>
Additionally, the Company believes the game of golf will benefit from
favorable demographic trends. The United States Census Bureau estimates that the
population age 50 and over will increase from 69.3 million in 1996 to 96.3
million in 2010, a 39% increase. The average number of rounds played per golfer
on an annual basis increases significantly with age. Golfers in their 50's play
more than twice as many rounds annually as golfers in their 30's, and golfers
age 65 and older generally play three times as many rounds annually as golfers
in their 30's. The Company believes that the number of golfers as well as the
total number of rounds played will increase significantly as the average age of
the population continues to increase. The Company believes that the "baby
boomers," the oldest of whom are in their early 50's, will contribute to the
growth in total rounds played due to growing wealth and leisure time as well as
the suitability of golf as a sport for an aging population. In addition, the
Company believes that golfers over the age of 50 play a substantially greater
number of rounds at high quality golf courses relative to younger golfers
because, on average, older golfers have more disposable income and leisure time
than younger golfers.
3
<PAGE>
The following graph sets forth the difference in age dispersion in the
United States between 1996 and 2010 and the effect on the number of golf rounds
played as an individual ages.
DEMOGRAPHICS
COLUMNS REPRESENT AVERAGE ANNUAL ROUNDS/GOLFER PER AGE GROUP
Graph depicting the average number of rounds of golf played in different age
groups. Graph also depicts the age dispersion in the United States between 1996
and 2010.
4
<PAGE>
RISK FACTORS
INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER "RISK
FACTORS" PRIOR TO MAKING AN INVESTMENT DECISION REGARDING THE COMMON STOCK
OFFERED HEREBY. SUCH RISKS INCLUDE:
- On a pro forma basis for the six months ended June 30, 1996, operations at
three of the Golf Courses, including the two recently opened Golf Courses,
would not have generated pro forma net operating income for the applicable
Initial Lessee.
- Two of the Golf Courses were recently opened and have limited operating
history and may not achieve sufficient revenue to enable the Initial
Lessee to pay the initial Base Rent for such Golf Courses.
- Dependence on Lease Payments from the Initial Lessees for substantially
all of the Company's income and the risks associated with the length of
the Participating Leases, which, with extensions, may have terms of up to
40 years.
- Risks associated with the fact that the holders of at least 66.7% of the
interests in the Operating Partnership, including the Company, which
initially will own only a 39.7% interest in the Operating Partnership,
must approve a sale of all or substantially all of the assets of the
Company or a merger or consolidation of the Operating Partnership.
- The lack of appraisals for the Golf Courses and the possibility that the
purchase prices paid by the Company for the Golf Courses may exceed the
fair market value of one or more of the Golf Courses.
- Risks associated with the Company's limited control over the day-to-day
management and operation of the Golf Courses due to the tax restrictions
that prevent a REIT from operating golf courses.
- Risks affecting golf course operations generally, including competition,
uninsured casualties, increases in operating costs, inclement weather and
seasonality and decrease in demand, all of which could adversely affect an
Initial Lessee's ability to make its Lease Payments.
- The lack of an operating history for the Company and the fact that
management has no experience operating a public company and limited
experience working as a management team.
- Risks associated with rapid growth and the implementation of the Company's
growth strategy, including competition for acquisitions from
well-established owners and operators.
- Risks associated with the substantial number of new golf courses opened in
recent years and currently under development or planned for development,
which could increase competition for golfers at the Golf Courses and
adversely affect the number of rounds played and the green fees received.
- Receipt by executive officers and one of the directors of the Company of
material benefits from the Formation Transactions.
- Risks associated with the concentration of five of the Golf Courses in the
Myrtle Beach, South Carolina vicinity.
- Taxation of the Company as a regular corporation if it fails to qualify as
a REIT, treatment of the Operating Partnership as an association taxable
as a corporation if it fails to qualify as a partnership, and the
resulting decrease in cash available to pay dividends as a result thereof.
- Risks normally associated with debt financing and the fact that there is
no limitation on the amount of debt the Company may incur.
- The restrictions on the ownership of outstanding shares of Common Stock
intended to ensure compliance with certain requirements related to
qualification of the Company as a REIT and certain other provisions in the
Company's Charter and Bylaws (as herein defined), which may inhibit a
change in control of the Company even where such a change in control might
be beneficial to the Company's stockholders.
5
<PAGE>
- The lack of a prior market for the Common Stock, the potential impact of
market interest rate increases and other factors on the trading price of
the Common Stock and the ability of the Company to maintain or increase
its initial estimated distribution rate.
- Immediate and substantial dilution of $11.37 per share in the net tangible
book value of the Common Stock purchased hereby, based on the Offering
Price.
THE GOLF COURSES
The Golf Courses consist of 10 nationally or regionally recognized high
quality courses located in the mid-Atlantic, southeastern and southwestern
United States. Four of the Golf Courses were ranked among the Top Ten New
Courses by either GOLF DIGEST or GOLF MAGAZINE in the year each opened,
including the recently opened Stonehouse Golf Club, which was recently named the
Best New Upscale Course by GOLF DIGEST for 1996. Two of the established courses
(Oyster Bay and Heritage Club) have been ranked in the Top 50 Public Golf
Courses by GOLF DIGEST.
The Golf Courses include eight high quality Daily Fee courses (including six
Resort Courses), one semi-private country club and one private country club.
"Daily Fee" courses are open to the public and generate revenues principally
through green fees, golf cart rentals, food and beverage operations, merchandise
sales and driving range charges. "Resort Courses" are Daily Fee golf courses
that attract a significant percentage of players from outside the immediate area
in which the golf course is located and generate a significant amount of revenue
through golf vacation packages. The Company considers the Daily Fee and Resort
Courses to be high-end golf courses because of the quality and maintenance of
each golf course and the average green fees, which are significantly above the
averages for golf courses in their respective geographic markets. Semi-private
country clubs typically offer memberships with playing privileges, while also
catering to the public, and receive revenue from the same sources as Daily Fee
courses as well as from membership dues. Private country clubs are generally
closed to the public and derive revenues principally from membership dues,
initiation fees, transfer fees, golf cart rentals, guest fees, food and beverage
operations and merchandise sales.
The Company believes that the overall quality of the Golf Courses is
reflected in the average green fees charged at each Golf Course, which
significantly exceed national averages. The Company believes its focus on high
quality Daily Fee golf courses and private and semi-private country clubs, which
attract golfers with attractive demographic and economic profiles, will result
in stronger and less cyclical revenue growth in comparison to lower-end golf
courses.
Five of the Golf Courses are located in the Myrtle Beach, South Carolina
vicinity, a popular year-round golf destination area. Myrtle Beach is considered
one of the nation's premier golf resort locations with nearly 100 golf courses
and more than 3.9 million rounds played in 1995, according to the MYRTLE BEACH
GOLF HOLIDAY-TM-. In addition to golf courses, Myrtle Beach offers a mix of
entertainment, shopping and dining, as well as proximity to beaches. All of the
Golf Courses located in the Myrtle Beach vicinity were developed and are
currently owned and operated by The Legends Group.
Two of the Golf Courses are located in the Williamsburg, Virginia area and
were opened in June and August 1996. Williamsburg is a leading tourist
destination and an emerging golf destination area, with a population of
approximately 2.6 million within a 60 mile radius, providing the area with an
opportunity to attract both resort and local golfers. Since 1995 five new
courses have been opened in the Williamsburg vicinity, including two of the Golf
Courses. In addition to golf course opportunities, Williamsburg and the
surrounding area offer shopping, dining, entertainment and historical sites.
Both of the Golf Courses located in Williamsburg were developed and are
currently owned and operated by The Legends Group.
One of the Golf Courses is located in Gulf Shores, Alabama, a popular golf
and vacation destination area located near the Florida panhandle. In addition to
golf, Gulf Shores offers 30 miles of sandy beaches. The other Golf Courses are
located in Houston, Texas and Atlanta, Georgia, two major metropolitan areas
with high levels of golf participation.
6
<PAGE>
Certain information respecting each of the Golf Courses is set forth below:
<TABLE>
<CAPTION>
ROUNDS
------------------------
TWELVE
MONTHS
ENDED
TYPE OF YEAR JUNE 30,
NAME LOCATION YARDAGE (1) COURSE OPENED 1994 1995 1996
- ---------------- ------------------ ------- ------- ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Heritage Club... Pawleys Island, SC 7,040 Resort 1986 59,524 55,094 51,634
Heathland....... Myrtle Beach, SC 6,785 Resort 1990 55,393 49,312 48,138
Moorland........ Myrtle Beach, SC 6,799 Resort 1990 54,383 49,590 47,851
Parkland........ Myrtle Beach, SC 7,170 Resort 1992 50,508 46,564 44,614
Oyster Bay...... Sunset Beach, NC 6,685 Resort 1982 62,962 62,141 57,828
The Woodlands
(5)............ Gulf Shores, AL 6,584 Resort 1994 13,490 43,459 40,816
Royal New Daily
Kent (6)....... Williamsburg, VA 7,291 Fee 1996 -- -- --
Stonehouse Golf Daily
Club (7)....... Williamsburg, VA 6,963 Fee 1996 -- -- --
Olde Atlanta.... Atlanta, GA 6,789 Semi-Private 1993 43,415 41,195 39,409
Northgate
Country Club... Houston, TX 6,540 Private 1984 44,370 46,600 47,033
Total..................................................................................
<CAPTION>
REVENUE PER PLAYER (2)
-------------------------- GROSS GOLF REVENUE (3)
TWELVE -------------------------------------
MONTHS TWELVE
ENDED MONTHS
JUNE 30, ENDED JUNE INITIAL
NAME 1994 1995 1996 1994 1995 30, 1996 BASE RENT
- ---------------- ------- ------- -------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Heritage Club... $ 51.89 $ 57.28 $ 61.11 $ 3,088,447 $ 3,155,843 $ 3,155,111 $ 1,824,980
Heathland....... $ 50.12 $ 55.03 $ 56.92 $ 2,776,387 $ 2,713,633 $ 2,740,022 $ 1,556,635(4)
Moorland........ $ 50.12 $ 55.03 $ 56.92 $ 2,725,765 $ 2,729,099 $ 2,723,686 $ 1,556,635(4)
Parkland........ $ 50.12 $ 55.03 $ 56.92 $ 2,531,543 $ 2,560,760 $ 2,539,435 $ 1,556,635(4)
Oyster Bay...... $ 51.60 $ 55.66 $ 58.49 $ 3,248,740 $ 3,458,971 $ 3,382,212 $ 1,975,589
The Woodlands
(5)............ $ 28.43 $ 33.49 $ 34.86 $ 383,569 $ 1,455,355 $ 1,422,948 $ 679,029
Royal New
Kent (6)....... -- -- -- -- -- -- $ 1,816,501
Stonehouse Golf
Club (7)....... -- -- -- -- -- -- $ 1,770,225
Olde Atlanta.... $ 37.39 $ 38.06 $ 40.77 $ 1,623,367 $ 1,567,918 $ 1,606,558 $ 845,058
Northgate
Country Club... $ 59.16 $ 66.50 $ 61.88 $ 2,624,805 $ 3,099,110 $ 2,910,484 $ 1,406,843
----------- ----------- ----------- ---------------
Total......... $19,002,623 $20,740,689 $20,480,456 $14,988,134
----------- ----------- ----------- ---------------
----------- ----------- ----------- ---------------
</TABLE>
- ---------------
(1) Yardage is calculated from the championship tees.
(2) "Revenue Per Player" is calculated by dividing total Gross Golf Revenue at
the applicable Golf Course by the number of rounds played at the applicable
Golf Course. For Heathland, Moorland and Parkland, which share common
facilities and have the same green fees, Revenue Per Player is equally
allocated among these courses.
(3) Gross Golf Revenue is generally defined as all revenues from a golf course,
including green fees, golf cart rentals, range fees, membership dues, member
initiation fees and transfer fees, but excluding food and beverage and
merchandise revenue.
(4) The Heathland, Moorland and Parkland Golf Courses are subject to a single
Participating Lease and the Base Rent is equally allocated among these Golf
Courses.
(5) Opened in August 1994.
(6) Opened in August 1996.
(7) Opened in June 1996.
7
<PAGE>
BUSINESS STRATEGIES AND OBJECTIVES
The Company's primary objective will be to increase Cash Available for
Distribution to stockholders and enhance stockholder value by acquiring
additional golf courses that meet the Company's investment criteria and by
participating in increased revenue from the Golf Courses and any subsequently
acquired golf courses through the Participating Leases.
ACQUISITIONS AND EXPANSIONS
ACQUISITIONS. The Company intends to acquire additional golf courses,
including multi-course portfolios, that meet one or more of its investment
criteria as generally described below. The Company believes its multiple
independent lessee structure, together with the industry knowledge, experience
and relationships of management of the Company and the Initial Lessees will
permit the Company to effectively target and acquire high quality golf courses,
including those which might not otherwise be available for sale. The Company
expects to have access to a variety of debt and equity financing sources to fund
acquisitions, including the Line of Credit and the ability to issue OP Units,
which can provide a means of structuring tax deferred transactions for sellers.
The Company believes market conditions today are favorable for the acquisition
of golf courses at attractive returns. The Company believes its structure offers
sellers of golf courses the following benefits: (i) the tax deferral and
increased liquidity associated with owning OP Units; (ii) the ability to retain
control over the operations of the golf courses by leasing the golf course from
the Company through its multiple independent lessee structure; (iii) the ability
to obtain additional OP Units through the Lessee Performance Option; (iv)
marketing and purchasing economies of scale gained from participation in the
Advisory Association (as herein defined); and (v) the ability to diversify a
seller's investment in golf courses by participating as an equity owner in the
Company's portfolio of golf courses.
The Company intends to concentrate its investment activities on golf courses
available at attractive prices that meet one or more of the following criteria:
- high quality Daily Fee courses that target avid golfers, who the Company
believes generally are willing to pay the higher green fees associated
with high quality golf courses;
- Resort Courses that offer superior facilities and service and attract a
relatively high number of affluent destination golfers;
- courses owned by multi-course owners and operators who have a strong
regional presence and afford the Company the opportunity to expand in a
particular region;
- private or semi-private golf courses with proven operating histories that
have the potential for significant cash flow growth;
- newly developed, well-designed golf courses with high growth potential;
and
- high quality, well-maintained golf courses with proven operating histories
located in areas where significant barriers to entry exist.
EXPANSIONS. The Prior Owner of Northgate Country Club currently plans to
add nine holes to that Golf Course, and the Prior Owner of The Woodlands
currently intends to build a new clubhouse (the "Expansion Facilities"). Subject
to satisfaction of certain conditions, the Company has agreed that following the
completion of the Offering it will acquire the Expansion Facilities when fully
completed and operational. The Company will acquire each Expansion Facility for
a price equal to the cost of construction, which cost must be approved in
advance by the Company and which may include an allowance for land. No
development fee will be paid to a Prior Owner or any affiliate of a Prior Owner
in connection with the construction of the Expansion Facilities.
The Base Rent for Northgate Country Club and The Woodlands will be increased
by an amount based on the price paid for any Expansion Facilities. The increase
in Base Rent is designed to be accretive to the Company's Funds From Operations
per share. Upon completion and intitial operation of the respective Expansion
Facilities, the Participating Leases for Northgate Country Club and The
Woodlands will be amended
8
<PAGE>
to include the applicable Expansion Facility, and the applicable Prior Owner
will be required to pledge additional OP Units (or cash or security acceptable
to the Company) equal to 15% of the purchase price paid by the Company for the
applicable Expansion Facility.
INTERNAL GROWTH
The Company believes the Golf Courses offer opportunities for revenue growth
through effective marketing and efficient operations. The Participating Leases
have been structured to provide the Initial Lessees with incentives to operate
and maintain the Golf Courses in a manner designed to increase revenue and, as a
result, increase Lease Payments to the Company under the Participating Leases.
The Company believes that management of the Initial Lessees have demonstrated
expertise in the management of the Golf Courses and that the Golf Courses are
positioned to benefit from favorable trends in the golf industry.
The Participating Leases provide that the Company will receive, in addition
to Base Rent, Participating Rent in an amount equal to 33 1/3% of any increase
in Gross Golf Revenue over Gross Golf Revenues at the Golf Courses in 1996. Base
Rent under each Participating Lease will increase by the lesser of 3% or 200% of
the change in the CPI for the prior year (the "Base Rent Escalator") during each
of the first five years of each Participating Lease and, if the Lessee
Performance Option is exercised, for an additional five years thereafter. "Gross
Golf Revenue" is generally defined as all revenues from a Golf Course including
green fees, golf cart rentals, range fees, membership dues, member initiation
fees and transfer fees, excluding, however, food and beverage and merchandise
revenue. Annual increases in Lease Payments are limited to 5% during each of the
first five years of the initial lease terms. See "The Golf Courses -- The
Participating Leases."
The Company will acquire the Golf Courses from the Prior Owners, and expects
to acquire additional golf courses from other sellers, utilizing an innovative
lease structure. This lease structure is designed to facilitate acquisitions of
golf courses with high growth potential which might not otherwise be available
for purchase, as well as to encourage aggressive growth in revenue at the Golf
Courses. During the first five years of each Participating Lease, each Prior
Owner will have the one-time right to elect to cause the Company to issue
additional OP Units to the Prior Owner with a corresponding increase in Base
Rent. The Prior Owner of the Northgate Country Club will have an additional two
year period to exercise the Lessee Performance Option if it elects to construct
the planned nine hole expansion. Upon the exercise of the Lessee Performance
Option, the Base Rent payable under the applicable Participating Lease will be
increased to take into account the value of the additional OP Units issued to
the Prior Owner. Any exercise of the Lessee Performance Option is designed to be
accretive to the Company's Funds From Operations on a per share basis. Following
the exercise of the Lessee Performance Option, the then applicable Base Rent
will be increased so that the Initial Lessee's net operating income for the
prior year will exceed the increased Base Rent by at least 13.5%. The adjusted
Base Rent will thereafter be increased by the Base Rent Escalator each year for
a period of five years.
9
<PAGE>
THE FORMATION TRANSACTIONS
Prior to or simultaneously with the completion of the Offering, the Company,
the Operating Partnership, the Prior Owners and the Initial Lessees will engage
in a series of transactions (collectively, the "Formation Transactions")
described below.
- The Company will sell 2,775,000 shares of Common Stock in the Offering and
will contribute all of the net proceeds thereof to its wholly-owned
subsidiaries, GTA GP and GTA LP, which will in turn contribute such net
proceeds to the Operating Partnership. Upon completion of the Offering and
the Formation Transactions, the Company will, through GTA GP and GPA LP,
own an approximately 39.7% ownership interest in the Operating
Partnership. GTA GP will be the sole general partner of the Operating
Partnership.
- The Prior Owners will contribute a 100% interest in each of the Golf
Courses to the Company in exchange for an aggregate of approximately
4,194,062 OP Units and approximately $4.5 million in cash. The Company
will use a portion of the net proceeds of the Offering to repay
approximately $47.4 million of existing mortgages and other indebtedness
at the Golf Courses.
- The Company, as landlord, will lease the Golf Courses to the Initial
Lessees pursuant to the Participating Leases for initial terms of ten
years each, with each Initial Lessee having the right to extend the term
of its Participating Lease for up to six renewal terms of five years each.
- The Company will enter into the Option Agreement (as herein defined) with
The Legends Group pursuant to which the Company will be granted the option
and right of first refusal to acquire golf courses currently owned or
subsequently acquired or developed by The Legends Group.
Following completion of the Formation Transactions, the structure and
relationships of the Company, the Operating Partnership, the Prior Owners,
management and the Initial Lessees will be as follows:
OWNERSHIP STRUCTURE
CHART OF OWNERSHIP STRUCTURE (CAN BE CONVERTED TO ASCII FILE)
10
<PAGE>
BENEFITS TO OFFICERS AND DIRECTORS
As a result of the Formation Transactions, executive officers and directors
of the Company and certain of their Affiliates will receive the following
benefits:
- Larry D. Young, a director of the Company and majority owner of The
Legends Group, and his affiliates will receive 3,738,556 OP Units, as
consideration for their interests in the Golf Courses owned by The Legends
Group. The OP Units to be received by Mr. Young and his affiliates (which
are redeemable for cash or, at the Company's option, Common Stock on a
one-for-one basis, beginning one year after the completion of the
Offering) will be worth approximately $74.8 million (based on the Offering
Price) and will be more liquid than their interests in the Golf Courses
once a public trading market for the Common Stock commences. As of June
30, 1996, the aggregate book value of the interests to be contributed by
The Legends Group was approximately $38.0 million.
- The 12,500 OP Units owned by Mr. Blair, Chairman of the Board of
Directors, Chief Executive Officer and President of the Company, and David
J. Dick, Executive Vice President and a director of the Company, will be
worth approximately $500,000, based on the Offering Price, a substantial
increase over the nominal purchase price paid by Messrs. Blair and Dick
for such OP Units.
- Mr. Blair and Mr. Dick will be granted options to acquire 150,000 and
125,000 shares of Common Stock, respectively, at the Offering Price. The
options vest ratably over three years commencing on the first anniversary
of the date of grant.
- Each Independent Director (as herein defined) will receive options to
acquire 5,000 shares of Common Stock at the Offering Price.
- In connection with the acquisition of the Golf Courses owned by The
Legends Group, the Company will repay approximately $27.0 million of debt
personally guaranteed by Mr. Young.
- The Company will pay to Mr. Young and his affiliates approximately $8.2
million in repayment of a loan made by Mr. Young to The Legends Group in
connection with the development of the two recently opened Golf Courses.
- Through the operation of seven of the Golf Courses, the Legends Lessees,
which are owned by Mr. Young and his affiliates, will be entitled to all
cash flow from such Golf Courses after payment of the Lease Payments under
the applicable Participating Leases and other operating expenses.
- Certain tax consequences to Mr. Young and his affiliates from the
conveyance to the Company of their interests in the Golf Courses being
contributed by The Legends Group will be deferred.
- The Company will enter into employment agreements with Mr. Blair and Mr.
Dick providing for annual salaries of $250,000 and $150,000, respectively.
DISTRIBUTION POLICY
Subsequent to the completion of the Offering, the Company intends to make
regular quarterly distributions to its stockholders. The Company's first
distribution, for the period from the completion of the Offering to March 31,
1997, is expected to equal a pro rata share of the anticipated initial quarterly
distribution of $.40625 per share of Common Stock, which, on an annualized
basis, will represent a distribution rate of $1.625 per share, or 8.125% of the
Offering Price. The Company estimates that approximately % of the initial
annual distribution will represent a return of capital for federal income tax
purposes. In order to maintain its status as a REIT for federal income tax
purposes, the Company is currently required to distribute at least 95% of its
taxable income. Based on the Company's pro forma results of operations for the
year ended December 31, 1995, the Company would have been required to distribute
approximately $ million, or $ per share to maintain its REIT tax status. On
a pro forma basis for the year ended December 31, 1995, the estimated initial
distribution represents 91.9% of estimated Cash Available for Distribution.
Holders of OP Units will receive
11
<PAGE>
distributions on a per unit basis equal to the per share distributions to owners
of Common Stock. See "Partnership Agreement." The Company does not expect to
adjust the estimated initial distribution rate if the Underwriters'
over-allotment option is exercised.
The Company has established the initial distribution rate based upon the
Company's estimate of Cash Available for Distribution, which has been derived
from the pro forma condensed statement of operations of the Company for the year
ended December 31, 1995. The Company believes the pro forma financial
information for the year ended December 31, 1995 constitutes a reasonable basis
for setting the initial distribution rate. The Board of Directors, in its sole
discretion, will determine the actual distribution rate based on the Company's
actual results of operations, economic conditions, tax considerations (including
those related to REITs) and other factors. See "Distribution Policy."
TAX STATUS
The Company will elect to be taxed as a REIT under sections 856 through 860
of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with
its taxable year ending December 31, 1997. If the Company qualifies for taxation
as a REIT, with certain exceptions, the Company will not be subject to federal
income tax at the corporate level on its taxable income that is distributed to
its stockholders. A REIT is subject to a number of organizational and
operational requirements, including a requirement that it currently distribute
at least 95% of its taxable income. Failure to qualify as a REIT will render the
Company subject to federal income tax (including any applicable minimum tax) on
its taxable income at regular corporate rates and distributions to the
stockholders in any such year will not be deductible by the Company. Although
the Company does not intend to request a ruling from the Internal Revenue
Service (the "Service") as to its REIT status, the Company will receive at the
completion of the Offering the opinion of its legal counsel, O'Melveny & Myers
LLP, as to its REIT status, which opinion will be based on certain assumptions
and representations and will not be binding on the Service or any court. Even if
the Company qualifies for taxation as a REIT, the Company may be subject to
certain state and local taxes on its income and property. In connection with the
Company's election to be taxed as a REIT, the Company's Charter will impose
restrictions on the transfer of shares of Common Stock. The Company will adopt
the calendar year as its taxable year. See "Risk Factors -Real Estate Investment
Trust and Partnership Qualification", " -- Limits on Changes in Control" and "
- -- Ownership Limit" and "Federal Income Tax Considerations" and "Capital Stock
- -- Restrictions on Ownership."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company...................... 2,775,000 shares
Common Stock and OP Units to
be outstanding after the
completion of the Offering... 6,997,812 shares (1)
Use of Proceeds............... To repay mortgage and other existing
indebtedness in connection with the acquisition
of the Golf Courses, to pay the cash portion of
the purchase price for the Golf Courses and
certain closing costs, and for working capital.
Proposed NYSE Symbol.......... GTA
</TABLE>
- ------------
(1) Does not include an aggregate of 600,000 shares reserved for issuance
pursuant to the Company's Plan and the Directors' Plan (each as herein
defined). See "Management -- Stock Incentive Plan" and "Management --
Directors' Plan."
12
<PAGE>
SUMMARY FINANCIAL DATA
The following tables set forth (i) unaudited selected consolidated pro forma
financial information for the Company, (ii) unaudited selected historical and
combined pro forma financial information for The Legends Group as accounting
acquiror and (iii) selected pro forma financial information for the Initial
Lessees. The pro forma operating information is presented as if the Formation
Transactions had occurred as of the beginning of the periods indicated and
therefore incorporates certain assumptions that are included in the Notes to Pro
Forma Condensed Statements of Operations included elsewhere in this Prospectus.
The pro forma balance sheet information is presented as if the Formation
Transactions had occurred on June 30, 1996. The pro forma information does not
purport to represent what the Company's or the Initial Lessees' financial
position or results of operations actually would have been had the Formation
Transactions, in fact, occurred on such date or at the beginning of the period
indicated, or to project the Company's or the Initial Lessees' financial
position or results of operations at any future date or any future period.
GOLF TRUST OF AMERICA, INC.
UNAUDITED SUMMARY CONSOLIDATED PRO FORMA FINANCIAL DATA
(in thousands, except per share and footnote data)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
OPERATING DATA:
Participating Lease revenue (1)................. $14,988 $ 7,494
Depreciation and amortization................... 3,202 1,601
General and administrative (2).................. 1,638 819
Interest expense................................ 366 183
Minority interest (3)........................... 5,902 2,951
------- -------------
Total expenses and minority interest............ 11,108 5,554
------- -------------
Net income applicable to common stockholders.... $ 3,880 $ 1,940
------- -------------
------- -------------
Net income per common share..................... $ 1.40 $ .70
Common shares outstanding....................... 2,775 2,775
------- -------------
------- -------------
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
CASH FLOW DATA:
Cash flows from operating activities (4)........ $13,004 $ 6,502
Cash flows used in investing activities (5)..... 609 304
Cash flows used in financing activities (6)..... 15,696 10,011
BALANCE SHEET DATA:
Investment in Golf Courses...................... $64,037
Total assets.................................... 64,696
Mortgages and notes payable..................... 4,325
Minority interest in Operating Partnership...... 36,431
Total stockholders' equity...................... 23,940
OTHER DATA:
Funds From Operations (7)....................... $12,984 $ 6,492
Cash Available for Distribution (8)............. 12,375 6,187
Common Stock and OP Units outstanding........... 6,998 6,998
</TABLE>
(NOTES ON PAGE 15)
13
<PAGE>
THE LEGENDS GROUP AND ACQUIRED GOLF COURSE OPERATIONS
UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA (9)
(in thousands)
<TABLE>
<CAPTION>
SEASIDE
RESORTS NORTHGATE
STATEMENTS OF OPERATIONS GOLF HERITAGE (OYSTER LEGENDS OF TOTAL COUNTRY THE OLDE
YEAR ENDED DECEMBER 31, 1995 LEGENDS GOLF CLUB BAY) VIRGINIA(10) LEGENDS CLUB WOODLANDS ATLANTA TOTAL
------- --------- ------- ------------ ------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from golf course
operations................... $8,004 $3,156 $3,459 $14,619 $3,099 $1,455 $1,568 $20,741
Other Revenue................. 2,176 783 865 3,824 1,467 291 466 6,048
------- --------- ------- ----- ------- --------- --------- ------- -------
Total revenue................. 10,180 3,939 4,324 18,443 4,566 1,746 2,034 26,789
Participating Lease
payments..................... 4,670 1,825 1,976 8,471 1,407 679 845 11,402
Other operating expenses...... 5,373 2,181 1,925 15 9,494 3,124 1,074 1,442 15,134
------- --------- ------- ----- ------- --------- --------- ------- -------
Net income (loss)............. $ 137 $ (67) $ 423 $ (15) $ 478 $ 35 $ (7) $ (253) $ 253
------- --------- ------- ----- ------- --------- --------- ------- -------
------- --------- ------- ----- ------- --------- --------- ------- -------
EBITDA (12)................... $ 359 $ 9 $ 490 $ (15) $ 843 $ 60 $ (7) $ (253) $ 643
------- --------- ------- ----- ------- --------- --------- ------- -------
------- --------- ------- ----- ------- --------- --------- ------- -------
SIX MONTHS ENDED JUNE 30, 1996
Revenue from golf
operations................... $4,723 $1,904 $1,993 $ 21 $8,641 $1,504 $ 769 $ 900 $11,814
Other revenue................. 1,378 423 478 4 2,283 812 150 250 3,495
------- --------- ------- ----- ------- --------- --------- ------- -------
Total revenue................. 6,101 2,327 2,471 25 10,924 2,316 919 1,150 15,309
Participating Lease
payments..................... 2,335 913 988 148 4,384 704 340 423 5,851
Other operating expenses...... 2,902 989 928 529 5,348 1,602 538 731 8,330
------- --------- ------- ----- ------- --------- --------- ------- -------
Net income (loss)............. $ 864 $ 425 $ 555 $(652) $1,192 $ 10 $ 41 $ (4) $ 1,128
------- --------- ------- ----- ------- --------- --------- ------- -------
------- --------- ------- ----- ------- --------- --------- ------- -------
EBITDA (12)................... $ 975 $ 456 $ 588 $(652) $1,367 $ 22 $ 41 $ (4) $ 1,426
------- --------- ------- ----- ------- --------- --------- ------- -------
------- --------- ------- ----- ------- --------- --------- ------- -------
</TABLE>
THE LEGENDS GROUP
SUMMARY COMBINED HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA:
Revenue from golf course operations............. $10,373 $11,724 $13,455 $14,371 $14,619 $ 8,798 $ 8,641
Other revenue................................... 2,647 2,931 3,438 3,724 3,823 2,145 2,283
------- ------- ------- ------- ------- ------- -------
Total revenue................................... 13,020 14,655 16,893 18,095 18,442 10,943 10,925
Operating expenses (11)......................... 7,702 8,895 9,882 10,082 10,322 5,217 5,757
Depreciation and amortization................... 1,253 1,406 1,564 1,830 1,791 911 1,004
Interest expense................................ 892 648 619 998 1,017 505 515
------- ------- ------- ------- ------- ------- -------
Net income (loss)............................... $ 3,173 $ 3,706 $ 4,828 $ 5,185 $ 5,312 $ 4,310 $ 3,649
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
BALANCE SHEET DATA:
Investment in Golf Courses...................... $14,917 $17,425 $16,663 $18,301 $32,099 $17,869 $33,738
Total assets.................................... 20,853 20,484 22,719 23,649 41,300 26,287 48,458
Mortgages, notes payable and advances from
affiliates and stockholders.................... 12,944 16,293 19,285 18,638 35,163 19,602 37,512
Capital lease obligations....................... 850 332 -- -- -- -- --
Total owners' equity............................ $ 5,199 $ 2,086 $ 2,263 $ 2,772 $ 5,328 $ 5,645 $ 8,976
</TABLE>
(NOTES ON PAGE 15)
14
<PAGE>
- ---------------
(1) Represents payments of Base Rent from the Initial Lessees to the Company
calculated on a pro forma basis as if the beginning of the period presented
was the beginning of a lease year including Participating Lease revenue from
Legends of Virginia, L.C. of $3,586,000 for the year ended December 31, 1995
and $1,791,000 for the six months ended June 30, 1996.
(2) Represents legal, audit, office, franchise taxes, salaries and other general
and administrative expenses to be paid by the Company.
(3) Calculated as approximately 60.3% of the Operating Partnership's net income.
(4) Represents the Company's income before minority interest adjusted for
non-cash depreciation and amortization. Estimated pro forma cash flows from
operating activity excludes cash provided by (used in) operating activities
due to changes in working capital resulting from changes in current assets
and current liabilities. The Company does not believe these excluded items
are material to cash flows from operating activities.
(5) Represents the amount of the reserve which the Company will be required to
make available annually under the Participating Leases to fund capital
expenditures calculated as 2.0% to 3.0% of Gross Golf Revenue at the Golf
Courses.
(6) Represents estimated initial distributions to be paid based on the
anticipated initial annual dividend rate of $1.625 per share and OP Unit and
an aggregate of 6,997,812 shares of Common Stock and OP Units outstanding
and initial borrowing of $4,325,000.
(7) In accordance with the resolution adopted by the Board of Governors of the
National Association of Real Estate Investment Trusts, Inc. ("NAREIT"),
Funds From Operations represents net income (loss) (computed in accordance
with generally accepted accounting principles), excluding gains (or losses)
from debt restructuring or sales of property, plus depreciation of real
property, and after adjustments for unconsolidated partnerships and joint
ventures. Funds From Operations should not be considered as an alternative
to net income or other measurements under generally accepted accounting
principles as an indicator of operating performance or to cash flows from
operating, investing or financial activities as a measure of liquidity.
Funds from operations does not reflect working capital changes, cash
expenditures for capital improvements or principal payments on indebtedness.
Under the Participating Leases, the Company is obligated to establish a
reserve for capital expenditures. The Company believes that Funds From
Operations is helpful to investors as a measure of the performance of an
equity REIT, because, along with cash flows from operating activities,
financing activities and investing activities, it provides investors with an
understanding of the ability of the Company to incur and service debt and
make capital expenditures.
(8) Cash Available for Distribution represents Funds From Operations, as
adjusted for certain non-cash items, less pro forma reserves for capital
expenditures under the Participating Leases.
(9) Pro forma amounts are presented as if (i) the Operating Partnership recorded
depreciation and amortization and (ii) the Formation Transactions occurred
as of the beginning of the periods presented.
(10) Legends of Virginia reflects the operations at both Stonehouse Golf Club
and Royal New Kent, which opened in June 1996 and August 1996, respectively.
Participating Lease payments reflect the periods in which the Golf Courses
were actually operating.
(11) Represents operating costs and expenses, general and administrative,
repairs and maintenance, utilities, marketing and management fees.
(12) EBITDA is defined as operating income before interest income, taxes,
depreciation and amortization. EDITDA does not represent cash generated from
operating activities in accordance with generally accepted accounting
principles and is not to be considered as an alternative to net income as an
indication of financial performance or to cash flows from operating
activities as a measure of liquidity.
15
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION IN
CONJUNCTION WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE
PURCHASING SHARES OF COMMON STOCK IN THE OFFERING. CERTAIN STATEMENTS IN THIS
PROSPECTUS THAT ARE NOT HISTORICAL FACT CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
DISCUSSIONS CONTAINING SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THE
MATERIAL SET FORTH UNDER "PROSPECTUS SUMMARY," "USE OF PROCEEDS," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
LIQUIDITY AND CAPITAL RESOURCES", "THE GOLF INDUSTRY" AND "THE GOLF COURSES," 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 UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
THE RISK FACTORS SET FORTH BELOW, AND THE MATTERS SET FORTH IN THIS PROSPECTUS
GENERALLY. THE COMPANY 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.
INITIAL LESSEE PRO FORMA NET INCOME
On a pro forma basis for the six months ending June 30, 1996, operations at
three of the Golf Courses, including the two recently opened Golf Courses, would
not have generated net operating income for the applicable Initial Lessee. If an
Initial Lessee is unable to generate an operating profit there is a greater risk
that such Initial Lessee will default on its obligations under the applicable
Participating Lease. In that event, the Company's Cash Available for
Distribution to its stockholders could be adversely affected.
ACQUISITION OF GOLF COURSES WITH LIMITED OPERATING HISTORY
Two of the Golf Courses recently opened and have limited operating history.
The Base Rent for these Golf Courses is based on the Company's projections of
Gross Golf Revenue and net operating income. Consequently, the Company will be
subject to risks that these Golf Courses will not achieve anticipated Gross Golf
Revenues or net operating income and, therefore, that the Initial Lessees of
such Golf Courses will be unable to make the Lease Payments.
DEPENDENCE ON PAYMENTS UNDER THE PARTICIPATING LEASES
The Company's ability to make distributions to stockholders will depend
solely upon the ability of the Initial Lessees to make Lease Payments under
Participating Leases (which will be dependent primarily on the Initial Lessees'
ability to generate sufficient revenues in excess of operating expenses from the
Golf Courses). Any failure or delay by an Initial Lessee in making Lease
Payments may adversely affect the Company's ability to make anticipated
distributions to stockholders. Such failure or delay may be caused by reductions
in revenue from the Golf Courses or in the net operating income of an Initial
Lessee or otherwise. In addition, the Initial Lessees are newly-organized
limited purpose entities and have nominal capitalization. Although failure on
the part of an Initial Lessee to materially comply with the terms of its
Participating Lease would give the Company the right to terminate such
Participating Lease, recover any OP Units pledged as a security deposit,
repossess the applicable Golf Course and enforce the Lease Payment obligations
under the Participating Lease, the Company would then be required to find
another lessee to lease such Golf Course. There can be no assurance that the
Company would be able to find another lessee or that, if another lessee were
found, the Company would be able to enter into a new lease on favorable terms.
DURATION OF LEASE; NO RIGHT TO TERMINATE PARTICIPATING LEASES ON A SALE
The Participating Leases, which, with extensions, may have terms of up to 40
years, do not terminate when a Golf Course is sold. It may therefore be more
difficult to sell a Golf Course, and the value to a prospective buyer, and
therefore the price paid to the Company for a Golf Course, may be less than if
the Participating Leases were to terminate upon a sale. See "The Golf Courses --
The Participating Leases."
16
<PAGE>
LACK OF APPRAISALS
No third-party valuations of the Golf Courses were obtained in connection
with the Formation Transactions. The valuation of the Company is based upon the
capitalization of the Company's estimated Cash Available for Distribution and
the factors set forth in this Prospectus in the section "Underwriting." There
can be no assurance that the price paid by the Company for the Golf Courses does
not exceed the fair market value of one or more of the Golf Courses.
LACK OF CONTROL OVER DAY-TO-DAY OPERATIONS AND MANAGEMENT OF THE GOLF COURSES
In order to qualify as a REIT for federal income tax purposes, the Company
may not operate the Golf Courses or participate in the decisions affecting the
operations of the Golf Courses. Each Initial Lessee will control the operations
of the Golf Courses it leases under the Participating Leases, which have initial
terms of ten years and may be extended at the option of each Initial Lessee for
up to six five-year renewal terms. The Company will not have the authority to
require any Initial Lessee to operate the Golf Courses in a particular manner,
or to govern any particular aspect of their operation (e.g., setting green
fees), except as set forth in the Participating Leases. Thus, even if the
Company believes an Initial Lessee is operating the Golf Courses it leases
inefficiently or in a manner that does not result in a maximization of
Participating Rent to the Company under the Participating Leases and, therefore,
does not increase Cash Available for Distribution to the stockholders, the
Company may not require an Initial Lessee to change its method of operation. The
Company is limited to seeking redress only if an Initial Lessee violates the
terms of the Participating Lease, in which case the Company's primary remedy is
to terminate one or more of the Participating Leases and seek to recover damages
from such Initial Lessee. See "The Golf Courses -- The Participating Leases."
GOLF INDUSTRY RISKS
OPERATING RISKS
The Golf Courses will be subject to all operating risks common to the golf
industry. These risks include, among other things (i) increases in operating
costs due to inflation and other factors, which increases may not be offset by
increased dues and fees; (ii) dependence on tourism, particularly for the Resort
Courses, which may fluctuate and be seasonal; and (iii) adverse effects of
general and local economic conditions. These factors could adversely affect the
Initial Lessee's ability to generate revenues and to make Lease Payments and,
therefore, the Company's ability to make expected distributions to the Company's
stockholders.
SUPPLY OF GOLF COURSES
There have been a substantial number of new golf courses opened in recent
years and a number of new courses currently are under development or planned for
development including golf courses located near the Golf Courses. These new golf
courses could increase the competition faced by one or more of the Golf Courses
and reduce the rounds played and revenues associated with one or more of the
Golf Courses. Any such decrease in revenues may adversely affect the net
operating income of an Initial Lessee and, therefore, its ability to make the
Lease Payments.
INVESTMENT IN SINGLE INDUSTRY
The Company's current strategy is to acquire only golf courses and related
facilities. As a result, the Company will be subject to risks inherent in
investments in a single industry. The effects on Cash Available for Distribution
to stockholders resulting from a downturn in the golf industry will be more
pronounced than if the Company had diversified its investments.
SEASONALITY
The golf industry is seasonal. Seasonal variations in revenue at the Golf
Courses may require the Initial Lessees to supplement revenue at the applicable
Golf Course to pay Base Rent. Failure of an Initial Lessee to properly manage
its cash flow may result in an Initial Lessee with insufficient cash to make its
Lease Payments during low seasons and, therefore, adversely affect Cash
Available for Distribution to stockholders.
17
<PAGE>
ADVERSE WEATHER CONDITIONS
Several climatological factors beyond the control of the Initial Lessees may
influence the revenues at the Golf Courses, including adverse weather such as
hurricanes, heat waves, frosts and floods. In the event of adverse weather or
destruction of the turf grass at a Golf Course, the number of rounds played at
such Golf Course could decrease, which could have a negative impact on any
Participating Rent received from the affected Golf Course and the ability of the
applicable Initial Lessee to make its Lease Payment. The six Golf Courses in the
Myrtle Beach and Gulf Shores areas are generally susceptible to damage from
hurricanes, which damage (including loss of revenue) is not generally insurable
at commercially reasonable rates. Consequently, a hurricane may adversely affect
both the value of the Company's investment in a particular Golf Course as well
as the ability of the Initial Lessee of such Golf Course to make Lease Payments.
Additionally, hurricanes may damage local accommodations such as hotels and
condominiums, thereby limiting play, particularly at Resort Courses.
FACTORS AFFECTING GOLF PARTICIPATION
The success of efforts to attract and retain members at private country
clubs and the number of rounds played at public golf courses historically has
been dependent upon discretionary spending by consumers, which may be adversely
affected by regional and economic conditions. 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 Gross Golf Revenue generated per Golf Course and,
therefore, the Lease Payments to be paid under the Participating Leases.
COURSE CONDITIONS
General turf grass conditions must be satisfactory to attract play on the
Golf Courses. Severe weather or other factors, including disease, could
adversely affect the turf grass conditions at the Golf Courses. Turf grass
conditions at the Golf Courses also depend to a large extent on the quality and
quantity of water available. The availability and quantity of water available is
affected by various factors, many of which are beyond the control of the
Company. There can be no assurance that certain conditions, including drought,
governmental regulation or environmental concerns, which could adversely affect
the supply of water to a particular Golf Course, may not arise in the future.
LACK OF OPERATING HISTORY
The Company has been recently organized and has no operating history. There
can be no assurance that the Company will be able to generate sufficient revenue
from operations to make anticipated distributions. The Company also will be
subject to the risks generally associated with the formation of any new
business. The Company's management has no experience operating a public company
and limited experience working together.
RISKS RELATED TO THE COMPANY'S GROWTH STRATEGY
COMPETITION FOR ACQUISITIONS
The Company will compete for golf course acquisition opportunities with
entities organized for purposes substantially similar to the Company's
objectives as well as other purchasers of golf courses. The Company may be
competing for such golf course acquisition opportunities with entities which
have substantially greater financial resources than the Company and a broader
geographic knowledge base. These entities may also generally be able to accept
more risk than the Company prudently can manage. Thus, competition may generally
reduce the number of suitable golf course acquisition opportunities available to
the Company. See "The Golf Courses -- Competition."
POSSIBLE UNAVAILABILITY OF CAPITAL
The success of the Company's growth strategy will, in part, depend upon its
access to capital necessary to acquire additional golf courses through use of
excess cash flow, borrowings or subsequent issuances of Common Stock, OP Units
or other securities.
18
<PAGE>
INABILITY TO EFFECTIVELY MANAGE GROWTH
The Company's success will depend upon the ability of each Initial Lessee to
effectively operate all of the Golf Courses it leases, as well as the ability of
the Company to continue to select an appropriate lessee for each additional Golf
Course it acquires. The Company has no existing arrangement with any entity to
lease golf courses which the Company may acquire in the future. There can be no
assurance that the Company will have access to capital or that an Initial Lessee
will effectively operate the Golf Courses it leases. In the event the Company
fails to obtain access to capital or an Initial Lessee fails to effectively
operate the Golf Courses it leases, Cash Available for Distribution to
stockholders could be adversely affected.
RISKS RELATED TO EXPANSION OPPORTUNITIES
The Company is obligated under certain conditions to acquire additional
facilities to be developed at two of the Golf Courses. See "The Company --
Acquisitions and Expansions." Such acquisitions will be subject to risks
associated with any newly acquired project without an operating history,
including the ability of the additional facilities to generate the expected
revenues.
BENEFITS TO OFFICERS AND DIRECTORS
The Company's officers and directors will receive material benefits from the
Formation Transactions that will not generally be received by others
participating in the Offering. Such benefits include (i) receipt by Mr. Young,
one of the Company's directors, and his affiliates of 3,738,556 OP Units (valued
at approximately $74.8 million based on the Offering Price) in exchange for
their interests in the Golf Courses contributed by The Legends Group, (ii) a
substantial increase in the value of the OP Units held by Mr. Blair and Mr. Dick
over the nominal purchase price paid for such OP Units prior to the commencement
of the Offering, (iii) repayment of approximately $27.0 million of indebtedness
personally guaranteed by Mr. Young, (iv) receipt by the executive officers of
options to acquire 275,000 shares of Common Stock at the Offering Price, (v)
receipt by each Independent Director of options to acquire 5,000 shares of
Common Stock at the Offering Price, and (vi) payment to Mr. Young and his
affiliates of approximately $8.2 million in repayment of an outstanding loan to
The Legends Group incurred in connection with the development of the two
recently opened Golf Courses. In addition, the Legends Lessees, which will lease
the Golf Courses contributed by The Legends Group and which are owned by Mr.
Young and his affiliates, will be entitled to all cash flow from the Golf
Courses leased to the Legends Lessees after payment of the Lease Payments and
other operating expenses. Thus, the Company's officers and certain of its
directors may have interests that conflict with the interests of persons
acquiring Common Stock in the Offering. See "The Formation Transactions."
CONCENTRATION OF INVESTMENTS IN MYRTLE BEACH
Five of the Golf Courses are located in the Myrtle Beach area. The
concentration of the Company's investments in the Myrtle Beach area could result
in adverse events or conditions which affect those areas in particular, such as
competition, hurricanes, overbuilding, and economic recession which affect that
area in particular, having a more significant negative impact on the operations
of the Golf Courses located there, and ultimately Cash Available for
Distribution to the Company's stockholders, than if the Company's investments
were more geographically diverse.
REAL ESTATE INVESTMENT RISKS
GENERAL
Acquisitions of the Golf Courses and any additional golf courses in which
the Company may invest in the future are subject to risks typically associated
with investments in real estate. Such risks include the possibility that the
Golf Courses and any additional golf courses will generate rent and capital
appreciation, if any, at rates lower than those anticipated or will yield
returns lower than those available through other investments. Income from the
Golf Courses may be affected by many factors, including changes in government
regulation, general or local economic conditions, the available local supply of
golf courses, a decrease in the number of golfers, adverse weather conditions or
other factors.
19
<PAGE>
ILLIQUIDITY OF REAL ESTATE
Real estate investments are relatively illiquid. The ability of the Company
to vary its portfolio in response to changes in economic and other conditions is
limited. The ground lessor of the Oyster Bay Golf Course has a right of first
refusal to acquire such Golf Course upon any proposed sale by the Company. In
addition, each of the Initial Lessees has a right of first offer to acquire the
Golf Course(s) leased by it in the event of a proposed sale by the Company. In
the event that a sale of a Golf Course will result in a taxable gain to the
Prior Owner thereof, the Company has agreed to use reasonable efforts to
structure such a sale as a tax-deferred exchange. All of these factors may make
it more difficult to transfer a Golf Course even where such transfer may be in
the best interests of the Company.
ENVIRONMENTAL MATTERS
Operations at the 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 removal or remediation of certain hazardous substances released on or
in its property. Such laws often impose such liability without regard to whether
the owner or operator knew of, or was responsible for, the release of such
hazardous substances. The presence of such substances, or the failure to
remediate such substances properly, may adversely affect the owner's ability to
sell such real estate or to borrow using such real estate as collateral.
Although all of the Golf Courses have been subjected to a Phase I environmental
audit (which does not involve invasive procedures, such as soil sampling or
ground water analysis) by an independent environmental consultant, no assurance
can be given that these reports reveal all potential environmental liabilities,
that no prior or adjacent owner created any material environmental condition not
known to the Company or the independent consultant or that future uses or
conditions (including, without limitation, changes in applicable environmental
laws and regulations) will not result in imposition of environmental liability
to the Company. While the Participating Leases provide that the Initial Lessees
will indemnify the Company for certain potential environmental liabilities at
the Golf Courses, the Initial Lessees are newly-formed entities with nominal
capitalization. See "The Golf Courses -- Government Regulation."
UNINSURED LOSSES
The Participating Leases require that each Initial Lessee maintain insurance
with respect to each of the Golf Courses it leases, including comprehensive
liability, fire, flood (but only to the extent comparable golf courses in the
area carry such insurance and such insurance is available at commercially
reasonable rates) and extended coverage insurance. There are, however, certain
types of losses (such as from hurricanes, floods or earthquakes) which may be
either uninsurable or not economically insurable. Should an uninsured loss
occur, the Company could lose both its invested capital in and anticipated
profits from the applicable golf course. See "The Golf Courses -- The
Participating Leases."
GROUND LEASE
One of the Golf Courses, Oyster Bay, is operated pursuant to a ground lease
with a remaining term of 35 years. The ground lessor may terminate the ground
lease in accordance with its terms or may choose not to renew such ground lease.
If the ground lease is terminated or is not renewed, the Company would lose its
investment in the Oyster Bay Golf Course.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of shares of Common Stock in the Offering will experience
immediate and substantial dilution of $11.37 per share (based on the Offering
Price) in the net tangible book value of the shares of Common Stock from the
Offering Price. See "Dilution."
POSSIBLE CONFLICTS OF INTEREST
SALE OF GOLF COURSES
One of the directors of the Company and his affiliates may have unrealized
gain in their interests in certain of the Golf Courses transferred to the
Company. The sale of such courses by the Company may cause adverse tax
20
<PAGE>
consequences to such director and his affiliates. See "Federal Income Tax
Considerations -- Tax Aspects of the Operating Partnership -- Tax Allocations
with Respect to the Golf Courses." Therefore, the interests of the Company and
such director and his affiliates could be different in connection with the
disposition of such Golf Courses.
COMPETITION FROM OTHER GOLF COURSES OPERATED BY THE INITIAL LESSEES
Excluding the Golf Courses, affiliates of the Initial Lessees currently own
and/or manage five golf courses and related facilities. Some of these golf
courses and related facilities are located in the same geographic areas as the
Golf Courses and may compete with the Golf Courses. In particular, affiliates of
the Initial Lessee of The Woodlands will continue to own and operate a 27-hole
golf facility near The Woodlands. Affiliates of any Initial Lessee may continue
to acquire, develop or manage golf courses that compete with the Company's golf
courses. Accordingly, an Initial Lessee's decisions relating to the operation of
a Golf Course that is in competition with other golf courses managed by it may
be adverse to the interests of the Company.
OTHER POSSIBLE CONFLICTS
Other transactions involving the Company and affiliates of the Initial
Lessees may also give rise to possible conflicts of interest, such as future
acquisitions of golf courses and selection of operators for golf courses
acquired in the future.
REAL ESTATE INVESTMENT TRUST AND PARTNERSHIP QUALIFICATION
The Company intends to operate so as to qualify as a REIT under the Code.
Although the Company believes that it will be so organized and will operate in
such a manner and has received an opinion of its legal counsel, O'Melveny &
Myers LLP, as to its REIT status (which opinion is based on certain assumptions
and representations), no assurance can be given that the Company will qualify or
remain qualified as a REIT. Qualification as a REIT involves the application of
highly technical and complex Code provisions for which there are only limited
judicial or administrative interpretations. The complexity of these provisions
and of the applicable income tax regulations that have been promulgated under
the Code (the "Treasury Regulations") is greater in the case of a REIT that
holds its assets in partnership form. The determination of various factual
matters and circumstances not entirely within the Company's control may affect
its ability to qualify as a REIT. In addition, no assurance can be given that
legislation, new regulations, administrative interpretations or court decisions
will not significantly change the tax laws with respect to qualification as a
REIT or the federal income tax consequences of such qualification. See "Federal
Income Tax Considerations."
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would not be allowed a deduction for distributions to stockholders in
computing taxable income and would be subject to federal income tax on its
taxable income at regular corporate rates. Unless entitled to relief under
certain statutory provisions, the Company would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification was lost. As a result, the funds available for distribution to the
Company's stockholders would be reduced for each of the years involved. Although
the Company currently intends to operate in a manner designed to qualify as a
REIT, it is possible that future economic, market, legal, tax or other
considerations may cause the Company to fail to qualify as a REIT or may cause
the Board of Directors to revoke the REIT election. See "Federal Income Tax
Considerations."
The Operating Partnership has been structured to be classified as a
partnership for federal income tax purposes. If the Service were to challenge
successfully the tax status of the Operating Partnership as a partnership for
federal income tax purposes, the Operating Partnership would be treated as an
association taxable as a corporation. In such event, the character of the
Company's assets and items of gross income would change and preclude the Company
from satisfying the asset tests and possibly the income tests (imposed by the
Code as discussed below) and, in turn, would prevent the Company from qualifying
as a REIT. See "Federal Income Tax Considerations -- Taxation of the Company --
Requirements for Qualification." In addition, the imposition of a corporate tax
on the Operating Partnership would reduce the amount of funds from operations
available for distribution to the Company and its stockholders. See "Federal
Income Tax Considerations -- Tax Aspects of the Operating Partnership."
21
<PAGE>
COMPETITION FOR MANAGEMENT TIME FOR THE INITIAL LESSEES
Management of the Initial Lessees will continue to devote significant time
to other business interests, including in many instances resort and residential
development on property adjacent to the Golf Courses. As a result, management of
the Initial Lessees may be subject to competing demands on their time, and may
not devote sufficient time to the operations of the Golf Courses, which may
result in less revenue being generated from the Golf Courses.
RISKS OF LEVERAGE; NO LIMITATIONS ON INDEBTEDNESS
Upon completion of the Offering, the Company will have outstanding
indebtedness of approximately $4.3 million incurred in connection with the
acquisition of one of the Golf Courses. The Company's Charter does not limit its
ability to incur indebtedness. The Company may borrow additional amounts from
the same or other lenders in the future, or may issue corporate debt securities
in public or private offerings. Certain of such additional borrowings may be
secured by the Golf Courses owned by the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Policies and Objectives with Respect to Certain
Activities -- Financing." The Company has agreed to maintain up to $4.3 million
of indebtedness for a period of up to 10 years following the completion of the
Offering to accommodate a Prior Owner's efforts to minimize certain adverse tax
consequences. In the event that the Company fails to maintain such indebtedness,
the Company will be liable for any resulting income tax liabilities to the Prior
Owner.
There can be no assurance that the Company, upon the incurrence of debt,
will be able to meet its debt service obligations and, to the extent that it
cannot, the Company risks the loss of some or all of its assets, including any
Golf Courses securing such debt, to foreclosure, which could result in a
financial loss to the Company. Adverse economic conditions could result in
higher interest rates on variable rate debt, including borrowings under the Line
of Credit, which could decrease Cash Available for Distribution and increase the
risk of loss upon a sale or from a foreclosure.
MARKET FOR COMMON STOCK; ADVERSE EFFECT OF INCREASE IN MARKET INTEREST RATES
Prior to the completion of the Offering, there has been no public market for
the Common Stock, and there can be no assurance that an active trading market
will develop or be sustained or that the Common Stock may be resold at or above
the Offering Price. The Offering Price will be determined through negotiations
between the Company and the Underwriters and may not be indicative of the market
price for the Common Stock after the completion of the Offering. See
"Underwriting."
In addition, one of the factors that may influence the price of the Common
Stock in public trading markets will be the annual yield from distributions by
the Company on the Common Stock as compared to yields on other financial
instruments. Thus, an increase in market interest rates will result in higher
yields on other financial instruments, which could adversely affect the market
price of the Common Stock.
CHANGES IN INVESTMENT AND FINANCING POLICIES
The Board of Directors of the Company (the "Board of Directors") determines
the Company's investment and financing policies and policies with respect to
certain other activities, including its growth, capitalization, distributions
and operating policies. Although the Board of Directors has no present intention
to amend or revise these policies, the Board of Directors may do so at any time
without a vote of the Company's stockholders. See "Policies and Objectives With
Respect to Certain Activities -- Investment Objectives and Policies."
LIMITS ON CHANGES IN CONTROL
The restrictions on the ownership of outstanding shares of Common Stock
intended to ensure compliance with certain requirements related to continued
qualification of the Company as a REIT and restrictions on changes in control
contained in the Company's Charter and Bylaws, including a staggered Board of
Directors and the ability of the Board of Directors to issue preferred stock
without stockholder approval, may have the effect of inhibiting a change in
control of the Company, even where such a change of control could be beneficial
to the Company's stockholders.
22
<PAGE>
DEPENDENCE ON ACQUISITIONS TO INCREASE CASH AVAILABLE FOR DISTRIBUTION
The Company's success in implementing its growth plan will depend
significantly on the Company's ability to acquire additional golf courses at
attractive prices. Because of the structure of the Participating Leases, which
limit increases in Lease Payments to 5% annually for the first five years,
internal growth through increases in revenues of the Golf Courses is not
expected to provide as much growth in Cash Available for Distribution to
stockholders as will the acquisition of additional golf courses. See "-- Risks
of Leverage; No Limitation on Indebtedness" and "-- Risks Related to the
Company's Growth Strategy." If the Company is unable to acquire additional golf
courses at attractive prices, the Company's ability to grow and maintain or
increase Cash Available for Distribution per share may be adversely affected.
DISTRIBUTION TO STOCKHOLDERS
The Company's ability to make distributions to its stockholders will be
based principally on Lease Payments under the Participating Leases. In the event
of a default by an Initial Lessee under its Participating Lease, there could be
a decrease or cessation of Lease Payments from such Initial Lessee. In addition,
the amount available to the Company to make distributions to its stockholders
may decrease on a per share basis if golf courses acquired in the future yield
lower than expected revenues. In addition, if the Company incurs additional
indebtedness in the future, it will require additional funds to service such
indebtedness and Cash Available for Distribution may decrease. Distributions by
the Company will also be dependent on a number of other factors, including the
amount of Funds From Operations available for distribution, the Company's
financial condition, any decision to reinvest funds rather than to distribute
such funds, capital expenditures, the annual distribution requirements under the
REIT provisions of the Code (see "Federal Income Tax Considerations -- Taxation
of the Company -- Requirements for Qualifications -- Annual Distribution
Requirements") and such other factors as the Company deems relevant.
In order to qualify as a REIT, the Company generally will be required to
distribute to its stockholders at least 95% of its net taxable income each year.
In addition, the Company will be subject to a 4% nondeductible excise tax on the
amount, if any, by which certain distributions paid by it with respect to any
calendar year are less than the sum of 85% of its ordinary income, 95% of its
capital gain net income and undistributed income from prior years.
The Company intends to make distributions to its stockholders to comply with
the 95% distribution requirements of the Code and to avoid the nondeductible
excise tax. The Company's income and cash flow will consist primarily of rent
payments under the Participating Leases. Differences in timing between the
receipt of income and the payment of expenses in arriving at taxable income and
the effect of required debt amortization payments could require the Company to
borrow funds on a short-term basis to meet the distribution requirements that
are necessary to achieve the tax benefits associated with qualifying as a REIT.
ADVERSE EFFECT OF SHARES AVAILABLE FOR FUTURE ISSUANCE AND SALE ON MARKET PRICE
OF COMMON STOCK
Sales of a substantial number of shares of Common Stock or the perception
that such sales could occur, may adversely affect prevailing market prices for
the Common Stock. In addition to the shares of Common Stock offered by the
Company in the Offering, an aggregate of 4,222,812 OP Units will be outstanding
upon completion of the Formation Transactions. See "The Formation Transactions".
Fifty percent of the OP Units may be redeemed by the holders of such OP Units at
any time after the first anniversary of the completion of the Offering and the
remaining 50% of such OP Units may be redeemed at any time after the second
anniversary of the completion of the Offering for cash, or at the Company's
option, for shares of Common Stock on a one-for-one basis. See "Shares Available
for Future Sale." At the conclusion of the periods described above, the shares
of Common Stock issuable upon redemption of the OP Units may be sold in the
public market pursuant to a shelf registration statement which the Company is
obligated to file with respect to the issuance of such shares, or pursuant to
any available exemptions from registration. The Company also has granted the
Prior Owners certain "piggyback" registration rights commencing on the first
anniversary of the completion of the Offering (see "Shares Available for Future
Sale -- Registration Rights").
23
<PAGE>
The Company's acquisition strategy will depend in part on access to
additional capital through sales and issuances of equity securities, including
OP Units. The market price of the Common Stock may be adversely affected by the
availability for future sale and issuance of shares of Common Stock that may be
issued upon redemption of the OP Units as well as any additional OP Units issued
in future acquisitions or in connection with an Initial Lessee's exercise of the
Lessee Performance Option. See "The Company -- Acquisitions and Expansions." No
predictions can be made as to the effect, if any, that future sales of shares,
or the perception that such sales could occur will have the price of the Common
Stock.
OWNERSHIP LIMIT
In order for the Company to qualify and to maintain its qualification as a
REIT, not more than 50% in value of its outstanding stock may be owned, directly
or constructively, by five or fewer individuals (as defined in the Code). In
addition, rent from related party tenants is not qualifying income for purposes
of the gross income tests under the Code. See "Federal Income Tax Considerations
- -- Taxation of the Company." Two sets of constructive ownership rules (one to
determine whether a REIT is closely held and one to determine whether rent is
from a related party tenant) apply in determining whether these requirements are
met. For the purpose of preserving the Company's REIT qualification, the Charter
prohibits direct or constructive ownership of more than 9.8% of the lesser of
the total number or value of the outstanding shares of the Common Stock or more
than 9.8% of the outstanding preferred stock (if any) of the Company (the
"Ownership Limit"). The constructive ownership rules are complex and may cause
Common Stock owned, directly or constructively, by a group of related
individuals and/or entities to be deemed to be constructively owned by one
individual or entity. As a result, the acquisition of less than 9.8% of the
Common Stock (or the acquisition of an interest in an entity which owns Common
Stock) by an individual or entity could cause that individual or entity (or
another individual or entity) to own constructively in excess of 9.8% of the
Common Stock, and thus subject such Common Stock to the Ownership Limit. See
"Capital Stock -- Restrictions on Ownership." Direct or constructive ownership
of shares of Common Stock in excess of the Ownership Limit would cause the
violative transfer or ownership to be void, or cause such shares to be
designated as "Shares-in-Trust", as herein defined. See "Capital Stock --
Restrictions on Ownership."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this
Prospectus, including, without limitation, statements containing the words
"believes," "anticipates," "expects" and words of similar import, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Certain of these
factors are discussed in more detail elsewhere in this Prospectus, including,
without limitation, under the captions "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "The Golf Industry" and "The Golf Courses." Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward-looking statements. The Company disclaims any obligation to
update any such factors or to publicly announce the result of any revisions to
any of the forward-looking statements contained herein to reflect future events
or developments.
24
<PAGE>
THE COMPANY
The Company has been created as a self-administered REIT to capitalize upon
consolidation opportunities in the ownership of golf courses in the United
States. The principal business strategy of the Company will be to acquire high
quality golf courses and to lease the golf courses to an affiliate of the seller
or other qualified operator. The Company believes its multiple independent
lessee structure, together with the substantial industry knowledge, experience
and relationships within the golf community of management of the Company and the
Initial Lessees (who collectively will own a 60.3% equity interest in the
Company upon completion of the Formation Transactions) will permit it to
effectively target and acquire high quality golf courses, including those which
might not otherwise be available for sale.
Upon completion of the Offering and the Formation Transactions, the Company
will be one of only two publicly traded REITs in the United States focused on
owning and acquiring golf courses and will own 10 courses located in South
Carolina (4), Virginia (2), Alabama, Georgia, North Carolina and Texas. The Golf
Courses will be leased to the Initial Lessees affiliated with the Prior Owners
under the Participating Leases, which provide for the payment of fixed Base Rent
and Participating Rent based on growth in revenue at the Golf Courses. The
Company believes it will benefit from the continuity of golf course management
provided by the Initial Lessees, whose affiliates developed and have operated
each of the Golf Courses since their completion. Neither the Company nor its
executive officers will own any interest in or participate in the management of
the Initial Lessees.
The Company's goal is to increase stockholder value by becoming the leading
owner of nationally or regionally recognized high quality golf courses in the
United States. Four of the Golf Courses were ranked among the Top Ten New
Courses by either GOLF DIGEST or GOLF MAGAZINE in the year the applicable Golf
Course opened, including the recently opened Stonehouse Golf Club, which in
November 1996 was named the Best New Upscale Course by GOLF DIGEST for 1996. Two
of the established courses (Oyster Bay and Heritage Club) have been ranked in
the Top 50 Public Golf Courses by GOLF DIGEST. The Company believes that the
quality of the Golf Courses is further reflected in their average green fees,
which significantly exceed national industry averages. All of the Golf Courses
were developed and have been continuously operated by the Prior Owners. The
Initial Lessees will be special purpose entities formed by the Prior Owners to
lease the Golf Courses from the Company pursuant to the Participating Leases.
The Company believes the continuity of management provided by these experienced
operators will facilitate the Company's growth and profitability. The Company
believes that the substantial ownership interest of affiliates of the Initial
Lessees in the Company will align the interests of the Initial Lessees with
those of the stockholders of the Company. As security for an Initial Lessee's
obligations under its Participating Lease, each Prior Owner will pledge to the
Company for a minimum of two years OP Units having a value, based on the
Offering Price, equal to 15% of the purchase price for the applicable Golf
Course, which approximates 16 months of initial Base Rent under the applicable
Participating Lease.
The Chairman of the Board, Chief Executive Officer and President of the
Company, W. Bradley Blair, II, currently serves as the Executive Vice President
and Chief Operating Officer of The Legends Group, a leading golf course owner,
developer and operator in the southeast and mid-Atlantic regions of the United
States. Seven of the eight golf courses currently owned by The Legends Group are
being contributed to the Company. The one course not being contributed by The
Legends Group to the Company is owned by The Legends Group pursuant to a ground
lease with a short remaining term which does not presently meet the Company's
investment criteria. The Company will have an option and right of first refusal
to acquire any golf courses owned, developed or acquired by The Legends Group
pursuant to the Option Agreement. See "Certain Relationships and Transactions --
Option to Purchase and Right of First Refusal." The initial Participating Leases
with the Legends Lessees will be cross-collateralized and cross-defaulted.
Following the completion of the Offering, the Company expects to have access
to a variety of debt and equity financing sources to fund acquisitions,
including the ability to issue OP Units, which can provide a tax-deferred
structure for sellers. Upon completion of the Offering, the Company expects to
obtain the Line of Credit from a major bank which will be utilized primarily for
the acquisition of additional golf courses. The
25
<PAGE>
Company will have approximately $4.3 million of outstanding indebtedness upon
completion of the Offering, which will be incurred in connection with the
acquisition of one of the Golf Courses. The Company believes its initial low
level of debt, coupled with the Line of Credit will provide the Company with
significant financial flexibility in pursuing golf course acquisition
opportunities. The Company intends to maintain a capital structure which limits
consolidated indebtedness to no more than 50% of its total market
capitalization.
The Company's executive offices are located at 190 King Street, Charleston,
South Carolina 29401 and its telephone number is (803) 768-8300.
BUSINESS STRATEGY
The Company will seek to maximize its Cash Available for Distribution to
stockholders and enhance stockholder value by acquiring additional golf courses
that meet one or more of the Company's investment criteria and by participating
in increased revenue from the Golf Courses and any subsequently acquired golf
courses through the Participating Leases.
ACQUISITIONS AND EXPANSIONS
ACQUISITIONS. The Company intends to acquire additional golf courses,
including multi-course portfolios, that meet one or more of its investment
criteria as generally described below. The Company believes its multiple
independent lessee structure, together with the industry knowledge, experience
and relationships of management of the Company and the Initial Lessees will
permit the Company to effectively target and acquire high quality golf courses,
including those which might not otherwise be available for sale. The Company
expects to have access to a variety of debt and equity financing sources to fund
acquisitions, including the Line of Credit and the ability to issue OP Units,
which can provide a means of structuring tax-deferred transactions for sellers.
The Company believes market conditions today are favorable for the acquisition
of golf courses at attractive returns. The Company believes its structure offers
sellers of golf courses the following benefits: (i) the tax deferral and
increased liquidity associated with owning OP Units; (ii) the ability to retain
control over the
operations of the golf course by leasing the golf course from the Company
through its multiple independent lessee structure; (iii) the ability to obtain
additional OP Units through the Lessee Performance Option; (iv) marketing and
purchasing economies of scale gained from participation in the Advisory
Association; and (v) the ability to diversify a seller's investment in Golf
Courses by participating as an equity owner in the Company's portfolio of golf
courses.
The Company intends to concentrate its investment activities on golf courses
available at attractive prices that meet one or more of the following criteria:
- high quality Daily Fee courses that target avid golfers, who the Company
believes are generally willing to pay the higher green fees associated
with high quality golf courses;
- Resort Courses that offer superior facilities and service and attract a
relatively high number of affluent destination golfers;
- courses owned by multi-course owners and operators who have a strong
regional presence and afford the Company the opportunity to expand in a
particular region;
- private or semi-private golf courses with proven operating histories that
have the potential for significant cash flow growth;
- newly developed, well-designed courses with high growth potential; and
- high quality, well-maintained golf courses with proven operating histories
located in areas where significant barriers to entry exist.
26
<PAGE>
The Company will undertake a sophisticated analysis with respect to golf
courses to be considered for acquisition, including an evaluation of the
following:
- Condition of course and agronomy review;
- Competitive position in market;
- Barriers to entry in development of new golf courses;
- Irrigation -- quantity, quality and cost (watershed, wells, etc.);
- Strength of the lodging industry, including hotels and condominiums, in
destination golf areas; and
- Product and service differentiation.
EXPANSIONS. The Prior Owner of Northgate Country Club currently plans to
add nine holes to that Golf Course, and the Prior Owner of The Woodlands
currently intends to build a new clubhouse. Subject to satisfaction of certain
conditions, the Company has agreed that following the completion of the Offering
it will acquire the Expansion Facilities when fully completed and operational.
The Company will acquire each Expansion Facility for a price equal to the cost
of construction, which cost must be approved in advance by the Company and which
may include an allowance for land. No development fee will be paid to a Prior
Owner or any affiliate of a Prior Owner in connection with the construction of
the Expansion Facilities.
The Base Rent for Northgate Country Club and The Woodlands will be increased
by an amount based on the price paid for any Expansion Facilities. The increase
in Base Rent is designed to be accretive to the Company's Funds From Operations
per share. Upon completion and initial operation of the respective Expansion
Facilities, the Participating Leases for Northgate Country Club and The
Woodlands will be amended to include the applicable Expansion Facility, and the
applicable Prior Owner will be required to pledge for a minimum of two years
additional OP Units (or cash or security acceptable to the Company) equal to 15%
of the purchase price paid by the Company for the applicable Expansion Facility.
INTERNAL GROWTH
The Company believes the Golf Courses offer opportunities for revenue growth
through continued effective marketing and efficient operations. The
Participating Leases have been structured to provide the Initial Lessees with
incentives to operate and maintain the Golf Courses in a manner designed to
increase revenue and, as a result, increase Lease Payments to the Company under
the Participating Leases. The Company believes that management of the Initial
Lessees have demonstrated expertise in the management of the Golf Courses and
that the Golf Courses are positioned to benefit from favorable trends in the
golf industry.
The Participating Leases provide that the Company will receive, in addition
to Base Rent, Participating Rent in an amount equal to 33 1/3% of any increase
in Gross Golf Revenue over Gross Golf Revenues at the Golf Courses in 1996. Base
Rent under each Participating Lease will increase by the Base Rent Escalator
during each of the first five years of each Participating Lease and, if the
Lessee Performance Option is exercised, for an additional five years thereafter.
Annual increases in Lease Payments are limited to 5% during the first five years
of the initial lease terms. See "The Golf Courses -- The Participating Leases."
The Company will acquire the Golf Courses from the Prior Owners, and expects
to acquire additional golf courses from other sellers, utilizing an innovative
lease structure. This lease structure is designed to facilitate acquisitions of
golf courses with high growth potential which might not otherwise be available
for purchase, as well as to encourage aggressive growth in revenue at the Golf
Courses. During the first five years of each Participating Lease, each Prior
Owner will have the one-time right to elect to cause the Company to issue
additional OP Units to the Prior Owner with a corresponding increase in Base
Rent. Such election can be made beginning in 1999. Upon the exercise of the
Lessee Performance Option, the Base Rent payable under the applicable
Participating Lease will be increased to take into account the value of the
additional OP Units issued to the Prior Owner. Any exercise of the Lessee
Performance Option is designed to be accretive to the Company's Funds From
Operations on a per share basis.
27
<PAGE>
The Lessee Performance Option permits an Initial Lessee which is generating
net operating income in excess of the required Lease Payment, including any
Participating Rent, to increase the Base Rent to an amount that provides a
minimum lease coverage ratio of 113.5% for the prior year's pro forma net
operating income. This difference in net operating income for the year of
conversion and the pro forma net operating income based on the increase in rent
is then capitalized at the Company's current cost of equity funds plus 200 basis
points.
Upon the exercise of the Lessee Performance Option, the applicable Prior
Owner will be required to pledge additional OP Units (or cash or other
securities acceptable to the Company) so that the aggregate security deposit
equals 15% of the initial purchase price and the value of the OP Units issued in
connection with the exercise of the Lessee Performance Option. The adjusted Base
Rent will thereafter be increased annually by the Base Rent Escalator for a
period of five years.
THE OPERATING PARTNERSHIP
Upon contribution of the net proceeds of the Offering to the Operating
Partnership, the Company, through GTA GP and GTA LP, will acquire an
approximately 39.7% interest in the Operating Partnership, a Delaware limited
partnership. The Operating Partnership will own all of the Golf Courses and will
lease the Golf Courses to the Initial Lessees pursuant to the Participating
Leases. GTA GP will be the sole general partner of the Operating Partnership and
will own a 1.0% general partnership interest in the Operating Partnership. GTA
LP will be one of the Operating Partnership's limited partners and will own an
approximately 38.7% limited partnership interest in the Operating Partnership.
The other Limited Partners of the Operating Partnership will include the Prior
Owners and Messrs. Blair and Dick. In their capacity as such, the Limited
Partners will have limited authority to transact business for, or participate in
the management, activities or decisions of, the Operating Partnership. The
Limited Partners (other than GTA LP) will be entitled to vote on certain
matters, including the sale of all or substantially all the Company's assets or
the merger or consolidation of the Partnership, which will require the approval
of the holders of at least 66.7% of the interests in the Operating Partnership.
The OP Units held by the Limited Partners other than GTA LP are redeemable 50%
beginning one year after completion of the Offering and 50% beginning two years
after completion of the Offering for cash or, at the election of the Company,
for shares of Common Stock on a one-for-one basis.
28
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after payment of expenses
incurred in connection with the Offering, are estimated to be approximately
$48.2 million. The Company intends to apply the net proceeds of the Offering as
follows:
<TABLE>
<CAPTION>
DOLLARS IN
THOUSANDS
-----------
<S> <C>
Repayment of existing mortgages and other indebtedness (net of cash
proceeds from initial borrowing of $4.3 million)..................... $ 43,200
Payment of cash portion of the purchase price for the Golf Courses,
and related closing costs............................................ 4,400
Working capital....................................................... 600
-----------
Total................................................................. $ 48,200
-----------
-----------
</TABLE>
The balance of the purchase price for the Golf Courses will be paid with the
issuance of approximately 4.2 million OP Units. If the Underwriters'
over-allotment option is exercised, the Company intends to use the additional
net proceeds of approximately $7.7 million for the acquisition of additional
golf courses and for working capital.
The mortgage and other indebtedness to be repaid with the net proceeds of
the Offering reflects a weighted average interest rate of approximately 8.75%.
The weighted average remaining maturity of such indebtedness is approximately 3
years. Approximately $4.0 million of such indebtedness was incurred in the past
year and used to fund a portion of the development of the two recently opened
Golf Courses.
Pending the uses described above, the net proceeds will be invested in
interest-bearing accounts and short-term, interest-bearing securities, which are
consistent with the Company's intention to qualify for taxation as a REIT. Such
investments may include, for example, government and government agency
securities, certificates of deposit, interest bearing bank deposits and mortgage
loan participation.
29
<PAGE>
DISTRIBUTION POLICY
Subsequent to the completion of the Offering, the Company intends to make
regular quarterly distributions to its stockholders. The Company's first
distribution, for the period from the completion of the Offering to March 31,
1997, is expected to equal a pro rata share of the anticipated initial quarterly
distribution of $.40625 per share of Common Stock, which, on an annualized
basis, will represent a distribution rate of $1.625 per share, or 8.125% of the
Offering Price. On a pro forma basis for the year ended December 31, 1995, the
estimated initial distribution represents 91.9% of estimated Cash Available for
Distribution. Holders of OP Units will receive distributions on a per unit basis
equal to the per share distributions to owners of Common Stock. The Company does
not expect to adjust the estimated initial distribution rate if the
Underwriters' over-allotment option is exercised. See "Partnership Agreement."
The Company has established the initial distribution rate based upon the
Company's estimate of Cash Available for Distribution, which has been derived
from the pro forma condensed statement of operations of the Company for the year
ended December 31, 1995. The Company believes the pro forma financial
information for the year ended December 31, 1995 constitutes a reasonable basis
for setting the initial distribution rate. The Board of Directors, in its sole
discretion, will determine the actual distribution rate based on the Company's
actual results of operations, economic conditions, tax considerations (including
those related to REITs) and other factors.
The following table sets forth certain financial information for the year
ended December 31, 1995, which has been used to establish the expected initial
distribution per share of Common Stock.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C>
Pro forma income before minority interest(1).......................... $ 9,782
Pro forma depreciation and amortization............................... 3,202
-------
Pro forma Funds From Operations(2).................................... 12,984
Adjustments:
Estimated capital expenditures(3)................................. (609)
-------
Estimated Cash Available for Distribution............................. 12,375
-------
-------
Expected initial annual distribution(4)............................... 11,371
Expected initial distribution per OP Unit and per share of Common
Stock................................................................ $ 1.625
Expected payout ratio based on estimated Cash Available for
Distribution(5)...................................................... 91.9%
</TABLE>
- ------------
(1) Minority interest in pro forma income for the year ended December 31, 1995
is approximately $5.9 million (approximately 60.3%).
(2) Management and industry analysts generally consider Funds From Operations to
be one measure of the financial performance of an equity REIT that provides
a relevant basis for comparison among REITs and it is presented to assist
investors in analyzing the performance of the Company. "Funds From
Operations" is defined as income before minority interest (computed in
accordance with generally accepted accounting principles), excluding gains
(losses) from debt restructuring and sales of property and real estate
related depreciation and amortization (excluding amortization of financing
costs). Funds From Operations does not represent cash generated from
operating activities in accordance with generally accepted account
principles and is not necessarily indicative of cash available to fund cash
needs. Funds From Operations should not be considered an alternative to net
income as an indication of the Company's financial performance or as an
alternative to cash flows from operating activities as a measure of
liquidity.
30
<PAGE>
(3) The Participating Leases require the Company to reserve annually between 2%
and 3% of the Gross Golf Revenues of the Golf Courses to fund capital
expenditures. Any capital expenditures in excess of such amounts will be
funded by the Initial Lessees.
(4) Represents expected initial annual distribution per share of Common Stock
and OP Unit times the 6,997,812 shares of Common Stock and OP Units to be
outstanding upon completion of the Formation Transactions.
(5) Represents the anticipated initial aggregate annual distribution divided by
Cash Available for Distribution. The expected payout ratio based upon
estimated pro forma Funds From Operations is approximately 87.6%.
The Company expects to maintain its initial distribution rate unless actual
results of operations, economic conditions or other factors differ from the pro
forma results for the year ended December 31, 1995. The Company's actual Cash
Available for Distribution will be affected by a number of factors, including
Gross Golf Revenues generated at the Golf Courses. The Company anticipates that
Cash Available for Distribution will exceed earnings and profits due to non-cash
expenses, primarily depreciation and amortization, to be incurred by the
Company. Distributions by the Company to the extent of its current or
accumulated earnings and profits for federal income tax purposes, other than
capital gain dividends, will be taxable to stockholders as ordinary dividend
income. Any dividends designated by the Company as capital gain dividends
generally will give rise to capital gain for stockholders. Distributions in
excess of the Company's current or accumulated earnings and profits generally
will be treated as a non-taxable reduction of a stockholder's basis in the
Common Stock to the extent thereof, and thereafter as capital gain.
Distributions treated as non-taxable reduction in basis will have the effect of
deferring taxation until the sale of a stockholder's Common Stock or future
distributions in excess of the stockholder's basis in the Common Stock. Based
upon the total estimated Cash Available for Distribution set forth in the table
above, the Company believes that approximately % of the Company's expected
annual distribution would represent a return of capital for federal income tax
purposes. See "Federal Income Tax Considerations -- Taxation of the Company --
Annual Distribution Requirements." If actual Cash Available for Distribution or
taxable income vary from these amounts, or if the Company is not treated as the
owner of one or more of the Golf Courses, the percentage of distributions which
represents a return of capital may be materially different.
In order to maintain its qualification as a REIT, the Company must make
annual distributions to its stockholders of at least 95% of its taxable income
(excluding net capital gains). Based on the Company's pro forma results of
operations for the year ended December 31, 1995, the Company would have been
required to distribute approximately million, or $ per share, in
order to maintain its status as a REIT. Under certain circumstances, the Company
may be required to make distributions in excess of Cash Available for
Distribution in order to meet such distribution requirements. In such event, the
Company would seek to borrow the amount of the deficiency or sell assets to
obtain the cash necessary to make distributions to retain its qualification as a
REIT for federal income tax purposes.
The Board of Directors, in its sole discretion, will determine the actual
distribution rate based on a number of factors, including the amount of Cash
Available for Distribution, the Company's financial condition, capital
expenditure requirements for the Company's properties, the annual distribution
requirements under the REIT provisions of the Code and such other factors as the
Board of Directors deems relevant. For a discussion of the tax treatment of
distributions to holders of Common Stock, see "Federal Income Tax
Considerations."
31
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization on a historical combined
basis for The Legends Group as of June 30, 1996 and, on a pro forma basis, for
the Company as of June 30, 1996, assuming completion of the Offering and
Formation Transactions and use of the proceeds from the Offering as described in
"Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
THE LEGENDS
GROUP COMPANY PRO
HISTORICAL(1) FORMA
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Mortgages and other notes payable............................................. $ 37,512 $ 4,325
Minority interest in Operating Partnership.................................... 36,431
Stockholders' equity:
Preferred Stock, $0.01 par value, 10,000,000 shares authorized, no shares
issued and outstanding..................................................... -- --
Common Stock, $0.01 par value per share, 90,000,000 shares authorized,
2,775,000 shares issued and outstanding, as adjusted (2)................... 4 27
Additional paid in capital.................................................. 300 23,913
Accumulated earnings........................................................ 8,672 --
----------- -----------
Total stockholders' equity.................................................. 8,976 23,940
----------- -----------
Total capitalization...................................................... $ 46,488 $ 64,696
----------- -----------
----------- -----------
</TABLE>
- ------------
(1) Reflects predecessor entities.
(2) Excludes 4,222,812 shares issuable upon redemption of OP Units outstanding
prior to the Offering or issued in connection with the Formation
Transactions.
32
<PAGE>
DILUTION
The initial price per share to the public of Common Stock offered hereby
exceeds the net tangible book value per share. Therefore, purchasers of Common
Stock in the Offering will realize an immediate and substantial dilution of the
net tangible book value of their shares. Net pro forma tangible book value is
determined by subtracting total liabilities from total tangible assets and
dividing the remainder by the number of shares of Common Stock and OP Units that
will be outstanding after the Offering. The following table illustrates the
dilution to purchasers of Common Stock sold in the Offering, based on the
Offering Price.
<TABLE>
<S> <C> <C>
Offering Price (1).................................................... $ 20.00
Pro forma net tangible book value prior to the Offering (2)........... 2.88
Increase in net tangible book value attributable to shares issued in
the Offering......................................................... 5.75
---
Pro forma net tangible book value after Formation Transactions (3).... 8.63
---------
Dilution per share purchased in the Offering.......................... $ 11.37
---------
---------
</TABLE>
- ------------
(1) Before deducting underwriting discount and estimated expenses of the
Offering.
(2) Pro forma net tangible book value prior to the Offering is determined by
subtracting total liabilities from total tangible assets of Operating
Partnership prior to the Company's contribution, divided by the total number
of shares of Common Stock and OP Units to be issued by the Operating
Partnership in the Formation Transactions.
(3) Based on the total pro forma net tangible book value of the Company
(including minority interest) divided by the total shares of Common Stock
and OP Units outstanding.
The following table sets forth the number of shares of Common Stock to be
sold by the Company in the Offering, the total contributions to be paid to the
Company by purchasers of shares in the Offering, the OP Units to be issued in
the Formation Transactions, and the tangible book value per share and per OP
Unit based on total contributions (determined as if the consummation of the
Formation Transactions occurred on June 30, 1996).
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK TOTAL CONTRIBUTIONS TO
ISSUED BY THE COMPANY
AND OP UNITS ISSUED BY
THE OPERATING
PARTNERSHIP THE COMPANY TANGIBLE BOOK
------------------------ ------------------------- VALUE
NUMBER PERCENT PERCENT PER SHARE/OP UNIT
---------- ------------ AMOUNT ---------- ------------------
-------------
(IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
Shares of Common Stock sold by the Company in
the Offering.................................. 2,775,000 39.7% $ 55,500 91.9% $ 20.00(1)
OP Units issued in the Formation
Transactions.................................. 4,222,812 60.3% 12,178 20.2% 2.88(2)
Expenses of the Offering....................... (7,307) (12.1%)
---------- -------------
Total.......................................... 6,997,812 $ 60,371 $ 8.63
---------- -------------
---------- -------------
</TABLE>
- ------------
(1) Based on the Offering Price before deducting expenses of the Offering.
(2) Based on the book value of assets to be contributed to the Operating
Partnership in the Formation Transactions.
33
<PAGE>
THE GOLF COURSES
SELECTED HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
LEGENDS
OF
HERITAGE GOLF VIRGINIA (1) NORTHGATE COUNTRY
GOLF LEGENDS CLUB OYSTER BAY ------- TOTAL LEGENDS CLUB
----------------- ----------------- ----------------- ----------------- -----------------
SIX
SIX MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED MONTHS SIX MONTHS ENDED SIX MONTHS ENDED
ENDED
----------------- ----------------- ----------------- ------- ----------------- -----------------
6/30/95 6/30/96 6/30/95 6/30/96 6/30/95 6/30/96 6/30/96 6/30/95 6/30/96 6/20/95 6/20/96
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from golf
operations......... $4,812 $4,723 $1,907 $1,904 $2,079 $1,993 $ 21 $8,798 $8,641 $1,379 $1,504
Other revenue....... 1,193 1,378 439 423 512 478 4 2,145 2,284 800 812
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenue....... 6,006 6,101 2,346 2,327 2,591 2,471 25 10,943 10,925 2,179 2,316
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating
expenses........... 2,908 3,142 1,250 1,087 1,118 1,043 529 5,217 5,868 1,540 1,611
Depreciation........ 614 638 156 155 82 95 73 911 1,004 163 171
Interest............ 434 1,397 32 27 39 35 35 505 515 223 248
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total expenses...... $3,956 $4,177 $1,438 $1,269 $1,239 $1,173 $ 657 $6,633 $7,276 $1,926 $2,030
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)... $2,050 $1,924 $ 908 $1,058 $1,352 $1,298 $ (632) $4,310 $3,649 $ 253 $ 286
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
EBITDA(3)........... $3,098 $2,959 $1,096 $1,240 $1,473 $1,428 $ (504) $5,726 $5,168 $ 639 $ 705
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<CAPTION>
THE WOODLANDS (2)
OLDE ATLANTA
----------------- -----------------
SIX MONTHS ENDED SIX MONTHS ENDED
----------------- -----------------
6/30/95 6/30/96 6/30/95 6/30/96
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue from golf
operations......... $ 802 $ 769 $ 868 $ 900
Other revenue....... 171 150 222 250
------- ------- ------- -------
Total revenue....... 943 919 1,090 1,150
------- ------- ------- -------
Operating
expenses........... 511 538 718 781
Depreciation........ 122 123 139 162
Interest............ 215 183 87 112
------- ------- ------- -------
Total expenses...... $ 848 $ 844 $ 944 $1,055
------- ------- ------- -------
Net income (loss)... $ 95 $ 75 $ 146 $ 95
------- ------- ------- -------
------- ------- ------- -------
EBITDA(3)........... $ 432 $ 381 $ 372 $ 369
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
LEGENDS
HERITAGE GOLF OF
GOLF LEGENDS CLUB OYSTER BAY VIRGINIA (B)
----------------- ----------------- ----------------- -------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
----------------- ----------------- ----------------- -------
12/31/94 12/31/95 12/31/94 12/31/95 12/31/94 12/31/95 12/31/94
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue from golf
operations......... $8,034 $8,004 $3,088 $3,156 $3,248 $3,459 --
Other revenue....... 2,012 2,176 846 783 867 865 --
------- ------- ------- ------- ------- ------- -------
Total revenue....... 10,046 10,180 3,934 3,939 4,115 4,324 --
------- ------- ------- ------- ------- ------- -------
Operating
expenses........... 5,707 5,738 2,411 2,442 1,964 2,126 $ 15
Depreciation........ 1,291 1,257 358 319 181 187 29
Interest............ 857 877 63 63 78 77 --
------- ------- ------- ------- ------- ------- -------
Total expenses...... $7,855 $7,872 $2,832 $2,824 $2,223 $2,390 $ 44
------- ------- ------- ------- ------- ------- -------
Net income (loss)... $2,191 $2,308 $1,103 $1,115 $1,891 $1,934 $ (44)
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
EBITDA(3)........... $4,339 $4,442 $1,524 $1,497 $2,150 $2,198 $ (15)
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
<CAPTION>
NORTHGATE COUNTRY
TOTAL LEGENDS CLUB THE WOODLANDS (C) OLDE ATLANTA
----------------- ----------------- ----------------- -----------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
----------------- ----------------- ----------------- -----------------
12/31/94 12/31/95 12/20/94 12/20/95 12/31/94 12/31/95 12/31/94 12/31/95
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from golf
operations......... $14,371 $14,619 $2,625 $3,099 $ 376 $1,455 $1,623 $1,568
Other revenue....... 3,724 3,823 1,537 1,467 87 291 442 466
------- ------- ------- ------- ------- ------- ------- -------
Total revenue....... 18,095 18,442 4,162 4,566 463 1,746 2,065 2,034
------- ------- ------- ------- ------- ------- ------- -------
Operating
expenses........... 10,082 10,322 3,114 3,140 363 1,074 1,489 1,434
Depreciation........ 1,830 1,791 401 323 104 247 352 375
Interest............ 998 1,016 475 485 134 424 143 202
------- ------- ------- ------- ------- ------- ------- -------
Total expenses...... $12,910 $13,129 $3,990 $3,948 $ 601 $1,745 $1,984 $2,011
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)... $5,185 $5,313 $ 172 $ 618 $ (137) $ 1 $ 81 $ 23
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
EBITDA(3)........... $8,013 $8,120 $1,048 $1,426 $ 101 $ 672 $ 576 $ 600
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
- ---------------
(A) Legends of Virginia comprises two courses which commenced operations in June
1996 (Stonehouse Golf Club) and August 1996 (Royal New Kent).
(B) The Woodlands commenced operations in August 1994.
(C) EBITDA is defined as operating income before interest, taxes, depreciation
and amortization. EBITDA does not represent cash generated from operating
activities in accordance with generally accepted accounting principles and
is not to be considered as an alternative to net income as an indication of
financial performance or cash flows from operating activities as a measure
of liquidity.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Upon completion of the Offering and the Formation Transactions, the
Operating Partnership will own the Golf Courses, and the Company, through its
wholly owned subsidiaries, GTA GP and GTA LP, will own an approximately 39.7%
interest in the Operating Partnership. GTA GP will be the sole general partner
of the Operating Partnership. The Company's primary source of revenue will be
the Lease Payments under the Participating Leases. Each Initial Lessee will have
nominal capitalization and an Initial Lessee's ability to make the Lease
Payments to the Company under the Participating Leases will be dependent upon an
Initial Lessee's ability to generate sufficient cash flow from the operation of
the Golf Course(s) leased by it. Each Golf Course will be leased by a separate
Initial Lessee except for the Heathland, Moorland and Parkland courses
(collectively, the "Legends Resort"), which share a common clubhouse, driving
range, golf carts and other facilities, and Royal New Kent and Stonehouse Golf
Club, both of which were recently opened and are located in close proximity to
each other. These two groups of courses each will be leased by a single Legends
Lessee pursuant to a single Participating Lease. In addition to Base Rent,
Participating Rent will be payable quarterly by the Initial Lessees in an amount
equal to 33 1/3% of the increase in Gross Golf Revenues over the Gross Golf
Revenues for the Golf Course for the year ended December 31, 1996, as adjusted
by the Company and Prior Owners for purposes of arriving at the purchase prices
of the Golf Courses. Base Rent will increase each year by the Base Rent
Escalator during the first five years of the lease term (and for five years
following the exercise of the Lessee Performance Option). Annual increases in
Lease Payments are limited to a maximum of 5% for the first five years of the
lease terms.
As a result of the Formation Transactions, substantially all of the
indebtedness of the Prior Owners related to the Golf Courses will be repaid, the
Golf Courses will be contributed to the Company and the Company and the Initial
Lessees will enter into the Participating Leases providing for the Lease
Payments to the Company. Consequently, the results of operations for the Initial
Lessees following the Formation Transactions will differ significantly from the
historical results for the Prior Owners.
Management believes the principal source of growth in Gross Golf Revenues at
the Golf Courses will be increased green fees, cart fees and other related fees
(revenues per player). In order to achieve higher revenues per player,
management believes the Initial Lessees will need to continue to offer golfers a
high quality golf experience as it relates to the pace of play, condition of the
Golf Course and overall quality of the facilities.
The following discussion and analysis of financial condition and pro forma
results of operations of the Company, the Prior Owners and the Initial Lessees
is based upon the pro forma consolidated financial statements of the Company and
the Initial Lessees which are presented elsewhere in this Prospectus, the
historical combined financial statements of The Legends Group, the accounting
acquiror, with respect to seven of the Golf Courses, and the historical
financial statements of the other Prior Owners. In establishing the amount of
Base Rent for the Golf Courses, in addition to actual historical results of
operations the Company and the Initial Lessees considered a number of other
factors which, under the accounting rules of the Securities and Exchange
Commission, cannot be reflected in the pro forma financial information for the
Initial Lessees. Such factors include (i) declines in revenues at certain of the
Golf Courses as a result of unusually severe weather conditions (affecting Olde
Atlanta and The Woodlands), (ii) cost savings expected to be achieved by the
Initial Lessees as a result of operational changes following completion of the
Formation Transactions (affecting the Legends Group courses and Olde Atlanta),
(iii) revenue enhancing programs which certain Initial Lessees intend to
implement following completion of the Formation Transactions (affecting Legends
Resort, Oyster Bay and Heritage, and (iv) estimated revenues and expenses at the
two recently opened Golf Courses (Royal New Kent and Stonehouse Golf Club). The
pro forma financial information for the Company and the Initial Lessees reflects
initial Base Rent and no Participating Rent.
35
<PAGE>
PRO FORMA RESULTS OF OPERATIONS OF THE COMPANY
On a pro forma basis for the year ended December 31, 1995, the Company would
have received $14,988,000 in revenue from the Participating Leases for the Golf
Courses, assuming a full year's operation for all courses. The pro forma
condensed consolidated statement of operations reflects annual payments of
initial Base Rent from each Initial Lessee.
Total pro forma expenses before minority interest, totaling $5,206,000 for
the year ended December 31, 1995, reflect depreciation and amortization, general
and administrative expenses and interest expense. Depreciation expense is based
on the Company's cost of acquiring the Golf Courses, except for the seven Golf
Courses acquired by the Company from The Legends Group. Under generally accepted
accounting principles, The Legends Group, with its Prior Owners holding 53.4% of
the combined Common Stock and OP Units outstanding after the completion of the
Formation Transactions, is considered the accounting acquiror. Consequently, the
contribution of the Golf Courses by The Legends Group to the Company has been
recorded at the Prior Owners' historical cost.
Minority interest, totaling $5,902,000 for the year ended December 31, 1995,
reflects the 60.3% interest in the pro forma net income of the Operating
Partnership of the Prior Owners and management.
Pro forma expenses and minority interest for the six months ended June 30,
1996 are based upon the same assumptions underlying the pro forma expenses and
minority interest presented for the year ended December 31, 1995.
PRO FORMA LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
On a pro forma basis, cash flow from operating activities for the year ended
December 31, 1995, excluding changes in working capital, would have been
$13,004,000. This reflects net income before minority interest, plus non-cash
charges to income for depreciation and loan fee amortization. Cash flows used in
investing activities reflects capital expenditures of $609,000, calculated based
upon the capital expenditure reserve required by the terms of the Participating
Leases. Cash flows used in financing activities, totaling $15,696,000,
represents distributions (based upon an initial estimated per share and OP Unit
distribution rate of $1.625) to holders of the Common Stock and OP Units and the
amount of the initial borrowing of $4,325,000.
The Company's principal source of cash to meet its cash requirements,
including distributions to its stockholders, will be its share of the Operating
Partnership's cash flow. The Operating Partnership's sole source of revenue will
be Lease Payments under the Participating Leases. The Initial Lessees have
nominal capitalization and the ability of the Initial Lessees to make Lease
Payments to the Operating Partnership and, therefore, the Company's liquidity,
including the ability to make distributions to its stockholders, will depend
upon the Initial Lessees' ability to generate sufficient cash flow from their
operations at their respective Golf Courses.
Concurrent with the completion of the Formation Transactions, the Company
will borrow approximately $4,325,000 which, together with the net proceeds of
the Offering, will be used to retire mortgage indebtedness and other debt, to
fund the cash portion of the purchase of the Golf Courses and to provide
approximately $619,000 in initial working capital ($8,366,000 if the
underwriters' overallotment option is exercised). The Company has agreed to
maintain approximately $4,325,000 of indebtedness for up to 10 years to
accommodate a Prior Owner's efforts to seek to minimize certain adverse tax
consequences from the contribution of one of the Golf Courses to the Company.
The Company is negotiating to obtain a commitment for the Line of Credit, which
would be available primarily for the acquisition of additional golf courses, but
a portion of which may also be used for acquisition of the Expansion Facilities,
for capital expenditures or for general working capital purposes. Detailed terms
and conditions of the Line of Credit are presently being negotiated. In the
future, the Company may negotiate additional credit facilities or issue
corporate debt instruments. Any debt issued or incurred by the Company may be
secured or unsecured, long-term or short-term, fixed or variable interest rate
and may be subject to such other terms as the Board of Directors deems prudent.
36
<PAGE>
The Company believes its acquisition capabilities will be enhanced by its
initial capital structure. Upon completion of the Offering and the Formation
Transactions, consolidated indebtedness will comprise approximately 3% of the
total market capitalization of the Company on a pro forma basis. The Company
intends to maintain a capital structure with consolidated indebtedness
representing no more than 50% of its total market capitalization.
The Company will invest in additional golf courses as suitable opportunities
arise, and the Company will not undertake investments unless adequate sources of
financing are available. Future acquisitions of golf courses will be financed,
in whole or in part, with proceeds from the Line of Credit, additional issuances
of OP Units or shares of Common Stock, borrowings under financing arrangements
or other securities issuances. The Company currently has no agreement to acquire
any golf course, other than the Golf Courses, and there can be no assurance that
the Company will make any acquisitions of any other golf courses.
Pursuant to the Participating Leases, the Company is obligated to reserve
annually for each Golf Course for capital expenditures approved by the Company,
including the periodic replacement or refurbishment of furniture, fixtures and
equipment, an amount equal to between 2% and 3% of Gross Golf Revenue at each
Golf Course. Capital expenditures in excess of these amounts will be funded by
the Initial Lessees. The Company anticipates entering into similar arrangements
with respect to golf courses it acquires in the future.
THE LEGENDS GROUP PRIOR OWNERS
GENERAL. Pursuant to the Formation Transactions, the Company will acquire
the following seven Golf Courses from The Legends Group: Heritage Club,
Heathland, Moorland, Parkland, Oyster Bay, Royal New Kent and Stonehouse Golf
Club. These seven Golf Courses will be operated by four Legends Lessees. The
Legends Resort courses -- Heathland, Moorland and Parkland -- share a common
clubhouse, driving range, golf carts and other facilities and will be leased by
a single Legends Lessee pursuant to a single Participating Lease. The
newly-opened Golf Courses -- Royal New Kent and Stonehouse Golf Club -- are in
similar stages of operation and will be leased by a single Legends Lessee
pursuant to a single Participating Lease. Each of the other Legends Group Golf
Courses will be leased by a separate Legends Lessee. Aggregate Base Rent under
the Participating Leases with the Legends Lessees represents approximately 80.4%
of the Company's pro forma revenue under the Participating Leases for the year
ended December 31, 1995. The Legends Group Prior Owners will receive OP Units
representing approximately 53.4% of the outstanding Common Stock and OP Units
upon completion of the Formation Transactions.
The following discussion and analysis addresses the combined historical
results of operations of the Legends Group Golf Courses. However, the results of
operations of The Legends Group do not purport to represent the pro forma
results of operations of the Legends Lessees or the Company and should not be
used to assess the operating performance of the Legends Lessees or the Company.
Two of the Legends Group Golf Courses, Stonehouse Golf Club and Royal New Kent,
opened in June and August 1996, respectively.
The Legends Group markets its courses through media advertising (primarily
in golf publications) and various other promotional arrangements (generally
discounted green fees) provided to guests of local hotels in the markets where
its Golf Courses are located. In addition, in 1995, an affiliated entity began
constructing, selling and renting golf villas as part of a resort/residential
development at the Legends Resort. This development eventually is expected to
include 204 golf villas with over 800 beds. The Company believes that this
resort/ residential development helped contribute to the number of rounds played
at the Legends Resort in 1995 and is expected to continue to be a source of
rounds played as the development is completed.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Revenue from golf operations decreased 1.8% to $8,641,000 from $8,798,000,
primarily as a result of an 8% decrease in total rounds played from 154,200 to
141,800. Partially offsetting the decrease in the number of rounds played was an
increase in the revenue per player (principally as a result of increased green
fees and golf cart rentals) from $57.06 to $60.93. In January and February 1996,
management reduced available tee times and
37
<PAGE>
increased green fees and cart fees over the prior period's winter rates in an
effort to enhance the quality of the golf experience during the slower time of
the year. The Company believes that the late, harsh winter of 1996 in the
midwest and northeastern United States reduced vacation golfers' travel from
these areas, which contributed to the decrease in number of rounds played.
Other revenue sources, including food and beverage and merchandise sales are
significantly influenced by the number of rounds played. However, despite the
decrease in number of rounds played, other revenue increased 6.5% to $2,284,000
from $2,145,000 principally due to a 15.8% increase in food and beverage sales
resulting from additional demand created by occupants of the newly constructed
golf villas at the Legends Resort.
Operating expenses increased 10.3% to $6,761,000 from $6,128,000,
principally due to one-time pre-opening costs in the 1996 period for the two
recently opened Golf Courses which opened in June and August 1996.
Interest expense increased 2.0% to $515,000 from $505,000 as a result of
higher borrowings incurred in connection with the completion of the two recently
opened Golf Courses.
Net income decreased 15.3% from $4,310,000 to $3,649,000.
YEAR ENDED DECEMBER 31, 1995 AND 1994
Revenue from golf operations increased 1.7% to $14,619,000 from $14,371,000.
The increase resulted primarily from a 9.5% increase in revenues per player
(principally as a result of increased green fees and golf cart rentals) from
$50.82 to $55.65, which was partially offset by a 7.1% decrease in rounds played
from 282,800 to 262,700.
Other revenue increased 2.7% to $3,823,000 from $3,724,000 principally due
to increased food and beverage and merchandise sales.
Operating expenses increased 1.7% to $12,113,000 from $11,912,000, primarily
as a result of normal wage and other operating cost increases.
Interest expense increased 1.9% to $1,017,000 from $998,000 primarily due to
financing costs incurred in connection with the development of the two recently
opened Golf Courses.
Net income increased 2.4% to $5,312,000 from $5,185,000.
YEAR ENDED DECEMBER 31, 1994 AND 1993
Revenue from golf operations increased 6.8% to $14,371,000 from $13,455,000.
The increase resulted primarily from a 1.8% increase in the number of rounds
played, from 277,700 to 282,800, and a 4.6% increase in revenue per player
(principally as a result of increased green fees and golf cart rentals), from
$48.32 to $50.55. The growth in the number of rounds played, as well as the
increase in the revenue per player, reflected the general growth in total rounds
played in the Myrtle Beach area. New golf courses continued to open in the
region reflecting the expansion of Myrtle Beach as a golf destination resort
area.
Operating expenses increased 4.1% to $11,912,000 from $11,448,000. Repairs
and maintenance costs and depreciation and amortization expenses increased as a
result of full stabilization of operations at the Parkland course, which opened
in 1992. Offsetting these increases was a decline in general and administrative
costs in early 1993 due to the elimination of costs associated with the start-up
of operations at Parkland.
Interest expense increased 61.2% to $998,000 from $619,000. The increase
resulted from higher levels of borrowing incurred in connection with the
commencement of construction of the two recently opened Golf Courses.
Net income increased 7.4% to $5,185,000 from $4,828,000.
38
<PAGE>
LEGENDS LESSEES
On a pro forma basis, assuming the Formation Transactions had occurred as of
the beginning of the respective periods, the pro forma results of operations of
the Legends Lessees for the year ended December 31, 1995 and the six months
ended June 30, 1996 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
GOLF COURSES DECEMBER 31, 1995 JUNE 30, 1996
- -------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
LEGENDS RESORT COMPLEX
(Heathland, Moorland and Parkland)
Total revenue......................................... $ 10,180 $ 6,101
Participating Lease payment........................... 4,670 2,335
Net income............................................ 137 864
EBITDA (1)............................................ 359 975
HERITAGE
Total revenue......................................... $ 3,939 $ 2,327
Participating Lease payment........................... 1,825 913
Net income (loss)..................................... (67) 425
EBITDA (1)............................................ 9 456
OYSTER BAY
Total revenue......................................... $ 4,324 $ 2,471
Participating Lease payment........................... 1,976 988
Net income............................................ 423 555
EBITDA (1)............................................ 490 588
LEGENDS OF VIRGINIA (2)
(Royal New Kent and Stonehouse Golf Club)
Total revenue......................................... $ -- $ 25
Participating Lease payment........................... -- 148
Net income (loss)..................................... (15) (652)
EBITDA (1)............................................ (15) (652)
</TABLE>
- ------------
(1) EBITDA is defined as operating income before interest, income taxes,
depreciation and amortization. Management considers EBITDA to be an
important measure of the cash flows from operations of the Initial Lessees
(before payment of debt service obligations and non-cash depreciation
charges). EBITDA does not represent cash generated from operating activities
in accordance with generally accepted accounting principles and is not to be
considered as an alternative to net income as an indication of financial
performance or to cash flows from operating activities as a measure of
liquidity.
(2) Reflects one month of operations for the Stonehouse Golf Club. Annual
initial Base Rent for Royal New Kent and Stonehouse Golf Club is $3,586,726.
NORTHGATE COUNTRY CLUB
GENERAL. In 1982, an affiliate of the Prior Owner of Northgate Country Club
began development of the 430 acres of Northgate Forest as a master planned,
upscale country club residential subdivision. When completed, the development is
expected to contain approximately 310 homesites, approximately 30 acres of
complementary commercial development, and Northgate Country Club, which
ultimately will have 27 holes of golf. Currently the Golf Course has 18 holes.
To date, approximately one-fourth of the residential building sites in the
Northgate Forest development have had homes constructed on them. Management
believes that revenue growth at the Northgate Golf Course will come from both
future Northgate Forest residents, as well as from non-Northgate residents who
are attracted to the Club because of the quality of the golf experience as well
as because of the exclusive and upscale quality of the development that
surrounds the clubhouse and Golf Course.
Northgate is a private country club. Besides revenue generated by full
country club members, Northgate generates revenues from golf tournaments,
private parties and non-golf club memberships.
39
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 20, 1996 AND 1995
Golf revenues increased 9.1% to $1,504,000 from $1,379,000. The growth in
revenues was primarily a result of an increase in club membership sales and
usage of the club by the new members, as there was no increase in major fee
categories (monthly dues, guest fees, golf cart rentals). The Company believes
that the additional memberships are attributable to concerted marketing efforts
to sell full and special purpose memberships. The enhanced usage of the club is
attributable to intensified sales and service efforts, as well as the
construction of an additional restaurant and a tennis pavilion. The Company
believes that the new restaurant and tennis pavilion are partially responsible
for the increase in memberships and anticipates that they will continue to have
a positive impact on operations. Other revenue increased 1.5% to $812,000 from
$800,000 also reflecting of increased usage of the club.
Operating costs and expenses increased 4.6% to $1,782,000 from $1,703,000.
This increase is associated with the increase in revenue discussed above,
including greater emphasis on quality of service and new membership development.
Interest expense increased 11.2% to $248,000 from $223,000 as a result of a
slight increase in the average debt outstanding due to higher borrowing costs.
Net income increased to $286,000 from $253,000, as a result of the increase
in revenues and the decrease in operating expenses.
YEAR ENDED DECEMBER 20, 1995 AND 1994
Golf revenues increased 18.1% to $3,099,000 from $2,625,000. The increase is
primarily attributable to a net gain in club membership and usage of the club by
the new members, as well as rate increases in major fee categories (monthly
dues, guest fees, golf cart rentals) imposed in 1995. Revenues per player
increased 2.4% to $66.50 from $59.16. Other revenue decreased 4.6% to $1,467,000
from $1,537,000.
Operating costs and expenses decreased 1.5% to $3,463,000 from $3,515,000
primarily due to improved operating efficiencies.
Interest expense increased 2.1% to $485,000 from $475,000.
Net income increased 13.0% to $286,000 from $253,000.
YEAR ENDED DECEMBER 20, 1994 AND 1993
Golf revenues increased by 5% to $2,625,000 from $2,499,000, primarily as a
result of a net gain of 9.6% in the club membership, and usage of the club by
the new members. The additional memberships are attributable to increased
marketing efforts to sell full and special purpose memberships. Other revenue
increased 1.6% to $1,537,000 from $1,513,000.
Operating costs and expenses increased 9.0% to $3,515,000 from $3,379,000,
consistent with the increase in club usage.
Interest expense declined 46.8% to $475,000 from $914,000 primarily as a
result of $462,125 of lender participation fees incurred in 1993. No lender
participation fees were incurred in 1994.
Net income increased to $172,000 from a net loss of $281,000.
40
<PAGE>
NORTHGATE LESSEE
On a pro forma basis, assuming the Formation Transactions had occurred as of
the beginning of the respective periods, the pro forma results of operations of
the Initial Lessee for Northgate Country Club were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, 1995 ENDED JUNE 30, 1996
------------------- -------------------
<S> <C> <C>
Total revenue......................................... $ 4,566 $ 1,504
Participating Lease payment........................... 1,407 704
Net income............................................ 35 10
EBIDTA (1)............................................ 60 22
</TABLE>
- ------------
(1) EBITDA is defined as operating income before interest, income taxes,
depreciation and amortization. Management considers EBITDA to be an
important measure of the cash flows from operations of the Initial Lessees
(before payment of debt service obligations and non-cash depreciation
charges). EBITDA does not represent cash generated from operating activities
in accordance with generally accepted accounting principles and is not to be
considered as an alternative to net income as an indication of financial
performance or to cash flows from operating activities as a measure of
liquidity.
THE WOODLANDS
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Golf Revenues decreased 4.1% to $769,000 from $802,000, primarily as a
result of a 10.4% decrease in rounds played from 25,352 to 22,706. The decline
in total rounds played resulted from increased competition from two newly
developed golf courses in the Gulf Shores area and the closure of nine holes for
16 days during June 1996 due to extraordinary winter kill problems. Prior to the
golf course closing, revenues had increased $32,426 or 4.2% through the first 5
months of the year as compared to the same period in 1995.
Revenue per player increased 16.5% from $29.78 to $34.70 as a result of a 6%
increase in daily golf fees. Management believes that golf revenues will
continue to be favorably impacted by the formation in 1995 of the Gulf Shores
Golf Association, an association of golf course owners in the Gulf Shores area.
The Association's goal is to promote the Gulf Shores golf market as a golf
destination.
Food and beverage revenues decreased 10.2% to $79,000 from $88,000 as a
result of the decrease in rounds played during the period. The Company believes
food and beverage revenues per golfer at The Woodlands are lower than the Gulf
Shores market average principally because of the temporary clubhouse facility at
The Woodlands which the Woodlands Initial Lessee plans to replace with a new
permanent facility in 1997. See "The Company -- Acquisitions and Expansions --
Expansions."
Despite the decrease in rounds played, merchandise revenues increased 13.2%
to $60,000 from $53,000. The increase is due largely to discount sales of
merchandise. Management of the Golf Course also hired an assistant director of
golf in 1995 whose focus is largely merchandising inventory.
Operating costs and expenses increased 4.4% to $661,000 from $633,000
principally as a result of an increase in maintenance expenses resulting from an
unusually cold winter that significantly damaged the greens at the course.
Additional fertilizer and topdressing expenses were incurred to reestablish the
damaged greens.
During December 1995, outstanding indebtedness of $4,000,000 was renewed,
and monthly payments of principal and interest began. Prior to this renewal,
payment was interest only. As a result, interest expense decreased 14.9% to
$183,000 from $215,000.
Net income decreased 21.1% to $75,000 from $95,000.
41
<PAGE>
YEAR ENDED DECEMBER 31, 1995
Comparisons between the years ended December 31, 1995 and 1994 would not be
meaningful, because the course opened in August 1994.
Total rounds played were 43,459. Golf revenues were $1,455,000. The Company
believes revenues were favorably impacted by marketing efforts of the recently
formed Gulf Shores Golf Association. Revenue per player increased 17.8% to
$33.49 from $28.43.
Food and beverage revenues were $169,000. Merchandise revenues were
$116,000.
Operating costs and expenses were $1,321,000. Interest expense was $424,000
and net income was $1,000 after depreciation of $247,000 for the first full year
of operations.
YEAR ENDED DECEMBER 31, 1994
The course opened in August 1994. Total rounds played were 13,490. Golf
revenues for 1994 were $384,000 or an average of $28.43 per player. Management
of the course priced golf fees $6 to $10 below the market average to encourage
golfers to try the new facility. Golf fees were increased in 1995. Food and
Beverage revenues were $56,000. Merchandise revenues were $23,000.
Operating costs and expenses were $467,000, primarily due to costs
associated with the opening of the golf course. Start-up costs include expenses
incurred for operating supplies, increased labor and increased maintenance.
Fertilization and turf grass replacement expenses were above normal daily
maintenance due to immature turf grass at the course. The course also had
extensive irrigation and drainage work performed after it was opened.
A net loss of $137,000 was recognized after depreciation of $104,000.
THE WOODLANDS LESSEE
On a pro forma basis, assuming the Formation Transactions had occurred as of
the beginning of the respective periods, the pro forma results of operations of
the Initial Lessee for The Woodlands were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, 1995 ENDED JUNE 30, 1996
------------------- ---------------------
<S> <C> <C>
Total revenue......................................... $ 1,746 $ 919
Participating Lease Payment........................... 679 340
Net income (loss)..................................... (7) 41
EBITDA (1)............................................ (7) 41
</TABLE>
- ------------
(1) EBITDA is defined as operating income before interest, income taxes,
depreciation and amortization. Management considers EBITDA to be an
important measure of the cash flows from operations of the Initial Lessees
(before payment of debt service obligations and non-cash depreciation
charges). EBITDA does not represent cash generated from operating activities
in accordance with generally accepted accounting principles and is not to be
considered as an alternative to net income as an indication of financial
performance or to cash flows from operating activities as a measure of
liquidity.
OLDE ATLANTA
Olde Atlanta, a semi-private country club, was opened in late 1993 and as of
June 30, 1996 had approximately 375 active memberships. Revenues at Olde Atlanta
include membership fees and dues as well as daily fees. Olde Atlanta was built
in conjunction with a 615 homesite planned community developed by Centex Homes.
Centex is one the nation's largest homebuilders. The homesites surrounding the
course are approximately 80% built and occupied.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Golf Revenues increased 3.7% to $900,000 from $868,000. Unusually severe
winter weather resulted in approximately 1,800 fewer rounds played. Other
revenue increased 12.6% to $250,000 from $222,000.
42
<PAGE>
Operating costs and expenses increased 10.0% to $943,000 from $857,000
primarily as of result of 3% growth in wages, a new golf cart lease and driving
range expenditures, all of which were partially offset by a non-cash decline in
depreciation and amortization. Interest expense increased 28.7% to $112,000 from
$87,000 as outstanding debt increased.
Net income declined to $95,000 from $146,000.
YEAR ENDED DECEMBER 31, 1995 AND 1994
Golf Revenues declined 3.4%, to $1,568,000 from $1,623,000. During 1994,
which was the course's first full year of operation, Olde Atlanta received
$232,000 of non-resident initiation fees. Non-resident initiation fees decreased
to $52,000 in 1995. Despite the expected decline in initiation fees, revenue per
player grew from $37.39 to $38.06 as member dues increased to levels offsetting
the initiation fees decline. Other revenue increased 5.4% to $466,000 from
$442,000.
Rounds played declined by 2,220 rounds from 43,415 to 41,195. Such decline
was attributable to poor weather in the fourth quarter of 1995 and to a lesser
extent in the first quarter of such year. The poor weather during these periods
lowered the number of playable days. Rounds played increased during the second
and third quarters.
Operating costs and expenses decreased by 1.7% to $1,809,000 from $1,841,000
primarily as a result of lower depreciation and amortization. Interest expense
increased 41.3% to $202,000 from $143,000.
Net income declined to $23,000 from $81,000.
OLDE ATLANTA LESSEE
On a pro forma basis, assuming the Formation Transactions had occurred as of
the beginning of the respective periods, the pro forma results of operations of
the Initial Lessee for Olde Atlanta were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, 1995 ENDED JUNE 30, 1996
------------------- -------------------
<S> <C> <C>
Total revenue......................................... $ 2,034 $ 1,150
Participating Lease Payment........................... 845 423
Net loss.............................................. (253) (4)
EBITDA (1)............................................ (253) (4)
</TABLE>
- ------------
(1) EBITDA is defined as operating income before interest, income taxes,
depreciation and amortization. Management considers EBITDA to be an
important measure of the cash flows from operations of the Initial Lessees
(before payment of debt service obligations and non-cash depreciation
charges). EBITDA does not represent cash generated from operating activities
in accordance with generally accepted accounting principles and is not to be
considered as an alternative to net income as an indication of financial
performance or to cash flows from operating activities as a measure of
liquidity.
INFLATION
All of the Participating Leases provide for initial terms of 10 years with
Base Rent and Participating Rent features. Base Rent will increase by the Base
Rent Escalator for each year during the first five years of the term of each
Participating Lease (and for an additional five years if the Lessee Performance
Option is exercised). All of such leases are triple net leases requiring the
Initial Lessees to pay for all maintenance and repair, insurance, utilities and
services, and, subject to certain limited exceptions, all real estate taxes,
thereby minimizing the Company's exposure to increases in costs and operating
expenses resulting from inflation.
SEASONALITY
The golf industry is seasonal in nature based on weather conditions and
fewer available tee times in the rainy season and the winter months. Each of the
Initial Lessees operating a Daily Fee course may vary green fees based on
changes in demand.
43
<PAGE>
THE GOLF INDUSTRY
The Company believes the United States golf industry is entering into a
period of significant growth. The Company expects that this growth will
contribute to an increase in the number of rounds played and Gross Golf Revenues
at the Golf Courses and any golf courses subsequently acquired by the Company.
Golf course ownership in the United States is highly fragmented, with relatively
few multi-course owners or operators. There are approximately 15,400 golf
courses in the United States owned by approximately 11,000 different entities.
The Company believes that the 15 largest golf course owners in the United States
collectively own or lease fewer than 5% of the total number of golf courses and
that fewer than 10 golf course owners own more than 10 golf courses. The Company
believes that this fragmented ownership provides an excellent opportunity for
consolidation of the ownership high quality golf courses.
The Company believes the relatively few number of multi-course owners in the
golf course industry has resulted from a variety of factors, including a
scarcity of capital, the entrepreneurial nature of many golf course owners and
operators and the associated pride of ownership. The Company believes that
economies of scale in owning and operating multiple golf courses, the growing
significance of professional financial management in the operation of golf
courses and the desire for liquidity by golf course owners will contribute to
the consolidation of the ownership of golf courses.
Largely in response to the increasing popularity of golf, the construction
of golf courses in the United States has increased significantly in recent
years. New golf course openings from the mid-1970's through 1987 averaged
approximately 150 golf courses per year. For the period 1987 through 1995, an
average of 275 new golf courses were opened each year, with a high of 336 new
golf course openings in 1995.
The golf industry generated approximately $15 billion in revenues in the
United States in 1995. The Company believes the game of golf has exhibited
strong growth in popularity as shown below.
<TABLE>
<CAPTION>
1980 1995 % CHANGE
--- --- ---------
<S> <C> <C> <C>
(MILLIONS)
Number of golfers.......................................... 15 25 67%
Rounds played.............................................. 358 490 37%
</TABLE>
Additionally, the Company believes the game of golf will benefit from
favorable demographic trends. The United States Census Bureau estimates that the
population age 50 and over will increase from 69.3 million in 1996 to 96.3
million in 2010, a 39% increase. The average number of rounds played per golfer
on an annual basis increases significantly with age. Golfers in their 50's play
more than twice as many rounds annually as golfers in their 30's, and golfers
age 65 and older generally play three times as many rounds annually as golfers
in their 30's. The Company believes that the number of golfers as well as the
total number of rounds played will increase significantly as the average age of
the population continues to increase. The Company anticipates that the number of
golfers, as well as the total number of rounds played, will increase as the
average age of the population continues to increase. The Company believes that
the "baby boomers," the oldest of whom are in their early 50's, will contribute
to the growth in total rounds played due to growing wealth and leisure time as
well as the suitability of golf as a sport for an aging population. In addition,
the Company believes that golfers over the age of 50 play a substantially
greater number of rounds at high quality golf courses relative to younger
golfers because, on average, older golfers have more disposable income and
leisure time than younger golfers.
44
<PAGE>
The following graph sets forth the difference in age dispersion in the
United States between 1996 and 2010 and the effect on the number of golf rounds
played as an individual ages.
DEMOGRAPHICS
COLUMNS REPRESENT AVERAGE ANNUAL ROUNDS/GOLFER PER AGE GROUP
Graph depicting the average number of rounds of golf played in different age
groups. Graph also depicts the age dispersion in the United States between 1996
and 2010.
45
<PAGE>
The following chart illustrates the growth in demand at Daily Fee courses,
as compared to municipal courses, which tend to be of lesser quality, and
private country clubs.
Chart depicting the demand growth in rounds played in 1994 and 1995 at Daily
Fee, municipal and private courses and the percentage change associated
therewith.
The Company believes that high quality Daily Fee courses (including Resort
Courses), similar to those targeted by the Company, are well situated to take
advantage of the changing demographics. High quality golf courses have generated
increased revenues by charging higher green fees in response to golfer demand.
The following table illustrates the percentage increase in weekend green fees at
Daily Fee courses.
<TABLE>
<CAPTION>
GREEN FEES -- WEEKEND
------------
DAILY FEE 1993 1995 % CHANGE ANNUAL CHANGE
--- --- ----------- ---------------
<S> <C> <C> <C> <C>
Median.................................................................. $ 18 $ 21 16.7% 8.0%
Top 25%................................................................. $ 25 $ 30 20.0% 9.5%
Top 5%.................................................................. $ 53 $ 65 22.6% 10.7%
</TABLE>
46
<PAGE>
THE GOLF COURSES
The Golf Courses consist of 10 nationally or regionally recognized high
quality courses located in the mid-Atlantic, southeastern and southwestern
United States. Four of the Golf Courses were ranked among the Top Ten New
Courses by either GOLF DIGEST or GOLF MAGAZINE in the year the applicable Golf
Course opened, including the recently opened Stonehouse Golf Club, which in
November 1996 was named the Best New Upscale Course by GOLF DIGEST for 1996. Two
of the established courses (Oyster Bay and Heritage Club) have been ranked in
the Top 50 Public Golf Courses by GOLF DIGEST.
The Golf Courses include eight high quality Daily Fee courses (including six
Resort Courses), one semi-private country club and one private country club.
"Daily Fee" courses are open to the public and generate revenues principally
through green fees, golf cart rentals, food and beverage operations, merchandise
sales and driving range charges. "Resort Courses" are Daily Fee golf courses
that attract a significant percentage of players from outside the immediate area
in which the golf course is located and generate a significant amount of revenue
through golf vacation packages. The Company considers the Daily Fee and Resort
Courses to be high-end golf courses because of the quality and maintenance of
each golf course and the average green fees, which are significantly above the
averages for golf courses in their respective geographic markets. Semi-private
country clubs typically offer memberships with playing privileges, while also
catering to the public, and receive revenue from the same sources as Daily Fee
Courses as well as from membership dues. Private country clubs are generally
closed to the public and derive revenues principally from membership dues,
initiation fees, transfer fees, golf cart rentals, guest fees, food and beverage
operations and merchandise sales.
The Company believes that the overall quality of the Golf Courses is
reflected in the average green fees charged at each Golf Course, which
significantly exceed national averages. The Company believes its focus on high
quality Daily Fee golf courses and private and semi-private country clubs, which
attract golfers with attractive demographic and economic profiles, will result
in stronger and less cyclical revenue growth in comparison to lower-end golf
courses.
Five of the Golf Courses are located in the Myrtle Beach, South Carolina
vicinity, a popular year-round golf destination area. Myrtle Beach is considered
one of the nation's premier golf resort locations with nearly 100 golf courses
and more than 3.9 million rounds played in 1995, according to the MYRTLE BEACH
GOLF HOLIDAY-TM-. In addition to golf courses, Myrtle Beach offers a mix of
entertainment, shopping and dining, as well as proximity to beaches. All of the
Golf Courses located in the Myrtle Beach vicinity were developed and are
currently owned and operated by The Legends Group.
Two of the Golf Courses are located in the Williamsburg, Virginia area and
were opened in June and August 1996. Williamsburg is a leading tourist
destination and an emerging golf destination area, with a population of
approximately 2.6 million within a 60 mile radius, providing the area with an
opportunity to attract both resort and local golfers. Since 1995 five new
courses have been opened in the Williamsburg vicinity, including two of the Golf
Courses. In addition to golf course opportunities, Williamsburg and the
surrounding area offer shopping, dining, entertainment and historical sites.
Both of the Golf Courses located in Williamsburg were developed and are
currently owned and operated by The Legends Group.
One of the Golf Courses is located in Gulf Shores, Alabama, a popular golf
and vacation destination area located near the Florida panhandle. In addition to
golf, Gulf Shores offers 30 miles of sandy beaches. The other Golf Courses are
located in Houston, Texas and Atlanta, Georgia, two major metropolitan areas
with high levels of golf participation.
47
<PAGE>
Certain information respecting each of the Golf Courses is set forth below:
<TABLE>
<CAPTION>
REVENUE PER
ROUNDS PLAYER (2)
------------------------ --------------
TWELVE
MONTHS
ENDED
TYPE OF YEAR JUNE 30,
LOCATION YARDAGE (1) COURSE OPENED 1994 1995 1996 1994 1995
------------------ ----------- ------------ ------ ------ ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Heritage Club............ Pawleys Island, SC 7,040 Resort 1986 59,524 55,094 51,634 $51.89 $57.28
Heathland................ Myrtle Beach, SC 6,785 Resort 1990 55,393 49,312 48,138 $50.12 $55.03
Moorland................. Myrtle Beach, SC 6,799 Resort 1990 54,383 49,590 47,851 $50.12 $55.03
Parkland................. Myrtle Beach, SC 7,170 Resort 1992 50,508 46,564 44,614 $50.12 $55.03
Oyster Bay............... Sunset Beach, NC 6,685 Resort 1988 62,962 62,141 57,828 $51.60 $55.66
The Woodlands (5)........ Gulf Shores, AL 6,584 Resort 1994 13,490 43,459 40,816 $28.43 $33.49
Royal New Kent (6)....... Williamsburg, VA 7,291 Daily Fee 1996 -- -- -- -- --
Stonehouse Golf Club
(7)..................... Williamsburg, VA 6,963 Daily Fee 1996 -- -- -- -- --
Olde Atlanta............. Atlanta, GA 6,789 Semi-Private 1993 43,415 41,195 39,409 $37.39 $38.06
Northgate Country Club... Houston, TX 6,540 Private 1984 44,370 46,600 47,033 $59.16 $66.50
<CAPTION>
TOTAL GROSS GOLF REVENUE (3)
TWELVE -------------------------------------
MONTHS TWELVE
ENDED MONTHS
JUNE 30, ENDED JUNE INITIAL
1996 1994 1995 30, 1996 BASE RENT
-------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Heritage Club............ $61.11 $ 3,088,447 $ 3,155,843 $ 3,155,111 $ 1,824,980
Heathland................ $56.92 $ 2,776,387 $ 2,713,633 $ 2,740,022 $ 1,556,635(4)
Moorland................. $56.92 $ 2,725,765 $ 2,729,099 $ 2,723,686 $ 1,556,635(4)
Parkland................. $56.92 $ 2,531,543 $ 2,560,760 $ 2,539,435 $ 1,556,635(4)
Oyster Bay............... $58.49 $ 3,248,740 $ 3,458,971 $ 3,382,212 $ 1,975,589
The Woodlands (5)........ $34.86 $ 383,569 $ 1,455,355 $ 1,422,947 $ 679,029
Royal New Kent (6)....... -- -- -- -- $ 1,816,501
Stonehouse Golf Club
(7)..................... -- -- -- -- $ 1,770,225
Olde Atlanta............. $40.77 $ 1,623,367 $ 1,567,918 $ 1,606,558 $ 845,058
Northgate Country Club... $61.88 $ 2,624,805 $ 3,099,110 $ 2,910,484 $ 1,406,843
----------- ----------- ----------- --------------
Total.. $19,002,623 $20,740,689 $20,480,456 $14,988,134
----------- ----------- ----------- --------------
----------- ----------- ----------- --------------
</TABLE>
- ---------------
(1) Yardage is calculated from the championship tees.
(2) "Revenue Per Player" is calculated by dividing Total Gross Golf Revenue at
the applicable Golf Course by the number of rounds played at the applicable
Golf Course. For Heathland, Moorland and Parkland, which share common
facilities and have the same green fees, Revenue Per Player is equally
allocated among these courses.
(3) Gross Golf Revenue is generally defined as all revenues from a golf course,
including green fees, golf cart rentals, range fees, membership dues,
member initiation fees and transfer fees, but excluding food and beverage
and merchandise revenue.
(4) The Heathland, Moorland and Parkland Golf Courses are subject to a single
Participating Lease and the Base Rent is equally allocated among these Golf
Courses.
(5) Opened in August 1994.
(6) Opened in August of 1996.
(7) Opened in June of 1996.
48
<PAGE>
DESCRIPTIONS OF THE GOLF COURSES
GENERAL
Set forth below are brief descriptions of each of the Golf Courses. Unless
otherwise noted, the Company will own fee title to the Golf Courses, free and
clear of any material liens.
RESORT COURSES
Resort Courses are Daily Fee golf courses that draw a high percentage of
players from outside the immediate area in which the course is located and
generate a significant amount of revenue through golf vacation packages.
HEATHLAND -- MYRTLE BEACH, SOUTH CAROLINA. Heathland, a Resort Course
developed by The Legends Group, opened in 1990 and was named by GOLF
MAGAZINE as one of the United States' Top 10 New Courses in 1990. The
Heathland course has been molded in the image of the British Isles links
courses and most of its holes are without trees or vegetation, providing a
spectacular visual presentation. Heathland is part of the Legends Resort
that consists of a 42,000 square foot clubhouse on a 1,300 acre development,
along with the Moorland and Parkland courses that are described below. This
Scottish style resort includes various amenities such as a pub adorned with
Scottish memorabilia and the sounds of Scottish bagpipes at sunset.
MOORLAND -- MYRTLE BEACH, SOUTH CAROLINA. Moorland, a Resort Course
developed by The Legends Group, opened in 1990 and was named by GOLF DIGEST
as one of the United States' Top 5 New Courses in 1990. Moorland is part of
the Legends Resort and was designed by P.B. Dye. Moorland consists of large
expanses of natural growth, sand and water that combine with undulations and
bulkheaded areas to present a challenging "target style" course.
PARKLAND -- MYRTLE BEACH, SOUTH CAROLINA. Parkland, a Resort Course
developed by The Legends Group, opened in 1992 and is the last golf course
that was opened at the Legends Resort. Parkland demonstrates the diversity
and beauty of the local natural terrain by its combination of tree-lined
fairways, vast natural areas, deep-faced bunkers and massive multi-level
greens.
HERITAGE CLUB -- PAWLEYS ISLAND, SOUTH CAROLINA. Heritage Club was
developed by The Legends Group and opened in 1986. Heritage Club was named
to GOLF DIGEST'S Top 50 Public Courses in the United States in 1992.
Heritage Club is a semi-private resort consisting of over 600 acres of giant
magnolias and oaks, fresh water lakes and marshes. Heritage Club is built on
the site of two plantations and retains a historic atmosphere with
facilities designed in a traditional plantation architectural style,
including the southern style Colonial Clubhouse.
OYSTER BAY -- SUNSET BEACH, NORTH CAROLINA. Oyster Bay, developed by
The Legends Group, opened in 1983 and was named by GOLF DIGEST as its Best
New Resort Course in the United States in 1983 and was named to GOLF
DIGEST'S Top 50 Public Courses in the United States in 1992. Oyster Bay is
operated pursuant to a ground lease with a remaining term of 35 years.
Oyster Bay consists of several marsh-oriented holes, two island greens and
strategic fresh water lakes. Over half of the holes are situated so that
water hazards add an additional challenge.
THE WOODLANDS -- GULF SHORES, ALABAMA. The Woodlands is a 6,600-yard
par 72 course which opened in 1994. The course, featuring lakes, marshes and
tree-lined fairways, was designed by Larry Nelson, former United States Open
champion and two-time PGA Championship winner. Gulf Shores, Alabama, located
near the Florida panhandle, is an emerging golf course destination area that
includes 10 golf courses in the immediate area. Gulf Shores includes over 30
miles of white sand beaches and the historical Civil War outposts of Fort
Morgan and Fort Gaines.
Subject to certain conditions, the Company has agreed to acquire a
clubhouse to be constructed at the course by the Initial Lessee of The
Woodlands (See "The Company -- Acquisitions and Expansions"). The Company
believes that the construction of the clubhouse will permit the Initial
Lessee to attract more group and tournament play and also permit an increase
in green fees.
49
<PAGE>
The Company has agreed to reconvey to the Prior Owner of The Woodlands
the land on which a portion of certain of the existing holes are located at
such time as the Prior Owner is prepared to contribute comparable golf holes
to the Company. All costs associated with such exchange shall be paid for by
the Prior Owner.
HIGH-END DAILY FEE COURSES
The Company considers its Daily Fee courses to be high-end courses,
reflected in the quality and maintenance standards of the golf courses, and the
green fees, which are generally higher than other golf courses in their market.
STONEHOUSE GOLF CLUB -- WILLIAMSBURG, VIRGINIA. Stonehouse Golf Club,
located within a 20,000 acre master planned community, was developed by The
Legends Group. Stonehouse Golf Club opened in June 1996 and was named by
GOLF DIGEST as the Best New Upscale Course for 1996. Stonehouse Golf Club
was designed by Mike Strantz (formerly with Tom Weiskopf Golf Design) and
constructed in a densely forested area that includes tall hardwood trees and
deep ravines. One of the holes at Stonehouse Golf Club features a spring-fed
waterfall behind the green while another requires players to hit over a
wide, plunging ravine to a green on a cliff-like setting. Stonehouse Golf
Club features large greens and wide fairways despite the nearby trees.
ROYAL NEW KENT -- PROVIDENCE FORGE, VIRGINIA. Royal New Kent, located
just outside Williamsburg, Virginia, was developed by The Legends Group and
opened in August, 1996. Royal New Kent is located adjacent to New Kent
Downs, which is scheduled to open in 1997 and will be the only pari-mutual
horse racing facility in Virginia. Royal New Kent also was designed by Mike
Strantz and includes five sets of tees, including the "Invicta" tees (which
is Latin for "unconquerable") to accommodate the over 7,000 yards of the
course. Royal New Kent was fashioned after traditional Irish courses and
features a fairway lined with a stone wall.
SEMI-PRIVATE COUNTRY CLUB COURSES
Semi-Private country clubs offer membership packages that allow members
special privileges at the golf course, but also allow public play upon advance
reservation.
OLDE ATLANTA GOLF CLUB -- ATLANTA, GEORGIA. Olde Atlanta Golf Club
("Olde Atlanta") is a semi-private, non-equity club that is open for public
play as well as for member play. Olde Atlanta was designed by Arthur Hills
and located in Suwanee, Georgia (a northeast Atlanta suburb), in the
foothills of north Georgia. This geographic setting allows for multiple
changes in terrain and elevation throughout the course. Olde Atlanta's
course layout includes three lakes, clustered mounds, grass and sand bunkers
and grassy hollows. Olde Atlanta's facilities include a 6,000 square foot
clubhouse, which includes a pro shop and a dining room that can seat up to
100 persons.
PRIVATE COUNTRY CLUB COURSES
Private country clubs are generally closed to the public and generate
revenue principally through initiation fees and membership dues, golf cart
rentals and guest green fees. Initiation fees and membership dues are determined
according to the particular market segment in which the club operates.
Revenue and cash flows of private and semi-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.
NORTHGATE COUNTRY CLUB -- HOUSTON, TEXAS. Northgate Country Club
("Northgate"), is a full service upscale country club with a championship
golf course designed by Robert von Haggie and Bruce Devlin, which opened in
1984. An additional nine holes are expected to open at the course in 1998.
The Company has agreed to acquire such additional holes, subject to certain
conditions. The Golf Course is located in a forested area north of Houston
within a 440 acre high-end master planned community. See "The Company --
Acquisitions and Expansions - Expansions."
50
<PAGE>
Northgate recently completed the construction of a tennis center
building and a restaurant cafe. The improvements provide Northgate greater
utilization of its facilities, which the Company believes have produced a
sustainable increase in new membership sales. The adjacent country club
community of Northgate Forest is presently comprised of 177 developed
homesites with completed homes situated on 83 of these homesites. It is
anticipated that 128 more homesites will be developed with approximately 80%
of these new homesites to be situated on the additional nine hole expansion
referred to above, which is expected to provide Northgate with a sustainable
source of future members.
The following table sets forth certain information regarding the Golf
Courses.
THE GOLF COURSES -- RESORT COURSES
<TABLE>
<CAPTION>
LOCATION NO. OF YEAR
COURSE NAME CITY, STATE HOLES YARDAGE OPENED
- ------------------------ -------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Heathland............... Myrtle Beach, South 18 6,785 1990
Carolina
Parkland................ Myrtle Beach, 18 7,170 1992
South Carolina
Moorland................ Myrtle Beach, 18 6,799 1990
South Carolina
Heritage Club........... Pawleys Island, 18 7,040 1986
South Carolina
Oyster Bay.............. Sunset Beach, 18 6,685 1988
North Carolina
The Woodlands........... Gulf Shores, 18 6,584 1994
Alabama
<CAPTION>
FACILITIES AND SERVICES
--------------------------------------------------------
DRIVING CART FOOD &
COURSE NAME RANGE RENTAL CLUBHOUSE BEVERAGE PRO SHOP
- ------------------------ --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Heathland............... Yes Yes Yes Yes Yes
Parkland................ Yes Yes Yes Yes Yes
Moorland................ Yes Yes Yes Yes Yes
Heritage Club........... Yes Yes Yes Yes Yes
Oyster Bay.............. Yes Yes Yes Yes Yes
The Woodlands........... Yes Yes Yes(1) Yes Yes
</TABLE>
- ------------
(1) The Woodlands has a temporary clubhouse which the Company expects will be
replaced with a permanent facility. See "The Company -- Acquisitions and
Expansions - Expansions."
THE GOLF COURSES -- HIGH-END DAILY FEE COURSES
<TABLE>
<CAPTION>
FACILITIES AND SERVICES
----------------------------------
LOCATION NO. OF YEAR DRIVING CART
COURSE NAME CITY, STATE HOLES YARDAGE OPENED RANGE RENTAL CLUBHOUSE
- ------------------------ -------------------- ----------- ----------- ----------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Royal New Kent.......... Providence Forge, 18 7,291 1996 Yes Yes Yes(1)
Virginia
Stonehouse Golf Club.... Williamsburg, 18 6,963 1996 Yes Yes Yes(1)
Virginia
<CAPTION>
FOOD &
COURSE NAME BEVERAGE PRO SHOP
- ------------------------ ---------- ---------
<S> <C> <C>
Royal New Kent.......... Yes Yes
Stonehouse Golf Club.... Yes Yes
</TABLE>
- ------------
(1) These courses each have a temporary clubhouse which the Company expects will
be replaced with a permanent facility. The construction of the permanent
facilities will be at the election of the applicable Initial Lessee, and at
the sole cost and expense of the applicable Initial Lessee. See "The Company
-- Acquisitions and Expansions -- Expansions."
51
<PAGE>
THE GOLF COURSES -- SEMI-PRIVATE COUNTRY CLUB COURSE
<TABLE>
<CAPTION>
LOCATION NO. OF YEAR
COURSE NAME CITY, STATE HOLES YARDAGE OPENED
- ------------------------ -------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Olde Atlanta............ Atlanta, Georgia 18 6,789 1993
<CAPTION>
FACILITIES AND SERVICES
----------------------------------------------------------
DRIVING CART FOOD &
COURSE NAME RANGE RENTAL CLUBHOUSE BEVERAGE PRO SHOP
- ------------------------ --------- --------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Olde Atlanta............ Yes Yes Yes Yes Yes
</TABLE>
THE GOLF COURSES -- PRIVATE COUNTRY CLUB COURSE
<TABLE>
<CAPTION>
LOCATION NO. OF YEAR
COURSE NAME CITY, STATE HOLES YARDAGE OPENED
- ------------------------ -------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Northgate Country
Club................... Houston, Texas 18 6,540 1984
<CAPTION>
FACILITIES AND SERVICES
----------------------------------------------------------
DRIVING CART FOOD &
COURSE NAME RANGE RENTAL CLUBHOUSE BEVERAGE PRO SHOP
- ------------------------ --------- --------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Northgate Country
Club................... Yes Yes Yes Yes Yes
</TABLE>
THE PARTICIPATING LEASES
THE FOLLOWING SUMMARY OF THE PARTICIPATING LEASES BETWEEN THE COMPANY AND
THE INITIAL LESSEES (THE "PARTICIPATING LEASES") IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE PARTICIPATING LEASES, A FORM OF WHICH IS FILED AS AN EXHIBIT TO
THE REGISTRATION STATEMENT, OF WHICH THIS PROSPECTUS IS A PART. THE FOLLOWING
DESCRIPTION OF THE PARTICIPATING LEASES DOES NOT PURPORT TO BE COMPLETE BUT
CONTAINS A SUMMARY OF THE MATERIAL PROVISIONS THEREOF.
LEASE TERM. The Participating Leases, all of which will contain the same
basic provisions described below, will be entered into upon the conveyance to
the Company of the Golf Courses. The Company's interest in each Golf Course
includes the land, buildings and improvements, related easements and rights, and
fixtures (collectively, the "Leased Property"). Each Golf Course will be leased
to the respective Initial Lessee under a Participating Lease which will have a
primary term of 10 years ending on December 31, 2006 (the "Fixed Term"). In
addition, each Initial Lessee will have options to extend the term of each
Participating Lease (the "Extended Terms") for six terms of five years each,
subject to earlier termination upon the occurrence of certain contingencies
described in the Participating Lease. (The term of the Participating Lease for
Oyster Bay, which is leased pursuant to a ground lease with 35 years remaining,
will have four extension terms of five years each.) Any additional properties
acquired will be leased pursuant to such terms and conditions as may be agreed
upon between the lessee and the Company at the time of such acquisitions, and
such terms and conditions may vary from the terms and conditions described
herein with respect to the Participating Leases. The Company anticipates that
any new leases will be with either existing Initial Lessees, affiliates of
sellers of courses or unaffiliated third parties experienced in the operation of
similar courses.
In addition, at the expiration of the Fixed Term and the Extended Terms, the
Initial Lessee will have a right of first offer to continue to lease the Golf
Course on the terms and conditions pursuant to which the Company intends to
lease the Golf Course to a third party.
USE OF THE GOLF COURSES. Each Participating Lease permits the Initial
Lessee to operate the Leased Property as a golf course, along with a clubhouse
and other activities customarily associated with or incidental to the operation
of a golf course and other facilities located at the golf course, including,
where applicable, swim and tennis operations. Operations may include sale or
rental of golf-related merchandise, sale of memberships, furnishing of lessons,
operation of a driving range, and sales of food and beverages, including liquor
sales.
BASE RENT; PARTICIPATING RENT. Base Rent will increase annually by the
lesser of 3% or 200% of the change in CPI for the prior year during the first
five years of each Participating Lease term and, if the Lessee Performance
Option is exercised, an additional five years thereafter from the date of
exercise. The Participating Leases provide for the Company to receive, in
addition to Base Rent, Participating Rent equal to 33 1/3% of any increase in
Gross Golf Revenue over Gross Golf Revenue for 1996, as adjusted, which base
year will be reset to the year immediately preceding the date on which a Prior
Owner exercises the Lessee Performance Option, if applicable. For the recently
opened Golf Courses, the base year Gross Golf Revenue is based on an estimate by
52
<PAGE>
the Company and the Initial Lessee of such courses, which estimate was also the
basis for the valuation of those Golf Courses. If the Lessee Performance Option
is exercised, the base year for measuring Gross Golf Revenue will be adjusted to
the year preceding the exercise of such option. Increases in the Lease Payments
under the Participating Leases are limited to 5% during the first five years.
Base Rent is required to be paid monthly in arrears on the first day of each
calendar month and Participating Rent is payable quarterly in arrears.
TRIPLE NET LEASES. The Participating Leases are structured as triple net
leases under which each Initial Lessee will be required to pay all real estate
and personal property taxes, insurance, utilities and services and other
operating expenses. Out of the payment of Base Rent, the Company will reserve
with respect to each Golf Course a capital replacement reserve (the "Capital
Replacement Fund") of between 2% and 3% of the annual Gross Golf Revenue
generated by such Golf Course (depending primarily on the condition of the
structures and the age and condition of the Golf Course), which the Initial
Lessee of such course may use for capital improvements or replacements pursuant
to a capital replacement budget approved by the Company. The Company will not be
required to make or pay for any capital improvements with respect to any Golf
Course, except to the extent of such Capital Replacement Fund.
SECURITY DEPOSIT. As security for an Initial Lessee's obligations under the
Participating Leases, the seller of each Golf Course will pledge, on behalf of
the affiliated Initial Lessee, OP Units (or cash or other collateral acceptable
to the Company) with a value initially equal to 15% of the purchase price for
the applicable Golf Course, which approximates 16 months of the initial Base
Rent (at the Offering Price). The OP Units will not be released for two years.
Beginning in the third year and any time thereafter, one-third of the pledged OP
Units will be released when the net operating income to lease payment coverage
ratio (the "Coverage Ratio") from the applicable Golf Course for the two prior
fiscal years equals or exceeds 120%, 130% and 140%, respectively. If the
Coverage Ratio falls below 120% at any time following the release of pledged
collateral, then the Initial Lessee shall be required to retain and not
distribute profits until such time as six months of Base Rent at current levels
has been retained. In addition, the Participating Leases with the Legends
Lessees will be cross-collateralized and cross-defaulted.
The security deposit will be increased following the exercise of any Lessee
Performance Option to equal approximately 15% of the sum of the initial purchase
price of such Golf Course and the value of any additional OP Units issued in
connection with the exercise of the Lessee Performance Option. If the Company
acquires any Expansion Facility, the security deposit also will be increased by
an amount equal to approximately 15% of the purchase price of the Expansion
Facility.
ADVISORY ASSOCIATION. Each Initial Lessee will be a member of the Advisory
Association, which will participate in cross-marketing of the Golf Courses and
will identify each Golf Course as owned by the Company, thereby increasing the
golfing consumer's brand name awareness of the Company. Membership in the
Advisory Association also is designed to provide the Initial Lessees greater
purchasing power with vendors than individual Initial Lessees. The Advisory
Association is expected to provide a means of ensuring a consistent, high-
quality product at each of the Golf Courses. In conjunction with management of
the Company, the Advisory Association will review and analyze any disputes
between the Company and an Initial Lessee concerning annual capital and
operating budgets and will also, in conjunction with the Company, confirm each
Initial Lessee's compliance with its repair and maintenance obligations under
each Participating Lease.
MAINTENANCE AND MODIFICATIONS. Each Initial Lessee will, at its sole cost
and expense, maintain and operate its respective Leased Property in good order,
repair and appearance and will make structural and non-structural, interior and
exterior foreseen and unforeseen, and ordinary and extraordinary repairs which
may be necessary and appropriate to keep such Leased Property in good order,
repair and appearance. Each Initial Lessee will also maintain each Golf Course
it leases in accordance with the condition of the Golf Course at the
commencement of the Participating Lease and otherwise in a condition comparable
to other comparable golf courses in the vicinity of that Golf Course. If the
Company, in consultation with the Advisory Association, determines that an
Initial Lessee has failed to comply with its maintenance and operation
obligations, then the Company shall provide a written list to the Initial Lessee
setting forth a list of remedial work and/or steps to be
53
<PAGE>
performed. If the Initial Lessee disputes the Company's assertions, then the
matter shall be handled by a committee composed of members of the Advisory
Association and representatives of the Company. The Company will not be required
to build or rebuild any improvements on any Leased Property, or to make any
repairs, replacements, alterations, restorations or renewals of any nature or
description to any Leased Property, whether ordinary or extraordinary,
structural or non-structural, foreseen or unforeseen, or to make any expenditure
whatsoever with respect thereto, in connection with any Participating Lease, or
to maintain any Leased Property in any way. In the event that the Company elects
to make capital improvements on a Golf Course, the Company will generally
condition such election on an increase in minimum rent under the Participating
Lease with respect to such Golf Course to reflect such expenditures.
The Company will maintain with respect to each Golf Course a Capital
Replacement Fund in an amount equal to between 2% and 3% of Gross Golf Revenues
at such Golf Course, depending on certain factors, including the condition of
the structures and the age and condition of the Golf Course. The Company and
each Initial Lessee will agree on the use of funds in these reserves and the
Company has the right to approve each Initial Lessee's annual and long-term
capital expenditure budgets. Funds in the Capital Replacement Fund shall be paid
to an Initial Lessee to reimburse such Initial Lessee for expenditures made in
connection with capital replacements. Amounts in the Capital Replacement Fund
will be deemed to accrue interest at a money market rate of interest. Any
amounts in the Capital Replacement Fund at the expiration of the applicable
Participating Lease will be retained by the Company.
During the Fixed Term and each Extended Term, each Initial Lessee, at its
sole cost and expense, may make alterations, additions, changes and/or
improvements ("Initial Lessee Improvements") to each Leased Property, without
the Company's prior written consent, provided such alterations do not diminish
the value or appearance of the Golf Course. All such Initial Lessee Improvements
will be subject to all the terms and provisions of each applicable Lease and
will become the property of the Company upon termination of such Lease.
At the end of the Participating Lease, all remaining personal property on
the Leased Property will become the property of the Company.
INSURANCE. Each Initial Lessee will maintain insurance on each Leased
Property it leases under insurance policies providing for all-risk, liability,
flood (if carried by comparable golf course facilities in the area and is
otherwise available at commercially reasonable rates) and worker's compensation,
which at the time is usual and commonly obtained in connection with the
properties similar in type of building size and use to the Leased Property and
located in the geographic area where the Leased Property is located. Each
insurance policy will name the Company as additional insureds or loss payees, as
applicable.
ENVIRONMENTAL MATTERS. Each Initial Lessee will make various
representations and warranties relating to environmental matters in respect of
the applicable Leased Property in each Participating Lease.
ASSIGNMENT AND SUBLETTING. An Initial Lessee may not, without the prior
written consent of the Company (which consent may be withheld by the Company in
its sole discretion, except in limited instances), assign, mortgage, pledge,
hypothecate, encumber or otherwise transfer any Participating Lease or any
interest therein, all or any part of the Leased Property or suffer or permit any
lease or the leasehold estate created thereby or any other rights arising under
any Participating Lease to be assigned, transferred, mortgaged, pledged,
hypothecated or encumbered, in whole or in part, whether voluntarily,
involuntarily or by operation of law. An assignment of a Participating Lease
will be deemed to include any change of control of such Initial Lessee, as if
such change of control were an assignment of the Participating Lease. Each
Initial Lessee shall have the right to assign its Participating Lease to its
affiliates.
Each Prior Owner shall retain the right to use the existing portion of any
club house or other improvements on a Golf Course for its continued corporate
operations not associated with the Golf Course.
Each Initial Lessee may, with the Company's prior approval, which approval
the Company may withhold in its discretion, be permitted to sublease portions of
any Leased Property to operate portions (but not the entirety) customarily
associated with or incidental to the operation of a golf course (e.g, driving
range, restaurant, etc.).
54
<PAGE>
COMPANY'S RIGHT OF FIRST OFFER. In the event the Initial Lessee desires to
sell its interest in its Participating Lease to an unaffiliated third party, it
must first offer the Company or its designee the right to purchase such
interest. The Initial Lessee must give the Company written notice of its intent
to sell, which shall indicate the terms and conditions upon which such Initial
Lessee intends to sell its interest in the Participating Lease. The Company or
its designee shall thereafter have a period of 60 days to elect to purchase the
leasehold interest on the terms and conditions at which such Initial Lessee
proposes to sell its interest. If the Company or its designee elects not to
purchase the interest of the Initial Lessee, then such Initial Lessee shall be
free to sell its interest to a third party, subject to the Company's approval as
described below. However, if the terms on which the Initial Lessee intends to
sell its interest are reduced by 5% or more then such Initial Lessee shall again
offer the Company the right to acquire its interest, provided the Company shall
have only 15 days to accept such offer.
INITIAL LESSEE'S RIGHT OF FIRST OFFER. The Company may sell a Golf Course,
but must first offer the Initial Lessee of such course the right to purchase the
Golf Course. The Company must give the relevant Initial Lessee written notice of
its intent to sell, which shall indicate the terms and conditions upon which the
Company intends to sell such Golf Course. Such Initial Lessee shall thereafter
have a period of 60 days to elect to purchase the Golf Course on the terms and
conditions at which the Company proposes to sell the Golf Course. If such
Initial Lessee elects not to purchase the Golf Course, then the Company shall be
free to sell the Golf Course to a third party. However, if the terms on which
the Company intends to sell the Golf Course are reduced by 5% or more, then the
Company shall again offer such Initial Lessee the right to acquire the Golf
Course upon the same terms and conditions, provided that such Initial Lessee
shall have only 15 days to accept such offer.
DAMAGE TO, OR CONDEMNATION OF, A LEASED PROPERTY. In the event of damage to
or destruction of any Leased Property which is caused by an insured risk, the
Initial Lessee will be obligated to diligently restore the Leased Property to
substantially the same condition as existed immediately prior to such damage or
destruction and, to the extent the insurance proceeds and the Capital
Replacement Fund are insufficient to do so, such Initial Lessee will be
obligated to contribute the excess funds needed to restore the Leased Property.
Any excess insurance proceeds will be paid to the Company. Notwithstanding the
foregoing, in the event the damage or destruction of the Leased Property renders
the Leased Property unsuitable for use a golf course for a period of 12 months
or more, the Initial Lessee may terminate the Participating Lease.
INDEMNIFICATION GENERALLY. Under each Participating Lease, the applicable
Initial Lessee will agree to indemnify, and is obligated to hold harmless, the
Company from and against all liabilities, obligations, claims, actual or
consequential damages, penalties, causes of action, costs and expenses
(including reasonable attorneys' fees and expenses) imposed upon or asserted
against the Company as owner of the applicable Leased Property on account of,
among other things, (i) any accident, injury to or death of a person or loss of
or damage to property on or about the Leased Property, (ii) any use, non-use,
condition, maintenance or repair misuse, by such Initial Lessee of the Leased
Property, (iii) any impositions (which are the obligations of the relevant
Initial Lessee to pay pursuant to the applicable provisions of such
Participating Lease) or the operations thereon, (iv) any failure on the part of
such Initial Lessee to perform or comply with any of the terms of the
Participating Lease or any sublease, (v) any taxes levied against such Leased
Property, and (vi) any liability the Company may incur or suffer as a result of
any permitted contest by such Initial Lessee under any Participating Lease.
EVENTS OF DEFAULT. Events of Default are defined in each Participating
Lease to include, among others, the following:
(i) if an Initial Lessee fails to make a rent payment when such payment
becomes due and payable and such failure is not cured by such Initial Lessee
within a period of 10 days after receipt of written notice thereof from the
Company;
(ii) if an Initial Lessee fails to observe or perform any material term,
covenant or condition of a Participating Lease and such failure is not cured
by such Initial Lessee within a period of 30 days after receipt by such
Initial Lessee of written notice thereof from the Company, unless such
failure cannot with
55
<PAGE>
due diligence be cured within a period of 30 days, in which case such
failure will not constitute an Event of Default if such Initial Lessee
proceeds promptly and with due diligence to cure the failure and diligently
completes the curing thereof, within 120 days;
(iii) if an Initial Lessee: (a) admits in writing its inability to pay
its debts generally as they become due, (b) files a petition in bankruptcy
or a petition to take advantage of any insolvency act, (c) makes an
assignment for the benefit of its creditors, (d) is unable to pay its debts
as they mature, (e) consents to the appointment of a receive of itself or of
the whole or any substantial part of its property, or (f) files a petition
or answer seeking reorganization or arrangement under the federal bankruptcy
laws or any other applicable law or statute of the United States of America
or any state thereof;
(iv) if such Initial Lessee is liquidated or dissolved;
(v) if such Initial Lessee voluntarily ceases operations on the Leased
Property, except as a result of damage, destruction or a partial or complete
condemnation or other unavoidable delays; or
(vi) if such Initial Lessee or an affiliate thereof is in default under
any other Participating Lease with the Company.
If an Event of Default occurs and is continuing under a Participating Lease,
then the Company may terminate the Participating Lease by giving such Initial
Lessee not less than 10 days notice (only if required by the Participating
Lease) of such termination and upon the expiration of such time, the Fixed or
Extended Term, as the case may be, will terminate and all rights of such Initial
Lessee under such Participating Lease shall cease.
GOVERNING LAW. The Participating Leases will be governed by and construed
in accordance with the law of the state where the Golf Course is located.
Because the Golf Courses are located in various states, the Participating Leases
may be subject to restrictions imposed by applicable local law.
COMPETITION
The Golf Courses are, and any additional golf courses and related facilities
acquired by the Company will be, subject to competition for players and members
from other golf courses located in the same geographic areas. The number and
quality of golf courses in a particular area could have a material effect on the
revenues of the Golf Courses. In addition, revenues of the Golf Courses will be
affected by a number of factors including the demand for golf and general
economic conditions. In addition, the Company will be subject to the competition
for the acquisition of golf courses and related facilities with other purchasers
of golf courses, including other golf course acquisition companies.
EMPLOYEES
The Company will be self-administered and will have eight full-time
employees, three of which will be devoted primarily to acquisitions.
LEGAL PROCEEDINGS
Owners and operators of golf courses are subject to a variety of legal
proceedings arising in the ordinary course of operating a golf course, including
proceedings relating to personal injury and property damage. Such proceedings
are generally brought against the operator of a golf course, but may also be
brought against the owner. Each of the Prior Owners has represented to the
Company that the Golf Course(s) contributed by it currently is not subject to
any material legal proceedings. The Participating Leases provide that the
respective Initial Lessee is responsible for claims based on personal injury and
property damage at the Golf Courses leased by such Initial Lessee and require
each Initial Lessee to maintain insurance for such purposes. See "Participating
Leases" and "Risk Factors -- Real Estate Investment Risks -- Uninsured Losses."
GOVERNMENT REGULATION
ENVIRONMENTAL MATTERS. Operations of the Golf Courses involve the use and
storage of various hazardous materials such as herbicides, pesticides,
fertilizers, motor oils 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
56
<PAGE>
removal or remediation of certain hazardous substances released on or in its
property. Such laws often impose such liability without regard to whether the
owner or operator knew of, or was responsible for, the release of such hazardous
substances. The presence of such substances, or the failure to remediate such
substances properly when released, may adversely affect the owner's ability to
sell such real estate or to borrow using such real estate as collateral. The
Company has not been notified by any governmental authority of any material non-
compliance, liability or other claim in connection with any of the Golf Courses
and the Company is not aware of any other environmental condition with respect
to any of the Golf Courses that is likely to be material for which the Company
is being indemnified by the Initial Lessees or Prior Owners. All of the Golf
Courses have been subjected to a Phase I environmental audit (which does not
involve invasive procedures, such as soil sampling or ground water analysis) by
an independent environmental consultant. No assurance, however, can be given
that these reports reveal all potential environmental liabilities, that no prior
or adjacent owner created any material environmental condition not known to the
Company or the independent consultant or that future uses or conditions
(including, without limitation, changes in applicable environmental laws and
regulations) will not result in imposition of environmental liability. The
Participating Leases provide that the Initial Lessees will indemnify the Company
for certain potential environmental liabilities at the Golf Courses. See
"Participating Leases."
AMERICANS WITH DISABILITIES ACT. The Golf Courses are subject to the
Americans with Disabilities Act of 1990 (the "ADA"). The ADA has separate
compliance requirements for "public accommodations" and "commercial facilities"
but generally requires that public facilities such as clubhouses and recreation
areas be made accessible to people with disabilities. These requirements became
effective in 1992. Compliance with the ADA requirements could require removal of
access barriers and other capital improvements at the Golf Courses.
Noncompliance could result in imposition of fines or an award of damages to
private litigants. Under the Participating Leases, the Initial Lessees will be
responsible for any costs associated with ADA compliance.
57
<PAGE>
MANAGEMENT
DIRECTORS, PROPOSED DIRECTORS AND EXECUTIVE OFFICERS
Upon completion of the Offering, the Board of Directors will consist of 7
members. The directors include W. Bradley Blair II, Chairman, Chief Executive
Officer and President, David J. Dick, Executive Vice President and Larry D.
Young, founder of The Legends Group. The remaining directors will be Independent
Directors (the "Independent Directors"). See "Partnership Agreement --
Management" and "Capital Stock -- Corporate Governance." Subject to rights
pursuant to any employment agreements, officers of the Company serve at the
pleasure of the Board of Directors.
Set forth below is information with respect to directors and executive
officers of the Company.
<TABLE>
<CAPTION>
TERM
NAME AGE POSITION EXPIRES
- ------------------------------ --- ---------------------------------------------- -----------
<S> <C> <C> <C>
W. Bradley Blair, II.......... 52 Chairman of the Board of Directors, 1999
Chief Executive Officer and
President of the Company
David J. Dick................. 37 Executive Vice President, Director 1998
Larry D. Young................ 55 Director 2000
</TABLE>
W. Bradley Blair, II is the Chairman of the Board, Chief Executive Officer
and President of the Company. Prior to the completion of the Offering Mr. Blair
served as Executive Vice President, Chief Operating Officer and General Counsel
for The Legends Group since 1993. As an officer of The Legends Group, Mr. Blair
was responsible for all aspects of operations, including acquisitions,
development and marketing. From 1978 to 1993, Mr. Blair was the managing partner
and currently is of counsel at Blair, Conway Bograd and Martin, a law firm,
specializing in real estate, finance, taxation and acquisitions. Several clients
of Blair, Conway Bograd and Martin were golf course owners and companies. Mr.
Blair received a Bachelor of Science Degree in Business from Indiana University
and a Juris Doctorate from University of North Carolina at Chapel Hill Law
School.
David J. Dick is Executive Vice President of the Company. Since 1993 Mr.
Dick has worked with the Inland Group, Inc. as a consultant specializing in real
estate investment banking and golf course finance. From 1983 to 1992 Mr. Dick
served as Vice President of Development and Asset/Portfolio management for
Thoner & Birmingham Development Corporation, a golf and country club community
developer that is affiliated with the owner of Northgate Country Club. While
with Thoner & Birmingham Development Corporation, Mr. Dick's responsibilities
included many aspects of golf course and country club development, operations
and management. Mr. Dick received a Bachelor of Science in Business
Administration from Central Missouri State University. Mr. Dick is a Certified
Commercial Investment Member and a registered representative with H. D. Vest, an
NASD member firm.
Larry D. Young is a director of the Company and is the founder of The
Legends Group. Mr. Young began his career in the golf business in the early
1960's. He constructed his first golf course in 1973 (Green Valley) in Gastonia,
North Carolina. In 1975 he moved to Myrtle Beach, South Carolina, where he
started what became The Legends Group, a leading golf course owner, developer
and operator in the southeast and Mid-Atlantic regions of the United States. Mr.
Young has served in numerous capacities in golf industry related non-profit
organizations.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. Promptly following the completion of the Offering, the
Board of Directors will establish an audit committee that will consist of three
Independent Directors (the "Audit Committee"). The Audit Committee will be
established to make recommendations concerning the engagement of independent
public accountants, review with the independent public accountants the plans and
results of the audit engagement,
58
<PAGE>
approve professional services provided by the independent public accountants,
review the independence of the independent public accounts, consider the range
of audit and non-audit fees and review the adequacy of the Company's internal
accounting controls.
COMPENSATION COMMITTEE. Promptly following the completion of the Offering,
the Board of Directors will establish a compensation committee (the
"Compensation Committee") to determine compensation, including awards under the
Company's Stock Incentive Plan, for the Company's executive officers. The
Company expects that the Compensation Committee will consist of three
Independent Directors.
The Board of Directors will not initially have a nominating committee and
the entire Board of Directors will perform the function of such a committee. The
Company may from time to time form other committees as circumstances warrant.
Such committees will have authority and responsibility as delegated by the Board
of Directors.
The membership of the Committees of the Board of Directors will be
established after the completion of the Offering.
COMPENSATION OF DIRECTORS
The Company intends to pay its Independent Directors fees for their services
as directors. Directors will receive annual compensation of $10,000 plus a fee
of $1,000 for attendance at each meeting of the Board of Directors, but not for
committee meetings. Directors who are not Independent Directors will not be paid
any director fees. The Company will reimburse directors for their out-of-pocket
travel expenses.
DIRECTORS AND OFFICERS INSURANCE
The Company will have directors and officers liability insurance. Directors
and officers liability insurance insures (i) the officers and directors of the
Company from any claim arising out of an alleged wrongful act by such persons
while acting as directors and officers of the Company, and (ii) the Company to
the extent that it has indemnified the directors and officers for such loss.
INDEMNIFICATION
The Charter provides for the indemnification of the Company's officers and
directors against certain liabilities to the fullest extent permitted under
applicable law. The Charter also provides that the directors and officers of the
Company be exculpated from monetary damages to the fullest extent permitted
under applicable law. In addition, the officers, directors and controlling
persons of the Company will be indemnified against certain liabilities by the
Underwriters, and the Underwriters will be indemnified against certain
liabilities by the Company. See "Underwriting."
EXECUTIVE COMPENSATION
Prior to the completion of the Offering, the Company did not pay any
compensation to its executive officers. The following table sets forth the
estimated 1997 compensation, on an annualized basis, expected to be paid to the
most highly compensated executive officers of the Company whose cash
compensation from the Company in 1997 on an annualized basis is expected to
exceed $100,000.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ----------------
SECURITIES
----------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR (1) SALARY OPTIONS/SARS (2)
- ----------------------------------------------------------------------------- ----------- ---------- ----------------
<S> <C> <C> <C>
W. Bradley Blair, II......................................................... 1997 $ 250,000 150,000
Chairman of the Board of Directors/Chief Executive Officer/President
David J. Dick................................................................ 1997 $ 150,000 125,000
Executive Vice President
</TABLE>
- ------------
(1) Amounts given are annualized projections for the year ending December 31,
1997.
59
<PAGE>
(2) Options to purchase an aggregate of 295,000 shares of Common Stock will be
granted to directors and executive officers of the Company effective upon
closing of the Offering. See "-- Stock Incentive Plan."
STOCK INCENTIVE PLAN
The Company intends to establish a stock incentive plan (the "Plan") to
enable executive officers and other key employees of the Company to participate
in the ownership of the Company. The Plan is designed to attract and retain
executive officers and other key employees of the Company and to provide
incentive to such persons to maximize the Company's cash flow available for
distribution. The Plan provides for the award to executive officers and other
key employees of the Company (subject to the Ownership Limit) of a broad variety
of stock-based compensation alternatives such as nonqualified stock options,
incentive stock options, restricted stock and performance awards and provides
for the grant to executive officers (subject to the Ownership Limit) of
nonqualified stock options.
The Plan will be administered by the Compensation Committee, which is
authorized to select from among the eligible employees of the Company the
individuals to whom options, restricted stock purchase rights and performance
awards are to be granted and to determine the number of shares to be subject
thereto and the terms and conditions thereof. The Compensation Committee will
select the individuals to whom nonqualified stock options are to be granted and
will determine the number of shares to be subject thereto and the terms and
conditions thereof. The Compensation Committee is also authorized to adopt,
amend and rescind rules relating to the administration of the Plan. No member of
the Compensation Committee will be eligible to participate in the Plan.
AWARDS UNDER THE PLAN
NONQUALIFIED STOCK OPTIONS will provide for the right to purchase Common
Stock at a specified price which may be less than fair market value on the date
of grant (but not less than par value), and usually will become exercisable in
installments after the grant date. Nonqualified stock options may be granted for
any reasonable term.
INCENTIVE STOCK OPTIONS, if granted, will be designed to comply with the
provisions of the Code and will be subject to restrictions contained in the
Code, including exercise prices equal to at least 100% of fair market value of
the Common Stock on the grant date and a ten year restriction on their term, but
may be subsequently modified to disqualify them from treatment as an incentive
stock option.
RESTRICTED STOCK may be sold to participants at various prices (but not
below par value) and made subject to such restrictions as may be determined by
the Compensation Committee. Restricted stock, typically, may be repurchased by
the Company at the original purchase price if the conditions or restrictions are
not met. In general, restricted stock may not be sold, or otherwise transferred
or hypothecated, until restrictions are removed or expire. Purchasers of
restricted stock, unlike recipients of options, will have voting rights and will
receive dividends prior to the time when the restrictions lapse.
PERFORMANCE AWARDS may be granted by the Compensation Committee on an
individual or group basis. Generally, these awards will be based upon specific
agreements and may be paid in cash or in Common Stock or in a combination of
cash and Common Stock. Performance awards may include "phantom" stock awards
that provide for payments based upon increases in the price of the Company's
Common Stock over a predetermined period. Performance awards may also include
bonuses which may be granted by the Compensation Committee on an individual or
group basis and which may be payable in cash or in Common Stock or in a
combination of cash and Common Stock.
The Board of Directors will approve prior to the completion of the Offering
the grant of options to Mr. Blair and Mr. Dick to purchase up to 150,000 and
125,000 shares of Common Stock, respectively. The options will become
exercisable in three equal installments, commencing upon the first anniversary
of the date of grant and each of the two years thereafter. The options will be
exercisable for 10 years from the date of grant at the fair market value of the
Common Stock on the date of grant.
60
<PAGE>
A maximum of 225,000 additional shares will be reserved for issuance under
the Plan. There is no limit on the number of awards that may be granted to any
one individual so long as the grant does not violate the Ownership Limit or
cause the Company to fail to qualify as a REIT for federal income tax purposes.
See "Capital Stock -- Restrictions on Ownership."
DIRECTORS' PLAN
SHARE AUTHORIZATION. A maximum of 100,000 shares of Common Stock may be
issued under the Company's Non-Employee Directors' Plan (the "Directors' Plan").
The share limitation and terms of outstanding awards shall be adjusted, as the
Compensation Committee deems appropriate, in the event of a stock dividend,
stock split, combination, reclassification, recapitalization or other similar
event.
ELIGIBILITY. The Directors' Plan provides for the grant of options to
purchase Common Stock and the award of shares of Common Stock to each eligible
director of the Company. No director who is an employee of the Company or a
Prior Owner is eligible to participate in the Directors' Plan.
OPTIONS. The Directors' Plan provides that each eligible director who is a
member of the Board of Directors as of the date that the registration statement
relating to the Offering is declared effective by the SEC will be awarded
nonqualified options to purchase 5,000 shares of Common Stock on that date (each
such director, a "Founding Director"). Each eligible director who is not a
Founding Director (a "Non-Founding Director") will receive nonqualified options
to purchase 5,000 shares of Common Stock on the date of the meeting of the
Company's stockholders at which the Non-Founding Director is first elected to
the Board of Directors. The options granted to Founding Directors upon
effectiveness of the registration statement relating to the Offering will have
an exercise price equal to the initial public offering price and will vest on
the date of grant. The exercise price of options under future grants will be
100% of the fair market value of the Common Stock on the date of grant and will
vest in the same manner. The exercise price may be paid in cash, cash
equivalents, Common Stock or a combination thereof acceptable to the
Compensation Committee. Options granted under the Directors' Plan are
exercisable for 10 years from the date of grant.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES RELATING TO OPTIONS. Generally, an
eligible director does not recognize any taxable income, and the Company is not
entitled to a deduction upon the grant of an option. Upon the exercise of an
option the eligible director recognizes ordinary income equal to the excess of
the fair market value of the shares acquired over the option exercise price, if
any. Special rules may apply as a result of Section 16 of the Exchange Act. The
Company is generally entitled to a deduction equal to the compensation taxable
to the eligible director as ordinary income. Eligible directors may be subject
to backup withholding requirements for federal income tax.
AMENDMENT AND TERMINATION. The Directors' Plan provides that the Board may
amend or terminate the Plan, but the terms of the Plan relating to the amount,
price and timing of awards under the Plan may not be amended more than once
every six months other than to comport with changes in the Code, or the rules
and regulations thereunder. An amendment will not become effective without
stockholder approval if the amendment materially (i) increases the number of
shares that may be issued under the Directors' Plan, (ii) changes the
eligibility requirements, or (iii) increases the benefits that may be provided
under the Directors' Plan. No options may be granted under the Directors' Plan
after December 31, 2006.
61
<PAGE>
DEFERRED COMPENSATION PLAN
The Company intends to establish a deferred compensation plan under which
executive officers of the Company may elect to defer receiving a portion of
their cash compensation otherwise payable in one tax year until a later tax year
and thereby postpone payment of tax on the deferred amount. Prior to the
beginning of any taxable year, such executive officers may elect to defer
receipt of such amount of cash compensation until a future date or until an
event selected by such persons pursuant to the terms of the plan. Deferred
compensation will be invested in a separate trust account.
EMPLOYMENT AGREEMENTS
The Company will enter into written employment agreements with W. Bradley
Blair, II and David J. Dick. The employment agreement for Mr. Blair will have a
term of four years and the employment agreement for Mr. Dick will have a term of
three years. The employment agreement of each of such executives provides for an
annual salary of $250,000 and $150,000 for Messrs. Blair and Dick, respectively,
with annual performance bonuses determined by the Independent Directors in
connection with the achievement of performance criteria to be determined by the
Board of Directors. In addition, each of Messrs. Blair and Dick have received
options to purchase shares of Common Stock as described above under the heading
"Stock Incentive Plan." In addition, each of Messrs. Blair and Dick shall
receive severance payments equal to base compensation and bonus at the most
recent annual amount for the longer of the balance of the employment term or two
years upon the death, disability, termination or resignation of such executive,
unless such executive resigns without "good cause" or unless the Company
terminates such executive as a result of gross negligence, willful misconduct,
fraud or a material breach of the employment agreement. Each such executive will
have "good cause" to terminate his employment with the Company in the event of
any reduction in his compensation or benefits, material breach or material
default by the Company under his employment agreement or following the merger or
change in control of the Company.
Following the completion of the Offering, the Compensation Committee may
establish incentive compensation arrangements for its executive officers and
certain key employees.
COVENANTS NOT TO COMPETE. Mr. Blair and Mr. Dick have agreed to devote
substantially full time to the business of the Company and not to engage in any
competitive business. Mr. Blair and Mr. Dick have agreed not to compete directly
with the Company in a business similar to that of the Company for a period of
one year following any termination of employment. Mr. Blair may continue to
invest with Mr. Young and his affiliates in certain residential real estate
developments.
62
<PAGE>
INITIAL LESSEES
The Initial Lessees, each of which is owned by an affiliate of the Prior
Owners of each of the Golf Courses, will lease the Golf Courses under triple net
leases. The Initial Lessees derive revenues from the operation of golf courses
principally through receipt of green fees, membership initiation fees, food and
beverage operations, sale of merchandise, membership dues, golf cart rentals and
driving range charges. Each Initial Lessee will be a single purpose entity with
nominal assets.
THE LEGENDS LESSEES
The four Legends Lessees will lease the seven golf courses contributed by
The Legends Group. The three Golf Courses at The Legends Complex will be leased
pursuant to a single Participating Lease, as will the two recently opened Golf
Courses. Each of the other Golf Courses will be leased to individual Initial
Lessees pursuant to separate Participating Leases. Each Participating Lease with
the Legends Lessees will be cross-defaulted and cross-collateralized. Mr. Young
and his affiliates will own each of the Legends Lessees. The Legends Group is
contributing seven of the eight courses it currently operates. The course not
being contributed did not meet the Company's investment criteria because it is
subject to a ground lease with a short remaining term. That course may be
acquired by the Company at a later date should the ground lease be extended. See
"Certain Transactions -- Option to Purchase and Right of First Refusal."
Mr. Young, who is a director of the Company, began his career in the golf
business in the early 1960's and has owned and managed golf courses for over 25
years. During such time, Mr. Young has designed and developed 10 golf courses,
eight of which have been nationally recognized. Mr. Young constructed his first
course in 1973 (Green Valley) in Gastonia, North Carolina. In 1975, he moved to
Myrtle Beach, South Carolina, where he started what was to become The Legends
Group, a company specializing in development, construction, management and
ownership of golf courses. Mr. Young has served in numerous capacities in golf
industry related non-profit organizations.
THE WOODLANDS
The Woodlands was developed, is currently owned, and will be leased to an
affiliate of Craft Farms. Craft Farms is operated by the father and son team of
R.C. and Robert Craft, longtime residents of Gulf Shores, Alabama. In addition
to developing Craft Farms, a successful golf community encompassing both resort
and residential properties, the Crafts operate a successful turf grass farm.
R.C. and Robert Craft have a total of approximately 20 years experience in the
golf industry and continue to own and operate a golf course located near The
Woodlands.
Mr. R. C. Craft has approximately 50 years of experience in real estate
ownership and management and, together with Mr. Robert Craft, has over 10 years'
experience in golf course development and management in a resort market. Mr.
Robert S. Craft is the Chairman of the Board of Colonial Bank (Gulf Coast
Region), the Board of Directors of the Colonial Bank Holding Company and the
President and founder of the Gulf Shores Golf Association, a cooperative golf
marketing network.
OLDE ATLANTA GOLF CLUB
Olde Atlanta Golf Club is being conveyed to the Company by Olde Atlanta Golf
Club Limited Partnership, a partnership in which The Crescent Company is the
general partner. Olde Atlanta Golf Club Limited Partnership developed the course
in 1993, and the course will be leased to an affiliate thereof. Senior
management at The Crescent Company, including its president E. Neal Trogdon,
have a combined 30 years of experience in the golf industry and affiliates of
The Crescent Company currently own and manage three other golf courses.
Mr. Trogdon is the President of The Crescent Company. Since his first golf
course acquisition in 1989, Mr. Trogdon has served as managing general partner
for the four Daily Fee golf courses now managed by The Crescent Company
including Olde Atlanta. The golf courses are located in the Atlanta, Georgia
suburbs (2) and Augusta, Georgia area (2). Mr. Trogdon was previously an
Executive Vice President at The First National Bank of Chicago and a senior
officer at NationsBank.
63
<PAGE>
NORTHGATE COUNTRY CLUB
Northgate Country Club was developed, is currently owned and will be leased
to an affiliate of Jack Thoner. Mr. Thoner has over 35 years of experience in
real estate development and has owned and operated Northgate Country Club for 12
years. Mr. Thoner's real estate development includes the construction of over
5,000 multi-family units, as well as hotel and office properties.
GOLF COURSE OPERATIONS
Prior to the completion of the Offering, the Golf Courses were owned (or
leased pursuant to long-term ground leases) and operated by the Prior Owners,
all of which are affiliates of the Initial Lessees. Such Initial Lessees will
continue to operate the Golf Courses under the Participating Leases with the
Company. See "The Golf Courses -- The Participating Leases." Each Initial Lessee
has developed sophisticated operating systems and procedures in all areas of
golf course operations that enable it to provide high quality service and
products to its customers.
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES
Set forth below is a discussion of the Company's investment objectives and
policies, financing policies and policies with respect to certain other
activities. These policies are determined by the Board of Directors and may be
amended or revised from time to time at the discretion of the Board of Directors
without a vote of the Company's stockholders.
As the sole general partner of the Operating Partnership, the Company also
will determine the investment policies of the Operating Partnership. Under the
Partnership Agreement, all future investments generally must be made through the
Operating Partnership. See "Partnership Agreement -- Management."
INVESTMENT OBJECTIVES AND POLICIES
The Company's investment objective is to maximize both current income and
long-term growth in income. The Company will seek to accomplish its objective
through its ownership of Golf Courses and selective acquisitions of additional
golf courses and related facilities.
The Company may purchase or lease properties for long-term investment,
expand and improve the Golf Courses presently owned or sell such properties, in
whole or in part, when circumstances warrant. The Company also may participate
with other entities in property ownership, through joint ventures or other types
of co-ownership. Equity investments may be subject to existing mortgage
financing and other indebtedness that have priority over the equity interest of
the Company.
While the Company intends to emphasize equity real estate investments, it
may, in its discretion, invest in mortgages, stock of other REITs, partnerships
and other real estate interests. Such mortgage investments may include
participating or convertible mortgages.
There are no limitations on the percentage of the Company's assets that may
be invested in any one property or venture. The Board of Directors may establish
limitations as it deems appropriate from time to time. No limitations have been
set on the number of properties in which the Company will seek to invest or on
the concentration of investments in any one geographic region.
DISPOSITIONS
The Company has no current intention to cause the disposition of any of the
Golf Courses, although it reserves the right to do so if the Board of Directors
determines that such action would be in the best interests of the Company. The
Company has agreed to use reasonable efforts to structure the sale of any Golf
Course as a tax deferred like-kind exchange if the contributing Prior Owner
would incur an adverse tax liability upon such sale. The Participating Leases
impose restrictions on the Company's ability to sell the Golf Courses. See "The
Golf Courses -- The Participating Leases -- Initial Lessee Right of First
Offer".
64
<PAGE>
FINANCING
The Company presently intends to maintain a ratio of debt-to-total market
capitalization of 50% or less. Following the completion of the Offering and the
use of net proceeds therefrom, the Company will have approximately $4.3 million
of indebtedness, which constitutes approximately 3% of its total market
capitalization. The Company may, however, from time to time re-evaluate this
policy and decrease or increase such ratio accordingly. The Company will
determine its financing policies in light of then current economic conditions,
relative costs of debt and equity capital, market values of properties, growth
and acquisition opportunities and other factors. If the Board of Directors
determines that additional funding is desirable, the Company may raise such
funds through additional equity offerings, debt financing or retention of cash
flow (subject to provisions in the Code concerning taxability of undistributed
REIT income and REIT qualification), or a combination of these methods.
In connection with the acquisition of one of the Golf Courses, the Company
has agreed to maintain, for a period of 10 years following the completion of the
Offering, at least $4.3 million of indebtedness to accommodate the effort to
minimize certain adverse tax consequences of the Prior Owner of such Golf
Course. Such indebtedness may be reduced upon certain taxable events relating to
the OP Units to be held by the Prior Owner of such Golf Course. In the event
that the Company fails to maintain such indebtedness, the Company will be liable
for any resulting income tax liabilities incurred by the Prior Owner of such
Golf Course.
It is anticipated that borrowings will be made through the Operating
Partnership, although the Company may also incur indebtedness that may be
re-loaned to the Operating Partnership on the same terms and conditions as are
applicable to the Company's borrowing of such funds. See "Partnership
Agreement." Indebtedness may be in the form of purchase money obligations to the
Prior Owners, publicly or privately placed debt instruments, or financing from
banks, institutional investors or other lenders, any of which indebtedness may
be unsecured or may be secured by mortgages or other interests in the property
owned by the Company. There are no limits on the number or amount of mortgages
or other interests which may be placed on any one property. In addition, such
indebtedness may be recourse to all or any part of the property of the Company
or may be limited to the particular property to which the indebtedness relates.
The proceeds from any borrowings may be used for the payment of distributions,
working capital, to purchase OP Units, to refinance indebtedness or to finance
acquisitions, expansions or development of new properties.
In the event that the Board of Directors determines to raise additional
equity capital, the Board has the authority, without stockholder approval, to
issue additional shares of authorized Common Stock or other capital stock
(including securities senior to the Common Stock) of the Company in any manner
(and on such terms and for such consideration) it deems appropriate, including
in exchange for property. Existing stockholders would have no preemptive right
to purchase shares issued in any offering, and any such offering might cause a
dilution of a stockholder's investment in the Company. If the Board of Directors
determines to raise additional equity capital to fund investments by the
Operating Partnership, the Company will contribute such funds to the Operating
Partnership as a contribution to capital and purchase of additional OP Units. In
addition, the Company may issue additional shares of Common Stock in connection
with the exchange of OP Units for shares of Common Stock pursuant to the
exercise of Redemption Rights. See "Partnership Agreement."
The Board of Directors also has the authority to cause the Operating
Partnership to issue additional OP Units in any manner (and on such terms and
for such consideration) as it deems appropriate, including in exchange for
property. See "Partnership Agreement -- Capital Contribution."
WORKING CAPITAL RESERVES
The Company will maintain working capital reserves (and when not sufficient,
access to borrowings) in amounts that the Board of Directors determines to be
adequate to meet normal contingencies in connection with the operation of the
Company's business and investments.
65
<PAGE>
CONFLICT OF INTEREST POLICIES
The Company will adopt certain policies and enter into certain agreements
designed to minimize potential conflicts of interest. The Company's Board of
Directors is subject to certain provisions of Maryland law, which are designed
to eliminate or minimize certain potential conflicts of interest. However, there
can be no assurance that these policies always will be successful in eliminating
the influence of such conflicts, and if they are not successful, decisions could
be made that might fail to reflect fully the interests of all stockholders.
CHARTER AND BYLAW PROVISIONS
The Company's Charter, with limited exceptions, requires that a majority of
the Company's Board of Directors be comprised of persons who are not officers or
employees of the Company or Affiliates of any advisor to the Company under an
advisory agreement, any lessee or management company operating any property of
the Company, any subsidiary of the Company or any partnership that is an
Affiliate of the Company (each such person, an "Independent Director"). The
Charter provides that such provisions relating to Independent Directors may not
be amended, altered or repealed without the affirmative vote of two-thirds of
all the votes entitled to be cast on the matter. In addition, the Company's
Bylaws provide that any purchase, sale, lease or mortgage involving the Company
in which a director or officer of the Company or any affiliate of the foregoing
has any direct or indirect interest, other than solely as a result of his status
as a director, officer or shareholder of the Company, must be approved by a
majority of the directors, including a majority of the Independent Directors.
PROVISIONS OF MARYLAND LAW
Pursuant to Maryland law (the jurisdiction under which the Company is
organized), each director is required to discharge his duties in good faith,
with the care an ordinarily prudent person in a like position would exercise
under similar circumstances and in a manner he reasonably believes to be in the
best interest of the Company. In addition, under Maryland law, a contract or
transaction between the Company and any of its directors or between the Company
and a corporation, firm or other entity in which a director is a director or has
a material financial interest is not void or voidable solely because of (a) the
common directorship or interest, (b) the presence of the director at the meeting
of the Board or a committee of the Board that authorizes or approves or ratifies
the contract or transaction or (c) the counting of the vote of the director for
the authorization, approval or ratification of the contract or transaction if
(i) after disclosure of the interest, the transaction is authorized, approved or
ratified, by the affirmative vote of a majority of the disinterested directors,
or by the affirmative vote of a majority of the votes cast by stockholders
entitled to vote other than the votes of shares owned of record or beneficially
by the interested director or corporation, firm or other entity, or (ii) the
transaction is fair and reasonable to the Company.
OTHER POLICIES
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company does not intend
(i) to invest in the securities of other issuers (other than the Operating
Partnership) for the purpose of exercising control over such issuer, (ii) to
underwrite securities of other issuers or (iii) to trade actively in loans or
other investments.
The Company may make investments other than as previously described,
although it does not currently intend to do so. The Company has authority to
repurchase or otherwise reacquire Common Stock or any other securities it may
issue and may engage in such activities in the future. The Board of Directors
has no present intention of causing the Company to repurchase any of the shares
of Common Stock, and any such action would be taken only in conformity with
applicable federal and state laws and the requirements for qualifying as a REIT
under the Code and the Treasury Regulations. Although it may do so in the
future, except in connection with the Formation Transactions, the Company has
not issued Common Stock or any other securities in exchange for property, nor
has it reacquired any of its Common Stock or any other securities. See "The
Formation Transactions." The Company may make loans to third parties, including,
without limitation, to its officers and to joint
66
<PAGE>
ventures in which it decides to participate. The Company has not engaged in
trading, underwriting or agency distribution or sale of securities of other
issuers, nor has the Company invested in the securities of other issuers other
than the Operating Partnership for the purpose of exercising control.
THE FORMATION TRANSACTIONS
Prior to or simultaneously with the completion of the Offering, the Company,
the Operating Partnership, the Prior Owners and the Initial Lessees will engage
in the Formation Transactions described below.
- The Company will sell 2,775,000 shares of Common Stock in the Offering and
will contribute all of the net proceeds thereof to GTA GP and GTA LP,
which will in turn contribute such net proceeds to the Operating
Partnership. Upon completion of the Offering and the Formation
Transactions, the Company will, through GTA GP and GPA LP, own an
approximately 39.7% ownership interest in the Operating Partnership. GTA
GP will be the sole general partner of the Operating Partnership.
- The Prior Owners will contribute a 100% interest in each of the Golf
Courses to the Company in exchange for an aggregate of approximately
4,194,062 OP Units and approximately $4.5 million in cash. The Company
will use a portion of the net proceeds of the Offering to repay
approximately $47.4 million of existing mortgages and other indebtedness
at the Golf Courses.
- The Company, as landlord, will lease the Golf Courses to the Initial
Lessees pursuant to the Participating Leases for initial terms of ten
years each, with each Initial Lessee having the right to extend the term
of its Participating Lease for up to six renewal terms of five years each.
- The Company will enter into the Option Agreement with The Legends Group
pursuant to which the Company will be granted the option and right of
first refusal to acquire golf courses currently owned or subsequently
acquired or developed by The Legends Group.
BENEFITS TO OFFICERS AND DIRECTORS
As a result of the Formation Transactions, executive officers and directors
of the Company and certain of their affiliates will receive the following
benefits:
- Larry D. Young, a director of the Company and majority owner of The
Legends Group, and his affiliates will receive 3,738,556 OP Units, as
consideration for their interests in the Golf Courses owned by The Legends
Group. The OP Units to be received by Mr. Young and his affiliates (which
are redeemable for cash or, at the Company's option, Common Stock on a
one-for-one basis, beginning one year after the completion of the
Offering) will be worth approximately $74.8 million (based on the Offering
Price) and will be more liquid than their interests in the Golf Courses
once a public trading market for the Common Stock commences. As of June
30, 1996, the aggregate book value of the interests to be contributed by
The Legends Group was approximately $38.0 million.
- The 12,500 OP Units owned by Mr. Blair, Chairman of the Board of
Directors, Chief Executive Officer and President of the Company, and Mr.
Dick, Executive Vice President and a director of the Company, will be
worth approximately $500,000, based on the Offering Price, a substantial
increase over the nominal purchase price paid by Messrs. Blair and Dick
for such OP Units.
- Mr. Blair and Mr. Dick will be granted options to acquire 150,000 and
125,000 shares of Common Stock, respectively, at the Offering Price. The
options vest ratably over three years commencing on the first anniversary
of the date of grant.
- Each Independent Director will receive options to acquire 5,000 shares of
Common Stock at the Offering Price.
- In connection with the acquisition of the Golf Courses owned by The
Legends Group, the Company will repay approximately $27.0 million of debt
personally guaranteed by Mr. Young.
67
<PAGE>
- The Company will pay to Mr. Young and his affiliates approximately $8.2
million in repayment of a loan made by Mr. Young to The Legends Group in
connection with the development of the two recently opened Golf Courses.
- Through the operation of seven of the Golf Courses, the Legends Lessees,
which are owned by Mr. Young or his affiliates, will be entitled to all
cash flow from such Golf Courses after payment of the Lease Payments under
the applicable Participating Leases and other operating expenses.
- Certain tax consequences to Mr. Young and his Affiliates from the
conveyance of their interests in the Golf Courses being contributed by The
Legends Group will be deferred.
TRANSFER DOCUMENTS
The transfer of the Golf Courses is subject to the completion of the
Offering as well as the normal and customary conditions to the closing of real
estate transactions. The Company will assume certain past obligations and all
obligations arising after the transfer of the Golf Courses to the Company. The
agreements to transfer the Golf Courses will contain representations and
warranties to the Company concerning the Golf Courses customarily found in
agreements of such type. Such representations and warranties will generally
survive the closing of the transfer of title to the Golf Courses for one year.
The representations and warranties will be secured by a pledge of OP Units from
each Prior Owner for a period of one year, which OP Units will also secure the
obligations of the related Initial Lessee under the applicable Participating
Lease.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
RELATIONSHIPS AMONG OFFICERS AND DIRECTORS
Larry Young is a director of the Company and the majority owner of The
Legends Group and the Legends Lessees. Mr. Blair, upon completion of the
Offering, will resign as Chief Operating Officer of The Legends Group.
ACQUISITION OF INTERESTS IN CERTAIN OF THE GOLF COURSES
Mr. Young and his affiliates will receive 3,738,556 OP Units in exchange for
their interests in certain of the Golf Courses. Upon exercise of his right to
redeem such OP Units (which rights are not exercisable until beginning one year
after the completion of the Offering), such persons and entities may receive an
aggregate of 3,738,556 shares of Common Stock or, at the Company's option, cash
in the amount of approximately $74.8 million based on the Offering Price. See
"Partnership Agreement -- Redemption Rights."
REPAYMENT OF INDEBTEDNESS
The Company will repay approximately $27.0 million of indebtedness
guaranteed by Mr. Young. The Company also will pay to Mr. Young and his
affiliates approximately $8.2 million in repayment of a loan made by Mr. Young
to The Legends Group in connection with the development of the two recently
opened Golf Courses.
EMPLOYMENT AGREEMENTS
The Company will enter into employment agreements with W. Bradley Blair, II
and David J. Dick pursuant to which Mr. Blair will serve as Chairman of the
Board, Chief Executive Officer and President and Mr. Dick will serve as
Executive Vice President of the Company, for a term of four years and three
years, respectively, at an initial annual base compensation of $250,000 and
$150,000, respectively, subject to any increases in base compensation approved
by the Compensation Committee. Upon termination of the employments other than
for cause, Messrs. Blair and Dick will be entitled to receive severance
benefits. See "Management -- Employment Agreements."
OPTION TO PURCHASE AND RIGHT OF FIRST REFUSAL
The Legends Group currently owns a golf course that is not being contributed
to the Company, because it is subject to a ground lease with a short remaining
term, and may acquire or develop additional golf courses in the future. The
Company will have an option and right of first refusal to acquire all such golf
courses, pursuant to an Option to Purchase and Right of First Refusal Agreement
(the "Option Agreement"). Commencing four years after the public opening of a
golf course developed by The Legends Group, or 24 months after the acquisition
of
68
<PAGE>
an established operating golf course, the Company may purchase the applicable
golf course under the Option Agreement for a purchase price based on the net
operating income of the golf course, subject to adjustments agreed upon by the
parties, divided by a capitalization rate equal to the Company's cost of equity
capital plus 200 basis points. For purpose of this calculation, the Company's
cost of equity capital is deemed to equal the Company's Funds From Operations
yield for the then current fiscal year as published by First Call, less reserves
for capital expenditures. In the event The Legends Group receives a bona fide
third party offer to acquire a developed golf course, the option will not be
effective pending the acquisition by the third party, in which case the Company
shall have the right to purchase the developed golf course pursuant to the right
of first refusal described below. The Company anticipates that any such
developed golf course will have achieved stabilized operating revenues before
the Company would consider purchasing such developed golf course from The
Legends Group or any affiliate of The Legends Group.
If the Company does not elect to exercise its option to acquire a golf
course owned, acquired or developed by The Legends Group, or if the parties are
unable to agree on the adjustments to net operating income for purposes of the
pricing formula, then the Company will have a right of first refusal under the
Option Agreement with respect to such golf course. The right of first refusal
will obligate The Legends Group to offer the Company the right to buy any such
golf course on the same terms and conditions as The Legends Group intends to
offer to any third party. If the Company does not exercise its right to acquire
such golf course, The Legends Group will be free to sell to a third party,
provided if The Legends Group either opts not to sell the golf course within
nine months or reduces the purchase price by 5% or more, The Legends Group must
again offer the golf course to the Company. The Option Agreement shall run for a
period of 10 years after the Offering.
PARTNERSHIP AGREEMENT
THE FOLLOWING SUMMARY OF THE PARTNERSHIP AGREEMENT, INCLUDING THE
DESCRIPTIONS OF CERTAIN PROVISIONS SET FORTH ELSEWHERE IN THIS PROSPECTUS, IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PARTNERSHIP AGREEMENT, WHICH IS
FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A
PART.
MANAGEMENT
The Operating Partnership is organized as a Delaware limited partnership
pursuant to the terms of the Partnership Agreement. Pursuant to the Partnership
Agreement, the Company, as the sole general partner of the Operating
Partnership, will generally have full, exclusive and complete responsibility and
discretion in the management and control of the Operating Partnership including
the ability to cause the Operating Partnership to enter into certain major
transactions including acquisitions, dispositions, refinancings and selection of
golf course operators and to cause changes in the Operating Partnership's line
of business and distribution policies. If the Company elects to sell a golf
course contributed by a Limited Partner, then the Company will be obligated to
use reasonable efforts to structure the sale as tax deferred exchange, subject
to limited exceptions.
The consent of Limited Partners (other than GTA LP) holding 66.67% of the
interests in the Operating Partnership is required with respect to certain
amendments to the Partnership Agreement, including amendments which (i)
adversely affect the Limited Partners rights to redeem their OP Units, (ii)
adversely affect the Limited Partners rights to receive cash distributions,
(iii) alter the Operating Partnership's allocation of income, or (iv) impose on
the Limited Partners the obligation to make capital contributions. In addition,
the affirmative vote of Limited Partners (including GTA LP) holding 66.67% of
the interests in the Operating Partnership is required for a sale of all or
substantially all of the assets of the Company, or to approve a merger or
consolidation of the Operating Partnership.
TRANSFERABILITY OF OP UNITS
The Partnership Agreement generally provides that Limited Partners may not
transfer their OP Units without the consent of the Company.
69
<PAGE>
PLEDGE
Each Limited Partner may pledge up to 85% of its OP Units as collateral to
institutional third party lenders. In addition, for a period of at least two
years, each Limited Partner will pledge to the Company OP Units having a value
based on the Offering Price equal to 15% of the purchase price of the Golf
Course contributed by it (approximately 16 months of initial Base Rent, at the
Offering Price) as collateral for the applicable Participating Lease. See
"Percentage Lease -- Security Deposit." In addition, the pledged OP Units will
also secure representations and warranties made by the Prior Owner in connection
with the Formation Transactions for a period of one year. See "The Formation
Transactions."
REDEMPTION RIGHTS
Pursuant to the Partnership Agreement, the Limited Partners, other than GTA
LP, will receive rights which will enable them to cause the Operating
Partnership to redeem each OP Unit for cash equal to the value of a share of
Common Stock (or, at the Company's election, the Company may purchase each OP
Unit offered for redemption for one share of Common Stock) (the "Redemption
Rights"). The Redemption Rights may not be exercised, however, if and to the
extent that the delivery of Common Stock upon exercise of such rights
(regardless of whether the Company would exercise its rights to deliver Common
Stock) would (i) result in any person owning, directly or indirectly, shares of
Common Stock in excess of the Ownership Limit, (ii) result in shares of capital
stock of the Company being owned by fewer than 100 persons (determined without
reference to any rules of attribution), (iii) result in the Company being
"closely held" within the meaning of section 856(h) of the Code, (iv) cause the
Company to own, actually or constructively, 10% or more of the ownership
interests in a tenant of the Company's or the Operating Partnership's real
property, within the meaning of section 856(d)(2)(B) of the Code, or (v) cause
the acquisition of shares of Common Stock by such redeeming Limited Partner to
be "integrated" with any other distribution of shares of Common Stock for
purposes of complying with the Securities Act. The Redemption Rights may be
exercised (subject to certain lock-up agreements described in "Underwriting"),
at any time after one year following the completion of the Offering, provided
that not more than four redemptions by any Unitholder may occur during each
calendar year, and each Limited Partner may not exercise the Redemption Right
for less than 1,000 OP Units or, if such Limited Partner holds less than 1,000
OP Units, all of the OP Units held by such Limited Partner. Prior to the
expiration of such one year period, the Redemption Right may be exercised (but
only for cash) by a lender to which any OP Units may have been pledged, provided
that such pledge was permissible in light of the lock-up agreements described in
"Underwriting." In the future, it may become necessary to place additional
restrictions on the exercise of Redemption Rights in order to assure that the
Operating Partnership does not become a "publicly traded partnership" that is
treated as a corporation for federal income tax purposes. See "Federal Income
Tax Considerations -- Tax Aspects of the Operating Partnership and the
Subsidiary Partnerships." The aggregate number of shares of Common Stock
initially issuable upon exercise of the Redemption Rights will be 4,222,812. The
number of shares of Common Stock issuable upon exercise of the Redemption Rights
will be adjusted upon the occurrence of share splits, mergers, consolidations or
similar pro rata share transactions, which otherwise would have the effect of
diluting the ownership interests of the Limited Partners or the stockholders of
the Company. See "Shares Available for Future Sale."
CAPITAL CONTRIBUTION
The Company, through GTA GP and GTA LP, will contribute to the Operating
Partnership substantially all of the net proceeds of the Offering, in
consideration of which GTA GP will receive a 1% general partnership interest and
GTA LP will receive approximately a 38.7% limited partnership interest in the
Operating Partnership. The Partnership Agreement provides that if the Operating
Partnership requires additional funds at any time or from time to time in excess
of funds available to the Operating Partnership from borrowing or capital
contributions, the Company may borrow such funds from a financial institution or
other lender and lend such funds to the Operating Partnership on the same terms
and conditions as are applicable to the Company's borrowing of such funds. Under
the Partnership Agreement, the Company generally is obligated to contribute,
through GTA GP and GTA LP, the proceeds of a share offering as additional
capital to the Operating Partnership. Moreover, the Company is authorized,
through GTA GP and GTA LP, to cause the Operating Partnership to
70
<PAGE>
issue partnership interests for less than fair market value if the Company has
concluded in good faith that such issuance is in the best interests of the
Company and the Operating Partnership. If the Company so contributes additional
capital to the Operating Partnership, GTA GP and GTA LP will receive additional
OP Units and their percentage interests in the Operating Partnership will be
increased on a proportionate basis based upon the amount of such additional
capital contributions and the value of the Operating Partnership at the time of
such contributions. Conversely, the percentage interests of the Limited
Partners, other than GTA LP, will be decreased on a proportionate basis in the
event of additional capital contributions by the Company.
TERM
The Operating Partnership will continue in full force and effect for a term
of 75 years, or until sooner dissolved pursuant to the terms of the Partnership
Agreement.
TAX MATTERS
Pursuant to the Partnership Agreement, the general partner will be the tax
matters partner of the Operating Partnership and, as such, will have authority
to handle tax audits and to make tax elections under the Code on behalf of the
Operating Partnership.
71
<PAGE>
PRINCIPAL STOCKHOLDERS OF THE COMPANY AND
PRINCIPAL PARTNERS IN THE OPERATING PARTNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of Common Stock and OP Units by each director, by each named executive
officer of the Company, by all directors and officers of the Company as a group
and by each person who is expected to be the beneficial owner of 5% or more of
the outstanding Common Stock immediately following the completion of the
Offering. As of the date of this Prospectus each person named in the table has
sole voting and investment power with respect to all of the shares of Common
Stock or OP Units shown as beneficially owned by such person, except as
otherwise set forth in the notes to the table.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES OF PERCENTAGE INTEREST
NUMBER OF SHARES OF COMMON STOCK NUMBER OF OP IN OPERATING
NAME AND ADDRESS OF BENEFICIAL OWNER COMMON STOCK OUTSTANDING UNITS(2) PARTNERSHIP
- --------------------------------------- --------------------- ----------------------- ------------- -------------------
<S> <C> <C> <C> <C>
W. Bradley Blair....................... -- -- 12,500 *
David J. Dick.......................... -- -- 12,500 *
Larry D. Young(1)...................... -- -- 3,738,556 53.4%
Directors and officers
as a group (3 persons)................ -- -- 3,763,556 53.8%
</TABLE>
- ------------
* Less than 1%.
(1) Address is The Legends Group, 1500 Legends Drive, Myrtle Beach, South
Carolina 29577.
(2) The Operating Partnership will have 6,997,812 OP Units outstanding as of the
Offering, of which 2,775,000 will be owned by the Company. The numbers and
percentages set forth in this table assumed that all outstanding OP Units
are redeemed for shares of Common Stock. The OP Units (other than those
owned by the Company) may be redeemed as follows: 50% after the first
anniversary of the completion of the Offering and 50% after the second
anniversary of the completion of the Offering.
72
<PAGE>
CAPITAL STOCK
GENERAL
Under the Charter, the total number of shares of all classes of stock that
the Company has authority to issue is 100,000,000 consisting of 90,000,000
shares of Common Stock and 10,000,000 shares of preferred stock, par value $.01
per share (the "Preferred Stock"). No shares of Preferred Stock are outstanding
or will be outstanding immediately after completion of the Offering.
The holders of Common Stock are entitled to one vote per share on all
matters voted on by stockholders, including elections of directors, and, except
as otherwise required by law or provided in any resolution adopted by the Board
of Directors with respect to any series of Preferred Stock establishing the
powers, designations, preferences and relative, participating, option or other
special rights of such series, the holders of such shares of Common Stock
exclusively possess all voting power. The Charter does not provide for
cumulative voting in the election of directors. Subject to any preferential
rights of any outstanding series of Preferred Stock, the holders of Common Stock
are entitled to such distributions as may be declared from time to time by the
Board of Directors from funds available therefor, and upon liquidation are
entitled to receive PRO RATA all assets of the Company available for
distributions to such holders. All shares of Common Stock issued in the Offering
will be fully paid and nonassessable and the holders thereof will not have
preemptive rights.
The Charter provides for a staggered Board of Directors consisting of three
classes as nearly equal in size as practicable. Each class holds office until
the third annual meeting for selection of directors following the election of
such class, except that the initial terms of the three classes expire in 1998,
1999 and 2000, respectively. The provisions relating to the staggered board may
be amended only upon the vote of the holders of at least 66.67% of the capital
stock entitled to vote for the election of directors.
The Board of Directors is authorized to provide for the issuance of shares
of Preferred Stock in one or more series, to establish the number of shares in
each series and to fix the designation, powers, preferences and rights of each
such series and the qualifications, limitations or restrictions thereof. The
Company has no present intention to issue shares of Preferred Stock.
CORPORATE GOVERNANCE
Certain significant actions will require stockholder approval, including
certain amendments to the Charter or the Bylaws including provisions relating to
cumulative voting and indemnification. In addition, certain actions relating to
the Operating Partnership and the Company's interest therein require approval of
the Limited Partners. See "Partnership Agreement -- Management."
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares of capital
stock. Specifically, not more than 50% in value of the Company's outstanding
shares of capital stock may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities) during the last
half of a taxable year, and the Company must be beneficially owned by 100 or
more persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year. See "Federal Income Tax
Considerations -- Requirements for Qualification." In addition, the Company must
meet certain requirements regarding the nature of its gross income in order to
qualify as a REIT. One such requirement is that at least 75% of the Company's
gross income for each year must consist of rents from real property and income
from certain other real property investments. The rents received by the
Operating Partnership from an Initial Lessee would not qualify as rents from
real property, which would result in loss of REIT status for the Company, if the
Company were at any time to own, directly or constructively, 10% or more of the
ownership interests in an Initial Lessee within the meaning of Section
856(d)(2)(B) of the Code. See "Federal Income Tax Considerations -- Requirements
for Qualification -- Income Tests."
Because the Board of Directors believes it is essential for the Company to
qualify as a REIT, the Charter, subject to certain exceptions described below,
provides that no person may own, or be deemed to own by virtue
73
<PAGE>
of the constructive ownership provisions of the Code, more than 9.8% of the
lesser in value of the total number or value of the outstanding shares of Common
Stock or more than 9.8% of the outstanding shares of Preferred Stock (the
"Ownership Limit"). The constructive ownership rules of the Code are complex and
may cause shares owned actually or constructively by two or more related
individuals and/or entities to be constructively owned by one individual or
entity. As a result, the acquisition of less than 9.8% of the outstanding shares
of Common Stock or 9.8% of the shares of Preferred Stock (or the acquisition of
an interest in an entity which owns the shares) by an individual or entity could
cause that individual or entity (or another individual or entity) to own
constructively in excess of 9.8% of the outstanding shares of Common Stock or
9.8% of the outstanding shares of Preferred Stock, and thus subject such shares
to the Ownership Limit provisions of the Charter. The Ownership Limit also
prohibits any transfer of Common or Preferred Stock that would (i) result in the
Common and Preferred Stock being owned by fewer than 100 persons (determined
without reference to any rules of attribution), (ii) result in the Company being
"closely held" within the meaning of Section 856(h) of the Code, or (iii) cause
the Company to own, directly or constructively, 10% or more of the ownership
interests in a tenant of the Company's real property, within the meaning of
Section 856(d)(2)(B) of the Code. Except as otherwise provided below, any such
acquisition or transfer of the Company's capital stock (including any
constructive acquisition or transfer of ownership) shall be null and void, and
the intended transferee or owner will acquire no rights to, or economic
interests in, the shares.
Subject to certain exceptions described below, any purported transfer of
Common or Preferred Stock that would (i) result in any person owning, directly
or indirectly, Common or Preferred Stock in excess of the Ownership Limit, (ii)
result in the Common and Preferred Stock being owned by fewer than 100 persons
(determined without reference to any rules of attribution), (iii) result in the
Company being "closely held" within the meaning of Section 856(h) of the Code,
or (iv) cause the Company to own, directly or constructively, 10.0% or more of
the ownership interests in a tenant of the Company's or the Partnership's real
property, within the meaning of Section 856(d)(2)(B) of the Code, will be
designated as "Shares-in-Trust" and transferred automatically to a trust (the
"Share Trust") effective on the day before the purported transfer of such Common
or Preferred Stock. The record holder of the Common or Preferred Stock that are
designated as Shares in Trust (the "Prohibited Owner") will be required to
submit such number of Common or Preferred Stock to the Share Trust for
designation in the name of the Share Trustee. The Share Trustee will be
designated by the Company. The beneficiary of the Share Trust (the
"Beneficiary") will be one or more charitable organizations that are named by
the Company.
Shares-in-Trust will remain issued and outstanding Common or Preferred Stock
and will be entitled to the same rights and privileges as all other shares of
the same class or series. The Share Trust will receive all dividends and
distributions on the Shares-in-Trust and will hold such dividends or
distributions in trust for the benefit of the Beneficiary. The Share Trustee
will vote all Shares-in-Trust. The Share Trustee will designate a permitted
transferee of the Shares-in-Trust, provided that the permitted transferee (i)
purchases such Shares-in-Trust for valuable consideration and (ii) acquires such
Shares-in-Trust without such acquisition resulting in a transfer to another
Share Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required to
repay to the Share Trust the amount of any dividends or distributions received
by the Prohibited Owner (i) that are attributable to any Shares-in-Trust and
(ii) that the record date of which was on or after the date that such shares
became Shares-in-Trust. The Prohibited Owner generally will receive from the
Share Trustee the lesser of (i) the price per share such Prohibited Owner paid
for the Common or Preferred Stock that were designated as Shares-in-Trust (or,
in the case of a gift or devise, the Market Price (as defined below) per share
on the date of such transfer) and (ii) the price per share received by the Share
Trustee from the sale or other disposition of such Shares-in-Trust. Any amounts
received by the Share Trustee in excess of the amounts to be paid to the
Prohibited Owner will be distributed to the Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Shares-in-Trust (or, in the
case of a gift or devise, the Market Price per share on the date of such
transfer) or (ii) the Market Price per
74
<PAGE>
share on the date that the Company, or its designee, accepts such offer. The
Company will have the right to accept such offer for a period of 90 days after
the later of (i) the date of the purported transfer which resulted in such
Shares-in-Trust and (ii) the date the Company determines in good faith that a
transfer resulting in such Shares-in-Trust occurred.
"Market Price" on any date shall mean the average of the Closing Price (as
defined below) for the five consecutive Trading Days (as defined below) ending
on such date. The "Closing Price" on any date shall mean the last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if the Common
or Preferred Stock are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the shares of Common or Preferred Stock are listed or admitted to
trading or, if the shares of Common or Preferred Stock are not listed or
admitted to trading on any national securities exchange, the last quoted price,
or if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotation System or, if such system is no longer in use,
the principal other automated quotations system that may then be in use or, if
the shares of Common or Preferred Stock are not quoted by any such organization,
the average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Common or Preferred Stock as selected by the
Board of Directors. "Trading Day" shall mean a day on which the principal
national securities exchange on which the shares of Common or Preferred Stock
are listed or admitted to trading is open for the transaction of business or, if
the shares of Common or Preferred Stock are not listed or admitted to trading on
any national securities exchange, shall mean any day other than a Saturday, a
Sunday or a day on which banking institutions in the State of New York are
authorized or obligated by law or executive order to close.
Any person who acquires or attempts to acquire Common or Preferred Stock in
violation of the foregoing restrictions, or any person who owned shares of
Common or Preferred Stock that were transferred to a Share Trust, will be
required (i) to give immediately written notice to the Company of such event and
(ii) to provide to the Company such other information as the Company may request
in order to determine the effect, if any, of such transfer on the Company's
status as a REIT.
All persons who own, directly or indirectly, more than 5% (or such lower
percentages as required pursuant to regulations under the Code) of the
outstanding shares of Common and Preferred Stock must within 30 days after
January 1 of each year, provide to the Company a written statement or affidavit
stating the name and address of such direct or indirect owner, the number of
shares of Common and Preferred Stock owned directly or indirectly, and a
description of how such shares are held. In addition, each direct or indirect
stockholder shall provide to the Company such additional information as the
Company may request in order to determine the effect, if any, of such ownership
on the Company's status as a REIT and to ensure compliance with the Ownership
Limit.
The Ownership Limit generally will not apply to the acquisitions of shares
of Common or Preferred Stock by an underwriter that participates in a public
offering of such shares. In addition, the Board of Directors, upon receipt of a
ruling from the Service or an opinion of counsel and upon such other conditions
as the Board of Directors may direct, may exempt a person from the Ownership
Limit under certain circumstances. The foregoing restrictions will continue to
apply until the Board of Directors, with the approval of the holders of at least
two-thirds of the outstanding shares of all votes entitled to vote on such
matter at a regular or special meeting of the stockholders of the Company,
determines to terminate its status as a REIT.
The Ownership Limit will not be automatically removed even if the REIT
provisions of the Code are changed so as to remove any ownership concentration
limitation. Any change of the Ownership Limit would require an amendment to the
Charter. Such amendment requires the affirmative vote of holders holding at
least
75
<PAGE>
two-thirds of the outstanding shares entitled to vote on the matter. In addition
to preserving the Company's status as a REIT, the Ownership Limit may have the
effect of delaying, deferring, discouraging or preventing an acquisition of
control of the Company without the approval of the Board of Directors.
All certificates representing shares of Common or Preferred Stock will bear
a legend referring to the restrictions described above.
BUSINESS COMBINATIONS
The Charter requires that business combinations (as defined) involving the
Company be approved by the affirmative vote of a majority of the voting
stockholders of the Company. A business combination is defined in the Charter as
(i) any merger or consolidation of the Company with or into another entity, (ii)
any share exchange; or (iii) any sale of all or substantially all of the assets
of the Company.
LIMITATIONS ON CHANGES IN CONTROL
The provisions of the Charter and the Bylaws providing for ownership
limitations, a staggered Board of Directors and the authorization of the Board
of Directors to issue Preferred Stock without stockholder approval could have
the effect of delaying, deferring or preventing a change in control of the
Company or the removal of existing management, and as a result could prevent the
stockholders of the Company from being paid a premium for their shares of Common
Stock.
LIMITATION OF LIABILITY OF DIRECTORS; INDEMNIFICATION AGREEMENTS
The Charter provides that a director will not be personally liable for
monetary damages to the Company or its stockholders for breach of fiduciary duty
as a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, or (iii) for any transaction from which the director derived an improper
personal benefit.
The Company intends to enter into indemnification agreements with each of
the Company's officers and directors. The indemnification agreements will
require, among other things, that the Company indemnify its officers and
directors to the fullest extent permitted by law, and advance to the officers
and directors all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. The Company must
also indemnify and advance all expenses incurred by officers and directors
seeking to enforce their rights under the indemnification agreements, and cover
officers and directors under the Company's directors' and officers' liability
insurance. Although the form of indemnification agreement will offer
substantially the same scope of coverage afforded by provisions in the Charter
and the Bylaws, it provides greater assurance to directors and officers that
indemnification will be available, because, as a contract, it cannot be modified
unilaterally in the future by the Board of Directors or by the stockholders to
eliminate the rights it provides.
It is the position of the Securities and Exchange Commission that
indemnification of directors and officers for liabilities arising under the
Securities Act is against public policy and unenforceable pursuant to Section 14
of the Securities Act.
TRANSFER AGENT AND REGISTRAR
The Company will appoint a transfer agent and registrar prior to the
completion of the Offering.
76
<PAGE>
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S CHARTER AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Charter and Bylaws of the Company does not purport to be complete and is subject
to and qualified in its entirety by reference to Maryland law and the Charter
and Bylaws of the Company. Copies of the Charter and Bylaws may be obtained as
described under "Available Information."
MARYLAND BUSINESS COMBINATION LAW
Under the MGCL, certain "business combinations" (including certain issuances
of equity securities) between a Maryland corporation and any Interested
Stockholder or an affiliate thereof are prohibited for five years after the date
on which the Interested Stockholder becomes an Interested Stockholder unless
approved by two super-majority votes of the stockholders. Under the MGCL, an
"Interested Stockholder" includes any individual or entity owning 10% or more of
a corporation's outstanding stock which is entitled to vote generally in the
election of directors ("Voting Stock"). However, as permitted by the statute,
the Board of Directors has elected to exempt the Company from the business
combination provision of the MGCL and, therefore, unless such exemption is
amended or repealed by the Board of Directors, the five-year prohibition and the
super-majority vote requirements described above will not apply to any business
combination between any Interested Stockholder and the Company.
Although the Board of Directors has voted to exempt any business combination
with an Interested Stockholder from the provisions of the business combination
provisions of the MGCL, such exemption may be amended or repealed by the Board
of Directors at any time, except that the exemption may not be repealed or
amended with respect to the Prior Owners and their affiliates. Such action by
the Board of Directors would impose the restrictions of the business combination
provisions of the MGCL on the Company, which could delay, defer or prevent a
transaction or change in control of the Company that might involve a premium
price for the Common Stock or otherwise be in the best interest of the
stockholders or that could otherwise adversely affect the interests of the
stockholders.
CONTROL SHARE ACQUISITIONS
The MGCL also provides that "control shares" (defined below) of a Maryland
corporation acquired in a "control share acquisition" have no voting rights
except to the extent approved by a vote of two-thirds of the votes entitled to
be cast on the matter, excluding shares of stock owned by the acquiror, by
officers or by directors who are employees of the corporation. The control share
provisions of the MGCL do not apply (a) to shares acquired in a merger,
consolidation or share exchange if the corporation is a party to the transaction
or (b) to acquisitions approved or exempted by the corporation's charter or
bylaws. The Bylaws of the Company currently contain a provision exempting from
the control share provisions of the MGCL any and all acquisitions by any person
of the Company's shares of stock and, as a result, the control share provisions
currently do not apply to the Company. There can be no assurance, however, that
such provisions will not be amended or eliminated by the Board of Directors at
any time in the future.
"Control Shares" are voting shares of stock which, if aggregated with all
other such shares of stock previously acquired by the acquiror, or in respect of
which the acquiror is able to exercise or direct the exercise of voting power
(except solely by virtue of a revocable proxy), would entitle the acquiror to
exercise voting power in electing directors within one of the following ranges
of voting power: (i) one-fifth or more but less than one-third, (ii) one-third
or more but less than a majority, or (iii) a majority or more of all voting
power. Thus, if an acquisition of control shares within one range is approved by
stockholders and is followed by an acquisition of additional control shares by
the same person that results in the total number of control shares owned by that
person being in a higher range, then voting rights for the additional shares in
excess of the previously approved range would also have to be approved by the
stockholders. Control shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained stockholder approval.
A "control share acquisition" means the acquisition of control shares, subject
to certain exceptions.
77
<PAGE>
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain limitations, the corporation may redeem any or all of the
control shares (except those for which voting rights have previously been
approved) for fair value determined, without regard to the absence of voting
rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of the stockholders meeting at which the voting
rights of such shares were considered and not approved. If voting rights for
control shares are approved at the stockholders meeting and the acquiror becomes
entitled to vote a majority of the shares, all other stockholders may exercise
appraisal rights. The fair value of the shares as determined for purposes of
such appraisal rights may not be less than the highest price per share paid by
the acquiror in the control share acquisition.
As stated above, the control share provisions of the MGCL do not currently
apply to the Company because the Bylaws of the Company contain a provision
exempting from the control share provisions of the MGCL any and all acquisitions
by any person of the Company's shares of stock. There can be no assurance,
however, that such provision will not be amended or eliminated by the Board of
Directors at any time in the future. Moreover, any amendment or elimination of
such provision of the Bylaws may result in the application of the control share
provisions of the MGCL not only to shares which may be acquired in any future
control share acquisitions, but also to shares acquired in prior control share
acquisitions. The potential for such application of the control share provisions
of the MGCL could delay, defer or prevent a transaction or change in control of
the Company that might involve a premium price for the Company's stock or
otherwise be in the best interest of the stockholders.
INTERESTED DIRECTOR TRANSACTIONS
The MGCL provides that a contract or other transaction between a corporation
and any of its directors or between a corporation and any other entity in which
any of its directors is a director or has a material financial interest is not
void or voidable by reason of such common directorship or interest if: (i) the
fact of the common directorship or interest is disclosed or known to the board
of directors and the board of directors ratifies or approves the contract or
transaction by the affirmative vote of a majority of its disinterested
directors; (ii) the fact of the common directorship or interest is disclosed or
known to the stockholders entitled to vote, and the contract or transaction is
authorized, approved or ratified by a majority of the votes cast by the
stockholders entitled to vote, other than the votes of shares owned of record or
beneficially by the interested director or corporation; or (iii) the contract or
transaction is fair and reasonable to the corporation. In addition, the
Company's Charter contains a provision for approval by the disinterested
directors that is substantially similar to the provision of the MGCL referred to
in clause (i) of the preceding sentence.
AMENDMENTS TO THE CHARTER AND BYLAWS
The Charter provides generally that its provisions may be amended only by
the affirmative vote of a majority of all the votes entitled to be cast on the
matter.
The Bylaws provide that the Board of Directors has the exclusive power to
adopt, alter or repeal any provision of the Bylaws and to make new Bylaws,
except as provided with respect to the provision regarding the exemption from
the control share provision of the MGCL.
78
<PAGE>
SHARES AVAILABLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have outstanding
2,775,000 shares of Common Stock. The shares of Common Stock issued in the
Offering will be freely tradeable by persons other than "affiliates" of the
Company without restriction under the Securities Act of 1933, as amended (the
"Securities Act"), subject to the limitations on ownership set forth in the
Charter. See "Capital Stock -- Restrictions on Ownership." In addition to the
shares of Common Stock issued in the Offering, the Company may issue additional
shares of Common Stock if the Prior Owners exercise their Redemption Rights. The
shares of Common Stock issuable in connection with the exercise of Redemption
Rights will be "restricted" securities within the meaning of Rule 144
promulgated under the Securities Act ("Rule 144") and may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including exemptions contained in Rule 144. In
addition, certain of the shares of Common Stock owned by the Prior Owners may be
subject to limitations on resale under Rule 145 promulgated under the Securities
Act. As described below under "-- Registration Rights," the Company has granted
certain registration rights to the Prior Owners with respect to shares of Common
Stock issuable upon the redemption of their OP Units.
In general, under Rule 144 as currently in effect, if two years have elapsed
since the later of the date of acquisition of restricted shares from the Company
or any "affiliate" of the Company, as that term is defined under the Securities
Act, the acquiror or subsequent holder thereof is entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
the then outstanding Common Stock or the average weekly trading volume of the
Common Stock during the four calendar weeks preceding the date on which notice
of the sale is filed with the Securities and Exchange Commission. Sales under
Rule 144 are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. If three years have elapsed since the date of acquisition of restricted
shares from the Company or from any "affiliate" of the Company, and the acquiror
or subsequent holder thereof is deemed not to have been an affiliate of the
Company at any time during the 90 days preceding a sale, such person would be
entitled to sell such shares in the public market under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, public information
requirements or notice requirements.
Prior to the date of this Prospectus, there has been no public market for
the Common Stock. The Company intends to apply to list the Common Stock on the
New York Stock Exchange. No prediction can be made as to the effect, if any,
that future sales of shares, or the availability of shares for future sale, will
have on the market price prevailing from time to time. Sales of substantial
amounts of Common Stock or the perception that such sales could occur, could
adversely affect prevailing market prices of the Common Stock. See "Risk Factors
- -- Adverse effect of Shares Available for Future Sale on Market Price of Common
Stock."
For a description of certain restrictions on transfers of Common Stock held
by certain stockholders of the Company, see "Underwriting" and "Capital Stock --
Restrictions on Ownership."
REGISTRATION RIGHTS
The Company has agreed to register one year from the completion of the
Offering all of the shares of Common Stock issuable to Prior Owners upon
redemption of their OP Units pursuant to the exercise of their Redemption Rights
and to keep such registration effective for a period of two years. The Company
has the right to delay the filing of the shelf registration statement for a
period of 120 days in the exercise of its reasonable discretion. The Company
also has granted Prior Owners certain "piggyback" registration rights commencing
on the first anniversary of the completion of the Offering.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
regarding the Offering is based on current law, is for general information only
and is not tax advice. This discussion does not purport to deal with all aspects
of taxation that may be relevant to particular stockholders in light of their
personal investment or tax
79
<PAGE>
circumstances, or to certain types of stockholders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
foreign corporations and persons who are not citizens or residents of the United
States) subject to special treatment under the federal income tax laws.
The statements in this discussion and the opinion of O'Melveny & Myers LLP
are based on current provisions of the Code, existing, temporary, and currently
proposed Treasury Regulations promulgated under the Code, the legislative
history of the Code, existing administrative rulings and practices of the
Service, and judicial decisions. No assurance can be given that future
legislative, judicial, or administrative actions or decisions, which may be
retroactive in effect, will not affect the accuracy of any statements in this
Prospectus with respect to the transactions entered into or contemplated prior
to the effective date of such changes.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND
SALE OF THE COMMON STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REAL
ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER
TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
GENERAL. The Company currently has in effect an election to be taxed as a
pass-through entity under subchapter S of the Code, but intends to revoke its S
election of the day prior to the completion of the Offering. The Company plans
to make an election to be taxed as a REIT under Sections 856 through 860 of the
Code, commencing with its short taxable year beginning on the day prior to the
completion of the Offering and ending on December 31, 1997. The Company believes
that, commencing with its initial taxable year, it will be organized and will
operate in such a manner as to qualify for taxation as a REIT under the Code,
and the Company intends to operate in such a manner, but no assurance can be
given that it will operate in a manner so as to qualify or remain qualified as a
REIT.
These sections of the Code are highly technical and complex. The following
sets forth the material aspects of the sections that govern the federal income
tax treatment of a REIT and its stockholders. This summary is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretations thereof. O'Melveny &
Myers LLP has acted as tax counsel to the Company in connection with the
Offering.
In the opinion of O'Melveny & Myers LLP, commencing with the Company's
taxable year ending December 31, 1997, the Company will be organized in
conformity with the requirements for qualification as a REIT, and its proposed
method of operation will enable it to meet the requirements for qualification
and taxation as a REIT under the Code. It must be emphasized that this opinion
is based on various assumptions and is conditioned upon certain representations
made by the Company as to factual matters. In addition, this opinion is based
upon the factual representations of the Company concerning its business and
properties as set forth in this Prospectus and assumes that the actions
described in this Prospectus are completed in a timely fashion. Moreover, such
qualification and taxation as a REIT depends upon the Company's ability to meet,
through actual annual operating results, distribution levels, diversity of stock
ownership, and the various other qualification tests imposed under the Code
discussed below, the results of which will not be reviewed by O'Melveny & Myers
LLP. Accordingly, no assurance can be given that the actual results of the
Company's operation for any particular taxable year will satisfy such
requirements. See "-- Failure to Qualify."
In any year in which the Company qualifies as a REIT, in general it will not
be subject to federal income tax on that portion of its taxable income or
capital gain which is distributed to stockholders. The Company will, however, be
subject to tax at normal corporate rates upon any taxable income or capital gain
not distributed.
Notwithstanding its qualification as a REIT, the Company may also be subject
to taxation in certain other circumstances. If the Company should fail to
satisfy the 75% or the 95% gross income test (as discussed below), and
nonetheless maintains its qualification as a REIT because certain other
requirements are met, it will be
80
<PAGE>
subject to a 100% tax on the greater of the amount by which the Company fails
either the 75% or the 95% test, multiplied by a fraction intended to reflect the
Company's profitability. The Company will also be subject to a tax of 100% on
net income from "prohibited transactions" (which are, in general, certain sales
or other dispositions of property held primarily for sale to customers in the
ordinary course of business, other than foreclosure property) and, if the
Company has (i) net income from the sale or other disposition of "foreclosure
property" (generally, property acquired by reason of a default on indebtedness
or a lease) which is held primarily for sale to customers in the ordinary course
of business or (ii) other non-qualifying income from foreclosure property, it
will be subject to tax on such income from foreclosure property at the highest
corporate rate. In addition, if the Company should fail to distribute during
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain net income for such year, and (iii)
any undistributed taxable income from prior years, the Company would be subject
to a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. The Company may also be subject to the corporate
"alternative minimum tax," on its items of tax preference, as well as tax in
certain situations not presently contemplated.
REQUIREMENTS FOR QUALIFICATION. The Code defines a REIT as a corporation,
trust or association (i) which is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (iii) which would be
taxable as a domestic corporation, but for Sections 856 through 859 of the Code;
(iv) which is neither a financial institution nor an insurance company subject
to certain provisions of the Code; (v) the beneficial ownership of which is held
by 100 or more persons; (vi) during the last half of each taxable year not more
than 50% in value of the outstanding stock of which is owned, directly or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities); and (vii) which meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides that conditions
(i) to (iv), inclusive, must be met during the entire taxable year and that
condition (v) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
Conditions (v) and (vi) will not apply until after the first taxable year for
which an election is made to be taxed as a REIT.
The Company believes that it will have issued sufficient shares pursuant to
the Offering to allow it to satisfy conditions (v) and (vi). In addition, the
Company's Charter provides for restrictions regarding the transfer and ownership
of shares, which restrictions are intended to assist the Company in continuing
to satisfy the share ownership requirements described in (v) and (vi) above.
Such transfer and ownership restrictions are described in "Capital Stock --
Restrictions on Ownership."
The Company currently has two subsidiaries and may have additional
subsidiaries in the future. Code Section 856(i) provides that a corporation that
is a "qualified REIT subsidiary" shall not be treated as a separate corporation,
and all assets, liabilities, and items of income, deduction, and credit of a
"qualified REIT subsidiary" shall be treated as assets, liabilities, and items
of income, deduction, and credit of the REIT. A "qualified REIT subsidiary" is a
corporation, all of the capital stock of which has been held by the REIT at all
times during the period such corporation was in existence. Thus, in applying the
requirements described herein, any "qualified REIT subsidiaries" acquired or
formed by the Company will be ignored, and all assets, liabilities, and items of
income, deduction, and credit of such subsidiaries will be treated as assets,
liabilities and items of income, deduction, and credit of the Company. Each of
the Company's current subsidiaries is a "qualified REIT subsidiary."
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the assets and gross
income of the partnership retain the same character in the hands of the REIT for
purposes of Section 856 of the Code, including satisfying the gross income tests
and the asset tests. Thus, the Company's proportionate share of the assets,
liabilities and items of income of the Operating Partnership will be treated as
assets, liabilities and items of income of the Company for purposes of applying
the requirements described herein. A summary of the rules governing the federal
income taxation of partnerships and their partners is provided below in "Federal
Income Tax Consideration -- Tax Aspects of the Operating Partnership."
81
<PAGE>
INCOME TESTS. In order to qualify and maintain qualification as a REIT, the
Company annually must satisfy three gross income requirements. First, at least
75% of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and, in certain circumstances, interest) or from
certain types of temporary investments. Second, at least 95% of the Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from such real property investments, dividends,
interest and gain from the sale or disposition of stock or securities (or from
any combination of the foregoing). Third, short-term gain from the sale or other
disposition of stock or securities, gain from prohibited transactions and gain
on the sale or other disposition of real property held for less than four years
(apart from involuntary conversions and sales of foreclosure property) must
represent less than 30% of the Company's gross income (including gross income
from prohibited transactions) for each taxable year.
Pursuant to the Participating Leases, the Initial Lessees lease from the
Company the land, buildings, improvements and equipment comprising the Golf
Courses for a 10-year period, with, except in one instance, options to extend
for six additional terms of five years each. The Participating Leases provide
that the Initial Lessees will be obligated to pay to the Company (i) Base Rent
and, if applicable, Participating Rent and (ii) certain other additional
charges.
In order for the Base Rent, the Participating Rent and the additional
charges to constitute "rents from real property," the Participating Leases must
be respected as true leases for federal income tax purposes and not treated as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the Participating Leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties, (ii) the form of the agreement, (iii)
the degree of control over the property that is retained by the property owner
(e.g., whether the lessee has substantial control over the operation of the
property or whether the lessee was required simply to use its best efforts to
perform its obligations under the agreement), and (iv) the extent to which the
property owner retains the risk of loss with respect to the property (e.g.,
whether the lessee bears the risk of increases in operating expenses or the risk
of damage to the property).
In addition, Code Section 7701(e) provides that a contract that purports to
be a service contract (or a partnership agreement) is treated instead as a lease
of property if the contract is properly treated as such, taking into account all
relevant factors, including whether or not: (i) the service recipient is in
physical possession of the property, (ii) the service recipient controls the
property, (iii) the service recipient has a significant economic or possessory
interest in the property (e.g., the property's use is likely to be dedicated to
the service recipient for a substantial portion of the useful life of the
property, the recipient shares the risk that the property will decline in value,
the recipient shares in any appreciation in the value of the property, the
recipient shares in savings in the property's operating costs, or the recipient
bears the risk of damage to or loss of the property), (iv) the service provider
does not bear any risk of substantially diminished receipts or substantially
increased expenditures if there is nonperformance under the contract, (v) the
service provider does not use the property concurrently to provide significant
services to entities unrelated to the service recipient, and (vi) the total
contract price does not substantially exceed the rental value of the property
for the contract period. Since the determination whether a service contract
should be treated as a lease is inherently factual, the presence or absence of
any single factor may not be dispositive in every case.
O'Melveny & Myers LLP is of the opinion that each Participating Lease will
be treated as a true lease for federal income tax purposes. Such opinion is
based, in part, on the following facts: (i) the Operating Partnership and the
Initial Lessees intend for their relationship to be that of a lessor and lessee
and such relationship is documented by lease agreements, (ii) the Initial
Lessees have the right to exclusive possession and use and quiet enjoyment of
the Golf Courses during the term of the Participating Leases, (iii) the Initial
Lessees bear the cost of, and will be responsible for, day-to-day maintenance
and repair of the Golf Courses, other than the cost of certain capital
expenditures, and dictate how the Golf Courses are operated, maintained, and
improved, (iv) the Initial Lessees bear all of the costs and expenses of
operating the Golf Courses (including the cost of any
82
<PAGE>
inventory used in their operation) during the term of the Participating Leases
other than the cost of certain furniture, fixtures and equipment, and certain
capital expenditures), (v) the Initial Lessees benefit from any savings in the
costs of operating the Golf Courses during the term of the Participating Leases,
(vi) in the event of damage or destruction to a Golf Course, the Initial Lessees
are at economic risk because they will be obligated either (A) to restore the
property to its prior condition, in which event they will bear all costs of such
restoration in excess of any insurance proceeds or (B) in certain circumstances,
terminate the Participating Lease, (vii) the Initial Lessees have indemnified
the Operating Partnership against all liabilities imposed on the Operating
Partnership during the term of the Participating Leases by reason of (A) injury
to persons or damage to property occurring at the Golf Courses or (B) the
Initial Lessees' use, management, maintenance or repair of the Golf Courses,
(viii) the Initial Lessees are obligated to pay substantial Base Rent for the
period of use of the Golf Courses, and (ix) the Initial Lessees stand to incur
substantial losses (or reap substantial gains) depending on how successfully
they operate the Golf Courses. Such opinion is also based upon the
representation of the Company to the effect that upon termination of the
Participating Leases (including the optional fixed-rate renewal periods), each
such Golf Course is expected to have a remaining useful life equal to at least
20% of its expected useful life when contributed to the Operating Partnership,
and a fair market value equal to at least 20% of its fair market value when
contributed to the Operating Partnership.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Participating Leases that discuss whether
such leases constitute true leases for federal income tax purposes. Therefore,
the opinion of O'Melveny & Myers LLP with respect to the relationship between
the Operating Partnership and the Initial Lessees is based upon all of the facts
and circumstances and upon rulings and judicial decisions involving situations
that are considered to be analogous. Opinions of counsel are not binding upon
the Service or any court, and there can be no complete assurance that the
Service will not assert successfully a contrary position. If the Participating
Leases are recharacterized as service contracts or partnership agreements,
rather than true leases, part or all of the payments that the Operating
Partnership receives from the Initial Lessees may not be considered rent or may
not otherwise satisfy the various requirements for qualification as "rents from
real property." In that case, the Company likely would not be able to satisfy
either the 75% or 95% gross income tests and, as a result, would lose its REIT
status.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as "rents from real property" in satisfying the gross
income tests if the REIT, or an owner of 10% or more of the REIT, directly or
constructively owns 10% or more of such tenant (a "Related Party Tenant"). No
stockholder is permitted to own, directly or constructively, in excess of 9.8%
of the Common Stock. Third, if rent attributable to personal property, leased in
connection with a lease of real property, is greater than 15% of the total rent
received under the lease, then the portion of rent attributable to such personal
property will not qualify as "rents from real property." Finally, for rents
received to qualify as "rents from real property," the REIT generally must not
operate or manage the property or furnish or render services to the tenants of
such property, other than through an independent contractor from whom the REIT
derives no revenue, provided, however, the Company may directly perform certain
services that are "usually or customarily rendered" in connection with the
rental of space for occupancy only and are not otherwise considered "rendered to
the occupant" of the property. The Company does not and will not (i) charge rent
for any property that is based in whole or in part on the income or profits of
any person (except by reason of being based on a percentage of receipts or
sales, as described above), (ii) rent any property to a Related Party Tenant,
(iii) derive rental income attributable to personal property (other than
personal property leased in connection with the lease of real property, the
amount of which is less than 15% of the total rent received under the lease), or
(iv) perform services considered to be rendered to the occupant of the property,
other than through an independent contractor from whom the Company derives no
revenue.
83
<PAGE>
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will be generally available if the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of these relief provisions. As
discussed above in " General," even if these relief provisions apply, a tax
would be imposed with respect to the excess net income.
ASSET TESTS. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by real
estate assets (including (i) its allocable share of real estate assets held by
partnerships in which the Company owns an interest and (ii) stock or debt
instruments held for not more than one year purchased with the proceeds of a
stock offering or long-term (at least five years) debt offering of the Company),
cash, cash items and government securities. Second, not more than 25% of the
Company's total assets may be represented by securities other than those in the
75% asset class. Third, of the investments not included in the 75% asset class,
the value of any one issuer's securities owned by the Company may not exceed 5%
of the value of the Company's total assets and the Company may not own more than
10% of any one issuer's outstanding voting securities (except for its ownership
interest in the stock of a qualified REIT subsidiary).
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied all of the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets and
the asset requirements either did not exist immediately after the acquisition of
any particular asset or was not wholly or partly caused by such an acquisition
(i.e., the discrepancy arose from changes in the market values of its assets).
If the condition described in clause (ii) of the preceding sentence were not
satisfied, the Company still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the quarter in which it arose.
ANNUAL DISTRIBUTION REQUIREMENTS. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its stockholders in an amount at least equal to (i) the sum of (a) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (b) 95% of the net income
(after tax), if any, from foreclosure property, minus (ii) the sum of certain
items of noncash income. Such distributions must be paid in the taxable year to
which they relate, or in the following taxable year if declared before the
Company timely files its tax return for such year and if paid on or before the
first regular dividend payment after such declaration. To the extent that the
Company does not distribute all of its net capital gain or distributes at least
95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be
subject to tax thereon at regular ordinary and capital gain corporate tax rates.
Furthermore, if the Company should fail to distribute during each calendar year
at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95%
of its REIT capital gain income for such year, and (iii) any undistributed
taxable income from prior periods, the Company will be subject to a 4% excise
tax on the excess of such required distribution over the amounts actually
distributed. The Company intends to make timely distributions sufficient to
satisfy this annual distribution requirement.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses and (ii) the inclusion of such income and deduction of
such expenses in
84
<PAGE>
arriving at taxable income of the Company. In the event that such timing
differences occur, in order to meet the 95% distribution requirement, the
Company may find it necessary to arrange for short-term, or possibly long-term,
borrowings or to pay dividends in the form of taxable stock dividends.
The Company intends to calculate its "REIT taxable income" based upon the
conclusion that the Operating Partnership is the owner for federal income tax
purposes of all of the Golf Courses. As a result, the Company expects that
depreciation deductions with respect to all such Golf Courses will reduce its
"REIT taxable income". This conclusion is consistent with the opinion of
O'Melveny & Myers LLP as described above, which in turn is based upon
representations from the Company as to the expected useful life and future fair
market value of each such Golf Course. If the Service were to successfully
challenge this position, the Company might be deemed retroactively to have
failed to meet the distribution requirement.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends" to
stockholders in a later year, which may be included in the Company's deduction
for dividends paid for the earlier year. Thus, the Company may be able to avoid
being taxed on amount s distributed as deficiency dividends; however, the
Company will be required to pay interest based upon the amount of any deduction
taken for deficiency dividends.
PARTNERSHIP ANTI-ABUSE RULE
The United States Treasury Department has issued a regulation (the
"Anti-Abuse Rule") under the partnership provisions of the Code (the
"Partnership Provisions") that authorizes the Service, in certain "abusive"
transactions involving partnerships, to disregard the form of the transaction
and recast it for federal tax purposes as the Service deems appropriate. The
Anti-Abuse Rule applies where a partnership is formed or utilized in connection
with a transaction (or series of related transactions) with a principal purpose
of substantially reducing the present value of the partners' aggregate federal
tax liability in a manner inconsistent with the intent of the Partnership
Provisions. The Anti-Abuse Rule states that the Partnership Provisions are
intended to permit taxpayers to conduct joint business (including investment)
activities through a flexible economic arrangement that accurately reflects the
partners' economic agreement and clearly reflects the partners' income without
incurring any entity-level tax. The purposes for structuring a transaction
involving a partnership are determined based on all of the facts and
circumstances, including a comparison of the purported business purpose for a
transaction and the claimed tax benefits resulting from the transaction. A
reduction in the present value of the partners' aggregate federal tax liability
through the use of a partnership does not, by itself, establish inconsistency
with the intent of the Partnership Provisions.
The Anti-Abuse Rule contains an example in which a corporation that elects
to be treated as a REIT contributes substantially all of the proceeds from a
public offering to a partnership in exchange for a general partner interest. The
limited partners of the partnership contribute real property assets to the
partnership, subject to liabilities that exceed their respective aggregate bases
in such property. In addition, some of the limited partners have the right,
beginning two years after the formation of the partnership, to require the
redemption of their limited partnership interests in exchange for cash or REIT
stock (at the REIT's option) equal to the fair market value of their respective
interests in the partnership at the time of the redemption. The example
concludes that the use of the partnership is not inconsistent with the intent of
the Partnership Provisions and, thus, cannot be recast by the Service. Based on
the foregoing, O'Melveny & Myers LLP is of the opinion that the Anti-Abuse Rule
will not have any adverse impact on the Company's ability to qualify as a REIT.
However, the Anti-Abuse Rule is extraordinarily broad in scope and is applied
based on an analysis of all of the facts and circumstances. As a result, there
can be no assurance that the Service will not attempt to apply the Anti-Abuse
Rule to the Company. If the conditions of the Anti-Abuse Rule are met, the
Service is authorized to take appropriate enforcement action, including
disregarding the Operating Partnership for federal tax purposes or treating one
or more of its partners as nonpartners. Any such action potentially could
jeopardize the Company's status as a REIT.
85
<PAGE>
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will they be
required to be made. In such event, to the extent of current and accumulated
earnings and profits, all distributions to stockholders will be taxable as
ordinary income, and, subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, the Company will also be
disqualified from taxation as a REIT for the four taxable years following the
year during which qualification was lost. It is not possible to state whether in
all circumstances the Company would be entitled to such statutory relief.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable domestic stockholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be taken into
account by them as ordinary income and will not be eligible for the dividends
received deduction for corporations. Distributions that are designated as
capital gain dividends will be taxed as long-term capital gain (to the extent
they do not exceed the Company's actual net capital gain for the taxable year)
without regard to the period for which the stockholder has held its stock.
However, corporate stockholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Distributions in excess of current
and accumulated earnings and profits will not be taxable to a stockholder to the
extent that they do not exceed the adjusted basis of the stockholder's shares,
but rather will reduce the adjusted basis of such shares. To the extent that
such distributions exceed the adjusted basis of a stockholder's shares they will
be included in income as long-term capital gain (or short-term capital gain if
the shares have been held for one year or less) assuming the shares are a
capital asset in the hands of the stockholder. In addition, any dividend
declared by the Company in October, November or December of any year payable to
a stockholder of record on a specified date in any such month shall be treated
as both paid by the Company and received by the stockholder on December 31 of
such year, provided that the dividend is actually paid by the Company during
January of the following calendar year. Stockholders may not include in their
individual income tax returns any net operating losses or capital losses of the
Company.
In general, any loss upon a sale or exchange of shares by a stockholder who
has held such shares for six months or less (after applying certain holding
period rules), will be treated as a long-term capital loss to the extent of
distributions from the Company required to be treated by such stockholder as
long-term capital gain.
BACKUP WITHHOLDING
The Company will report to its domestic stockholders and the Service the
amount of dividends paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a stockholder may be
subject to backup withholding at the rate of 31% with respect to dividends paid
unless such holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (b) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A stockholder that does not provide the Company with his
correct taxpayer identification number may also be subject to penalties imposed
by the Service. Any amount paid as backup withholding will be creditable against
the stockholder's income tax liability. In addition, the Company may be required
to withhold a portion of capital gain distributions made to any stockholders who
fail to certify their non-foreign status to the Company. The Service issued
proposed regulations in April 1996 that would alter the technical requirements
relating to backup withholding compliance as applied to foreign stockholders.
See "-- Taxation of Foreign Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
In Revenue Ruling 66-106, 1966-1 C.B. 151, the Service ruled that amounts
distributed by a REIT to a tax-exempt employees' pension trust did not
constitute "unrelated business taxable income" ("UBTI"). Revenue
86
<PAGE>
rulings are interpretive in nature and subject to revocation or modification by
the Service. However, based upon Revenue Ruling 66-106 and the analysis therein,
distributions by the Company to a stockholder that is a tax-exempt entity should
not constitute UBTI, provided that the tax-exempt entity has not financed the
acquisition of its shares with "acquisition indebtedness" within the meaning of
the Code and the shares are not otherwise used in an unrelated trade or business
of the tax-exempt entity.
TAXATION OF FOREIGN STOCKHOLDERS
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. Prospective
Non-U.S. Stockholders should consult with their own tax advisors to determine
the impact of federal, state and local income tax laws with regard to an
investment in shares, including any reporting requirements.
Distributions by the Company that are not attributable to gain from sales or
exchanges by the Company of United States real property interests and not
designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions, ordinarily,
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the Common Stock is treated as
effectively connected with the conduct by the Non-U.S. Stockholder of a United
States trade or business, the Non-U.S. Stockholder generally will be subject to
a tax at graduated rates, in the same manner as U.S. stockholders are taxed with
respect to such dividends (and may also be subject to the 30% branch profits tax
in the case of a Non-U.S. Stockholder that is a foreign corporation). The
Company expects to withhold United States income tax at the rate of 30% on the
gross amount of any such dividends made to a Non-U.S. Stockholders unless (i) a
lower treaty rate applies or (ii) the Non-U.S. Stockholder files an Service Form
4224 with the Company certifying that the investment to which the distribution
relates is effectively connected to a Untied States trade or business of such
Non-U.S. Stockholder. Lower treaty rates applicable to dividend income may not
necessarily apply to dividends from a REIT, however. The Service issued proposed
regulations in April 1996 that would modify the manner in which the Company
complies with the withholding requirements. Distributions in excess of current
and accumulated earnings and profits of the Company will not be taxable to a
stockholder to the extent that they do not exceed the adjusted basis of the
stockholder's shares, but rather will reduce the adjusted basis of such shares.
To the extent that such distributions exceed the adjusted basis of a Non-U.S.
Stockholder's shares, they will give rise to tax liability if the Non-U.S.
Stockholder otherwise is subject to tax on any gain from the sale or disposition
of his shares in the Company (as described below). If it cannot be determined at
the time a distribution is made whether or not such distribution will be in
excess of current and accumulated earnings and profits, the distribution will be
subject to withholding at the same rate applicable to dividends. However,
amounts thus withheld are refundable if it is subsequently determined that such
distribution was, in fact, in excess of current and accumulated earnings and
profits of the Company.
In August 1996, the U.S. Congress passed the Small Business Job Protection
Act of 1996, which requires the Company to withhold 10% of any distribution in
excess of the Company's current and accumulated earnings and profits. That
statute is effective for distributions made after August 20, 1996. Consequently,
although the Company intends to withhold at a rate of 30% on the entire amount
of any distribution, to the extent that the Company does not do so, any portion
of a distribution not subject to withholding at a rate of 30% will be subject to
withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of United States
real property interests will be taxed to a Non-U.S. Stockholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980, as
amended ("FIRPTA"). Under FIRPTA, these distributions are taxed to a Non-U.S.
Stockholder as if such gain were effectively connected with a United States
trade or business. Non-U.S. Stockholders would thus be taxed at the same capital
gain rates applicable to U.S. stockholders (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals). Also, distributions subject to FIRPTA may be subject
87
<PAGE>
to a 30% branch profits tax in the hands of a foreign corporate stockholder not
entitled to treaty relief or exemption. The Company is required by applicable
Treasury Regulations to withhold 35% of any distribution that could be
designated by the Company as a capital gains dividend. This amount is creditable
against the Non-U.S. Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of shares generally
will not be taxed under FIRPTA if the Company is a "domestically controlled
REIT," defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the stock was held directly or
indirectly by foreign persons. It is currently anticipated that the Company will
be a "domestically controlled REIT," and therefore the sale of shares will not
be subject to taxation under FIRPTA. However, because the shares will be
publicly-traded, no assurance can be given that the Company will continue to be
a "domestically-controlled REIT." In addition, gain not subject to FIRPTA will
be taxable to a Non-U.S. Stockholder if (i) investment in the shares is
effectively connected with the Non-U.S. Stockholder's United States trade or
business, in which case the Non-U.S. Stockholder will be subject to the same
treatment as U.S. stockholders with respect to such gain (except that a
stockholder that is a foreign corporation may also be subject to the 30% branch
profits tax), or (ii) the Non-U.S. Stockholder is a nonresident alien individual
who was present in the United States for 183 days or more during the taxable
year and has a "tax home" in the United States, in which case the nonresident
alien individual will be subject to a 30% tax on the individual's capital gains.
If the gain on the sale of shares were to be subject to taxation under FIRPTA,
the Non-U.S. Stockholder will be subject to the same treatment as U.S.
stockholders with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals and, in the case of foreign corporations, subject to the
possible application of the 30% branch profits tax).
STATE AND LOCAL TAXES
The Company, any of its subsidiaries, the Operating Partnership or the
Company's stockholders may be subject to state and local tax in various states
and localities, including those states and localities in which it or they
transact business, own property, or reside. The state tax treatment of the
Company and the stockholders in such jurisdictions may differ from the federal
income tax treatment described above. Consequently, prospective stockholders
should consult their own tax advisors regarding the effect of state and local
tax laws upon an investment in the Common Stock.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
The following discussion summarizes certain federal income tax
considerations applicable to the Company's investment in the Operating
Partnership. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
CLASSIFICATION AS A PARTNERSHIP. The Company will be entitled to include in
its income its distributive share of the Operating Partnership's income and to
deduct its distributive share of the Operating Partnership's losses only if the
Operating Partnership is classified for federal income tax purposes as a
partnership rather than as a corporation or an association taxable as a
corporation. An organization formed as a partnership will be treated as a
partnership, rather than as a corporation, for federal income tax purposes if
(i) it has no more than two of the four corporate characteristics that the
Treasury Regulations use to distinguish a partnership from a corporation for tax
purposes (continuity of life, centralization of management, limited liability,
and free transferability of interests); and (ii) it is not treated as a
corporation by virtue of being classified as a "publicly traded partnership."
The Operating Partnership will not request a ruling from the Service that it
will be classified as a partnership for federal income tax purposes. Instead, at
the Closing, O'Melveny & Myers LLP will deliver its opinion that, based on the
provisions of the Partnership Agreement, certain factual assumptions and certain
representations described in the opinion, the Operating Partnership will be
treated for federal income tax purposes as a partnership and not as an
association taxable as a corporation. Unlike a tax ruling, an opinion of counsel
is not binding upon the Service, and no assurance can be given that the Service
will not challenge the status of the Operating Partnership as a partnership for
federal income tax purposes. If such challenge were
88
<PAGE>
sustained by a court, the Operating Partnership would be treated as a
corporation for federal income tax purposes, as described below. In addition,
the opinion of O'Melveny & Myers LLP is based on existing law, which is to a
great extent the result of administrative and judicial interpretation. No
assurance can be given that administrative or judicial changes would not modify
the conclusions expressed in the opinion.
Under Section 7704 of the Code, a partnership is treated as a corporation
for federal income tax purposes if it is a "publicly traded partnership" (except
in situations in which 90% or more of the partnership's gross income is of a
specified type). A partnership is deemed to be publicly traded if its interests
are either (i) traded on an established securities market, or (ii) readily
tradable on a secondary market (or the substantial equivalent thereof). While
the OP Units will not be traded on an established securities market, they could
possibly be deemed to be traded on a secondary market or its equivalent due to
the Redemption Rights enabling the partners to dispose of their Units.
The Treasury Department recently issued regulations (the "PTP Regulations")
governing the classification of partnerships under Section 7704. These
regulations provide that the classification of partnerships is generally based
on a facts and circumstances analysis. However, the regulations also provide
limited "safe harbors" which preclude publicly traded partnership status.
Pursuant to one of those safe harbors, interests in a partnership will not be
treated as readily tradable on a secondary market or the substantial equivalent
thereof if (i) all interests in the partnership were issued in a transaction (or
transactions) that was not required to be registered under the Securities Act,
and (ii) the partnership does not have more than 100 partners at any time during
the partnership's taxable year. In determining the number of partners in a
partnership for this purpose, a person owning an interest in a flowthrough
entity (i.e., a partnership, grantor trust, or S corporation) that owns an
interest in the partnership is treated as a partner in such partnership only if
(x) substantially all of the value of the person's interest in the flow-through
entity is attributable to the flow-through entity's interest (direct or
indirect) in the partnership and (y) a principal purpose of the use of the
tiered arrangement is to permit the partnership to satisfy the 100-partner
limitation.
The Operating Partnership is expected to have less than 100 partners
(including persons owning interests through flow-through entities). The
Operating Partnership has not issued any OP Units required to be registered
under the Securities Act. Thus, the Operating Partnership presently qualifies
for the safe harbors provided in the PTP Regulations. If the Operating
Partnership were to have more than 100 partners (including, in certain
circumstances, persons owning interests through flow-through entities), it
nevertheless would be treated as a partnership for federal income tax purposes
(rather than an association taxable as a corporation) if at least 90% of its
gross income in each taxable year (commencing with the year in which it is
treated as a publicly traded partnership) consists of "qualifying income" with
the meaning of Section 7704(c)(2) of the Code (including interest, dividends,
"real property rents" and gains from the disposition of real property (the "90%
Passive-Type Income Exception"). Because of the substantial ownership of the
Operating Partnership by the Initial Lessees (or their affiliates), the
Operating Partnership currently would not be eligible for the 90% Passive-Type
Income Exception. Thus, if the Operating Partnership were to have more than 100
partners (including, in certain circumstances, persons owning interests through
flow-through entities), the Company would be required to place appropriate
restrictions on the ability of the Limited Partners to exercise their Redemption
Rights as and if deemed necessary to ensure that the Operating Partnership does
not constitute a publicly traded partnership. However, there is no assurance
that the Operating Partnership will at all times in the future be able to avoid
treatment as a publicly traded partnership. The opinion of O'Melveny & Myers LLP
as to the classification of the Partnership is based on an assumption that the
Operating Partnership will continue to fall within a safe harbor from publicly
traded partnership status.
If for any reason the Operating Partnership were taxable as a corporation,
rather than as a partnership, for federal income tax purposes, the Company would
not be able to satisfy the income and asset requirements for REIT status. See
"Federal Income Tax Considerations -- Requirements for Qualification -- Income
Tests" and "-- Requirements for Qualification -- Asset Tests." In addition, any
change in the Operating Partnership's status for tax purposes might be treated
as a taxable event, in which case the Company might incur a tax liability
89
<PAGE>
without any related cash distribution. See "Federal Income Tax Considerations --
Requirements for Qualification -- Distribution Requirements." Further, items of
income and deduction of the Operating Partnership would not pass through to its
partners, and its partners would be treated as stockholders for tax purposes.
Consequently, the Operating Partnership would be required to pay income tax at
corporate tax rates on its net income, and distributions to its partners would
constitute dividends that would not be deductible in computing the Operating
Partnership's taxable income.
The following discussion assumes that the Operating Partnership will be
treated as a partnership for federal income tax purposes.
PARTNERSHIP ALLOCATIONS. Although a partnership agreement will generally
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes if they do not comply with the provisions
of Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder. Generally, Section 704(b) and the Treasury Regulations promulgated
thereunder require that partnership allocations respect the economic arrangement
of the partners.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners with respect to such item. The Operating Partnership's allocations of
taxable income and loss are intended to comply with the requirements of Section
704(b) of the Code and the Treasury Regulations promulgated thereunder.
TAX ALLOCATIONS WITH RESPECT TO THE GOLF COURSES. Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to appreciated
or depreciated property (such as the Golf Courses) that is contributed to a
partnership in exchange for an interest in the partnership must be allocated in
a manner such that the contributing partner is charged with, or benefits from,
respectively, the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of such unrealized gain or
unrealized loss is generally equal to the difference between the fair market
value of contributed property at the time of contribution and the adjusted tax
basis of such property at the time of contribution (a "Book-Tax Difference").
Such allocations are solely for federal income tax purposes and do not affect
the book capital accounts or other economic or legal arrangements among the
partners. The Operating Partnership was formed by way of contributions of
appreciated property (including the Golf Courses). Consequently, the Partnership
Agreement will require such allocations to be made in a manner consistent with
Section 704(c) of the Code.
In general, the Prior Owners will be allocated depreciation deductions for
tax purposes which are lower than such deductions would be if determined on a
pro rata basis. In addition, in the event of the disposition of any of the
contributed assets (including the Golf Courses) which have a Book-Tax
Difference, all income attributable to such Book-Tax Difference will generally
be allocated to the Prior Owners and the Company will generally be allocated
only its share of capital gains attributable to appreciation, if any, occurring
after the closing of the Offering. This will tend to eliminate the Book-Tax
Difference over the life of the Operating Partnership. However, the special
allocation rules of Section 704(c) do not always entirely eliminate the Book-Tax
Difference on an annual basis or with respect to a specific taxable transaction
such as a sale. Thus, the carryover basis of the contributed assets in the hands
the Operating Partnership will cause the Company to be allocated lower
depreciation and other deductions, and possibly an amount of taxable income in
the event of a sale of such contributed assets in excess of the economic or book
income allocated to it as a result of such sale. This may cause the Company to
recognize taxable income in excess of cash proceeds, which might adversely
affect the Company's ability to comply with the REIT distribution requirements.
See "-- Taxation of the Company -- Annual Distribution Requirements." The
foregoing principles also apply in determining the earnings and profits of the
Company for purposes of determining the portion of distributions taxable as
dividend income. The application of these rules over time may result in a higher
portion of distributions being taxed as dividends than would have occurred had
the Company purchased the contributed assets at their agreed values.
The Treasury Regulations under Section 704(c) of the Code allow partnerships
to use any reasonable method of accounting for Book-Tax Differences so that the
contributing partner receives the tax benefits and
90
<PAGE>
burdens of any built-in gain or loss associated with the contributed property.
The Operating Partnership has determined to use the "traditional method" (which
is specifically approved in the Treasury Regulations) for accounting for
Book-Tax Differences with respect to the properties initially contributed to it.
The Operating Partnership has not determined which of the alternative
methods of accounting for Book-Tax Differences will be elected with respect to
any properties contributed to it in the future.
BASIS IN OPERATING PARTNERSHIP INTEREST. The Company's adjusted tax basis
in its interest in the Operating Partnership generally (i) will be equal to the
amount of cash and the basis of any other property contributed to the Operating
Partnership by the Company, (ii) will be increased by (a) its allocable share of
the Operating Partnership's income and (b) its allocable share of indebtedness
of the Operating Partnership and (iii) will be reduced, but not below zero, by
the Company's allocable share of (a) losses suffered by the Operating
Partnership, (b) the amount of cash distributed to the Company and (c) by
constructive distributions resulting from a reduction in the Company's share of
indebtedness of the Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss exceeds the adjusted tax basis of the Company's partnership
interest in the Operating Partnership, the recognition of such excess loss will
be deferred until such time and to the extent that the Company has adjusted tax
basis in its interest in the Operating Partnership. To the extent that the
Operating Partnership's distributions, or any decrease in the Company's share of
the indebtedness of the Operating Partnership (such decreases being considered a
cash distribution to the partners), exceeds the Company's adjusted tax basis,
such excess distributions (including such constructive distributions) constitute
taxable income to the Company. Such taxable income will normally be
characterized as a capital gain, and if the Company's interest in the Operating
Partnership has been held for longer than the long-term capital gain holding
period (currently one year), the distributions and constructive distributions
will constitute long-term capital gain. Under current law, capital gains and
ordinary income of corporations are generally taxed at the same marginal rates.
SALE OF THE GOLF COURSES. The Company's share of any gain realized by the
Operating Partnership on the sale of any property held by the Operating
Partnership as inventory or other property held primarily for sale to customers
in the ordinary course of the Operating Partnership's trade or business will be
treated as income from a prohibited transaction that is subject to a 100%
penalty tax. See "-- Requirements for Qualification -- Income Tests." Such
prohibited transaction income may also have an adverse effect upon the Company's
ability to satisfy the income tests for qualification as a REIT. See "--
Requirements for Qualification -- Income Tests." Under existing law, whether
property is held as inventory or primarily for sale to customers in the ordinary
course of a partnership's trade or business is a question of fact that depends
on all the facts and circumstances with respect to the particular transaction.
The Operating Partnership intends to hold the Golf Courses for investment with a
view to long-term appreciation, to engage in the business of acquiring,
developing, owning, and operating the Golf Courses (and other golf courses) and
to make such occasional sales of the Golf Courses, including peripheral land, as
are consistent with the Operating Partnership's investment objectives.
91
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC and Wheat, First Securities, Inc. (the
"Representatives"), have severally agreed with the Company, subject to the terms
and conditions of the Underwriting Agreement, to purchase the numbers of shares
of Common Stock set forth opposite their respective names below. The
Underwriters are committed to purchase and pay for all such shares if any are
purchased.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ---------------------------------------------------------------------------- ----------------
<S> <C>
Robertson, Stephens & Company LLC...........................................
Wheat, First Securities, Inc................................................
--------
Total................................................................. 2,775,000
--------
--------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the Offering Price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession of not in excess of $ per share, of which $ may be
reallowed to other dealers. After the Offering, the Offering Price, concession
and reallowance to dealers may be reduced by the Representatives. No such
reduction shall change the amount of proceeds to be received by the Company as
set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 416,250
additional shares of Common Stock, at the same price per share as the Company
will receive for the 2,775,000 shares that the Underwriters have agreed to
purchase from the Company. To the extent that the Underwriters exercise this
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage of such additional shares that the number of
shares of Common Stock to be purchased by it shown in the above table represents
as a percentage of the 2,775,000 shares offered hereby. If purchased, such
additional shares will be sold by the Underwriters on the same terms as those on
which the 2,775,000 shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.
The Company has agreed with the Representatives for a period of 180 days
after the consummation of the Offering, subject to certain exceptions, not to
offer to sell, contract to sell, or otherwise sell, dispose of, or grant any
rights with respect to any shares of Common Stock, any options or warrants to
purchase any shares of Common Stock, or any securities convertible into or
exchangeable for shares of Common Stock other than the Company's sales of shares
in the Offering, and the Company's issuance of options and stock under the
Directors' Plan without the prior written consent of Robertson, Stephens &
Company LLC. In addition, Mr. Young and each of the officers of the Company have
agreed that, for a period of 18 months following the completion of the Offering,
they and their affiliates will not, without prior written consent of Robertson,
Stephens & Company LLC, subject to certain exceptions, issue, sell, contract to
sell, or otherwise dispose of, any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock or any securities convertible
into, exercisable for or exchangeable for shares of Common Stock. At the
expiration of such 18 month period, transfers of 50% of any such securities held
by such officers and Mr. Young shall continue to be restricted until 30 months
following the completion of the Offering. Robertson, Stephens & Company LLC may,
in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements.
92
<PAGE>
Prior to the completion of the Offering, there has been no public market for
the Common Stock of the Company. Consequently, the Offering Price is being
determined through negotiations among the Company and the Representatives. Among
the factors considered in such negotiations are prevailing market conditions,
certain financial information of the Company, market valuations of other
companies that the Company and the Representatives believe to be comparable to
the Company, estimates of the business potential of the Company, the present
state of the Company's development and other factors deemed relevant.
The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
EXPERTS
The balance sheet of the Company as of November 8, 1996 and the consolidated
financial statements of Northgate Country Club as of December 20, 1995 and 1994
and for each of three fiscal years ended in the period ended December 20, 1995
included in the Prospectus have been so included in reliance on the reports of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The combined financial statements of the Legends Golf and the individual
financial statements of Golf Legends, Ltd., Heritage Golf Club, Ltd., Seaside
Resorts, Ltd. and Legends of Virginia, LC appearing in this Prospectus and
Registration Statement for the fiscal years ended December 31, 1995, 1994, and
1993 have been audited by BDO Seidman, LLP, independent auditors, as set forth
in their reports appearing elsewhere herein and are included in reliance upon
such report given the authority of such firm as experts in accounting and
auditing.
The financial statements of Bright's Creek Development, LLC (current owner
of The Woodlands) appearing in this Prospectus and Registration Statement as of
June 30, 1996 and December 31, 1995 and 1994, and for the six months ended June
30, 1996 and 1995, the year ended December 31, 1995, and the period from
inception (May 17, 1994) through December 31, 1994 have been audited by Coopers
& Lybrand L.L.P., independent accountants, as set forth in their report
appearing elsewhere herein and are included in reliance upon such report given
the authority of such firm as experts in accounting and auditing.
The combined financial statements of Olde Atlanta Golf Club Limited
Partnership appearing in this Prospectus and Registration Statement for the
fiscal years ended December 31, 1995 and 1994 have been audited by Crowe, Chizek
and Company LLP, independent auditors, as set forth in their reports appearing
elsewhere herein and are included in reliance upon such report given the
authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by O'Melveny & Myers LLP, San Francisco, California, and
certain legal matters will be passed upon for the Underwriters by Hunton &
Williams. O'Melveny & Myers LLP and Hunton & Williams will rely as to all
matters of Maryland law on the opinion of Ballard Spahr Andrews & Ingersoll,
Baltimore, Maryland. In addition, the description of federal income tax
consequences contained in this Prospectus entitled "Federal Income Tax
Considerations" is based upon the opinion of O'Melveny & Myers LLP.
93
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement on Form S-11 under the
Securities Act of 1933, as amended (the "Securities Act"), and the rules and
regulations promulgated thereunder, with respect to the Common Stock offered
pursuant to this Prospectus. This Prospectus, which is part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits. For further information concerning the Company and
the Common Stock offered hereby, reference is made to the Registration Statement
and the exhibits and schedules filed therewith, which may be examined without
charge at, or copies obtained upon payment of prescribed fees from, the
Commission and its regional offices at the locations listed above. Any
statements contained herein concerning the provisions of any document are not
necessarily complete, and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement or otherwise
filed with the Commission. Each such statement is qualified in its entirety by
such reference.
For further information with respect to the Company and the Common Stock,
reference is made to the Registration Statement and such exhibits and schedules,
copies of which may be examined without charge at, or copies obtained upon
payment of prescribed fees from, the Public Reference Section of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also
be available for inspection and copying at the regional offices of the
Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048
and at Northwestern Atrium Center, Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661-2511.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files, reports, proxy statements and other information filed by the
Company can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at regional offices of the Commission located
at 7 World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Corp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material can be obtained by mail from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Company intends to include in such reports annual audited
and quarterly unaudited financial statements for those Initial Lessees
contributing a material portion of the revenue of the Company. The Commission
also maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission, including the Company, and the address is
http://www.sec.gov.
The Company intends to furnish to its stockholders annual reports containing
audited financial statements examined by its independent public accountants and
quarterly reports containing unaudited financial information for the first three
quarters of each fiscal year.
94
<PAGE>
GLOSSARY
Unless the context otherwise requires, the following capitalized terms shall
have the meanings set forth below for the purposes of this Prospectus:
"ADA" means the Americans with Disabilities Act of 1990, as amended.
"ANTI-ABUSE RULE" means the regulation that authorizes the Service, in
certain "abusive" transactions involving partnerships, to disregard the form of
the transaction and recast it for federal tax purposes as the Service deems
appropriate.
"ADVISORY ASSOCIATION" means the association of Initial Lessees, established
to facilitate the cross-marketing of the Golf Courses and to promote awareness
of the Golf Courses.
"AUDIT COMMITTEE" means the committee established by the Board of Directors
to make recommendations concerning the Company's accounting practices, including
the engagement and review of independent public accountants.
"BASE RENT" means the fixed base rent payable under the Participating
Leases.
"BASE RENT ESCALATOR" means the lesser of 3% or 200% of the change in the
CPI, calculated annually.
"BOARD OF DIRECTORS" means the board of directors of the Company.
"BOOK-TAX DIFFERENCES" means the difference between the fair market value of
property contributed to a partnership and the adjusted tax basis of such
property at the time of contribution.
"BUILT-IN GAIN" means the difference between the fair market value and the
adjusted basis of a Built-in Gain Asset as determined by the Operating
Partnership in consultation with the REIT and with the advice of counsel.
"BUILT-IN GAIN ASSET" means an asset acquired by the Company in certain
transactions from a corporation which is or has been a C corporation.
"BUSINESS COMBINATIONS" means any business combination as defined in the
Charter.
"BYLAWS" means the bylaws of the Company, as amended.
"CAPITAL REPLACEMENT FUND" means the fund established by the Company in
amounts ranging from 2% to 3% of Gross Golf Revenue at each Golf Course, to fund
capital expenditures.
"CASH AVAILABLE FOR DISTRIBUTION" means net income (loss) computed in
accordance with generally accepted accounting principles of the Company plus
depreciation and amortization and minority interest minus capital expenditures
and principal payments on indebtedness.
"CHARTER" means the Articles of Incorporation of the Company.
"CODE" means Internal Revenue Code of 1986, as amended.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means common stock, par value $.01 per share, of the Company.
"COMPANY" means Golf Trust of America, Inc., a Maryland corporation.
"COMPENSATION COMMITTEE" means the committee established by the Board of
Directors to determine compensation for the Company's executive officers.
"CPI" means the United States Consumer Price Index, All Urban Consumers,
U.S. City Average, All Items (1982-84 = 100).
95
<PAGE>
"DAILY FEE" means those Golf Courses that are open to the public and
generate revenues principally through green fees, golf cart rentals, merchandise
sales, driving range charges, and food and beverage operations.
"DIRECTORS' PLAN" means the Company's Non-Employee Directors' Incentive
Plan.
"DISQUALIFIED PERSONS" means persons who have specified relationships with
Plans.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXPANSION FACILITIES" means the planned expansion of the Northgate Country
Club course (nine additional holes), and new clubhouse to be constructed at The
Woodlands.
"EXTENDED TERMS" means each Initial Lessee's option to extend the term of
each Participating Lease for up to six five-year terms, subject to earlier
termination upon the occurrence of certain contingencies described in the
Participating Lease.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"FIXED TERM" means the initial term of each Participating Lease of 10 years.
"FORMATION TRANSACTIONS" means the series of transactions described in "The
Formation Transactions" in this Prospectus.
"GTA GP" means GTA GP, Inc., a wholly-owned subsidiary of the Company.
"GTA LP" means GTA LP, Inc., a wholly-owned subsidiary of the Company.
"GOLF COURSES" means the 10 golf courses to be acquired by the Company in
the Formation Transactions.
"GROSS GOLF REVENUE" means all revenues received from or by reason of a Golf
Course including revenues from memberships, initiation fees, dues, greens fees,
fees to reserve tee time, golf related guest fees, golf cart rental and
surcharges, fees and other charges paid to sponsors of any golf tournament;
provided, however, that Gross Golf Revenue does not include revenue relating to
food and beverage operations, golf professional shops, parking, fitness centers,
tennis facilities, locker rentals, bag storage, video games, vending machines,
fees paid by the providers of golf lessons, certain uncollectible amounts
relating to sales or excise taxes, uncollectible debts (i.e., checks and
charges), interest paid by customers for the extension of credit and certain
other revenues relating to marketing programs, refunds and employees.
"INDEPENDENT DIRECTORS" means the directors who are unaffiliated with the
Prior Owners and the Initial Lessees and are not officers or employees of the
Company.
"INITIAL LESSEES" means the seven separate lessees entering into the
Participating Leases.
"INITIAL LESSEE IMPROVEMENTS" means alteration, additions, changes and/or
improvements made by each Initial Lessee at its sole cost and expense, with the
Company's prior written consent.
"LEASE PAYMENT" means the rent payable to the Company under the
Participating Leases, consisting of the Base Rent plus any Participating Rent.
"LEASED PROPERTY" means the Company's interest in each Golf Course,
including land, buildings and improvements, related easements and rights, and
fixtures.
"LEGENDS GROUP" means The Legends Group, headquartered in Myrtle Beach,
South Carolina and its affiliates and predecessors which are in business of
owning and operating golf courses.
"LEGENDS LESSEE" means the Initial Lessees which are affiliates of The
Legends Group and will lease the Golf Courses contributed by The Legends Group.
96
<PAGE>
"LIMITED PARTNERS" means the limited partners of the Operating Partnership,
initially GTA LP, the Prior Owners and certain officers of the Company.
"LINE OF CREDIT" means the line of credit for which the Company is seeking a
commitment, which the Company expects to obtain following the Offering, to be
utilized primarily to fund the acquisition of additional golf courses by the
Company.
"NGF" means the National Golf Foundation, an industry trade association.
"NON-U.S. STOCKHOLDERS" means nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign stockholders.
"OFFERING" means the offering of up to 3,191,250 shares of Common Stock of
the Company, including the 416,250 shares subject to the Underwriters'
over-allotment option.
"OP UNITS" means units of limited partnership interest in the Operating
Partnership held by the Limited Partners other than GTA LP.
"OPERATING PARTNERSHIP" means Golf Trust of America Partnership, L.P., a
Delaware limited partnership.
"OPTION AGREEMENT" means the Option to Purchase and Right of First Refusal
Agreement between the Company and The Legends Group, pursuant to which the
Company will have an option and right of first refusal to purchase any golf
courses currently owned or subsequently acquired or developed in the future by
The Legends Group or its affiliates for a period of ten years from the
completion of the Offering.
"OWNERSHIP LIMIT" means the direct or constructive ownership by any
stockholder or group of affiliated stockholders of more than 9.8% of the
outstanding Common Stock.
"OWNERSHIP LIMIT PROVISION" means the provision of the Charter that
prohibits the direct or constructive ownership by any stockholder or group of
affiliated stockholders of more than 9.8% of the outstanding Common Stock.
"PARTICIPATING LEASES" means the leases between the Operating Partnership,
as lessor, and the Initial Lessees, as lessee.
"PARTICIPATING RENT" means the additional rent due annually to the Company
under the Participating Leases, in addition to Base Rent for any lease year, in
the amount of 33.33% of any increase in Gross Golf Revenue over Gross Golf
Revenue in 1996, as adjusted.
"PARTNERSHIP AGREEMENT" means the agreement of limited partnership of the
Operating Partnership.
"PARTNERSHIP PROVISIONS" means the provisions of the Code relating to
partnerships.
"LESSEE PERFORMANCE OPTION" means the one-time right of each Prior Owner to
elect to receive additional OP Units in exchange for an increase in Base Rent as
described in "The Company -- Internal Growth."
"PLAN" means the Company's stock incentive plan.
"PREFERRED STOCK" means preferred stock, par value $.01 per share, of the
Company.
"PRIOR OWNERS" means limited partners in the Operating Partnership who
contributed their interests in the Golf Courses to the Company.
"RECOGNITION PERIOD" means the recognition period pertaining the Built-in
Gain as defined pursuant to Treasury Regulations to be issued under Section
337(d) of the Code.
"REDEMPTION RIGHTS" means those rights granted to the Limited Partners
(other than the Company), pursuant to the Partnership Agreement, enabling them
to cause the Operating Partnership to redeem each OP Unit for cash or, at the
option of the Company, shares of Common Stock on a one-for-one basis, subject to
the Ownership Limit.
97
<PAGE>
"REIT" means real estate investment trust as defined in Section 856 of the
Code.
"RELATED PARTY TENANT" under the Code means with respect to the Company a
tenant of which the Company, or an owner of 10% or more of the Company, directly
or constructively owns a 10% or greater ownership interest.
"RENEWAL TERMS" means each Initial Lessee's option to extend the term of a
Participating Lease for up to six five-year renewal periods following an
aggregate term (the Fixed Term), subject to earlier termination upon the
occurrence of certain contingencies described in the Participating Lease.
"RESORT COURSES" means Daily Fee courses that attract a significant
percentage of players from outside the immediate area in which the course is
located, generating significant revenue through golf packages.
"RULE 144" means Rule 144 promulgated under the Securities Act.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SERVICE" means the Internal Revenue Service.
"SHARES-IN-TRUST" means the separate class of stock into which shares of
Common Stock directly or constructively owned by an individual in excess of the
Ownership Limit will be automatically exchanged.
"TREASURY REGULATIONS" means the income tax regulations that have been
promulgated under the Code.
"UBTI" means "unrelated business taxable income" as defined in Section
512(a) of the Code.
98
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
GOLF TRUST OF AMERICA, INC.:
Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1995
(unaudited)............................................................................................ F-5
Pro Forma Condensed Consolidated Statement of Operations for the six months ended June 30, 1996
(unaudited)............................................................................................ F-5
Notes to Pro Forma Condensed Consolidated Statements of Operations...................................... F-6
Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1996 (unaudited).......................... F-7
Notes to Pro Forma Condensed Consolidated Balance Sheet................................................. F-8
Report of Independent Accountants -- Price Waterhouse LLP............................................... F-10
Consolidated Balance Sheet as of November 8, 1996....................................................... F-11
Notes to Consolidated Balance Sheet..................................................................... F-11
GOLF COURSES AND INITIAL LESSEES PRO FORMA CONDENSED FINANCIAL STATEMENTS:
GOLF LEGENDS:
Pro Forma Condensed Statement of Operations for the year ended December 31, 1995 (unaudited)............ F-13
Pro Forma Condensed Statement of Operations for the six months ended June 30, 1996 (unaudited).......... F-13
Pro Forma Condensed Balance Sheet as of June 30, 1996 (unaudited)....................................... F-14
HERITAGE GOLF CLUB:
Pro Forma Condensed Statement of Operations for the year ended December 31, 1995 (unaudited)............ F-15
Pro Forma Condensed Statement of Operations for the six months ended June 30, 1996 (unaudited).......... F-15
Pro Forma Condensed Balance Sheet as of June 30, 1996 (unaudited)....................................... F-16
SEASIDE RESORTS:
Pro Forma Condensed Statement of Operations for the year ended December 31, 1995 (unaudited)............ F-17
Pro Forma Condensed Statement of Operations for the six months ended June 30, 1996 (unaudited).......... F-17
Pro Forma Condensed Balance Sheet as of June 30, 1996 (unaudited)....................................... F-18
LEGENDS OF VIRGINIA:
Pro Forma Condensed Statement of Operations for the year ended December 31, 1995 (unaudited)............ F-19
Pro Forma Condensed Statement of Operations for the six months ended June 30, 1996 (unaudited).......... F-19
Pro Forma Condensed Balance Sheet as of June 30, 1996 (unaudited)....................................... F-20
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
NORTHGATE COUNTRY CLUB:
Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1995
(unaudited)............................................................................................ F-21
Pro Forma Condensed Consolidated Statement of Operations for the six months ended June 30, 1996
(unaudited)............................................................................................ F-21
Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1996 (unaudited).......................... F-22
BRIGHT'S CREEK DEVELOPMENT, LLC
Pro Forma Condensed Statement of Operations for the year ended December 31, 1995 (unaudited)............ F-23
Pro Forma Condensed Statement of Operations for the six months ended June 30, 1996 (unaudited).......... F-23
Pro Forma Condensed Balance Sheet as of June 30, 1996 (unaudited)....................................... F-24
OLDE ATLANTA GOLF CLUB
Pro Forma Condensed Statement of Operations for the year ended December 31, 1995 (unaudited)............ F-25
Pro Forma Condensed Statement of Operations for the six months ended June 30, 1996 (unaudited).......... F-25
Pro Forma Condensed Balance Sheet as of June 30, 1996 (unaudited)....................................... F-26
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS......................................................... F-27
LEGENDS GOLF COMBINED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants -- BDO Seidman, LLP.................................. F-30
Combined Balance Sheets -- December 31, 1994 and 1995 and June 30, 1996 (unaudited)..................... F-31
Combined Statements of Income -- years ended December 31, 1993, 1994 and 1995 and six-month periods
ended June 30, 1995 and 1996 (unaudited)............................................................... F-32
Combined Statements of Owners' Equity -- years ended December 31, 1993, 1994 and 1995 and six-month
period ended June 30, 1996 (unaudited)................................................................. F-33
Combined Statements of Cash Flows -- years ended December 31, 1993, 1994 and 1995 and six-month periods
ended June 30, 1995 and 1996 (unaudited)............................................................... F-34
Notes to Combined Financial Statements.................................................................. F-35
GOLF LEGENDS, LTD. FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants -- BDO Seidman, LLP.................................. F-41
Balance Sheets -- December 31, 1994 and 1995 and June 30, 1996 (unaudited).............................. F-42
Statements of Income and Retained Earnings -- years ended December 31, 1993, 1994 and 1995 and six-month
periods ended June 30, 1995 and 1996 (unaudited)....................................................... F-43
Statements of Cash Flows -- years ended December 31, 1993, 1994 and 1995 and six-month periods ended
June 30, 1995 and 1996 (unaudited)..................................................................... F-44
Summary of Significant Accounting Policies.............................................................. F-45
Notes to Financial Statements........................................................................... F-47
</TABLE>
F-2
<PAGE>
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
HERITAGE GOLF CLUB, LTD. FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants -- BDO Seidman, LLP.................................. F-52
Balance Sheets -- December 31, 1994 and 1995 and June 30, 1996 (unaudited).............................. F-53
Statements of Income and Retained Earnings -- years ended December 31, 1993, 1994 and 1995 and six-month
periods ended June 30, 1995 and 1996 (unaudited)....................................................... F-54
Statements of Cash Flows -- years ended December 31, 1993, 1994 and 1995 and six-month periods ended
June 30, 1995 and 1996 (unaudited)..................................................................... F-55
Summary of Significant Accounting Policies.............................................................. F-56
Notes to Financial Statements........................................................................... F-58
SEASIDE RESORTS, LTD. FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants -- BDO Seidman, LLP.................................. F-62
Balance Sheets -- December 31, 1994 and 1995 and June 30, 1996 (unaudited).............................. F-63
Statements of Income and Retained Earnings -- years ended December 31, 1993, 1994 and 1995 and six-month
periods ended June 30, 1995 and 1996 (unaudited)....................................................... F-64
Statements of Cash Flows -- years ended December 31, 1993, 1994 and 1995 and six-month periods ended
June 30, 1995 and 1996 (unaudited)..................................................................... F-65
Summary of Significant Accounting Policies.............................................................. F-66
Notes to Financial Statements........................................................................... F-68
LEGENDS OF VIRGINIA, L.C. FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants -- BDO Seidman, LLP.................................. F-73
Balance Sheets -- December 31, 1994 and 1995 and June 30, 1996 (unaudited).............................. F-74
Statements of Loss and Members' Deficit -- year ended December 31, 1995 and six-month period ended June
30, 1996 (unaudited)................................................................................... F-75
Statements of Cash Flows -- year ended December 31, 1995 and six-month period ended June 30, 1996
(unaudited)............................................................................................ F-76
Summary of Significant Accounting Policies.............................................................. F-77
Notes to Financial Statements........................................................................... F-79
NORTHGATE COUNTRY CLUB FINANCIAL STATEMENTS:
Report of Independent Accountants -- Price Waterhouse LLP............................................... F-82
Consolidated Balance Sheets -- December 31, 1994 and 1995 and June 30, 1996 (unaudited)................. F-83
Consolidated Statements of Operations and Partners' Equity -- years ended December 31, 1993, 1994 and
1995 and six-month periods ended June 30, 1995 and 1996 (unaudited).................................... F-84
Consolidated Statements of Cash Flows -- years ended December 31, 1993, 1994 and 1995 and six-month
periods ended June 30, 1995 and 1996 (unaudited)....................................................... F-85
Notes to Consolidated Financial Statements.............................................................. F-86
</TABLE>
F-3
<PAGE>
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
BRIGHT'S CREEK DEVELOPMENT, LLC:
Report of Independent Accountants -- Coopers & Lybrand L.L.P............................................ F-89
Balance Sheets -- December 31, 1994 and 1995 and June 30, 1996.......................................... F-90
Statements of Operations -- for the period from inception (May 17, 1994) through December 31, 1994, the
year ended December 31, 1995 and the six-month periods ended June 30, 1995 and 1996.................... F-91
Statements of Members' Deficit -- for the period from inception (May 17, 1994) through December 31,
1994, the year ended December 31, 1995 and the six-month period ended June 30, 1996.................... F-92
Statements of Cash Flows -- for the period from inception (May 17, 1994) through December 31, 1994, the
year ended December 31, 1995 and the six-month period ended June 30, 1995 and 1996..................... F-93
Notes to Financial Statements........................................................................... F-94
OLDE ATLANTA GOLF CLUB FINANCIAL STATEMENTS:
Report of Independent Auditors -- Crowe, Chizek and Company LLP......................................... F-97
Balance Sheets -- December 31, 1994 and 1995 and June 30, 1996 (unaudited).............................. F-98
Statements of Income -- years ended December 31, 1994 and 1995 and six-month periods ended June 30, 1995
and 1996 (unaudited)................................................................................... F-99
Statements of Changes in Partners' Capital -- years ended December 31, 1994, and 1995 and six-month
period ended June 30, 1996 (unaudited)................................................................. F-100
Statements of Cash Flows -- years ended December 31, 1994 and 1995 and six-month periods ended June 30,
1995 and 1996 (unaudited).............................................................................. F-101
Notes to Financial Statements........................................................................... F-102
</TABLE>
F-4
<PAGE>
GOLF TRUST OF AMERICA, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company's unaudited Pro Forma Condensed Consolidated Statements of
Operations for the year ended December 31, 1995 and the six months ended June
30, 1996 are presented as if the completion of the Formation Transactions had
occurred as of the beginning of the period presented and carried forward through
each period presented. The Company was formed in November 1996 and has no
operating history. In management's opinion, all adjustments necessary to reflect
the effects of the Formation Transactions have been made.
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations are not necessarily indicative of what actual results of operations
of the Company would have been assuming such Formation Transactions had been
completed as of the beginning of the periods presented, nor do they purport to
represent the results of operations for future periods.
<TABLE>
<CAPTION>
(F)
FOR THE YEAR ENDED DECEMBER 31, 1995 HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Participating Lease revenue................................. -- $ 14,988(A) $ 14,988
----------- ----------- -----------
Depreciation and amortization............................... -- 3,202(B) 3,202
General and administrative.................................. -- 1,638(C) 1,638
Interest expense............................................ -- 366(D) 366
Minority interest........................................... -- 5,902(E) 5,902
----------- ----------- -----------
Total expenses and minority interest........................ -- 11,108 11,108
----------- ----------- -----------
Net income applicable to holders of Common Stock............ -- $ 3,880 $ 3,880
----------- ----------- -----------
----------- ----------- -----------
Net income per shares of Common Stock....................... $ 1.40
-----------
-----------
Shares of Common Stock outstanding.......................... 2,775
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<S> <C> <C> <C>
Participating Lease revenue........... -- $ 7,494(A) $ 7,494
----- ----------- ---------
Depreciation and amortization......... -- 1,601(B) 1,601
General and administrative............ -- 819(C) 819
Interest expense...................... -- 183(D) 183
Minority interest..................... -- 2,951(E) 2,951
----- ----------- ---------
Total expenses and minority
interest............................. -- 5,554 5,554
----- ----------- ---------
Net income applicable to holders of
Common Stock......................... -- $ 1,940 $ 1,940
----- ----------- ---------
----- ----------- ---------
Net income per shares of Common
Stock................................ $ .70
---------
---------
Shares of Common Stock outstanding.... 2,775
---------
---------
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-5
<PAGE>
GOLF TRUST OF AMERICA, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(A) Represents payments of Base Rent from the Initial Lessees to the Operating
Partnership calculated on a pro forma basis as if the beginning of the
period presented was the beginning of a lease year, including Participating
Lease revenue from Legends of Virginia, LC of $3,586 for the year ended
December 31, 1995 and $1,791 for the six months ended June 30, 1996. The
Legends of Virginia, LC pro forma condensed statements of operations reflect
Participating Lease payments on the newly developed golf courses for the
period in which the courses were actually operating.
(B) Represents depreciation on buildings, improvements, and furniture and
equipment and amortization. Depreciation is computed using the straight-line
method and is based upon the estimated useful lives of 30 years for
buildings, 20 years for improvements and 3 to 10 years for furniture and
equipment. Amortization of loan fees is computed using the straight-line
method over the life of the loan.
(C) Represents legal, audit, office, franchise taxes, salaries and other general
and administrative expenses to be paid by the Company.
(D) Reflects interest expense at 8% per annum to be paid on the initial
borrowing of $4.325 million and loan costs amortized as interest expense.
(E) Calculated as approximately 60.3% of the Operating Partnership's net income.
(F) As General Partner of the Operating Partnership, the Company is responsible
for the management of the Operating Partnership. Such responsibilities
enable the Company to obtain financing secured by the Golf Courses and to
sell the Golf Courses without the consent of the Limited Partners. Further,
the Company may not be replaced by the Limited Partners, except in certain
limited circumstances. Accordingly, for accounting purposes, the Company is
considered to control the Operating Partnership and the accompanying
unaudited Pro Forma Condensed Consolidated Statement of Operations
consolidates the accounts of the Company and the Operating Partnership.
F-6
<PAGE>
GOLF TRUST OF AMERICA, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
The unaudited Pro Forma Condensed Consolidated Balance Sheet is presented as
if the completion of the Formation Transactions and the application of the net
proceeds of the Offering as set forth under the caption "Use of Proceeds" had
occurred on June 30, 1996. Such pro forma information is based in part upon the
combined balance sheet of Legends Golf, as accounting acquiror. It should be
read in conjunction with the Financial Statements listed in the Index at Page
F-1 of this Prospectus. In management's opinion, all adjustments necessary to
reflect the effects of the Formation Transactions have been made.
This unaudited Pro Forma Condensed Consolidated Balance Sheet is not
necessarily indicative of what the actual financial position would have been
assuming such transaction had been completed as of June 30, 1996, nor does it
purport to represent the future financial position of the Company.
<TABLE>
<CAPTION>
(A) ACQUIRED (I)
LEGENDS GOLF COURSES COMBINED PRO FORMA
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS CONSOLIDATED
----------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Properties, net.............................. $ 33,738 $ 18,506 $ 52,244 $ 11,793(B) $ 64,037
Cash......................................... 208 171 379 240(C) 619
Advances to Affiliates....................... 11,976 1,470 13,446 (13,446)(D) --
Other assets................................. 2,486 1,339 3,825 (3,785)(E) 40
----------- ------------ ----------- ------------- ------------
Total assets............................... $ 48,408 $ 21,486 $ 69,894 $ (5,198) $ 64,696
----------- ------------ ----------- ------------- ------------
----------- ------------ ----------- ------------- ------------
LIABILITIES & EQUITY
Due to Affiliates............................ $ 9,934 $ -- $ 9,934 $ (9,934)(F) $ --
Notes payable................................ 27,578 12,962 40,540 (36,215)(F) 4,325
Accounts payable and accrued expenses........ 1,656 202 1,858 (1,858)(D) --
Other liabilities............................ 264 2,021 2,285 (2,285)(D) --
Minority interest............................ -- -- -- 36,431(G) 36,431
Common stock................................. 4 6,301 6,305 (6,278)(H) 27
Additional paid in capital................... 300 -- 300 23,613(H) 23,913
Retained earnings............................ 8,672 -- 8,672 (8,672)(H) --
----------- ------------ ----------- ------------- ------------
Total liablities and equity................ $ 48,408 $ 21,486 $ 69,894 $ (5,198) $ 64,696
----------- ------------ ----------- ------------- ------------
----------- ------------ ----------- ------------- ------------
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-7
<PAGE>
GOLF TRUST OF AMERICA, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
(A) Reflects the combined balance sheet of Legends Golf as acquiror as of June
30, 1996.
(B) Reflects: (i) the acquisition of property and equipment from Northgate
Country Club, Bright's Creek Development and Olde Atlanta Golf Club which
includes, but is not limited to, the Golf Courses, buildings, improvements,
fixed assets and equipment (except golf carts), and (ii) contribution of
land by Larry Young to Heritage Golf Club and Golf Legends subsequent to
June 30, 1996 as follows:
<TABLE>
<S> <C>
Cash............................................................... $ 3,991
Assumption of debt................................................. 12,962
Issuance of OP Units............................................... 9,110
---------
Consideration paid for acquired Golf Courses....................... 26,063
Less: Historical basis in acquired Golf Courses.................... 18,506
---------
Increase in basis of acquired Golf Courses......................... 7,557
Contribution of land subsequent to June 30, 1996................... 4,236
---------
$ 11,793
---------
---------
</TABLE>
(C) Reflects the following proposed transactions:
<TABLE>
<S> <C>
Gross proceeds from Offering...................................... $ 55,500
Expenses of Offering.............................................. (7,307)
Initial borrowing proceeds, net................................... 4,285
Repayment of outstanding mortgages................................ (47,868)
Acquisition of the Golf Courses................................... (3,991)
Cash not being acquired by the Company............................ (379)
---------
$ 240
---------
---------
</TABLE>
(D) Reflects assets and liabilities not being acquired by the Company.
(E) Reflects other assets not being acquired by the Company and loan costs
related to the initial borrowing ($40).
(F) Reflects the following proposed transactions:
<TABLE>
<S> <C>
Repayment of debt and due to Affiliates with Offering proceeds.... $ (47,868)
Initial borrowing................................................. 4,325
Debt not being assumed by the Company............................. (2,606)
---------
$ (46,149)
---------
---------
</TABLE>
(G) Reflects the following proposed transactions:
<TABLE>
<S> <C>
Net equity contributed to the Company by Legends Golf.............. $ 3,068
OP Units to Prior Owners issued for acquisition of Golf Courses.... 9,110
OP Units issued to the Company..................................... 48,193
---------
Total equity of Operating Partnership.............................. 60,371
Minority interest %................................................ 60.3%
---------
Minority interest.................................................. $ 36,431
---------
---------
</TABLE>
F-8
<PAGE>
GOLF TRUST OF AMERICA, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
(H) Reflects the following proposed transactions:
<TABLE>
<S> <C>
Historical equity of Legends Golf and acquired golf courses not
acquired......................................................... $ (16,445)
Contribution of land subsequent to June 30, 1996.................. 4,236
OP Units issued for acquisition of Golf Courses................... 9,110
Net proceeds from Offering........................................ 48,193
Minority interest................................................. (36,431)
---------
$ 8,663
---------
---------
</TABLE>
(I) As General Partner of the Operating Partnership, the Company will control
the Operating Partnership in accordance with the Operating Partnership
Agreement and is responsible for the management of the Operating
Partnership. Such responsibilities enable the Company to obtain financing
secured by the Golf Courses and sell the Golf Courses without the consent of
the Limited Partners. Further, the Company may not be replaced by the
Limited Partners, except in the case of the General Partner's bankruptcy and
certain extraordinary circumstances. Accordingly, for accounting purposes,
the Company is considered to control the Operating Partnership and the
accompanying unaudited Pro Forma Condensed Balance Sheet consolidates the
accounts of the Company and the Operating Partnership.
F-9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Golf Trust of America, Inc.
In our opinion, the accompanying consolidated balance sheet presents fairly,
in all material respects, the financial position of Golf Trust of America, Inc.
at November 8, 1996, in conformity with generally accepted accounting
principles. The balance sheet is the responsibility of the Company's management;
our responsibility is to express an opinion on the balance sheet based on our
audit. We conducted our audit of the balance sheet in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall presentation. We believe that our audit provides a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
Costa Mesa, California
November 8, 1996
F-10
<PAGE>
GOLF TRUST OF AMERICA, INC.
CONSOLIDATED BALANCE SHEET
NOVEMBER 8, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash............................................................................... $ 100
------
------
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, 10,000,000 shares authorized, no shares issued
Common Stock, $.01 par value, 90,000,000 shares authorized, 1 share issued and
outstanding....................................................................... $ --
------
Additional paid-in capital......................................................... 100
------
Total stockholders' equity........................................................... $ 100
------
------
</TABLE>
NOTES TO CONSOLIDATED BALANCE SHEET
1. ORGANIZATION
Golf Trust of America, Inc. (the "Company") was incorporated in Maryland on
November 8, 1996. The authorized capital stock of the Company consists of
90,000,000 shares of Common Stock having a par value of $.01 per share and
10,000,000 shares of Preferred Stock having a par value of $.01 per share.
Holders of limited partnership interests in the Operating Partnership ("OP
Units") will have the opportunity after one year following the receipt of such
OP Units, subject to certain restrictions, to have their OP Units exchanged for
cash in an amount equal to the fair market value of an equivalent number of
shares of Common Stock or, at the election of the Company, for Common Stock on a
one-for-one basis. The Company currently expects that it will elect to issue
Common Stock in connection with such exchange, unless it is prohibited from
doing so because of the ownership restrictions in its Charter.
2. FORMATION OF COMPANY AND OPERATIONS
The Company will own a 1.0% sole general partnership interest and 38.7%
limited partnership interest in Golf Trust of America, L.P. (the "Operating
Partnership") currently in the process of formation. The Operating Partnership
will acquire and own resort golf courses, private golf courses and daily fee
golf courses throughout the United States.
3. INCOME TAXES
After the completion of the Offering, the Company intends to make an
election to be taxed as a real estate investment trust ("REIT") under Sections
856 through 860 of the Code. As a REIT, the Company generally will not be
subject to federal income tax if it distributes at least 95% of its REIT taxable
income to its stockholders. REITs are subject to a number of organizational and
operational requirements. If the Company fails to qualify as a REIT in any
taxable year, the Company will be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
tax rates. Even if the Company qualifies for taxation as a REIT, the Company may
be subject to state and local taxes on its income and property and to federal
income and excise taxes on its undistributed income.
F-11
<PAGE>
GOLF COURSES AND INITIAL LESSEES
PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited Pro Forma Condensed Financial Statements give effect
to the proposed contribution of assets and liabilities to the Operating
Partnership in connection with the Formation Transactions and the contribution
of certain other assets and liabilities by the Prior Owners to the Initial
Lessees. The unaudited Pro Forma Condensed Balance Sheets are based upon the
individual historical balance sheets of each of the Prior Owners and have been
prepared to reflect the contribution of assets and liabilities by the Prior
Owners to the Operating Partnership and Initial Lessees as if such event had
occurred on June 30, 1996. The unaudited Pro Forma Condensed Statements of
Income for the year ended December 31, 1995 and the six months ended June 30,
1996 are based upon the individual historical income statements of each of the
Golf Courses and have been prepared to reflect the operating results of the
Initial Lessees as if such events had occurred as of the beginning of the period
presented and carried forward through each period presented. The pro forma
condensed financial information has been prepared by the management of each of
the Prior Owners. These Pro Forma Condensed Financial Statements may not be
indicative of the results that actually would have occurred if the proposed
transactions had occurred on the dates indicated.
F-12
<PAGE>
GOLF LEGENDS
COURSES: PARKLAND, HEATHLAND, MOORLAND
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
PRIOR PRO FORMA LESSEE
OWNER (A) ADJUSTMENTS PRO FORMA
-------- --------------- -----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Revenue from golf operations............................................. $ 8,004 $-- $8,004
Other revenue............................................................ 2,176 -- 2,176
-------- ------- -----------
Total revenue............................................................ 10,180 -- 10,180
-------- ------- -----------
Participating Lease payments............................................. -- 4,670(F) 4,670
Operating expenses....................................................... 5,738 (587)(O) 5,151
Interest expense......................................................... 877 (825)(D) 52
Depreciation............................................................. 1,257 (1,087)(E) 170
-------- ------- -----------
Total expenses........................................................... 7,872 2,171 10,043
-------- ------- -----------
Net income (loss)........................................................ $ 2,308 $(2,171) $ 137
-------- ------- -----------
-------- ------- -----------
EBITDA(U)................................................................ $ 4,442 $ 359
-------- -----------
-------- -----------
SIX MONTHS ENDED JUNE 30, 1996
Revenue from golf operations............................................. $ 4,723 $-- $4,723
Other revenue............................................................ 1,378 -- 1,378
-------- ------- -----------
Total revenue............................................................ 6,101 -- 6,101
-------- ------- -----------
Participating Lease payments............................................. -- 2,335(F) 2,335
Operating expenses....................................................... 3,142 (351)(O) 2,791
Interest expense......................................................... 397 (381)(D) 16
Depreciation............................................................. 638 (543)(E) 95
-------- ------- -----------
Total expenses........................................................... 4,177 1,060 5,237
-------- ------- -----------
Net income (loss)........................................................ $ 1,924 $(1,060) $ 864
-------- ------- -----------
-------- ------- -----------
EBITDA(U)................................................................ $ 2,959 $ 975
-------- -----------
-------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-13
<PAGE>
GOLF LEGENDS
COURSES: PARKLAND, HEATHLAND, MOORLAND
PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
PRIOR PRO FORMA LESSEE
OWNER (B) ADJUSTMENTS PRO FORMA
----------- ------------------ -----------
<S> <C> <C> <C>
Current assets........................................................ $ 994 $ (870)(V) $ 124
Property and equipment................................................ 11,205 (10,807)(N),(X) 398
Advances to Affiliates................................................ 7,158 (6,463)(V) 695
Other................................................................. 15 (15)(V) --
----------- -------- -----------
Total assets.......................................................... $ 19,372 $ (18,155) $ 1,217
----------- -------- -----------
----------- -------- -----------
Current liabilities................................................... $ 850 $ -- $ 850
Current maturities of long-term debt.................................. 277 (161)(I) 116
Long-term debt........................................................ 12,519 (12,269)(I) 250
Advances from Affiliates.............................................. 1,015 (1,015)(V) --
----------- -------- -----------
Total liabilities..................................................... 14,661 (13,445) 1,216
Owners' equity........................................................ 4,711 (4,710)(V) 1
----------- -------- -----------
Total liabilities and owners equity................................... $ 19,372 $ (18,155) $ 1,217
----------- -------- -----------
----------- -------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-14
<PAGE>
HERITAGE GOLF CLUB
COURSE: HERITAGE GOLF CLUB
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
LESSEE
PRIOR PRO FORMA PRO
OWNER (A) ADJUSTMENTS FORMA
-------- ----------- --------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Revenue from golf operations............................................... $ 3,156 $ -- $ 3,156
Other revenue.............................................................. 783 -- 783
-------- ----------- --------
Total revenue............................................................ 3,939 -- 3,939
-------- ----------- --------
Participating Lease payments............................................... -- 1,825(F) 1,825
Operating expenses......................................................... 2,442 (337)(P) 2,105
Interest expense........................................................... 63 (48)(D) 15
Depreciation............................................................... 319 (258)(E) 61
-------- ----------- --------
Total expenses........................................................... 2,824 1,182 4,006
-------- ----------- --------
Net income (loss)........................................................ $ 1,115 $(1,182) $ (67)
-------- ----------- --------
-------- ----------- --------
EBITDA(u)................................................................ $ 1,497 $ 9
-------- --------
-------- --------
SIX MONTHS ENDED JUNE 30, 1996
Revenue from golf operations............................................... $ 1,904 $ -- $ 1,904
Other revenue.............................................................. 423 -- 423
-------- ----------- --------
Total revenue............................................................ 2,327 -- 2,327
-------- ----------- --------
Participating Lease payments............................................... -- 913(F) 913
Operating expenses......................................................... 1,087 (129)(P) 958
Interest expense........................................................... 27 (22)(D) 5
Depreciation............................................................... 155 (129)(E) 26
-------- ----------- --------
Total expenses........................................................... 1,269 633 1,902
-------- ----------- --------
Net income............................................................... $ 1,058 $ (633) $ 425
-------- ----------- --------
-------- ----------- --------
EBITDA(u)................................................................ $ 1,240 $ 456
-------- --------
-------- --------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-15
<PAGE>
HERITAGE GOLF CLUB
COURSE: HERITAGE GOLF CLUB
PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
PRIOR PRO FORMA LESSEE
OWNER (B) ADJUSTMENTS PRO FORMA
--------- ---------------- ---------
<S> <C> <C> <C>
Current assets.......................... $ 550 $ (468)(W) $ 82
Property and equipment.................. 2,031 (1,877)(H)(X) 154
Advances to Affiliates.................. 1,941 (1,784)(W) 157
--------- ------- ---
Total assets........................ $4,522 $(4,129) $393
--------- ------- ---
--------- ------- ---
Current liabilities..................... $ 297 $-- $297
Current maturities of long-term debt.... 41 (9)(I) 32
Long-term debt.......................... 790 (727)(I) 63
Advances from Affiliates................ 596 (596)(W) --
--------- ------- ---
Total liabilities................... 1,724 (1,332) 392
Owners' equity...................... 2,798 (2,797)(W) 1
--------- ------- ---
Total liabilities and owners
equity............................. $4,522 $(4,129) $393
--------- ------- ---
--------- ------- ---
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-16
<PAGE>
SEASIDE RESORTS
COURSE: OYSTER BAY
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
LESSEE
PRIOR PRO FORMA PRO
OWNER (A) ADJUSTMENTS FORMA
-------- ----------- --------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Revenue from golf operations............................................... $ 3,459 $ -- $ 3,459
Other revenue.............................................................. 865 -- 865
-------- ----------- --------
Total revenue............................................................ 4,324 -- 4,324
-------- ----------- --------
Participating Lease payments................................................. -- 1,976(F) 1,976
Operating expenses......................................................... 2,126 (268)(R) 1,858
Interest expense........................................................... 77 (63)(D) 14
Depreciation............................................................... 187 (134)(E) 53
-------- ----------- --------
Total expenses........................................................... 2,390 1,511 3,901
-------- ----------- --------
Net income............................................................... $ 1,934 $(1,511) $ 423
-------- ----------- --------
-------- ----------- --------
EBITDA (U)............................................................... $ 2,198 $ 490
-------- --------
-------- --------
SIX MONTHS ENDED JUNE 30, 1996
Revenue from golf operations............................................... $ 1,993 -- $ 1,993
Other revenue.............................................................. 478 -- 478
-------- ----------- --------
Total revenue............................................................ 2,471 -- 2,471
-------- ----------- --------
Participating Lease payments............................................... -- 988(F) 988
Operating expenses......................................................... 1,043 (148)(R) 895
Interest expense........................................................... 35 (30)(D) 5
Depreciation............................................................... 95 (67)(E) 28
-------- ----------- --------
Total expenses........................................................... 1,173 743 1,916
-------- ----------- --------
Net income............................................................... $ 1,298 $ (743) $ 555
-------- ----------- --------
-------- ----------- --------
EBITDA (U)............................................................... $ 1,428 $ 588
-------- --------
-------- --------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-17
<PAGE>
SEASIDE RESORTS
COURSE: OYSTER BAY
PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
LESSEE
PRIOR PRO FORMA PRO
OWNER (B) ADJUSTMENTS FORMA
-------- ----------- --------
<S> <C> <C> <C>
Current assets.......................... $ 845 $ (702)(Q) $ 143
Property and equipment.................. 975 (820)(H) 155
Advances to Affiliates.................. 2,816 (2,816)(Q) --
-------- ----------- ---
Total assets........................ $ 4,636 $(4,338) $ 298
-------- ----------- ---
-------- ----------- ---
Current liabilities..................... $ 161 $ -- $ 161
Current maturities of long-term debt.... 46 (14)(I) 32
Long-term debt.......................... 1,035 (972)(I) 63
Advances from Affiliates................ 1,252 (1,211)(Q) 41
-------- ----------- ---
Total liabilities................... 2,494 (2,197) 297
Owners' equity...................... 2,142 (2,141)(Q) 1
-------- ----------- ---
Total liabilities and owners
equity............................. $ 4,636 $(4,338) $ 298
-------- ----------- ---
-------- ----------- ---
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-18
<PAGE>
LEGENDS OF VIRGINIA
COURSES: ROYAL NEW KENT, STONEHOUSE GOLF CLUB
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
LESSEE PRO
PRIOR PRO FORMA FORMA
OWNER (A) ADJUSTMENTS CONSOLIDATED
--------- ------------- ------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Revenue from golf operations.......... $-- -$- $ --
Other revenue......................... -- -- --
--------- --- -----
Total revenue......................... -- -- --
--------- --- -----
Participating Lease payments.......... -- -- (F) --
Operating expenses.................... 15 -- 15
Depreciation.......................... 29 (29)(E) --
--------- --- -----
Total expenses........................ 44 (29) 15
--------- --- -----
Net loss.............................. $ (44) $ 29 $ (15)
--------- --- -----
--------- --- -----
EBITDA (U)............................ $ (15) $ (15)
--------- -----
--------- -----
SIX MONTHS ENDED JUNE 30, 1996
Revenue from golf operations.......... $ 21 -$- $ 21
Other revenue......................... 4 -- 4
--------- --- -----
Total revenue......................... 25 -- 25
--------- --- -----
Participating Lease payments.......... -- 148(F) 148
Operating expenses.................... 529 -- 529
Interest expense...................... 55 (55)(D) --
Depreciation.......................... 73 (73)(E) --
--------- --- -----
Total expenses........................ 657 20 677
--------- --- -----
Net loss.............................. $(632) $ (20) $ (652)
--------- --- -----
--------- --- -----
EBITDA (U)............................ $(504) $ (652)
--------- -----
--------- -----
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-19
<PAGE>
LEGENDS OF VIRGINIA
COURSES: ROYAL NEW KENT, STONEHOUSE GOLF CLUB
PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
PRIOR PRO FORMA LESSEE PRO
OWNER (B) ADJUSTMENTS FORMA
-------- ----------------- -----------
<S> <C> <C> <C>
Current assets......................... $ 24 $-- $ 24
Property and equipment................ 19,528 (19,528)(H) --
Advances to Affiliates................ 61 528(T) 589
Other................................. 315 (315)(T) --
-------- ------- ---
Total assets...................... $19,928 $ (19,315) $ 613
-------- ------- ---
-------- ------- ---
Current liabilities................... $ 660 $ (48)(T) $ 612
Current maturities of long-term
debt................................. 56 (56)(I) --
Long-term debt........................ 12,815 (12,815)(I) --
Advances from Affiliates.............. 7,072 (7,072)(S) --
-------- ------- ---
Total liabilities..................... 20,603 (19,991) 612
Owners' equity........................ (675) 676(T) 1
-------- ------- ---
Total liabilities and owners
equity........................... $19,928 $ (19,315) $ 613
-------- ------- ---
-------- ------- ---
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-20
<PAGE>
NORTHGATE COUNTRY CLUB
PRO FORMA CONDENSED CONSOLDIATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
PRIOR PRO FORMA LESSEE PRO
OWNER (A) ADJUSTMENTS FORMA
-------- -------------- ------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Revenue from golf operations.......... $ 3,099 $-- $3,099
Other revenue......................... 1,467 -- 1,467
-------- ----- ------
Total revenue......................... 4,566 -- 4,566
-------- ----- ------
Participating Lease payments.......... -- 1,407(F) 1,407
Operating expenses.................... 3,140 (41)(G) 3,099
Interest expense...................... 485 (485)(D) --
Depreciation.......................... 323 (298)(E) 25
-------- ----- ------
Total expenses........................ 3,948 583 4,531
-------- ----- ------
Net income............................ $ 618 (583) $ 35
-------- ----- ------
-------- ----- ------
EBITDA (U)............................ $ 1,426 $ 60
-------- ------
-------- ------
SIX MONTHS ENDED JUNE 30, 1996
Revenue from golf operations.......... $ 1,504 -- $1,504
Other revenue......................... 812 -- 812
-------- ----- ------
Total revenue......................... 2,316 -- 2,316
-------- ----- ------
Participating Lease payments.......... -- 704(F) 704
Operating expenses.................... 1,611 (21)(G) 1,590
Interest expense...................... 248 (248)(D) --
Depreciation.......................... 171 (159)(E) 12
-------- ----- ------
Total expenses........................ 2,030 276 2,306
-------- ----- ------
Net income............................ $ 286 $ (276) $ 10
-------- ----- ------
-------- ----- ------
EBITDA (U)............................ $ 705 $ 22
-------- ------
-------- ------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-21
<PAGE>
NORTHGATE COUNTRY CLUB
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
PRIOR PRO FORMA LESSEE PRO
OWNER (B) ADJUSTMENTS FORMA
-------- --------------- -----------
<S> <C> <C> <C>
Current assets.......................... $ 2,227 $-- $2,227
Property and equipment.................. 10,434 (10,413)(H) 21
-------- ------- -----------
Total assets........................ $12,661 $(10,413) $2,248
-------- ------- -----------
-------- ------- -----------
Current liabilities..................... $ 662 (40)(I) $ 622
Long-term debt.......................... 6,265 (6,265)(I) --
Membership deposits..................... 1,435 -- 1,435
-------- ------- -----------
Total liabilities................... 8,362 (6,305) 2,057
Partners' equity........................ 4,299 (4,108)(Y) 191
-------- ------- -----------
Total liabilities and partners'
equity............................. $12,661 $(10,413) $2,248
-------- ------- -----------
-------- ------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-22
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
PRIOR PRO FORMA LESSEE PRO
OWNER (A) ADJUSTMENTS FORMA
-------- -------------- -----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Revenue from golf operations.......... $ 1,455 $-- $1,455
Other revenue......................... 291 -- 291
-------- ----- -----------
Total revenue......................... 1,746 -- 1,746
-------- ----- -----------
Participating Lease payments.......... -- 679(F) 679
Operating expenses.................... 1,074 -- 1,074
Interest expense...................... 424 (424)(D) --
Depreciation.......................... 247 (247)(E) --
-------- ----- -----------
Total expenses........................ 1,745 8 1,753
-------- ----- -----------
Net income (loss)..................... $ 1 $ (8) $ (7)
-------- ----- -----------
-------- ----- -----------
EBITDA (U)............................ $ 622 $ (7)
-------- -----------
-------- -----------
SIX MONTHS ENDED JUNE 30, 1996
Revenue from golf operations.......... $ 769 $-- $ 769
Other revenue......................... 150 -- 150
-------- ----- -----------
Total revenue......................... 919 -- 919
-------- ----- -----------
Participating Lease payments.......... -- 340(F) 340
Operating expenses.................... 538 -- 538
Interest expense...................... 183 (183)(D) --
Depreciation.......................... 123 (123)(E) --
-------- ----- -----------
Total expenses........................ 844 34 878
-------- ----- -----------
Net income............................ $ 75 $ (34) $ 41
-------- ----- -----------
-------- ----- -----------
EBITDA (U)............................ $ 381 $ 41
-------- -----------
-------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-23
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
PRIOR PRO FORMA LESSEE PRO
OWNER (B) ADJUSTMENTS FORMA
-------- -------------- ----------
<S> <C> <C> <C>
Current assets.......................... $ 225 $-- $225
Other assets............................ 52 (51)(C) 1
Property and equipment, net............. 3,697 (3,697)(H) --
-------- ------ ---
Total assets........................ $ 3,974 $(3,748) $226
-------- ------ ---
-------- ------ ---
Current liabilities..................... $ 302 $ (257)(I) $ 45
Notes payable........................... 3,774 (3,774)(I) --
-------- ------ ---
Total liabilities................... 4,076 (4,031) 45
Members' (deficit) equity............... (102) 283(Z) 181
-------- ------ ---
Total liabilities and members'
deficit............................ $ 3,974 $(3,748) $226
-------- ------ ---
-------- ------ ---
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-24
<PAGE>
OLDE ATLANTA GOLF CLUB
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
PRIOR PRO FORMA LESSEE PRO
OWNER (A) ADJUSTMENTS FORMA
----------- -------------- -----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Revenue from golf operations............................................... $ 1,568 $ -- $ 1,568
Other revenue.............................................................. 466 -- 466
----------- ----- -----------
Total revenue.............................................................. 2,034 -- 2,034
----------- ----- -----------
Participating Lease payments............................................... -- 845(F) 845
Operating expenses......................................................... 1,434 8(J) 1,442
Interest expense........................................................... 202 (202)(D) --
Depreciation and amortization.............................................. 375 (277)(E) --
-- (98)(K) --
----------- ----- -----------
Total expenses............................................................. 2,011 276 2,287
----------- ----- -----------
Net income (loss).......................................................... $ 23 $ (276) $ (253)
----------- ----- -----------
----------- ----- -----------
EBITDA (U)................................................................. $ 600 $ (253)
----------- -----------
----------- -----------
SIX MONTHS ENDED JUNE 30, 1996
Revenue from golf operations............................................... $ 900 $ -- $ 900
Other revenue.............................................................. 250 -- 250
----------- ----- -----------
Total revenue.............................................................. 1,150 -- 1,150
----------- ----- -----------
Participating Lease payments............................................... -- 423(F) 423
Operating expenses......................................................... 781 (29)(J) 731
(21)(L)
Interest expense........................................................... 112 (112)(D) --
Depreciation and amortization.............................................. 162 (112)(E) --
-- (50)(K) --
----------- ----- -----------
Total expenses............................................................. 1,055 99 1,154
----------- ----- -----------
Net income (loss).......................................................... $ 95 $ (99) $ (4)
----------- ----- -----------
----------- ----- -----------
EBITDA (U)................................................................. $ 369 $ (4)
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-25
<PAGE>
OLDE ATLANTA GOLF CLUB
PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
PRIOR PRO FORMA LESSEE
OWNER (B) ADJUSTMENTS PRO FORMA
--------- ----------- ---------
<S> <C> <C> <C>
Current assets.......................... $ 324 $ -- $324
Intangible assets....................... 243 (243)(M) --
Property and equipment, net............. 4,375 (4,375)(H) --
--------- ----------- ---
Total assets............................ $4,942 $(4,618) $324
--------- ----------- ---
--------- ----------- ---
Current liabilities..................... 153 (58)(I) 95
Notes payable........................... 2,568 (2,568)(I) --
--------- ----------- ---
Total liabilities....................... 2,721 (2,626) 95
Owners' equity.......................... 2,221 (1,992)(Y) 229
--------- ----------- ---
Total liabilities and owners equity..... $4,942 $(4,618) $324
--------- ----------- ---
--------- ----------- ---
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-26
<PAGE>
GOLF COURSES AND LESSEES
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
(A) Reflects the Prior Owner's Historical Condensed Statements of Operations for
the year ended December 31, 1995 and the six months ended June 30, 1996.
(B) Reflects the Prior Owner's Historical Condensed Balance Sheet at June 30,
1996.
(C) Decrease reflects the write-off of deferred financing costs related to debt
expected to be repaid with the proceeds of the Offering. These nonrecurring
costs are expected to be incurred in connection with the "Formation
Transactions" and the completion of the Offering and have not been included
in the unaudited Pro Forma Condensed Statements of Operations, but are
expected to be charged to operations when incurred.
(D) Decrease relates to a reduction in interest expense associated with debt
payoff from the Use of Proceeds.
(E) Decrease relates to a reduction in depreciation expense on the assets
contributed to the Operating Partnership.
(F) Represents lease expense as calculated in accordance with the lease
agreement as if the Formation Transactions were completed as of the
beginning of the period presented. The Legends of Virginia pro forma
condensed statements of operations reflect Participating Lease payments on
the newly developed golf courses for the period in which the courses were
actually operating. Had the courses been operating and the Participating
Lease payments reflected rental payments for the entire period presented,
the Participating Lease payments would have been $3,586 for the year ended
December 31, 1995 and $1,791 for the six months ended June 30, 1996.
(G) Reflects a decrease in costs which would have been paid by the Operating
Partnership with funds accrued from capital expenditure reserves included in
the Participating Lease payments had the Formation Transactions been
consummated at the beginning of the period presented.
(H) Reflects transfers as a result of the Formation Transactions of property and
equipment and leasehold improvements expected to be contributed to the
Operating Partnership. Golf carts and certain vehicles are to be retained by
the Initial Lessee and have not been included in the amounts transferred.
(I) Reflects the transfer of certain bank debt, as part of the Formation
Transactions, expected to be retired with the proceeds of the Offering.
(J) Reflects a change in management fees and area manager compensation based on
the new management agreement as a result of the Formation Transactions.
(K) Represents the elimination of amortization expense of intangible assets as
such assets are not being transferred to the initial Lessee.
(L) Reflects a reduction in legal fees which would not have been incurred if the
Formation Transactions occurred on January 1, 1995.
(M) Reflects the removal of intangible assets which are not being transferred to
the Initial Lessee as a result of the Formation Transactions.
(N) The leasehold improvements are encumbered by a conservatory easement entered
into prior to the Formation Transactions.
F-27
<PAGE>
(O) Represents the elimination of the following expenses not expected to recur
as a result of the Formation Transactions:
<TABLE>
<CAPTION>
SIX-MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
<S> <C> <C>
Land lease payment to the stockholder............. $534 $325
Allocable portion of executive vice president
compensation and related benefits eliminated as a
result of the elimination of the position........ 53 26
--- ---
$587 $351
--- ---
--- ---
</TABLE>
(P) Represents the elimination of the following expenses not expected to recur
as a result of the Formation Transactions:
<TABLE>
<CAPTION>
SIX-MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
<S> <C> <C>
Land lease payment to the sole stockholder........ $200 $120
Allocable portion of executive vice president
compensation and related benefits eliminated as a
result of the elimination of the position........ 18 9
Maintenance expenses to be paid a third party
under contract effective January 1, 1996......... 119 --
--- ---
$337 $129
--- ---
--- ---
</TABLE>
(Q) Certain assets, liabilities and equity have not been transferred to the
Initial Lessee as part of the Formation Transactions. These amounts remain
with the original company and are as follows:
<TABLE>
<S> <C>
Cash.............................................. $ 83
Accounts receivable............................... $ 619
Advances to affiliates............................ $ 2,816
Advances from affiliates.......................... $ 1,211
Equity............................................ $ 2,141
</TABLE>
(R) Represents the elimination of the allocable portion of executive vice
president's compensation and related benefits eliminated as a result of the
elimination of the position expected to occur as a result of the Formation
Transactions.
(S) Represents $7,072 of advances from affiliates of Legends of Virginia for the
construction of two Virginia golf courses to be repaid with proceeds of the
Offering as part of the Formation Transaction.
(T) Certain assets, liabilities and deficit have not been transferred to the
Initial Lessee as part of the Formation Transactions. These amounts remain
with the original company and are as follows:
<TABLE>
<S> <C>
Advances to affiliates............................ $ 528
Prepaid assets.................................... $ 315
Accounts payable.................................. $ 48
Equity............................................ $ (676)
</TABLE>
(U) EBITDA represents earnings before interest, taxes, depreciation and
amortization.
F-28
<PAGE>
(V) Certain assets, liabilities and equity have not been transferred to the
Initial Lessee as part of the Formation Transactions. These amounts remain
with the original company and are as follows:
<TABLE>
<S> <C>
Cash.............................................. $ 74
Accounts receivable............................... $ 796
Advances to affiliates............................ $ 6,463
Other............................................. $ 15
Advances from affiliates.......................... $ 1,015
Equity............................................ $ 4,710
</TABLE>
(W) Certain assets, liabilities and equity have not been transferred to the
Initial Lessee as part of the Formation Transactions. These amounts remain
with the original company and are as follows:
<TABLE>
<S> <C>
Cash.............................................. $ 101
Accounts receivable............................... $ 365
Prepaid assets.................................... $ 2
Advances to affiliates............................ $ 1,784
Advances from affiliates.......................... $ 596
Equity............................................ $ 2,797
</TABLE>
(X) Transfer does not reflect the contribution of land by Mr. Larry Young to
Golf Legends or Heritage Golf Club and the subsequent transfer to the
Operating Partnership as a result of the Formation Transactions.
(Y) Decrease reflects the transfer of assets to the Operating Partnership in
excess of liabilities transferred.
(Z) Increase reflects the transfer of liabilities to the Operating Partnership
in excess of assets transferred.
The aforementioned adjustments do not reflect any allocable share of the
income or distributions from the interest in the OP Units received as a result
of the Formation Transactions as these pro forma statements are intended to
reflect the accounts of the newly formed Initial Lessee only.
F-29
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Legends Golf
Myrtle Beach, South Carolina
We have audited the accompanying combined balance sheets of Legends Golf (as
defined in Note 1) as of December 31, 1994 and 1995, and the related combined
statements of income, owners' equity, and cash flows for each of the three years
in the period ended December 31, 1995. These combined financial statements are
the responsibility of Legends Golf'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 to 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.
As more fully described in the notes to the combined financial statements,
Legends Golf has material transactions with its majority stockholder and
affiliates.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Legends Golf 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.
BDO SEIDMAN, LLP
Charlotte, North Carolina
April 10, 1996, except for Note 6
which is as of November 7, 1996
F-30
<PAGE>
LEGENDS GOLF
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (Note 6)
CURRENT:
Cash......................................................................... $ 505 $ 400 $ 258
Accounts receivable (Note 3):
Golf packages.............................................................. 462 580 1,015
Related parties............................................................ 30 45 70
Stockholder................................................................ 886 -- 663
Other...................................................................... 36 37 33
Inventories.................................................................. 429 294 373
Prepaid assets............................................................... 16 2 2
--------- --------- -----------
Total current assets....................................................... 2,364 1,358 2,413
--------- --------- -----------
Property and equipment, less accumulated depreciation and amortization (Notes 4
and 6)........................................................................ 18,301 32,099 33,738
--------- --------- -----------
Other assets:
Advances to affiliates (Note 3).............................................. 2,899 7,803 11,976
Other........................................................................ 85 40 331
--------- --------- -----------
Total other assets......................................................... 2,984 7,843 12,307
--------- --------- -----------
$ 23,649 $ 41,300 $ 48,458
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND OWNERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable............................................................. $ 517 $ 430 $ 1,155
Accrued expenses:
Land lease (Note 3)........................................................ 1,318 -- 445
Retirement plan (Note 5)................................................... 74 71 106
Other...................................................................... 330 308 264
Current maturities of long-term debt (Note 6)................................ 1,076 1,710 420
--------- --------- -----------
Total current liabilities.................................................. 3,315 2,519 2,390
Advances from affiliates (Note 3).............................................. 2,372 8,787 9,934
Advances from stockholder (Note 3)............................................. 525 -- --
Long-term debt, less current maturities (Note 6)............................... 14,665 24,666 27,158
--------- --------- -----------
Total liabilities.......................................................... 20,877 35,972 39,482
--------- --------- -----------
Commitments and contingencies (Notes 5 and 7)
Owners' equity:
Common stock, $1 par -- shares authorized, 300,000; outstanding, 3,000....... 3 3 3
Members' contributions....................................................... 1 1 1
Additional paid-in capital................................................... 300 300 300
Members' accumulated deficit................................................. -- (44) (676)
Retained earnings (Note 6)................................................... 2,468 5,068 9,348
--------- --------- -----------
Total owners' equity....................................................... 2,772 5,328 8,976
--------- --------- -----------
$ 23,649 $ 41,300 $ 48,458
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes to Combined Financial Statements.
F-31
<PAGE>
LEGENDS GOLF
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Green fees............................................... $ 9,336 $ 9,931 $ 10,147 $ 6,175 $ 6,139
Cart rentals............................................. 4,082 4,364 4,373 2,549 2,374
Membership dues.......................................... 37 76 99 74 128
Food and beverage sales.................................. 1,546 1,652 1,708 973 1,127
Pro shop merchandise sales............................... 1,834 1,857 2,021 1,139 1,122
Other income............................................. 58 215 94 33 35
--------- --------- --------- --------- ---------
Total revenues......................................... 16,893 18,095 18,442 10,943 10,925
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
General and administrative............................... 4,370 4,149 3,998 1,944 2,256
Repairs and maintenance.................................. 2,138 2,319 2,386 1,173 1,279
Depreciation and amortization............................ 1,564 1,830 1,791 911 1,004
Cost of merchandise sold................................. 812 911 983 557 552
Rents.................................................... 902 956 982 537 539
Pro shop operations...................................... 767 765 857 438 432
Cost of food and beverage sold........................... 541 565 604 330 400
Food and beverage operations............................. 352 417 512 238 299
--------- --------- --------- --------- ---------
Total costs and expenses............................... 11,446 11,912 12,113 6,128 6,761
--------- --------- --------- --------- ---------
Operating income........................................... 5,447 6,183 6,329 4,815 4,164
Interest expense........................................... 619 998 1,016 505 515
--------- --------- --------- --------- ---------
Net income................................................. $ 4,828 $ 5,185 $ 5,313 $ 4,310 $ 3,649
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to Combined Financial Statements.
F-32
<PAGE>
LEGENDS GOLF
COMBINED STATEMENTS OF OWNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
MEMBERS' PAID-IN RETAINED ACCUMULATED
SHARES AMOUNT CONTRIBUTIONS CAPITAL EARNINGS DEFICIT
-------- -------- ------------- ------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993........... 3 $ 3 $ -- $300 $ 1,783 $ --
Net income......................... -- -- -- -- 4,828 --
Cash dividends..................... -- -- -- -- (4,651) --
-------- -------- ------------- ------- ------------- ----------------
Balance, December 31, 1993......... 3 3 -- 300 1,960 --
Net income......................... -- -- -- -- 5,185 --
Cash dividends..................... -- -- -- -- (4,677) --
Members' contributions............. -- -- 1 -- -- --
-------- -------- ------------- ------- ------------- ----------------
Balance, December 31, 1994......... 3 3 1 300 2,468 --
Net income (loss).................. -- -- -- -- 5,357 (44)
Cash dividends..................... -- -- -- -- (2,757) --
-------- -------- ------------- ------- ------------- ----------------
Balance, December 31, 1995......... 3 3 1 300 5,068 (44)
Net income (loss) (unaudited)...... -- -- -- -- 4,281 (632)
Cash dividends (unaudited)......... -- -- -- -- -- --
-------- -------- ------------- ------- ------------- ----------------
Balance, June 30, 1996
(unaudited)....................... 3 $ 3 $ 1 $300 $ 9,349 $ (676)
-------- -------- ------------- ------- ------------- ----------------
-------- -------- ------------- ------- ------------- ----------------
</TABLE>
See accompanying notes to Combined Financial Statements.
F-33
<PAGE>
LEGENDS GOLF
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 4,828 $ 5,185 $ 5,312 $ 4,310 $ 3,649
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 1,564 1,830 1,791 861 956
Loss (gain) on sale of property and equipment............ (2) -- 5 -- --
Decrease (increase) in:
Accounts receivable.................................... (1,409) 374 (135) 193 (1,118)
Inventories............................................ (55) (98) 135 98 (79)
Prepaid expenses/other assets.......................... (137) (16) 7 (10) (315)
Increase (decrease) in:
Checks written against future deposits................. (48) -- -- -- --
Accounts payable....................................... (264) 293 (87) 62 725
Accrued expenses....................................... (290) 777 (458) (1,342) 437
--------- --------- --------- --------- ---------
Net cash provided by operating activities.................... 4,187 8,345 6,570 4,172 4,255
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions........................... (807) (3,414) (15,664) (396) (2,571)
Proceeds from sale of property and equipment............... 28 -- 124 -- --
Increase in advances to affiliates......................... (116) (698) (4,904) (3,437) (4,173)
--------- --------- --------- --------- ---------
Net cash used in investing activities........................ (895) (4,112) (20,444) (3,833) (6,744)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of dividends...................................... (1,128) (3,599) (2,757) (1,437) --
Proceeds from long-term debt............................... 8,949 1,175 11,448 461 1,413
Payments on long-term debt................................. (8,943) (1,660) (812) -- (211)
Members' contributions..................................... -- 1 -- -- --
Increase (decrease) in advances from affiliates............ (1,668) (162) 6,415 1,029 1,147
Increase (decrease) in advances from stockholder........... -- -- (525) (525) --
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities.......... (2,790) (4,245) 13,769 (472) 2,349
--------- --------- --------- --------- ---------
Net increase (decrease) in cash.............................. 502 (12) (105) (133) (142)
Cash, beginning of period.................................... 15 517 505 505 400
--------- --------- --------- --------- ---------
Cash, end of period.......................................... $ 517 $ 505 $ 400 $ 372 $ 258
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to Combined Financial Statements.
F-34
<PAGE>
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying combined financial statements include the accounts of three
S-Corporations (Seaside Resorts, Ltd. d/b/a Oyster Bay Golf Club; Heritage Golf
Club, Ltd.; and Golf Legends, Ltd.) and one limited liability company (Legends
of Virginia, LC). The entities, referred to collectively as Legends Golf, are
engaged in the operation of golf courses in North Carolina and South Carolina,
and Virginia.
The accompanying combined financial statements of Legends Golf have been
presented on a historical cost basis since the Legends Golf is to be the subject
of a business combination upon the contribution of real estate and other
properties in exchange for interest in a limited partnership to be formed by the
operating partnership for inclusion in a public offering (see Note 9). All
significant intercompany balances and transactions have been eliminated.
Additionally, certain classifications may vary from those of the individual
companies' financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are valued at the lower-of-cost (first-in, first-out) or market
and consist primarily of food, beverages, golf equipment, and clothing.
REVENUE RECOGNITION
Revenue from green fees, cart rentals, food and beverage sales, merchandise
sales, and range income are generally recognized at the time of sale.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets using straight-line methods for financial
reporting and accelerated methods for income tax purposes.
Estimated useful lives for major asset categories approximate:
<TABLE>
<CAPTION>
DESCRIPTION YEARS
- ---------------------------------------- -----
<S> <C>
Golf courses............................ 15
Buildings............................... 40
Machinery and equipment................. 3-8
Furniture............................... 8
Golf carts.............................. 5
</TABLE>
Major renewals and betterments are capitalized. Maintenance, repairs and
minor renewals are expensed as incurred. When properties are retired or
otherwise disposed of, related cost and accumulated depreciation are removed
from the accounts.
INCOME TAXES
For the S-Corporations, the absence of a provision for income taxes is due
to the election by the companies, and consent by their sole stockholder, to
include the taxable income or loss of the companies in his individual tax
returns. As a result, no federal or state income taxes are imposed on the
companies. For the limited liability company, no provision has been made for
income taxes or related credits as under the Internal Revenue Code as a limited
liability company is treated as a partnership for income tax purposes.
Therefore, the results of operations are includable in the income tax returns of
the members.
F-35
<PAGE>
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of combined financial statements in conformity with
generally accepted accounting principles required management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject Legends Golf to
concentration of credit risk consist primarily of trade receivables.
Concentration of credit risk with respect to trade receivables, which
consists primarily of golf packages from hotels and charges, is limited due to
the large number of hotels comprising Legends Golf's customer base. The trade
receivables are billed and due monthly, and all probable bad debt losses have
been appropriately considered in establishing an allowance for doubtful
accounts. As of December 31, 1994, 1995, and June 30, 1996, the Company had no
significant concentration of credit risk.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" (Statement No. 121).
Statement No. 121 requires that long-lived assets and certain intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Legends Golf
periodically reevaluates the carrying amounts of its long-lived assets and the
related depreciation and amortization periods are discussed above, and Legends
Golf believes that the adoption of Statement No. 121 will not have a material
effect on its combined financial statements. This statement is effective for
fiscal years beginning after December 15, 1995.
ADVERTISING
Legends Golf expenses advertising costs as incurred. Advertising costs
included in general and administrative costs in the amounts of $446, $403, and
$418 for December 31, 1993, 1994, and 1995, respectively. Amounts expended for
the periods ended June 30, 1995 and 1996, were $210 and $318, respectively.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1995 and
1996, are unaudited; however, in the opinion of the management, the interim
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
3. RELATED PARTY TRANSACTIONS
The Legends' sole stockholder (majority member) also owns and operates Marsh
Harbour, Ltd.; Heritage Plantation, Ltd.; Legends Golf Development, Ltd.; The
Legends Group, Ltd.; Legends Scottish Village, LLC; Legends Properties, LLC;
Legends Golf Resorts, LLC; and other related businesses.
The Legends Group, Ltd. provides various management and administrative
services including reservations, advertising, accounting, payroll and related
benefits, and telephone for all affiliated companies. These expenses are
allocated to the businesses using procedures deemed appropriate to the nature of
the expenses
F-36
<PAGE>
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
involved. The procedures utilize various allocation bases such as relative
investment and number of employees and direct effort expended. Interest on
allocated external debt is charged as incurred. Legends Golf's management
believes the allocations are reasonable, but they are not necessarily indicative
of the costs that would have been incurred if the businesses had operated as
separate companies. Administrative fees paid by Legends Golf for such services
are as follows.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- ---------
<S> <C>
1993.................................... $ 1,485
1994.................................... $ 934
1995.................................... $ 1,065
<CAPTION>
SIX-MONTH PERIOD ENDED JUNE 30,
- ----------------------------------------
<S> <C>
1995.................................... $ 533
1996.................................... $ 593
</TABLE>
Advances to and from affiliated companies, stockholder receivable and
accrued land lease (Note 7), as shown on the balance sheets, have no fixed
payment/repayment provisions.
Interest income and expense on advances to and from affiliates is not
recorded for financial statement purposes.
Legends Golf paid an affiliate approximately $18,221 for construction of two
golf courses which represented cost plus seven percent.
4. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Golf courses............................ $ 15,267 $ 15,297 $ 32,677
Buildings............................... 3,466 3,835 4,692
Machinery and equipment................. 2,808 3,549 3,788
Furniture............................... 716 727 735
Golf carts.............................. 1,439 1,439 1,448
Construction-in-progress,............... 2,469 16,821 --
--------- --------- ---------
26,155 41,668 44,239
Less accumulated depreciation........... 7,854 9,569 10,501
--------- --------- ---------
Net property and equipment.............. $ 18,301 $ 32,099 $ 33,738
--------- --------- ---------
--------- --------- ---------
</TABLE>
5. RETIREMENT PLAN
The Legends Group, Ltd. sponsors a defined-contribution retirement plan for
all eligible employees, of Legends Golf and other affiliated companies including
officers. The plan provides for contributions by Legends
F-37
<PAGE>
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
5. RETIREMENT PLAN (CONTINUED)
Golf equal to the level funding amount as calculated and defined in the plan
agreement for its eligible employees. The actual benefit, at any point in time
for each participant, is the actual value of the participant's account based on
the earnings or losses experienced by the plan. Retirement plan expense was:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1993.................................... $ 64
1994.................................... $ 93
1995.................................... $ 71
<CAPTION>
SIX-MONTH PERIOD ENDED JUNE 30,
- ----------------------------------------
<S> <C>
1995.................................... $ 40
1996.................................... $ 41
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- ------------
<S> <C> <C> <C>
6.25% note payable to bank collateralized by substantially all assets (1)..... $ 14,666 $ 14,152 $ 14,124
Note payable to bank at prime (8.5% as of December 31, 1995) (2).............. -- 11,048 12,473
Notes payable to bank, due in monthly installments of principal plus interest
at prime to dates ranging from November 1996 to May 1998; collateralized by
golf carts having a net book value of $925 at June 30, 1996.................. 1,049 687 507
Notes payable to financing corporation maturing February 1997 and April 2000
with monthly payments of principal plus interest at prime plus .9% to 1.15%
collateralized by equipment with a net book value of $601.................... -- 519 474
Repaid in 1995................................................................ 25 -- --
--------- --------- ------------
15,740 26,376 27,578
Less current maturities....................................................... 1,076 1,710 624
--------- --------- ------------
Total long-term debt.......................................................... $ 14,665 $ 24,666 $ 26,954
--------- --------- ------------
--------- --------- ------------
</TABLE>
- ------------
(1) Legends Golf, along with certain affiliated companies (The Legends Group,
Ltd. and Marsh Harbour, Ltd.), participate in a debt agreement with a bank
consisting of two term notes totaling $17,804 as of June 30, 1996. The
aforementioned companies are jointly liable for the debt and the sole
stockholder has guaranteed the loans.
Effective October 26, 1996, the rate was adjusted to the bank's prime rate.
(2) On April 19, 1995, the Legends of Virginia, LC obtained a loan with a bank
totaling $13,925. In addition, on this date, the affiliated entities amended
an existing loan agreement of which the Legends of Virginia, LC is jointly
liable. These loans are guaranteed by the majority member and collateralized
by the two new golf courses, New Kent and Stonehouse, and existing
affiliated courses and clubhouses and other assets of the majority member.
F-38
<PAGE>
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
6. LONG-TERM DEBT (CONTINUED)
Payment terms on the above notes are from October 25, 1996, $69 monthly plus
interest; from October 25, 1997, $75 monthly plus interest; from October 25,
1998, $82 monthly plus interest; total remaining due in balloon payment on
October 25, 1999.
The loan agreements provide among other covenants, restrictions on certain
financial ratios, a minimum aggregate cash balance of $250, payments to the
sole stockholder, capital expenditures, indebtedness, liens, changes in the
nature of the business and significant other limitations as to the use of
funds. Legends Golf had obtained a waiver of certain of the covenants not
met as of December 31, 1995 and June 30, 1996.
Legends Golf is jointly liable as a guarantor, along with the sole
stockholder, with other affiliated entities for additional amounts totaling
$2,268.
Total debt of all affiliated entities of which Legends Golf is jointly
liable is approximately $32,718, at June 30, 1995.
The aggregate annual maturities for the above mortgage notes payable at June
30, 1996, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, AMOUNT
- ---------------------------------------- ---------
<S> <C>
1996 (six months)....................... $ 420
1997.................................... 1,987
1998.................................... 1,935
1999.................................... 22,293
2000.................................... 108
2001.................................... 48
Thereafter.............................. 787
---------
Total................................... $ 27,578
---------
---------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
LEASES (Note 9)
Legends Golf leases the land for two of the entities included in the
combined financials from the sole stockholder. Legends Golf has four leases from
the sole stockholder one expiring in 2006, two expiring in 2009, and one in
2012. An additional lease from a third party expires in 2032. The leases require
rental payments of 10% of monthly green fees as defined in the lease agreements.
The leases do not contain an option to purchase the land. Total lease expense
approximates the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, STOCKHOLDER OTHER
- ---------------------------------------- ------------- -----------
<S> <C> <C>
1993.................................... $ 669 $ 234
1994.................................... $ 728 $ 228
1995.................................... $ 734 $ 248
<CAPTION>
SIX-MONTH PERIOD ENDED JUNE 30,
- ----------------------------------------
<S> <C> <C>
1995.................................... $ 450 $ 141
1996.................................... $ 445 $ 138
</TABLE>
F-39
<PAGE>
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
SELF-INSURANCE
Legends Golf along with its affiliates maintain a self-insurance program for
that portion of health care costs not covered by insurance. Legends Golf is
liable for claims up to $15 per employee annually with an annual aggregate
maximum liability under the program for all entities included in these combined
financials which totals $225. Cumulative amounts estimated to be payable by
Legends Golf with respect to pending and potential claims have been accrued as
liabilities.
EMPLOYMENT AGREEMENT
Legends Golf, along with other affiliated entities, have an employment
agreement with an officer that expires in 1998. The agreement provides basic
compensation in addition to other incentives and bonuses based upon certain
conditions as defined in the agreement.
8. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- ---------
<S> <C>
1993.................................... $ 607
1994.................................... $ 1,016
1995.................................... $ 1,574
<CAPTION>
SIX-MONTH PERIOD ENDED JUNE 30,
- ----------------------------------------
<S> <C>
1995.................................... $ 505
1996.................................... $ 725
</TABLE>
During 1993, equipment having a net book value of $334 and cash of $176 was
exchanged for similar new equipment having a value of $480.
During 1994, equipment having a net book value of $827 and cash of $333 was
exchanged for similar new equipment having a value of $1,159.
During 1994, $1,078 of receivables from the sole stockholder were settled
through the declaration of a dividend.
During 1995, $898 of land lease payable to stockholder were netted against
receivables from the stockholder.
9. PROPOSED CONTRIBUTION OF ASSETS
The Company is in negotiations to contribute the Company's interest in the
golf courses properties and related equipment along with related debt to a newly
formed partnership, Golf Trust of America, L.P. (GTA LP) in exchange for a
limited partnership interest in GTA LP. A newly formed affiliate would lease the
golf course properties and related equipment from GTA LP. GTA LP's general
partner, Golf Trust of America, Inc. intends to file a Form S-11 registration
statement with the Securities and Exchange Commission in connection with a
proposed offering of shares to the public.
F-40
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Golf Legends, Ltd.
Myrtle Beach, South Carolina
We have audited the accompanying balance sheets of GOLF LEGENDS, LTD. as of
December 31, 1995 and 1994, and the related statements of income and retained
earnings, and cash flows for each of the three years in the period ended
December 31, 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.
As more fully described in the notes to the financial statements, the
Company has material transactions with its stockholder and affiliates.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GOLF LEGENDS, LTD. at
December 31, 1995 and 1994, 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.
BDO SEIDMAN, LLP
Charlotte, North Carolina
April 10, 1996, except for Note 5
which is as of November 7, 1996
F-41
<PAGE>
GOLF LEGENDS, LTD.
BALANCE SHEETS
(IN THOUSANDS)
ASSETS (NOTE 5)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT:
Cash......................................................................... $ 215 $ 216 $ 74
Accounts receivable (Notes 2 and 7).......................................... 1,188 356 796
Inventories.................................................................. 181 98 124
--------- --------- -----------
Total current assets..................................................... 1,584 670 994
--------- --------- -----------
Property and equipment (Notes 3, 5 and 6), less accumulated depreciation....... 12,218 11,654 11,205
--------- --------- -----------
Other assets:
Advances to affiliates (Note 1).............................................. 2,191 4,924 7,158
Other........................................................................ 85 39 15
--------- --------- -----------
Total other assets....................................................... 2,276 4,963 7,173
--------- --------- -----------
$ 16,078 $ 17,287 $ 19,372
--------- --------- -----------
--------- --------- -----------
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable............................................................. $ 282 $ 257 $ 316
Accrued expenses:
Land lease (Notes 1, 6 and 7)................................................ 898 -- 325
Retirement plan (Note 4)..................................................... 41 36 54
Other........................................................................ 206 200 155
Current maturities of long-term debt (Note 5)................................ 867 882 277
--------- --------- -----------
Total current liabilities................................................ 2,294 1,375 1,127
Advances from affiliates (Notes 1 and 5)....................................... 7 1,064 1,015
Advances from stockholder (Note 1)............................................. 525 -- --
Long-term debt, less current maturities (Note 5)............................... 12,739 12,061 12,519
--------- --------- -----------
Total liabilities........................................................ 15,565 14,500 14,661
--------- --------- -----------
Commitments and contingencies (Notes 4, 5 and 6)
Stockholder's equity:
Common stock, $1 par--shares authorized, 100,000; outstanding, 1,000......... 1 1 1
Additional paid-in capital................................................... 300 300 300
Retained earnings (Note 5 and 7)............................................. 212 2,486 4,410
--------- --------- -----------
Total stockholder's equity............................................... 513 2,787 4,711
--------- --------- -----------
$ 16,078 $ 17,287 $ 19,372
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying summary of significant accounting polices
and notes to financial statements.
F-42
<PAGE>
GOLF LEGENDS, LTD.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUE................................................................. $ 9,333 $ 9,948 $ 10,091 $ 5,973 $ 6,069
Cost of operations (Note 1)............................................. 6,537 6,998 6,995 3,522 3,780
--------- --------- --------- --------- ---------
OPERATING INCOME........................................................ 2,796 2,950 3,096 2,451 2,289
--------- --------- --------- --------- ---------
Other income (expense):
Interest............................................................ (562) (857) (877) (434) (397)
Miscellaneous....................................................... 34 98 89 33 32
--------- --------- --------- --------- ---------
Total other expense............................................... (528) (759) (788) (401) (365)
--------- --------- --------- --------- ---------
Net income.............................................................. 2,268 2,191 2,308 2,050 1,924
Retained earnings, beginning of period.................................. 879 919 212 212 2,486
Dividends (Notes 5 and 7)............................................... (2,228) (2,898) (35) -- --
--------- --------- --------- --------- ---------
Retained earnings, end of period........................................ $ 919 $ 212 $ 2,486 $ 2,262 $ 4,410
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying summary of significant accounting policies
and notes to financial statements.
F-43
<PAGE>
GOLF LEGENDS, LTD.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 2,268 $ 2,191 $ 2,308 $ 2,050 $ 1,924
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 1,088 1,291 1,257 614 638
Loss (gain) on sale of property........................ (2) -- -- -- --
Decrease (increase) in:
Accounts receivable................................ (1,322) 186 (54) 386 (440)
Inventories........................................ (38) (55) 83 61 (26)
Prepaid expenses/other assets...................... (140) -- (8) -- --
Increase (decrease) in:
Checks written against future deposits............... (8) -- -- -- --
Accounts payable..................................... (144) 148 (25) 84 59
Accrued expenses..................................... 94 551 (24) (1,055) 298
--------- --------- --------- ----------- ---------
Net cash provided by operating activities.................. 1,797 4,312 3,537 2,140 2,453
--------- --------- --------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions......................... (326) (748) (638) (339) (164)
Proceeds from sale of property and equipment............. 28 -- -- -- --
Increase in advances to affiliates....................... (574) (886) (2,733) (2,040) (2,234)
--------- --------- --------- ----------- ---------
Net cash used in investing activities...................... (872) (1,634) (3,371) (2,379) (2,398)
--------- --------- --------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends..................................... -- (2,370) (35) -- --
Proceeds from long-term debt............................. 8,447 733 53 -- --
Payments on long-term debt............................... (8,429) (1,123) (715) 564 (147)
Increase (decrease) in advances from affiliates.......... (657) 7 1,057 (6) (50)
Decrease in advances from stockholder.................... -- -- (525) (473) --
--------- --------- --------- ----------- ---------
Net cash provided by (used in) financing activities........ (640) (2,753) (165) 85 (197)
--------- --------- --------- ----------- ---------
Net increase (decrease) in cash............................ 285 (75) 1 (154) (142)
Cash, beginning of period.................................. 4 289 215 215 215
--------- --------- --------- ----------- ---------
Cash, end of period........................................ $ 289 $ 215 $ 216 $ 61 $ 74
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
See accompanying summary of significant accounting policies
and notes to financial statements.
F-44
<PAGE>
GOLF LEGENDS, LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
BUSINESS
Golf Legends, Ltd. (the Company) owns and operates three golf courses,
"Heathland Links," "Moorland Links," and "Parkland Links," located in Myrtle
Beach, South Carolina.
INVENTORIES
Inventories are valued at the lower-of-cost (first-in, first-out) or market
and consist primarily of food, beverages, golf equipment and clothing.
REVENUE RECOGNITION
Revenue from green fees, cart rentals, food and beverage sales, merchandise
sales, and range income are generally recognized at the time of sale.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets using straight-line methods for financial
reporting and accelerated methods for income tax purposes.
Estimated useful lives for major asset categories approximate:
<TABLE>
<CAPTION>
DESCRIPTION YEARS
- ---------------------------------------- -----
<S> <C>
Golf courses............................ 15
Buildings............................... 40
Machinery and equipment................. 3-8
Furniture............................... 8
Golf carts.............................. 5
</TABLE>
Major renewals and betterments are capitalized. Maintenance, repairs and
minor renewals are expensed as incurred. When properties are retired or
otherwise disposed of, related cost and accumulated depreciation are removed
from the accounts.
INCOME TAXES
The absence of a provision for income taxes is due to the election by the
Company, and consent by its stockholder, to include the taxable income or loss
of the Company in his individual tax returns. As a result, no federal or state
income taxes are imposed on the Company.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consist primarily of trade receivables.
Concentration of credit risk with respect to trade receivables, which
consists primarily of golf packages from hotels and charges, is limited due to
the large number of hotels comprising the Company's customer base.
F-45
<PAGE>
GOLF LEGENDS, LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
The trade receivables are billed and due monthly, and all probable bad debt
losses have been appropriately considered in establishing an allowance for
doubtful accounts. As of December 31, 1994, 1995, and June 30, 1996, the Company
had no significant concentration of credit risk.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" (Statement No. 121).
Statement No. 121 requires that long-lived assets and certain intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company
periodically reevaluates the carrying amounts of its long-lived assets and the
related depreciation and amortization periods are discussed above, and the
Company believes that the adoption of Statement No. 121 will not have a material
effect on its combined financial statements. This statement is effective for
fiscal years beginning after December 15, 1995.
ADVERTISING
Golf Legends expenses advertising costs as incurred. Advertising costs
included in general and administrative costs in the amounts of $275, $234, and
$258 for December 31, 1993, 1994, and 1995, respectively. Amounts expended for
the periods ended June 30, 1995 and 1996, were $132 and $95, respectively.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1995 and
1996, are unaudited; however, in the opinion of the management, the interim
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
F-46
<PAGE>
GOLF LEGENDS, LTD.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
1. AFFILIATED COMPANIES
The Company's sole stockholder also owns and operates Marsh Harbour, Ltd.;
Seaside Resorts, Ltd. (d/b/a Oyster Bay Golf Links); Heritage Golf Club, Ltd.;
Heritage Plantation Ltd.; Legends Golf Development, Ltd.; The Legends Group,
Ltd.; Legends of Virginia, LC; and other businesses.
The Legends Group, Ltd. provides various management and administrative
services including reservations, advertising, accounting, payroll and related
benefits, and telephone for all affiliated companies. These expenses are
allocated to the businesses using procedures deemed appropriate to the nature of
the expenses involved. The procedures utilize various allocation bases such as
relative investment and number of employees and direct effort expended. Interest
on allocated external debt is charged as incurred. Legends Golf's management
believes the allocations are reasonable, but they are not necessarily indicative
of the costs that would have been incurred if the businesses had operated as
separate companies. Administrative fees paid by the Legends Golf for such
services are as follows.
Administrative fees paid by the Company for such services are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1993.................................. $ 891
1994.................................. $ 560
1995.................................. $ 639
<CAPTION>
SIX-MONTH PERIOD ENDED JUNE 30,
- ----------------------------------------
<S> <C>
1995.................................. $ 320
1996.................................. $ 320
</TABLE>
Advances to and from affiliated companies, stockholder receivable (Note 2)
and accrued land lease (Note 6), as shown on the balance sheets, have no fixed
payment/repayment provisions and are noninterest bearing.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995 JUNE 30, 1996
--------- --------- ---------------
<S> <C> <C> <C>
Golf packages........................... $ 272 $ 311 $ 579
Related parties......................... 30 45 70
Stockholder (Note 1).................... 886 -- 147
--------- --- ---
$ 1,188 $ 356 $ 796
--------- --- ---
--------- --- ---
</TABLE>
F-47
<PAGE>
GOLF LEGENDS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
3. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995 JUNE 30, 1996
--------- --------- -------------
<S> <C> <C> <C>
Golf courses............................ $ 11,642 $ 11,642 $ 11,699
Buildings............................... 2,069 2,567 2,599
Machinery and equipment................. 1,441 1,648 1,738
Furniture............................... 248 256 259
Golf carts.............................. 877 877 887
Construction-in-progress................ 101 27 --
--------- --------- -------------
16,379 17,017 17,182
Less accumulated depreciation........... 4,161 5,363 5,977
--------- --------- -------------
Net property and equipment.............. $ 12,218 $ 11,654 $ 11,205
--------- --------- -------------
--------- --------- -------------
</TABLE>
The estimated cost to complete the construction-in-progress is approximately
$216, $21 and $0 as of December 31, 1994 and 1995, and June 30, 1996,
respectively.
4. RETIREMENT PLAN
Legends Group, Ltd. sponsors a defined-contribution retirement plan for all
eligible employees, of Golf Legends and other affiliated companies including
officers. The plan provides for contributions by the Company equal to the level
funding amount as calculated an defined in the plan agreement. The actual
benefit, at any point in time for each participant, is the actual value of the
participant's account based on the earnings or losses experienced by the plan.
Retirement plan expense was
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1993.................................... $ 36
1994.................................... 54
1995.................................... 53
<CAPTION>
SIX MONTHS END JUNE 30,
- ----------------------------------------
<S> <C>
1995.................................... 23
1996.................................... 18
</TABLE>
F-48
<PAGE>
GOLF LEGENDS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995 JUNE 30, 1996
--------- --------- -------------
<S> <C> <C> <C>
6.25% note payable to bank, collateralized by substantially all assets(1).... $ 12,910 $ 12,455 $ 12,428
Notes payable to bank, due in monthly installments of $20,000, including
interest at prime (8.5% as of December 31, 1995) to dates ranging from
November 1996 to May 1998; collateralized by golf carts having a net book
value of $565,000 at June 30, 1996.......................................... 670 435 317
Note payable to a finance company maturing April 2000 with monthly payments
of $1,000 plus interest at prime plus 1.15%; collateralized by equipment
with a net book value of $189,000........................................... -- 53 51
Paid in 1995................................................................. 26 -- --
--------- --------- -------------
13,606 12,943 12,796
Less current maturities...................................................... 867 882 277
--------- --------- -------------
Total long-term debt......................................................... $ 12,739 $ 12,061 $ 12,519
--------- --------- -------------
--------- --------- -------------
</TABLE>
- ------------
(1) The Company, along with certain affiliated companies (The Legends Group,
Ltd.; Seaside Resorts, Ltd.; Marsh Harbour, Ltd.; and Heritage Golf Club,
Ltd.), participates in a debt agreement with a bank consisting of two term
notes totaling $17,804 as of June 30, 1996. The aforementioned companies are
jointly liable for the debt and the sole stockholder as guaranteed the
loans.
Effective October 25, 1996, the rate on the notes was adjusted to the bank's
prime rate.
The outstanding balance at June 30, 1996, has been allocated to the various
entities based on the original use of the loan proceeds net of payments to date
as follows:
<TABLE>
<CAPTION>
AFFILIATE AMOUNT
- -------------------------------------------------- -------------
<S> <C>
Marsh Harbour, Ltd................................ $ 3,680
Seaside Resorts, Ltd.............................. 960
Golf Legends, Ltd................................. 12,428
Heritage Golf Club, Ltd........................... 736
-------------
$ 17,804
-------------
-------------
</TABLE>
On April 19, 1995, the Company, along with the affiliated entities, amended
the bank loan agreement and increased the total available loan by approximately
$13,925 ($12,473 outstanding at June 30, 1996). These funds are to be used for
construction of golf courses by an affiliated entity, Legends of Virginia, LC.
Payment terms on the above Notes are from October 25, 1996, $69 monthly plus
interest; from October 25, 1997, $75 monthly plus interest; from October 25,
1998, $82 monthly plus interest; total remaining due in balloon payment on
October 25, 1999.
F-49
<PAGE>
GOLF LEGENDS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
5. LONG-TERM DEBT (CONTINUED)
The loan agreements provide, among other covenants, restrictions on certain
financial ratios, a minimum aggregate cash balance of $250, payments to the sole
stockholder, capital expenditures, indebtedness, liens, changes in the nature of
the business and significant other limitations as to the use of funds. The
Company had obtained a waiver for those covenants not met at December 31, 1995
and June 30, 1996.
The Company is jointly liable as a guarantor, along with the sole
stockholder, with other affiliated entities for additional amounts totaling
$2,268.
Total debt of all affiliated entities of which the Company is jointly liable
is approximately $32,718 at June 30, 1996.
The aggregate annual maturities are as follows:
<TABLE>
<S> <C>
1996 (six months)...................................... $ 277
1997................................................... 861
1998................................................... 757
1999................................................... 10,002
2000................................................... 63
2001................................................... 48
Thereafter............................................. 788
-----------
Total.................................................. $ 12,796
-----------
-----------
</TABLE>
6. COMMITMENTS
LEASES
The Company leases the land for the golf courses from the sole stockholder.
As of June 30, 1996, the Company has three leases for the golf courses, two
expiring in 2009 and one in 2012. The leases require rental payments of 10% of
monthly green fees as defined in the lease agreements. The total rental expense
approximated the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------
<S> <C>
1993......................................................................... $ 494
1994......................................................................... 531
1995......................................................................... 534
<CAPTION>
SIX MONTH PERIOD END JUNE 30,
- -----------------------------------------------------------------------------
<S> <C>
1995......................................................................... 325
1996......................................................................... 325
</TABLE>
SELF-INSURANCE
The Company and its affiliates maintain a self-insurance program for that
portion of health care costs not covered by insurance. The Company is liable for
claims up to $15 per employee annually with an annual aggregate maximum
liability under the program for all companies of $225. Cumulative amounts
estimated to be payable by the Company with respect to pending and potential
claims have been accrued as liabilities.
F-50
<PAGE>
GOLF LEGENDS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
6. COMMITMENTS (CONTINUED)
EMPLOYMENT AGREEMENT
The Company, along with other affiliated entities, has an employment
agreement with an officer that expires in 1998. The agreement provides basic
compensation in addition to other incentives and bonuses based upon certain
conditions as defined in the agreement.
7. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Cash paid during the year for interest............................... $ 873 $ 876
</TABLE>
During 1994, equipment having a net book value of $419 and cash of $227 was
exchanged for similar new equipment having a value of $645.
During 1994, $527 of receivables from the stockholder were settled through
the declaration of a dividend.
During 1995, $898 of land lease payables to stockholder were netted against
receivables from stockholders.
8. PROPOSED CONTRIBUTION OF ASSETS
The Company is in negotiations to contribute the Company's interest in the
golf courses properties and related equipment along with related debt to a newly
formed partnership, Golf Trust of America, L.P. (GTA LP) in exchange for a
limited partnership interest in GTA LP. A newly formed affiliate would lease the
golf course properties and related equipment from GTA LP. GTA LP's general
partner, Golf Trust of America, Inc. intends to file a Form S-11 registration
statement with the Securities and Exchange Commission in connection with a
proposed offering of shares to the public.
F-51
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Heritage Golf Club, Ltd.
Myrtle Beach, South Carolina
We have audited the accompanying balance sheets of Heritage Golf Club, Ltd.
as of December 31, 1995 and 1994, and the related statements of income and
retained earnings, and cash flows for each of the three years in the period
ended December 31, 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.
As more fully described in the notes to the financial statements, the
Company has material transactions with its stockholder and affiliates.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Heritage Golf Club, Ltd. at
December 31, 1995 and 1994, 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.
BDO SEIDMAN, LLP
Charlotte, North Carolina
April 10, 1996, except for Note 4
in which as of November 7, 1996.
F-52
<PAGE>
HERITAGE GOLF CLUB, LTD.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1994 1995 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTE 5)
CURRENT:
Cash.................................................................................... $ 152 $ 75 $ 101
Accounts receivable (Notes 1 and 6)..................................................... 92 144 365
Inventories............................................................................. 98 76 82
Prepaid expenses........................................................................ 16 2 2
------ ------ -----------
Total current assets.................................................................. 359 297 550
------ ------ -----------
Property and equipment (Notes 2 and 4), less accumulated depreciation..................... 2,526 2,160 2,031
------ ------ -----------
Advances to affiliates, net (Note 1)...................................................... 1 956 1,941
------ ------ -----------
$2,886 $3,413 $4,522
------ ------ -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................................ $ 138 $ 108 $ 77
Accrued expenses:
Land lease (Notes 5).................................................................. 420 -- 120
Retirement plan (Note 3).............................................................. 25 23 34
Other................................................................................. 86 85 66
Current maturities of long-term debt (Note 4)............................................. 99 89 41
------ ------ -----------
Total current liabilities........................................................... 768 305 338
Advances from affiliates (Notes 1)........................................................ -- 595 596
Long-term debt, less current maturities (Note 4).......................................... 853 773 790
------ ------ -----------
Total liabilities................................................................... 1,621 1,673 1,724
------ ------ -----------
Commitments (Notes 3 and 5)
Stockholder's equity:
Common stock, $1 par--shares authorized, 100,000; outstanding, 1,000.................... 1 1 1
Retained earnings (Note 4 and 6)........................................................ 1,264 1,739 2,797
------ ------ -----------
Total stockholder's equity.......................................................... 1,265 1,740 2,798
------ ------ -----------
$2,886 $3,413 $4,522
------ ------ -----------
------ ------ -----------
</TABLE>
See accompanying summary of significant accounting policies
and notes to financial statements.
F-53
<PAGE>
HERITAGE GOLF CLUB, LTD.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE.......................................................... $ 3,332 $ 3,881 $ 3,939 $ 2,346 $ 2,327
Cost of operations (Note 1)...................................... 2,783 2,769 2,761 1,406 1,242
--------- --------- --------- --------- ---------
OPERATING INCOME................................................. 549 1,112 1,178 940 1,085
--------- --------- --------- --------- ---------
Other income (expense):
Interest..................................................... (26) (63) (63) (32) (27)
Miscellaneous................................................ 7 53 -- -- --
--------- --------- --------- --------- ---------
Total other expense........................................ (19) (10) (63) (32) (27)
--------- --------- --------- --------- ---------
Net income....................................................... 530 1,103 1,115 908 1,058
Retained earnings, beginning of period........................... 578 858 1,264 1,264 1,739
Dividends (Notes 4 and 6)........................................ (250) (697) (639) (254) --
--------- --------- --------- --------- ---------
Retained earnings, end of period................................. $ 858 $ 1,264 $ 1,740 $ 1,918 $ 2,797
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying summary of significant accounting policies
and notes to financial statements.
F-54
<PAGE>
HERITAGE GOLF CLUB, LTD.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 530 $ 1,103 $ 1,114 $ 908 $ 1,058
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss of sale of assets........................................ -- -- 5 -- --
Depreciation.................................................. 332 358 319 156 155
(Increase) decrease) in:
Accounts receivable......................................... (55) 112 (52) (101) (220)
Inventories................................................. 5 (27) 22 26 (6)
Prepaid expenses/other assets............................... 3 (16) 15 (2) --
Increase (decrease) in:
Checks written against future deposits...................... (13) -- -- -- --
Accounts payable............................................ (24) 74 (30) (31) 31
Accrued expenses............................................ (310) 210 (423) (326) 112
--------- --------- --------- --------- ---------
Net cash provided by operating activities......................... 469 1,815 969 632 1,068
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions................................ (320) -- -- (72) (25)
Proceeds from sale of assets.................................... -- -- 124 -- --
Purchases of property and equipment............................. -- (91) (82) -- --
Increase in advances to affiliates.............................. -- (1) (955) (674) (986)
--------- --------- --------- --------- ---------
Net cash used in investing activities............................. (320) (92) (913) (746) (1,011)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends............................................ -- (146) (639) (254) --
Proceeds from long-term debt.................................... 253 222 -- -- --
Payments on long-term debt...................................... (241) (265) (89) (49) (32)
Increase (decrease) in advances from affiliates................. (48) (1,499) 595 410 1
--------- --------- --------- --------- ---------
Net cash used in financing activities............................. (36) (1,689) (133) 107 (31)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash................................... 112 34 (77) (8) 26
Cash, beginning of period......................................... 6 119 152 152 75
--------- --------- --------- --------- ---------
Cash, end of period............................................... $ 119 $ 152 $ 75 $ 145 $ 101
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying summary of significant accounting policies
and notes to financial statements.
F-55
<PAGE>
HERITAGE GOLF CLUB, LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
BUSINESS
Heritage Golf Club, Ltd. (the Company) owns and operates Heritage Golf Club,
located on Pawleys Island, South Carolina.
INVENTORIES
Inventories are valued at the lower-of-cost (first-in, first-out) or market
and consist primarily of food, beverages, golf equipment and clothing.
REVENUE RECOGNITION
Revenue from green fees, cart rentals, food and beverage sales, merchandise
sales, and range income are generally recognized at the time of sale.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets using straight-line methods for financial
reporting and accelerated methods for income tax purposes.
Estimated useful lives for major asset categories approximate:
<TABLE>
<CAPTION>
DESCRIPTION YEARS
- ---------------------------------------- -----
<S> <C>
Golf courses............................ 15
Buildings............................... 40
Machinery and equipment................. 3-8
Furniture............................... 8
Golf carts.............................. 5
</TABLE>
Major renewals and betterments are capitalized. Maintenance, repairs and
minor renewals are expensed as incurred. When properties are retired or
otherwise disposed of, related cost and accumulated depreciation are removed
from the accounts.
INCOME TAXES
The absence of a provision for income taxes is due to the election by the
Company, and consent by its stockholder, to include the taxable income or loss
of the Company in his individual tax returns. As a result, no federal or state
income taxes are imposed on the Company.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consist primarily of trade receivables.
Concentration of credit risk with respect to trade receivables, which
consists primarily of golf packages from hotels and charges, is limited due to
the large number of hotels comprising the Company's customer base.
F-56
<PAGE>
HERITAGE GOLF CLUB, LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
The trade receivables are billed and due monthly, and all probable bad debt
losses have been appropriately considered in establishing an allowance for
doubtful accounts. As of December 31, 1994, 1995, and June 30, 1996, the Company
had no significant concentration of credit risk.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" (Statement No. 121).
Statement No. 121 requires that long-lived assets and certain intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company
periodically reevaluates the carrying amounts of its long-lived assets and the
related depreciation and amortization periods are discussed above, and the
Company believes that the adoption of Statement No. 121 will not have a material
effect on its combined financial statements. This statement is effective for
fiscal years beginning after December 15, 1995.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising costs
included in general and administrative costs in the amounts of $82, $76, and $81
for December 31, 1993, 1994, and 1995, respectively. Amounts expended for the
periods ended June 30, 1995 and 1996, were $38 and $37, respectively.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1995 and
1996, are unaudited; however, in the opinion of the management, the interim
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
F-57
<PAGE>
HERITAGE GOLF CLUB, LTD.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
1. AFFILIATED COMPANIES
The Company's sole stockholder also owns and operates Marsh Harbour, Ltd.;
Seaside Resorts, Ltd. (d/b/a Oyster Bay Golf Links); Heritage Plantation Ltd.;
Legends Golf Development, Ltd.; The Legends Group, Ltd.; Golf Legends, Ltd.;
Legends of Virginia, LC; and other businesses.
The Legends Group, Ltd. provides various management and administrative
services including reservations, advertising, accounting, payroll and related
benefits, and telephone for all affiliated companies. These expenses are
allocated to the businesses using procedures deemed appropriate to the nature of
the expenses involved. The procedures utilize various allocation bases such as
relative investment and number of employees and direct effort expended. Interest
on allocated external debt is charged as incurred. Legends Golf's management
believes the allocations are reasonable, but they are not necessarily indicative
of the costs that would have been incurred if the businesses had operated as
separate companies. Administrative fees paid by the Legends Golf for such
services are as follows.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1993.................................. $ 297
1994.................................. $ 187
1995.................................. $ 213
<CAPTION>
SIX-MONTH PERIOD ENDED JUNE 30, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1995.................................. $ 107
1996.................................. $ 107
</TABLE>
Advances to and from affiliated companies, stockholder receivable and
accrued land lease (Note 5), as shown on the balance sheets, have no fixed
payment/repayment provisions and are noninterest bearing.
2. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
Golf course............................. $ 2,490 $ 2,511 $ 2,511
Machinery and equipment................. 699 757 783
Furniture and fixtures.................. 363 366 366
Buildings............................... 1,161 1,032 1,032
Golf carts.............................. 296 296 296
--------- --------- -----------
5,010 4,963 4,988
Less accumulated depreciation........... 2,484 2,803 2,958
--------- --------- -----------
Net property and equipment.............. $ 2,526 $ 2,160 $ 2,031
--------- --------- -----------
--------- --------- -----------
</TABLE>
3. RETIREMENT PLAN
The Company and its affiliates sponsor a defined-contribution retirement
plan for all eligible employees, including officers. The plan provides for
contributions by the Company equal to the level funding amount as
F-58
<PAGE>
HERITAGE GOLF CLUB, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
3. RETIREMENT PLAN (CONTINUED)
calculated an defined in the plan agreement. The actual benefit, at any point in
time for each participant, is the actual value of the participant's account
based on the earnings or losses experienced by the plan. Retirement plan
expense:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -------------
<S> <C>
1993.................................. $ 13
1994.................................. $ 26
1995.................................. $ 24
<CAPTION>
SIX MONTHS ENDED JUNE 30,
- ----------------------------------------
<S> <C>
1995.................................. $ 11
1996.................................. $ 11
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
6.25% note payable to bank, collateralized by substantially all assets (1).... $ 761 $ 737 $ 736
Note payable to bank, due in monthly installments of $5, including interest at
prime (8.5% as of December 31, 1995) to February 1997; collateralized by golf
carts having a net book value of $180 at December 31, 1995................... 190 127 95
--- --- ---
952 864 831
Less current maturities....................................................... 99 89 41
--- --- ---
Total long-term debt.......................................................... $ 853 $ 773 $ 790
--- --- ---
--- --- ---
</TABLE>
- ------------
(1) The Company, along with certain affiliated companies (The Legends Group,
Ltd.; Seaside Resorts, Ltd.; Golf Legends, Ltd.; and Marsh Harbour, Ltd.),
participates in a debt agreement with a bank consisting of two term notes
totaling $17,804 as of December 31, 1995. The aforementioned companies are
jointly liable for the debt and the sole stockholder as guaranteed the
loans.
The outstanding balance at December 31, 1995, has been allocated to the
various entities based on the original use of the loan proceeds net of payments
to date as follows:
<TABLE>
<CAPTION>
AFFILIATE AMOUNT
- ---------------------------------------- ---------
<S> <C>
Marsh Harbour, Ltd...................... $ 3,680
Seaside Resorts, Ltd.................... 960
Golf Legends, Ltd....................... 12,428
Heritage Golf Club, Ltd................. 736
---------
$ 17,804
---------
---------
</TABLE>
On April 19, 1995, the Company, along with the affiliated entities, amended
the bank loan agreement and increased the total available loan by approximately
$13,925 ($12,473 outstanding at June 30, 1996). These funds are to be used for
construction of golf courses by an affiliated entity, Legends of Virginia, LC.
F-59
<PAGE>
HERITAGE GOLF CLUB, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
4. LONG-TERM DEBT (CONTINUED)
Payment terms on the above notes are from October 26, 1996, $69 monthly plus
interest; from October 25, 1997, $75 monthly plus interest; from October 25,
1998, $82 monthly plus interest; total remaining due in balloon payment on
October 25, 1999.
The loan agreement provides, among other covenants, restrictions on certain
financial ratios, a minimum aggregate cash balance of $250, payments to the sole
stockholder, capital expenditures, indebtedness, liens, changes in the nature of
the business and significant other limitations as to the use of funds. The
Company obtained a waiver for those covenants not met at December 31, 1996 and
June 30, 1996.
The Company is jointly liable as a guarantor, along with the sole
stockholder, with other affiliated entities for additional amounts totaling
$2,268.
Total debt of all affiliated entities of which the Company is jointly liable
is approximately $32,718 at June 30, 1996.
The aggregate annual maturities are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1996 (six months)..................... $ 41
1997.................................. 63
1998.................................. 89
1999.................................. 638
---
Total............................... $ 831
---
---
</TABLE>
5. COMMITMENTS
LEASES
The Company leases the land for the golf course from the sole stockholder.
The lease expires in June 2006 and requires a rental payment of 10% of the
monthly green fees as defined in the lease agreements. The total rental expense
for the land approximates:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -------------
<S> <C>
1993.................................. $ 175
1994.................................. $ 197
1995.................................. $ 200
<CAPTION>
SIX MONTHS ENDED JUNE 30,
- ----------------------------------------
<S> <C>
1995.................................. $ 125
1996.................................. $ 120
</TABLE>
SELF-INSURANCE
The Company and its affiliates maintain a self-insurance program for that
portion of health care costs not covered by insurance. The Company is liable for
claims up to $15 per employee annually with an annual aggregate maximum
liability under the program for all companies of $225. Cumulative amounts
estimated to be payable by the Company with respect to pending and potential
claims have been accrued as liabilities.
F-60
<PAGE>
HERITAGE GOLF CLUB, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
5. COMMITMENTS (CONTINUED)
EMPLOYMENT AGREEMENT
The Company, along with other affiliated entities, has an employment
agreement with an officer that expires in 1998. The agreement provides basic
compensation in addition to other incentives and bonuses based upon certain
conditions as defined in the agreement.
6. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -------------
<S> <C>
1993.................................. $ 26
1994.................................. $ 64
1995.................................. $ 63
<CAPTION>
PERIOD ENDED JUNE 30,
- ----------------------------------------
<S> <C>
1996.................................. $ 107
1995.................................. $ 107
</TABLE>
During 1994, equipment having a net book value of $204 and cash of $53 was
exchanged for similar new equipment having a value of $257.
During 1994, $551 of receivables from the stockholder were settled through
the declaration of a dividend.
During 1993, equipment having a net book value of $167 and cash of $88 was
exchanged for similar new equipment having a value of $255.
7. PROPOSED CONTRIBUTION OF ASSETS
The Company is in negotiations to contribute the Company's interest in the
golf courses properties and related equipment along with related debt to a newly
formed partnership, Golf Trust of America, L.P. (GTA LP) in exchange for a
limited partnership interest in GTA LP. A newly formed affiliate would lease the
golf course properties and related equipment from GTA LP. GTA LP's general
partner, Golf Trust of America, Inc. intends to file a Form S-11 registration
statement with the Securities and Exchange Commission in connection with a
proposed offering of shares to the public.
F-61
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Seaside Resorts, Ltd.
Myrtle Beach, South Carolina
We have audited the accompanying balance sheets of SEASIDE RESORTS, LTD. as
of December 31, 1995 and 1994, and the related statements of income and retained
earnings, and cash flows for each of the three years in the period ended
December 31, 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.
As more fully described in the notes to the financial statements, the
Company has material transactions with its shareholder and affiliates.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SEASIDE RESORTS, LTD. at
December 31, 1995 and 1994, 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.
BDO SEIDMAN, LLP
Charlotte, North Carolina
April 10, 1996, except for Note 5
which is as of November 7, 1996
F-62
<PAGE>
SEASIDE RESORTS, LTD.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (Note 5)
CURRENT:
Cash............................................................................ $ 138 $ 109 $ 83
Accounts receivable (Note 2).................................................... 133 162 619
Inventories..................................................................... 151 120 143
--------- --------- -----------
Total current assets........................................................ 422 391 845
--------- --------- -----------
Property and equipment (Notes 3 and 5), less accumulated depreciation............. 1,191 1,055 975
--------- --------- -----------
Advances to affiliates (Note 1)................................................... 706 1,862 2,816
--------- --------- -----------
$ 2,320 $ 3,309 $ 4,636
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 96 $ 64 $ 99
Accrued expenses:
Retirement plan (Note 4)...................................................... 8 12 19
Other......................................................................... 38 23 43
Current maturities of long-term debt (Note 5)................................. 109 116 46
--------- --------- -----------
Total current liabilities................................................... 252 216 207
Advances from affiliates (Note 1)................................................. -- 1,252 1,252
Long-term debt, less current maturities (Note 5).................................. 1,073 996 1,035
--------- --------- -----------
Total liabilities........................................................... 1,326 2,464 2,494
--------- --------- -----------
Commitments (Notes 4 and 6)
Shareholder's equity:
Common stock, $1 par -- shares authorized, 100,000; outstanding, 1,000.......... 1 1 1
Retained earnings (Note 5)...................................................... 993 843 2,141
--------- --------- -----------
Total shareholder's equity.................................................. 994 844 2,142
--------- --------- -----------
$ 2,320 $ 3,309 $ 4,636
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements
F-63
<PAGE>
SEASIDE RESORTS, LTD.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE........................................................ $ 4,170 $ 4,051 $ 4,318 $ 2,591 $ 2,471
Cost of operations (Note 1).................................... 2,127 2,145 2,313 1,200 1,138
--------- --------- --------- --------- ---------
OPERATING INCOME............................................... 2,043 1,906 2,005 1,391 1,333
--------- --------- --------- --------- ---------
Other income (expense):
Interest................................................... (31) (78) (77) (39) (35)
Miscellaneous.............................................. 18 64 6 -- --
--------- --------- --------- --------- ---------
Total other expense...................................... (13) (14) (71) (39) (35)
--------- --------- --------- --------- ---------
Net income..................................................... 2,030 1,891 1,934 1,352 1,298
Retained earnings, beginning of period......................... 327 184 993 993 843
Dividends (Note 5)............................................. (2,173) (1,082) (2,084) (1,235) --
--------- --------- --------- --------- ---------
Retained earnings, end of period............................... $ 184 $ 993 $ 843 $ 1,110 $ 2,141
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-64
<PAGE>
SEASIDE RESORTS, LTD.
STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................... $ 2,030 $ 1,891 $ 1,934 $ 1,352 $ 1,298
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation............................................... 144 181 187 82 95
(Increase) decrease in:
Accounts receivable...................................... (32) 76 (29) (93) (457)
Inventories.............................................. (22) (16) 31 10 (23)
Increase (decrease) in:
Checks written against future deposits................... (27) -- -- -- --
Accounts payable......................................... (97) 70 (32) 9 34
Accrued expenses......................................... (74) 15 (11) 39 26
--------- --------- --------- --------- ---------
Net cash provided by operating activities...................... 1,922 2,218 2,080 1,399 974
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions............................. (161) (210) (50) -- --
Proceeds from sale of property and equipment................. -- -- -- 15 (14)
(Increase) decrease in advances to affiliates................ 458 189 (1,156) (723) (954)
--------- --------- --------- --------- ---------
Net cash used in investing activities.......................... 297 (20) (1,206) (708) (968)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends......................................... (1,128) (1,082) (2,084) (1,235) --
Proceeds from long-term debt................................. 249 220 26 -- --
Payments on long-term debt................................... (273) (272) (97) (54) (31)
Increase (decrease) in advances from affiliates.............. (963) (1,035) 1,252 625 --
--------- --------- --------- --------- ---------
Net cash used in financing activities.......................... (2,115) (2,169) (902) (664) (31)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash................................ 105 29 (29) 28 (25)
Cash, beginning of period...................................... 4 109 138 138 109
--------- --------- --------- --------- ---------
Cash, end of period............................................ $ 109 $ 138 $ 109 $ 165 $ 83
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements
F-65
<PAGE>
SEASIDE RESORTS, LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
BUSINESS
Seaside Resorts, Ltd. (the Company) owns and operates Oyster Bay Golf Links
located in Sunset Beach, North Carolina.
INVENTORIES
Inventories are valued at the lower-of-cost (first-in, first-out) or market
and consist primarily of food, beverages, golf equipment and clothing.
REVENUE RECOGNITION
Revenue from green fees, cart rentals, food and beverage sales, merchandise
sales, and range income are generally recognized at time of sale.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets using straight-line methods for financial
reporting and accelerated methods for income tax purposes.
Estimated useful lives for major asset categories approximate:
<TABLE>
<CAPTION>
DESCRIPTION YEARS
- ---------------------------------------- -----
<S> <C>
Golf courses............................ 15
Buildings............................... 40
Machinery and equipment................. 3-8
Furniture............................... 8
Golf carts.............................. 5
</TABLE>
INCOME TAXES
The absence of a provision for income taxes is due to the election by the
Company, and consent by its shareholder, to include the taxable income or loss
of the Company in his individual tax returns. As a result, no federal or state
income taxes are imposed on the Company.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consist primarily of trade receivables.
Concentration of credit risk with respect to trade receivables, which
consists primarily of golf packages from hotels and charges, is limited due to
the large number of hotels comprising the Company's customer base. The trade
receivables are billed and due monthly, and all probable bad debt losses have
been appropriately considered in establishing an allowance for doubtful
accounts. As of December 31, 1994, 1995, and June 30, 1996, the Company had no
significant concentration of credit risk.
F-66
<PAGE>
SEASIDE RESORTS, LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" (Statement No. 121).
Statement No. 121 requires that long-lived assets and certain intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company
periodically reevaluates the carrying amounts of its long-lived assets and the
related depreciation and amortization periods are discussed above, and the
Company believes that the adoption of Statement No. 121 will not have a material
effect on its combined financial statements. This statement is effective for
fiscal years beginning after December 15, 1995.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising costs
included in general and administrative costs in the amounts of $34, $32, and $37
for December 31, 1993, 1994, and 1995, respectively. Amounts expended for the
periods ended June 30, 1995 and 1996, were $18 and $15, respectively.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1995 and
1996, are unaudited; however, in the opinion of the management, the interim
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
F-67
<PAGE>
SEASIDE RESORTS, LTD.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
1. AFFILIATED COMPANIES
The Company's sole shareholder also owns and operates Marsh Harbour, Ltd.;
Heritage Golf Club, Ltd.; Heritage Plantation, Ltd.; Legends Golf Development,
Ltd.; Golf Legends, Ltd.; The Legends Group, Ltd.; Legends of Virginia, LC; and
other businesses.
The Legends Group, Ltd. provides various management and administrative
services including reservations, advertising, accounting, payroll and related
benefits, and telephone for all affiliated companies. These expenses are
allocated to the businesses using procedures deemed appropriate to the nature of
the expenses involved. The procedures utilize various allocation bases such as
relative investment and number of employees and direct effort expended. Interest
on allocated external debt is charged as incurred. The Company's management
believes the allocations are reasonable, but they are not necessarily indicative
of the costs that would have been incurred if the businesses had operated as
separate companies. Administrative fees paid by the Company for such services
are as follows.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1993.................................... $ 297
1994.................................... $ 187
1995.................................... $ 213
<CAPTION>
SIX-MONTH PERIOD ENDED JUNE 30,
- ----------------------------------------
<S> <C>
1995.................................... $ 107
1996.................................... $ 107
</TABLE>
Advances to and from affiliated companies, as shown on the balance sheets,
have no fixed payment/ repayment provisions and are noninterest bearing.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
Golf packages receivables............... $ 97 $ 125 $ 204
Other................................... 36 37 34
Stockholder............................. -- -- 381
--- --- ---
$ 133 $ 162 $ 619
--- --- ---
--- --- ---
</TABLE>
F-68
<PAGE>
SEASIDE RESORTS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
3. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
Golf courses............................ $ 1,136 $ 1,144 $ 1,144
Buildings............................... 236 236 236
Machinery and equipment................. 659 679 693
Furniture and fixtures.................. 105 105 105
Golf carts.............................. 265 265 105
--------- --------- -----------
2,401 2,428 2,443
Less accumulated depreciation........... 1,209 1,373 1,468
--------- --------- -----------
Net property and equipment.............. $ 1,191 $ 1,055 $ 975
--------- --------- -----------
--------- --------- -----------
</TABLE>
4. RETIREMENT PLAN
The Company and its affiliates sponsor a defined-contribution retirement
plan for all eligible employees, including officers. The plan provides for
contributions by the Company, equal to the level funding amount as calculated an
defined in the plan agreement. The actual benefit, at any point in time for each
participant, is the actual value of the participant's account based on the
earnings or losses experienced by the plan. Retirement plan expense was:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1993.................................... $ 12
1994.................................... $ 13
1995.................................... $ 16
<CAPTION>
SIX MONTH PERIOD ENDED JUNE 30,
- ----------------------------------------
<S> <C>
1995.................................... $ 11
1996.................................... $ 11
</TABLE>
F-69
<PAGE>
SEASIDE RESORTS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
6.25% note payable to bank, collateralized by substantially all
assets(1)..................................................... $ 994 $ 960 $ 960
Note payable to bank, due in monthly installments of $5
including interest at prime (8.5% as of December 31, 1995) to
December 1997; collateralized by golf carts having a net book
value of $180 at December 31, 1995............................ 188 125 94
Note payable to a finance company maturing April 2000 with
monthly payments of $1 plus interest at prime plus 1.15%;
collateralized by equipment with a net book value of $31...... -- 26 26
--------- --------- -----------
1,183 1,112 1,081
Less current maturities........................................ 109 116 46
--------- --------- -----------
Total long-term debt........................................... $ 1,073 $ 996 $ 1,035
--------- --------- -----------
--------- --------- -----------
</TABLE>
- ------------
(1) The Company, along with certain affiliated companies (The Legends Group,
Ltd.; Marsh Harbour, Ltd.; Golf Legends, Ltd.; and Heritage Golf Club,
Ltd.), participates in a debt agreement with a bank consisting of two term
notes totaling $17,804 as of December 31, 1995. The aforementioned companies
are jointly liable for the debt and the sole shareholder as guaranteed the
loans.
The outstanding balance at December 31, 1995, has been allocated to the
various entities based on the original use of the loan proceeds net of payments
to date as follows:
<TABLE>
<CAPTION>
AFFILIATE AMOUNT
- ---------------------------------------- ---------
<S> <C>
Marsh Harbour, Ltd...................... $ 3,680
Seaside Resorts, Ltd.................... 960
Golf Legends, Ltd....................... 12,428
Heritage Golf Club, Ltd................. 736
---------
$ 17,804
---------
---------
</TABLE>
On April 19, 1995, the Company, along with the affiliated entities, amended
the bank loan agreement and increased the total available loan by approximately
$13,925 ($12,473 outstanding at June 30, 1996. These funds are to be used for
construction of golf courses by an affiliated entity, Legends of Virginia, LC.
Payment terms on the above notes are from October 25, 1996, $69 monthly plus
interest; from October 25, 1997, $75 monthly plus interest; from October 25,
1998, $82 monthly plus interest; total remaining due in balloon payment on
October 25, 1999.
F-70
<PAGE>
SEASIDE RESORTS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
5. LONG-TERM DEBT (CONTINUED)
The loan agreement provides, among other covenants, restrictions on certain
financial ratios, a minimum aggregate cash balance of $250,000, payments to the
sole shareholder, capital expenditures, indebtedness, liens, changes in the
nature of the business and significant other limitations as to the use of funds.
The Company had obtained a waiver for those covenants not met at December 31,
1996 and June 30, 1996.
The Company is jointly liable as a guarantor, along with the sole
shareholder, with other affiliated entities for additional amounts totaling
$2,268.
Total debt of all affiliated entities of which the Company is jointly liable
is approximately $32,718 at June 30, 1996.
The aggregate annual maturities are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ---------------------------------------- ---------
<S> <C>
1996 (six months)....................... $ 46
1997.................................... 121
1998.................................... 63
1999.................................... 848
2000.................................... 3
---------
Total................................... $ 1,081
---------
---------
</TABLE>
6. COMMITMENTS
LEASES
The Company leases land for the golf course. The lease has a term of fifty
years expiring in April 2032. The lease requires an annual rental payment of 10%
of the green fees, as defined in the lease agreement. The lease does not contain
an option to purchase the land. The total rental expense for the land
approximated.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ---------------------------------------- -------------
<S> <C>
1993.................................... $ 234
1994.................................... 228
1995.................................... 248
<CAPTION>
SIX MONTHS ENDED JUNE 30,
- ----------------------------------------
<S> <C>
1995.................................... 139
1996.................................... 141
</TABLE>
SELF-INSURANCE
The Company and its affiliates maintain a self-insurance program for that
portion of health care costs not covered by insurance. The Company is liable for
claims up to $15 per employee annually with an annual aggregate maximum
liability under the program for all companies of $225. Cumulative amounts
estimated to be payable by the Company with respect to pending and potential
claims have been accrued as liabilities.
EMPLOYMENT AGREEMENT
The Company, along with other affiliated entities, has an employment
agreement with an officer that expires in 1998. The agreement provides basic
compensation in addition to other incentives and bonuses based upon certain
conditions as defined in the agreement.
F-71
<PAGE>
SEASIDE RESORTS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
7. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1993.................................... $ 30
1994.................................... 79
1995.................................... 77
<CAPTION>
SIX MONTHS ENDED JUNE 30,
- ----------------------------------------
<S> <C>
1995.................................... 40
1996.................................... 35
</TABLE>
During 1993, equipment having a net book value of $167 and cash of $88 was
exchanged for similar new equipment having a value of $225.
During 1994, equipment having a net book value of $204 and cash of $53 was
exchanged for similar new equipment having a value of $257.
8. PROPOSED CONTRIBUTION OF ASSETS
The Company is in negotiations to contribute the Company's interest in the
golf courses properties and related equipment along with related debt to a newly
formed partnership, Golf Trust of America, L.P. (GTA LP) in exchange for a
limited partnership interest in GTA LP. A newly formed affiliate would lease the
golf course properties and related equipment from GTA LP. GTA LP's general
partner, Golf Trust of America, Inc. intends to file a Form S-11 registration
statement with the Securities and Exchange Commission in connection with a
proposed offering of shares to the public.
F-72
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Members
Legends of Virginia, LC
Myrtle Beach, South Carolina
We have audited the accompanying balance sheets of LEGENDS OF VIRGINIA, LC
as of December 31, 1995 and 1994 and the related statements of income and
retained earnings, and cash flows for the years then ended. 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.
As more fully described in the notes to the financial statements, LEGENDS OF
VIRGINIA, LC has material transactions with its majority member and affiliates.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LEGENDS OF VIRGINIA, LC at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
BDO SEIDMAN, LLP
Charlotte, North Carolina
April 10, 1996 except for Note 2,
which is as of November 7, 1996
F-73
<PAGE>
LEGENDS OF VIRGINIA, LC
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTE 5)
CURRENT:
Cash........................................................... $ -- $ -- $ --
Inventories.................................................... -- -- 24
--------- --------- -----------
Total current assets....................................... -- -- 24
Advances to affiliates (Note 1).................................. -- 60 61
Other............................................................ -- -- 315
Property and equipment (Notes 3 and 5), less accumulated
depreciation.................................................... -- 436 19,528
Construction in progress (Note 1)................................ 2,365 16,795 --
--------- --------- -----------
$ 2,365 $ 17,291 $ 19,928
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND MEMBERS' EQUITY
Accounts payable................................................. $ -- $ -- $ 660
Advances from affiliates (Note 1)................................ 2,364 5,876 7,072
Current maturities of long-term debt (Note 5).................... -- -- 56
--------- --------- -----------
Total current liabilities.................................. 2,364 5,876 7,788
Long-term debt (Note 5).......................................... -- 11,458 12,815
--------- --------- -----------
Total liabilities.......................................... 2,364 17,334 20,603
--------- --------- -----------
Commitments (Notes 4 and 6)
Members' equity:
Members' contributions......................................... 1 1 1
Members' capital deficit (Note 5).............................. -- (44) (676)
--------- --------- -----------
Total (deficit)............................................ 1 (43) (675)
--------- --------- -----------
$ 2,365 $ 17,291 $ 19,928
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-74
<PAGE>
LEGENDS OF VIRGINIA, LC
STATEMENTS OF LOSS AND MEMBERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SIX-MONTH
-------------------- PERIOD ENDED
1994 1995 JUNE 30, 1996
--------- --------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUE........................................................ $ -- $ -- $ 25
Cost of operations (Note 1).................................... -- 44 602
--------- --------- -----
OPERATING LOSS................................................. -- (44) (577)
Other income (expense):
Interest................................................... -- -- (55)
--------- --------- -----
Total other expense...................................... -- -- (55)
--------- --------- -----
Net loss....................................................... -- (44) (632)
Members' deficit, beginning of period.......................... -- -- (44)
--------- --------- -----
Members' deficit, end of period................................ $ -- $ (44) $ (676)
--------- --------- -----
--------- --------- -----
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-75
<PAGE>
LEGENDS OF VIRGINIA, LC
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SIX-MONTH PERIOD
----------------- ENDED
1994 1995 JUNE 30, 1996
------- -------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $ -- $ (44) $ (632)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.................................. -- 29 69
(Increase) decrease in:
Inventories................................. -- -- (24)
Prepaid expenses/other assets............... -- -- (315)
Increase (decrease) in:
Accounts payable............................ -- -- 660
Accrued expenses............................ --
------- -------- ------
Net cash (used in) operating activities........... -- (15) (242)
------- -------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions................ -- -- (2,366)
------- -------- ------
Net cash used in investing activities............. -- -- (2,366)
------- -------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.................... -- 11,458 1,413
Increase (decrease) in advances from
affiliates..................................... -- (11,443) 1,195
------- -------- ------
Net cash provided by financing activities......... -- 15 2,608
------- -------- ------
Net decrease in cash.............................. -- -- --
Cash, beginning of period......................... -- -- --
------- -------- ------
Cash, end of period............................... $ -- $ -- $--
------- -------- ------
------- -------- ------
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-76
<PAGE>
LEGENDS OF VIRGINIA, LC
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
BUSINESS
Legends of Virginia, LC (the Company) is in the business of developing and
operating two golf courses near Williamsburg, Virginia, Stonehouse Golf Club and
Royal New Kent which opened in June and August 1996, respectively.
REVENUE RECOGNITION
Revenue from green fees, cart rentals, food and beverage sales, merchandise
sales, and range income are generally recognized at the time of sale.
CONSTRUCTION-IN-PROGRESS
Construction-in-progress is stated at cost.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets using straight-line methods for financial
reporting and accelerated methods for income tax purposes.
Estimated useful lives for major asset categories approximate:
<TABLE>
<CAPTION>
DESCRIPTION YEARS
- ---------------------------------------- -----
<S> <C>
Golf courses............................ 15
Buildings............................... 40
Machinery and equipment................. 3-8
Furniture............................... 8
Golf carts.............................. 5
</TABLE>
Major renewals and betterment's are capitalized. Maintenance, repairs and
minor renewals are expensed as incurred. When properties are retired or
otherwise disposed of, related cost and accumulated depreciation are removed
from the accounts.
INCOME TAXES
No provision has been made for income taxes or related credits, as under the
Internal Revenue Code a limited liability company is treated as a partnership
for income tax purposes. Therefore, the results of operations are includable in
the income tax returns of the members.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consist primarily of trade receivables.
Concentration of credit risk with respect to trade receivables, which
consists primarily of golf packages from hotels and charges, is limited due to
the large number of hotels comprising the Company's customer base.
F-77
<PAGE>
LEGENDS OF VIRGINIA, LC
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
The trade receivables are billed and due monthly, and all probable bad debt
losses have been appropriately considered in establishing an allowance for
doubtful accounts. As of December 31, 1994, 1995, and June 30, 1996, the Company
had no significant concentration of credit risk.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" (Statement No. 121).
Statement No. 121 requires that long-lived assets and certain intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company
periodically reevaluates the carrying amounts of its long-lived assets and the
related depreciation and amortization periods are discussed above, and the
Company believes that the adoption of Statement No. 121 will not have a material
effect on its combined financial statements. This statement is effective for
fiscal years beginning after December 15, 1995.
ADVERTISING
The Company expenses advertising costs as incurred. The Company incurred no
advertising costs in 1994 and 1995. Amounts expended for the periods ended June
30, 1995 and 1996, were $0 and $157, respectively.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1995 and
1996, are unaudited; however, in the opinion of the management, the interim
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
F-78
<PAGE>
LEGENDS OF VIRGINIA, LC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
1. AFFILIATED COMPANIES
The Company's majority member also owns and operates Seaside Resorts, Ltd.
(d/b/a Oyster Bay Golf Links); Marsh Harbour, Ltd.; Heritage Golf Club, Ltd.;
Legends Golf Development, Ltd.; Heritage Plantation, Ltd.; Legends Properties,
LLC; The Legends Group, Ltd.; Golf Legends, Ltd.; and other businesses.
Legends Golf Development, Ltd. (LGD) serves as the general contractor for
the projects. Under the terms of the contract, LGD will be paid 7 percent over
costs as its fee.
The Legends Group, Ltd. provides various management and administrative
services including reservations, advertising, accounting, payroll and related
benefits, and telephone for all affiliated companies. These expenses are
allocated to the businesses using procedures deemed appropriate to the nature of
the expenses involved. The procedures utilize various allocation bases such as
relative investment and number of employees and direct effort expended. Interest
on allocated external debt is charged as incurred. Legends Golf's management
believes the allocations are reasonable, but they are not necessarily indicative
of the costs that would have been incurred if the businesses had operated as
separate companies. Administrative fees paid by the Legends Golf for such
services are as follows.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1994.................................. $ --
1995.................................. $ --
<CAPTION>
SIX-MONTH PERIOD ENDED JUNE 30, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1996.................................. $ 60
</TABLE>
2. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Note payable to bank at prime (1)........................................ $ -- $ 11,048 $ 12,473
Notes payable to financing corporation maturing at April 2000 with
monthly payments of $10 plus interest at prime plus .9% (8.5% at
December 31, 1995) collateralized by equipment.......................... -- 392 386
Note payable to financing corporation maturing at February 1997 with
monthly payments of $2 collateralized by equipment...................... 18 12
--------- --------- ---------
-- 11,458 12,871
Less current maturities.................................................. -- 622 56
--------- --------- ---------
Total long-term debt..................................................... $ -- $ 10,836 $ 12,815
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------
(1) On April 19, 1995, the Company obtained a loan with a bank totaling $13,925.
In addition, on this date, the affiliated entities amended an existing loan
agreement of which the Company is jointly liable. These loans are guaranteed
by the majority member and collateralized by the two new golf courses, New
Kent and Stonehouse, and existing affiliated courses and clubhouses and
other assets of the majority member.
F-79
<PAGE>
LEGENDS OF VIRGINIA, LC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
2. LONG-TERM DEBT (CONTINUED)
Certain affiliated companies (Legends Group, Ltd., Golf Legends, Ltd.,
Seaside Resorts, Ltd., Heritage Golf Club, Ltd. and Marsh Harbor, Ltd.)
participate in a debt agreement with a bank consisting of two term notes
totaling $17,804 as of June 30, 1996. The aforementioned companies are jointly
liable for the debt and the sole stockholder has guaranteed the loans.
Payment terms on the above notes are from October 25, 1996, $69 monthly plus
interest; from October 25, 1997, $75 monthly plus interest; from October 25,
1998, $82 monthly plus interest; total remaining due in balloon payment on
October 25, 1999.
The loan agreement provides, among other covenants, restrictions on certain
financial ratios, a minimum aggregate cash balance of $250, payments to the
majority member, capital expenditures, indebtedness, liens, changes in the
nature of the business and significant other limitations as to the use of funds.
The Company had obtained a waiver of certain of the covenants not met as of
December 31, 1995 and June 30, 1996.
The Company is jointly liable as a guarantor, along with the majority
member, with other affiliated entities for additional amounts totaling $2,268.
Total debt of all affiliated entities of which the Company is jointly liable
is approximately $32,718 at June 30, 1996.
The aggregate annual maturities are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ---------------------------------------- ---------
<S> <C>
1996 (six months)....................... $ 56
1997.................................... $ 942
1998.................................... $ 1,026
1999.................................... $ 10,805
2000.................................... $ 42
---------
Total................................. $ 12,871
---------
---------
</TABLE>
3. COMMITMENT
EMPLOYMENT AGREEMENT
The Company, along with other affiliated entities, has an employment
agreement with an officer that expires in 1998. The agreement provides basic
compensation in addition to other incentives and bonus based upon certain
conditions as defined in the agreement.
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During 1994, the Company acquired $2,365 of construction costs through
advances from an affiliated company.
During 1995, the Company acquired $14,894 of property and equipment through
advances from an affiliated company.
5. PROPOSED CONTRIBUTION OF ASSETS
The Company is in negotiations to contribute the Company's interest in the
golf courses properties and related equipment along with related debt to a newly
formed partnership, Golf Trust of America, L.P. (GTA LP) in exchange for a
limited partnership interest in GTA LP. A newly formed affiliate would lease the
golf course
F-80
<PAGE>
LEGENDS OF VIRGINIA, LC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS)
5. PROPOSED CONTRIBUTION OF ASSETS (CONTINUED)
properties and related equipment from GTA LP. GTA LP's general partner, Golf
Trust of America, Inc. intends to file a form S-11 registration statement with
the Securities and Exchange Commission in connection with a proposed offering of
shares to the public.
F-81
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Northgate Country Club
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and partner's equity and of cash flows
present fairly, in all material respects, the financial position of Northgate
Country Club (the "Club") at December 20, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 20, 1995, 1994 and 1993 in conformity with generally accepted
accounting principles. These financial statements 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 of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits 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.
PRICE WATERHOUSE LLP
Costa Mesa, CA
July 22, 1996
F-82
<PAGE>
NORTHGATE COUNTRY CLUB
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 20, JUNE 20,
-------------------- 1996
1994 1995 -----------
--------- --------- (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................................... $ 97 $ 20 $ 25
Accounts receivable, net of allowance for doubtful accounts of $-0-, $12 and
$-0-, respectively.......................................................... 515 539 504
Receivable from affiliate.................................................... 70 1,953 1,546
Inventories.................................................................. 99 99 112
Prepaid expenses............................................................. 42 176 40
--------- --------- -----------
Total current assets....................................................... 823 2,787 2,227
Property and equipment, net.................................................... 10,567 10,594 10,434
--------- --------- -----------
Total assets............................................................... $ 11,390 $ 13,381 $ 12,661
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................. $ 214 $ 262 $ 69
Notes payable -- current portion............................................. 88 31 40
Accrued liabilities.......................................................... 166 32 36
Deferred revenue............................................................. 229 249 178
Other liabilities............................................................ 352 345 339
--------- --------- -----------
Total current liabilities.................................................. 1,049 919 662
Membership deposits............................................................ 1,649 1,482 1,435
Notes payable.................................................................. 4,839 6,719 6,265
--------- --------- -----------
Total liabilities.......................................................... 7,537 9,120 8,362
--------- --------- -----------
Contingencies (Note 6)
Partners' equity............................................................... 3,853 4,261 4,299
--------- --------- -----------
Total liabilities and partners' equity..................................... $ 11,390 $ 13,381 $ 12,661
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes to are an integral part to these financial statements.
F-83
<PAGE>
NORTHGATE COUNTRY CLUB
CONSOLIDATED STATEMENTS OF OPERATIONS
AND PARTNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH
YEAR ENDED DECEMBER 20, PERIOD
ENDED JUNE 20,
------------------------ --------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES........................................ $4,012 $4,162 $4,566 $2,179 $2,316
OPERATING COSTS AND EXPENSES
Operating expenses.............................. 1,107 1,194 1,149 600 651
Costs of goods sold............................. 589 594 731 312 316
General and administrative...................... 580 580 517 267 242
Repairs and maintenance......................... 743 746 743 361 402
Depreciation and amortization................... 360 401 323 163 171
------ ------ ------ ------ ------
Total operating costs and expenses.......... 3,379 3,515 3,463 1,703 1,782
------ ------ ------ ------ ------
Operating income................................ 633 647 1,103 476 534
------ ------ ------ ------ ------
OTHER EXPENSES
Interest expense................................ 914 475 485 223 248
------ ------ ------ ------ ------
Net (loss) income............................... (281) 172 618 253 286
------
------
Capital contributions........................... 2,055 201 577 10
Capital distributions........................... (733) (522) (787) (258)
Partners' equity beginning of period............ 2,961 4,002 3,853 4,261
------ ------ ------ ------
Partners' equity end of period.................. $4,002 $3,853 $4,261 $4,299
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
The accompanying notes to are an integral part to these financial statements.
F-84
<PAGE>
NORTHGATE COUNTRY CLUB
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
YEAR ENDED DECEMBER 20, ENDED JUNE 20,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.................................................. $ (281) $ 172 $ 618 $ 253 $ 286
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation..................................................... 360 401 323 163 171
Decrease (increase) in accounts receivable....................... 236 (87) (1,907) (1,787) 446
Decrease (increase) in inventories............................... (15) 7 -- 3 (13)
Decrease (increase) in prepaid expenses.......................... 382 (2) (134) (72) 136
Decrease (increase) in accounts payable.......................... (4) 127 48 (103) (193)
(Decrease) increase in accrued liabilities....................... 19 8 (134) (163) 4
(Decrease) increase in deferred revenue.......................... 86 7 20 (55) (71)
(Decrease) increase in other liabilities......................... 82 (42) (7) (3) (6)
(Decrease) increase in membership deposits....................... (25) (77) (167) (81) (21)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities.............. 840 514 (1,340) (1,845) 739
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment................................. (37) (81) (347) (120) (41)
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing activities.............. (37) (81) (347) (120) (41)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt....................... 63 -- 7,000 7,000 --
Principal payments on notes payable................................ (501) (115) (5,180) (5,180) (445)
Contributions...................................................... 375 201 577 426 10
Distributions...................................................... (733) (522) (787) (370) (258)
--------- --------- --------- --------- ---------
Net cash used by financial activities............................ (796) (436) 1,610 1,876 (693)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash.................................... 7 (3) (77) (89) 5
Cash at beginning of year.......................................... 93 100 97 97 20
--------- --------- --------- --------- ---------
Cash at end of year................................................ $ 100 $ 97 $ 20 $ 8 $ 25
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes to are an intergral part to these financial statements.
F-85
<PAGE>
NORTHGATE COUNTRY CLUB
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
(IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Northgate, a
Texas general partnership, and Northgate Country Club Beverage, Inc., a Texas
corporation (collectively, the "Partnership"). Northgate was formed in 1982 for
the purpose of constructing and operating a country club facility consisting of
a golf course, clubhouse, pro shop, tennis courts and dining facilities. Jack A.
Thoner owns an 89% general partner interest in Northgate and is the sole
shareholder of Northgate Country Club Beverage, Inc.
The term "affiliate," as used in these financial statements, refers to any
entity which Jack A. Thoner has a controlling interest.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
All material intercompany transactions and balances have been eliminated.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, all cash and certificates of
deposit purchased with a maturity of three months or less are considered to be
cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market value. Inventories consist primarily of food, beverage, golf
and tennis equipment, clothing and accessories.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost which is less than fair value as
measured in accordance with Statement of Financial Accounting Standards No. 121
"Accounting for the Improvement of Long-Lived Assets and for Long-Lived Assets
to be Disposed of." Depreciation is computed using the straight-line basis over
the estimated useful lives as follows:
<TABLE>
<S> <C>
Buildings............................... 30 years
Land improvements....................... 20 years
Equipment............................... 3 to 10
years
</TABLE>
Significant expenditures which extend the useful lives of existing assets
are capitalized. All other maintenance and repair costs are charged to current
operations.
Replacement china, glassware, silver, linens and other related costs are
expensed.
MEMBERSHIP DEPOSITS
Membership deposits consist of refundable deposits to members, provided that
the membership contract has not been downgraded or terminated for a term of 30
years after the origination dated.
REVENUE RECOGNITION
Membership dues are recorded as revenue during the period to which the dues
apply. Other revenue is recorded when earned. Fees collected in advance are
deferred and recorded as revenue over the period to which they apply.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Partnership to
concentration of credit risk consist primarily of trade receivables.
F-86
<PAGE>
NORTHGATE COUNTRY CLUB
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (CONTINUED)
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration of credit risk with respect to trade receivables, which
consists primarily of membership dues and charges, is limited due to the large
number of club members comprising the Partnership's customer base. The trade
receivables are billed and due monthly, and all probable bad debt losses have
been appropriately considered in establishing an allowance for doubtful
accounts. As of December 31, 1995, the Partnership had no significant
concentration of credit risk.
The Partnership has cash in financial institutions which is insured by the
Federal Deposit Insurance Corporation ("FDIC") up to $100,000 per institution.
At various times throughout the year, the Partnership may have cash in financial
institutions which exceed the FDIC insurance limits.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The cost basis of the Partnership's note payable approximates fair value
based on comparison with current market rates for loans of similar risks and
maturities.
INCOME TAXES
No provision has been made in the accompanying consolidated financial
statements for federal or state income taxes because, as a partnership, the
results of operations are included in the tax returns of the respective
partners.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1995 and
1996, are unaudited; however, in the opinion of the management, the interim
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Land.................................... $ 7,144 $ 7,144
Golf course improvements................ 2,592 2,640
Buildings............................... 2,788 3,018
Furniture, fixtures, machinery and
equipment.............................. 1,539 1,579
--------- ---------
14,063 14,381
Less accumulated depreciation........... (3,496) (3,787)
--------- ---------
$ 10,567 $ 10,594
--------- ---------
--------- ---------
</TABLE>
F-87
<PAGE>
NORTHGATE COUNTRY CLUB
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (CONTINUED)
(IN THOUSANDS)
4. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Notes payable to purchase equipment.................................................. $ 46 $ 49
Note payable to Greyrock Capital Group, Inc. The note is due in the year 2000 but may
be extended for five years at the option of the Partnership; requires monthly
principal and interest payments and accrues interest at an annual rate of LIBOR plus
4 1/2%.............................................................................. -- 6,701
Note payable to Textron Financial Corporation. The note is due in 1998 and accrues
interest at an annual rate equal to the greater of prime plus 2.5% or 9%. The note
was repaid in 1995 from funds obtained from Greyrock Capital Group, Inc............. 4,881 --
--------- ---------
$ 4,927 $ 6,750
--------- ---------
--------- ---------
</TABLE>
The Company obtained the note payable to Greyrock Capital Group, Inc.
("Greyrock") to pay off the note with Textron Financial Corporation and to have
the available capital to facilitate the lending of funds to an affiliate (Note
6. The Company has allocated financing costs of the Greyrock note to the
affiliate and charges the affiliate interest in accordance with the stated rate
on the note.
The Greyrock note is collateralized by the golf course land as well as 21
additional real estate lots deeded to the Company by various affiliates solely
for the purpose of collateralizing and obtaining the loan. Accordingly, the
Company has not recorded the 21 additional lots on the financial statements.
The following is a schedule of maturities on notes payables for the next
five years ending December 20 and in total thereafter:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---------------------------------------- ---------
<S> <C>
1996.................................... $ 31
1997.................................... 103
1998.................................... 105
1999.................................... 108
2000.................................... 113
Thereafter.............................. 6,290
---------
$ 6,750
---------
---------
</TABLE>
5. RELATED PARTY TRANSACTIONS
During 1995 the Company refinanced its note payable (Note 4 to facilitate
the lending of funds to an affiliate. The amounts due from the affiliate are
collateralized by 21 real estate lots, bear interest at the same rate as the
note payable owed by the Company (LIBOR plus 4 1/2% per annum) and represent
amounts borrowed from the Company and loan fees paid on behalf of the affiliate
by the Company.
6. CONTINGENCIES
The Company is involved in various legal proceedings incidental to the
conduct of its normal business operations. The Company's management believes
that none of these legal proceedings will have a material impact on the
financial condition or results of operations of the Company.
7. SUBSEQUENT EVENTS
Subsequent to December 31, 1995, the Partnership began negotiating
agreements to transfer the golf course and related improvements and equipment to
Golf Trust of America.
F-88
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members
Bright's Creek Development, LLC
We have audited the accompanying balance sheets of Bright's Creek
Development, LLC, as of June 30, 1996 and December 31, 1995 and 1994, and the
related statements of operations and cash flows for the six months ended June
30, 1996 and 1995, the year ended December 31, 1995, and the period from
inception (May 17, 1994) through December 31, 1994 and the statement of members'
deficit for the six months ended June 30, 1996, the year ended December 31,
1995, and the period from inception (May 17, 1994) through December 31, 1994.
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 audits 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 financial position of Bright's Creek Development,
LLC, as of June 30, 1996 and December 31, 1995 and 1994, and the results of its
operations and its cash flows for the six months ended June 30, 1996 and 1995,
the year ended December 31, 1995, and the period from inception (May 17, 1994)
through December 31, 1994, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
October 12, 1996
F-89
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
BALANCE SHEETS
(IN THOUSANDS)
(DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and equivalents............................................................... $ 26 $ 51 $ 20
Accounts receivable................................................................ 12 10 6
Notes receivable................................................................... 183 155 155
Inventory.......................................................................... 23 43 41
Other.............................................................................. 1 3 3
--------- --------- -----------
Total current assets........................................................... 245 262 225
--------- --------- -----------
LAND, BUILDINGS, AND EQUIPMENT:
Land............................................................................... 1,001 1,001 1,001
Golf course improvements........................................................... 2,596 2,596 2,603
Buildings.......................................................................... 312 312 312
Furniture and equipment............................................................ 194 230 207
Automobiles........................................................................ 45 37 37
--------- --------- -----------
4,148 4,176 4,160
Less accumulated depreciation........................................................ (104) (350) (463)
--------- --------- -----------
4,044 3,826 3,697
--------- --------- -----------
OTHER ASSETS:
Deposits........................................................................... 1 1 1
Loan costs, net.................................................................... 52 52 51
--------- --------- -----------
53 53 52
--------- --------- -----------
Total assets................................................................... $ 4,342 $ 4,141 $ 3,974
<CAPTION>
LIABILITIES AND MEMBERS' DEFICIT
<S> <C> <C> <C>
Accounts payable and accrued expenses................................................ $ 44 $ 35 $ 45
Current maturities of long-term debt................................................. 4,433 413 257
--------- --------- -----------
Total current liabilities...................................................... 4,477 448 302
Long-term debt....................................................................... -- 3,855 3,774
Total liabilities.............................................................. 4,477 4,303 4,076
Members' deficit..................................................................... (135) (162) (102)
--------- --------- -----------
Total liabilities and members' deficit......................................... $ 4,342 $ 4,141 $ 3,974
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-90
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(FOR THE PERIOD FROM INCEPTION (MAY 17, 1994) THROUGH DECEMBER 31, 1994 AND THE
YEAR ENDED DECEMBER 31, 1995 AND THE SIX MONTH PERIODS ENDED JUNE 30, 1995 AND
1996)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION SIX MONTHS
(MAY 17, 1994) ENDED
THROUGH YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ------------
1994 1995 1995 1996
-------------- ------------ ----- -----
<S> <C> <C> <C> <C>
REVENUES:
Golf revenues................................... $ 376 $1,429 $ 788 $ 755
Food and beverage............................... 56 169 88 79
Pro shop........................................ 23 116 53 60
Other income.................................... 8 26 14 14
----- ------ ----- -----
Total revenues.............................. 463 1,740 943 908
----- ------ ----- -----
OPERATING COSTS AND EXPENSES:
Golf course maintenance......................... 122 302 149 171
Pro shop costs and expenses..................... 85 335 154 179
Food and beverage costs and expenses............ 43 124 63 60
General and administrative expenses............. 113 313 145 128
Depreciation and amortization................... 104 247 122 123
----- ------ ----- -----
Total operating costs and expenses.......... 467 1,321 633 661
----- ------ ----- -----
Operating (loss) income..................... (4) 419 310 247
Interest expense.................................. (134) (424) (215) (183)
Other income...................................... 1 6 -- 11
----- ------ ----- -----
Net (loss) income........................... $(137) $ 1 $ 95 $ 75
----- ------ ----- -----
----- ------ ----- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-91
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
STATEMENTS OF MEMBERS' DEFICIT
(IN THOUSANDS)
(FOR THE PERIOD FROM INCEPTION (MAY 17, 1994) THROUGH DECEMBER 31, 1994 AND THE
YEAR ENDED DECEMBER 31, 1995 AND THE SIX MONTH PERIODS ENDED JUNE 30, 1995 AND
1996)
<TABLE>
<S> <C>
Initial contribution from members, May 17, 1994...................................... $ 1
Net loss............................................................................. (137)
Other contributions.................................................................. 1
---------
Balance, December 31, 1994........................................................... (135)
Net income........................................................................... 1
Distributions to members............................................................. (31)
Contributions from members........................................................... 3
---------
Balance, December 31, 1995........................................................... (162)
Net income........................................................................... 75
Distributions to members............................................................. (15)
---------
Balance, June 30, 1996............................................................... $ (102)
---------
---------
</TABLE>
F-92
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(FOR THE PERIOD FROM INCEPTION (MAY 17, 1994) THROUGH DECEMBER 31, 1994 AND THE
YEAR ENDED DECEMBER 31, 1995 AND THE SIX MONTH PERIODS ENDED JUNE 30, 1995 AND
1996)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MAY 17,
1994) SIX MONTHS ENDED
THROUGH YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ----------------------
1994 1995 1995 1996
------------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................................. $ (137) $ 1 $ 95 $ 75
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization............................... 104 247 122 123
Changes in current assets and liabilities:
Accounts receivable....................................... (12) 2 4 4
Inventory................................................. (23) (20) (13) 2
Other assets.............................................. (1) (2)
Deposits.................................................. (1)
Accounts payable and accrued expenses..................... 44 (8) (2) 10
------------- ----- ----- ---------
Net cash provided by (used in) operating activities..... (26) 220 206 214
------------- ----- ----- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of golf course.................................... (3,416)
Capital expenditures.......................................... (731) (33) (33) (8)
Notes receivable issued by related parties.................... (183)
Payments received from related parties........................ 28 30
------------- ----- ----- ---------
Net cash used in investing activities....................... (4,330) (5) (3) (8)
------------- ----- ----- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common units........................ 1
Distributions to members...................................... (25)
Principal reductions of debt.................................. (13) (72)
Net change in revolving credit balances....................... 30 (30)
Proceeds from bankborrowings.................................. 4,000
Proceeds from related party borrowings........................ 433
Payments made to related parties.............................. (182) (147) (135)
Payment of loan financing costs............................... (52)
------------- ----- ----- ---------
Net cash provided by (used in) financing activities....... 4,382 (190) (147) (237)
------------- ----- ----- ---------
Increase (decrease) in cash and cash equivalents.......... 26 25 56 (31)
Cash and equivalents, beginning of period....................... 26 26 51
------------- ----- ----- ---------
Cash and equivalents, end of period............................. $ 26 $ 51 $ 82 $ 20
------------- ----- ----- ---------
------------- ----- ----- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest........................ $ 118 $ 437 $ 195 $ 184
------------- ----- ----- ---------
------------- ----- ----- ---------
</TABLE>
F-93
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
1. FORMATION AND PRESENTATION
Bright's Creek Development, LLC (the Company) is a limited liability
corporation which owns and operates The Woodlands Golf Course in Gulf Shores,
Alabama. Under the operating agreement of the limited liability corporation, the
members may be held liable only to the extent of each member's respective
investment in the Company. The Company was formed on May 17, 1994 and,
subsequently, purchased The Woodlands Golf Course for a purchase price of
$3,416. After completion of the golf course, operations began in August 1994.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORY -- Inventory is valued at the lower of cost (specific
identification method) or market.
LAND, BUILDINGS, AND EQUIPMENT -- Land, buildings, and equipment is stated
at the lower of cost, less accumulated depreciation, or net realizable value.
Maintenance and repairs are charged to expense as incurred. Replacements and
improvements are capitalized and depreciated over the estimated remaining useful
lives of the assets. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets.
LOAN COSTS -- Amortization of loan costs is recorded using the straight-line
method, which approximates the effective interest method, over the life of the
related note.
REVENUE RECOGNITION -- Golf course related income is recognized as services
are provided.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses. Actual results could differ from those
estimates.
INCOME TAXES -- Federal and state income taxes are not incurred by the
Company. Members are taxed individually on their share of earnings. Accordingly,
no provision for federal or state income taxes has been provided in these
financial statements.
CASH AND EQUIVALENTS -- The Company considers all highly liquid marketable
securities and debt instruments purchased with a maturity of three months or
less in cash equivalents.
RECENTLY ISSUED ACCOUNTING STANDARDS -- Statement of Financial Accounting
Standards No. 121 (SFAS 121), ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS, establishes guidance beginning in 1996 for recognizing and measuring
impairment losses which require that the carrying amounts of impaired assets be
reduced to fair value. Management does not believe that the adoption of SFAS 121
will have a material effect on the financial statements of the Company.
PRO SHOP COSTS AND EXPENSES -- Included in pro shop costs and expenses are
certain costs which are incurred for the benefit of the entire golf course and
not solely for the benefit of the pro shop. These expenses include, but are not
limited to, golf professionals' salaries and wages and certain overhead costs.
F-94
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
3. NOTES PAYABLE
Notes payable at December 31, 1994 and 1995, and June 30, 1996 were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1996
------------- ------------- -----------
<S> <C> <C> <C>
Note payable to Colonial Bank, dated December 1, 1995; payable
in monthly installments beginning December 31, 1995 of $41,
including interest at .5% over the Colonial Bank base rate
(9.25% at December 31, 1995); final payment due at maturity on
November 30, 2000; collateralized by real estate, guaranteed by
Robert S. Craft and Craft Turf Farms........................... $ $ 3,987 $ 3,915
Note payable to Colonial Bank, dated May 17, 1994 in the amounts
of $3,000 and $1,000 payable in monthly installments of
interest only beginning June 16, 1994; interest accrues at 1%
over the Colonial Bank base rate; final payment of principal
balance due at maturity on November 16, 1995; collateralized by
real estate, guaranteed by Robert S. Craft and Craft Turf
Farms.......................................................... 4,000 -- --
Note payable to Craft Development Corporation (related party).
This note is dated May 17, 1994; payable on demand; bears
interest at 7.16% annually; unsecured.......................... 433 251 116
Line of credit dated August 16, 1995, which provides for
borrowings up to a maximum of $200 with Gulf Bank; interest
payable quarterly at a rate equal to the New York prime rate;
matures August 14, 1996; unsecured............................. -- 30 --
------ ------ -----------
$ 4,433 $ 4,268 $ 4,031
------ ------ -----------
------ ------ -----------
</TABLE>
The aggregate maturities of notes payable at December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996........................................................................ $ 413
1997........................................................................ 147
1998........................................................................ 162
1999........................................................................ 177
2000........................................................................ 3,369
---------
$ 4,268
---------
---------
</TABLE>
4. LEASES
The Company rents certain machinery, equipment, and buildings under
operating leases in the normal course of business.
F-95
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
4. LEASES (CONTINUED)
Total rent expense for the year ended December 31, 1995 amounted to
approximately $102. Minimum commitments under noncancelable operating leases as
of December 31, 1995 are payable as follows:
<TABLE>
<S> <C>
1996......................................................................... $ 100
1997......................................................................... 66
---
$ 166
---
---
</TABLE>
5. RELATED PARTY TRANSACTIONS
The Company has a note receivable, which bears interest at 7.63% and is due
on demand, from Pinehurst Development Partnership in the amounts of $58, $58 and
$86 at June 30, 1996, December 31, 1995, and December 31, 1994, respectively.
The Company also has a note receivable, which bears interest at 7.63% and is due
on demand, from Craft Land Company in the amount of $97 at June 30, 1996,
December 31, 1995, and December 31, 1994. Both Pinehurst Development Partnership
and Craft Land Company are related parties.
The Company has a note payable to Craft Development Corporation which is due
on demand (SEE NOTE 3).
Robert S. Craft serves as a member on the board of directors of Colonial
BancGroup, the Company's primary lender.
Craft Farms, a related party, occasionally provides the Company with sod. No
amount is charged for the sod; accordingly, the cost of this sod is not
reflected in the financial statements.
Certain overhead and administrative functions are provided to the Company by
a related party. These functions include, but are not limited to, administrative
and general accounting. No fee is charged by the related party for these
services; accordingly, these services are not reflected in the financial
statements.
6. EMPLOYEE BENEFIT PLAN
The Company has a profit sharing plan for all employees who have worked
1,000 hours and have been employed at least two years. Funding is discretionary
by the members of the Company.
7. LITIGATION
The Company is engaged in various legal actions in the ordinary course of
business. Management does not believe the ultimate outcome of these actions will
have a material adverse affect on the financial position, results of operations,
or cash flows of the Company.
F-96
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners
Olde Atlanta Golf Club Limited Partnership
Suwanee, Georgia
We have audited the accompanying balance sheets of Olde Atlanta Golf Club
Limited Partnership as of December 31, 1995 and 1994, and the related statements
of income, changes in partners' capital and cash flows for the years 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 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 financial position of Olde Atlanta Golf Club Limited
Partnership as of December 31, 1995 and 1994, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
CROWE, CHIZEK AND COMPANY LLP
Oak Brook, Illinois
September 23, 1996
F-97
<PAGE>
OLDE ATLANTA GOLF CLUB LIMITED PARTNERSHIP
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- 1996
1994 1995 -----------
--------- --------- (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash............................................................................ $ 135 $ 66 $ 126
Accounts receivable............................................................. 56 43 81
Inventories..................................................................... 57 64 85
Other current assets............................................................ 18 20 32
--------- --------- -----------
Total current assets.......................................................... 266 193 324
Property and equipment
Land............................................................................ 2,229 2,229 2,229
Land improvements............................................................... 1,159 1,167 1,167
Buildings and equipment......................................................... 1,671 1,696 1,716
--------- --------- -----------
5,059 5,092 5,112
Accumulated depreciation........................................................ 366 625 737
--------- --------- -----------
Total property and equipment.................................................. 4,693 4,467 4,375
Intangible assets................................................................. 369 293 243
--------- --------- -----------
$ 5,328 $ 4,953 $ 4,942
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND CAPITAL
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 2)................................... $ 42 $ 65 $ 58
Accounts payable................................................................ 7 7 25
Accrued property taxes.......................................................... 42 53 27
Other current liabilities....................................................... 79 39 43
--------- --------- -----------
Total current liabilities..................................................... 170 164 153
Long-term debt (Note 2)........................................................... 1,766 2,591 2,568
Capital
General partners................................................................ 34 22 22
Limited partners................................................................ 3,358 2,176 2,199
--------- --------- -----------
Total capital................................................................. 3,392 2,198 2,221
--------- --------- -----------
$ 5,328 $ 4,953 $ 4,942
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes to financial statements.
F-98
<PAGE>
OLDE ATLANTA GOLF CLUB LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX-MONTH PERIOD
DECEMBER 31, ENDED JUNE 30,
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
SALES
Green fees, cart fees, driving range fees, membership fees and dues...... $ 1,623 $ 1,568 $ 868 $ 900
Golf shop sales.......................................................... 186 200 92 97
Restaurant sales......................................................... 246 261 127 148
Other sales.............................................................. 10 5 3 5
--------- --------- --------- ---------
Total sales............................................................ 2,065 2,034 1,090 1,150
--------- --------- --------- ---------
COSTS AND EXPENSES
Cost of sales -- golf shop and restaurant.................................. 236 252 116 130
Operating expenses......................................................... 1,605 1,557 741 813
--------- --------- --------- ---------
1,841 1,809 857 943
--------- --------- --------- ---------
Income from operations..................................................... 224 225 233 207
Interest expense........................................................... 143 202 87 112
--------- --------- --------- ---------
Net income................................................................. $ 81 $ 23 $ 146 $ 95
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
F-99
<PAGE>
OLDE ATLANTA GOLF CLUB LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
----------- --------- ---------
<S> <C> <C> <C>
Partners' capital at January 1, 1994................................................ $ 35 $ 3,440 $ 3,475
Distributions....................................................................... (2) (162) (164)
Net income.......................................................................... 1 80 81
--- --------- ---------
Partners' capital at December 31, 1994.............................................. 34 3,358 3,392
Purchase of limited partnership interest............................................ -- (21) (21)
Distributions....................................................................... (12) (1,184) (1,196)
Net income.......................................................................... -- 23 23
--- --------- ---------
Partners' capital at December 31, 1995.............................................. 22 2,176 2,198
Distributions (unaudited)........................................................... (1) (71) (72)
Net income (unaudited).............................................................. 1 94 95
--- --------- ---------
Partners' capital at June 30, 1996 (unaudited)...................................... $ 22 $ 2,199 $ 2,221
--- --------- ---------
--- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-100
<PAGE>
OLDE ATLANTA GOLF CLUB LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX-MONTH PERIOD
DECEMBER 31, ENDED JUNE 30,
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................. $ 81 $ 23 $ 146 $ 95
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation.......................................................... 352 277 139 112
Amortization.......................................................... 91 98 48 50
Change in assets and liabilities:
Accounts receivable................................................. (49) 13 4 (38)
Inventory........................................................... (30) (7) (9) (22)
Other current assets................................................ (11) (2) (9) (12)
Accounts payable.................................................... (79) -- 10 19
Other current liabilities........................................... (35) (27) (51) (22)
--------- --------- --------- ---------
Net cash provided by operating activities............................... 320 375 278 182
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...................................... (196) (69) (63) (19)
Proceeds from sale of equipment......................................... -- 16 -- --
--------- --------- --------- ---------
Net cash used in investing activities................................... (196) (53) (63) (19)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of limited partnership interest................................ -- (21) (21) --
Payments of financing fees.............................................. (41) (22) (22) --
Proceeds from long-term debt............................................ 1,835 900 900 --
Payments on long-term debt.............................................. (1,702) (52) (21) (31)
Partner distributions................................................... (164) (1,196) (1,029) (72)
--------- --------- --------- ---------
Net cash used in financing activities................................... (72) (391) (193) (103)
--------- --------- --------- ---------
Net increase (decrease) in cash........................................... 52 (69) 22 60
Cash at beginning of period............................................... 83 135 135 66
--------- --------- --------- ---------
Cash at end of period..................................................... $ 135 $ 66 $ 157 $ 126
--------- --------- --------- ---------
--------- --------- --------- ---------
Supplemental disclosure of cash flow information
Cash paid during the period for interest................................ $ 143 $ 202 $ 87 $ 112
</TABLE>
See accompanying notes to financial statements.
F-101
<PAGE>
OLDE ATLANTA GOLF CLUB LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
1. NATURE OF BUSINESS AND OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS
Olde Atlanta Golf Club Limited Partnership (the Partnership) owns and
operates a golf course, Olde Atlanta Country Club, in Atlanta, Georgia. The
Partnership was organized as a limited partnership on August 21, 1992 under the
laws of the State of Illinois.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
Management must make estimates and assumptions in preparing financial
statements that affect the amounts reported therein and the disclosures
provided. These estimates and assumptions may change in the future and future
results could differ.
INVENTORY
Inventory is stated at the lower of cost or market, cost determined on the
first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Improvements and betterments
are capitalized; maintenance and repairs are charged to operations as incurred.
Depreciation is provided for financial reporting and income tax purposes using
both accelerated and straight-line methods over lives from 5 to 31 years.
INTANGIBLE ASSETS
Intangible assets consist of financing fees, start-up costs, and
organization costs. Financing fees are being amortized on the straight-line
method over the period of the underlying loans. Start-up and organization costs
are being amortized on the straight-line method over 60 months. Accumulated
amortization at December 31, 1994 and 1995 was $98 and $195, respectively.
REVENUE RECOGNITION
Green fees, cart fees, and driving range fees are recognized as revenue when
the rounds are played. Membership initiation fees are recorded as revenue when
received, as these amounts are nonrefundable. Membership dues are recognized in
the period in which they relate.
INCOME TAXES
The Partnership is not subject to income taxes since the income or loss of
the Partnership is includable in the respective income tax returns of the
partners.
UNAUDITED INTERIM FINANCIAL INFORMATION
In the opinion of management, the Partnership has made all adjustments
necessary for a fair presentation of the financial condition of the Partnership
as of June 30, 1996 and the results of operations and cash flows for each of the
six months ended June 30, 1996 and 1995, as presented in the accompanying
unaudited interim financial information. The results of operations for such
interim periods are not necessarily indicative of the results to be obtained for
the full year.
F-102
<PAGE>
OLDE ATLANTA GOLF CLUB LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
2. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Loan with Peoples Bank of Forsyth County, dated April 20, 1994, due in monthly
payments of $15 including interest, with a balloon payment due April 19, 1999;
interest at 8% secured by the golf course, including all improvements............... $ 1,808 $ 1,767
Loan with Peoples Bank of Forsyth County, dated April 15, 1995, due in monthly
payments of $8 including interest, with a balloon payment due April 15, 1999;
interest at 9.25%, secured by the golf course, including all improvements. An unused
line of credit for $100 to acquire equipment is available........................... -- 889
--------- ---------
1,808 2,656
Current maturities of long-term debt................................................. 42 65
--------- ---------
Total long-term debt................................................................. $ 1,766 $ 2,591
--------- ---------
--------- ---------
</TABLE>
Maturities of long-term debt as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996........................................................................ $ 65
1997........................................................................ 71
1998........................................................................ 77
1999........................................................................ 2,443
</TABLE>
Based on the borrowing rates currently available to the Partnership for
loans with similar terms and maturities, the fair value of long-term debt
approximates the carrying amount.
3. COMMITMENTS
The Partnership leases golf carts under an operating lease which expires in
November 1997. Minimum future rentals under this lease as of December 31, 1995
are as follows:
<TABLE>
<S> <C>
1996........................................................................ $ 46
1997........................................................................ 43
---------
$ 89
---------
---------
</TABLE>
Total rent expense for 1995 and 1994 amounted to $55 and $51, respectively.
The Partnership terminated its agreement with HMS Golf Management, Inc. to
manage the golf club effective November 30, 1994. The termination agreement
included a termination fee of $102 to be paid by the Partnership. Total expense
plus the termination fee incurred in 1994 amounted to $161.
The Partnership pays a management fee to the general partner for
administrative and management services. The management fee is based on gross
revenues and amounted to $78 and $54 for 1995 and 1994, respectively.
4. SUBSEQUENT EVENT
Subsequent to December 31, 1995, the Partnership began negotiating
agreements to transfer the golf course and related improvements and equipment to
Golf Trust of America.
F-103
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECTED AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
--------------
SUMMARY TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 16
The Company............................................................... 25
Use of Proceeds........................................................... 29
Distribution Policy....................................................... 30
Capitalization............................................................ 32
Dilution.................................................................. 33
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 35
The Golf Industry......................................................... 44
The Golf Courses.......................................................... 47
Management................................................................ 58
Initial Lessees........................................................... 63
Policies and Objectives With Respect to Certain Activities................ 64
The Formation Transactions................................................ 67
Certain Relationships and Transactions.................................... 68
Partnership Agreement..................................................... 69
Principal Stockholders of the Company and Principal Partners in the
Operating Partnership.................................................... 72
Capital Stock............................................................. 73
Certain Provisions of Maryland Law and of the Company's Charter and
Bylaws................................................................... 77
Shares Available for Future Sale.......................................... 79
Federal Income Tax Considerations......................................... 79
Underwriting.............................................................. 92
Experts................................................................... 93
Legal Matters............................................................. 93
Additional Information.................................................... 94
Glossary.................................................................. 95
Financial Statements...................................................... F-1
</TABLE>
--------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT 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.
[LOGO]
2,775,000 SHARES
GOLF TRUST OF AMERICA, INC.
COMMON STOCK
-----------------
PROSPECTUS
-----------------
ROBERTSON, STEPHENS & COMPANY
WHEAT FIRST BUTCHER SINGER
, 19
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, payable by the
Company in connection with the sale of Common Stock being registered. All
amounts are estimates except the SEC registration fee, the NASD filing fee and
the New York Stock Exchange listing fees.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
----------
<S> <C>
SEC Registration fee.............................................................. $ 20,308
NASD filing fee................................................................... 7,202
New York Stock Exchange listing fees.............................................. *
Printing and engraving............................................................ *
Legal fees and expenses of the Company............................................ *
Accounting fees and expenses...................................................... *
Blue sky fees and expenses........................................................ *
Transfer Agent and Registrar fees................................................. *
Miscellaneous..................................................................... *
----------
Total.........................................................................
----------
----------
</TABLE>
- ------------
* To be completed by amendment.
ITEM 31. SALES TO SPECIAL PARTIES.
See Item 32 below.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
On November 11, 1996, 1 share of Common Stock was issued by the Company to
C.A. Hooks, Jr. This issuance of Common Stock was effected in reliance upon an
exemption from registration under Section 4(2) of the Securities Act as a
transaction not involving a public offering. On November 11, 1996 (i) 12,500 OP
Units were issued by the Operating Partnership to W. Bradley Blair, II, (ii)
12,500 OP Units were issued to David J. Dick and (iii) 3,750 OP Units were
issued to James Hoppenrath. These issuances were effected in reliance upon an
exemption from registration under Section 4(2) of the Securities Act as a
transaction not involving a public offering.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 2-418 of the Maryland General Corporation Law (the "MGCL") empowers
the Company to indemnify, subject to the standards set forth therein, any person
who is a party in any action in connection with any action, suit or proceeding
brought or threatened by reason of the fact that the person was a director,
officer, employee or agent of such company, or is or was serving as such with
respect to another entity at the request of such company. The MGCL also provides
that the Company may purchase insurance on behalf of any such director, officer,
employee or agent.
The Company's Charter provides for indemnification of the officers and
directors of the Company substantially identical in scope to that permitted
under Section 2-418 of the MGCL. The Bylaws of the Company also provide that the
expenses of officers and directors incurred in defending any action, suit or
proceeding, whether civil, criminal, administrative or investigative, must be
paid by the Company as they are incurred and in advance of the final disposition
of the action, suit or proceeding, upon receipt of an undertaking by or on
behalf of the director or officer to repay all amounts so advanced if it is
ultimately determined by a court of competent jurisdiction that the officer or
director is not entitled to be indemnified by the Company.
Prior to the completion of the Offering, the Company anticipates entering
into indemnification agreements with certain of its directors and officers that
require the Company to indemnify such directors and officers to the
II-1
<PAGE>
fullest extent permitted by applicable provisions of the MGCL, provided that any
settlement of a third party action against a director or officer is approved by
the Company, and subject to limitations for actions initiated by the director or
officer, penalties paid by insurance, and violations of Section 16(b) of the
Securities Exchange Act of 1934, as amended, and similar laws.
Pursuant to the Underwriting Agreement, the Registrant has agreed to
indemnify the Underwriters against certain liabilities which may be incurred in
connection with the Offering made by this Prospectus forming a part of this
Registration Statement, including liabilities under the Securities Act, and the
Underwriters have agreed to indemnify the Company and its officers and directors
against certain similar liabilities.
The Company's Charter limits the liability of the Company's directors and
officers for money damages to the Company and its shareholders to the fullest
extent permitted from time to time by Maryland law. Maryland law presently
permits the liability of directors and officers to a corporation or its
shareholders for money damages to be limited, except (i) to the extent that it
is proved that the director or officer actually received an improper benefit or
profit or (ii) if a judgment or other final adjudication is entered in a
proceeding based on a finding that the director's or officer's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. This provision
does not limit the ability of the Company or its shareholders to obtain other
relief, such as an injunction or rescission.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements.
Index included at page F-1 to F-4
(b) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO.
- ---------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Charter of the Company, as filed with the State Department of
Assessments and Taxation of Maryland on November 8, 1996.
3.2* Bylaws of the Company, as currently in effect.
5.1* Opinion of Ballard Spahr Andrews & Ingersoll as to legality of the
shares being registered.
8.1* Opinion of O'Melveny & Myers LLP as to tax matters.
10.1* Form of First Amended and Restated Agreement of Limited Partnership
of the Operating Partnership.
10.2* Form of Participating Lease.
10.3* Form of Right of Option to Purchase and Right of First Refusal
Agreement.
10.4 Form of Contribution and Leaseback Agreement.
10.5* Form of Registration Rights Agreement between the Company and the
persons named therein.
10.6* Form of Golf Trust of America, Inc. Stock Incentive Plan.
10.7* Form of Golf Trust of America, Inc. Non-Employee Directors'
Incentive Plan.
10.8* Form of Employment Agreement between the Company and W. Bradley
Blair, II.
10.9* Form of Employment Agreement between the Company and David J. Dick.
22.1* List of subsidiaries of the Company.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
- ---------
23.1 Consents of Price Waterhouse LLP, Coopers & Lybrand L.L.P., BDO
Seidman, LLP and Crowe, Chizek and Company LLP.
<C> <S>
23.3* Consents of O'Melveny & Myers LLP and Ballard Spahr Andrews &
Ingersoll (Included with opinion filed as Exhibit 8.1)
24.1 Powers of Attorney. See page II-4.
</TABLE>
- ------------
* To be filed by amendment.
ITEM 36. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 33 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933, as amended, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
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 Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus as
filed as part of the registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to Rule
424(b(1) or (4) or 497(h) under the Securities Act of 1933, as amended,
shall be deemed to be part of the registration statement as of the time it
was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each posteffective amendment that contains a form
of prospectus 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.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Myrtle Beach, State of South Carolina
on November 12, 1996.
GOLF TRUST OF AMERICA, INC.
By: /S/ W. BRADLEY BLAIR, II
-----------------------------------
W. Bradley Blair, II
PRESIDENT
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints W.
Bradley Blair, II his true and lawful attorney-in-fact and agent, with full
powers of substitution, for him and in his name, place and stead, in any and all
capacities, to sign and to file any and all amendments, including post-effective
amendments and any registration statements filed pursuant to Rule 462(b), to
this Registration Statement with the Securities and Exchange Commission,
granting to said attorney-in-fact power and authority to perform any other act
on behalf of the undersigned required to be done in connection therewith.
Pursuant to the requirements of the Securities Act of 1933 this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------- ----------------------------------------- ----------------------
<S> <C> <C>
Chairman of the Board of Directors/ Chief
/S/ W. BRADLEY BLAIR, II Executive Officer/President
- --------------------------------
/S/ DAVID J. DICK Executive Vice President/Director
- --------------------------------
/S/ LARRY D. YOUNG Director
- --------------------------------
</TABLE>
II-4
<PAGE>
ARTICLES OF INCORPORATION
OF
GOLF TRUST OF AMERICA, INC.
ARTICLE I
The undersigned, David J. Dick, whose post office address is c/o
Inland Group, Inc., South Tower, Suite 606, 3501 Jamboree Road, Newport Beach,
California 92660, being at least 18 years of age and the sole incorporator of
Golf Trust of America, Inc., does, pursuant to the Maryland General Corporation
Law, form Golf Trust of America, Inc. under the general laws of the State of
Maryland.
ARTICLE II
NAME
The name of the corporation (which is hereinafter called the
"Corporation") is:
Golf Trust of America, Inc.
ARTICLE III
PURPOSES
The purpose for which the Corporation is formed is to engage in any
lawful act or activity for which corporations may be organized under the General
Laws of the State of Maryland now or hereafter in force. Subject to, and not in
limitation of the authority of the preceding sentence, upon completion of its
Initial Public Offering, the Corporation shall engage in business as a real
estate investment trust (a "REIT") qualifying as such under Sections 856 through
860 of the Code, as defined below, unless and until the Board of Directors shall
have determined that it is no longer in the best interests of the Corporation to
engage in such business, and shall have taken the action contemplated in such
event by Section 3(b) of Article IX hereof.
The foregoing enumerated purposes and objects shall be in no way
limited or restricted by reference to, or inference from, the terms of the any
other clause of this or any other Article of the Articles of Incorporation of
the Corporation, and each shall be regarded as independent; and they are
intended to be and shall be construed as powers as well as purposes and objects
of the Corporation and shall be in addition to and not in limitation of the
general powers of corporations under the General Laws of the State of Maryland.
ARTICLE IV
PRINCIPAL OFFICE IN MARYLAND
AND RESIDENT AGENT
The post office address of the principal office of the Corporation in
the State of Maryland is PARASEC, c/o Federal Research Corporation, 928 North
Charles Street, Unit B2, Baltimore, Maryland 21201. The name of the resident
agent of the Corporation in the State of Maryland is PARASEC, c/o Federal
Research Corporation, 928 North Charles Street, Unit B2, Baltimore, Maryland
21201. Said resident agent is a resident of the State of Maryland.
<PAGE>
ARTICLE V
SHARES OF CAPITAL STOCK
SECTION 1. AUTHORIZED SHARES OF CAPITAL STOCK.
(a) AUTHORIZED SHARES. The total number of shares of capital stock
of all classes that the Corporation has authority to issue is one hundred
million (100,000,000) shares of capital stock (par value one cent ($.01) per
share), consisting of: (i) ninety million (90,000,000) shares of Common Stock,
par value one cent ($.01) per share (the "Common Shares"); and (ii) ten million
(10,000,000) shares of Preferred Stock, par value one cent ($.01) per share (the
"Preferred Shares") which may be issued in one or more classes as described in
Section 5 of Article V. The Common Shares and each class of the Preferred
Shares shall each constitute a separate class of capital stock of the
Corporation.
The Board of Directors may classify and reclassify any unissued shares
of capital stock in accordance with Section 6 of Article V hereof.
(b) TERMINOLOGY AND AGGREGATE PAR VALUE. The Common Shares and
Preferred Shares are collectively referred to herein as the "Equity Shares."
The aggregate par value of all the Corporation's authorized Equity Shares having
par value is $1,000,000.
SECTION 2. REIT-RELATED RESTRICTIONS AND LIMITATIONS ON THE EQUITY
SHARES OF THE CORPORATION.
Subsequent to the date of the Initial Public Offering, as defined
below, and until the "Restriction Termination Date," as defined below, all
Equity Shares of the Corporation shall be subject to the following restrictions
and limitations intended to preserve the Corporation's status as a REIT:
(a) DEFINITIONS. The following terms shall have the following
meanings:
"Acquire" shall mean the acquisition of Beneficial or Constructive
Ownership of Equity Shares, whether by a Transfer, Non-Transfer Event of by any
other means, including, without limitation, acquisition pursuant to the exercise
of the Acquisition Rights or any other option, warrant, pledge or other security
interest or similar right to acquire shares, but shall not include the
acquisition of any such rights unless, as a result, the acquiror would be
considered a Beneficial Owner, as defined below.
"Acquisition Rights" shall mean rights to Acquire Equity Shares
pursuant to: (i) the exercise of any option issued by the Corporation and
outstanding at the opening of business on the first business day following the
closing of the Initial Public Offering (whether exercisable on that day or not);
(ii) any right to exchange Units held on the first business day following the
closing of the Initial Public Offering or any right to exchange Units that may
be Acquired pursuant to an agreement described in the following clause; (iii)
any pledge of Equity Shares or Units made pursuant to an agreement executed on
or before the opening of business on the first business day following the
closing of the Initial Public Offering (or the exchange of Units subject to such
an agreement).
"Beneficial Ownership" shall mean ownership of Equity Shares by a
Person who would be treated as an owner of Equity Shares either directly or
indirectly under Section 542(a)(2) of the Code, taking into account, for this
purpose, constructive ownership determined under Section 514 of the Code, as
modified by Section 856(h)(1)(B) of the Code (except where expressly provided
otherwise). The terms "Beneficial Owner," "Beneficially Owns" and "Beneficially
Owned" shall have the correlative meanings.
"Beneficiary" shall mean, with respect to any Share Trust, one or more
organizations described in each of Section 170(b)(1)(A) (other than clauses
(vii) or (viii) thereof) and Section 170(c)(2) of the
2
<PAGE>
Code that are named by the Share Trustee as the beneficiary or beneficiaries of
such Share Trust, in accordance with the provisions of Section 4(a) of this
Article V.
"Code" shall mean the Internal Revenue Code of 1986, as amended and in
effect from time to time, or any successor statute thereto, as interpreted by
the applicable regulations thereunder. Any reference herein to a specific
section or sections of the Code shall be deemed to include a reference to any
corresponding provision of future law.
"Constructive Ownership" shall mean ownership of Equity Shares by a
Person who would be treated as an owner of such Equity Shares either directly or
constructively through the application of Section 318 of the Code, as modified
by Section 856(d)(5) of the Code. The terms "Constructively Own,"
"Constructively Owned" and "Constructive Owner" shall have the correlative
meanings.
"Initial Public Offering" shall mean the closing of the first sale of
Common Shares by the Corporation in an underwritten public offering pursuant to
an effective registration statement for such Common Shares filed under the
Securities Act of 1933, as amended.
"Market Price" on any date shall mean the average of the Closing Price
for the five consecutive Trading Days ending on such date. The "Closing Price"
on any day shall mean the last reported sale price, regular way, or, in case no
such sale takes place on such day, the average of the closing bid and asked
prices, regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange, of the class of Equity Shares of the
Corporation, or, if not reported in the consolidated transaction reporting
system with respect to securities listed on the principal national securities
exchange on which such Equity Shares are listed or admitted to trading or, if
such Equity Shares are not then listed or admitted to trading on any national
securities exchange, the last quoted price, or if not so quoted, the average of
the high bid and low asked prices in the over-the-counter market, as reported by
the National Association of Securities Dealers, Inc. Automated Quotation System
or, if such system is no longer in use, the principal other automated quotations
system that may then be in use or, if such Equity Shares are not quoted by any
such market maker making a market in such Equity Shares as selected in good
faith by the Board of Directors of the Corporation. "Trading Day" shall mean a
day on which the principal national securities exchange on which such Equity
Shares are listed or admitted to trading is open for the transaction of business
or, if such Equity Shares are not listed or admitted to trading on any national
securities exchange, shall mean any day other than a Saturday, a Sunday or a day
on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Non-Transfer Event" shall mean an event other than a purported
Transfer that would cause any Person to Beneficially Own or Constructively Own
Equity Shares in excess of the Ownership Limit (or would cause the Corporation
to fail to qualify as a REIT), including, without limitation, a change in the
capital structure of the Corporation.
"Ownership Limit" shall initially mean, (i) with respect to the Common
Shares, 9.8% of the lesser of (a) the total number, or (b) the value of the
total number, of outstanding Common Shares or (ii) with respect to the Preferred
Shares, 9.8% of the lesser of (a) the total number, or (b) the value of the
total number, of outstanding Preferred Shares (or such other number or value of
Preferred Shares as the Board of Directors may determine in fixing the terms of
the Preferred Shares).
"Partnership" shall mean Golf Trust of America, L.P., a Delaware
limited partnership formed pursuant to the Partnership Agreement and any
successor thereto.
"Partnership Agreement" shall mean the agreement of limited
partnership establishing the Partnership, as the same may be amended,
supplemented or restated from time to time.
3
<PAGE>
"Permitted Transferee" shall mean any Person designated as a Permitted
Transferee in accordance with the provisions of Section 4(e) of this Article V.
"Person" shall mean an individual, corporation, partnership, limited
liability company or partnership, estate, trust (including a trust qualified
under Section 401(a) or 501(c)(17) of the Code), a portion of a trust
permanently set aside for or to be used exclusively for the purposes described
in Section 642(c) of the Code, association, private foundation within the
meaning of Section 509(a) of the Code, joint stock company or other entity and
also includes a group as that term is used for purposes of Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended but does not include (i) an
underwriter who participates in the Initial Public Offering or (ii) an
underwriter who participates in any public offering of the common Shares and/or
Preferred Shares and/or securities convertible into or exchangeable for Common
Shares and/or Preferred Shares subsequent to the Initial Public Offering (a
"Secondary Offering") for a period of sixty (60) days following the purchase by
such underwriter of the Common Shares and/or Preferred Shares and/or securities
convertible into or exchangeable for Common Shares and/or Preferred Shares in
such Secondary Offering.
"Purported Beneficial Transferee" shall mean, with respect to any
purported Transfer that results in Shares-in-Trust as defined below in Section 4
of this Article V, the purported beneficial transferee for whom the Purported
Record Transferee would have Acquired Equity Shares of the Corporation if such
Transfer had been valid under Section 2(b) of this Article V.
"Purported Record Transferee" shall mean, with respect to any
purported Transfer which results in Shares-in-Trust, the Person who would have
been the record holder of the Equity Shares of the Corporation if such Transfer
had been valid under Section 2(b) of this Article V.
"REIT" shall mean a real estate investment trust under Section 856 et
seq. of the Code.
"Restriction Termination Date" shall mean the first day after the date
of the Initial Public Offering on which the Corporation determines pursuant to
Section 3(b) of Article IX and Section 2(i) of this Article V that it is no
longer in the best interests of the Corporation to attempt to, or continue to,
qualify as a REIT.
"Share Trust" shall mean any separate trust created pursuant to
Section 4(a) of this Article V and administered in accordance with the terms of
Section 4 of this Article V, for the exclusive benefit of any Beneficiary.
"Shares-in-Trust" shall mean any Equity Shares designated
Shares-in-Trust pursuant to Section 4(a) of this Article V.
"Share Trustee" shall mean the trustee of the Share Trust, which is
selected by the Corporation but not affiliated with the Corporation, the
Partnership or the Beneficiary, and any successor trustee appointed by the
Corporation.
"Transfer" (as a noun) shall mean any sale, transfer, gift,
assignment, devise or other disposition of Equity Shares or the right to vote or
receive dividends on Equity Shares (including without limitation (i) the
granting of any option or entering into any agreement for the sale, transfer or
other disposition of Equity Shares or the right to vote or receive dividends on
Equity Shares or (ii) the sale, transfer, assignment or other disposition or
grant of any Acquisition Rights or other securities or rights convertible into
or exchangeable for Equity Shares, or the right to vote or receive dividends on
Equity Shares), whether voluntary or involuntary, whether of record or
beneficially and whether by operation of law or otherwise. "Transfer" (as a
verb) shall have a correlative meaning.
"Units" shall mean Partnership Units as that term is defined in the
Partnership Agreement, as effective on the date of the Initial Public Offering.
4
<PAGE>
(b) OWNERSHIP LIMITATION AND TRANSFER RESTRICTIONS.
(i) Except as provided in Section 2(f) of this Article V, from
and after the date of the Initial Public Offering and prior to the Restriction
Termination Date: (w) no Person shall Beneficially Own or Constructively Own
Equity Shares in excess of the Ownership Limit; (x) no Person shall Acquire
Equity Shares, if, as a result of such action, the Equity Shares would be
beneficially owned by fewer than 100 Persons (determined without reference to
any rules of attribution under the Code); (y) no Person shall Acquire Equity
Shares or any interest therein if, as a result of such acquisition, the
Corporation would be "closely held" within the meaning of Section 856(h) of the
Code or would otherwise fail to qualify as a REIT, as the case may be; and (z)
no Person shall Acquire Equity Shares or any interest therein if, as a result of
such acquisition, the Corporation would Constructively Own 10% or more of the
ownership interests in a tenant of the Corporation's or the Partnership's real
property, within the meaning of Section 856(d)(2)(B) of the Code, or would
otherwise fail to qualify as a REIT, as the case may be.
(ii) Any Transfer that would result in a violation of the
restrictions in Section (b)(i) above, shall be void AB INITIO as to the
purported Transfer of such number of Equity Shares that would cause the
violation of the applicable restriction in Section (b)(i), and the Purported
Record Transferee (and the Purported Beneficial Transferee, if different) shall
acquire no rights in such Equity Shares.
(c) AUTOMATIC TRANSFER TO SHARE TRUST.
(i) If, notwithstanding the other provisions contained in this
Article V, at any time from and after the date of the Initial Public Offering
and prior to the Restriction Termination Date, there is a purported Transfer or
Non-Transfer Event such that any Person would either Beneficially Own or
Constructively Own Equity Shares in excess of the Ownership Limit, then, except
as otherwise provided in Section 2(f) of this Article V, (x) the Purported
Record Transferee (and the Purported Beneficial Transferee, if different) shall
acquire no right or interest (or, in the case of a Non-Transfer Event, the
person holding record title to the Equity Shares Beneficially Owned or
Constructively Owned by such Beneficial Owner or Constructive Owner, shall cease
to own any right or interest) in such number of Equity Shares which would cause
such Purported Record Transferee (and Purported Beneficial Transferee, if
different) to Beneficially Own or Constructively Own Equity Shares in excess of
the Ownership Limit (rounded up to the nearest whole share), (y) such number of
Equity Shares in excess of the Ownership Limit (rounded up to the nearest whole
share) shall be designated Shares-in-Trust and, in accordance with the
provisions of Section 4(a) of this Article V, transferred automatically and by
operation of law to the Share Trust to be held in accordance with Section 4 of
this Article V and (z) such Purported Record Transferee (and the Purported
Beneficial Transferee, if different) shall submit such number of Equity Shares
to the Share Trust for registration in the name of the Share Trustee. Any
Purported Record Transferee (and Purported Beneficial Transferee, if different)
shall acquire no right or interest (or, in the case of a Non-Transfer Event, the
person holding title to the Shares Beneficially Owned or Constructively Owned by
such Beneficial Owner or Constructive Owner, shall cease to own any right or
interest) in such number of Shares which would cause such person to own Shares
in excess of the Ownership Limit. Such transfer to a Share Trust and the
designation of shares as Shares-in-Trust shall be effective as of the close of
business on the business day prior to the date of the Transfer or Non-Transfer
Event, as the case may be.
(ii) If, notwithstanding the other provisions contained in this
Article V, at any time from and after the date of the Initial Public Offering
and prior to the Restriction Termination Date, there is a purported Transfer of
Non-Transfer Event that, if effective, would (i) result in the Equity Shares
being beneficially owned by fewer than 100 persons (determined without reference
to any rules of attribution), (ii) result in the Corporation being "closely
held" within the meaning of Section 856(h) of the Code, (iii) cause the
Corporation or the Partnership to Constructively Own 10% or more of the
ownership interests in a tenant of the Corporation's real property, within the
meaning of Section 856(d)(2)(B) of the Code, or (iv) cause the Corporation to
otherwise fail to qualify as a REIT, as the case may be, then (x) the Purported
Record Transferee (and the Purported Beneficial Transferee, if different) shall
acquire no right or interest (or, in the
5
<PAGE>
case of a Non-Transfer Event, the person holding record title to the Equity
Shares with respect to which such Non-Transfer Event occurred, shall cease to
own any right or interest) in such number of Equity Shares, the ownership of
which by such Purported Record Transfer (and Purported Beneficial Transferee, if
different) would (A) result in the Equity Shares being beneficially owned by
fewer than 100 Persons (determined without reference to any rules of
attribution), (B) result in the Corporation being "closely held" within the
meaning of Section 856(h) of the Code, (C) cause the Corporation or the
Partnership to Constructively Own 10% or more of the ownership interests in a
tenant of the Corporation's property, within the meaning of Section 856(d)(2)(B)
of the Code, or (D) would otherwise cause the Corporation to fail to qualify as
a REIT, as the case may be, (y) such number of Equity Shares (rounded up to the
nearest whole share) shall be designated Shares-in-Trust and , in accordance
with the provisions of Section 4(a) of this Article V, transferred automatically
and by operation of law to the Share Trust to be held in accordance with Section
4 of this Article V and (z) the Purported Record Transferee (and the Purported
Beneficial Transferee, if different) shall submit such number of Equity Shares
to the Share Trust for registration in the name of the Share Trustee.
(d) REMEDIES FOR BREACH. If the Board of Directors or the
Corporation or its designee shall at any time determine in good faith that a
purported Transfer of Equity Shares has taken place in violation of Section 2(b)
of this Article V or that a Person intends to acquire or has attempted to
acquire beneficial ownership (determined without reference to any rules of
attribution). Beneficial Ownership or Constructive Ownership of any Equity
Shares of the Corporation in violation of Section 2(b) of this Article V, the
Board of Directors or the Corporation or its designee shall take such action as
it deems advisable to refuse to give effect to or to prevent such Transfer or
acquisition, including, but not limited to, refusing to give effect to such
Transfer or acquisition on the books of the Corporation or instituting
proceedings to enjoin such Transfer or acquisition; PROVIDED, HOWEVER, that any
Transfer, attempted Transfer, acquisition or attempted acquisition in violation
of Section 2(b)(i) of this Article V shall automatically result in the transfer
described in Section 2(c) of this Article V, irrespective of any action (or
non-action) by the Board of Directors, except as provided in Section 2(f) of
this Article V.
(e) NOTICE OF RESTRICTED TRANSFER.
(i) Any Person who acquires or attempts to acquire Equity Shares
in violation of Section 2(b) of this Article V, and any Person who is a
Purported Record Transferee or a Purported Beneficial Transferee of Equity
Shares that are transferred to a Share Trust under Section 2(c) of this Article
V, shall immediately give written notice to the Corporation of such event, shall
submit to the Corporation such number of Equity Shares to be transferred to the
Share Trust and shall provide to the Corporation such other information as the
Corporation may request in order to determine the effect, if any, of such
Transfer or attempted Transfer or such Non-Transfer Event on the Corporation's
status as a REIT.
(ii) From and after the date of the Initial Public Offering and
prior to the Restriction Termination Date every Beneficial Owner or Constructive
Owner of more than 5% (or such other percentage, as provided in the pertinent
income tax regulations promulgated under the Code) of the number or value of the
outstanding Equity Shares of the Corporation shall, within 30 days after January
1 of each year, give written notice to the Corporation stating the name and
address of such Beneficial Owner or Constructive Owner, the number of Equity
Shares Beneficially or Constructively Owned, and a description of how such
shares are held. Each such Beneficial Owner or Constructive Owner shall provide
to the Corporation such additional information that the Corporation may
reasonably request in order to determine the effect, if any, of such Beneficial
or Constructive Ownership on the Corporation's status as a REIT and to ensure
compliance with the Ownership Limit; and
(iii) From and after the date of the Initial Public Offering
and prior to the Restriction Termination Date, each Person who is a Beneficial
Owner or Constructive Owner of Equity Shares of the Corporation and each Person
(including the stockholder of record) who is holding Equity Shares of the
Corporation for a Beneficial Owner or Constrictive Owner shall provide to the
Corporation such information as the Corporation may reasonably request in order
to determine the Corporation's status as a REIT, to comply
6
<PAGE>
with the requirements of any taxing authority or governmental agency or to
determine any such compliance and to ensure compliance with the Ownership Limit.
(f) EXCEPTION. The Board of Directors may, upon receipt of either a
certified copy of a ruling from the Internal Revenue Service or an opinion of
counsel satisfactory to the Board of Directors, but shall in no case be required
to, exempt a Person (the "Exempted Holder") from the Ownership Limit, if the
ruling or opinion concludes that no Person who is an individual as defined in
Section 542(a)(2) of the Code will, as the result of the ownership of Equity
Shares by the Exempted Holder, be considered to have Beneficial Ownership or
Constructive Ownership of an amount of Equity Shares that will violate the
restrictions contained in Sections 2(b)(i)(x), 2(b)(i)(y) and 2(b)(i)(z) of this
Article V; provided, that (i) the Board of Directors obtains such
representations and undertakings from such Person as are reasonably necessary to
ascertain that no individual's Beneficial Ownership of Equity Shares will
violate the Ownership Limit, and (ii) such Person agrees that any violation or
attempted violation will result in such transfer to the Share Trust of Equity
Shares pursuant to Section 2(c) of this Article V.
(g) LEGEND. Each certificate for shares of Equity Shares shall bear
substantially the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO RESTRICTIONS ON OWNERSHIP AND TRANSFER FOR THE PURPOSE OF
THE CORPORATION'S MAINTENANCE OF ITS STATUS AS A REAL ESTATE
INVESTMENT TRUST UNDER THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED (THE 'CODE'). EXCEPT AS OTHERWISE PROVIDED PURSUANT
TO THE CHARTER OF THE CORPORATION, NO PERSON MAY
BENEFICIALLY OWN OR CONSTRUCTIVELY OWN (1) COMMON SHARES OF
THE CORPORATION IN EXCESS OF 9.8% OF THE LESSER OF THE TOTAL
NUMBER OR VALUE OF THE OUTSTANDING COMMON SHARES OF THE
CORPORATION, (2) PREFERRED SHARES OF THE CORPORATION IN
EXCESS OF 9.8% OF THE LESSER OF THE TOTAL NUMBER OF VALUE OF
THE OUTSTANDING PREFERRED SHARES OF THE CORPORATION, (3)
EQUITY SHARES THAT WOULD RESULT IN THE TRUST BEING "CLOSELY
HELD" UNDER SECTION 856(h) OF THE CODE, (4) EQUITY SHARES
THAT WOULD RESULT IN THE EQUITY SHARES BEING BENEFICIALLY
OWNED BY FEWER THAN 100 PERSONS (DETERMINED WITHOUT
REFERENCE TO ANY RULES OF ATTRIBUTION) OR (5) EQUITY SHARES
THAT WOULD CAUSE THE CORPORATION OR GOLF TRUST OF AMERICA,
L.P., A DELAWARE LIMITED PARTNERSHIP, TO CONSTRUCTIVELY OWN
10% OR MORE OF THE OWNERSHIP INTERESTS IN A TENANT OF THE
REAL PROPERTY OF THE CORPORATION OR GOLF TRUST OF AMERICA,
L.P., WITHIN THE MEANING OF SECTION 856(d)(2)(B) OF THE
CODE, WITH FURTHER RESTRICTIONS AND EXCEPTIONS SET FORTH IN
THE CORPORATION'S CHARTER. ANY PERSON WHO ATTEMPTS OR
PROPOSES TO BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES OF
EQUITY SHARES IN EXCESS OF THE ABOVE LIMITATIONS MUST
IMMEDIATELY NOTIFY THE CORPORATION IN WRITING. IF AN
ATTEMPT IS MADE TO VIOLATE OR THERE IS A VIOLATION OF THESE
RESTRICTIONS (I) ANY PURPORTED TRANSFER WILL BE VOID AB
INITIO AND WILL NOT BE RECOGNIZED BY THE CORPORATION, (II)
THE EQUITY SHARES IN VIOLATION OF THESE RESTRICTIONS,
WHETHER AS A RESULT OF
7
<PAGE>
A TRANSFER OR NON-TRANSFER EVENT, WILL BE TRANSFERRED AUTOMATICALLY
AND BY OPERATION OF LAW TO A SHARE TRUST AND SHALL BE DESIGNATED
SHARES-IN-TRUST. ALL TERMS USED IN THIS LEGEND AND DEFINED IN THE
CORPORATION'S CHARTER HAVE THE MEANINGS DEFINED IN THE CORPORATION'S
CHARTER, AS THE SAME MAY BE AMENDED FROM TIME TO TIME, A COPY OF
WHICH, INCLUDING THE RESTRICTIONS ON OWNERSHIP AND TRANSFER, WILL BE
SENT WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS."
(h) REIT QUALIFICATION. From and after the date of the Initial
Public Offering, the Board of Directors shall use its reasonable best efforts to
cause the Corporation and its stockholders to qualify for United States federal
income tax treatment as a REIT in accordance with the provisions of the Code
applicable to a REIT and shall not take any action which could adversely affect
the ability of the Corporation to qualify as a REIT. In furtherance of the
foregoing, the Board of Directors shall use its reasonable best efforts to take
such actions as are necessary, and may take such actions as in its sole judgment
and discretion are desirable, to preserve the status of the Corporation as a
REIT; PROVIDED, HOWEVER that if it is determined that it is no longer in the
best interests of the Corporation to continue to have the Corporation qualify as
a REIT, the actions required by Article IX Section 3(b) may be taken to
terminate the Corporation's REIT election.
(i) REMEDIES NOT LIMITED. Subject to Section 7 of this Article V,
nothing contained in this Article shall limit the authority of the Board of
Directors to take such other action as it deems necessary or advisable to
protect the Corporation and the interests of its stockholders in preserving the
Corporation's status as a REIT.
(j) AMBIGUITY. In the case of an ambiguity in the application of any
of the provisions of this Article V, including any definition contained in
Section 2(a), the Board of Directors shall have the power to determine the
application of the provisions of this Article V with respect to any situation
based on the facts known to it.
(k) SEVERABILITY. If any provision of this Article V or any
application of any such provision is determined to be invalid by a federal or
state court having jurisdiction over the issue, the validity of the remaining
provisions shall not be affected and other applications of such provision shall
be affected only to the extent necessary to comply with the determination of
such court.
SECTION 3. COMMON SHARES.
Subject to the provisions of Sections 2, 4 and 5 of this Article V,
the Common Shares shall have the following preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption and such other rights as may be afforded
by law.
(a) VOTING RIGHTS. Except as may otherwise be required by law, each
holder of Common Shares shall have one vote in respect of each Common Share on
all actions to be taken by the stockholders of the Corporation, and, except as
otherwise provided in respect of any class of stock, hereafter classified or
reclassified, the exclusive voting power for all purposes shall be vested in the
holders of the Common Shares.
(b) DIVIDEND RIGHTS. Subject to the provisions of law and any
preferences of any class of stock hereafter classified or reclassified,
dividends, including dividends payable in shares of another class of the
Corporation's stock, may be paid on the Common Shares of the Corporation at such
time and in such amounts as the Board of Directors may deem advisable and the
holders of the Common Shares shall share ratably in any
8
<PAGE>
such dividends, in proportion to the number of Common Shares held by them
respectively, on a share for share basis.
(c) LIQUIDATION RIGHTS. In the event of any liquidation, dissolution
or winding up of the Corporation, whether voluntary of involuntary, the holders
of the Common Shares shall be entitled, after payment or provision for payment
of the debts and other liabilities of the Corporation and the amount to which
the holders of any class of capital stock hereafter classified or reclassified
having a preference on distributions in the liquidation, dissolution or winding
up on the Corporation are entitled, together with the holders of any other class
of capital stock hereafter classified or reclassified not having a preference on
distributions in the liquidation, dissolution or winding up of the Corporation,
to share ratably in the remaining net assets of the Corporation.
(d) NEW YORK STOCK EXCHANGE TRANSACTIONS. Notwithstanding any
provisions contained herein to the contrary, nothing in these Articles of
Incorporation shall preclude the settlement of any transaction entered into
through the facilities of the New York Stock Exchange.
SECTION 4. SHARES-IN-TRUST.
(a) SHARE TRUST. Any Equity Shares transferred to a Share Trust and
designated Shares-in-Trust pursuant to Section 2(c) hereof shall be held for the
exclusive benefit of the Beneficiary. The Corporation shall name a beneficiary
and trustee of each Share Trust within five days after discovery of the
existence thereof. Any transfer to a Share Trust, and subsequent designation of
Equity Shares as Shares-in-Trust, pursuant to Section 2(c) hereof shall be
effective as of the close of business on the business day prior to the date of
the Transfer or Non-Transfer Event that results in the transfer to the Share
Trust. Shares-in-Trust shall remain issued and outstanding Equity Shares of the
Corporation and shall be entitled to the same rights and privileges on identical
terms and conditions as are all other issued and outstanding Equity Shares of
the same class and series. When transferred to the Permitted Transferee in
accordance with the provisions of Section 4(c) hereof, such Shares-in-Trust
shall cease to be designated as Shares-in-Trust.
(b) DIVIDEND RIGHTS. The Trustee, as record holder of
Shares-in-Trust, shall be entitled to receive all dividends and distributions as
may be declared by the Board of Directors on such Equity Shares and shall hold
such dividends or distributions in trust for the benefit of the Beneficiary.
The Purported Record Transferee (or Purported Beneficial Transferee, if
applicable) with respect to Shares-in-Trust shall repay to the Share Trustee the
amount of any dividends or distributions received by it that (i) are
attributable to any Equity Shares designated as Shares-in-Trust and (ii) the
record date of which was on or after the date that such shares became
Shares-in-Trust. The Corporation shall take all measures that it determines
reasonably necessary to recover the amount of any such dividend or distribution
paid to the Purported Record Transferee (or Purported Beneficial Transferee, if
applicable), including, if necessary, withholding any portion of future
dividends or distributions payable on Equity Shares Beneficially Owned or
Constructively Owned by the Person who, but for the provisions of Section 2(c)
hereof, would Constructively Own or Beneficially Own the Shares-in-Trust; and,
as soon as reasonably practicable following the Corporation's receipt or
withholding thereof, shall pay over to the Share Trustee for the benefit of the
Beneficiary the dividends so received or withheld, as the case may be.
(c) RIGHTS UPON LIQUIDATION. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of, or any distribution of
the assets of (other than a dividend), the Corporation, each Trustee of
Shares-in-Trust shall be entitled to receive, ratably with each other holder of
Equity Shares of the same class or series, that portion of the assets of the
Corporation which is available for distribution to the holders of such class and
series of Equity Shares. The Trustee shall distribute to the Purported Record
Transferee the amounts received upon such liquidation, dissolution, or winding
up, or distribution, PROVIDED, HOWEVER, that the Purported Record Transferee
shall not be entitled to receive amounts pursuant to this Section 4(c) in excess
of, in the case of a purported Transfer in which the Purported Record Transferee
gave value for Equity Shares and which Transfer resulted in the transfer of the
shares to the Share Trust, the price per share, if
9
<PAGE>
any, such Purported Record Transferee paid for the Equity Shares and, in the
case of a Non-Transfer Event or Transfer in which the Purported Record
Transferee did not give value for such shares (e.g., if the shares were received
through a gift or devise) and which Non-Transfer Event or Transfer, as the case
may be, resulted in the transfer of shares to the Share Trust, the price per
share equal to the Market Price on the date of such Non-Transfer Event or
Transfer. Any remaining amount in such Share Trust shall be distributed to the
Beneficiary.
(d) VOTING RIGHTS. The Share Trustee shall be entitled to vote all
Shares-in-Trust. Any vote by a Purported Record Transferee as a holder of
Equity Shares prior to the discovery by the Corporation that the Equity Shares
are Shares-in-Trust shall, subject to applicable law, be rescinded and shall be
void AB INITIO with respect to such Shares-in-Trust and the Purported Record
Transferee shall be deemed to have given, as of the close of business on the
business day prior to the date of the purported Transfer or Non-Transfer Event
that results in the transfer to the Share Trust of Equity Shares under Section
2(c) hereof, an irrevocable proxy to the Share Trustee to vote the
Shares-in-Trust in the manner in which the Share Trustee, in its sole and
absolute discretion, desires.
(e) DESIGNATION OF PERMITTED TRANSFEREE. The Share Trustee shall
have the exclusive and absolute right to designate a Permitted Transferee of any
and all Shares-in-Trust. In an orderly fashion so as not to materially
adversely affect the Market Price of the Shares-in-Trust, the Share Trustee
shall designate any Person as Permitted Transferee, PROVIDED, HOWEVER, that (i)
the Permitted Transferee so designated purchases for valuable consideration
(whether in a public or private sale), at a price as set forth in Section 4(g)
hereof, the Shares-in-Trust and (ii) the Permitted Transferee so designated may
acquire such Shares-in-Trust without such acquisition resulting in a transfer to
a Share Trust and the redesignation of such Equity Shares so acquired as
Shares-in-Trust under Section 2(c) hereof. Upon the designation by the Share
Trustee of a Permitted Transferee in accordance with the provisions of this
Section 4(e), the Share Trustee of a Share Trust shall (i) cause to be
transferred to the Permitted Transferee that number of Shares-in-Trust acquired
by the Permitted Transferee, (ii) cause to be recorded on the books of the
Corporation that the Permitted Transferee is the holder of record of such number
of Equity Shares, (iii) cause the Shares-in-Trust to be cancelled, and (iv)
distribute to the Beneficiary any and all amounts held with respect to the
Shares-in-Trust after making that payment to the Purported Record Transferee
pursuant to Section 4(f) hereof.
(f) COMPENSATION TO RECORD HOLDER OF EQUITY SHARES THAT BECOME
SHARES-IN-TRUST. Any Purported Record Transferee shall be entitled (following
discovery of the Shares-in-Trust and subsequent designation of the Permitted
Transferee in accordance with Section 4(c) hereof) to receive from the Share
Trustee upon the sale or other disposition of such Shares-in-Trust the lesser of
(i) in the case of (a) a purported Transfer in which the Purported Record
Transferee (or Purported Beneficial Transferee, if applicable) gave value for
Equity Shares and which Transfer resulted in the transfer of the shares to the
Share Trust, the price per share, if any, such Purported Record Transferee (or
Purported Beneficial Transferee, if applicable) paid for the Equity Shares, or
(b) a Non-Transfer Event or Transfer in which the Purported Record Transferee
(or Purported Beneficial Transferee, if applicable) did not give value for such
shares (e.g., if the shares were received through a gift or devise) and which
Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of
shares to the Share Trust, the price per share equal to the Market Price on the
date of such Non-Transfer Event or Transfer, and (ii) the price per share
received by the Share Trustee of the Share Trust from the sale or other
disposition of such Shares in Trust in accordance with Section 4(e) or (g)
hereof. Any amounts received by the Share Trustee in respect of such
Shares-in-Trust and in excess of such amounts to be paid the Purported Record
Transferee pursuant to this Section 4(f) shall be distributed to the Beneficiary
in accordance with the provisions of Section 4(e) hereof. Each Beneficiary and
Purported Record Transferee (and Purported Beneficial Transferee, if different)
waives any and all claims that each may have against the Share Trustee and the
Share Trust arising out of the disposition of the Shares-in-Trust, except for
claims arising out of the gross negligence or willful misconduct of, or any
failure to make payments in accordance with this Section 4 by, such Share
Trustee or the Corporation.
(g) PURCHASE RIGHTS IN SHARES-IN-TRUST. Shares-in-Trust shall be
deemed to have been offered for sale to the Corporation, or its designee, at a
price per share equal to the lesser of (i) the price per
10
<PAGE>
share in the transaction that created such Shares-in-Trust (or, in the case of
devise, gift or Non-Transfer Event, the Market Price at the time of such devise,
gift or Non-Transfer Event) and (ii) the Market Price on the date the
Corporation, or its designee, accepts such offer. The Corporation shall have
the right to accept such offer for a period of ninety days after the later of
(i) the date of the Non-Transfer Event or purported Transfer which resulted in
such Shares-in-Trust and (ii) the date the Corporation determines in good faith
that a Transfer or Non-Transfer Event resulting in Shares-in-Trust has occurred,
if the Corporation does not receive a notice of such Transfer or Non-Transfer
Event pursuant to Section 2(e) hereof.
SECTION 5. PREFERRED SHARES.
The Preferred Shares may be issued from time to time in one or more
classes. The Board of Directors is expressly authorized, in the resolution or
resolutions providing for the issuance of any wholly unissued class of Preferred
Shares, to fix, state and express the powers, rights, designations, preferences,
qualifications, limitations and restrictions thereof, including without
limitation: the rate of dividends upon which and the times at which dividends
on shares of such class shall be payable and the preference, if any, which such
dividends shall have relative to dividends on shares of any other class or
classes of stock of the Corporation; whether such dividends shall be cumulative
or noncumulative, and if cumulative, the date or dates from which dividends on
shares of such class shall be cumulative; the voting rights, if any, to be
provided for shares of such class; the rights, if any, which the holders of
shares of such class shall have in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation; the
rights, if any, which the holders of shares of such class shall have to convert
such shares into or exchange such shares for shares of stock of the Corporation,
and the terms and conditions, including price and rate of exchange of such
conversion or exchange; and the redemption rights (including sinking fund
provisions), if any, for shares of such class; and such other powers, rights,
designations, preferences, qualifications, limitations and restrictions as the
Board of Directors may desire to so fix. The Board of Directors is also
expressly authorized to fix the number of shares constituting such class and to
increase or decrease the number of shares of any class prior to the issuance of
shares of that class and to increase or decrease the number of shares of any
class subsequent to the issuance of shares of that class, but not to decrease
such number below the number of shares of such class then outstanding. In case
the number of shares of any class shall be so decreased, the shares constituting
such decrease shall resume the status which they had prior to the adoption of
the resolution originally fixing the number of shares of such class.
SECTION 6. CLASSIFICATION AND RECLASSIFICATION OF CAPITAL STOCK.
(a) Subject to the foregoing provisions of Article V of the Charter,
the power of the Board of Directors to classify and reclassify any of the
unissued shares of capital stock shall include, without limitation, subject to
the provisions of the Charter, authority to classify or reclassify any unissued
shares of such stock into a class or classes of preferred stock, preference
stock, special stock or other stock, by determining, fixing, or altering one or
more of the following:
(i) The distinctive designation of such class and the number of
shares to constitute such class, provided that, unless otherwise prohibited by
the terms of such or any other class, the number of shares of any class may be
decreased by the Board of Directors in connection with any classification or
reclassification of unissued shares and the number of shares of such class may
be increased by the Board of Directors in connection with any such
classification or reclassification, and any shares of any class which have been
redeemed, purchased, otherwise acquired or converted into Common Shares or any
other class shall become part of the authorized capital stock and be subject to
classification and reclassification as provided in this Section.
(ii) Whether or not and, if so, the rates, amounts and times at
which, and the conditions under which, dividends shall be payable on shares of
such class, whether any such dividends shall rank senior or junior to or on a
parity with the dividends payable on any other class of stock, and the status of
11
<PAGE>
any such dividends as cumulative, cumulative to a limited extent or
non-cumulative and as participating or non-participating.
(iii) Whether or not shares of such class shall have voting
rights, in addition to any voting rights provided by law and, if so, the terms
of such voting rights.
(iv) Whether or not shares of such class shall have
conversion or exchange privileges and, if so, the terms and conditions thereof,
including provision for adjustment of the conversion or exchange rate in such
events or at such times as the Board of Directors shall determine.
(v) Whether or not shares of such class shall be subject to
redemption and, if so, the terms and conditions of such redemption, including
the date or dates upon or after which they shall be redeemable and the amount
per share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates; and whether or not there shall be
any sinking fund or purchase account in respect thereof, and if so, the terms
thereof.
(vi) The rights of the holders of shares of such class upon
the liquidation, dissolution or winding up of the affairs of, or upon any
distribution of the assets of, the Corporation, which rights may vary depending
upon whether such liquidation, dissolution or winding up is voluntary or
involuntary and, if voluntary, may vary at different dates, and whether such
rights shall rank senior or junior to or on a parity with such rights of any
other class of stock.
(vii) Whether or not there shall be any limitations
applicable, while shares of such class are outstanding, upon the payment of
dividends or making of distributions on, or the acquisition of, or the use of
moneys for purchase or redemption of, any stock of the Corporation, or upon any
other action of the Corporation, including action under this Section, and, if
so, the terms and conditions thereof.
(viii) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of such class, not
inconsistent with law and the Charter of the Corporation.
(b) For the purposes hereof and of any articles supplementary to the
Charter providing for the classification or reclassification of any shares of
capital stock or of any other charter document of the Corporation (unless
otherwise provided in any such articles or document), any class of stock of the
Corporation shall be deemed to rank:
(i) prior to another class either as to dividends or upon
liquidation, if the holders of such class shall be entitled to the receipt of
dividends or of amounts distributable on liquidation, dissolution or winding up,
as the case may be, in preference or priority to holders of such other class;
(ii) on a parity with another class either as to dividends or
upon liquidation, whether or not the dividend rates, dividend payment dates or
redemption or liquidation price per share thereof be different from those of
such others, if the holders of such class of stock shall be entitled to receipt
of dividends or amounts distributable upon liquidation, dissolution or winding
up, as the case may be, in proportion to their respective dividend rates or
redemption or liquidation prices, without preference or priority over the
holders of such other class; and
(iii) junior to another class either as to dividends or upon
liquidation, if the rights of the holders of such class shall be subject or
subordinate to the rights of the holders of such other class in respect of the
receipt of dividends or the amounts distributable upon liquidation, dissolution
or winding up, as the case may be.
12
<PAGE>
SECTION 7. SETTLEMENT.
Nothing in this Article V shall be interpreted to preclude the
settlement of any transaction entered into through the facilities of the New
York Stock Exchange, any other national securities exchange or The Nasdaq
National Market system, but the Equity Shares which are the subject of such
transaction shall continue to be subject to the terms of this Article V
subsequent to such settlement.
ARTICLE VI
THE BOARD OF DIRECTORS
SECTION 1. NUMBER AND QUALIFICATION OF DIRECTORS.
(a) AUTHORIZED NUMBER. The business and affairs of the Corporation
shall be managed by a Board of Directors which may exercise all of the powers of
the Corporation except those conferred on, or reserved to, the stockholders
hereunder, under the Bylaws or by law. The number of directors of the
Corporation initially shall be three (3) which number may be increased or
decreased pursuant to the Bylaws of the Corporation but in no event shall be
less than the minimum number required by the general laws of the State of
Maryland. A director need not be a shareholder of the Corporation.
(b) INITIAL DIRECTORS. The names of the directors who will serve
until the first annual meeting (or until such directors' class, determined in
accordance with Section 2 of this Article VI, expires) and until their
successors are elected and qualify are as follows:
DAVID J. DICK (CLASS III)
W. BRADLEY BLAIR, II (CLASS II)
LARRY D. YOUNG (CLASS I)
SECTION 2. CLASSIFIED BOARD.
At all times subsequent to the closing of the Initial Public Offering
the directors (except for those elected solely by a class of Equity Shares other
than Common Shares) of the Corporation shall be divided into three Classes,
designated "Class I," "Class II" and "Class III," respectively. The number of
directors in each Class shall be as nearly equal in number as possible. Each
director shall serve for a term ending on the date of the third annual meeting
of stockholders following the annual meeting at which such director was elected;
PROVIDED, HOWEVER, that the directors in office at the time of the closing of
the Initial Public Offering shall be divided into classes by the Board of
Directors and once classified, each such director in Class I shall serve for a
term ending on the date of the annual meeting held in 1999; each such director
in Class II shall serve for a term ending on the date of the annual meeting held
in 1998; and each such director in Class III shall serve for a term ending on
the date of the annual meeting held in 1997.
SECTION 3. REMOVAL OF DIRECTORS.
Any director may be removed with or without cause by the affirmative
vote of stockholders holding not less than 66-2/3% of all votes entitled to be
cast for the election of directors, subject to any rights granted to any class
of Preferred Shares.
SECTION 4. FILLING VACANCIES.
Except in the case of a vacancy on the Board of Directors among the
directors elected by a class of Equity Shares other than Common Shares, any
vacancy on the Board of Directors may be filled by the affirmative vote of the
remaining directors (except that a vacancy which results from an increase in the
number of directors may be filled by a majority of the entire Board of
Directors), and, in the case of a vacancy resulting
13
<PAGE>
from the removal of a director, by the stockholders by the vote of a majority of
the votes entitled to be cast in the election of directors, subject to any
rights granted to any class of Preferred Shares.
SECTION 5. NO CUMULATIVE VOTING.
Stockholders shall not be entitled to cumulative voting rights with
respect to the election of directors.
SECTION 6. RESERVED POWERS OF THE BOARD OF DIRECTORS.
The enumeration and definition of particular powers of the Board of
Directors included in the foregoing provisions of Article VI or the provisions
of Article VII of the Charter shall in no way be limited or restricted by
reference to or inference from the terms of any other clause of this or any
other Article of the Charter of the Corporation, or construed as or deemed by
inference or otherwise in any manner to exclude or limit any powers conferred
upon the Board of Directors under the General Laws of the State of Maryland now
or hereafter in force.
SECTION 7. INDEPENDENT DIRECTORS.
At all times (except (i) during a period not to exceed sixty (60) days
following the death, resignation, incapacity or removal from office of a
Director prior to the expiration of the Director's term of office or (ii) prior
to the closing date of the Initial Public Offering (as hereinafter defined) and
the consummation of all transactions related thereto), a majority of the
Directors shall be Independent Directors.
An Independent Director shall be a person who is not: (i) an officer
or employee of the Corporation; or (ii) an Affiliate of (w) any advisor to the
Corporation under an advisory agreement; (x) any lessee or management company
operating any property of the Corporation; (y) any subsidiary of the
Corporation; (z) or any partnership which is an Affiliate of the Corporation.
For purposes of this Section 6 of Article VII of the Charter, an
"Affiliate" of a person or entity shall mean (i) any person that, directly or
indirectly, controls or is controlled by or is under common control with such
person, (ii) any other person that owns, beneficially, directly or indirectly,
five percent (5%) or more of the outstanding capital shares, shares or equity
interests of such person, or (iii) any officer, director, employee, partner or
trustee of such person or any person controlling, controlled by or under common
control with such person (excluding trustees and persons serving in similar
capacities who are not otherwise an Affiliate of such person). The term
"person" means and includes individuals, corporations, general and limited
partnerships, stock companies or associations, joint ventures, associations
companies, trusts, banks, trust companies, last trusts, business trusts, or
other entities and governments and agencies and political subdivisions thereof.
For the purposes of this definition, "control" (including the correlative
meanings of the terms "controlled by" and "under common control with", as used
with respect to any person, shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
such person, through the ownership of voting securities, partnership interests
or other equity interests.
Notwithstanding the foregoing requirement that a majority of the
directors be Independent Directors, no action otherwise validly taken by the
Board of Directors during a period in which a majority of its members are not
Independent Directors shall be invalidated or otherwise affected by such
circumstance, nor shall such circumstance subject the directors taking any such
action to a higher standard of care or to liability other than that which would
have applied to such action had a majority of the members of the Board of
Directors been independent Directors at the time such action was taken.
14
<PAGE>
ARTICLE VII
PROVISIONS FOR DEFINING, LIMITING AND REGULATING
CERTAIN POWERS OF THE CORPORATION AND OF THE
STOCKHOLDERS AND DIRECTORS
The following provisions are hereby adopted for the purpose of
defining, limiting, and regulating the powers of the Corporation and of the
directors and stockholders:
SECTION 1. BOARD AUTHORIZATION OF SHARE ISSUANCES.
The Board of Directors is hereby empowered to authorize the issuance
from time to time of shares of any class of Equity Shares, whether now or
hereafter authorized, or securities convertible into any class of Equity Shares,
whether now or hereafter authorized, for such consideration as may be deemed
advisable by the Board of Directors and without any action by the stockholders.
SECTION 2. NO PREEMPTIVE RIGHTS.
Except as provided by the Board of Directors in authorizing the
issuance of Preferred Shares pursuant to Section 5 of Article V, no holder of
any stock or any other securities of the Corporation, whether now or hereafter
authorized, shall have any preemptive right to subscribe to or purchase (i) any
shares of capital stock of the Corporation, (ii) any warrants, rights, or
options to purchase any such shares, or (ii) any other securities of the
Corporation or obligations convertible into any shares of capital stock of the
Corporation or such other securities or into warrants, rights or options to
purchase any such shares or other securities.
SECTION 3. POWERS OF THE BOARD OF DIRECTORS.
The Board of Directors of the Corporation shall, consistent with
applicable law, have the power in its sole discretion to determine from time to
time in accordance with sound accounting practice or other reasonable valuation
methods what constitutes annual or other net profits, earnings, surplus, or net
assets in excess of capital; to fix and vary from time to time the amount to be
reserved as working capital, or determine that retained earnings or surplus
shall remain in the hands of the Corporation; to set apart out of any funds of
the Corporation such reserve or reserves in such amount or amounts and for such
proper purpose or purposes as it shall determine and to abolish any such reserve
or any part thereof; to distribute and pay distributions or dividends in stock,
cash or other securities or property, out of surplus or any other funds or
amounts legally available therefor, at such times and to the stockholders of
record on such dates as it may, from time to time, determine; and to determine
whether and to what extent and at what times and places and under what
conditions and regulations the books, accounts and documents of the Corporation,
or any of them, shall be open to the inspection of stockholders, except as
otherwise provided by statute or by the Bylaws of the Corporation, and, except
as so provided, no stockholder shall have any right to inspect any book, account
or document of the Corporation unless authorized so to do by resolution of the
Board of Directors.
SECTION 4. RELATED PARTY TRANSACTIONS.
Without limiting any other procedures available by law or otherwise to
the Corporation, the Board of Directors may authorize any agreement or
transaction with any Person, corporation, association, company, trust,
partnership (limited or general) or other organization, although one or more of
the directors or officers of the Corporation may be a party to any such
agreement or an officer, director, stockholder or member of such other party (an
"Interested Officer/Director"), and no such agreement or transaction shall be
invalidated or rendered void or voidable solely by reason of the existence of
any such relationship if: (i) the existence is disclosed or known to the Board
of Directors, and the contract or transaction is authorized, approved
15
<PAGE>
or ratified by the affirmative vote of a majority of the directors, excluding
the Interested Officers/Directors; or (ii) the existence is disclosed to the
stockholders entitled to vote, and the contract or transaction is authorized,
approved or ratified by a majority of the votes entitled to be cast by the
stockholders, other than the votes of the shares held of record by the
Interested Officers/Directors; or (iii) the contract or transaction of fair and
reasonable to the Corporation. Any Interested Officer/Director of the
Corporation or the stock owned by them or by a corporation, association,
company, trust, partnership (limited or general) or other organization in which
an Interested Officer/Director may have an interest, may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or a
committee of the Board of Directors or at a meeting of the stockholders, as the
case may be, at which the contract or transaction is authorized, approved or
ratified.
ARTICLE VIII
INDEMNIFICATION
AND LIMITATION OF LIABILITY
SECTION 1. INDEMNIFICATION.
(a) INDEMNIFICATION OF AGENTS. The Corporation shall indemnify, in
the manner and to the fullest extent permitted by law, any person (or the estate
of any person) who is or was a party to, or is threatened to be made a party to,
any threatened, pending or completed action, suit or proceeding, whether or not
by or in the right of the Corporation, and whether civil, criminal,
administrative, investigative or otherwise, by reason of the fact that such
person is or was a director or officer of the Corporation, or such director or
officer is or was serving at the request of the Corporation as a director,
officer, agent, trustee, partner or employee of another corporation,
partnership, joint venture, limited liability company, trust, real estate
investment trust, employee benefit plan or other enterprise. To the fullest
extent permitted by law, the indemnification provided herein shall include
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement and any such expenses may be paid by the Corporation in advance of
the final disposition of such action, suit or proceeding. The Corporation shall
indemnify other employees and agents to such extent as shall be authorized by
the Board of Directors or the Corporation's Bylaws and be permitted by law. Any
repeal or modification of this Section 1(a) by the stockholders of the
Corporation shall be prospective only, and shall not adversely affect any right
to indemnification or advancement of expenses hereunder existing at the time of
such repeal or modification.
(b) INSURANCE. The Corporation may, to the fullest extent permitted
by law, purchase and maintain insurance on behalf of any such person against any
liability which may be asserted against such person.
(c) INDEMNIFICATION NON-EXCLUSIVE. The indemnification provided
herein shall not be deemed to limit the right of the Corporation to indemnify
any other person for any such expenses to the fullest extent permitted by law,
nor shall it be deemed exclusive of any other rights to which any person seeking
indemnification from the Corporation may be entitled under any agreement, vote
of stockholders or disinterested directors, or otherwise, both as to action in
such person's official capacity and as to action in another capacity while
holding such office.
SECTION 2. LIMITATION OF LIABILITY.
To the fullest extent permitted by Maryland statutory or decisional
law, as amended or interpreted from time to time, no director or officer of this
Corporation shall be personally liable to the Corporation or its stockholders,
or any of them, for money damages. No amendment of the Charter of the
Corporation or repeal of any of its provisions shall limit or eliminate the
benefits provided to directors and officers under this provision with respect to
any act or omission which occurred prior to such amendment or repeal.
16
<PAGE>
ARTICLE IX
AMENDMENTS
SECTION 1. RIGHT TO AMEND CHARTER.
The Corporation reserves the right form time to time to make any
amendments to the Charter which may now or hereafter be authorized by law,
including any amendments changing the terms or contract rights, as expressly set
forth in the Charter, of any of its outstanding stock by classification,
reclassification or otherwise.
SECTION 2. AMENDMENT TO THE CHARTER OF THE CORPORATION.
Notwithstanding any provision of law to the contrary, except as
otherwise specifically provided in Section 3 of this Article IX, the affirmative
vote of a majority of all votes entitled to be cast by the stockholders of the
Corporation shall be sufficient, valid and effective, after due authorization,
approval or advice by the Board of Directors, to approve and authorize any
amendment to the Charter of the Corporation.
SECTION 3. CERTAIN AMENDMENTS REQUIRING SPECIAL STOCKHOLDER VOTE.
(a) Notwithstanding any other provisions of the Charter or Bylaws of
the Corporation (and in addition to any other vote, approval, authorization or
advice (including that of the Board of Directors) that may be required by law,
the Charter or the Bylaws of the Corporation), the affirmative vote of
stockholders holding at least two-thirds (66-2/3%) of all of the votes entitled
to be cast thereon shall be required to amend, alter, change, repeal, or adopt
any provisions inconsistent with, the provisions of this Article IX, Section 2
(classified Board) and Section 3 (removal of directors) of Article VI, Section 5
(no cumulative voting) of Article VI, Section 6 (Independent Directors) of
Article VII, Article VIII (indemnification of directors, officers, employees and
agents and limitation of liability of officers and directors) and Section 2
(preemptive rights) of Article VII. In addition, no term or provisions of the
Charter may be added, amended or repealed in any respect that would, in the
determination of the Board of Directors, cause the Corporation not to qualify as
a REIT under the Code unless, in each such case, such action is approved (in
addition to any other vote, approval, authorization or advice (including that of
the Board of Directors) that may otherwise be required) by the affirmative vote
of the holders of not less than two-thirds (66-2/3%) of all the votes entitled
to be cast on the matter.
(b) The Board of Directors SHALL take no action to terminate the
Corporation's status as a REIT or to amend the provisions of Article V until
such time as (i) the Board of Directors adopts a resolution recommending that
the Corporation terminate its status as a REIT or amend Article V, as the case
may be, (ii) the Board of Directors presents the resolution at an annual or
special meeting of the stockholders and (iii) such resolution is approved by at
least two-thirds (66-2/3%) of all of the votes entitled to be cast on the
matter.
ARTICLE X
DURATION OF CORPORATION
The duration of the Corporation shall be perpetual.
17
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Incorporation and acknowledges the same to be his act, and further acknowledges,
under the penalties of perjury, that, to the best of his knowledge, information
and belief, the matters and facts contained herein are true in all material
respects on this 7th day of November, 1996
By:______________________________________
David J. Dick
Sole Incorporator
WITNESS:
_____________________________
18
<PAGE>
CONTRIBUTION AND LEASEBACK AGREEMENT
SUMMARY SHEET
Transferee: GOLF TRUST OF AMERICA, L.P., a Delaware Limited Partnership
Transferor: ___________________________________________,
a _________________________________________
Date of
Agreement: November 1, 1996
Golf Course: _____________________________________________
(address): _____________________________________________
_____________________________________________
Trade Name: _____________________________________________
Notice Address
of Transferor: _____________________________________________
_____________________________________________
with a copy to: _____________________________________________
_____________________________________________
Notice Address
of Transferee: David J. Dick
Golf Trust of America, Inc.
3501 Jamboree Road
South Tower Suite 605
Newport Beach, CA 92660
i
<PAGE>
with a copy to: Peter T. Healy, Esq.
O'Melveny & Myers LLP
275 Battery Street, Suite 2600
San Francisco, California 94111-3305
ii
<PAGE>
CONTRIBUTION AND LEASEBACK AGREEMENT
THIS CONTRIBUTION AND LEASEBACK AGREEMENT (this "Agreement") is
entered into by and between Transferee and Transferor.
RECITALS:
A. Transferor is the owner of that certain Golf Course and related
improvements located on the real property more particularly described in EXHIBIT
A attached hereto (the "Land").
B. Subject to the terms of this Agreement, Transferor hereby agrees
to contribute, assign and convey to Transferee, and Transferee hereby agrees to
acquire from Transferor, all of Transferor's right, title and interest in and to
the following:
1. The Land, together with the golf course, driving range, putting
greens, clubhouse facilities, snack bar, restaurant, pro shop, buildings,
structures, parking lots, improvements, fixtures and other items of real
estate located on the Land (the "Improvements"), as more particularly
described in EXHIBIT B attached hereto.
2. All rights, privileges, easements and appurtenances to the Land
and the Improvements, if any, including, without limitation, all of
Transferor's right, title and interest, if any, in and to all mineral and
water rights and all easements, rights-of-way and other appurtenances used
or connected with the beneficial use or enjoyment of the Land and the
Improvements, including, without limitation, concession agreements for spas
and the like (the Land, the Improvements and all such easements and
appurtenances are sometimes collectively hereinafter referred to as the
"Real Property").
3. All items of tangible personal property and fixtures (if any)
owned or leased by Transferor and located on or used in connection with
the Real Property, including, but not limited to, machinery, equipment,
furniture, furnishings, movable walls or partitions, phone systems and
other control systems, restaurant equipment, computers or trade fixtures,
golf course operation and maintenance equipment, including mowers,
tractors, aerators, sprinklers, sprinkler and irrigation facilities and
equipment, valves or rotors, driving range equipment, athletic training
equipment, office equipment or machines, other decorations, and equipment
or machinery of every kind or nature located on or used in connection with
the operation of the Real Property whether on or off-site, including all
warranties and guaranties associated therewith (the "Tangible Personal
Property"), excluding all golf carts, whether owned or leased, which shall
be retained by Transferor. A schedule of the Tangible Personal Property is
attached to this Agreement as EXHIBIT C, indicating whether such Tangible
Personal Property is owned or leased. The schedule of Tangible Personal
Property shall also indicate
1
<PAGE>
those items of personal property, such as art and antiques, which is
excluded from the personal property being conveyed hereby.
4. All intangible personal property owned or possessed by Transferor
and used in connection with the ownership, operation, leasing or
maintenance of the Real Property or the Tangible Personal Property, all
goodwill attributed to the Property, and any and all trademarks and
copyrights, guarantees, Authorizations (as hereinafter defined), general
intangibles, business records, plans and specifications, surveys and title
insurance policies pertaining to the Property, all licenses, permits and
approvals with respect to the construction, ownership, operation or
maintenance of the Property, any unpaid award for taking by condemnation or
any damage to the Real Property by reason of a change of grade or location
of or access to any street or highway, excluding (a) any of the aforesaid
rights that Transferee elects not to acquire and (b) the Current Assets, as
hereinafter defined (collectively, the "Intangible Personal Property"). A
schedule of the Intangible Personal Property is attached to this Agreement
as EXHIBIT D. The Intangible Personal Property shall not include the right
to use the Trade Name, which shall be retained by Transferor and
transferred to the lessee of the Golf Course (and further provided in no
event shall Transferee have the right to use such trade name in connection
with any other property owned by Transferee or any affiliate of
Transferee). (The Real Property, Tangible Personal Property and Intangible
Personal Property are sometimes collectively referred to as the
"Property".)
C. Upon the acquisition by the Transferee of the Property, the
Transferee will lease the Property to an affiliate of Transferor pursuant to a
lease (the "Golf Course Lease"), substantially in the form attached hereto as
EXHIBIT E.
NOW, THEREFORE, in consideration of the mutual covenants, promises and
undertakings of the parties hereinafter set forth, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by the parties, it is agreed:
ARTICLE I
DEFINITIONS; RULES OF CONSTRUCTION
1.1 DEFINITIONS. Capitalized terms not otherwise defined herein shall
have the meanings set forth on the Summary Sheet. The following terms shall
have the indicated meanings:
"ACT OF BANKRUPTCY" shall mean if a party hereto or any general
partner thereof shall (a) apply for or consent to the appointment of, or the
taking of possession by, a receiver, custodian, trustee or liquidator of itself
or of all or a substantial part of its Property, (b) admit in writing its
inability to pay its debts as they become due, (c) make
2
<PAGE>
a general assignment for the benefit of its creditors, (d) file a voluntary
petition or commence a voluntary case or proceeding under the Federal Bankruptcy
Code (as now or hereafter in effect) or any new bankruptcy statute, (e) be
adjudicated bankrupt or insolvent, (f) file a petition seeking to take advantage
of any other law relating to bankruptcy, insolvency, reorganization, winding-up
or composition or adjustment of debts, (g) fail to controvert in a timely and
appropriate manner, or acquiesce in writing to, any petition filed against it in
an involuntary case or proceeding under the Federal Bankruptcy Code (as now or
hereafter in effect) or any new bankruptcy statute, or (h) take any corporate or
partnership action for the purpose of effecting any of the foregoing; or if a
proceeding or case shall be commenced, without the application or consent of a
party hereto or any general partner thereof, in any court of competent
jurisdiction seeking (1) the liquidation, reorganization, dissolution or
winding-up, or the composition or readjustment of debts, of such party or
general partner, (2) the appointment of a receiver, custodian, trustee or
liquidator or such party or general partner or all or any substantial part of
its assets, or (3) other similar relief under any law relating to bankruptcy,
insolvency, reorganization, winding-up or composition or adjustment of debts,
and such proceeding or case shall continue undismissed; or an order (including
an order for relief entered in an involuntary case under the Federal Bankruptcy
Code, as now or hereafter in effect) judgment or decree approving or ordering
any of the foregoing shall be entered and continue unstayed and in effect, for a
period of sixty (60) consecutive days.
"AUTHORIZATIONS" shall mean all licenses, permits and approvals
required by any governmental or quasi-governmental agency, body or officer for
the ownership, operation and use of the Property or any part thereof as a golf
course with the existing uses and operations, including clubhouse, bar and
related facilities, as applicable.
"BILL OF SALE - PERSONAL PROPERTY" shall mean a bill of sale conveying
title to the Tangible Personal Property and Intangible Personal Property from
Transferor to Transferee, substantially in the form of EXHIBIT F attached
hereto.
"CLOSING" shall mean the time the Deed and each of the deliveries to
be made by Transferor (as provided in Section 6.2) and Transferee (as provided
in Section 6.3) are made and each of the Closing conditions of Transferee and
Transferor in Sections 5.1 and 5.2, respectively, have been satisfied or waived.
"CLOSING DATE" shall mean the date on which the Closing occurs.
"CLOSING STATEMENTS" shall have the meaning set forth in Section
6.4(a).
"CURRENT ASSETS" shall mean cash, accounts receivable, Inventory and
Restaurant Supplies (each as hereinafter defined) held by Transferor prior to
the Closing Date.
"DEED" shall mean a grant deed or special warranty deed, substantially
in the form of EXHIBIT G attached hereto (or lease assignment, if the Property
is owned by
3
<PAGE>
Transferor pursuant to a ground lease), in form and substance satisfactory to
Transferee, conveying the title of Transferor to the Real Property, with such
grant or warranty covenants of title from Transferor to Transferee as are
customary in the state in which the Property is located, subject only to
Permitted Title Exceptions. If there is any difference between the description
of the Land, as shown on EXHIBIT A attached hereto and the description of the
Land as shown on the Survey, the description of the Land to be contained in the
Deed and the description of the Land set forth in the Owner's Title Policy, as
defined herein, shall conform to the description shown on the Survey.
"DISCLOSURE SCHEDULE" shall have the meaning set forth in Section
2.2(e).
"DUE DILIGENCE PERIOD" shall mean the period commencing at 9:00 a.m.,
California time, on the date hereof, and continuing through 5:00 p.m.,
California time, on the date that is sixty (60) days from the date hereof or
such longer period as the Transferee may require.
"EMPLOYMENT AGREEMENTS" shall mean all employment agreements, written
or oral, between Transferor or its managing agent and the persons employed with
respect to the Property in effect as of the date hereof.
"ENVIRONMENTAL CLAIM" shall mean any administrative, regulatory or
judicial action, suit, demand, letter, claim, lien, notice of non-compliance or
violation, investigation or proceeding relating in any way to any Environmental
Laws or any permit issued under any Environmental Law including, without
limitation, (i) by governmental or regulatory authorities for enforcement,
cleanup, removal, response, remedial or other actions or damages pursuant to any
applicable Environmental Laws, and (ii) by any third party seeking damages,
contribution, indemnification, cost recovery, compensation or injunctive relief
resulting from Hazardous Substances or arising from alleged injury or threat of
injury to health, safety or the environment.
"ENVIRONMENTAL LAWS" shall mean the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section
9601, et seq.; the Resource Conservation and Recovery Act, 42 U.S.C. Section
6901, et seq.; the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.;
the Hazardous Materials Transportation Act, as amended, 49 U.S.C. Section 1801,
et seq.; the Superfund Amendments and reauthorization Act of 1986, Pub. L. 99-
499 and 99-563; the Occupational Safety and Health Act of 1970, as amended, 29
U.S.C. Section 651, et seq.; the Clean Air Act, as amended, 42 U.S.C. Section
7401, et seq.; the Safe Drinking Water Act, as amended, 42 U.S.C. Section 201,
et seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C. Section
1251, et seq.; and all federal, state and local environmental health and safety
statutes, ordinance, codes, rules, regulations, orders and decrees regulating,
relating to or imposing liability or standards concerning or in connection with
Hazardous Substances.
"ESCROW AGENT" shall mean the Title Company.
4
<PAGE>
"FIRPTA CERTIFICATE" shall mean the affidavit of Transferor under
Section 1445 of the Internal Revenue Code certifying that Transferor is not a
foreign corporation, foreign partnership, foreign trust, foreign estate or
foreign person (as those terms are defined in the Internal Revenue Code and the
Income Tax Regulations), substantially in the form of EXHIBIT H attached hereto.
"GOLF CLUB" shall mean any organization, club or group whereby
memberships are offered by Transferor for purchase in connection with golfing
privileges at the Property.
"GOLF COURSE LEASE" shall have the meaning set forth in Recital C.
"GOVERNMENTAL BODY" shall mean any federal state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign.
"HAZARDOUS SUBSTANCES" shall mean any substance, material, waste, gas
or particulate matter which is regulated by any local, state of federal
governmental authority, including but not limited to any material or substance
which is (i) defined as a "hazardous waste", "hazardous material", or
"restricted hazardous waste" or words of similar import under any provision of
any Environmental Law; (ii) petroleum or petroleum products; (iii) asbestos;
(iv) polychlorinated biphenyl; (v) radioactive material; (vi) radon gas; (vii)
designated as a "hazardous substance" pursuant to Section 311 of the Clean Water
Act, 33 U.S.C. Section 1251, et seq. (42 U.S.C. Section 1317); (viii) defined as
a "hazardous waste" pursuant to Section 1004 of the Resource Conservation and
Recovery Act, 42 U.S.C. Section 6901, et seq. (42 U.S.C. Section 6903); or (ix)
defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601,
et seq. (42 U.S.C. Section 9601).
"IMPROVEMENTS" shall have the meaning set forth in Recital B(1).
"INTANGIBLE PERSONAL PROPERTY" shall have the meaning set forth in
Recital B(4).
"INVENTORY" shall mean the merchandise located in any pro shop or
similar facility and held for sale in the ordinary course of Transferor's
business.
"LAND" shall have the meaning set forth in Recital A.
"MORTGAGE INDEBTEDNESS" shall have the meaning set forth in Section
2.2(d).
"OPERATING AGREEMENTS" shall mean any management agreements,
maintenance or repair contracts, service contracts, supply contracts and other
agreements, if any, in effect with respect to the construction, ownership,
operation,
5
<PAGE>
occupancy or maintenance of the Property in force and effect as of the date
hereof, as more particularly set forth on EXHIBIT I attached hereto.
"OWNER'S SHARES" shall mean limited partnership interests in the
Partnership.
"OWNER'S TITLE POLICY" shall mean a 1970 Form B American Land Title
Association extended coverage owner's policy of title insurance issued to
Transferee by the Title Company, pursuant to which the Title Company insures
Transferee's ownership of fee simple title (or ground lease interest, as
applicable) to the Real Property (including the marketability thereof) subject
only to Permitted Title Exceptions and shall include those title endorsements
required by Transferee. The Owner's Title Policy shall insure Transferee in the
amount designated by Transferee and shall be acceptable in form and substance to
Transferee.
"PARTNERSHIP AGREEMENT" shall mean that certain amended and restated
limited partnership agreement relating to Transferee, which shall be
substantially in the form attached hereto as EXHIBIT J.
"PERMITTED TITLE EXCEPTIONS" shall mean those exceptions to title to
the Real Property that are satisfactory to Transferee as determined under this
Agreement, and as evidenced by a pro forma title report.
"PRELIMINARY TITLE REPORT" shall have the meaning set forth in Section
2.2(d).
"PROPERTY" shall have the meaning set forth in Recital B(4).
"PURCHASE PRICE" shall mean the amount as calculated by the procedure
set forth in EXHIBIT K attached hereto.
"REAL PROPERTY" shall have the meaning set forth in Recital B(2).
"REGISTERED OFFERING" shall have the same meaning set forth in Section
3.20.
"RESTAURANT SUPPLIES" shall mean the consumable goods, supplies
(including beverages) and all silverware, glassware, napkins, tablecloths, paper
goods and related goods necessary to efficiently operate the restaurant, bar,
lounge or snack shop located upon or within the Improvements.
"SEC" shall mean the United States Securities and Exchange Commission.
"SECURITIES" shall have the meaning set forth in Section 7.4.
6
<PAGE>
"STATE" shall mean the state or commonwealth in which the Property is
located.
"SUMMARY SHEET" shall mean the summary page attached to this Agreement
and incorporated herein by reference.
"SURVEY" shall mean the survey prepared pursuant to Section 2.2(c).
"TANGIBLE PERSONAL PROPERTY" shall have the meaning set forth in
Recital B (3).
"TITLE COMPANY" shall mean a title insurance company selected by
Transferee and authorized to conduct a title insurance business in the State.
"TITLE OBJECTIONS" shall have the meaning set forth in Section 2.2(d).
"TRANSFEROR'S ORGANIZATIONAL DOCUMENTS" shall mean the current
organizational documents of Transferor.
"UTILITIES" shall mean public sanitary and storm sewers, natural gas,
telephone, public water facilities, electrical facilities and all other utility
facilities and services necessary for the operation and occupancy of the
Property.
"WARN ACT" shall mean the Worker Adjustment Retraining and
Notification Act, as amended.
1.2 RULES OF CONSTRUCTION. The following rules shall apply to the
construction and interpretation of this Agreement:
a. Singular words shall connote the plural number as well as the
singular and vice versa, and the masculine shall include the feminine and
the neuter.
b. All references herein to particular articles, sections,
subsections, clauses or exhibits are references to articles, sections,
subsections, clauses or exhibits of this Agreement.
c. The table of contents and headings contained herein are solely
for convenience of reference and shall not constitute a part of this
Agreement nor shall they affect its meaning, construction or effect.
d. Each party hereto and its counsel have reviewed and revised (or
requested revisions of) this Agreement and have participated in the
preparation of this Agreement, and therefore any usual rules of
construction requiring that ambiguities are to be resolved against a
particular party shall not be applicable in the construction and
interpretation of this Agreement or any exhibits hereto.
7
<PAGE>
ARTICLE II
PURCHASE AND CONTRIBUTION; PAYMENT OF PURCHASE PRICE
2.1 PURCHASE AND CONTRIBUTION. Transferor agrees to contribute and
Transferee agrees to acquire the Property for the Purchase Price.
2.2 DUE DILIGENCE PERIOD.
(a) Transferee shall have the right, during the Due Diligence Period,
and thereafter if Transferee notifies Transferor that Transferee has
elected to proceed to Closing in the manner described below, to enter upon
the Real Property and to perform, at Transferor's expense, such surveying,
engineering, and environmental studies and investigations as Transferee may
deem appropriate. If such tests, studies and investigations warrant, in
Transferee's sole, absolute and unreviewable discretion, the purchase of
the Property for the purposes contemplated by Transferee, then Transferee
may elect to proceed to Closing and shall so notify Transferor and the
Escrow Agent, in writing, prior to the expiration of the Due Diligence
Period. If for any reason Transferee does not so notify Transferor and
Escrow Agent of its determination to proceed to Closing prior to the
expiration of the Due Diligence Period, or if Transferee notifies
Transferor and Escrow Agent, in writing, prior to the expiration of the Due
Diligence Period that it has determined not to proceed to Closing, this
Agreement automatically shall terminate and Transferee and Escrow Agent
shall be released from any further liability or obligation under this
Agreement and, if requested by Transferor, Transferee will deliver such
reports and materials to Transferor.
(b) During the Due Diligence Period, Transferor shall make available
to Transferee, its agents, auditors, engineers, attorneys and other
designees, for inspection and/or copying, copies of all existing
architectural and engineering studies, surveys, title insurance policies,
zoning and site plan materials, correspondence, environmental audits and
reviews, books, records, tax returns, bank statements, financial
statements, fee schedules and any and all other material or information
relating to the Property which are in, or come into, Transferor's
possession or control, or which Transferor may attain. Such information is
more particularly described in EXHIBIT L attached hereto, as the same may
be amended or supplemented by Transferor from time to time.
(c) Within thirty (30) days from the date hereof, if requested by
Transferee, Transferor shall deliver to Transferee an ALTA/ACSM survey or a
boundary survey, as reasonably required by Transferee, of the Land and the
Improvements, prepared by a surveyor licensed to practice as such in the
State, bearing a date not earlier than sixty (60) days from the date of its
delivery and certified to both Transferee, Transferor and the Title Company
(and any lender or other party designated by Transferee), showing the legal
description of the Land, all dimensions thereof, and showing the location
of Improvements on the Land and the setbacks thereof from the property
line, as well as the setbacks
8
<PAGE>
required by applicable zoning laws or regulations (the "Survey").
The Survey shall locate all easements which serve and affect the
Land. The Survey shall reflect that no buildings or improvements
located on any other property encroach upon the Land and that the
Improvements located upon the Land do not encroach upon any other
property. The surveyor preparing the Survey shall certify that (i)
the Survey is an accurate Survey of the Land and the Improvements,
(ii) that the Survey was made under the surveyor's supervision,
(iii) that the Survey meets (a) the requirements of the Title
Company for the issuance of the Owner's Title Policy free of any
general survey exception, and (b) the minimum technical standards
for land boundary surveys with improvements, set forth by applicable
statutes or applicable professional organizations, and (iv) all
buildings and other structures and their relation to the property
lines are shown and that there are no encroachments, overlaps,
boundary line disputes, easements, or claims of easements visible on
the ground, other than those shown on the Survey. If Transferee has
any objection to Survey matters, the same shall be treated for all
purposes as Title Objections within the provisions of this Agreement.
(d) Transferor agrees to provide to Transferee, within five (5)
business days following the date of this Agreement, a copy of any existing
title insurance policies which Transferor may have in its possession or
control covering the Real Property, together with legible copies of all
exception documents referred to therein. During the Due Diligence Period,
Transferee, at its expense, shall cause an examination of title to the
Property to be made and a preliminary title report to be issued (the
"Preliminary Title Report"), and, prior to the expiration of the Due
Diligence Period, shall notify Transferor of any defects in title shown by
such examination that Transferee is unwilling to accept by delivering a pro
forma copy of the Preliminary Title Report that reflects such unacceptable
defects in title, which shall be designated as the Title Objections.
Within ten (10) days after such notification, Transferor shall notify
Transferee whether Transferor is willing to cure such defects. If
Transferor is willing to cure such defects, Transferor shall act promptly
and diligently to cure such defects at its expense. If any of such defects
consist of mortgages, deeds of trust, construction or mechanics' liens, tax
liens or other liens or charges in a fixed sum or capable of computation as
a fixed sum, then, to that extent, and notwithstanding the foregoing,
Transferor shall be obligated to pay and discharge such defects at Closing,
except for the mortgages scheduled and set forth in EXHIBIT M attached
hereto (the "Mortgage Indebtedness") which Transferee shall take subject to
as provided in Section 2.3(a). For such purposes, Transferor may use all
or a portion of the cash to close. If Transferor is unable to cure such
defects by Closing, after having attempted to do so diligently and in good
faith, Transferee shall elect (1) to waive such defects and proceed to
Closing without any abatement in the Purchase Price, or (2) to terminate
this Agreement. Transferor shall not, after the date of this Agreement,
subject the Property to any liens, encumbrances, leases, covenants,
conditions, restrictions, easements or other title matters or seek any
zoning changes or take any other action which may affect or modify the
status of title without Transferee's prior written consent. All title
matters revealed by
9
<PAGE>
Transferee's title examination and not objected to by Transferee as
provided above shall be deemed Permitted Title Exceptions. If Transferee
shall fail to examine title and notify Transferor of any such Title
Objections by the end of the Due Diligence Period, all such title
exceptions (other than those rendering title unmarketable and those that
are to be paid at Closing as provided above) shall be deemed Permitted
Title Exceptions. Notwithstanding the foregoing, Transferee shall not be
required to take title to the Property subject to any matters which may
arise subsequent to the effective date of its examination of title to the
Property made during the Due Diligence Period.
(e) Transferor shall deliver to Transferee within fourteen (14) days
after the date of the execution of this Agreement by Transferor and
transferee a disclosure schedule that accurately and completely identifies
and describes (a) all Employment Agreements (including name of employee,
social security number, wage or salary, accrued vacation benefits, other
fringe benefits, etc.), and (b) an updated Golf Club membership list,
setting forth the names of the members of the Golf Club, the length of
their membership, the payment obligations of the members and a summary of
the terms of the memberships (the "Disclosure Schedule").
(f) Transferor shall deliver to Transferee within thirty (30) days
after the date of execution of this Agreement by Transferor and Transferee
current searches of all Uniform Commercial Code financing statements filed
with the Secretary of State of the State respecting Transferor, together
with searches for pending litigation, tax liens and bankruptcy filings in
all appropriate jurisdictions.
2.3 PAYMENT OF PURCHASE PRICE. The Purchase Price shall be paid to
Transferor in the following manner:
(a) Transferee shall (i) take subject to the Mortgage Indebtedness in
an aggregate amount not in excess of the Purchase Price and (ii) receive a
credit against the Purchase Price in an amount equal to a sum necessary to
pay off in full the Mortgage Indebtedness, including any prepayment
premium, and to obtain a release of such deeds of trust or mortgages
evidencing the Mortgage Indebtedness as of the Closing Date, as evidenced
by a payoff letter from the beneficiary of each such deed of trust or
mortgage in form and substance satisfactory to Transferee and the Title
Company.
(b) Transferee shall pay a portion of the Purchase Price, as adjusted
in the manner specified in Article VI and as set forth above, to Transferor
in Owner's Shares. Such formula also includes a contingent sales price
which permits Transferor to receive additional Owner's Shares as more
particularly described therein.
(c) Transferee shall pay the balance in cash in an amount necessary
to pay for certain tax liabilities of Transferor and the cost incurred by
Transferor in
10
<PAGE>
connection with the preparation of certain audited financial statements,
due diligence costs and closing costs and to permit the liquidation of
certain third party-interests in Transferor, as set forth in a schedule to
be prepared by Transferor and delivered to Transferee prior to the
expiration of the Due Diligence Period, which schedule shall be subject to
Transferee's review and approval, which approval shall not be unreasonably
withheld.
ARTICLE III
TRANSFEROR'S REPRESENTATIONS, WARRANTIES AND COVENANTS
To induce Transferee to enter into this Agreement and to purchase the
Property, and to pay the Purchase Price therefor, Transferor hereby makes the
following representations, warranties and covenants with respect to the
Property, subject to the Warranty Disclosure Schedule attached hereto as EXHIBIT
P, upon each of which Transferor acknowledges and agrees that Transferee is
entitled to rely and has relied:
3.1 ORGANIZATION AND POWER. Transferor is duly formed or organized,
validly existing and in good standing under the laws of the state of its
formation and is qualified to transact business in the State and has all
requisite powers and all governmental licenses, authorizations, consents and
approvals to carry on its business as now conducted and to enter into and
perform its obligations hereunder and under any document or instrument required
to be executed and delivered by or on behalf of Transferor hereunder.
3.2 AUTHORIZATION AND EXECUTION. This Agreement has been, and each
of the agreements and certificates of Transferor to be delivered to Transferee
at Closing as provided in Section 5.1 will be, duly authorized by all necessary
action on the part of Transferor, has been duly executed and delivered by
Transferor, constitutes the valid and binding agreement of Transferor and is
enforceable against Transferor in accordance with its terms. There is no other
person or entity who has an ownership interest in the Property or whose consent
is required in connection with Transferor's performance of its obligations
hereunder. All action required pursuant to this Agreement necessary to
effectuate the transactions contemplated herein has been, or will at Closing be,
taken promptly and in good faith by Transferor and its representatives and
agents.
3.3 NONCONTRAVENTION. The execution and delivery of, and the
performance by Transferor of its obligations under, this Agreement do not and
will not contravene, or constitute a default under, any provision of applicable
law or regulation, Transferor's Organizational Documents or any agreement,
judgment, injunction, order, decree or other instrument binding upon Transferor,
or result in the creation of any lien or other encumbrance on any asset of
Transferor. There are no outstanding agreements (written or oral) pursuant to
which Transferor (or any predecessor to or representative of Transferor) has
agreed to contribute or has granted an option or right of first refusal to
purchase the Property or any part thereof. Other than the rights of tenants, as
tenants only, under the Leases, there are no purchase contracts, options or
other agreements of any kind, written or oral, recorded or unrecorded, whereby
any person or entity other
11
<PAGE>
than Transferor will have acquired or will have any basis to assert any right,
title or interest in, or right to possession, use, enjoyment or proceeds of, all
or any portion of the Property. There are no rights, subscriptions, warrants,
options, conversion rights or agreements of any kind outstanding to purchase or
to otherwise acquire any interest or profit participation of any kind in the
Property or any part thereof.
3.4 NO SPECIAL TAXES. Transferor has no knowledge of, nor has it
received any notice of, any special taxes or assessments relating to the
Property or any part thereof, including taxes relating to the business of the
Property, or any planned public improvements that may result in a special tax or
assessment against the Property, that are not otherwise disclosed in the
Preliminary Title Report. To the best of Transferor's knowledge, there is not
any proposed increase in the assessed valuation of the Real Property for tax
purposes (except as may relate to the transfer contemplated by this Agreement).
3.5 COMPLIANCE WITH EXISTING LAWS. Transferor possesses all
Authorizations, each of which is valid and in full force and effect, and no
provision, condition or limitation of any of the Authorizations has been
breached or violated. Transferor has not misrepresented or failed to disclose
any relevant fact in obtaining all Authorizations, and Transferor has no
knowledge of any change in the circumstances under which any of those
Authorizations were obtained that result in their termination, suspension,
modification or limitation. Transferor has not taken any action (or failed to
take any action), the omission of which would result in the revocation of any of
the Authorizations. Transferor has no knowledge, nor has it received notice
within the past three years, of any existing or threatened violation of any
provision of any applicable building, zoning, subdivision, environmental or
other governmental ordinance, resolution, statute, rule, order or regulation,
including but not limited to those of environmental agencies or insurance boards
of underwriters, with respect to the ownership, operation, use, maintenance or
condition of the Property or any part thereof, or requiring any repairs or
alterations other than those that have been made prior to the date hereof.
3.6 REAL PROPERTY. To the best of Transferor's knowledge, (i) the
Improvements conform in all respects to all legal requirements, (ii) all
easements necessary or appropriate for the use or operation of the Property have
been obtained, (iii) all contractors and subcontractors retained by Transferor
who have performed work on or supplied materials to the Property have been fully
paid, and all materials used at or on the Property have been fully paid for,
(iv) the Improvements have been completed in all material respects in a
workmanlike manner of first-class quality, and (v) all equipment necessary or
appropriate for the use or operation of the Property has been installed and is
presently operative in good working order. Transferor has not received any
written notice which is still in effect that there is, and, to the best of
Transferor's knowledge, there does not exist, any violation of a condition or
agreement contained in any easement, restrictive covenant or any similar
instrument or agreement effecting the Real Property, or any portion thereof.
12
<PAGE>
3.7 PERSONAL PROPERTY. All of the Tangible Personal Property and
Intangible Personal Property being conveyed by Transferor to Transferee is free
and clear of all liens and encumbrances and will be so on the Closing Date and
Transferor has good, merchantable title thereto and the right to convey same in
accordance with the terms of this Agreement.
3.8 OPERATING AGREEMENTS. Each of the Operating Agreements may be
terminated upon not more than thirty (30) days prior written notice and without
the payment of any penalty, fee, premium or other amount. Transferor has
performed all of its obligations under each of the Operating Agreements and no
fact or circumstance has occurred which, by itself or with the passage of time
or the giving of notice or both, would constitute a default under any of the
Operating Agreements. Transferor shall not enter into any new Operating
Agreements, supply contract, vending or service contract or other agreements
with respect to the Property, nor shall Transferor enter into any agreements
modifying the Operating Agreements, unless (a) any such agreement or
modification will not bind Transferee or the Property after the Closing Date, or
(b) Transferor has obtained Transferee's prior written consent to such agreement
or modification. Transferor acknowledges that Transferee will not assume any of
the Operating Agreements and none of the Operating Agreements will be binding on
Transferee or the Property after Closing.
3.9 WARRANTIES AND GUARANTIES. Transferor shall not before or after
Closing, release or modify any warranties or guarantees, if any, of
manufacturers, suppliers and installers relating to the Improvements and the
Personal Property or any part thereof, except with the prior written consent of
Transferee.
3.10 INSURANCE. All of Transferor's insurance policies are valid and
in full force and effect, all premiums for such policies were paid when due and
all future premiums for such policies (and any replacements thereof) shall be
paid by Transferor on or before the due date therefor. Transferor shall pay all
premiums on, and shall not cancel or voluntarily allow to expire, any of
Transferor's insurance policies unless such policy is replaced, without any
lapse of coverage, by another policy or policies providing coverage at least as
extensive as the policy or policies being replaced. Transferor has not received
any notice from any insurance company of any defect or inadequacies in the
Property to any part thereof which would adversely affect the insurability of
the Property, or which would increase the cost of insurance beyond that which
would ordinarily and customarily be charged for similar properties in the
vicinity of the Real Property. The Property is fully insured in accordance with
prudent and customary practice.
3.11 CONDEMNATION PROCEEDINGS; ROADWAYS. Transferor has received no
notice of any condemnation or eminent domain proceeding pending or threatened
against the Property or any part thereof. Transferor has no knowledge of any
change or proposed change in the route, grade or width of, or otherwise
affecting, any street or road adjacent to or serving the Real Property. To the
best of Transferor's knowledge, no fact or condition exists which would result
in the termination or material impairment of access to the Real Property from
adjoining public or private streets or ways or which
13
<PAGE>
could result in discontinuation of presently available or otherwise necessary
sewer, water, electric, gas, telephone or other utilities or services.
3.12 LITIGATION. Except as disclosed in writing to Transferor,
there is no action, suit or proceeding pending or known to be threatened
against or affecting Transferor or any of its properties in any court, before
any arbitrator or before or by any Governmental Body which (a) in any manner
raises any question affecting the validity or enforceability of this
Agreement or any other agreement or instrument to which Transferor is a party
or by which it is bound and that is or is to be used in connection with, or
is contemplated by, this Agreement, (b) could materially and adversely affect
the business, financial position or results of operations of Transferor,
(c) could materially and adversely affect the ability of Transferor to perform
its obligations hereunder, or under any document to be delivered pursuant
hereto, (d) could create a lien on the Property, any part thereof or any
interest therein, (e) the subject matter of which concerns any past or
present employee of Transferor or its managing agent, or (f) could otherwise
adversely materially affect the Property, any part thereof or any interest
therein or the use, operation, condition or occupancy thereof.
3.13 LABOR DISPUTES AND AGREEMENTS. There are no labor disputes
pending or, to the best of Transferor's knowledge, threatened as to the
operation or maintenance of the Property or any part thereof. Transferor is not
a party to any union or other collective bargaining agreement with employees
employed in connection with the ownership, operation or maintenance of the
Property. Transferor is not a party to any employment contracts or agreements,
other than the Employment Agreements, and neither Transferor nor its managing
agent will, between the date hereof and the Closing Date, enter into any new
employment contracts or agreements, amend any existing Employment Agreement,
except with the prior written consent of Transferee. Transferor acknowledges
that Transferee will not assume any of the Employment Agreements and Transferor
has complied with and shall be responsible for compliance with the WARN Act and
any other applicable employment-related laws or ordinances. Transferor has
complied with the requirements of the federal Immigration and Reform Control Act
respecting the employment of undocumented workers.
3.14 FINANCIAL INFORMATION. To the best of Transferor's knowledge,
all of Transferor's financial information, including, without limitation, all
books and records and financial statements, is correct and complete in all
material respects and presents accurately the results of the operations of the
Property for the periods indicated.
3.15 ORGANIZATIONAL DOCUMENTS. Transferor's Organizational
Documents are in full force and effect and have not been modified or
supplemented, and no fact or circumstance has occurred that, by itself or with
the giving of notice or the passage of time or both, would constitute a default
thereunder.
3.16 OPERATION OF PROPERTY. Transferor covenants, that between the
date hereof and the Closing Date, it will (a) operate the Property in the usual,
regular and ordinary manner consistent with Transferor's prior practice, (b)
maintain its books of
14
<PAGE>
account and records in the usual, regular and ordinary manner, in accordance
with sound accounting principles applied on a basis consistent with the basis
used in keeping its books in prior years and (c) use all reasonable efforts to
preserve intact its present business organization, keep available the services
of its present officers, partners and employees and preserve its relationships
with suppliers and others having business dealings with it. Except as otherwise
permitted hereby, from the date hereof until Closing, Transferor shall not take
any action or fail to take action the result of which would have a material
adverse effect on the Property or Transferee's ability to continue the operation
thereof after the Closing Date in substantially the same manner as presently
conducted, or which would cause any of the representations and warranties
contained in this Article III to be untrue as of Closing.
From and after the execution and delivery of this Agreement,
Transferor shall not, other than in the ordinary course of business, (a) make
any agreements which shall be binding upon Transferee with respect to the
Property, or (b) reduce or cause to be reduced any green fees, membership fees,
tournament fees, driving range fees or any other charges over which Transferor
has operational control. Between the date hereof and the Closing Date, if and
to the extent requested by Transferee, Transferor shall deliver to Transferee
such periodic information with respect to the above information as Transferor
customarily keeps internally for its own use. Transferor agrees that it will
operate the Property in accordance with the provisions of this Section 3.16
between the date hereof and the Closing Date.
3.17 BANKRUPTCY. No Act of Bankruptcy has occurred with respect to
Transferor.
3.18 LAND USE. The current use and occupancy of the Property for
golfing and all other related purposes (including, without limitation, the sale
of merchandise and food and beverages) are permitted as a matter of right as a
principal use under all laws and regulations applicable thereto without the
necessity of any special use permit, special exception or other special permit,
permission or consent and Transferor is not aware of any proposal to change or
restrict such use. Transferor has all necessary certificates of occupancy or
completion to operate the Property as presently operated and there are no
unfulfilled conditions respecting the development of the Property.
3.19 HAZARDOUS SUBSTANCES. Except as may be disclosed in the Phase
I environmental assessment report for the Property, to the best of Transferor's
knowledge, (i) no Hazardous Substances are or have been located on (except in
immaterial amounts used in the ordinary course for the operation or maintenance
of the Property by Transferor in accordance with all applicable laws), in or
under the Property or have been released into the environment, or discharged,
placed or disposed of at, on or under the Property; (ii) no underground storage
tanks are, or have been, located at the Property; (ii) the Property has never
been used to store, treat or dispose of Hazardous Substances; and (iv) the
Property and its prior uses comply with, and at all times have complied with all
applicable Environmental Laws or any other governmental law, regulation or
15
<PAGE>
requirement relating to environmental and occupational health and safety matters
and Hazardous Substances. To the best of Transferor's knowledge, there
currently exist no facts or circumstances that could reasonably be expected to
give rise to a material non-compliance with Environmental Laws, material
environmental liability or material Environmental Claim.
3.20 PUBLIC OFFERING; PREPARATION OF S-11. Transferor shall
cooperate in the preparation by an affiliate of Transferee of a Form S-11 under
the Securities Act of 1933, as amended, to be filed with the SEC and the Closing
of the offering (the "Registered Offering") registered thereby. The Registered
Offering shall be for purposes of selling shares of common stock in an affiliate
of Transferee. Transferor shall provide Transferee access to all financial and
other information relating to the Property which would be sufficient to enable
them to prepare financial statements in conformity with Regulation S-X of the
SEC and to enable the Transferee to prepare a registration statement, report or
disclosure statement for filing with the SEC. Transferor shall also provide to
Transferee's representatives a signed representation letter which would be
sufficient to enable an independent public accountant to render an opinion on
the financial statements related to the Property.
3.21 UTILITIES. All Utilities required for the operation of the
Property either enter the Property through adjoining streets, or they pass
through adjoining land and do so in accordance with valid public easements or
private easements, and all of said Utilities are installed and are in good
working order and repair and operating as necessary for the operation of the
Property and all installation and connection charges therefor have been paid in
full. The sewage, sanitation, plumbing, water retention and detention, refuse
disposal and utility facilities in and on and/or servicing the Real Property are
adequate to service the Real Property as it is currently being used and the Real
Property's utilization of such facilities is in compliance with all applicable
governmental and environmental protection authorities' laws, rules, regulations
and requirements.
3.22 CURB CUTS. All curb cut street opening permits or licenses
required for vehicular access to and from the Property from any adjoining public
street have been obtained and paid for and are in full force and effect.
3.23 LEASED PROPERTY. The Personal Property identified on EXHIBIT C
is all of the leased property at the Property, and such exhibit reflects the
date of each such lease, the name of the lessor, the name of the lessee, the
term of each such lease, the lease payment terms and a description of the
property demised by each such lease. All leases of such property are in good
standing and free from default.
3.24 SUFFICIENCY OF CERTAIN ITEMS. The Property, together with the
Current Assets, contain an amount of equipment and supplies, which is sufficient
to efficiently operate and maintain the Property in the manner in which it is
normally operated and maintained.
16
<PAGE>
3.25 ACCREDITED INVESTOR. Transferor and all equity owners of
Transferor are as of the date hereof, and as of the Closing Date shall be,
Accredited Investors. Concurrent herewith Transferor shall execute and deliver
to Transferee the Accredited Investor Questionnaire attached hereto as EXHIBIT
N.
Each of the representations, warranties and covenants contained in this
Article III are intended for the benefit of Transferee and any underwriter in
the Registered Offering. Each of said representations, warranties and covenants
shall survive the Closing for a period of one (1) year, at which time they shall
expire unless prior to such time Transferee has made a formal, written claim
alleging a breach of one or more of the representations, warranties or
covenants. No investigation, audit, inspection, review or the like conducted by
or on behalf of Transferee shall be deemed to terminate the effect of any such
representations, warranties and covenants, it being understood that Transferee
has the right to rely thereon and that each such representation, warranty and
covenant constitutes a material inducement to Transferee to execute this
Agreement and to close the transaction contemplated hereby and to pay the
Purchase Price to Transferor.
ARTICLE IV
TRANSFEREE'S REPRESENTATIONS, WARRANTIES AND COVENANTS
To induce Transferor to enter into this Agreement and to contribute
the Property, Transferee hereby makes the following representations, warranties
and covenants, upon each of which Transferee acknowledges and agrees that
Transferor is entitled to rely and has relied:
4.1 ORGANIZATION AND POWER. Transferee is duly formed or organized,
validly existing and in good standing under the laws of the state of its
formation and has all governmental licenses, Authorizations, consents and
approvals required to carry on its business as now conducted and to enter into
and perform its obligations under this Agreement and any document or instrument
required to be executed and delivered on behalf of Transferee hereunder.
4.2 NONCONTRAVENTION. The execution and delivery of this Agreement
and the performance by Transferee of its obligations hereunder do not and will
not contravene, or constitute a default under, any provisions of applicable law
or regulation, Partnership Agreement or any agreement, judgment, injunction,
order, decree or other instrument binding upon Transferee or result in the
creation of any lien or other encumbrance on any asset of Transferee.
4.3 LITIGATION. There is no action, suit or proceeding, pending or
known to be threatened, against or affecting Transferee in any court or before
any arbitrator or before any administrative panel or otherwise that (a) could
materially and adversely affect the business, financial position or results of
operations of Transferee, or (b) could materially and adversely affect the
ability of Transferee to perform its obligations hereunder, or under any
document to be delivered pursuant hereto.
17
<PAGE>
4.4 BANKRUPTCY. No Act of Bankruptcy has occurred with respect to
Transferee.
4.5 PUBLIC OFFERING. Transferor shall diligently and in good faith
proceed to file the Registration Statement and seek to consummate the Public
Offering in a timely manner.
4.6 AUTHORIZATION AND EXECUTION. This Agreement has been, and each
of the agreements and certificates of Transferee to be delivered to Transferor
at Closing as provided in Section 5.2 will be, duly authorized by all necessary
action on the part of Transferee, has been duly executed and delivered by
Transferee, constitutes the valid and binding agreement of Transferee and is
enforceable against Transferee in accordance with its terms. All action
required pursuant to this Agreement necessary to effectuate the transactions
contemplated herein has been, or will at Closing be, taken promptly and in good
faith by Transferee and its representatives and agents.
4.7 TRADE NAME. Transferee shall not use the trade name referenced
in Recital B(4) in connection with any other property owned by Transferee or any
affiliate of Transferee.
ARTICLE V
CONDITIONS AND ADDITIONAL COVENANTS
5.1 AS TO TRANSFEREE'S OBLIGATIONS. Transferee's obligations
hereunder are subject to the satisfaction of the following conditions precedent
and the compliance by Transferor with the following covenants:
(a) TRANSFEROR'S DELIVERIES. Transferor shall have delivered to or
for the benefit of Transferee, as the case may be, on or before the Closing
Date, all of the documents and other information required of Transferor
pursuant to this Agreement.
(b) REPRESENTATIONS, WARRANTIES AND COVENANTS. All of Transferor's
representations and warranties made in this Agreement shall be true and
correct as of the date hereof and as of the Closing Date as if then made,
there shall have occurred no material adverse change in the condition or
financial results of the operation of the Property since the date hereof.
Transferor shall have performed all of its covenants and other obligations
under this Agreement and Transferor shall have executed and delivered to
Transferee on the Closing Date a certificate dated as of the Closing Date
to the foregoing effect in the form of EXHIBIT O attached hereto.
(c) TITLE INSURANCE. The Title Company shall have delivered the
Owner's Title Policy, subject only to the Permitted Title Exceptions.
18
<PAGE>
(d) TITLE TO PROPERTY. Transferee shall have determined that
Transferor is the sole owner of good and marketable fee simple title (or
ground lease interest, as applicable) to the Real Property and to the
Tangible Personal Property, free and clear of all liens, encumbrances,
restrictions, conditions and agreements except for Permitted Title
Exceptions. Transferor shall not have taken any action or permitted or
suffered any action to be taken by others from the date hereof and through
and including the Closing Date that would adversely affect the status of
title to the Real Property or to the Tangible Personal Property.
(e) CONDITION OF PROPERTY. The Real Property and the Tangible
Personal Property (including but not limited to the golf course, driving
range, putting greens, mechanical systems, plumbing, electrical wiring,
appliances, fixtures, heating, air conditioning and ventilating equipment,
elevators, boilers, equipment, roofs, structural members and furnaces)
shall be in the same condition at Closing as they are as of the date
hereof, reasonable wear and tear excepted. Prior to Closing, Transferor
shall not have diminished the quality or quantity of maintenance and upkeep
services heretofore provided to the Real Property and the Tangible Personal
Property. Transferor shall not have removed or caused or permitted to be
removed any part or portion of the Real Property or the Tangible Personal
Property unless the same is replaced, prior to Closing, with similar items
of at least equal quality and acceptable to Transferee.
(f) UTILITIES. All of the Utilities shall be installed in and
operating at the Property, and service shall be available for the removal
of garbage and other waste from the Property. Between the date hereof and
the Closing Date, Transferor shall have received no notice of any material
increase or proposed material increase in the rates charged for the
Utilities from the rates in effect as of the date hereof.
(g) LIQUOR LICENSE. Transferee, or Transferee's nominee, shall have
obtained all liquor licenses, alcoholic beverage licenses and other permits
and Authorizations necessary to operate the restaurant, bars, snack shops
and lounges presently located at the Property. To that end, Transferor and
Transferee, or Transferee's nominee, shall have cooperated with each other,
and each shall have executed such transfer forms, license applications and
other documents as may be necessary to effect the obtaining of the liquor
licenses, alcoholic beverage licenses and other Authorizations required
hereby.
(h) SUCCESSFUL PUBLIC OFFERING. Transferee's obligations hereunder
are expressly conditioned upon the closing of the Registered Offering.
(i) PARTNERSHIP AGREEMENT. Transferor shall have delivered to
Transferee a countersigned copy of the Partnership Agreement in a form
prepared by Transferee, which shall be in substantially the form attached
hereto as EXHIBIT J.
19
<PAGE>
(j) GOLF COURSE LEASE. An Affiliate of Transferor shall have
delivered to Transferee a countersigned copy of the Golf Course Lease in a
form prepared by Transferee, which shall be in substantially the form
attached hereto as EXHIBIT E.
Each of the conditions and additional covenants contained in this Section are
intended for the benefit of Transferee and may be waived in whole or in part by
Transferee, but only by an instrument in writing signed by Transferee.
5.2 AS TO TRANSFEROR'S OBLIGATIONS. Transferor's obligations
hereunder are subject to the satisfaction of the following conditions precedent
and the compliance by Transferee with the following covenants:
(a) TRANSFEREE'S DELIVERIES. Transferee shall have delivered to or
for the benefit of Transferor, on or before the Closing Date, all of the
documents and payments required of Transferee pursuant to this Agreement.
(b) REPRESENTATIONS, WARRANTIES AND COVENANTS. All of Transferee's
representations and warranties made in this Agreement shall be true and
correct as of the date hereof and as of the Closing Date as if then made
and Transferee shall have performed all of its covenants and other
obligations under this Agreement.
(c) REVIEW AND APPROVAL OF CONSOLIDATED FINANCIAL STATEMENTS.
Transferor shall have reviewed and approved consolidated financial
statements of Transferee. Transferor shall have five (5) days from receipt
of such consolidated financial statements to review such financial
statements.
(d) CAPITALIZATION RATE. The Capitalization Rate, as defined in
EXHIBIT K, shall be less than or equal to 10.95%.
(e) COUNTERSIGNED COPIES OF PARTNERSHIP AGREEMENT AND GOLF COURSE
LEASE. Transferee shall have delivered to Transferor countersigned copies
of the Partnership Agreement and Golf Course Lease.
Each of the conditions and additional covenants contained in this Section are
intended for the benefit of Transferor and may be waived in whole or in part, by
Transferor, but only by an instrument in writing signed by Transferor.
ARTICLE VI
CLOSING
6.1 CLOSING. Closing shall be held at 9:00 a.m., New York time, at
the offices of the Company (or counsel to the Company) on a date which is the
earlier of (i) fifteen (15) days after Transferee shall have given Transferor
written notice that Transferee is ready, willing and able to close the
transaction contemplated hereby, or (ii)
20
<PAGE>
December 31, 1996, as may be extended in Transferee's reasonable discretion for
up to an additional ninety (90) days. If the Closing Date falls on a Saturday,
Sunday or other legal holiday, the Closing shall take place on the first
following business day thereafter. Possession of the Property shall be delivered
to Transferee at Closing, subject only to Permitted Title Exceptions.
6.2 TRANSFEROR'S DELIVERIES. At Closing, Transferor shall deliver to
Transferee all of the following instruments, each of which shall have been duly
executed and, where applicable, acknowledged and/or sworn on behalf of
Transferor and shall be dated as of the Closing Date:
(a) The certificate required by Section 5.1 (b).
(b) The Deed.
(c) The Bill of Sale - Personal Property.
(d) The Partnership Agreement.
(e) The Golf Course Lease.
(f) Evidence of title acceptable to Transferee for any vehicle owned
by Transferor and used in connection with the Property.
(g) Such agreements, affidavits or other documents as may be required
by the Title Company to issue the Owner's Title Policy including those
endorsements requested by Transferee, and to eliminate the standard
exceptions as exceptions thereto, so that the Owner's Title Policy will be
subject only to the Permitted Title Exceptions, including, without
limitation, an appropriate mechanics' and construction lien, possession and
gap affidavit.
(h) The FIRPTA Certificate.
(i) To the extent available, true, correct and complete copies of all
warranties, if any, of manufacturers, suppliers and installers possessed by
Transferor and relating to the Property, or any part thereof.
(j) Certified copies of Transferor's Organizational Documents.
(k) Appropriate resolutions of the board of directors or partners, as
the case may be, of Transferor, certified by the secretary or an assistant
secretary of Transferor or a general partner, as the case may be, together
with all other necessary approvals and consents of Transferor, authorizing
(i) the execution on behalf of Transferor of this Agreement and the
documents to be executed and delivered by Transferor prior to, at or
otherwise in connection with Closing, and (ii) the performance by
Transferor of its obligations hereunder and under such
21
<PAGE>
documents, or appropriate resolutions of the partners of Transferor, as the
case may be.
(l) A valid, final and unconditional certificate of occupancy for the
Real Property and Improvements, issued by the appropriate Governmental Body
allowing for the use of the Real Property as a golf course and permitting
the continued operation of the improvements as presently operated.
(m) Such proof as Transferee may reasonably require with respect to
Transferor's compliance (or indemnity with respect to compliance) with the
bulk sales laws or similar statutes.
(n) Copy of each and every existing insurance policy covering the
Property and certificates evidencing such coverage.
(o) To the extent available, a set or copies of the plans and
specifications for the Improvements.
(p) A written instrument executed by Transferor, conveying and
transferring to Transferee all of Transferor's right, title and interest in
any telephone numbers, fax numbers or internet or electronic mail addresses
(if applicable) relating solely to the Property, and, if Transferor
maintains a post office box solely with respect to the Property, conveying
to Transferee all of its interest in and to such post office box and the
number associated therewith, so as to assure a continuity in operation and
communication.
(q) All current real estate and personal property tax bills in
Transferor's possession or under its control.
(r) All surveys and plot plans of the Real Property in possession of
or in the control of Transferor.
(s) A complete list of all scheduled tournaments, functions and the
like, in reasonable detail.
(t) A list of Transferor's outstanding accounts receivable as of
midnight on the date prior to the Closing, specifying the name of each
account and the amount due Transferor.
(u) A pay off statement prepared by any holder of Mortgage
Indebtedness setting forth the amount, including accrued interest and
prepayment penalties, to pay off the Mortgage Indebtedness.
(v) Written notice executed by Transferor notifying all interested
parties, including all tenants under any leases of the Property, that the
Property
22
<PAGE>
has been conveyed to Transferee and directing that all payments, inquiries
and the like be forwarded to Transferee at the address to be provided by
Transferee.
(u) Any other document or instrument reasonably requested by
Transferee with respect to the Property, or in connection with the
Registered Offering.
6.3 TRANSFEREE'S DELIVERIES. At Closing, Transferee shall pay or
deliver to Transferor the following:
(a) The cash portion of the Purchase Price by federal funds wire to
an account designated by Transferor.
(b) The non-cash portion of the Purchase Price payable in Owner's
Shares issued to such holders and in such denominations to such holders as
specified by Transferor.
(c) Any other document or instrument reasonably requested by
Transferor relating to the transaction contemplated hereby.
6.4 MUTUAL DELIVERIES. At Closing, Transferee and Transferor shall
mutually execute and deliver each to the other:
(a) A closing statement for Transferor and a closing statement for
Transferee (collectively, the "Closing Statements") reflecting the Purchase
Price and the adjustments and prorations required hereunder and the
allocation of income and expenses required hereby.
(b) Such other documents, instruments and undertakings as may be
required by the liquor authorities of the State or of any county or
municipality or Governmental Body having jurisdiction with respect to the
transfer or issue of any liquor licenses or alcoholic beverage licenses or
permits for the Property, to the extent not theretofore executed and
delivered.
(c) The Golf Course Lease.
(d) The Partnership Agreement.
(e) Such other and further documents, papers and instruments as may
be reasonably required by the parties hereto or their respective counsel.
6.5 CLOSING COSTS. Except as is otherwise provided in this
Agreement, each party hereto shall pay its own legal fees and expenses, and
Transferor shall pay for the cost of any audit required by Transferee with
respect to the Property. All filing fees for the Deed and the real estate
transfer, recording or other similar taxes due with respect to the transfer of
title and all charges for title insurance premiums shall be paid
23
<PAGE>
by Transferor. Transferor shall pay for preparation of the documents to be
delivered by Transferor hereunder, and for the releases of any deeds of trust,
mortgages and other financing encumbering the Property and for any costs
associated with any corrective instruments, and for the cost of any due
diligence reports and surveys prepared by or for Transferee with respect to the
Property. Transferor shall receive a cash payment at closing to pay for such
closing costs as provided in Section 2.3(c).
6.6 INCOME AND EXPENSE ALLOCATIONS. All income and expenses with
respect to the Property, and applicable to the period of time before and after
Closing, determined in accordance with generally accepted accounting principles
consistently applied, shall be allocated between Transferor and Transferee (or,
at Transferee's election, between Transferor and the lessee under the Golf
Course Lease to the extent such income or expenses will be payable by or
attributable to such lessee). Transferor shall be entitled to all income and
shall be responsible for all expenses for the period of time up to but not
including the Closing Date, and Transferee shall be entitled to all income and
shall be responsible for all expenses for the period of time from, after and
including the Closing Date. Such adjustments shall be shown on the Closing
Statements (with such supporting documentation as the parties hereto may require
being attached as exhibits to the Closing Statements) and shall increase or
decrease (as the case may be) the Purchase Price payable by Transferee. Without
limiting the generality of the foregoing, the following items of income and
expense shall be prorated at Closing:
(a) Current and prepaid rents or fees, including, without limitation,
prepaid Golf Club membership fees, function receipts and other reservation
receipts.
(b) Real estate and personal property taxes.
(c) Utility charges (including but not limited to charges for water,
sewer and electricity).
(d) Value of fuel stored on the Property at the price paid for such
fuel by Transferor, including any taxes.
(e) Municipal improvement liens where the work has physically
commenced (certified liens) shall be paid by Transferor at Closing.
Municipal improvement liens which have been authorized, but where the work
has not commenced (pending liens) shall be assumed by Transferee.
(f) License and permit fees, where transferable.
(g) All other income and expenses of the Property, including, but not
being limited to such things as restaurant and snack bar income and
expenses and the like.
24
<PAGE>
(h) Such other items as are usually and customarily prorated between
Transferees and Transferors of golf course properties in the area in which
the Property is located shall be prorated as of the Closing Date.
6.7 SALES TAXES. Transferor shall be required to pay all sales taxes
and like impositions arising from the ownership and operation of the Property
currently through the Closing Date.
6.8 POST-CLOSING ADJUSTMENTS.
(a) Transferee shall not be obligated to collect any accounts
receivable or revenues accrued prior to the Closing Date for Transferor,
but if Transferee collects same, such amounts will be promptly remitted to
Transferor in the form received. Transferee shall receive a credit at
Closing for the amount of any security deposits held by Transferor under
any lease of any portion of the Property that is being assigned to
Transferee in accordance herewith.
(b) If accurate allocations and prorations cannot be made at Closing
because current bills are not obtainable (as, for example, in the case of
utility bills and/or real estate or personal property taxes), the parties
shall allocate such income or expenses at Closing on the best available
information, subject to adjustment outside of escrow upon receipt of the
final bill or other evidence of the applicable income or expense. Any
income received or expense incurred by Transferor or Transferee with
respect to the Property after the Closing Date shall be promptly allocated
in the manner described herein and the parties shall promptly pay or
reimburse any amount due. Transferor shall pay at Closing all accrued
special assessments and taxes applicable to the Property.
ARTICLE VII
GENERAL PROVISIONS
7.1 CONDEMNATION. In the event of any actual or threatened taking,
pursuant to the power of eminent domain, of all or any portion of the Real
Property, or any proposed sale in lieu thereof, Transferor shall give written
notice thereof to Transferee promptly after Transferor learns or receives notice
thereof. If all or any part of the Real Property is, or is to be, so condemned
or sold, Transferee shall have the right to terminate this Agreement pursuant to
Section 8.3. If Transferee elects not to terminate this Agreement, all
proceeds, awards and other payments arising out of such condemnation or sale
(actual or threatened) shall be paid or assigned, as applicable, to Transferee
at Closing. Transferor will not settle or compromise any such proceeding
without Transferee's prior written consent.
7.2 RISK OF LOSS. The risk of any loss or damage to the Property
prior to the Closing Date shall remain upon Transferor. If any such loss or
damage occurs prior to Closing, Transferee shall have the right to terminate
this Agreement pursuant to Section 8.3. If Transferee elects not to terminate
this Agreement, all insurance proceeds
25
<PAGE>
and rights to proceeds arising out of such loss or damage shall be paid or
assigned, as applicable, to Transferee at Closing.
7.3 REAL ESTATE BROKER. Except for a broker or finder who may have
been engaged by Transferor and for whom Transferor accepts sole financial
responsibility, and except for any broker or finder who may have been engaged by
Transferee and for whom Transferee accepts sole financial responsibility, there
is no real estate broker involved in this transaction. Transferee warrants and
represents to Transferor that Transferee has not dealt with any other real
estate broker in connection with this transaction, nor has Transferee been
introduced to the Property or to Transferor by any other real estate broker, and
Transferee shall indemnify Transferor and save and hold Transferor harmless from
and against any claims, suits, demands or liabilities of any kind or nature
whatsoever arising on account of the claim of any person, firm or corporation to
a real estate brokerage commission or a finder's fee as a result of having dealt
with Transferee, or as a result of having introduced Transferee to Transferor or
to the Property. In like manner, Transferor warrants and represents to
Transferee that Transferor has not dealt with any real estate broker in
connection with this transaction, nor has Transferor been introduced to
Transferee by any real estate broker, and Transferor shall indemnify Transferee
and save and hold Transferee harmless from and against any claims, suits,
demands or liabilities of any kind or nature whatsoever arising on account of
the claim of any person, firm or corporation to a real estate brokerage
commission or a finder's fee as a result of having dealt with Transferor in
connection with this transaction. Transferee acknowledges that David J. Dick,
an officer of the Transferee, is a licensed California real estate broker but is
not acting as a broker in relation to this Agreement.
7.4 CONFIDENTIALITY. Except as hereinafter provided, from and after
the execution of this Agreement, Transferee and Transferor shall keep the terms,
conditions and provisions of this Agreement confidential and neither shall make
any public announcements hereof unless the other first approves of same in
writing, nor shall either disclose the terms, conditions and provisions hereof,
except to their respective attorneys, accountants, engineers, surveyors,
financiers and bankers. Notwithstanding the foregoing, it is acknowledged that
Transferee anticipates that it will seek to sell shares of its common stock and
other securities (collectively, the "Securities") to the general public pursuant
to the Registered Offering and that in connection therewith, Transferee will
have the absolute right to market the Securities and prepare and file all
necessary or required registration statements and other papers, documents and
instruments necessary or required in Transferee's judgment and that of its
attorneys and underwriters to file a registration statement with respect to the
Securities with the SEC and/or similar state authorities and to cause same to
become effective and to disclose therein and thus to its underwriters, to the
SEC and/or to similar state authorities and to the public all of the terms,
conditions and provisions of this Agreement. The obligations of this Section
7.4 shall survive any termination of this Agreement.
7.5 LIQUOR LICENSES. Transferor shall transfer or cause to be
transferred to Transferee or, at Transferee's discretion, Transferee's nominee
(which may include
26
<PAGE>
the lessee under the Golf Course Lease), all liquor licenses and alcoholic
beverage licenses, if any, necessary to operate the restaurant, bars, snack bars
and lounges presently located within the Property, if any. To that end,
Transferor and Transferee, or Transferee's nominee, shall cooperate each with
the other, and each shall execute such transfer forms, license applications and
other documents as may be necessary to effect such transfer. If permitted under
the laws of the jurisdiction in which the Property is located, the parties shall
execute and file all necessary transfer forms, applications and papers with the
appropriate liquor and alcoholic beverage authorities prior to Closing, to the
end that the transfer shall take effect, if possible, on the Closing Date,
simultaneously with Closing. If not so permitted, then the parties agree each
with the other that they will promptly execute all transfer forms, applications
and other documents required by the liquor authorities in order to effect such
transfer at the earliest date in time possible consistent with the laws of the
State in order that all liquor licenses may be transferred from Transferor to
Transferee, or Transferee's nominee, at the earliest possible time. If under
the laws of the State such licenses cannot be transferred until after the
Closing of the transaction contemplated hereby, then Transferor covenants and
agrees that Transferor will cooperate with Transferee, or Transferee's nominee,
in keeping open the bars and liquor facilities of the Property between the
Closing Date and the time when such liquor license transfers actually become
effective, by exercising management and supervision of such facilities until
such time under Transferor's licenses, provided, however, that Transferee shall
indemnify and hold Transferor harmless from any liability, damages or claims
encountered in connection with such operations during said period of time,
except for Transferor's gross negligence or willful misconduct.
ARTICLE VIII
LIABILITY OF TRANSFEREE; INDEMNIFICATION BY TRANSFEROR;
TERMINATION RIGHTS
8.1 LIABILITY OF TRANSFEREE. Except for any obligation expressly
assumed or agreed to be assumed by Transferee hereunder, Transferee does not
assume any obligation of Transferor or any liability for claims arising out of
any occurrence prior to Closing.
8.2 INDEMNIFICATION BY TRANSFEROR. Transferor hereby indemnifies and
holds Transferee harmless from and against any and all claims, costs, penalties,
damages, losses, liabilities and expenses (including reasonable attorneys' fees)
that may at any time be incurred by Transferee, whether before or after Closing,
as a result of any breach by Transferor of any of its representations,
warranties, covenants or obligations set forth herein or in any other document
delivered by Transferor pursuant hereto, for a period of one (1) year following
the Closing. The provisions of this section shall survive termination of this
Agreement by Transferee or Transferor.
8.3 TERMINATION BY TRANSFEREE. If any condition set forth herein for
the benefit of Transferee cannot or will not be satisfied prior to Closing, or
upon the occurrence of any other event that would entitle Transferee to
terminate this Agreement
27
<PAGE>
and its obligations hereunder, and Transferor fails to cure any such matter
within ten (10) business days after notice thereof from Transferee, Transferee,
at its option, may elect either (a) to terminate this Agreement and all other
rights and obligations of Transferor and Transferee hereunder shall terminate
immediately, or (b) to waive its right to terminate (but without waiving any
breach or default on the part of Transferor) and, instead, to proceed to
Closing. If Transferee terminates this Agreement as a consequence of a
misrepresentation or breach of a warranty or covenant by Transferor, or a
failure by Transferor to perform its obligations hereunder, then Transferee
shall retain all remedies accruing as a result thereof, including, without
limitation, specific performance.
8.4 TERMINATION BY TRANSFEROR. If any condition set forth herein for
the benefit of Transferor (other than a default by Transferee) cannot or will
not be satisfied prior to Closing, and Transferee fails to cure any such matter
within ten (10) business days after notice thereof from Transferor, Transferor
may, at its option, elect either (a) to terminate this Agreement, in which event
the rights and obligations of Transferor and Transferee hereunder shall
terminate immediately, or (b) to waive its right to terminate, and instead, to
proceed to Closing. If, prior to Closing, Transferee defaults in performing any
of its obligations under this Agreement (including its obligation to purchase
the Property), and Transferee fails to cure any such default within ten (10)
business days after notice thereof from Transferor, then Transferor's sole
remedy for such default shall be to terminate this Agreement and Transferor
waives any claims for damages, actual, consequential or otherwise, that it may
possess against Transferee.
8.5 COSTS AND ATTORNEYS' FEES. In the event of any litigation or
dispute between the parties arising out of or in any way connected with this
Agreement, resulting in any litigation, arbitration or other form of dispute
resolution, then the prevailing party in such litigation shall be entitled to
recover its costs of prosecuting and/or defending same, including, without
limitation, reasonable attorneys' fees at trial and all appellate levels.
ARTICLE IX
MISCELLANEOUS PROVISIONS
9.1 COMPLETENESS; MODIFICATION. This Agreement constitutes the
entire agreement between the parties hereto with respect to the transactions
contemplated hereby and supersedes all prior discussions, understandings,
agreements and negotiations between the parties hereto. This Agreement may be
modified only by a written instrument duly executed by the parties hereto.
9.2 ASSIGNMENTS. Transferee may assign its rights hereunder to an
affiliate of Transferee without the consent of Transferor. Transferee may not
otherwise assign its interest herein without the prior written consent of
Transferor. Transferor may not assign any of its rights pursuant to this
Agreement without the prior written consent of Transferee, which may be withheld
in Transferee's sole and absolute discretion.
28
<PAGE>
9.3 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to
the benefit of the parties hereto and their respective successors and assigns.
9.4 DAYS. If any action is required to be performed, or if any
notice, consent or other communication is given, on a day that is a Saturday or
Sunday or a legal holiday in the jurisdiction in which the action is required to
be performed or in which is located the intended recipient of such notice,
consent or other communication, such performance shall be deemed to be required,
and such notice, consent or other communication shall be deemed to be given, on
the first business day following such Saturday, Sunday or legal holiday. Unless
otherwise specified herein, all references herein to a "day" or "days" shall
refer to calendar days and not business days.
9.5 GOVERNING LAW. This Agreement and all documents referred to
herein shall be governed by and construed and interpreted in accordance with the
laws of the State.
9.6 COUNTERPARTS. To facilitate execution, this Agreement may be
executed in as many counterparts as may be required. It shall not be necessary
that the signature on behalf of both parties hereto appear on each counterpart
hereof. All counterparts hereof shall collectively constitute a single
agreement.
9.7 SEVERABILITY. If any term, covenant or condition of this
Agreement, or the application thereof to any person or circumstance, shall to
any extent be invalid or unenforceable, the remainder of this Agreement, or the
application of such term, covenant or condition to other persons or
circumstances, shall not be affected thereby, and each term, covenant or
condition of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
9.8 COSTS. Regardless of whether Closing occurs hereunder, and
except as otherwise expressly provided herein, each party hereto shall be
responsible for its own costs in connection with this Agreement and the
transactions contemplated hereby, including without limitation, fees of
attorneys, engineers and accountants.
9.9 NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be delivered by hand, transmitted by
facsimile transmission, sent prepaid by Federal Express (or a comparable
overnight delivery service) or sent by the United States mail, certified,
postage prepaid, return receipt requested, at the addresses and with such copies
as on the Summary Sheet or to such other address as the intended recipient may
have specified in a notice to the other party. Any party hereto may change its
address or designate different or other persons or entities to receive copies by
notifying the other party and Escrow Agent in a manner described in this
Section. Any notice, request, demand or other communication delivered or sent
in the manner aforesaid shall be deemed given or made (as the case may be) when
actually delivered to the intended recipient.
29
<PAGE>
9.10 INCORPORATION BY REFERENCE. All of the exhibits attached hereto
are by this reference incorporated herein and made a part hereof.
9.11 SURVIVAL. Except as expressly provided in Section 3, all of the
representations, warranties, covenants and agreements of Transferor and
Transferee made in, or pursuant to, this Agreement shall survive Closing and
shall not merge into the Deed or any other document or instrument executed and
delivered in connection herewith.
9.12 FURTHER ASSURANCES. Transferor and Transferee each covenant and
agree to sign, execute and deliver, or cause to be signed, executed and
delivered, and to do or make, or cause to be done or made, upon the written
request of the other party, any and all agreements, instruments, papers, deeds,
acts or things, supplemental, confirmatory or otherwise, as may be reasonably
required by either party hereto for the purpose of or in connection with
consummating the transactions described herein.
9.13 NO PARTNERSHIP. This Agreement does not and shall not be
construed to create a partnership, joint venture or any other relationship
between the parties hereto except the relationship of Transferor and Transferee
specifically established hereby.
9.14 CONFIDENTIALITY. Any confidential information delivered by
Transferor to Transferee hereunder shall be used solely for the purpose of
acquiring the Property and Transferee will keep such information confidential;
provided Transferee shall have the right to provide such information to its
consultants and advisors and to disclose such information as Transferee
determines is necessary or appropriate in connection with filing the Registered
Offering. If Transferee does not acquire the Property, it shall deliver to
Transferor copies of all proprietary information delivered to Transferee by
Transferor. Transferor agrees to keep confidential the terms and conditions of
this Agreement and the Registered Offering; provided, Transferor shall have the
right to provide such information to its consultants and advisors.
30
<PAGE>
IN WITNESS WHEREOF, Transferor and Transferee have hereunder affixed
their signatures to this Contribution and Leaseback Agreement, all as of the
_____ day of _________________, 1996.
"TRANSFEREE"
GOLF TRUST OF AMERICA, L.P., A DELAWARE LIMITED
PARTNERSHIP
By: Golf Trust of America, Inc.
a Maryland corporation
Its: General Partner
By:____________________________
Its:____________________________
"TRANSFEROR"
By: _______________________________
Its: _______________________________
31
<PAGE>
EXHIBIT A
(Legal Description of the Land)
A-1
<PAGE>
EXHIBIT B
(Improvements)
B-1
<PAGE>
EXHIBIT C
(Tangible Personal Property)
C-1
<PAGE>
EXHIBIT D
(Intangible Personal Property)
D-1
<PAGE>
EXHIBIT E
(Golf Course Lease)
(to be attached)
E-1
<PAGE>
EXHIBIT F
BILL OF SALE - PERSONAL PROPERTY
WHEREAS, by deed of even date herewith, _____________________________, a
____________________ ("Transferor") conveyed to GOLF TRUST OF AMERICA, L.P., a
Delaware limited partnership ("Transferee"), whose mailing address is
_______________________, _________________________, that certain tract of land
more particularly described in SCHEDULE F-1 attached hereto as a part hereof,
together with all improvements located thereon (the "Property").
WHEREAS, in connection with the above described conveyance Transferor
desires to contribute, transfer and convey to Transferee certain items of
tangible personal property as defined in the Contribution and Leaseback
Agreement dated ____________, 1996, (the "Agreement") including, without
limitation, the items hereinafter described.
NOW, THEREFORE, in consideration of the receipt of TEN AND NO/100 DOLLARS
($10.00) and other good and valuable consideration paid in hand by Transferee to
Transferor, the receipt and sufficiency of which are hereby acknowledged,
Transferor has, without representation or warranty except as set forth in the
Agreement, GRANTED, CONVEYED, CONTRIBUTED, TRANSFERRED, SET OVER and DELIVERED
and by these presents does hereby GRANT, CONTRIBUTE, TRANSFER, SET OVER and
DELIVER to Transferee, its legal representatives, successors and assigns, all
items of tangible personal property and fixtures (if any) owned or leased by
Transferor, including, but not limited to machinery, equipment, furniture,
furnishings, movable walls or partitions, phone systems and other control
systems, restaurant equipment, computers or trade fixtures, golf carts, golf
course operation and maintenance equipment, including mowers, tractors,
aerators, sprinklers, sprinkler and irrigation facilities and equipment, valves
or rotors, driving range equipment, athletic training equipment, office
equipment or machines, antiques or other decorations, and equipment or machinery
of every kind or nature located on or useful in the operation of the Real
Property whether on or off-site, including all warranties and guaranties
associated therewith (the "Tangible Personal Property"), including, without
limitation, the personal property described in SCHEDULE F-2 attached hereto and
all intangible personal property owned or possessed by Transferor and used in
connection with the ownership, operation, leasing or maintenance of the Real
Property or the Tangible Personal Property, all goodwill attributed to the
Property, and any and all trademarks and copyrights, guarantees, Authorizations
(as hereinafter defined), general intangibles, business records, plans and
specifications, surveys and title insurance policies pertaining to the Property,
all licenses, permits and approvals with respect to the construction, ownership,
operation or maintenance of the Property, any unpaid award for taking by
condemnation or any damage to the Real Property by reason of a change of grade
or location of or access to any street or highway, excluding (a) any of the
aforesaid rights
F-1
<PAGE>
that Transferee elects not to acquire and (b) the Current Assets, as hereinafter
defined (collectively, the "Intangible Personal Property"), and to have and to
hold, all and singular, the Tangible Personal Property and the Intangible
Personal Property unto Transferee forever.
EXECUTED this ____ day of ____________________, 1996.
Transferor:
____________________________,
a __________________________
By:__________________________
Its:______________________
F-2
<PAGE>
SCHEDULE F-1
[Description of Property]
Sch. F-1
<PAGE>
SCHEDULE F-2
[Description of Personal Property]
Sch. F-2
<PAGE>
EXHIBIT G
RECORDING REQUESTED BY
AND WHEN RECORDED MAIL TO:
O'MELVENY & MYERS LLP
275 Battery Street
San Francisco, California 94111
Attn: David G. Estes, Esq.
GRANT DEED
FOR A VALUABLE CONSIDERATION, receipt of which is hereby acknowledged,
______________________________________, a _____________________ ("GRANTOR"),
hereby GRANTS to GOLF TRUST OF AMERICA, L.P., a Delaware limited partnership,
that certain real property located in the County of _________________, State of
_____________________ and more particularly described in SCHEDULE G-1 attached
hereto and incorporated herein by this reference (the "PROPERTY"), together with
all improvements located thereon and all rights, privileges, easements and
appurtenances of Grantor appertaining to the Property and all right, title and
interest of Grantor in, to and under adjoining streets, rights of way and
easements.
IN WITNESS WHEREOF, Grantor has caused its duly authorized
representatives to execute this instrument as of the date hereinafter written.
DATED: _________, 1996 GRANTOR:
__________________________________, a
_________________________
By: __________________________
Its: __________________________
G-1, 1
<PAGE>
SCHEDULE G-1
THE PROPERTY
Sch. G-1
<PAGE>
STATE OF __________________ )
) ss.
COUNTY OF _________________ )
On ________________, 1996, before me ___________________________, a Notary
Public in and for said State, personally appeared
____________________________________, personally known to me (or proved to me on
the basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity on
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
__________________________________
Notary Public, State of California
G-3
<PAGE>
EXHIBIT H
TRANSFEROR'S FIRPTA AFFIDAVIT
Section 1445 of the Internal Revenue Code provides that a transferee of a
United States real property interest must withhold tax if the transferor is a
foreign person. To inform the transferee that withholding of tax is not
required upon the disposition of a United States real property interest by
____________________________________, a _______________________ ("Transferor"),
the undersigned hereby certifies the following on behalf of Transferor:
1. Transferor is not a foreign corporation, foreign partnership,
foreign trust, or foreign estate (as those terms are defined in the Internal
Revenue Code and Income Tax Regulations); and
2. Transferor's U.S. employer tax identification number is
______________________; and
3. Transferor's office address is ______________________,
_______________________________________.
Transferor understands that this certification may be disclosed to the
Internal Revenue Service by transferee and that any false statement contained
herein could be punished by fine, imprisonment, or both.
The undersigned officer of Transferor declares that he/she has examined
this certification and to the best of his/her knowledge and belief it is true,
correct and complete, and he/she further declares that he/she has authority to
sign this document on behalf of Transferor.
Dated: _____________, 19___
____________________________,
a __________________________
By:__________________________
Its:______________________
H-1
<PAGE>
EXHIBIT I
CONTRACTS AND OPERATING AGREEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROVIDER SERVICE DATE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
I-1
<PAGE>
EXHIBIT J
(Partnership Agreement)
(to be attached)
J-1
<PAGE>
EXHIBIT K
PURCHASE PRICE FORMULA
The Purchase Price shall be composed of the Base Purchase Price and
the Contingent Purchase Price, as hereinafter provided.
A. DEFINITIONS. For purposes of this EXHIBIT K, the following terms shall
have the following meanings:
(1) "ADJUSTED NET OPERATING INCOME" means the Net Operating Income or the
Conversion Date Net Operating Income, as applicable, divided by 1.135.
(2) "APPLICABLE TWELVE (12) MONTH PERIOD" means, (A) with respect to the
Base Purchase Price the twelve (12) month period ending June 30, 1996 and, (B)
with respect to the Contingent Purchase Price, the Conversion Year.
(3) "CAPITALIZATION RATE" shall mean the rate determined by dividing the
Net Operating Income of the Golf Courses by the Company pro forma total market
capitalization (based upon the mid-point of the filing range set forth in the
Company's Registration Statement on Form S-11) less the gross spread and other
offering and formation expenses, including a working capital reserve.
(4) "COMPANY" means Golf Trust of America, Inc.
(5) "COMPANY'S FIRST CALL FFO" means the consensus FFO per share estimate
for the Company for the calendar year which includes the Conversion Date,
subtracting the Company's capital expenditure reserve per share as estimated for
that year as such estimate is reported by First Call (or, if First Call is no
longer in general use within the securities industry, by such other reporting
service as is then in general use within the securities industry) divided by the
average of the Company's closing share price for the thirty (30) trading days
immediately preceding the Conversion Date.
(6) "CONVERSION DATE" means the April 30 following the date on which
Transferee receives written notice that Transferor has irrevocably elected to
receive the Contingent Purchase Price.
(7) "CONVERSION DATE CAPITALIZATION RATE" shall mean the Company's First
Call FFO, plus 200 basis points (but in no event less than the Capitalization
Rate).
(8) "CONVERSION DATE NET OPERATING INCOME" means the Gross Operating
Revenue for the Property LESS the Gross Operating Expenses for the Conversion
Year.
K-1
<PAGE>
(9) "CONVERSION YEAR" means the calendar year immediately preceding the
Conversion Date.
(10) "CONVERSION NOTICE" shall mean a written notice delivered by
Transferor to Transferee whereby Transferor elects to receive the Contingent
Purchase Price. The Conversion Notice may only be given once and must be given
on or before April 15 of a calendar year. If the Conversion Date is not given
on or before April 15, 2002, Transferor's right to receive the Contingent
Purchase Price shall automatically and irrevocably terminate. The Conversion
Notice may not be given prior to March 1, 1999.
(11) "DIVIDEND RATE" shall mean the initial anticipated dividend amount
set forth in the Registration Statement, on an annualized basis, divided by the
initial public offering price of shares in the Company.
(12) "GOLF COURSES" shall mean the initial golf courses owned by the
Company, as described in the Company's Registration on Form S-11.
(13) "GROSS OPERATING EXPENSES" means the gross operating expenses of
the Property for the Applicable Twelve (12) Month Period, calculated in
accordance with generally accepted accounting principles consistently applied
as adjusted in Schedule K-1. For purposes of calculating Gross Operating
Expenses, Transferee may make discretionary adjustments on a line item basis
to reflect stabilized Gross Operating Expenses, including the following
adjustments:
(a) annual capital replacement reserves shall be included, as
reasonably determined by Transferee;
(b) annual cash expenditures (including depreciation) for golf carts
shall be included, as reasonably determined by Transferee;
(c) extraordinary expenditures (such as to repair storm damage) which
are not anticipated to recur in the ordinary course shall be excluded, as
reasonably determined by Transferee;
(d) other adjustments to reflect stabilized Gross Operating
Expenses, as reasonably determined by Transferee shall be made; and
(e) depreciation, amortization and debt service shall be excluded.
For purposes of determining the Contingent Purchase Price, Gross Operating
Expenses will be adjusted upward by Transferee to the extent such expenses (or
any major component thereof) have decreased at a compound annual rate greater
than 2% per
K-2
<PAGE>
annum from the Base Year to the Conversion Year or more than 3% (on a year-to-
year basis) from the year immediately preceding the Conversion Year, unless,
Transferee shall determine that such expense reductions were of a nature so as
to be reasonably expected to be sustained.
(14) "GROSS OPERATING REVENUE" means the gross operating revenue of the
Property, including revenue related to the golf course operations, food and
beverage operations and sale of merchandise, for the Applicable Twelve (12)
Month Period, calculated in accordance with generally accepted accounting
principles consistently applied as adjusted in Schedule K-1. For purposes of
determining the Contingent Purchase Price, Gross Operating Revenue will be
adjusted downward to the extent such revenue has increased by more than 5.0%
from the year immediately preceding the Conversion Year to the Conversion Year,
unless Transferee shall have reasonably determined that such revenue increase
can reasonably be expected to be sustained. Factors to determine sustainability
shall include factors such as the creation of new demand generators (i.e., hotel
development or condominium development) and the non-recurring nature of any
revenue (i.e., a one-time tournament fee). Transferee shall further retain the
right to make downward adjustments to Gross Operating Revenue so as to establish
reasonable expectations of future cash flow results.
(15) "NET INCREMENTAL INCOME AVAILABLE FOR CONTINGENT PURCHASE PRICE"
means the Adjusted Net Operating Income for the Applicable Twelve (12) Month
Period, increased by the annual capital replacement reserve included in the
payment of base rent, preceding the Conversion Date less the rental payment
made by the lessee of the Property for the same period.
(16) "NET OPERATING INCOME" means the Gross Operating Revenue of the
Property for the Applicable Twelve (12) Month Period LESS the Gross Operating
Expenses for the same period.
B. BASE PURCHASE PRICE.
(1) The Base Purchase Price shall equal the Adjusted Net Operating Income
divided by the Capitalization Rate.
(2) Transferee and Transferor agree that based on the financial statements
ending June 30, 1996 with allowed adjustments for such period, and assuming the
Capitalization Rate is __________, the Base Purchase Price is $____________, as
detailed on the attached SCHEDULE K-1. Comparable adjustments to such audited
financial statement shall be made in determining Gross Operating Expenses for
purposes of calculating the Contingent Purchase Price.
K-3
<PAGE>
C. CONTINGENT PURCHASE PRICE.
(1) In addition to the Base Purchase Price, Transferor shall have the
right to receive the Contingent Purchase Price by delivering the Conversion
Notice to Transferee; provided that the tenant under the lease at the Property
shall have paid percentage rent on an annual basis for the prior calendar year.
The Contingent Purchase Price shall equal the Net Incremental Income Available
for Contingent Purchase Price divided by the Conversion Date Capitalization
Rate.
(2) Within forty-five (45) days of the Conversion Date, Transferor shall
deliver to Transferee the number of Owner's Units in Transferee that equals the
Contingent Purchase Price divided by the per share common stock price of the
Company on the Conversion Date.
D. EXAMPLE.
The calculation of the Base Purchase Price for calendar year 1995 and
the Contingent Purchase price are attached as SCHEDULE K-1 and SCHEDULE K-2 for
purposes of illustration only.
Schedule K-1: Base Purchase Price calculations for calendar year
1995.
Schedule K-2: Example of Contingent Purchase Price.
K-4
<PAGE>
SCHEDULE K-1
BASE PURCHASE PRICE
Sch. K-1
<PAGE>
SCHEDULE K-2
EXAMPLE OF CONTINGENT PURCHASE PRICE
Sch. K-1
<PAGE>
EXHIBIT L
DUE DILIGENCE REQUEST LIST
1. General Property Matters
(a) Preliminary title report.
(b) Phase I environmental site assessment report.
(c) Fuel tank integrity test for any underground storage tanks located on
Property.
(d) Structural engineering report covering the clubhouse and any other
major buildings.
(e) Long-term water quality and quantity reports.
(f) Wetlands delineation or compliance report.
(g) Other plans, specifications, appraisals, market studies, soil and
engineering reports, surveys, and environmental reports and studies in
Transferor's possession.
(h) Any other reports reasonably required by the Transferee.
(i) Leases, concession and occupancy agreements, and service, utility and
supply contracts, together with a schedule indicating term, payment
obligation, parties and options to extend or cancel.
(j) Property tax bills and other assessments paid with respect to the
Property for the past five years, copies of all information regarding
collected sales taxes, FICA taxes, gross receipts taxes, income taxes
or any other taxes relating to the Property, any correspondence sent
to or received from the tax assessor or any taxing entity, including
tax appeals.
(k) All permits and licenses that are required to operate the Property,
including, but not limited to, a development agreement, building and
occupancy permit, liquor license, and business permit, copies of any
existing information relating to the Property's past non-compliance
with applicable laws.
L-1
<PAGE>
(l) Copies of organizational documents of Transferor and evidence that all
necessary approvals of Transferor to enter into this Agreement have
been obtained.
(m) Such other documents and information as the Transferee may reasonably
request to determine the operating status of the Property and credit-
worthiness of the Owner.
(n) A description of all litigation, mechanic's liens, administrative or
condemnation proceedings, governmental investigations or inquiries,
pending or threatened, affecting the Property, including a description
of any significant disputes with vendors, concessionaires or employees
relating to the Property.
(o) A description of any known defects in the Property.
2. General Business Matters
(a) Name of owner.
(b) Form of ownership (i.e. C Corporation, S Corporation, Limited
Liability Co., Partnership, Limited Partnership and Proprietorship).
(c) Course location.
(d) Number of courses at this location.
(i) Public
(ii) Semi-Private
(iii) Private
Equity
Non-Equity
Hybrid
(e) Audited statements (1992-1995).
(f) Number of daily fee paid rounds (1992-1995).
(g) Number of member rounds (1992-1995).
(h) Number of complimentary rounds (1992-1995).
L-2
<PAGE>
(i) Total number of rounds (1992-1995).
(j) Description of replay policy.
(k) Annual gross revenues (1992-1995).
(i) Green fees
(ii) Dues
(iii) Initiation fees
(iv) Cart fees
(v) Food & Beverage
(vi) Merchandise
(vii) Other
(l) Net operating income.
(m) Operating statements for the Property for the past 5 years.
(n) Owner's projected operating statements for the Property for 1996 and
1997.
(o) Depreciation.
(p) Amortization.
(q) Balance Sheet.
(i) Total assets
(ii) Total liabilities
(ii) Net worth
(r) Debt.
(i) Secured
Long term
Short term
(ii) Unsecured
Long term
Short term
(s) Carts.
(i) Own
(ii) Lease
L-3
<PAGE>
(t) Maintenance budget per 18 holes.
(u) Average annual capital expenditures.
(v) Equipment list/age.
(w) Mortgage over basis or negative capital account.
L-4
<PAGE>
EXHIBIT M
SCHEDULE OF MORTGAGES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Lender Amount Date Balance Guarantor
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
M-1
<PAGE>
EXHIBIT N
GOLF TRUST OF AMERICA, L.P.
INVESTOR SUITABILITY QUESTIONNAIRE
INDIVIDUAL INVESTORS
Golf Trust of America, L.P. and Golf Trust of America, Inc.
(collectively, the "Company"), will use the responses to this questionnaire
to qualify prospective investors for purposes of United States federal and
state securities laws. This is not an offer to sell or the solicitation of
an offer to buy securities. Such an offer can be made only by appropriate
offering documentation. Any such offer may be conditioned upon your
qualification as an accredited investor under federal and state securities
laws.
If the answer to the question below is "none" or "not
applicable", please so indicate.
Your answers will be kept confidential at all times. However,
by signing this Questionnaire, you agree that the Company may present this
Questionnaire to such parties as it deems appropriate to establish the
availability of exemptions from registration under state and federal
securities laws.
I. GENERAL INFORMATION
1. REGISTRATION OF SECURITIES
Name to appear with respect to the securities: ______________________
_________________________________________________________________
Name of beneficial owner (if different from above):
____________________________________________________________
____________________________________________________________
If the beneficial owner differs from the registered holder, describe the
relationship: ____________________________________________________________
____________________________________________________________
____________________________________________________________
N-1
<PAGE>
2. PROPOSED INVESTMENT
Aggregate amount of your proposed investment in this financing:
U.S. $__________
II. INVESTOR INFORMATION
1. PERSONAL
Residence Address:
________________________________________________
Residence Telephone Number:
____________________________________________________________
Social Security Number:
____________________________________________________________
Date of Birth:
____________________________________________________________
2. BUSINESS
Occupation:
____________________________________________________________
Number of Years:
____________________________________________________________
Present Employer:
____________________________________________________________
Position/Title:
____________________________________________________________
Business Address:
____________________________________________________________
N-2
<PAGE>
3. INCOME
(a) Do you expect that your annual gross income for calendar year 1996
will be more than $200,000?
[ ] Yes [ ] No
(b) Was your annual gross income for calendar year 1995 more than
$200,000?
[ ] Yes [ ] No
(c) Was your annual gross income for calendar year 1994 more than
$200,000?
[ ] Yes [ ] No
NET WORTH
(a) Was your net worth as of December 31, 1995, together with the net
worth* of your spouse, if applicable, in excess of $1,000,000?
[ ] Yes [ ] No
(b) In the event you may propose to purchase U.S.$150,000 or more of
securities of the Company, does your total purchase price exceed 10%
of your net worth, or joint net worth with your spouse, at the time of
purchase?
[ ] Yes [ ] No
If "yes," what percent of net worth does the total purchase price
represent? _______________________________________________________
_______________________________________________________
* "Net worth" may include principal residence, net of encumbrances, at either
cost or appraised value, and furnishings and automobiles.
N-3
<PAGE>
5. EDUCATION
Please describe your educational background and degrees obtained, if any.
____________________________________________________________
____________________________________________________________
6. INVESTMENT EXPERIENCE
(a) Please describe briefly principal jobs held during the last five
years. Specific employers need not be identified. What is sought is
a sufficient description to permit a determination concerning the
extent of your experience in financial and business matters.
____________________________________________________________
____________________________________________________________
____________________________________________________________
(b) Please indicate the frequency of your investment in marketable
securities: ( ) often; ( ); occasionally; ( ) seldom; ( ) never.
(c) Please indicate the frequency of your investment in securities in
which no market is made: ( ) five or more; ( ) 1 or more, but fewer
than five; ( ) none.
7. RELATIONSHIP TO COMPANY
Please briefly describe the nature of any relationship you may already have
with the Company or any of its partners, including the appropriate date
when such relationship began.
____________________________________________________________
____________________________________________________________
____________________________________________________________
____________________________________________________________
____________________________________________________________
N-4
<PAGE>
8. ADVISORS
In evaluating this investment, will you use the services of any advisor?
[ ] No, I will not use the services of any advisor
[ ] Yes, I will use the services of the advisor(s) identified below:
(a) ACCOUNTANT/FINANCIAL ADVISOR
Name _______________________________________________________
Address ____________________________________________________
City __________________ State/Province _____________________
Zip/Postal Code ____________ Telephone _____________________
(b) ATTORNEY
Name _______________________________________________________
Address ____________________________________________________
City ___________________ State/Province ____________________
Zip/Postal Code ____________ Telephone _____________________
III. SIGNATURE
The above information is true and correct in all material
respects and the undersigned recognizes that the Company and its counsel are
relying on the truth and accuracy of such information in relying on an
exemption from the registration requirements of the Securities Act of 1933,
as amended, and in determining applicable state securities laws and relying
on exemptions contained therein. The
N-5
<PAGE>
undersigned agrees to notify the Company promptly of any changes in the
foregoing information which may occur prior to the investment.
Executed at ________________, on __________________, 1996.
___________________________________
(Signature)
___________________________________
(Print Name)
N-6
<PAGE>
EXHIBIT O
TRANSFEROR'S CERTIFICATE
Pursuant to SECTION 5.1(b) of that certain Contribution and
Leaseback Agreement (the "Agreement") by and between the undersigned
("Transferor") and GOLF TRUST OF AMERICA, L.P., a Delaware limited
partnership ("Buyer") dated as of ____________, 1996, Transferor hereby
certifies that all of its representations and warranties set forth in ARTICLE
III of the Agreement are true and correct, subject to the following:
________________________________________________.
Dated: _________________, 1996
____________________________,
a __________________________
By:__________________________
Its:______________________
O-1
<PAGE>
EXHIBIT P
WARRANTY DISCLOSURE SCHEDULE
P-1
<PAGE>
EXHIBIT Q
TRANSFEROR'S ADDITIONAL CONDITIONS PRECEDENT
Q-1
<PAGE>
CONTRIBUTION AND LEASEBACK AGREEMENT
dated as of November 1, 1996
by and between
__________________________
as Transferor,
and
GOLF TRUST OF AMERICA, L.P., a Delaware Limited Partnership
_________________________
_________________________
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I
DEFINITIONS; RULES OF CONSTRUCTION...................................... 2
1.1 DEFINITIONS................................................. 2
1.2 RULES OF CONSTRUCTION....................................... 7
ARTICLE II
PURCHASE AND CONTRIBUTION; PAYMENT OF PURCHASE PRICE.................... 8
2.1 PURCHASE AND CONTRIBUTION................................... 8
2.2 DUE DILIGENCE PERIOD........................................ 8
2.3 PAYMENT OF PURCHASE PRICE................................... 10
ARTICLE III
TRANSFEROR'S REPRESENTATIONS, WARRANTIES AND COVENANTS.................. 11
3.1 ORGANIZATION AND POWER...................................... 11
3.2 AUTHORIZATION AND EXECUTION................................. 11
3.3 NONCONTRAVENTION............................................ 11
3.4 NO SPECIAL TAXES............................................ 12
3.5 COMPLIANCE WITH EXISTING LAWS............................... 12
3.6 REAL PROPERTY............................................... 12
3.7 PERSONAL PROPERTY........................................... 13
3.8 OPERATING AGREEMENTS........................................ 13
3.9 WARRANTIES AND GUARANTIES................................... 13
3.10 INSURANCE................................................... 13
3.11 CONDEMNATION PROCEEDINGS; ROADWAYS.......................... 13
3.12 LITIGATION.................................................. 14
3.13 LABOR DISPUTES AND AGREEMENTS............................... 14
3.14 FINANCIAL INFORMATION....................................... 14
3.15 ORGANIZATIONAL DOCUMENTS.................................... 14
3.16 OPERATION OF PROPERTY....................................... 14
3.17 BANKRUPTCY.................................................. 15
3.18 LAND USE.................................................... 15
3.19 HAZARDOUS SUBSTANCES........................................ 15
3.20 PUBLIC OFFERING; PREPARATION OF S-11........................ 16
3.21 UTILITIES................................................... 16
3.22 CURB CUTS................................................... 16
3.23 LEASED PROPERTY............................................. 16
3.24 SUFFICIENCY OF CERTAIN ITEMS................................ 16
3.25 ACCREDITED INVESTOR......................................... 17
i
<PAGE>
ARTICLE IV
TRANSFEREE'S REPRESENTATIONS, WARRANTIES AND COVENANTS.................. 17
4.1 ORGANIZATION AND POWER...................................... 17
4.2 NONCONTRAVENTION............................................ 17
4.3 LITIGATION.................................................. 17
4.4 BANKRUPTCY.................................................. 18
4.5 PUBLIC OFFERING............................................. 18
4.6 AUTHORIZATION AND EXECUTION................................. 18
4.7 TRADE NAME.................................................. 18
ARTICLE V
CONDITIONS AND ADDITIONAL COVENANTS..................................... 18
5.1 AS TO TRANSFEREE'S OBLIGATIONS.............................. 18
5.2 AS TO TRANSFEROR'S OBLIGATIONS.............................. 20
ARTICLE VI
CLOSING................................................................. 20
6.1 CLOSING..................................................... 20
6.2 TRANSFEROR'S DELIVERIES..................................... 21
6.3 TRANSFEREE'S DELIVERIES..................................... 23
6.4 MUTUAL DELIVERIES........................................... 23
6.5 CLOSING COSTS............................................... 23
6.6 INCOME AND EXPENSE ALLOCATIONS.............................. 24
6.7 SALES TAXES................................................. 25
6.8 POST-CLOSING ADJUSTMENTS.................................... 25
ARTICLE VII
GENERAL PROVISIONS...................................................... 25
7.1 CONDEMNATION................................................ 25
7.2 RISK OF LOSS................................................ 25
7.3 REAL ESTATE BROKER.......................................... 26
7.4 CONFIDENTIALITY............................................. 26
7.5 LIQUOR LICENSES............................................. 26
ARTICLE VIII
LIABILITY OF TRANSFEREE; INDEMNIFICATION BY TRANSFEROR;
TERMINATION RIGHTS...................................................... 27
8.1 LIABILITY OF TRANSFEREE..................................... 27
8.2 INDEMNIFICATION BY TRANSFEROR............................... 27
8.3 TERMINATION BY TRANSFEREE................................... 27
8.4 TERMINATION BY TRANSFEROR................................... 28
8.5 COSTS AND ATTORNEYS' FEES................................... 28
ii
<PAGE>
ARTICLE IX
MISCELLANEOUS PROVISIONS................................................ 28
9.1 COMPLETENESS; MODIFICATION.................................. 28
9.2 ASSIGNMENTS................................................. 28
9.3 SUCCESSORS AND ASSIGNS...................................... 29
9.4 DAYS........................................................ 29
9.5 GOVERNING LAW............................................... 29
9.6 COUNTERPARTS................................................ 29
9.7 SEVERABILITY................................................ 29
9.8 COSTS....................................................... 29
9.9 NOTICES..................................................... 29
9.10 INCORPORATION BY REFERENCE.................................. 30
9.11 SURVIVAL.................................................... 30
9.12 FURTHER ASSURANCES.......................................... 30
9.13 NO PARTNERSHIP.............................................. 30
EXHIBITS
- --------
Exhibit A - Legal Description of the Land
Exhibit B - Description of Improvements
Exhibit C - Tangible Personal Property
Exhibit D - Intangible Personal Property
Exhibit E - Golf Course Lease
Exhibit F - Bill of Sale - Personal Property
Exhibit G - Deed
Exhibit H - FIRPTA Affidavit of Transferor
Exhibit I - Contracts and Operating Agreements
Exhibit J - Partnership Agreement
Exhibit K - Calculation of Purchase Price
Exhibit L - Due Diligence List
Exhibit M - Schedule of Mortgages
Exhibit N - Accredited Investor Questionnaire
Exhibit O - Transferor's Certificate
Exhibit P - Warranty Disclosure Schedule
Exhibit Q - Transferor's Additional Conditions Precedent
iii
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form S-11 of our report relating to the balance sheet
of the Company dated November 8, 1996 and our report relating to the
consolidated financial statements of Northgate Country Club dated July 22, 1996.
We also consent to the references to us under the heading "Experts" in such
Prospectus.
PRICE WATERHOUSE LLP
Costa Mesa, California
November 8, 1996
A-1
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement of Golf Trust of
America, Inc. on Form S-11 of our report dated September 23, 1996 on the
December 31, 1995 financial statements of Olde Atlanta Golf Club Limited
Partnership. We also consent to the reference to us under the heading "Experts"
in the Prospectus, which is part of this Registration Statement.
CROWE, CHIZEK AND COMPANY LLP
Oak Brook, Illinois
November 11, 1996
B-1
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-11 of
our report dated October 12, 1996, on our audits of the financial statements of
Bright's Creek Development, LLC as of June 30, 1996 and December 31, 1995 and
1994, and for the six months ended June 30, 1996 and 1995, the year ended
December 31, 1995, and the period from inception (May 17, 1994) through December
31, 1994. We also consent to the reference to our firm under the caption
"Experts."
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
November 8, 1996
C-1
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form S-11 of our reports dated April 10, 1996, except
as discussed in the notes, which is as of November 7, 1996, relating to the
financial statements of Legends Golf, Golf Legends, Ltd., Heritage Golf Club,
Ltd., Seaside Resorts, Ltd., and the Legends of Virginia, LC. We also consent to
the reference to us under the caption "Experts" in the Prospectus.
BDO SEIDMAN, LLP
Charlotte, North Carolina
November 11, 1996
D-1
