<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 31, 1997
REGISTRATION NO. 333-36847
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2 TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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GOLF TRUST OF AMERICA, INC.
(Exact Name of Registrant as Specified in its Governing Instruments)
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14 North Adger's Wharf
Charleston, South Carolina 29401
(803) 723-4653
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
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W. Bradley Blair, II
Chief Executive Officer
Golf Trust of America, Inc.
14 North Adger's Wharf
Charleston, South Carolina 29401
(803) 723-4653
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
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COPIES TO:
PETER T. HEALY, ESQ. DAVID C. WRIGHT, ESQ.
O'Melveny & Myers LLP Hunton & Williams
275 Battery Street, Suite 2600 951 East Byrd Street
San Francisco, California 94111 Richmond, Virgina 23219
(415) 984-8833 (804)788-8200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 31, 1997
[LOGO]
3,000,000 SHARES
COMMON STOCK
Golf Trust of America, Inc. (collectively with its affiliates, the
"Company") is a self-administered real estate investment trust ("REIT") formed
to capitalize upon consolidation opportunities in the ownership of upscale golf
courses throughout the United States. The Company currently holds a
participating interest in 19 golf courses (the "Golf Courses") located in
Florida (5), South Carolina (4), Georgia (2), Virginia (2), Alabama, Kansas,
Nebraska, North Carolina, Ohio and Texas.
The Company's goal is to increase Cash Available for Distribution per share
and to enhance stockholder value by becoming a leading owner of, and
participating in increased revenue from, nationally or regionally recognized
golf courses. The Company's principal business strategy is to acquire upscale
golf courses and thereafter lease the golf courses to qualified third party
operators, including affiliates of the sellers. The Company holds its
participating interest in the Golf Courses through an operating partnership (the
"Operating Partnership"). As a result, the Company may acquire interests in golf
courses through the issuance of units of limited partnership interest ("OP
Units") in the Operating Partnership, which generally can provide deferral of
gain recognition for sellers of golf courses. The Company believes it has a
distinct competitive advantage in the acquisition of upscale golf courses,
including those that might not otherwise be available for purchase, because of
(i) its utilization of a multiple independent lessee structure, (ii)
management's substantial industry knowledge, experience and relationships within
the golf community, (iii) the Company's strategic alliances with prominent golf
course operators and (iv) its ability to issue OP Units to golf course owners on
a tax-deferred basis.
All of the shares of common stock, par value $0.01 per share ("Common
Stock"), offered hereby are being sold by the Company. The Common Stock is
listed on the American Stock Exchange ("AMEX") under the symbol "GTA." On
October 30, 1997, the last reported sale price of the Common Stock on the AMEX
was $26.00 per share. See "Price Range of Common Stock and Distribution
History."
SEE "RISK FACTORS" COMMENCING ON PAGE 22 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK, INCLUDING:
- The Company's valuation of the Golf Courses and establishment of Lease
Payments (as herein defined) and interest payments under the Participating
Mortgage (as herein defined) may reflect significant adjustments to
historical operations or estimates of future performance that, if not
warranted, may result in non-payment of Lease Payments under a
Participating Lease (as herein defined) or interest payments under the
Participating Mortgage. Such estimates of future performance were
particularly significant with respect to two recently-opened Golf Courses
and the Participating Mortgage.
- Dependence on Lease Payments and payments under the Participating
Mortgage, which payments account for substantially all of the Company's
income.
- The length of the Participating Leases, which, with extensions, may have
terms of up to 40 years, which may affect adversely the Company's ability
to sell a Golf Course.
- The Company's inability to sell all or substantially all of the assets of
the Operating Partnership or to cause a merger or consolidation of the
Operating Partnership without the consent of holders of 66.7% of the
limited partnership interests.
- The Company's limited control over the day-to-day management and
operations of the Golf Courses due to the tax restrictions that prevent a
REIT from operating golf courses.
- Golf course operation risks in general, including competition, uninsured
casualties, increases in operating costs, inclement weather, seasonality,
oversupply and general decreases in demand.
- The Company's dependence on the skill, industry knowledge and established
relationships of its key personnel, all of whom would be difficult to
replace.
- Taxation of the Company as a regular corporation if it fails to qualify as
a REIT for federal income tax purposes and the resulting decrease in Cash
Available for Distribution.
- Risks associated with providing construction financing for golf courses.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE 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 450,000 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.
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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 BancAmerica Robertson Stephens, San Francisco, California
on or about , 1997.
BANCAMERICA ROBERTSON STEPHENS
A.G. EDWARDS & SONS, INC.
RAYMOND JAMES & ASSOCIATES, INC.
WHEAT FIRST BUTCHER SINGER
The date of this Prospectus is , 1997
(On the inside front cover, there is a picture of the Island Golf Course in
Tampa, Florida. There is also a color map of the United States showing the
states where the Company's Golf Courses are located. These states are
highlighted in green. There is also a breakout of each state with a numbered
flag in the location of each Golf Course. There is a legend next to the map that
lists each Golf Course with its corresponding number).
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MAY OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZATION, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS CONSTITUTES
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE EXCHANGE
ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), WHICH CAN BE IDENTIFIED BY THE USE
OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "ANTICIPATE," "ESTIMATE"
OR "CONTINUE" OR THE NEGATIVES THEREOF OR VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY. THE SECTION ENTITLED "RISK FACTORS" HEREIN CONTAINS CAUTIONARY
STATEMENTS IDENTIFYING IMPORTANT FACTORS, INCLUDING CERTAIN RISKS AND
UNCERTAINTIES, WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS THAT COULD CAUSE
THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER
MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS.
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 CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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PROSPECTUS SUMMARY....................... 1
The Company............................ 1
Developments Since the Initial Public
Offering............................. 2
Risk Factors........................... 4
The Golf Industry...................... 6
The Golf Courses....................... 8
Business Strategies and Objectives..... 11
Formation and Structure................ 14
Distribution Policy.................... 16
Tax Status............................. 16
The Offering........................... 16
Summary Financial Data................. 17
RISK FACTORS............................. 22
Use of Adjustments and Projections in
Establishing Lease Payments and
Participating Mortgage Payments...... 22
Dependence on Payments Under the
Participating Leases and the
Participating Mortgage............... 22
Duration of Lease; No Right to
Terminate Participating Leases on a
Sale................................. 23
Need for Certain Consents from the
Limited Partners..................... 23
Lack of Control Over Day-to-Day
Operations and Management of the Golf
Courses.............................. 23
The Participating Mortgage............. 23
Golf Industry Risks.................... 24
Dependence Upon Key Personnel.......... 25
Real Estate Investment Trust and
Partnership Qualification............ 25
Risks Relating to Construction
Financing............................ 26
<CAPTION>
PAGE
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Certain Golf Courses with Limited
Operating History.................... 26
Limited Operating History.............. 26
Adverse Effect of Shares Available for
Future Issuance and Sale on Market
Price of Common Stock................ 26
Risks Related to the Company's Growth
Strategy............................. 27
Risks of Leverage; No Limitations on
Indebtedness......................... 28
Limits on Changes in Control........... 28
Adverse Effect of Increase in Market
Interest Rates....................... 28
Real Estate Investment Risks........... 28
Conflicts of Interest.................. 30
Competition for Management Time of the
Operators............................ 30
Changes in Investment and Financing
Policies............................. 30
Dependence on Acquisitions to Increase
Cash Available for Distribution...... 30
Distribution to Stockholders........... 31
ERISA Risks............................ 31
Ownership Limit........................ 32
Anti-takeover Effect of Certain
Provisions of Maryland Law and the
Company's Charter and Bylaws......... 32
THE COMPANY.............................. 34
The Operating Partnership.............. 35
Business Strategies and Objectives..... 36
Acquisitions and Expansions............ 36
Internal Growth........................ 38
USE OF PROCEEDS.......................... 40
</TABLE>
i
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<TABLE>
<CAPTION>
PAGE
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PRICE RANGE OF COMMON STOCK AND
DISTRIBUTION HISTORY.................... 40
CAPITALIZATION........................... 41
SELECTED FINANCIAL INFORMATION........... 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................. 47
Overview............................... 47
The Golf Courses....................... 47
Liquidity and Capital Resources of the
Company.............................. 49
The Legends Group Prior Owners......... 51
Inflation.............................. 53
Seasonality............................ 53
Recent Accounting Pronouncements....... 53
Changes in the Company's Certifying
Public Accountant.................... 54
Important Factors Related to Forward-
Looking Statements and Associated
Risks................................ 54
THE GOLF INDUSTRY........................ 55
Demographics........................... 57
THE GOLF COURSES......................... 58
Descriptions of the Golf Courses....... 60
High-End Daily Fee Courses............. 62
Private Club Courses................... 63
The Participating Leases............... 66
The Participating Mortgage............. 71
Competition............................ 74
Employees.............................. 74
Legal Proceedings...................... 74
Government Regulation.................. 75
MANAGEMENT............................... 76
Directors and Executive Officers....... 76
Committees of the Board of Directors... 77
Compensation of Directors.............. 78
Directors and Officers Insurance....... 78
Indemnification........................ 78
Executive Compensation................. 79
Stock-Based Compensation Plans......... 79
Directors' Plan........................ 80
Stock Incentive Plans.................. 80
Deferred Compensation Plan............. 82
Employment Agreements.................. 82
Covenants Not to Compete............... 82
LESSEES AND OPERATORS.................... 83
POLICIES AND OBJECTIVES WITH RESPECT TO
CERTAIN ACTIVITIES...................... 85
Investment Objectives and Policies..... 85
Dispositions........................... 85
Financing.............................. 85
Working Capital Reserves............... 86
Conflict of Interest Policies.......... 86
Other Policies......................... 87
THE FORMATION TRANSACTIONS............... 87
Overview............................... 87
Formation Transactions................. 88
Benefits to Officers and Directors..... 89
Transfer Documents..................... 90
<CAPTION>
PAGE
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<S> <C>
CERTAIN RELATIONSHIPS AND TRANSACTIONS... 91
Relationships Among Officers and
Directors............................ 91
Acquisition of Interests in Certain of
the Golf Courses..................... 91
Repayment of Indebtedness.............. 91
Employment Agreements.................. 91
Option to Purchase and Right of First
Refusal.............................. 91
PARTNERSHIP AGREEMENT.................... 92
Management............................. 92
Transferability of OP Units............ 92
Pledge................................. 92
Redemption Rights...................... 93
Capital Contribution................... 93
Term................................... 94
Tax Matters............................ 94
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT................... 94
Principal Shareholders of the Company &
Principal Partners in the Operating
Partnership.......................... 94
CAPITAL STOCK............................ 95
General................................ 95
Corporate Governance................... 96
Restrictions on Ownership.............. 96
Limitations on Changes in Control...... 98
Transfer Agent and Registrar........... 98
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S CHARTER AND BYLAWS........ 99
Maryland Business Combination Law...... 99
Limitation of Liability of Directors;
Indemnification Agreements........... 99
Control Share Acquisitions............. 100
Interested Director Transactions....... 101
Amendments to the Charter and Bylaws... 101
SHARES AVAILABLE FOR FUTURE SALE......... 102
Registration Rights.................... 102
FEDERAL INCOME TAX CONSIDERATIONS........ 103
Taxation of the Company................ 103
Partnership Anti-Abuse Rule............ 110
Failure to Qualify..................... 111
Taxation of Taxable Domestic
Stockholders......................... 111
Backup Withholding..................... 112
Taxation of Tax-Exempt Stockholders.... 112
Taxation of Foreign Stockholders....... 113
State and Local Taxes.................. 114
Tax Aspects of the Operating
Partnership.......................... 114
UNDERWRITING............................. 118
EXPERTS.................................. 119
LEGAL MATTERS............................ 120
ADDITIONAL INFORMATION................... 120
GLOSSARY................................. 121
FINANCIAL STATEMENTS..................... F-1
</TABLE>
ii
<PAGE>
PROSPECTUS SUMMARY
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, ALL
CALCULATIONS AND INFORMATION CONTAINED IN THIS PROSPECTUS ASSUME THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED AND ARE BASED UPON AN
ASSUMED PRICE FOR THE COMMON STOCK OF $27.00 (THE "OFFERING PRICE"). UNLESS THE
CONTEXT OTHERWISE REQUIRES, THE TERM "COMPANY" INCLUDES GOLF TRUST OF AMERICA,
INC. ("GTA"), 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").
AFTER GIVING EFFECT TO THIS OFFERING (THIS "OFFERING"), THE COMPANY WILL OWN A
60.8% INTEREST IN THE OPERATING PARTNERSHIP. ALL REFERENCES TO THE COMPANY AS A
REIT ASSUME THAT THE COMPANY WILL QUALIFY AS A REAL ESTATE INVESTMENT TRUST
("REIT") BEGINNING WITH THE TAX YEAR ENDING DECEMBER 31, 1997. SEE "GLOSSARY"
FOR THE DEFINITIONS OF CERTAIN ADDITIONAL CAPITALIZED TERMS USED IN THIS
PROSPECTUS.
THE COMPANY
Golf Trust of America, Inc. is a self-administered REIT formed to capitalize
upon consolidation opportunities in the ownership of upscale golf courses
throughout the United States. The Company currently holds a participating
interest in 19 golf courses (the "Golf Courses"), 15 of which are owned and four
of which serve as collateral for a 30-year participating mortgage loan made by
the Company to the owner of the Innisbrook Resort (the "Participating
Mortgage"). The Golf Courses are located in Florida (5) South Carolina (4),
Georgia (2), Virginia (2), Alabama, Kansas, Nebraska, North Carolina, Ohio and
Texas.
The Company's goal is to increase Cash Available for Distribution (as herein
defined) per share and to enhance stockholder value by becoming a leading owner
of, and participating in increased revenue from, nationally or regionally
recognized golf courses. The Company's principal business strategy is to acquire
upscale golf courses and thereafter lease the golf courses to qualified third
party operators, including affiliates of the sellers. The Company may acquire
golf courses through the issuance of units of limited partnership interest in
the Operating Partnership ("OP Units"), which are redeemable for cash or, at the
Company's option, shares of Common Stock on a one-for-one basis. When the
Company acquires a golf course in exchange for OP Units, the golf course seller
generally may defer tax recognition until such seller elects to cause the OP
Units to be redeemed.
The Company believes it has a distinct competitive advantage in the
acquisition of upscale golf courses, including those that might not otherwise be
available for purchase, because of (i) its utilization of the multiple
independent lessee structure, (ii) management's substantial industry knowledge,
experience and relationships within the golf community, (iii) the Company's
strategic alliances with prominent golf course operators and (iv) its ability to
issue OP Units to golf course owners on a tax-deferred basis. The Company is one
of only two publicly-traded REITs in the United States focused on owning and
acquiring golf courses.
In February 1997, the Company raised net proceeds of approximately $73.0
million in its initial public offering (the "IPO") and acquired 10 Golf Courses
(the "Initial Courses") from their prior owners (together with the prior owners
of the Golf Courses acquired since the IPO, the "Prior Owners"). Each of the
Initial Courses was leased back to an affiliate of its Prior Owner as described
below. The Company believes the continuity of management provided by these
experienced operators facilitates the Company's growth and profitability. Since
the IPO, the Company has acquired an interest in an additional nine Golf
Courses. See "Developments Since the Initial Public Offering."
The Golf Courses are leased to multiple independent third party lessees (the
"Lessees") pursuant to leases ("Participating Leases") which provide for
payments ("Lease Payments") of fixed base rent ("Base Rent") and participating
rent ("Participating Rent") based on growth in revenue at the Golf Courses. The
interest payment under the Participating Mortgage is structured similarly to the
rent payments under the Participating Leases to provide the Company with base
interest payments and additional interest payments based on growth in revenue at
the Innisbrook Resort. See "The Participating Mortgage." Neither the Company nor
its executive officers
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owns any interest in, or participates in the management of, the Lessees or the
Innisbrook Resort Owner (as herein defined).
The Company believes the Initial Courses and its investments in Golf Courses
since the IPO are consistent with its goal of becoming a leading owner of, and
participating in increased revenue from, nationally or regionally recognized
upscale golf courses. Four of the Golf Courses were ranked among the Top Ten New
Courses by either GOLF DIGEST or GOLF MAGAZINE in the year the Golf Course
opened, including Stonehouse Golf Club, which in November 1996 was named the
"Best New Upscale Course of 1996" by GOLF DIGEST, and Oyster Bay, which was
named Best New Resort Course in the United States in 1983 by GOLF DIGEST. The
Copperhead Course at the Innisbrook Resort was ranked 43rd in the 1996 survey by
GOLF MAGAZINE of the "Top 100 Courses You Can Play" and the Island Course at the
Innisbrook Resort was ranked as one of the "Top 75 Resort Courses" by GOLF
DIGEST in 1992. Heritage Golf Club was ranked in the Top 50 Public Golf Courses
by GOLF DIGEST in 1992. See "The Golf Courses." 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.
DEVELOPMENTS SINCE THE INITIAL PUBLIC OFFERING
GOLF COURSE INVESTMENTS
Since its acquisition of the ten Initial Courses in February 1997, the
Company has acquired interests in the following nine Golf Courses for total
consideration of approximately $100 million.
TIBURON GOLF CLUB. On August 18, 1997, the Company acquired the 27-hole
Tiburon Golf Club ("Tiburon"), an upscale semi-private golf course in Omaha,
Nebraska, for an aggregate price of $6.0 million, including the issuance of
21,429 shares of Common Stock (valued at approximately $600,000 on such date).
Players can choose to play any two of the three nine-hole layouts at Tiburon for
a total of three distinct 18-hole combinations. The courses at Tiburon are
characterized by rolling fairways with mounds, berms and greenside bunkers.
Tiburon is leased to an affiliate of Granite Golf Group, Inc., (together with
its affiliates, "Granite Golf"). Granite Golf currently manages over 30 golf
courses throughout the United States.
RAINTREE COUNTRY CLUB. On September 2, 1997, the Company acquired the
Raintree Country Club ("Raintree"), located near Akron, Ohio, for an aggregate
price of $4.6 million, including the issuance of 121,529 OP Units (valued at
approximately $3.4 million based on the price of the Common Stock on such date).
This high-end daily fee golf course is located in a wooded area and has many
narrow fairways demanding precision shots. Raintree is leased to its Prior
Owner, who has continuously managed the course since its construction in 1991.
EAGLE WATCH GOLF CLUB. On September 30, 1997, the Company acquired Eagle
Watch Golf Club ("Eagle Watch"), located in Atlanta, Georgia, for an aggregate
price of $6.4 million, including the issuance of 70,158 OP Units (valued at
approximately $1.9 million based on the price of the Common Stock on such date).
Eagle Watch is an 18-hole course designed by Arnold Palmer on rolling hills with
tree-lined fairways and numerous lakes and ponds. The Prior Owner of Eagle Watch
is an affiliate of the Prior Owner of Olde Atlanta Golf Club, a course that was
acquired by the Company at the IPO. Eagle Watch is leased to an affiliate of the
Lessee of Olde Atlanta Golf Club.
LOST OAKS GOLF COURSE. On October 3, 1997, the Company acquired the Lost
Oaks Golf Course ("Lost Oaks"), in Tampa, Florida located near the Innisbrook
Resort, for approximately $5.9 million, including closing costs. Lost Oaks is
leased to an affiliate of Starwood Capital Group, LLC (together with its
affiliates, "Starwood"). The Company has agreed to fund certain improvements at
Lost Oaks in an amount not to exceed $1.25 million in exchange for an increased
Lease Payment.
CLUB OF THE COUNTRY. On October 17, 1997, the Company acquired Club of the
Country, a private country club located near Kansas City, Kansas, for an
aggregate price of approximately $3.1 million, including the issuance of
approximately 19,231 OP Units (valued at approximately $500,000 based on the
price of the
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<PAGE>
Common Stock on such date). Club of the Country, noted for its outstanding
greens and playability, combines the serenity of a wooded countryside,
meandering creeks and rolling hills with the challenge of 18 holes of
championship golf. Club of the Country is leased to an affiliate of the Prior
Owner and managed by an affiliate of Granite Golf.
INNISBROOK RESORT. On June 20, 1997, the Company entered into and made an
initial advance of $69.975 million under the $78.975 million Participating
Mortgage to Golf Host Resorts, Inc. (the "Innisbrook Resort Owner"), an
affiliate of Starwood. The loan is secured by a first lien on the Innisbrook
Resort, located near Tampa, Florida, and all other assets of the Innisbrook
Resort Owner. The Innisbrook Resort is a destination golf resort with 63 holes
(plus an additional nine holes currently under construction) and was named by
ESQUIRE as one of the top 10 resorts in North America. The four Golf Courses at
the Innisbrook Resort are operated by Troon Management Company, LLC ("Troon
Golf"), an affiliate of Starwood. The Innisbrook Resort also features one of the
largest hotel and conference facilities in Florida, which facilities are
operated by Westin Hotels & Resorts Company ("Westin") pursuant to a long-term
management agreement. Westin has agreed to pay up to $2.5 million per year to
the Innisbrook Resort Owner to supplement results of operations with respect to
the operations at the Innisbrook Resort for up to five years (the "Westin
Guaranty"). The Innisbrook Resort Owner used a portion of the proceeds of the
Participating Mortgage to acquire from the Company 274,039 newly issued OP Units
and 159,326 newly issued shares of Common Stock, representing an ownership
interest in the Company of approximately 5.1% (3.7% after giving effect to this
Offering).
THIRD QUARTER RESULTS
For the quarter ending September 30, 1997, total revenue was $6.1 million,
net income was $1.6 million and earnings per share was $0.39. For the period
from February 12, 1997 (inception of operations) through September 30, 1997,
total revenue was $3.6 million, net income was $1.6 million and earnings per
share was $0.84.
LETTERS OF INTENT
The Company has entered into three letters of intent to acquire a total of
four golf courses for purchase prices totalling $25 million. In addition, the
Company has recently submitted non-binding offers to acquire additional golf
courses and is in various stages of discussions to acquire additional golf
courses.
The Company is in various stages of negotiation and due diligence review for
each of the proposed acquisitions. Closing of these transactions is subject to
negotiation and execution of definitive purchase and sale agreements,
satisfactory completion of the Company's due diligence review and certain other
customary closing conditions. No assurances can be given that the Company will
acquire any of the proposed acquisitions, or will acquire any of the golf
courses for which it has letters of intent to acquire, submitted offers to
acquire or is in discussions to acquire.
LINE OF CREDIT
On June 20, 1997, the Company closed a two-year, $100 million secured
revolving credit facility (the "Line of Credit") with a group of four commercial
banks led by NationsBank, N.A. On September 24, 1997, the Company negotiated a
reduction in the interest rate from LIBOR plus 2.0% to LIBOR plus 1.75%.
Additionally, the Company has received a commitment to increase the Line of
Credit, upon completion of this Offering, to $125 million and to convert it to
an unsecured facility.
The Company drew upon the Line of Credit to fund a portion of the
Participating Mortgage as well as to fund the acquisitions of Tiburon, Raintree,
Eagle Watch, Lost Oaks and Club of the Country. The Company intends to draw upon
the Line of Credit, or any successor line of credit, to fund any future
acquisitions of additional golf courses. There can be no assurance, however,
that the Company will close any future acquisitions or that the Company will
continue to have access to sufficient debt and equity financing to allow it
successfully to pursue its acquisition strategy.
3
<PAGE>
STRATEGIC AFFILIATIONS
AFFILIATION WITH STARWOOD. Starwood, through its affiliates, operates the
Golf Courses at the Innisbrook Resort and leases Lost Oaks. In addition, the
golf and conference facilities of the Innisbrook Resort are owned by an
affiliate of Starwood and the hotel and conference facilities are managed by
Westin, an affiliate of Starwood. The Company believes Starwood, through its
affiliates, is one of the United States' leading golf course management,
development and consulting companies. Troon Golf has the exclusive right to
operate golf courses at hotels owned by Westin. The Company believes that its
existing relationship with Starwood, Westin and Troon Golf will provide the
Company with additional acquisition opportunities throughout the United States.
AFFILIATION WITH GRANITE GOLF. The Lessee of Tiburon is an affiliate of
Granite Golf and an affiliate of Granite Golf manages Club of the Country.
Granite Golf and its affiliates currently manage over 30 golf courses throughout
the United States. Granite Golf identified the acquisition opportunity at
Tiburon. The Company believes its affiliation with Granite Golf will provide the
Company with additional acquisition opportunities.
RISK FACTORS
INVESTORS SHOULD CONSIDER CAREFULLY THE MATTERS DISCUSSED UNDER "RISK
FACTORS" PRIOR TO MAKING AN INVESTMENT DECISION REGARDING THE COMMON STOCK
OFFERED HEREBY. SUCH RISKS INCLUDE:
- The Company generally values golf courses, and establishes Lease Payments
and Participating Mortgage Payments based on selected adjustments to
historical operating results or estimates of future performance which the
Company believes are appropriate. These adjustments include projected
increases in revenues from golf course operations and elimination of
certain operating expenses. If such adjustments are not appropriate, or if
estimates of future performance are not met, a Lessee or the Innisbrook
Resort Owner may not be able to make its scheduled payments to the
Company. Failure of a Lessee or the Innisbrook Resort Owner to make such a
payment may result in a default under a Participating Lease or under the
Participating Mortgage. This would have a material adverse effect on the
Company. Estimates of future performance were particularly significant
with respect to two recently-opened Virginia courses and the Innisbrook
Resort. In addition, although the Westin Guaranty is designed to
supplement results of operations at the Innisbrook Resort, it is for a
limited period and limited amount and may be insufficient to ensure
receipt by the Company of base interest under the Participating Mortgage.
- Dependence on Lease Payments and payments under the Participating
Mortgage, which payments account for substantially all of the Company's
income.
- The Participating Leases, with extensions, may have terms of up to 40
years, which could adversely affect the Company's ability to sell a Golf
Course.
- Even though the Company's wholly-owned subsidiary, GTA GP, is the sole
general partner of the Operating Partnership, the Company alone cannot
cause the Operating Partnership to merge or consolidate or to sell all or
substantially all of its assets under the Partnership Agreement (as herein
defined). Such extraordinary transactions require the consent of the
holders of at least 66.7% of the OP Units and, upon completion of this
Offering, the Company will hold only 60.8% of such interests.
- The REIT provisions of the Internal Revenue Code of 1986, as amended (the
"Tax Code"), prevent the Company from operating Golf Courses. As a result,
the Company must continue to find qualified independent lessees to lease
and operate its courses, and the Company may not exercise control over
such lessees' day-to-day management and operational decisions.
- The Golf Courses are subject to risks affecting golf course operations
generally, including competition, uninsured casualties, increases in
operating costs, inclement weather, seasonality, oversupply and general
decreases in demand, all of which could affect adversely a Golf Course
operator's ability to make its scheduled payments to the Company.
4
<PAGE>
- The Company depends upon the skill, industry knowledge and established
relationships of its key personnel, including W. Bradley Blair, II, the
Company's Chief Executive Officer and President, David J. Dick, its
Executive Vice President, and Scott D. Peters, its Senior Vice President
and Chief Financial Officer. The loss of such officers' services may
affect adversely the Company's business results.
- The Company will be taxed as a regular corporation if it fails to qualify
as a REIT for federal income tax purposes, and the Operating Partnership
will be treated as an association taxable as a regular corporation if it
fails to qualify as a partnership, both of which would result in a
reduction in Cash Available for Distribution.
- The Company from time to time acquires newly developed golf courses and
provides construction financing for expanding golf courses. In light of
the limited operating history at such acquisitions and expansions, there
is a risk that they will not perform at levels commensurate with the
Company's expectations, which may affect adversely Cash Available for
Distribution per share.
- In light of the Company's limited operating history and management's
limited experience operating a public company, operating a REIT and
working together as a team, the Company may lack the experience necessary
to implement its growth strategy.
- Beginning in February 1998, 2,310,157 OP Units will become redeemable, at
the option of their holders, for cash or, at the election of the Company,
shares of Common Stock on a one-for-one basis. Such redemption could cause
a substantial increase in the number of shares of Common Stock outstanding
(of up to 32.3% after giving effect to this Offering). The increased
number of outstanding shares, or the perception of such possibility, may
cause the market price of the Common Stock to decline.
- The Company competes with other well-established owners and operators to
acquire a limited number of golf courses available for purchase.
- Five of the Golf Courses are located in the Myrtle Beach, South Carolina
vicinity and five of the Golf Courses are located in the Tampa, Florida
area. Such geographic concentration leaves the Company vulnerable to local
market shifts and natural disasters, either of which could affect
adversely a Golf Course operator's ability to make its scheduled payments
to the Company.
- A substantial number of golf courses were opened in recent years, are
currently under development or are planned for development. Such new
supply may increase competition for golfers in the Company's markets and
may affect adversely the number of rounds played at the Golf Courses. A
decrease in the number of rounds played may affect adversely a Golf Course
operator's ability to make its scheduled payments to the Company.
- Stockholders face the risks normally associated with a company's use of
debt financing and the fact that there is no charter limitation on the
amount of debt the Company may incur.
- The Company's Charter and Bylaws contain certain restrictions, including a
limit on the extent of any one person's ownership of the outstanding
Common Stock, intended to ensure the Company's compliance with certain
requirements related to its qualification as a REIT. Such restrictions may
inhibit a change in control of the Company even where such a change in
control might be beneficial to the Company's stockholders.
- Increases in the market rate of interest and other factors may affect
adversely the trading price of the Common Stock.
THE GOLF INDUSTRY
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 NOT AFFILIATED WITH THE COMPANY.
5
<PAGE>
The Company believes the United States golf industry is entering a period of
significant growth. This belief is based, in part, on the fact that people over
the age of 50 play more golf than younger people, and the expectation that over
the next several years the number of people age 50 and older will increase
significantly as the "baby boomers" age. See "The Golf Industry --
Demographics." The Company expects that the aging population 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. There are
approximately 15,700 golf courses (approximately 12,900 eighteen-hole
equivalents) in the United States that the Company believes are owned by
approximately 13,000 different entities. The Company believes there are
relatively few owners of more than one course. The Company believes that the 15
largest golf course owners in the United States collectively own 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 it with an excellent opportunity for consolidation of the
ownership of upscale golf courses.
The Company believes the current fragmentation of golf course ownership
resulted from a variety of factors, including a scarcity of capital, the
entrepreneurial nature of many golf course owners and operators and their
associated pride of ownership. The Company believes that the 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 could lead to consolidation of golf
course ownership. In particular, the Company believes golf course owners will be
attracted to the Company's multiple independent lessee structure, which permits
the Company to acquire a course and then lease it back to an affiliate of the
seller. Such structure satisfies the owner's desire to remain involved in the
day-to-day operation of his course, while also satisfying his desire to obtain
liquidity. The Company further believes its ability to issue OP Units in
exchange for a golf course will attract potential sellers, who generally can
defer recognition of taxable gain on the exchange until they exercise their
right to cause the Company to redeem the OP Units for cash (or Common Stock, at
the Company's option) (their "Redemption Right"). By offering golf course owners
the tax planning benefit of OP Units and the economic benefit of participating
in the independent lessee structure, including resulting economies of scale in
operating golf courses, the Company believes it is able to acquire desirable
upscale courses that may not otherwise be available for purchase. See "The
Company -- Business Strategies and Objectives -- Acquisitions and Expansions."
Largely in response to the 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 1996 an average of 279 new
golf courses were opened each year, with a high of 336 new golf course openings
in 1995.
The emergence and popularity of younger professional golfers, including
Tiger Woods, Justin Leonard, Phil Mickelson and Karrie Webb, have increased
awareness and interest in golf. According to industry statistics, 19.4 million
homes watched the final round of the four major golf championships in 1996. In
1997, television viewership of the final four rounds of the four major golf
championships increased 56 percent to 30.3 million. The Company believes this
resurgent interest will result in increasing golf participation, including
increasing participation by women and younger golfers.
The golf industry generated approximately $15 billion in revenues in the
United States in 1996. The Company believes the game of golf has exhibited
strong growth in popularity in the past 16 years as illustrated below:
<TABLE>
<CAPTION>
1980 1996 % CHANGE
---- ---- --------
(MILLIONS)
<S> <C> <C> <C>
Number of golfers............................................................... 15.0 24.7 65%
Rounds played................................................................... 358 477 33%
</TABLE>
6
<PAGE>
DEMOGRAPHICS. 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 by 39% between 1996
and 2010, from 69.3 million to 96.3 million. The average number of rounds played
per golfer on an annual basis increases significantly as the golfer ages.
Golfers in their 50's play nearly 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 "baby boomers," the oldest of whom are now 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. Since 1991, the number of senior golfers (golfers age 50 and over)
has grown 16%, or by nearly 1 million golfers. See "The Golf Industry --
Demographics."
7
<PAGE>
THE GOLF COURSES
The Company believes that its acquisition of the 10 Initial Courses and its
acquisitions since the IPO are consistent with its goal of becoming a leading
owner of, and participating in increased revenue from, nationally or regionally
recognized golf courses. The Company's Golf Courses consist of 19 upscale
courses located in the mid-Atlantic, southeastern, midwestern 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 opened, including
Stonehouse Golf Club, which was named the Best New Upscale Course in 1996 by
GOLF DIGEST, and Oyster Bay, which was named Best New Resort Course in the
United States in 1983 by GOLF DIGEST. The Copperhead Course at the Innisbrook
Resort was ranked 43rd in the 1996 survey by GOLF MAGAZINE of the "Top 100
Courses You Can Play" and the Island Course at the Innisbrook Resort was rated
by GOLF DIGEST as one of the "Top 75 Resort Courses" in 1992. Heritage Golf Club
was ranked in the Top 50 Public Golf Courses by GOLF DIGEST in 1992.
The Golf Courses include 17 upscale Daily Fee courses (including 10 Resort
Courses) and two private clubs. "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 from golf vacation packages. The
Company considers its Daily Fee and Resort Courses to be high-end golf courses
because of the quality and maintenance of each golf course. Private country
clubs generally are 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 green fees charged at each Golf Course, which significantly
exceed national averages. The Company believes its focus on upscale Daily Fee
golf courses and private country clubs, which attract golfers with attractive
demographic and economic profiles, will result in stronger and less cyclical
revenue growth in comparison to golf courses with lower green fees.
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 approximately 3.9 million rounds played in 1996, 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
contributed to the Company by The Legends Group, a leading golf course owner,
developer and operator in the southeast and mid-Atlantic regions of the United
States controlled by Legends Group, Ltd. (together with its affiliates, "The
Legends Group").
Five of the Golf Courses are located in the Tampa, Florida area. Of these,
four are located at the Innisbrook Resort, a destination golf resort that
includes one of the largest hotel and conference facilities in the state. The
fifth course, Lost Oaks, is located near the Innisbrook Resort, and all five
courses are near the sandy beaches on the Gulf of Mexico. Additionally, the
courses benefit from the millions of tourists annually that visit
Disneyworld-TM-, Busch Gardens-TM- and other regional recreational attractions.
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 has a population of approximately 2.6 million within a 60 mile
radius. Williamsburg is an emerging golf resort destination, as evidenced by the
six new courses that have opened in the Williamsburg vicinity since 1995,
including two of the Company's courses. In addition to golf, Williamsburg and
the surrounding area offer shopping, dining, entertainment and historical
attractions. Both of the Golf Courses located in Williamsburg were developed and
contributed to the Company by The Legends Group.
The Company owns a fee simple interest in each of the Golf Courses with the
exception of Oyster Bay, which is subject to a long-term ground lease (with
approximately 35 years remaining), and the four Golf Courses at the Innisbrook
Resort, where the Company holds a first lien on the Golf Courses and all of the
related facilities (other than the separately-owned condominium units comprising
the hotel). The Company holds an option to purchase the Innisbrook Resort and
such facilities at the expiration of the Participating Mortgage for the lesser
of its fair market value or a pre-determined number of shares of Common Stock
and the cancellation of the outstanding balance of the Participating Mortgage.
Certain unaudited information regarding each of the Golf Courses is set
forth on the following page:
8
<PAGE>
THE GOLF COURSES
<TABLE>
<CAPTION>
REVENUE PER PLAYER
ROUNDS (2)
--------------------------------- --------------------
TWELVE
MONTHS
ENDED
YARDAGE TYPE OF YEAR JUNE 30,
NAME LOCATION (1) COURSE OPENED 1995 1996 1997 1995 1996
- ---------------- ------------------- ----------- --------- --------- --------- --------- ----------- --------- ---------
INITIAL COURSES:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Heritage Club... Pawleys Island, SC 7,040 Resort 1986 55,094 52,382 52,889 $ 57.28 $ 59.96
Heathland....... Myrtle Beach, SC 6,785 Resort 1990 49,312 50,294 50,937 55.04 53.92
Moorland........ Myrtle Beach, SC 6,799 Resort 1990 49,590 51,102 51,754 55.03 54.79
Parkland........ Myrtle Beach, SC 7,170 Resort 1992 46,564 47,331 48,437 54.98 54.21
Oyster Bay
(6)............ Sunset Beach, NC 6,685 Resort 1983 62,141 57,856 58,725 55.66 56.83
Woodlands....... Gulf Shores, AL 6,584 Resort 1994 43,464 41,744 44,623 32.88 34.86
Royal New Kent Providence Forge,
(7)............ VA 7,291 Daily Fee 1996 -- 5,743 12,948 -- 60.60
Stonehouse Golf
Club (8)....... Williamsburg, VA 6,963 Daily Fee 1996 -- 5,686 16,762 -- 60.50
Olde Atlanta.... Atlanta, GA 6,789 Daily Fee 1993 41,195 41,053 44,485 37.53 41.39
Northgate
Country Club
(9)............ Houston, TX 6,540 Private 1984 46,600 45,400 46,268 59.40 64.27
SUBSEQUENT
ACQUISITIONS:
Tiburon Golf
Club (10)...... Omaha, NE 7,005 Daily Fee 1989 56,496 53,160 60,644 21.33 23.19
Raintree Country
Club........... Akron, OH 6,886 Daily Fee 1991 44,000 40,000 40,000 19.25 20.38
Eagle Watch..... Atlanta, GA 6,896 Daily Fee 1989 36,484 36,322 40,126 38.67 39.23
Lost Oaks....... Tampa, FL 6,500 Daily Fee 1975 40,072 52,760 67,708 31.87 29.64
Club of the
Country........ Kansas City, KS 6,412 Private 1979 15,749 17,575 19,093 43.69 43.93
Innisbrook
Resort
(6)(12)........ Tampa, FL 148,294 140,922 139,094 95.35 101.23
Copperhead.... 7,087 Resort 1972
Island........ 6,999 Resort 1970
Eagle's Watch
(13)........ 6,245 Resort 1971
Hawk's Run
(13)........ 6,245 Resort 1971
Total..........................................................................................................................
<CAPTION>
GROSS GOLF REVENUE (3)
----------------------------------
TWELVE TWELVE
MONTHS MONTHS
ENDED ENDED INITIAL
JUNE 30, JUNE 30, BASE RENT
NAME 1997 1995 1996 1997 (4)
- ---------------- ----------- ---------- ---------- ---------- ----------
INITIAL COURSES:
<S> <C> <C> <C> <C> <C>
Heritage Club... $ 60.20 $3,156,000 $3,141,000 $3,184,000 $1,825,000
Heathland....... 53.81 2,714,000 2,712,000 2,741,000 1,556,000(5)
Moorland........ 55.20 2,729,000 2,800,000 2,857,000 1,556,000(5)
Parkland........ 53.88 2,560,000 2,566,000 2,610,000 1,557,000(5)
Oyster Bay
(6)............ 56.40 3,459,000 3,288,000 3,312,000 1,856,000
Woodlands....... 37.02 1,429,000 1,455,000 1,650,000 679,000
Royal New Kent
(7)............ 64.26 -- 348,000 832,000 1,817,000
Stonehouse Golf
Club (8)....... 67.65 -- 344,000 1,134,000 1,890,000
Olde Atlanta.... 41.14 1,546,000 1,699,000 1,830,000 845,000
Northgate
Country Club
(9)............ 66.05 2,768,000 2,918,003 3,056,000 1,407,000
SUBSEQUENT
ACQUISITIONS:
Tiburon Golf
Club (10)...... 21.37 1,205,000 1,233,000 1,296,000 682,000
Raintree Country
Club........... 21.15 847,000 815,000 857,000 520,000
Eagle Watch..... 38.03 1,411,000 1,425,000 1,526,000 703,000
Lost Oaks....... 24.28 1,277,000 1,564,000 1,644,000 625,000(11)
Club of the
Country........ 41.01 668,000 772,000 783,000 330,000
Innisbrook
Resort
(6)(12)........ 103.53 14,140,000 14,265,000 14,400,000 6,739,000
Copperhead....
Island........
Eagle's Watch
(13)........
Hawk's Run
(13)........
---------- ---------- ---------- ----------
Total......... $39,909,000 $41,345,000 $43,712,000 $24,587,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
9
<PAGE>
- ---------------
(1) Yardage is calculated from the championship tees.
(2) "Revenue Per Player" is calculated by dividing Gross Golf Revenue at the
applicable Golf Course by the number of rounds played at the applicable Golf
Course.
(3) Gross Golf Revenue is 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. In the case of the Innisbrook Resort the amounts shown
in the table include all revenue at the Innisbrook Resort, including golf
and hotel revenue, and food, beverage and merchandise sales, but exclude
various taxes and net of rental payments to individual condominium owners.
(4) In addition to Base Rent, Participating Rent may be payable by the Lessees
and Participating Interest (as herein defined) may be payable by the
Innisbrook Resort Owner. Participating Rent is calculated based on increases
in the Gross Golf Revenue from a base year (1996 in the case of the Initial
Courses), as adjusted. For the Innisbrook Resort, Base Rent shown
corresponds to the Base Interest payment.
(5) Heathland, Moorland and Parkland are subject to a single Participating
Lease and the Base Rent is equally allocated among these Golf Courses.
(6) The Company acquired or has a contract to acquire the fee simple interest
in each of the Golf Courses except Oyster Bay, which is subject to a
long-term ground lease with a lessor not affiliated with the Prior Owner
thereof, and the Innisbrook Resort, which serves as collateral under the
Participating Mortgage.
(7) Opened in August 1996.
(8) Opened in June 1996.
(9) The Company has agreed to fund up to $3.0 million to construct an
additional nine holes located on land adjacent to this Golf Course. The
Company expects to acquire, upon completion, the additional nine holes.
Amounts shown for Northgate Country Club are for its fiscal year ended
December 20, or the twelve months ended June 30, as applicable.
(10) Tiburon consists of 27 holes. Eighteen holes were built in 1989 with an
additional nine holes built in 1994. With the exception of Initial Base
Rent, numbers are 18-hole equivalents. Yardage and year opened is for the
White/Blue course.
(11) The Company has agreed to fund up to $1.25 million to pay for additional
improvements at the Lost Oaks course. If this amount is fully advanced, the
Base Rent will be increased to $740,930.
(12) The Company has a participating mortgage interest in the Innisbrook Resort.
The facility currently has 63 holes with an additional nine holes under
construction. Under the terms of the Participating Mortgage, the Company
initially funded $69.975 million and has agreed to fund an additional $9
million to fund certain improvements at the Innisbrook Resort, including the
construction of the additional nine holes. Upon funding of the entire $9
million, the Base Interest will be increased to approximately $7.6 million.
(13) Eagle's Watch and Hawk's Run currently comprise the 27-hole Sandpiper
course at the Innisbrook Resort. An additional nine holes are under
construction, which is scheduled for completion in 1998. Yardage shown
reflects 18-hole equivalents for Sandpiper.
10
<PAGE>
BUSINESS STRATEGIES AND OBJECTIVES
The Company's primary objectives are to increase its Cash Available for
Distribution per share to stockholders and to enhance stockholder value. The
Company's main strategy for such growth is to (i) acquire additional golf
courses that meet the Company's investment criteria and (ii) participate in
increased revenues at its Golf Courses. The Company currently holds a
participating interest in 19 Golf Courses.
When the Company acquires a golf course, the course is either leased back to
its prior owner or leased to another qualified operator not affiliated with the
Company. Under the Company's standard Participating Lease, the Company receives
fixed Base Rent and Participating Rent based on increases in Gross Golf Revenues
(as herein defined), if any, at such Golf Course. Currently all Golf Courses
owned by the Company are leased to their Prior Owners (or such owners'
affiliates) with the exception of Tiburon and Lost Oaks. The Company believes
the continuity of management provided by these experienced operators will
facilitate the Company's growth and profitability. Each Lessee is required to
join the Company's Lessee Advisory Association, which provides marketing
information and potential economic benefits to the Lessees, such as bulk
purchasing power for certain golf course supplies and equipment.
In certain instances, state and federal tax laws make sale-leaseback
transactions prohibitively expensive, in which case the Company may provide
financing to a particular golf course, provided it receives a participating
interest in revenues at the golf course on a basis comparable to the Company's
standard Participating Lease. Typically, the Company's loan will be secured by a
first-lien on the underlying golf course asset and will include an option to
purchase the course at the end of the loan's term. In considering any financing
transactions, including the Participating Mortgage, the Company seeks to obtain
economic terms similar to the standard Participating Lease.
In addition to acquiring new golf courses and new participating interests,
the Company seeks to increase revenue from its current assets through internal
growth. Both strategies are discussed below.
ACQUISITIONS AND EXPANSIONS
ACQUISITIONS. The Company believes market conditions today are favorable
for the acquisition of golf courses at attractive returns. The Company intends
to continue 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 the factors described below provide it
with a distinct competitive advantage in the acquisition of upscale golf
courses, including courses that might not otherwise be available for purchase.
To fund acquisitions, the Company has access to a variety of debt and equity
financing sources, including the Line of Credit, and the ability to issue OP
Units. The issuance of OP Units can provide a means of structuring tax-deferred
transactions for sellers of golf courses. OP Units represent units of limited
partnership interest in the Operating Partnership. Holders of OP Units generally
have the right to cause the Company to redeem their OP Units after certain
holding periods for cash, or at the Company's option for Common Stock on a
one-for-one basis. To the extent the Company acquires a golf course in exchange
for OP Units, the golf course seller generally will not recognize taxable income
until it exercises the Redemption Right (as herein defined).
The Company believes it can attract sellers by offering competitive pricing
and valuation and by offering the following benefits: (i) the ability to retain
control over the operations of the golf course by leasing the golf course back
from the Company through the Company's multiple independent lessee structure;
(ii) the tax deferral and increased liquidity associated with owning OP Units;
(iii) the ability to obtain additional OP Units through the Lessee Performance
Option (described below); (iv) marketing and purchasing economies of scale
gained from participation in the Lessee Advisory Association; and (v) the
ability to diversify the seller's investment by participating as an equity owner
in the Company's portfolio of golf courses.
11
<PAGE>
The Company intends to concentrate its investment activities on golf courses
available at attractive prices that meet one or more of the following criteria:
- upscale Daily Fee courses that target avid golfers, who the Company
believes are generally willing to pay the higher green fees associated
with upscale golf courses;
- private or semi-private golf courses with proven operating histories that
have the potential for significant cash flow growth;
- 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;
- newly developed, well-designed courses with high growth potential; and
- upscale, well-maintained golf courses with proven operating histories
located in areas where significant barriers to entry exist.
The Company will undertake an analysis with respect to golf courses to be
considered for acquisition, including an evaluation of the following:
- product and service differentiation;
- competitive position in market;
- barriers to entry in development of new golf courses;
- conditioning of the golf course and agronomy review;
- quantity, quality and cost of irrigation; and
- strength of the lodging industry, including hotels and condominiums, in
destination golf areas.
There can be no assurance that the Company will be able to find additional
golf courses that meet its investment criteria and there can be no assurance
that the Company will have access to sufficient debt and equity financing to
allow it successfully to acquire such courses. Moreover, acquisitions entail
risks that acquired courses will fail to perform in accordance with
expectations.
EXPANSIONS. The Prior Owner of Northgate Country Club plans to add nine
holes to that Golf Course, the Prior Owner of Woodlands is constructing a new
clubhouse at Woodlands and the owner of Lost Oaks plans to renovate and remodel
the clubhouse and course there (collectively, the "Expansion Facilities").
Subject to satisfaction of certain conditions, the Company has agreed that it
will purchase the Expansion Facilities when fully completed and operational. The
Company has agreed to fund the expansion at Northgate Country Club and may fund
the construction of the other Expansion Facilities. 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 thereof in connection with the construction of the Expansion
Facilities.
Upon the Company's acquisition of the respective Expansion Facilities, the
Participating Leases for Northgate Country Club, Woodlands and Lost Oaks will be
amended to include the applicable Expansion Facility, to increase the Base Rent
in an amount designed to be accretive to the Company's Funds From Operations (as
herein defined) per share, and, with the exception of Lost Oaks (which
Participating Lease is cross-defaulted with the Participating Mortgage on the
Innisbrook Resort), the Prior Owner will be required to pledge additional OP
Units (or cash or other security acceptable to the Company) equal to 15% of the
purchase price paid by the Company for the applicable Expansion Facility. See
"The Company -- Business Strategies and Objectives -- Acquisitions and
Expansions."
12
<PAGE>
The Lessee of Stonehouse Golf Club and Royal New Kent currently is
constructing clubhouses of 6,600 square feet and 7,700 square feet,
respectively, at such courses. The clubhouses are expected to be completed by
June 30, 1998 and will be constructed at the Lessee's expense. Base Rent will
not be adjusted but the Company will participate in any increases in Gross Golf
Revenue (as herein defined). See "The Golf Courses -- The Participating Leases."
The Innisbrook Resort Owner currently is adding an additional nine holes at
the Innisbrook Resort and is making significant capital improvements to the
resort and conference facilities. The Company, under the Participating Mortgage,
has agreed to fund up to $9 million for these improvements.
INTERNAL GROWTH
Based on the experience of its management, the Company believes the Golf
Courses offer opportunities for revenue growth through effective marketing and
efficient operations. See "The Golf Courses -- The Participating Leases --
Advisory Association." The Participating Leases and the Participating Mortgage
have been structured to provide the operators with incentives to manage and
maintain the Golf Courses in a manner designed to increase revenue and, as a
result, increase payments to the Company under the Participating Leases and the
Participating Mortgage. The Company believes that management of the Lessees, as
well as Troon Golf, have demonstrated expertise in the operation of the Golf
Courses and that the Golf Courses are positioned to benefit from favorable
trends in the golf industry. See "Lessees and Operators" and "The Golf
Industry."
PARTICIPATING LEASES. The Participating Leases generally provide that for
any calendar year, the Company will receive with respect to each leased Golf
Course, the greater of (a) Base Rent (as adjusted by the Base Rent Escalator
described below) or (b) an amount equal to the original (unescalated) Base Rent
plus the Participating Rent payable at the Golf Course. Participating Rent is
equal to 33 1/3% of the difference between that calendar year's Gross Golf
Revenue and Gross Golf Revenue at the Golf Course in the calendar year prior to
the course's acquisition, as adjusted in determining the original Base Rent.
Base Rent under each Participating Lease generally increases annually by the
lesser of (i) 3% or (ii) 200% of the change in the Consumer Price Index ("CPI")
for the prior year (the "Base Rent Escalator") during each of the first five
years of the 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 lease terms.
"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. See "The Golf Courses" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
PARTICIPATING MORTGAGE. The $78.9 million Participating Mortgage is
structured similarly to the Participating Lease. The Company anticipates that it
will receive a return similar to the return it anticipates on the Participating
Leases. Under the Participating Mortgage, the Company made an initial advance of
$69.975 million, which will be followed by additional advances of up to $9.0
million to be used for a nine-hole expansion and other improvements to the
Innisbrook Resort facilities currently underway. The loan term is 30 years, with
an initial base interest rate of 9.63% per annum and an interest rate of 9.75%
per annum on the amount of the loan in excess of $69.975 million (the "Base
Interest"). The loan provides for minimum increases in the aggregate annual
payment of Base Interest of 5% per year for the first five years and a
participating interest feature throughout the term based upon the growth in
Gross Golf Revenues, as well as in other revenues, at the Innisbrook Resort over
a 1996 base year (the "Participating Interest," and, together with the Base
Interest, the "Mortgage Payment"). The annual increases in the Mortgage Payment
are limited to 7% during the first five years. Westin has agreed to pay up to
$2.5 million per year to the Innisbrook Resort Owner to supplement results of
operations with respect to the operations at the Innisbrook Resort. The Westin
Guaranty has a term of up to five years.
LESSEE PERFORMANCE OPTION. The Participating Leases utilize an
incentive-based performance structure (the "Performance Option") designed to
encourage the operators to seek aggressive growth in revenue at the Golf
Courses. The structure also is designed to attract potential sellers of golf
courses that the Company believes
13
<PAGE>
have high growth potential and that might not otherwise be available for
purchase. Under the Performance Option for the Participating Leases, during
years three through five of each Participating Lease, the operator or its
affiliate, subject to certain qualifications and restrictions, may elect one
time to increase the Base Rent, in order to receive additional OP Units or
Common Stock. The Prior Owner of the Northgate Country Club has an additional
two-year period to exercise the Performance Option following its election to
construct the nine-hole expansion. The Performance Option for the Participating
Leases may be exercised only if the current-year net operating income of the
operator of the applicable Golf Course, inclusive of a capital replacement
reserve, exceeds 113.5% of such Lessee's Lease Payment, after taking into
account the increased amount of Base Rent. If the Performance Option is
exercised, the Base Rent is increased by an amount calculated to be accretive to
the Company's Funds From Operations on a per share basis. Following exercise of
the Performance Option, the adjusted Base Rent will be increased by the Base
Rent Escalator each year for a period of five years. An operator's ability to
exercise the Performance Option and the number of OP Units or Common Stock
issuable to such Prior Owner in connection therewith, will depend on future
operating results at the applicable Golf Course and therefore cannot be
determined in advance.
PERFORMANCE OPTION FOR THE PARTICIPATING MORTGAGE. The structure of the
Performance Option for the Participating Mortgage is similar to the Performance
Option for the Participating Leases. Under the Performance Option for the
Participating Mortgage, during years three though five of the Participating
Mortgage the Innisbrook Resort Owner, subject to certain qualifications and
restrictions, may elect one time to require the Company to make an additional
advance (the "Performance Advance") under the Participating Mortgage. The
Innisbrook Resort Owner will be required to purchase additional OP units with
the Performance Advance. The Performance Option for the Participating Mortgage
may be exercised only if the current-year net operating income of the Innisbrook
Resort, inclusive of a capital replacement reserve, exceeds 113.5% of such
operator's Participating Mortgage obligation, after taking into account the
increased amount of Base Interest. If the Performance Advance is made, the
interest on the Performance Advance will be calculated to be accretive to the
Company's Funds From Operations on a per share basis. Following exercise of the
Performance Option for the Participating Mortgage, the adjusted Base Interest
will be increased 3% per annum for five years. The Innisbrook Resort Owner's
ability to exercise the Performance Option will depend on future operating
results and therefore cannot be determined in advance.
FORMATION AND STRUCTURE
GTA was incorporated in Maryland in November 1996 to take advantage of
consolidation opportunities in owning golf courses. GTA has two wholly-owned
subsidiaries, GTA GP and GTA LP, which exist solely to hold the Company's
general and limited partnership interests in the Operating Partnership, the
Company's operating subsidiary. The board of directors of each subsidiary is
comprised of the executive officers of GTA. The Operating Partnership was formed
in Delaware in November 1996. GTA GP is the sole general partner of the
Operating Partnership.
In February 1997, the Company raised net proceeds of approximately $73.0
million in its IPO and acquired its 10 Initial Courses from their Prior Owners.
Each Initial Course was then leased back to an affiliate of its Prior Owner. The
Company believes that the substantial ownership interest of the Prior Owners in
the Company, equal to approximately 51% prior to this Offering, aligns the
interests of their affiliated Lessees with the interests of stockholders.
Prior to the IPO, the Chairman of the Board, Chief Executive Officer and
President of the Company, W. Bradley Blair, II, served as the Executive Vice
President and Chief Operating Officer of Legends Group, Ltd., which controls The
Legends Group, a leading golf course owner, developer and operator in the
southeast and mid-Atlantic regions of the United States. Certain of the Lessees
are affiliates of The Legends Group. Upon completion of the IPO, Mr. Blair
resigned from Legends Group, Ltd. and no longer holds any interest in the golf
operations of The Legends Group.
Seven of the Company's Initial Courses were acquired from The Legends Group.
As part of the Formation Transactions (as herein defined), the Company entered
into an Option to Purchase and Right of First Refusal
14
<PAGE>
Agreement relating to golf courses owned, developed or acquired by The Legends
Group. The Participating Leases with affiliates of The Legends Group (the
"Legends Lessees") are cross-collateralized and cross-defaulted. Larry D. Young,
a director of the Company, is the majority owner of The Legends Group and the
Legends Lessee.
Certain investors in the entities that contributed the Initial Golf Courses
to the Company at the IPO received certain benefits in connection with the IPO.
See "Formation Transactions."
OPERATING PARTNERSHIP. GTA, through its wholly-owned subsidiaries GTA GP
and GTA LP, currently holds a 47.4% interest in the Operating Partnership (60.8%
after giving effect to this Offering). GTA GP is the sole general partner of the
Operating Partnership. GTA LP is a limited partner of the Operating Partnership.
The other limited partners include those Prior Owners who received OP Units in
exchange for the contribution of their Golf Courses. Pursuant to the First
Amended and Restated Agreement of Limited Partnership, which was entered into
concurrently with the closing of the IPO, the limited partners do not have
day-to-day control over the Operating Partnership. However, the limited partners
are 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
Operating Partnership, which decisions require the approval of the holders of at
least 66.7% of the limited partnership interests in the Operating Partnership.
Each of the limited partners (other than GTA LP) may exercise Redemption Rights
for up to 50% of its OP Units beginning one year after the IPO (February 12,
1998) and the remaining 50% two years thereafter for cash or, at the election of
the Company, for shares of Common Stock on a one-for-one basis. See "Partnership
Agreement -- Redemption Rights."
The relationship after this offering between GTA, its subsidiaries, the
Operating Partnership, the Limited Partners (including many Prior Owners) and
the Lessees is described in the following chart:
[ORGANIZATIONAL CHART OF THE COMPANY AND ITS AFFILIATES]
15
<PAGE>
DISTRIBUTION POLICY
The Company intends to make regular quarterly distributions to its
stockholders. The Company declared a quarterly distribution of $0.41 per share
of Common Stock ($1.64 on an annualized basis) on October 15, 1997 to
stockholders of record on October 27, 1997. Future distributions will be at the
discretion of the Board of Directors based on the Company's actual results of
operations, economic conditions, tax considerations (including those related to
REITs) and other factors. In order to maintain its status as a REIT for federal
income tax purposes, the Company currently is required to distribute at least
95% of its annual taxable income. Holders of OP Units will receive distributions
on a per unit basis equal to the per share distributions to owners of Common
Stock. See "Partnership Agreement."
TAX STATUS
The Company will elect to be taxed as a REIT under sections 856 through 860
of the Tax 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 distribute at least 95% of its annual taxable income. Failure to qualify
as a REIT will render the Company subject to federal income tax (including any
applicable alternative 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 has received the opinion of its legal counsel, O'Melveny & Myers
LLP, as to its REIT status, which opinion is based on certain assumptions and
representations and is not 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 imposes
restrictions on the transfer of shares of Common Stock. The Company has adopted
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," "Federal Income Tax Considerations" and
"Capital Stock -- Restrictions on Ownership."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company.......................... 3,000,000 shares (1)
Common Stock and OP Units to be
outstanding after completion of
the Offering..................... 11,781,068 shares (1)(2)
Use of Proceeds................... To repay outstanding mortgage indebtedness under the
Line of Credit and for working capital, including the
acquisition of additional golf courses
American Stock Exchange symbol.... GTA
</TABLE>
- ------------
(1) Assumes the Underwriters' over-allotment option is not exercised. See
"Underwriting."
(2) Includes 70,000 shares of restricted Common Stock issued to the Company's
officers, which shares are subject to vesting conditions. See "Management --
Executive Compensation." Does not include an aggregate of 1,130,000 shares
reserved for issuance pursuant to the Company's Stock Incentive Plans and
the Directors' Plan (each as herein defined), see "Management -- Stock
Incentive Plans" and "Management -- Directors' Plan," and does not include
additional OP Units that may be issued pursuant to the Performance Option,
see "The Company -- Business Strategies and Objectives -- Internal Growth --
Performance Option."
16
<PAGE>
SUMMARY FINANCIAL DATA
The following tables set forth (i) unaudited selected consolidated
historical and pro forma financial information for the Company and The Legends
Group and (ii) selected historical financial information for The Legends Group,
the accounting acquiror, and for the Legends Lessee, the significant lessee. The
pro forma operating information is presented as if the Formation Transactions,
this Offering and the acquisition of the Golf Courses acquired subsequent to the
IPO (the "Subsequent Acquisitions") had occurred as of January 1, 1996, 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 this Offering and the
Subsequent Acquisitions had occurred on June 30, 1997. The pro forma information
does not purport to represent what the Company's nor the Legends Group's
financial position or results of operations actually would have been had the
Formation Transactions, this Offering and the Subsequent Acquisitions, in fact,
occurred on such date or at the beginning of the period indicated, or to project
the Company's or The Legends Group's financial position or results of operations
at any future date or for any future period.
GOLF TRUST OF AMERICA, INC.
UNAUDITED SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS FEBRUARY 12, 1997
YEAR ENDED ENDED JUNE (INCEPTION OF
DECEMBER 31, 30, OPERATIONS) THROUGH
1996 1997 JUNE 30, 1997
------------- ----------- -------------------
(PRO FORMA) (HISTORICAL)
<S> <C> <C> <C>
OPERATING DATA:
Revenue:
Participating Leases (1)....................................... $ 15,949 $ 9,033 $ 5,859
Participating Mortgage......................................... 8,067 4,034 181
Other interest income.......................................... -- -- 448
------------- ----------- ----------
Total revenue................................................ 24,016 13,067 6,488
------------- ----------- ----------
Depreciation and amortization (1)................................ 5,317 2,950 1,149
General and administrative....................................... 2,097 1,300 910
Interest expense................................................. 368 184 290
------------- ----------- ----------
Total expenses............................................... 7,782 4,434 2,349
------------- ----------- ----------
Income before minority interest (1).............................. 16,234 8,633 4,139
Minority interest (2)............................................ 6,104 3,384 2,129
------------- ----------- ----------
Net income applicable to common stockholders..................... $ 10,130 $ 5,249 $ 2,010
------------- ----------- ----------
------------- ----------- ----------
Net income per share of Common Stock............................. $ 1.42 $ 0.73 $ 0.50
------------- ----------- ----------
------------- ----------- ----------
Weighted average shares of Common Stock outstanding.............. 7,161 7,161 4,007
------------- ----------- ----------
------------- ----------- ----------
CASH FLOW DATA:
Cash flows from operating activities (3)....................... $ 21,551 $ 11,583 $ 3,578
Cash flows used in investing activities (4).................... (719) (359) (116,497)
Cash flows from financing activities (5)....................... 14,505 9,660 115,190
OTHER DATA:
Funds From Operations (6)...................................... $ 21,551 $ 11,583 $ 5,288
Cash Available for Distribution (6)............................ $ 19,504 $ 10,560 $ 5,011
Weighted average Common Stock and OP Units outstanding......... 11,482 11,781 8,479
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1997
-----------
1997 (HISTORICAL)
-----------
(PRO FORMA)
<S> <C> <C>
BALANCE SHEET DATA:
Investment in Golf Courses............................................................ $ 87,599 $ 61,724
Mortgage note receivable (7).......................................................... 61,680 61,680
Notes payable......................................................................... 4,325 43,900
Minority interest in Operating Partnership............................................ 49,267 43,487
Total stockholders' equity............................................................ 116,506 40,361
</TABLE>
(NOTES ON PAGE 19)
17
<PAGE>
THE LEGENDS GROUP GOLF COURSE OPERATIONS
UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA
(in thousands)
<TABLE>
<CAPTION>
SEASIDE LEGENDS
RESORTS OF TOTAL
GOLF HERITAGE (OYSTER VIRGINIA LEGENDS
LEGENDS GOLF CLUB BAY) (8) GOLF
--------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
OPERATING DATA:
Revenue from Golf Course operations....................... $ 8,078 $ 3,141 $ 3,288 $ 692 $ 15,199
Other revenue............................................. 2,534 745 784 151 4,214
--------- ----------- --------- --------- ---------
Total revenue............................................. 10,612 3,886 4,072 843 19,413
Participating Lease payments (1).......................... 4,670 1,825 1,856 928 9,279
Other operating expenses (9).............................. 6,216 2,171 2,296 2,492 13,175
--------- ----------- --------- --------- ---------
Net income (loss)......................................... $ (274) $ (110) $ (80) $ (2,577) $ (3,041)
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
CASH FLOW DATA:
Cash flows from (used in) operating activities (10)....... $ (125) $ (69) $ 40 $ (2,577) $ (2,731)
Cash flows from investing activities (11)................. -- -- -- -- --
Cash flows from financing activities (12)................. -- -- -- -- --
OTHER DATA:
EBITDA (13)............................................... $ (31) $ (55) $ 59 $ (2,577) $ (2,604)
SIX MONTHS ENDED JUNE 30, 1997
OPERATING DATA:
Revenue from Golf Course operations....................... $ 4,853 $ 1,943 $ 2,012 $ 1,274 $ 10,082
Other revenue............................................. 1,692 453 517 252 2,914
--------- ----------- --------- --------- ---------
Total revenue............................................. 6,545 2,396 2,529 1,526 12,996
Participating Lease payments (1).......................... 2,335 913 928 1,853 6,029
Other operating expenses (9).............................. 3,714 1,204 1,168 1,857 7,943
--------- ----------- --------- --------- ---------
Net income (loss)......................................... $ 496 $ 279 $ 433 $ (2,184) $ (976)
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
CASH FLOW DATA:
Cash flows from (used in) operating activities (10)....... $ 548 $ 295 $ 450 $ (2,184) $ (891)
Cash flows from investing activities (11)................. -- -- -- -- --
Cash flows from financing activities (12)................. -- -- -- -- --
OTHER DATA:
EBITDA (13)............................................... $ 557 $ 298 $ 453 $ (2,184) $ (876)
</TABLE>
(NOTES ON PAGE 19)
18
<PAGE>
THE LEGENDS GROUP
SUMMARY COMBINED HISTORICAL FINANCIAL INFORMATION
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997(14)
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA:
Revenue from golf course
operations....................... $ 11,724 $ 13,455 $ 14,371 $ 14,619 $ 15,199 $ 8,641 $ 10,082
Other revenue...................... 2,931 3,438 4,725 3,823 4,214 2,284 2,914
--------- --------- --------- --------- --------- --------- ---------
Total revenue...................... 14,655 16,893 19,096 18,442 19,413 10,925 12,996
Operating expenses(9).............. 8,895 9,882 10,083 10,322 13,556 5,757 12,540
Depreciation and amortization...... 1,406 1,564 1,830 1,791 2,400 1,004 808
Interest expense................... 648 619 998 1,017 1,589 515 420
--------- --------- --------- --------- --------- --------- ---------
Income before equity in earnings of
the Operating Partnership........ 3,706 4,828 6,185 5,312 1,868 3,649 (772)
Equity in earnings of the Operating
Partnership(15).................. -- -- -- -- -- -- 1,916
--------- --------- --------- --------- --------- --------- ---------
Net income......................... $ 3,706 $ 4,828 $ 6,185 $ 5,312 $ 1,868 $ 3,649 $ 1,144
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Investment in Golf Courses and
related equipment................ $ 17,425 $ 16,663 $ 19,301 $ 33,099 $ 35,060 $ 34,738 $ 1,083
Total assets....................... 20,484 22,719 24,649 42,300 49,804 49,458 22,019
Mortgages, notes payable and
advances from affiliates and
stockholders..................... 16,293 19,285 18,638 35,163 40,480 37,512 8,268
Capital lease obligations.......... 332 -- -- -- -- -- --
Total owners' equity............... 2,086 2,263 3,772 6,328 7,174 9,976 11,000
</TABLE>
(NOTES ON PAGE 19)
19
<PAGE>
- ---------------
(1) Represents payments of Base Rent from the 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, except for Legends of Virginia, the Lessee of
Stonehouse Golf Club and Royal New Kent, which courses opened in June 1996
and August 1996, respectively. Pro forma Participating Lease revenue payable
by Legends of Virginia reflects only the periods during which such Golf
Courses were actually operating.
If Stonehouse Golf Club and Royal New Kent had been operating during the
entire period presented (i) Participating Lease revenue would have been
$1,847 higher for the year ended December 31, 1996, for a total of $17,796,
(ii) depreciation and amortization would have been $580 higher for the year
ended December 31, 1996, for a total of $5,897, and (iii) income before
minority interest for the year ended December 31, 1996 would have been
$1,267 higher for a total of $17,501.
The pro forma information does not include estimates of Base Rent increases
in the second year. Pro forma results for the six months ended June 30, 1997
and actual results for the period from February 12, 1997 through June 30,
1997 include $109 of Participating Rent.
(2) Calculated as approximately 37.6%, 39.2% and 51.4% of the Operating
Partnership's net income for the applicable period based on the OP Units
outstanding for the period not owned by the Company.
(3) Represents the Company's income before minority interest adjusted for
non-cash depreciation and amortization. Estimated pro forma cash flows from
operating activities 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.
(4) Pro forma cash flows used in investing activities 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 5.0% of Gross Golf Revenue at the Golf Courses. In addition to
increases resulting from the Base Rent Escalator and payments of
Participating Rent, the Lessees generally are obligated to increase their
lease payments each year in an amount equal to the increase in the capital
expenditure reserve from the prior year. Historical cash flows used in
investing activities additionally reflects golf course acquisitions and
mortgage note issuance.
(5) Pro forma cash flows used in financing activities represent estimated
distributions to be paid based on the current quarterly dividend rate of
$0.41 per share of Common Stock or per OP Unit and an aggregate of 11,482
and 11,781 shares of Common Stock and OP Units outstanding for the year
ended December 31, 1996 and the six months ended June 30, 1997,
respectively, and debt of $4,325.
(6) Estimated Funds From Operations and Cash Available for Distribution are
calculated as follows:
<TABLE>
<CAPTION>
PERIOD FROM FEBRUARY 12,
1997
(INCEPTION OF
YEAR ENDED SIX MONTHS ENDED OPERATIONS)
DECEMBER 31, 1996 JUNE 30, 1997 THROUGH JUNE 30, 1997
----------------- ------------------ ------------------------
(PRO FORMA) (HISTORICAL)
<S> <C> <C> <C>
Income before minority interest............................. $16,234 $ 8,633 $4,139
Depreciation and amortization............................... 5,317 2,950 1,149
----------------- ---------- -------
Funds From Operations....................................... 21,551 11,583 5,288
Adjustments:
Noncash mortgage revenue.................................. (1,328) (664) (30)
Estimated capital expenditures............................ (719) (359) (247)
----------------- ---------- -------
Cash Available for Distribution............................. 19,504 10,560 5,011
Additional Base Rent for courses not operational during
entire period.............................................. 1,847 -- --
----------------- ---------- -------
Adjusted Cash Available for Distribution.................... $21,351 $10,560 $5,011
</TABLE>
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 ("GAAP")), excluding gains (or
losses) from debt restructuring or sales of property, plus depreciation of
real property, and after adjustments for unconsolidated partnership and
joint ventures. Funds From Operations should not be considered as an
alternative to net income or other measurements under GAAP 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. 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. Compliance with the NAREIT
definition of Funds From Operations is voluntary. Accordingly, the Company's
calculation of Funds From Operations in accordance with the NAREIT
definition may be different than similarly titled measures used by other
REITs. See "Distribution Policy." Pro forma income before minority interest
for the year ended December 31, 1996, reflects base rent from Legends of
Virginia for the period during which the Golf Courses it leases from the
Company, Stonehouse Golf Club and Royal New Kent, were actually operating
(Stonehouse Golf Club opened in June 1996 and Royal New Kent opened in
August 1996). The adjustment above reflects additional Base Rent payable
during the Golf Courses' initial year of operations (i.e., to reflect a full
year's initial Base Rent). Noncash mortgage revenue represents the
difference between interest revenue on the Participating Mortgage reported
by the Company in accordance with GAAP and the actual cash payment to be
received by the Company. See "The Golf Courses -- The Participating Mortgage
-- Fixed Interest Rate Escalation."
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The Participating Leases require the Company to reserve annually between
2.0% and 5.0% 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 Lessees.
(7) Represents amounts outstanding under the Participating Mortgage exclusive
of the amounts used to acquire OP Units and shares of the Common Stock.
(8) Legends of Virginia financial data reflects partial period 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.
(9) Represents operating costs and expenses, general and administrative,
repairs and maintenance, utilities, marketing and management fees. Operating
Expenses for The Legends Group for the six months ended June 30, 1997
includes Base Rent payments for the period commencing February 12, 1997.
(10) Represents pro forma income adjusted for non-cash depreciation and
amortization. Estimated pro forma cash flows from operating activities
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.
(11) Cash flows from investing activities consists principally of capital
improvements to the Golf Courses. As such improvements are expected to be
funded through a capital expenditure reserve funded by the Company, cash
flows from investing activities funded by the Lessees are not expected to be
material.
(12) Cash flows from financing activities primarily includes transactions with
the Prior Owners and borrowings and repayments on loans. Such cash flows
have been excluded in the determination of cash flows from financing
activities as the Company does not believe these excluded items are material
to cash flows from financing activities.
(13) 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 Lessees (before
payment of debt service obligations and non-cash depreciation charges).
EBITDA does not represent cash generated from operating activities in
accordance with GAAP and should not 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.
(14) Information presented includes the Prior Owners and the Legends Lessees
combined, as the operations were transferred to the Legends Lessee effective
February 12, 1997. Summary unaudited operating results for the Legends
Lessees for the period February 12, 1997 (inception) through June 30, 1997
included in The Legends Group for the six months ended June 30, 1997 are as
follows:
<TABLE>
<S> <C>
Gross golf revenue............................................................................... $ 9,164
Other revenue.................................................................................... 2,496
---------
Total Revenue.................................................................................. 11,660
Operating expenses............................................................................... 6,368
Lease Payments................................................................................... 4,629
Depreciation and amortization.................................................................... 37
---------
Total Expenses................................................................................. 11,034
---------
Net income....................................................................................... $ 626
---------
---------
</TABLE>
(15) Equity in earnings of the Operating Partnership reflects the Prior Owner's
proportionate interest in the earnings of the Operating Partnership based on
its limited partnership interest. These amounts do not represent cash
distributions to the Legends Group Prior Owner. Earnings reflect the
interest of the Prior Owner and not the Legends Lessee, and any
distributions payable to the Legends Group Prior Owner will not necessarily
be available to the Legends Lessee to make Lease Payments.
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RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK INVOLVES VARIOUS RISKS. PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN CONJUNCTION
WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING SHARES
OF COMMON STOCK IN THIS OFFERING.
WHEN USED IN THIS PROSPECTUS, THE WORDS "MAY," "WILL," "EXPECT,"
"ANTICIPATE," "CONTINUE," "ESTIMATE," "PROJECT," "INTEND" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, REGARDING EVENTS,
CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE PLANS OF
OPERATIONS, BUSINESS STRATEGY, RESULTS OF OPERATIONS AND FINANCIAL POSITION.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND
THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INCLUDED WITHIN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DESCRIBED BELOW, UNDER THE HEADING "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS PROSPECTUS.
USE OF ADJUSTMENTS AND PROJECTIONS IN ESTABLISHING LEASE PAYMENTS AND
PARTICIPATING MORTGAGE PAYMENTS
The Company generally values golf courses, and establishes Lease Payments
(and established the Participating Mortgage Payments), based on selected
adjustments to historical operating results or estimates of future performance
that the Company believes are appropriate. These adjustments include projected
increases in revenues from golf course operations and elimination of certain
operating expenses. If such adjustments are not appropriate, or if estimates of
future performance are not met, a Lessee or the Innisbrook Resort Owner may not
be able to make its scheduled payments to the Company. Failure of an operator to
make such a payment would have a material adverse effect on the operations of
the Company. Estimates of future performance were particularly significant with
respect to two recently-opened Virginia courses and the Innisbrook Resort. In
addition, although the Westin Guaranty is designed to supplement results of
operations at the Innisbrook Resort, it is for a limited period and limited
amount and may be insufficient to ensure receipt by the Company of Base Interest
under the Participating Mortgage.
DEPENDENCE ON PAYMENTS UNDER THE PARTICIPATING LEASES AND THE PARTICIPATING
MORTGAGE;
DIFFICULTY OF FINDING REPLACEMENT OPERATORS
The Company's ability to make distributions to stockholders will depend
primarily upon the ability of the Lessees to make Lease Payments under
Participating Leases and of the Innisbrook Resort Owner to make interest
payments under the Participating Mortgage (which, in both cases, will be
dependent primarily on the Golf Course operators' ability to generate sufficient
revenues in excess of operating expenses from the Golf Courses). Any failure or
delay by a Lessee or the Innisbrook Resort Owner in making such payments may
affect adversely 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 a Lessee or otherwise. In
addition, the Lessees are recently-organized limited purpose entities and have
nominal capitalization. Although failure on the part of a Lessee materially to
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 then would be
required to find another lessee to lease such Golf Course or risk losing its
ability to elect or maintain REIT status, as applicable. It may be difficult for
the Company to find suitable replacement lessees following a default,
particularly in instances where the prior lessee was not able to operate
profitably. In such instances the Company would likely be required to reduce the
Base Rent and consequently the Cash Available for Distribution on a per share
basis would be reduced.
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DURATION OF LEASE; NO RIGHT TO TERMINATE PARTICIPATING LEASES ON A SALE
The Participating Leases, with extensions, may have terms of up to 40 years
and 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."
NEED FOR CERTAIN CONSENTS FROM THE LIMITED PARTNERS
Under the Partnership Agreement (as herein defined) the holders of at least
66.7% of the interests in the Operating Partnership, including the Company which
currently owns a 60.8% interest in the Operating Partnership (after giving
effect to this Offering), must approve a sale of all or substantially all of the
assets of the Operating Partnership or a merger or consolidation of the
Operating Partnership. Larry D. Young, majority owner of The Legends Group and a
director of the Company, and his affiliates own a 31.7% interest in the
Operating Partnership (after giving effect to this Offering) and thus
effectively hold veto power over such extraordinary transactions. See
"Partnership Agreement -- Management."
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 of the Lessees and the Innisbrook Resort
Owner controls the operations of the respective Golf Courses. The Participating
Leases have initial terms of 10 years and generally may be extended at the
option of each Lessee for up to six five-year renewal terms. The Company will
not have the authority to require any operator 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 or the
Participating Mortgage. Thus, even if the Company believes an operator is
operating a Golf Course inefficiently or in a manner that does not result in a
maximization of Participating Rent or Participating Interest to the Company and,
therefore, does not increase Cash Available for Distribution to the
stockholders, the Company may not require an operator to change its method of
operation. The Company is limited to seeking redress only if a operator violates
the terms of the Participating Lease or the Participating Mortgage, as
applicable, in which case the Company's primary remedy is to terminate the
Participating Leases or the Participating Mortgage as applicable and seek to
recover damages from such operator. If a Participating Lease is terminated, the
Company will be required to find another lessee or risk losing its ability to
elect or maintain REIT status, as applicable. See "The Golf Courses -- The
Participating Leases."
THE PARTICIPATING MORTGAGE
DEFAULT ON PARTICIPATING MORTGAGE
A default by the Innisbrook Resort Owner under the Participating Mortgage
could materially and adversely affect the Company's results from operations. A
default under the Participating Mortgage may require the Company to become
involved in expensive and time-consuming proceedings, including bankruptcy,
reorganization or foreclosure proceedings, in an attempt to recover some portion
or all of its investment. It is anticipated that the resort property underlying
the Participating Mortgage will be the primary source of any recovery for the
Company. Because of the Company's status as a REIT, the Company may not operate
the Innisbrook Resort in the event of foreclosure. Accordingly, in the event of
a foreclosure, the Company will be materially dependent upon (i) its ability to
lease the Innisbrook Resort on favorable economic terms and (ii) the value of
the real property underlying the Participating Mortgage, each of which may be
affected by numerous factors outside the control of the Company. See "--
Dependence on Payments Under the Participating Leases; Difficulty of Finding
Replacement Lessees."
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LACK OF AMORTIZATION OF PARTICIPATING MORTGAGE
The Participating Mortgage does not provide for the amortization of
principal during its term. As a result, the entire principal balance of the
Participating Mortgage will be due at its maturity. Failure to amortize the
principal balance of the Participating Mortgage may increase the risk of a
default during the term, and at maturity, of the Participating Mortgage. A
default under the Participating Mortgage would have a material adverse effect on
the operations of the Company.
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 is seasonal; and (iii) adverse effects of
general and local economic conditions. These factors could adversely affect the
Golf Course operators' ability to generate revenues and to make payments under
the Participating Leases and the Participating Mortgage and, in turn, the
Company's ability to make expected distributions to the Company's stockholders.
COMPETITION; SUPPLY OF GOLF COURSES
The Company's Golf Courses face competition for golfers from other golf
courses. A substantial number of new golf courses have 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 a Golf Course operator and, therefore, its ability to make
its scheduled payments to the Company.
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 Golf Course operators to supplement revenue at the
applicable Golf Course to make scheduled payments to the Company. Failure of a
Golf Course operator to manage properly its cash flow may result in such
operator having insufficient cash to make its scheduled payments to the Company
during low seasons and, therefore, adversely affect Cash Available for
Distribution to stockholders.
ADVERSE WEATHER CONDITIONS
Several climatological factors beyond the control of the Golf Course
operators 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 or Participating Interest received from the
affected Golf Course and the ability of the applicable Golf Course operator to
make its scheduled payments to the Company. The 10 Golf Courses in the Myrtle
Beach, Tampa and Gulf Shores areas are susceptible to damage from hurricanes,
which damage (including loss of revenue) is not generally insurable
24
<PAGE>
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 operator of such Golf Course to make its scheduled
payments to the Company. Additionally, hurricanes may damage local
accommodations such as hotels and condominiums, thereby limiting play,
particularly at the Company's 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 or the
interest payable under the Participating Mortgage. For the period 1991 through
1996 golf participation decreased by 0.3%, according to NGF.
COURSE CONDITIONS
General turf grass conditions must be satisfactory to attract play on the
Golf Courses. Severe weather or other factors, including disease and insect
infestation, 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 quality 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.
DEPENDENCE UPON KEY PERSONNEL
The Company's success depends to a large extent upon the experience and
abilities of its founders W. Bradley Blair, II, who serves as the Company's
Chief Executive Officer and President, David J. Dick, who serves as Executive
Vice President, and Scott D. Peters, who serves as Senior Vice President and
Chief Financial Officer. See "Management -- Directors and Executive Officers."
The loss of the services of any of these individuals could have a material
adverse effect on the Company, its operations and its business prospects. See
"Certain Relationships and Transactions -- Employment Agreements." The Company's
success is also dependent upon its ability to attract and retain qualified
personnel.
REAL ESTATE INVESTMENT TRUST AND PARTNERSHIP QUALIFICATION
The Company operates and intends to continue to operate so as to qualify as
a REIT under the Tax Code. Although the Company believes that it is so organized
and operates in such a manner and has received a favorable 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 Tax 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 Tax 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
25
<PAGE>
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 Cash Available for Distribution to the
Company's stockholders would be reduced for each of the years involved. Although
the Company currently operates and intends to continue 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 regular 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 Tax 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 income tax on the Operating Partnership would reduce the amount of
Cash Available for Distribution to the Company and its stockholders. See
"Federal Income Tax Considerations -- Tax Aspects of the Operating Partnership."
RISKS RELATING TO CONSTRUCTION FINANCING
The Company has agreed to fund certain additional construction at certain of
the Golf Courses and anticipates that it may make other construction loans,
generally either (i) as financing that repays constructions costs, or (ii) where
the loan is secured by property with a pre-construction value that is within the
Company's investment guidelines. Construction loans often involve a higher
degree of risk than other lending because, among other reasons, (i) repayment
may be dependent upon successful completion of the project, (ii) the project, as
constructed or rehabilitated, may lack any operating history upon which to base
the loan's underwriting, (iii) estimating construction costs and timing is
difficult, (iv) construction costs may exceed budgeted amounts and (v) timing
delays may occur.
CERTAIN GOLF COURSES WITH LIMITED OPERATING HISTORY
The two Virginia Golf Courses recently opened and have a limited operating
history. The Base Rent for these Golf Courses is based on estimates of Gross
Golf Revenue and net operating income and constitutes a substantial portion of
the Company's pro forma Lease revenue. These Golf Courses may not achieve such
anticipated Gross Golf Revenues or net operating income and, in that case, the
Lessees of such Golf Courses may be unable to make their Lease Payments to the
Company.
LIMITED OPERATING HISTORY
The Company was recently organized and has limited operating history. There
can be no assurance that the Company will be able to generate sufficient revenue
from operations to make anticipated distributions to stockholders. The Company
also is subject to the risks generally associated with the formation of any new
business. The Company's management has limited experience operating a public
company or a REIT and limited experience working together.
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 affect adversely prevailing market prices for
the Common Stock. In addition to the shares of Common Stock currently
outstanding and the Shares offered by the Company in this Offering, an aggregate
of 4,620,313 OP Units will be outstanding (excluding OP Units held by
subsidiaries of GTA) following completion of this Offering, including an
aggregate of 4,135,356 OP Units issued in connection with the Formation
Transactions,
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see "The Formation Transactions". Fifty percent of the OP Units (I.E., 2,310,157
OP units) may be tendered for redemption by the holders of such OP Units at any
time after February 12, 1998, and the remaining 50% of such OP Units may be
tendered for redemption at any time after February 12, 1999, 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 such OP Units may be sold
in the public market pursuant to a shelf registration statement that the Company
is obligated to file with respect to the issuance or resale of such shares, or
pursuant to any available exemptions from registration. The Company also has
granted the OP Unit holders certain "piggyback" registration rights commencing
on February 12, 1998, subject to the requirement that each such holder agree not
to sell any of its redeemed shares not included in such piggyback offering
during the week prior to, and the month following, such piggyback offering. See
"Shares Available for Future Sale -- Registration Rights."
The Company's acquisition strategy depends in large 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 a 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 on the price of the
Common Stock.
RISKS RELATED TO THE COMPANY'S GROWTH STRATEGY
COMPETITION FOR ACQUISITIONS
The Company competes 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. From time to time the Company may compete
for such golf course acquisition opportunities with entities having
substantially greater financial resources and a broader geographic knowledge
base than the Company. These entities may also be able to accept more risk than
the Company prudently can manage. Thus, competition may 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 depends, in large part, upon
its continuing access to capital necessary to acquire additional golf courses.
There can be no assurance that the Company's use of excess cash flow, borrowings
or subsequent issuances of Common Stock, OP Units or other securities will be
sufficient to raise such necessary capital.
INABILITY TO MANAGE GROWTH EFFECTIVELY
The Company's success will depend upon the ability of each operator
effectively to manage all of its Golf Courses, as well as the ability of the
Company to continue to select an appropriate lessee for each additional Golf
Course it acquires. There can be no assurance that the current operators or
future lessees will operate efficiently and, if not, Cash Available for
Distribution to stockholders could be affected adversely.
CONCENTRATION OF INVESTMENTS
Five of the Golf Courses are located in the Myrtle Beach, South Carolina
area and five of the Golf Courses are located in the Tampa, Florida area. The
concentration of the Company's investments in these areas leaves the Company
vulnerable to regionally adverse events or conditions such as competition,
hurricanes and other weather conditions, overbuilding and economic recession. If
the Myrtle Beach or Tampa regions are subject to such events or conditions, the
Company's Cash Available for Distribution will be more adversely affected that
it would have been if the Company's investments were more geographically
diverse.
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RISKS OF LEVERAGE; NO LIMITATIONS ON INDEBTEDNESS
The Company's Charter does not limit its ability to incur indebtedness. The
Company may borrow under the Line of Credit or from 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 IPO to accommodate a Prior Owner's efforts to minimize
certain adverse tax consequences from the contribution of one of the Initial
Courses to the Company. 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.
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. See also "-- Anti-takeover Effect of Certain
Provisions of Maryland Law and the Company's Charter and Bylaws."
ADVERSE EFFECT OF INCREASE IN MARKET INTEREST RATES
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. The Company finances a portion of its operations
through its Line of Credit, which bears interest at a floating rate. The
Participating Mortgage bears interest at a fixed rate and the Participating
Leases have fixed rent payments (subject to certain adjustments). Accordingly,
increases in interest payable by the Company may not be reflected in interest
received under the Participating Mortgage or rent received under the
Participating Leases, exposing the Company to the risk of rises in market
interest rates. A significant rise in interest rates could affect adversely the
ability of the Company to make distributions to stockholders.
REAL ESTATE INVESTMENT RISKS
GENERAL
The Company's current holdings are subject, and any acquisitions of
additional golf courses will be 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.
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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 of such Golf Course
by the Company. In addition, each Lessee generally 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. The right of first offer is void in the event of a default by the
Lessee under the Participating Lease. The three courses located at the Legends
Resort -- Heathland, Moorland and Parkland -- are subject to conservatory
easements that prohibit developments other than golf courses on the property,
limit the ability to materially modify the existing layouts at such Golf Courses
and require that such Golf Courses be open for public play. 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 audits 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 and Participating Mortgage
provide that the operators will indemnify the Company for certain potential
environmental liabilities at the Golf Courses, the current operators have only
nominal capitalization. See "The Golf Courses -- Government Regulation."
UNINSURED LOSSES
The Participating Leases and the Participating Mortgage require that each
operator maintains insurance with respect to each of the Golf Courses it
operates, 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) that 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." The Participating Mortgage provides for
similar insurance requirements.
GROUND LEASE
One of the Golf Courses, Oyster Bay, is operated pursuant to a ground lease
with a remaining term of approximately 35 years. In the event of a default by
the Company under the ground lease, the ground lessor may terminate the ground
lease subject to certain terms and conditions. If the ground lease is terminated
or is not renewed, the Company would lose its investment in the Oyster Bay Golf
Course.
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CONFLICTS OF INTEREST
SALE OF GOLF COURSES
One of the directors of the Company and his affiliates have an 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
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 differ in connection with the disposition
of such Golf Courses.
RISK OF ENFORCEMENT OF TERMS OF CONTRIBUTION, LEASE AND OTHER AGREEMENTS
Because Mr. Young, a director of the Company, is the principal owner of The
Legends Group, which contributed seven of the Golf Courses to the Company and
the Legends Lessees, which lease those Golf Courses from the Company, there may
be a conflict of interest with respect to the enforcement of the Contribution
Agreement executed by The Legends Group, as well as with respect to enforcement
and termination of the Participating Leases respecting the Golf Courses leased
to the Legends Lessees.
OTHER POSSIBLE CONFLICTS
Other transactions involving the Company and affiliates of the Lessees may
also give rise to possible conflicts of interest, such as future acquisitions of
golf courses and selection of operators for such golf courses.
COMPETITION FOR MANAGEMENT TIME OF THE OPERATORS
Management of the Golf Course operators devote significant time to other
business interests, including in many instances resort and residential
development on property adjacent to the Golf Courses and the operation of golf
courses not being contributed to the Company. As a result, management of the
Golf Course operators are 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 than if they were
devoted full time to the Golf Courses.
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, outstanding indebtedness,
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."
DEPENDENCE ON ACQUISITIONS TO INCREASE CASH AVAILABLE FOR DISTRIBUTION
The Company's success in implementing its growth plan depends significantly
on the Company's ability to acquire additional golf courses at attractive
prices. Internal growth through increases in revenues from 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.
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DISTRIBUTION TO STOCKHOLDERS
The Company's continued ability to make distributions to its stockholders
will be based principally on Lease Payments under the Participating Leases and
interest payments under the Participating Mortgage. In the event of a default by
a Lessee under a Participating Lease or by the borrower under the Participating
Mortgage, there could be a decrease or cessation of payments under the
Participating Leases or the Participating Mortgage. 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 Cash
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 Tax 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 is 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 Tax 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 and interest payments under the
Participating Mortgage. 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.
For Federal income tax purposes, the Company is required to report interest
income from the Participating Mortgage, including Participating Interest, or a
yield-to-maturity Loan on a straight-line basis over the life of the
Participating Mortgage. Based on the Company's estimate of future revenue, the
Company expects to recognize for tax purposes interest income equal to
approximately 11.5% per year with respect to the Participating Mortgage, which
interest income will initially exceed cash payments to the Company under the
Participating Mortgage. In addition, upon a "Transfer Triggering Event" (as
herein defined), the borrower under the Participating Mortgage is required to
pay to the Company an amount equal to $19 million, discounted from the maturity
date of the Participating Mortgage to the date of the Transfer Triggering Event
at 11.5% per annum, and income will be recognized by the Company in such amount.
This amount is then required to be lent to the borrower by the Company and the
amount so lent accrues interest at 11.5% per annum. As a result of these
provisions, the Company will be deemed at various times to have received income
without having any corresponding cash payment. Consequently, to maintain the
Company's REIT status or, after 1997, to avoid a corporate level tax, the
Company may be required to borrow money to make cash distributions, which may
have a material adverse effect on the operations of the Company.
ERISA RISKS
Depending upon the particular circumstances of the plan, an investment in
Common Stock may not be an appropriate investment for an ERISA plan, a qualified
plan or an IRA. In deciding whether to purchase Common Stock, a fiduciary of an
ERISA plan, in consultation with its advisors, should carefully consider its
fiduciary responsibilities under ERISA, the prohibited transaction rules of
ERISA and the Tax Code, and the effect of the "plan asset" regulations issued by
the U.S. Department of Labor.
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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 Tax Code)
during the latter half of any taxable year (other than 1997). In addition, rent
from related party tenants is not qualifying income for purposes of the gross
income tests under the Tax 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 be subject 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."
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND THE COMPANY'S
CHARTER AND BYLAWS
Certain provisions of the Company's articles of incorporation (the
"Charter") and bylaws (the "Bylaws"), as well as Maryland corporate law, may be
deemed to have anti-takeover effects and may delay, defer or prevent a takeover
attempt that might be in the stockholders' best interest. For example, such
provisions may (i) defer tender offers for Common Stock, which offers may be
beneficial to stockholders, or (ii) defer purchases of large blocks of Common
Stock, thereby limiting the opportunity for stockholders to receive a premium
for their Common Stock over then-prevailing market prices. These provisions
include the following:
PREFERRED STOCK
The Charter authorizes the Board of Directors to issue Preferred Stock (as
defined herein) in one or more classes and to establish the preferences and
rights (including the right to vote and the right to convert into Common Stock)
of any class of Preferred Stock issued. No Preferred Stock will be issued or
outstanding as of the closing of the Offering. See "Description of Capital Stock
- -- Preferred Stock."
STAGGERED BOARD
The Board of Directors of the Company is divided into three classes of
directors. The initial terms of the first, second and third classes expire in
1998, 1999 and 2000, respectively. Directors of each class serve for a
three-year term and until their successors are elected and qualified. The
affirmative vote of Stockholders holding less than two-thirds of all votes
entitled to be cast for the election of directors is required to remove a
director. See "Policies and Objectives With Respect to Certain Activities --
Charter and Bylaw Provisions."
MARYLAND BUSINESS COMBINATION STATUTE
Under the Maryland General Corporation Law ("MCGL"), certain "business
combinations" (including the issuance of equity securities) between a Maryland
corporation and any person who owns, directly or indirectly, 10% or more of the
voting power of the corporation's shares of capital stock (an "Interested
Stockholder") must be approved by 80% of voting shares. In addition, an
Interested Stockholder may not engage in a business combination with the
Maryland corporation for five years following the date he or she became an
Interested
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Stockholder. See "Certain Provisions of Maryland Law and of the Company's
Charter and Bylaws -- Maryland Business Combination Law."
MARYLAND CONTROL SHARE ACQUISITION
Maryland law provides that "Control Shares" of a 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 eligible under the statute to be cast on
the matter (unless the corporation has opted out of the Control Share
Acquisition statute). "Control Shares" are voting shares of beneficial interest
that, if aggregated with all other such shares of beneficial interest previously
acquired by the acquiror, would entitle the acquiror directly or indirectly 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 of all voting powers.
Control Shares do not include shares of beneficial interest the acquiring person
is then entitled to vote as a result of previously having obtained stockholder
approval. A "Control Share Acquisition" means the acquisition of Control Shares,
subject to certain exceptions.
If voting rights are not approved at a meeting of stockholders then, subject
to certain conditions and limitations, the issuer may redeem any or all of the
Control Shares (except those for which voting rights have previously been
approved) for fair value. If voting rights for Control Shares are approved at a
stockholders meeting and the acquiror becomes entitled to vote a majority of the
shares of beneficial interest entitled to vote, all other stockholders may
exercise appraisal rights. See "Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws."
The Bylaws of the Company contain a provision exempting from the Control
Share Acquisition statute any and all acquisitions by any person of the
Company's Common Stock. There can be no assurance that such provision will not
be amended or eliminated at any time in the future.
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THE COMPANY
Golf Trust of America, Inc. is a self-administered REIT formed to capitalize
upon consolidation opportunities in the ownership of upscale golf courses
throughout the United States. The Company currently holds a participating
interest in 19 golf courses, 15 of which are owned and four of which serve as
collateral for the Participating Mortgage. The Golf Courses are located in
Florida (5), South Carolina (4), Georgia (2), Virginia (2), Alabama, Kansas,
Nebraska, North Carolina, Ohio and Texas.
The Company's goal is to increase Cash Available for Distribution per share
and to enhance stockholder value by becoming a leading owner of, and
participating in increased revenue from, nationally or regionally recognized
upscale golf courses. The Company's principal business strategy is to acquire
upscale golf courses and thereafter lease the golf courses to qualified third
party operators, including affiliates of the sellers. The Company may acquire
golf courses through the issuance of limited partnership interest in the
Operating Partnership which are redeemable for cash or, at the Company's option,
shares of Common Stock on a one-for-one basis. When the Company acquires a golf
course in exchange for OP Units, the golf course seller generally defers tax
recognition until the seller elects to cause the OP Units to be redeemed.
The Company believes it has a distinct competitive advantage in the
acquisition of upscale golf courses, including those which might not otherwise
be available for purchase, because of (i) its utilization of the multiple
independent lessee structure, (ii) management's substantial industry knowledge,
experience and relationships within the golf community, (iii) the Company's
strategic alliances with prominent golf course operators and (iv) its ability to
issue OP Units to golf course owners on a tax-deferred basis. The Company is one
of only two publicly-traded REITs in the United States focused on owning and
acquiring golf courses.
In February 1997, the Company raised net proceeds of approximately $73.0
million in its initial public offering and acquired the ten Initial Courses from
their Prior Owners. Each of the Initial Courses was leased-back to an affiliate
of its Prior Owner as described below. The Company believes the continuity of
management provided by these experienced operators facilitates the Company's
growth and profitability. Since the IPO, the Company has acquired an interest in
an additional nine Golf Courses. See "Developments Since the Initial Public
Offering."
The Golf Courses which the Company owns are leased to multiple independent
third party lessees pursuant to Participating Leases which provide for the
payment of fixed Base Rent and Participating Rent based on growth in revenue at
the Golf Courses. The interest payment under the Participating Mortgage is
structured similarly to the Participating Leases to provide the Company with
base interest payments and additional interest payments based on growth in
revenue at the Innisbrook Resort. See "The Participating Mortgage." Neither the
Company nor its executive officers owns any interest in, or participates in the
management of, the Lessees or the Innisbrook Resort Owner.
The Company believes the Initial Courses and its investments since the IPO
are consistent with its goal of becoming a leading owner of, and participating
in increased revenue from, nationally or regionally recognized upscale golf
courses. Four of the Golf Courses were ranked among the Top Ten New Courses by
either GOLF DIGEST or GOLF MAGAZINE in the year the Golf Course opened,
including Stonehouse Golf Club, which in November 1996 was named the "Best New
Upscale Course of 1996" by GOLF DIGEST and Oyser Bay, which was named Best New
Resort Course in the United States in 1983 by GOLF DIGEST. The Copperhead Course
at the Innisbrook Resort was ranked 43rd in the 1996 survey by GOLF MAGAZINE of
the "Top 100 Courses You Can Play" and the Island Course at the Innisbrook
Resort was ranked as one of the "Top 75 Resort Courses" by GOLF DIGEST in 1992.
Heritage Golf Club was ranked in the Top 50 Public Golf Courses by GOLF DIGEST.
See "The Golf Courses." 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.
The Company's executive offices are located at 14 North Adger's Wharf,
Charleston, South Carolina 29401 and its telephone number is (803) 723-GOLF
(4653).
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THE OPERATING PARTNERSHIP
The Operating Partnership holds the Participating Mortgage and owns the Golf
Courses which are subject to the Participating Leases. GTA, through its
wholly-owned subsidiaries, GTA GP and GTA LP, currently holds a 47.4% interest
in the Operating Partnership (60.8% after giving effect to this Offering). GTA
GP is the sole general partner of the Operating Partnership and GTA LP is a
limited partner of the Operating Partnership. The other limited partners include
those Prior Owners who received OP Units in exchange for the contribution of
their Golf Courses. Pursuant to the First Amended and Restated Agreement of
Limited Partnership, which was entered into concurrently with the closing of the
IPO, the limited partners do not have day-to-day control over the Operating
Partnership. However, the limited partners are 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 Operating Partnership, which decisions
require the approval of the holders of at least 66.7% of the interests in the
Operating Partnership. Each of the limited partners (other than GTA LP) may
exercise Redemption Rights for up to 50% of its OP Units beginning one year
after completion of the IPO (February 12, 1998) and the remaining 50% beginning
two years after completion of the IPO for cash or, at the election of the
Company, for shares of Common Stock on a one-for-one basis. See "Partnership
Agreement -- Redemption Rights."
The relationship after this Offering among GTA, its subsidiaries, the
Operating Partnership, the Limited Partners (including many Prior Owners and the
Innisbrook Resort Owner) and the Lessees is described in the following chart:
[ORGANIZATIONAL CHART OF THE COMPANY AND ITS AFFILIATES]
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BUSINESS STRATEGIES AND OBJECTIVES
The Company's primary objectives are to increase its Cash Available for
Distribution per share to stockholders and to enhance stockholder value. The
Company's main strategy for such growth is to (i) acquire additional golf
courses that meet the Company's investment criteria and (ii) participate in
increased revenues at its Golf Courses. The Company currently holds a
participating interest in 19 Golf Courses.
When the Company acquires a golf course, the course is either leased back to
its prior owner or leased to another qualified operator. Under the Company's
standard Participating Lease, the Company receives fixed Base Rent and
Participating Rent based on increases in Gross Golf Revenues, if any, at such
Golf Course. Currently all Golf Courses owned by the Company are leased to their
Prior Owners (or such owners' affiliates) with the exception of Tiburon and Lost
Oaks. The Company believes the continuity of management provided by these
experienced operators will facilitate the Company's growth and profitability.
Each Lessee joins the Company's Lessee Advisory Association, which provides
marketing information and opportunities and potential economic benefits to the
Lessees, such as bulk purchasing power for certain golf course supplies and
equipment.
In certain instances, state and federal tax laws make sale-leaseback
transactions prohibitively expensive, in which case the Company may provide
financing to a particular golf course, provided it receives a participating
interest in revenues at the golf course on a basis comparable to the Company's
standard Participating Lease. Typically, the Company's loan will be secured by a
first-lien on the underlying golf course asset and will include an option to
purchase the course at the end of the loan's term. In considering any financing
transactions, including the Participating Mortgage, the Company seeks to obtain
economic terms similar to the standard Participating Lease.
In addition to acquiring new golf courses and new participating interests,
the Company seeks to increase revenue from its current assets through internal
growth. Both strategies are discussed below.
ACQUISITIONS AND EXPANSIONS
ACQUISITIONS. The Company believes market conditions today are favorable
for the acquisition of golf courses at attractive returns. The Company intends
to continue 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 the factors described below provide it
with a distinct competitive advantage in the acquisition of upscale golf
courses, including courses that might not otherwise be available for purchase.
To fund acquisitions, the Company has access to a variety of debt and equity
financing sources, including the Line of Credit and the ability to issue OP
Units. The issuance of OP Units can provide a means of structuring tax-deferred
transactions for sellers of golf courses. Holders of OP Units generally have the
right to cause the Company to redeem their OP Units after certain holding
periods for cash, or at the Company's option, for Common Stock on a one-for-one
basis. To the extent the Company acquires a golf course in exchange for OP
Units, the golf course seller generally will not recognize taxable income until
it exercises the Redemption Right.
The Company believes it can attract sellers by offering competitive pricing
and valuation and by offering them the following benefits: (i) the ability to
retain control over the operations of the golf course by leasing the golf course
back from the Company; (ii) the tax deferral and increased liquidity associated
with owning OP Units; (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 Lessee Advisory Association; and (v) the
ability to diversify the seller's investment by participating as an equity owner
in the Company's portfolio of golf courses.
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The Company intends to concentrate its investment activities on golf courses
available at attractive prices that meet one or more of the following criteria:
- upscale Daily Fee courses that target avid golfers, who the Company
believes are generally willing to pay the higher green fees associated
with upscale golf courses;
- private or semi-private golf courses with proven operating histories that
have the potential for significant cash flow growth;
- 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;
- newly developed, well-designed courses with high growth potential; and
- upscale, well-maintained golf courses with proven operating histories
located in areas where significant barriers to entry exist.
The Company will undertake an analysis with respect to golf courses to be
considered for acquisition, including an evaluation of the following:
- product and service differentiation;
- competitive position in market;
- barriers to entry in development of new golf courses such as scarcity of
land and long lead-times for course developement;
- conditioning of the golf course and agronomy review;
- quantity, quality and cost of irrigation; and
- strength of the lodging industry, including hotels and condominiums, in
destination golf areas.
There can be no assurance that the Company will be able to find additional
golf courses that meet its investment criteria and there can be no assurance
that the Company will have access to sufficient debt and equity financing to
allow it successfully to acquire such courses. Moreover, acquisitions entail
risks that acquired courses will fail to perform in accordance with
expectations.
AFFILIATION WITH STARWOOD. Starwood, through an affiliate operates the Golf
Courses at the Innisbrook Resort and leases Lost Oaks. In addition, the golf and
conference facilities of the Innisbrook Resort are owned by an affiliate of
Starwood and the hotel and conference facilities are managed by Westin, an
affiliate of Starwood. The Company believes Starwood, through its affiliate is
one of the United States' leading golf course management, development and
consulting companies. Troon Golf has the exclusive right to operate golf courses
at hotels owned by Westin. The Company believes that its existing relationship
with Starwood, Westin and Troon Golf, will provide the Company with additional
acquisition opportunities throughout the United States.
AFFILIATION WITH GRANITE GOLF. The Lessee of Tiburon is an affiliate of
Granite Golf and an affiliate of Granite Golf manages Club of the Country.
Granite Golf and its affiliates currently manage over 30 golf courses throughout
the United States. Granite Golf identified the acquisition opportunity at
Tiburon. The Company believes its affiliation with Granite Golf will provide the
Company with additional acquisition opportunities.
EXPANSIONS. The Prior Owner of Northgate Country Club is adding nine holes
to that Golf Course, the Prior Owner of Woodlands is constructing a new
clubhouse at Woodlands and the owner of Lost Oaks plans to renovate and remodel
the clubhouse and course there (collectively, the "Expansion Facilities").
Subject to satisfaction of certain conditions, the Company has agreed that it
will purchase the Expansion Facilities when fully completed and operational. The
Company has agreed to fund the expansion at Northgate Country Club and
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may fund the construction of the other Expansion Facilities. 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. Upon such purchase or funding, the Base Rent payable at each
such course will be increased. No development fee will be paid to a Prior Owner
or any affiliate thereof in connection with the construction of the Expansion
Facilities.
The Company has entered into a loan agreement to provide construction
financing of approximately $3.0 million for the additional 9-hole facility at
Northgate Country Club, which construction is expected to commence in late 1997.
The interest rate for such loan is 10.47% and interest is payable monthly in
arrears.
Upon the Company's acquisition of the respective Expansion Facilities, the
Participating Leases for Northgate Country Club, Woodlands and Lost Oaks will be
amended to include the applicable Expansion Facility, to increase the Base Rent
in an amount designed to be accretive to the Company's Funds From Operations (as
herein defined) per share, and, with the exception of Lost Oaks (which
Participating Lease is cross-defaulted with the Participating Mortgage on the
Innisbrook Resort), the Prior Owner will be required to pledge additional OP
Units (or cash or other security acceptable to the Company) equal to 15% of the
purchase price paid by the Company for the applicable Expansion Facility. See
"The Company -- Business Strategies and Objectives -- Acquisitions and
Expansions."
The Prior Owner of Stonehouse Golf Club and Royal New Kent currently is
constructing clubhouses of 6,600 square feet and 7,700 square feet,
respectively, at such courses. The clubhouses are expected to be completed by
June 30, 1998 and will be constructed at the Lessee's expense. Base Rent will
not be adjusted but the Company will participate in any increases in Gross Golf
Revenue. See "The Golf Courses -- The Participating Leases."
The Innisbrook Resort Owner currently is adding an additional nine holes at
the Innisbrook Resort and is making significant capital improvements to the
resort and conference facilities. The Company, under the Participating Mortgage,
has agreed to fund up to $9.0 million for these improvements.
INTERNAL GROWTH
Based on the experience of its management, the Company believes the Golf
Courses offer opportunities for revenue growth through effective marketing and
efficient operations. See "The Golf Courses -- The Participating Leases --
Advisory Association." The Participating Leases and the Participating Mortgage
have been structured to provide the operators with incentives to manage and
maintain the Golf Courses in a manner designed to increase revenue and, as a
result, increase payments to the Company under the Participating Leases and the
Participating Mortgage. The Company believes that management of the Lessees, as
well as Troon Golf, have demonstrated expertise in the operation of the Golf
Courses and that the Golf Courses are positioned to benefit from favorable
trends in the golf industry. See "Lessees and Operators" and "The Golf
Industry."
PARTICIPATING LEASES. The Participating Leases generally provide that for
any calendar year, the Company will receive with respect to each leased Golf
Course, the greater of (a) Base Rent (as adjusted by the Base Rent Escalator
described below) or (b) an amount equal to the original (unescalated) Base Rent
plus the Participating Rent payable at the Golf Course. Participating Rent is
equal to 33 1/3% of the difference between that calendar year's Gross Golf
Revenue and Gross Golf Revenue at the Golf Course in the calendar year prior to
the course's acquisition, as adjusted in determining the original Base Rent.
Base Rent under each Participating Lease generally increases annually by the
lesser of (i) 3% or (ii) 200% of the change in the Consumer Price Index ("CPI")
for the prior year (the "Base Rent Escalator") during each of the first five
years of the 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 lease terms.
"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. See "The Golf Courses" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
38
<PAGE>
PARTICIPATING MORTGAGE. The $78.9 million Participating Mortgage is
structured similarly to the Participating Leases. The Company anticipates that
it will receive a return similar to the return it anticipates on the
Participating Leases. Under the Participating Mortgage, the Company has made an
initial advance of $69.975 million, which will be followed by additional
advances of up to $9.0 million to be used for a nine-hole expansion and other
improvements to the Innisbrook Resort facilities currently underway. The loan
term is 30 years, with an initial Base Interest rate of 9.63% per annum and an
interest rate of 9.75% per annum on the amount of the loan in excess of $69.975
million. The loan provides for minimum increases in the aggregate annual payment
of Base Interest of 5% per year for the first five years and a participating
interest feature throughout the term based upon the growth in Gross Golf
Revenues, as well as in other revenues, at the Innisbrook Resort over a 1996
base year. The annual increases in the Mortgage Payment are limited to 7% during
the first five years. Westin has agreed to pay up to $2.5 million per year to
the Innisbrook Resort Owner to supplement results of operations with respect to
the operations at the Innisbrook Resort for up to five years.
LESSEE PERFORMANCE OPTION. The Participating Leases utilize an
incentive-based performance structure. This Performance Option structure, is
designed to encourage the operators to seek aggressive growth in revenue at the
Golf Courses. The structure also is designed to attract potential sellers of
golf courses that the Company believes have high growth potential and that might
not otherwise be available for purchase. Under the Performance Option for the
Participating Leases, during years three through five of each Participating
Lease, the operator or its affiliate, subject to certain qualifications and
restrictions, may elect one time to increase the Base Rent in order to receive
additional OP Units or Common Stock. The Prior Owner of the Northgate Country
Club will have an additional two-year period to exercise the Performance Option
if it elects to construct the planned nine-hole expansion. The Performance
Option for the Participating Leases may only be exercised if the current-year
net operating income of the operator of the applicable Golf Course, inclusive of
a capital replacement reserve, exceeds 113.5% of such Lessee's Lease Payment
after taking into account the increased amount of Base Rent. If the Performance
Option is exercised, the Base Rent is increased by an amount calculated to be
accretive to the Company's Funds From Operations on a per share basis. Following
exercise of the Lessee Performance Option, the adjusted Base Rent will be
increased by the Base Rent Escalator each year for a period of five years. An
operator's ability to exercise the Performance Option and the number of OP Units
or Common Stock issuable to such Prior Owner in connection therewith, will
depend on future operating results at the applicable Golf Course and therefore
cannot be determined in advance.
PERFORMANCE OPTION FOR THE PARTICIPATING MORTGAGE. The structure of the
Performance Option for the Participating Mortgage is similar to the Performance
Option for the Participating Leases. Under the Performance Option for the
Participating Mortgage, during years three and five of the Participating
Mortgage the Innisbrook Resort Owner, subject to certain qualifications and
restrictions, may elect one time to require the Company to make an additional
advance under the Participating Mortgage and the Innisbrook Resort Owner will be
required to purchase additional OP Units with that advance. The Performance
Option for the Participating Mortgage may be exercised only if the current-year
net operating income of the Innisbrook Resort, inclusive of a capital
replacement reserve, exceeds 113.5% of such operator's Participating Mortgage
obligation after taking into account the increased amount of Base Interest. If
the Performance Advance is made, interest on the Performance Advance will be
calculated to be accretive to the Company's Funds From Operations on a per share
basis. Following exercise of the Performance Option for the Participating
Mortgage, the adjusted Base Interest will be increased by 3% per year for five
years. The Innisbrook Resort Owner's ability to exercise the Performance Option
will depend on future operating results and therefore cannot be determined in
advance.
39
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from this Offering, after payment of
estimated expenses of approximately $ incurred in connection with this
Offering, are estimated to be approximately $ . GTA, through its corporate
subsidiaries, intends to contribute the net proceeds of this Offering to the
Operating Partnership in exchange for additional interests in the Operating
Partnership, increasing GTA's ownership in the Operating Partnership from 47.4%,
currently, to 60.8%. The Operating Partnership will use the net proceeds of this
Offering to repay approximately $58.8 million outstanding under the Line of
Credit and for general corporate purposes, including the acquisition of
additional golf courses.
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY
The Company's Common Stock began trading on the American Stock Exchange
("AMEX") on February 7, 1997, under the symbol "GTA." On October 30, 1997, the
last reported sale price per share of Common Stock on the AMEX was $26.00 and
there were approximately 50 holders of record of the Common Stock. The following
table sets forth the quarterly high and low closing sale prices per share of
Common Stock reported on the AMEX and the distributions paid by the Company with
respect to each such period.
<TABLE>
<CAPTION>
CASH DISTRIBUTIONS
DECLARED
QUARTER ENDED HIGH LOW PER SHARE
- -------------------------------------------------------------------------------- ---- --- ------------------
<S> <C> <C> <C>
March 31, 1997 (from February 7, 1997).......................................... $261/8 $223/4 $0.21(1)
June 30, 1997................................................................... $283/4 $235/8 $0.41
September 30, 1997.............................................................. $285/8 $263/16 $0.41(2)
</TABLE>
- ------------
(1) The distribution was for a partial period from the closing of the IPO and
was equivalent to a quarterly distribution of $0.41 per share of Common
Stock.
(2) The third quarter dividend was declared on October 15, 1997 and is payable
on November 10, 1997 to stockholders of record on October 27, 1997.
Purchasers of Common Stock in this Offering will not receive the third
quarter distribution in respect of the shares of Common Stock offered
hereby.
The Company's Board of Directors declared a quarterly distribution of $0.41
per share for the quarter ended September 30, 1997. Future distributions by the
Company will be at the discretion of the Board of Directors and will depend on
the Company's financial condition, its capital requirements, the annual
distribution requirements under the REIT provisions of the Tax Code and such
other factors as the Board of Directors deems relevant. There can be no
assurance that any such distributions will be made by the Company.
Distributions by the Company to the extent of its current and accumulated
earnings and profits for federal income tax purposes generally will be taxable
to stockholders as ordinary dividend income. Distributions in excess of current
and accumulated earnings and profit will be treated as a non-taxable reduction
of the stockholder's basis in its shares of Common Stock to the extent thereof,
and thereafter as taxable gain. Distributions that are treated as a reduction of
the stockholder's basis in its shares of Common Stock will have the effect of
deferring taxation until the sale of the stockholder's shares. The Company
anticipates that, for federal income tax purposes, only a nominal portion of the
per share distribution paid for 1997 will represent a return of capital to the
stockholders. See "Federal Income Tax Considerations."
In the future, the Company may implement a dividend reinvestment program
under which holders of Common Stock may elect automatically to reinvest
dividends and make additional investments in shares of Common Stock. If a
dividend reinvestment and stock purchase program is implemented, the Company,
from time to time, may repurchase Common Stock in the open market for purposes
of fulfilling its obligations under the program, or may elect to issue
additional shares of Common Stock.
40
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
and the pro forma capitalization of the Company as of June 30, 1997, assuming
completion of this Offering and use of the proceeds from this Offering as
described in "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------
HISTORICAL PRO FORMA
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Borrowings under the Line of Credit..................... $ 43,900 $ 4,325
Minority interest in Operating Partnership.............. 43,487 49,267
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, 4,069,326 shares issued and
outstanding, 7,160,755 issued and outstanding pro
forma (1)........................................... 41 72
Additional paid-in capital............................ 42,429 118,543
Note receivable from stock sale....................... (3,298) (3,298)
Accumulated earnings.................................. 1,189 1,189
--------- ---------
Total stockholders' equity............................ 40,361 116,506
--------- ---------
Total capitalization................................ $ 127,748 $ 170,098
--------- ---------
--------- ---------
</TABLE>
- ------------
(1) Excludes 4,620,313 shares issuable upon redemption of OP Units outstanding
prior to this Offering.
41
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables set forth (i) unaudited selected consolidated
historical and pro forma financial information for the Company and The Legends
Group and (ii) selected historical financial information for The Legends Group,
the accounting acquiror, and for the Legends Lessee, the significant lessee. The
pro forma operating information is presented as if the Formation Transactions,
this Offering and the Subsequent Acquisitions had occurred as of January 1,
1996, 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 this
Offering and the Subsequent Acquisitions had occurred on June 30, 1997. The pro
forma information does not purport to represent what the Company's nor The
Legends Group's financial position or results of operations actually would have
been had the Formation Transactions, this Offering and the Subsequent
Acquisitions, in fact, occurred on such date or at the beginning of the period
indicated, or to project the Company's or The Legends Group's financial position
or results of operations at any future date or for any future period.
GOLF TRUST OF AMERICA, INC.
UNAUDITED SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS FEBRUARY 12, 1997
YEAR ENDED ENDED JUNE (INCEPTION OF
DECEMBER 31, 30, OPERATIONS) THROUGH
1996 1997 JUNE 30, 1997
------------- ----------- -------------------
(PRO FORMA) (HISTORICAL)
<S> <C> <C> <C>
OPERATING DATA:
Revenue:
Participating Leases (1)....................................... $ 15,949 $ 9,033 $ 5,859
Participating Mortgage......................................... 8,067 4,034 181
Other interest income.......................................... -- -- 448
------------- ----------- ----------
Total revenue................................................ 24,016 13,067 6,488
------------- ----------- ----------
Depreciation and amortization (1)................................ 5,317 2,950 1,149
General and administrative....................................... 2,097 1,300 910
Interest expense................................................. 368 184 290
------------- ----------- ----------
Total expenses............................................... 7,782 4,434 2,349
------------- ----------- ----------
Income before minority interest (1).............................. 16,234 8,633 4,139
Minority interest (2)............................................ 6,104 3,384 2,129
------------- ----------- ----------
Net income applicable to common stockholders..................... $ 10,130 $ 5,249 $ 2,010
------------- ----------- ----------
------------- ----------- ----------
Net income per share of Common Stock............................. $ 1.42 $ 0.73 $ 0.50
------------- ----------- ----------
------------- ----------- ----------
Weighted average shares of Common Stock outstanding.............. 7,161 7,161 4,007
------------- ----------- ----------
------------- ----------- ----------
CASH FLOW DATA:
Cash flows from operating activities (3)....................... $ 21,551 $ 11,583 $ 3,578
Cash flows used in investing activities (4).................... (719) (359) (116,497)
Cash flows from financing activities (5)....................... 14,505 9,660 115,190
OTHER DATA:
Funds From Operations (6)...................................... $ 21,551 $ 11,583 $ 5,288
Cash Available for Distribution (6)............................ $ 19,504 $ 10,560 $ 5,011
Weighted average Common Stock and OP Units outstanding......... 11,482 11,781 8,479
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1997
-----------
1997 (HISTORICAL)
-----------
(PRO FORMA)
<S> <C> <C>
BALANCE SHEET DATA:
Investment in Golf Courses............................................................ $ 87,599 $ 61,724
Mortgage note receivable (7).......................................................... 61,680 61,680
Notes payable......................................................................... 4,325 43,900
Minority interest in Operating Partnership............................................ 49,267 43,487
Total stockholders' equity............................................................ 116,506 40,361
</TABLE>
(NOTES ON PAGE 44)
42
<PAGE>
THE LEGENDS GROUP GOLF COURSE OPERATIONS
UNAUDITED SELECTED PRO FORMA FINANCIAL DATA
(in thousands)
<TABLE>
<CAPTION>
SEASIDE LEGENDS
RESORTS OF TOTAL
GOLF HERITAGE (OYSTER VIRGINIA LEGENDS
LEGENDS GOLF CLUB BAY) (8) GOLF
--------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
OPERATING DATA:
Revenue from Golf Course operations....................... $ 8,078 $ 3,141 $ 3,288 $ 692 $ 15,199
Other revenue............................................. 2,534 745 784 151 4,214
--------- ----------- --------- --------- ---------
Total revenue............................................. 10,612 3,886 4,072 843 19,413
Participating Lease payments (1).......................... 4,670 1,825 1,856 928 9,279
Other operating expenses (9).............................. 6,216 2,171 2,296 2,492 13,175
--------- ----------- --------- --------- ---------
Net income (loss)......................................... $ (274) $ (110) $ (80) $ (2,577) $ (3,041)
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
CASH FLOW DATA:
Cash flows from (used in) operating activities (10)....... $ (125) $ (69) $ 40 $ (2,577) $ (2,731)
Cash flows from investing activities (11)................. -- -- -- -- --
Cash flows from financing activities (12)................. -- -- -- -- --
OTHER DATA:
EBITDA (13)............................................... $ (31) $ (55) $ 59 $ (2,577) $ (2,604)
SIX MONTHS ENDED JUNE 30, 1997
OPERATING DATA:
Revenue from Golf Course operations....................... $ 4,853 $ 1,943 $ 2,012 $ 1,274 $ 10,082
Other revenue............................................. 1,692 453 517 252 2,914
--------- ----------- --------- --------- ---------
Total revenue............................................. 6,545 2,396 2,529 1,526 12,996
Participating Lease payments (1).......................... 2,335 913 928 1,853 6,029
Other operating expenses (9).............................. 3,714 1,204 1,168 1,857 7,943
--------- ----------- --------- --------- ---------
Net income (loss)......................................... $ 496 $ 279 $ 433 $ (2,184) $ (976)
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
CASH FLOW DATA:
Cash flows from (used in) operating activities (10)....... $ 548 $ 295 $ 450 $ (2,184) $ (891)
Cash flows from investing activities (11)................. -- -- -- -- --
Cash flows from financing activities (12)................. -- -- -- -- --
OTHER DATA:
EBITDA (13)............................................... $ 557 $ 298 $ 453 $ (2,184) $ (876)
</TABLE>
(NOTES ON PAGE 44)
43
<PAGE>
LEGENDS GOLF
SELECTED COMBINED HISTORICAL FINANCIAL INFORMATION
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997(14)
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA:
Revenue from golf course
operations....................... $ 11,724 $ 13,455 $ 14,371 $ 14,619 $ 15,199 $ 8,641 $ 10,082
Other revenue...................... 2,931 3,438 4,725 3,823 4,214 2,284 2,914
--------- --------- --------- --------- --------- --------- ---------
Total revenue...................... 14,655 16,893 19,096 18,442 19,413 10,925 12,996
Operating expenses(9).............. 8,895 9,882 10,083 10,322 13,556 5,757 12,540
Depreciation and amortization...... 1,406 1,564 1,830 1,791 2,400 1,004 808
Interest expense................... 648 619 998 1,017 1,589 515 420
--------- --------- --------- --------- --------- --------- ---------
Income before equity in earnings of
the Operating Partnership........ 3,706 4,828 6,185 5,312 1,868 3,649 (772)
Equity in earnings of the Operating
Partnership(15).................. -- -- -- -- -- -- 1,916
--------- --------- --------- --------- --------- --------- ---------
Net income......................... $ 3,706 $ 4,828 $ 6,185 $ 5,312 $ 1,868 $ 3,649 $ 1,144
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Investment in Golf Courses and
related equipment................ $ 17,425 $ 16,663 $ 19,301 $ 33,099 $ 35,060 $ 34,738 $ 1,083
Total assets....................... 20,484 22,719 24,649 42,300 49,804 49,458 22,019
Mortgages, notes payable and
advances from affiliates and
stockholders..................... 16,293 19,285 18,638 35,163 40,480 37,512 8,268
Capital lease obligations.......... 332 -- -- -- -- -- --
Total owners' equity............... 2,086 2,263 3,772 6,328 7,174 9,976 11,000
</TABLE>
(NOTES ON PAGE 44)
44
<PAGE>
- ---------------
(1) Represents payments of Base Rent from the 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, except for Legends of Virginia, the Lessee of
Stonehouse Golf Club and Royal New Kent, which courses opened in June 1996
and August 1996, respectively. Pro forma Participating Lease revenue payable
by Legends of Virginia reflects only the periods during which such Golf
Courses were actually operating.
If Stonehouse Golf Club and Royal New Kent had been operating during the
entire period presented (i) Participating Lease revenue would have been
$1,847 higher for the year ended December 31, 1996, for a total of $17,796,
(ii) depreciation and amortization would have been $580 higher for the year
ended December 31, 1996, for a total of $5,897, and (iii) income before
minority interest for the year ended December 31, 1996 would have been
$1,267 higher for a total of $17,501.
The pro forma information does not include estimates of Base Rent increases
in the second year. Pro forma results for the six months ended June 30, 1997
and actual results for the period from February 12, 1997 through June 30,
1997 include $109 of Participating Rent.
(2) Calculated as approximately 37.6%, 39.2% and 51.4% of the Operating
Partnership's net income for the applicable period based on the OP Units
outstanding for the period not owned by the Company.
(3) Represents the Company's income before minority interest adjusted for
non-cash depreciation and amortization. Estimated pro forma cash flows from
operating activities 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.
(4) Pro forma cash flows used in investing activities 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 5.0% of Gross Golf Revenue at the Golf Courses. In addition to
increases resulting from the Base Rent Escalator and payments of
Participating Rent, the Lessees generally are obligated to increase their
lease payments each year in an amount equal to the increase in the capital
expenditure reserve from the prior year. Historical cash flows used in
investing activities additionally reflects golf course acquisitions and
mortgage note issuance.
(5) Pro forma cash flows used in financing activities represents estimated
distributions to be paid based on the current quarterly dividend rate of
$0.41 per share of Common Stock or per OP Unit and an aggregate of 11,482
and 11,781 shares of Common Stock and OP Units outstanding for the year
ended December 31, 1996 and the six months ended June 30, 1997,
respectively, and debt of $4,325.
(6) Estimated Funds From Operations and Cash Available for Distribution are
calculated as follows:
<TABLE>
<CAPTION>
PERIOD FROM FEBRUARY 12,
1997
(INCEPTION OF
YEAR ENDED SIX MONTHS ENDED OPERATIONS)
DECEMBER 31, 1996 JUNE 30, 1997 THROUGH JUNE 30, 1997
----------------- ------------------ ------------------------
(PRO FORMA) (HISTORICAL)
<S> <C> <C> <C>
Income before minority interest............................. $16,234 $ 8,633 $4,139
Depreciation and amortization............................... 5,317 2,950 1,149
------- ------- ------
Funds From Operations....................................... 21,551 11,583 5,288
Adjustments:
Noncash mortgage revenue.................................. (1,328) (664) (30)
Estimated capital expenditures............................ (719) (359) (247)
------- ------- ------
Cash Available for Distribution............................. 19,504 10,560 5,011
Additional Base Rent for courses not operational during
entire period.............................................. 1,847 -- --
------- ------- ------
Adjusted Cash Available for Distribution.................... $21,351 $10,560 $5,011
</TABLE>
In accordance with the resolution adopted by the Board of Governors of
NAREIT, Funds From Operations represents net income (loss) (computed in
accordance with GAAP), excluding gains (or losses) from debt restructuring
or sales of property, plus depreciation of real property, and after
adjustments for unconsolidated partnership and joint ventures. Funds From
Operations should not be considered as an alternative to net income or other
measurements under GAAP 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. 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. Compliance with the NAREIT definition of Funds From Operations
is voluntary. Accordingly, the Company's calculation of Funds From
Operations in accordance with the NAREIT definition may be different than
similarly titled measures used by other REITs. See "Distribution Policy."
Pro forma income before minority interest for the year ended December 31,
1996, reflects base rent from Legends of Virginia for the period during
which the Golf Courses it leases from the Company, Stonehouse Golf Club and
Royal New Kent, were actually operating (Stonehouse Golf Club opened in June
1996 and Royal New Kent opened in August 1996). The adjustment above
reflects additional Base Rent payable during the Golf Courses' initial year
of operations (i.e., to reflect a full year's initial Base Rent). Noncash
mortgage revenue represents the difference between interest revenue on the
Participating Mortgage reported by the Company in accordance with GAAP and
the actual cash payment to be received by the Company. See "The Golf Courses
-- The Participating Mortgage -- Fixed Interest Rate Escalation."
45
<PAGE>
The Participating Leases require the Company to reserve annually between
2.0% and 5.0% 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 Lessees.
(7) Represents amounts outstanding under the Participating Mortgage exclusive
of the amounts used to acquire OP Units and shares of the Common Stock.
(8) Legends of Virginia financial data reflects partial period 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.
(9) Represents operating costs and expenses, general and administrative,
repairs and maintenance, utilities, marketing and management fees. Operating
Expenses for The Legends Group for the six months ended June 30, 1997
includes Base Rent payments for the period commencing February 12, 1997.
(10) Represents pro forma income adjusted for non-cash depreciation and
amortization. Estimated pro forma cash flows from operating activities
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.
(11) Cash flows from investing activities consists principally of capital
improvements to the Golf Courses. As such improvements are expected to be
funded through a capital expenditure reserve funded by the Company, cash
flows from investing activities funded by the Lessees are not expected to be
material.
(12) Cash flows from financing activities primarily includes transactions with
the Prior Owners and borrowings and repayments on loans. Such cash flows
have been excluded in the determination of cash flows from financing
activities as the Company does not believe these excluded items are material
to cash flows from financing activities.
(13) 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 Lessees (before
payment of debt service obligations and non-cash depreciation charges).
EBITDA does not represent cash generated from operating activities in
accordance with GAAP and should not 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.
(14) Information presented includes the Prior Owners and the Legends Lessee
combined, as the operations were transferred to the Legends Lessee effective
February 12, 1997. Summary unaudited operating results for the Legends
Lessees for the period February 12, 1997 (inception) through June 30, 1997
included in The Legends Group for the six months ended June 30, 1997 are as
follows:
<TABLE>
<CAPTION>
Gross golf revenue............................................................................... $ 9,164
<S> <C>
Other revenue.................................................................................... 2,496
---------
Total revenue............................................................................ 11,660
Operating expenses............................................................................... 6,368
Lease payments................................................................................... 4,629
Depreciation and amortization.................................................................... 37
---------
Total expenses........................................................................... 11,034
---------
Net income....................................................................................... $ 626
---------
---------
</TABLE>
(15) Equity in earnings of the Operating Partnership reflects the Prior Owner's
proportionate interest in the earnings of the Operating Partnership based on
its limited partnership interest. These amounts do not represent cash
distributions to the Legends Group Prior Owner. Earnings reflect the
interest of the Prior Owner and not the Legends Lessee, and any
distributions payable to the Legends Group Prior Owner will not necessarily
be available to the Legends Lessee to make Lease Payments.
46
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
GTA was incorporated in Maryland on November 8, 1996. The Company was formed
to capitalize upon consolidation opportunities in the ownership of upscale golf
courses in the United States. The Company's principal business strategy is to
acquire upscale golf courses and then lease the golf courses to qualified third
party operators, including affiliates of the sellers. Title to the acquired
courses is held by the Operating Partnership, in which the Company is the sole
general partner. The Company has the ability to issue OP Units in the Operating
Partnership. OP Units are redeemable by their holder for cash or, at the
election of the Company, for shares of Common Stock on a one-for-one basis. When
the Company acquires a golf course in exchange for OP Units, in most instances
the seller of the golf course does not recognize taxable gain until it exercises
the Redemption Right. OP Units can thus provide an attractive tax-deferred sale
structure for golf course sellers. The Company believes it has a distinct
competitive advantage in the acquisition of upscale golf courses, including
those which might not otherwise be available for purchase, because of (i) its
utilization of a multiple independent lessee structure, (ii) management's
substantial industry knowledge, experience and relationships within the golf
community, (iii) the Company's strategic alliances with prominent golf course
operators and (iv) its ability to issue OP Units to golf course owners on a
tax-deferred basis.
In February 1997, the Company raised net proceeds of approximately $73
million in its IPO and consummated the Formation Transactions. In the IPO the
Company sold 3,910,000 shares of Common Stock at $21.00 per share (including
510,000 shares sold pursuant to the underwriters' over-allotment option, which
was exercised in full). The Company contributed the net proceeds of the IPO to
the Operating Partnership in exchange for a 49% interest in the Operating
Partnership.
THE GOLF COURSES
Concurrently with the closing of the IPO, the Company acquired the 10
Initial Courses from their Prior Owners. The ten Initial Courses are located in
South Carolina (4), Virginia (2), Alabama, Georgia, North Carolina and Texas.
Title to the Initial Courses is held by the Operating Partnership. The Initial
Courses were contributed by their Prior Owners to the Operating Partnership in
exchange for approximately $6.2 million in cash, the assumption of approximately
$43.1 million of mortgage and other indebtedness and approximately 4.1 million
OP Units, which represented a 51% limited partnership interest in the Operating
Partnership. Control of the Operating Partnership remains in the hands of the
Company, as the sole general partner.
On June 23, 1997, the Company closed the $78.9 million Participating
Mortgage with the Innisbrook Resort Owner in connection with a merger
transaction that resulted in the Innisbrook Resort Owner acquiring the
Innisbrook Resort, as well as the Tamarron Resort, an 18-hole destination golf
and conference facility located near Durango, Colorado. The Company made an
initial advance of $69.975 million, which will be followed by additional
advances of up to $9.0 million to be used for a nine-hole expansion and other
improvement to the Innisbrook Resort facilities currently underway. The Company
was granted a first lien on the Innisbrook Resort, including the golf courses,
the conference facilities and the undeveloped land, but excluding the hotel,
which consists of individually-owned condominiums. Troon Golf manages the golf
facilities at the Innisbrook Resort. The condominium rental pool and conference
facility at the Innisbrook Resort is managed by Westin. Westin has agreed to pay
up to $2.5 million per year to the Innisbrook Resort Owner to supplement results
of operations with respect to the operations at the Innisbrook Resort. The
Westin Guaranty, which is for a period of up to five years, is designed to
ensure receipt by the Company of Base Interest payments under the Participating
Mortgage. The Participating Mortgage has a 30-year maturity, a 5% annual
increase in the Base Interest for the first five years and a participating
interest feature throughout the term based upon the growth in revenues over a
base year. The Company has the right to acquire the Innisbrook Resort at the
expiration of the term of the Participating Mortgage, including any early
expiration resulting from a default of the borrower thereunder. The purchase
price shall equal the lesser of the fair market value of the Innisbrook Resort
(but in no event less than
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the outstanding balance of the Participating Mortgage), as determined by a third
party appraisal, or 400,000 shares (125,000 shares if a Transfer Triggering
Event, as hereinafter defined, has occured) of the Company's Common Stock and
cancellation of the outstanding principal balance of the Participating Mortgage.
See "The Golf Courses--The Participating Mortgage."
On August 19, 1997, the Company acquired Tiburon, a 27-hole, upscale golf
course located in Omaha, Nebraska for $5.4 million in cash and Common Stock
valued at approximately $600,000 and leased the Golf Course to Granite Golf
under a Participating Lease.
On September 2, 1997, the Company acquired Raintree, an 18-hole golf course
located in Akron, Ohio, for $1.2 million in cash and OP Units valued at
approximately $3.4 million and leased the Golf Course to the Prior Owner under a
Participating Lease.
On October 3, 1997, the Company acquired Lost Oaks, an 18-hole upscale golf
course located in Tampa, Florida, for $5.9 million in cash, including closing
costs. The Company leases the Golf Course to an affiliate of Starwood under a
Participating Lease.
On September 30, 1997, the Company acquired Eagle Watch, an 18-hole golf
course located in Atlanta, Georgia, for $4.5 million in cash and OP Units valued
at approximately $1.9 million. The Company leases the Golf Course under a
Participating Lease to an affiliate of the Prior Owner.
On October 17, 1997, the Company acquired Club of the Country, an 18-hole
private country club located in Kansas City, Kansas, for approximately $2.6
million in cash and OP Units valued at approximately $500,000.
The leases between the Company, as lessor, and each Lessee provide for the
payment of Lease Payments comprised of Base Rent, including minimum rent
increases for a minimum of five years, and Participating Rent based on growth in
revenue at the Golf Course.
The Company's primary source of revenue is Lease Payments under the
Participating Leases and mortgage payments under the Participating Mortgage.
Each Lessee has only nominal capitalization and a Lessee's ability to make the
Lease Payments to the Company under the Participating Leases will be dependent
upon the Lessee's ability to generate sufficient cash flow from the operation of
the Golf Course(s) leased by it. Participating Rent is generally equal to
33 1/3% of the increase in Gross Golf Revenues over the Gross Golf Revenues for
the Golf Course for the base year, as adjusted by the Company in determining the
initial Base Rent. Base Rent will increase each year by the Base Rent Escalator
during the first five years of the lease term (and for an additional five years
thereafter following an exercise of the Lessee Performance Option). The Base
Rent Escalator for a given year generally equals the lesser of (i) 3% or (ii)
200% of the change in the CPI over the prior year. Annual increases in Lease
Payments are limited to a maximum of 5% for the first five years of the lease
terms.
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.
In order to achieve higher revenues, management believes the 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, and the Legends Group Prior Owners is
based upon the Company's financial statements as of December 31, 1996, the pro
forma consolidated balance sheet and income statement of the Company and the
Legend Lessees, and the historical combined financial statements of The Legends
Group, the accounting acquiror, with respect to seven of the Initial Courses. In
establishing the amount of Base Rent for the Courses, the Company and the
Lessees considered, in addition to actual historical results of operations, 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 Lessees. Such factors include (i) cost savings expected to be achieved
by the Lessees as a result of operational changes following completion of the
Formation Transaction (affecting the Legends Group courses), (ii) revenue
enhancing programs that certain Lessees intend to implement following completion
of the Formation Transactions (affecting Legends Resort Courses, Oyster Bay and
Heritage Golf
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Club) and (iii) estimated revenues and expenses at the two recently opened
Initial Courses (Royal New Kent and Stonehouse Golf Club). The pro forma
financial information for the Company and the Legends Lessees reflect initial
Base Rent and no Participating Rent.
RESULTS OF OPERATIONS OF THE COMPANY
FOR THE PERIOD FROM FEBRUARY 12, 1997 TO JUNE 30, 1997
For the period from February 12, 1997 to June 30, 1997, the Company received
$6,040,000 in revenue from the Participating Leases for the Initial Courses and
interest received on the mortgage note receivable. Included in revenue was
$109,000 Participating Rent from 8 of the 10 Initial Courses.
Total expenses before minority interest, totaling $2,349,000 for the period
from February 12 to June 30, 1997, reflect depreciation and amortization,
general and administrative expenses and interest expense.
Net income before minority interest for the period from February 12 to June
30, 1997 is $4,139,000.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
Cash flow from operating activities for the period from February 12, 1997 to
June 30, 1997, was $3,578,000. This reflects net income before minority
interest, plus noncash charges to income for depreciation and loan fee
amortization and working capital changes. Cash flows used in investing
activities reflect mortgage receivable of $61,599,000 and original golf course
acquisitions of $54,554,000. Cash flows provided by financing activities,
totaling $115,190,000, represents the total borrowing of $43,825,000 under the
Credit Facility (discussed below) and offering proceeds of $73,055,000 less
dividend distributions.
Concurrent with the closing of the IPO, the Company borrowed approximately
$4,325,000 that, together with the net proceeds of the IPO, was used to retire
mortgage indebtedness and other debt of the Prior Owners, to fund the cash
portion of the purchase of the Initial Courses and to provide initial working
capital. 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 its contribution of one of the
Initial Courses to the Company. This loan has been consolidated with the Line of
Credit.
On June 20, 1997, the Company entered into the Line of Credit ($43,900,000
outstanding as of June 30, 1997) to be used primarily for the acquisition of
additional golf courses, although a portion also may be used for acquisition of
the Expansion Facilities, for capital expenditures or for general working
capital purposes. The Line of Credit imposes certain conditions on the Company's
ability to draw on the Line of Credit, including, without limitation, a
borrowing base calculation. On September 24, 1997 the Company negotiated a
reduction in the interest rate from LIBOR plus 2.0% to LIBOR plus 1.75%.
Additionally, the Company has received a commitment to increase the Line of
Credit, upon completion of this Offering, to $125 million and to convert it to
an unsecured facility.
The Company intends to invest in additional golf courses as suitable
opportunities arise, but the Company will not undertake investments unless
adequate sources of financing are available. The Company anticipates that future
acquisitions would be funded with debt financing provided by the Line of Credit,
the issuance of OP Units or with proceeds of additional equity offerings. 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.
Except as described in this Prospectus, the Company currently has no binding
agreement to acquire any additional golf courses. The Company is in active
negotiations regarding the acquisition of additional golf courses, although
there can be no assurance that the Company will acquire any of these golf
courses.
The Company's acquisition capabilities are enhanced by its existing capital
structure. The Company intends to maintain a capital structure with consolidated
indebtedness representing no more than 50% of its total market capitalization.
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The Participating Leases require the Company to reserve annually between
2.0% and 5.0% 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 Lessees. For the six months ended June 30, 1997, the Company had reserved
$247,000 to fund capital expenditures under the Participating Leases,
The Company has agreed to fund certain improvements of $1.25 million at Lost
Oaks. In addition, the Company has committed to provide up to an additional $9
million under the Participating Mortgage and $3.0 million at Northgate under a
loan agreement to fund the construction of an additional nine holes.
PRO FORMA RESULTS OF OPERATIONS OF THE COMPANY
On a pro forma basis for the year ended December 31, 1996 and the six months
ended June 30, 1997, the Company would have received $15,949,000 and $9,033,000,
respectively, in Base Rent from the Participating Leases for the Golf Courses.
For the year ended December 31, 1996, this amount does not include $1,847,000 in
rent from Legends of Virginia LC related to its two courses, Stonehouse Golf
Club and Royal New Kent, because such courses opened in June 1996 and August
1996, respectively. As these Golf Courses are now fully operational, the Company
contractually is entitled to receive rent of approximately $17,856,000 in its
first full year of operation.
On a pro forma basis the Company also would have recognized interest income
under the Participating Mortgage of $8,067,000 and $4,034,000, respectively.
None of the revenue/income amounts reflects any participation revenue.
Total pro forma expenses of $7,782,000 and $4,434,000 for the year ended
December 31, 1996 and the six months ended June 30, 1997, respectively, 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 Golf Courses acquired by the Company from The
Legends Group. The contribution of these Golf Courses is treated for accounting
purposes as a reorganization of the interests of The Legends Group in the
contributed Golf Courses and has been accounted for at historical cost. Pro
forma expenses for the year ended December 31, 1996, do not include $580,000 of
depreciation related to the period these courses were not operational in 1996.
If these courses had been operational for all of 1996, total pro forma expenses
for the year ended December 31, 1996 would have been $8,362,000.
Minority interest totaling $6,104,000 for the year ended December 31, 1996,
($6,860,000 if the Legends of Virginia Golf Courses had been fully operational
for all of 1996) and $3,384,000 for the six months ended June 30, 1997, reflects
the 37.5% and 39.2% interest respectively, of the Prior Owners, management and
operators in the pro forma net income of the Operating Partnership.
Pro forma net income for the year ended December 31, 1996 is $10,130,000
($10,641,000 if the Legends of Virginia Golf Courses had been fully operational
for all of 1996). Pro forma net income for the six months ended June 30, 1997,
is $5,249,000.
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, 1996 and six months ended June 30, 1997, excluding changes in
working capital, would have been $21,551,000 ($23,398,000 for 1996 if the
Legends of Virginia Golf Courses had been fully operational for all of 1996) and
$11,583,000. 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 $719,000 and $359,000,
calculated based upon the Company's capital expenditure reserves required by the
terms of the Participating Leases. Cash flows from financing activities,
totaling $14,504,000 and $9,660,000, represents distributions (based upon the
current quarterly per share and per OP Unit distribution rate of $0.41) to
holders of the Common Stock and OP Units and the amount of the initial borrowing
of $4,325,000.
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THE LEGENDS GROUP PRIOR OWNERS
Pursuant to the Formation Transactions, the Company acquired seven Golf
Courses from The Legends Group: Heritage Golf Club, Heathland, Moorland,
Parkland, Oyster Bay, Royal New Kent and Stonehouse Golf Club. These seven Golf
Courses are 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 are leased by a single Legends Lessee pursuant to
a single Participating Lease. The recently opened Golf Courses -- Royal New Kent
and Stonehouse Golf Club -- are in similar stages of operation and are leased by
a single Legends Lessee. Each of the two other Legends Golf Courses is leased by
a separate Legends Lessee. Aggregate Base Rent under the Participating Leases
with the Legends Lessees represents approximately 49.0% and 50.1% of the
Company's pro forma revenue for the year ended December 31, 1996 and the six
months ended June 30, 1997, respectively. The Legends Group Prior Owners
received OP Units representing approximately 49.6% 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 Golf Courses being contributed by The Legends
Group; however, the results of operations of such Golf Courses 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 Golf Courses being contributed by The
Legends Group, 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, affiliated entities began
constructing, selling and renting golf villas as part of a resort/residential
development at the Legends Resort, site of the Legends Resort Courses,
Heathland, Moorland and Parkland. 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 Courses in 1996 and 1997 to date and is expected to
continue to be a source of rounds played as the development is completed.
For purposes of financial presentations, the term "Legends Golf" refers to
the combined operations of all seven Golf Courses contributed by The Legends
Group, and the term "Golf Legends" refers to operations of the three Golf
Courses located at the Legends Resort.
RESULTS OF OPERATIONS OF THE LEGENDS GROUP
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Revenue from golf operations increased 16.7% from $8,641,000 to $10,082,000
while the revenue per player increased from $60.95 to $61.30, and the total
rounds played increased 16.0% from 141,780 to 164,482. The increase in total
number of rounds primarily is due to the opening of the two Legends of Virginia
courses in mid-1996. Of the 22,702 increase in rounds, Legends of Virginia, LC
accounted for 18,281 rounds and a total revenue increase of $1,253,000.
The number of rounds played significantly influences other revenue sources,
including food and beverage and merchandise sales. The number of rounds
increased 16.0% and other revenue increased 27.6% to $2,914,000 from $2,284,000
principally because of (i) a 25.9% increase in food and beverage sales (which
resulted from additional demand created by occupants of the newly constructed
golf villas at the Legends Resort), increased sales at Legends of Virginia, LC
and (iii) a 15.9% increase in pro shops sales, (which resulted principally from
sales at Legends of Virginia, LC). Other income increased as a result of
reinstituting the course photography.
Operating expenses increased 97.3% to $13,348,000 from $6,761,000. Principal
components of the $6,587,000 increase were (i) operating costs exclusive of
lease payments to the Company and depreciation expense of approximately
$1,774,000 associated with the two Legends of Virginia courses opened in
mid-1996,
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(ii) lease payments to the Company, land lease payments to the prior owner and
depreciation expense totaling $6,287,000 for 1997 compared to $1,543,000 for
1996 (an increase of $4,744,000) when there were no lease payments to the
Company, (iii) $321,000 attributable to clubhouse repairs at Heritage Golf Club
and Oyster Bay along with the addition of several maintenance personnel to
improve the quality of the course maintenance and (iv) increased costs of the
food and beverage operations consistent with the increase in sales.
Interest expense decreased 18.5% to $420,000 from $515,000 as a result of
lower borrowings outstanding related to debt for the courses that was
transferred in connection with the Formation Transaction's retirement of debt.
Equity in earnings of the Operating Partnership resulted from an
approximately 48% limited partnership interest originating with the Formation
Transactions held by Legends Golf.
Net income decreased $2,505,000 from $3,649,000 to $1,144,000 primarily as a
result of the increased operating expenses from the two new courses and Lease
Payments under the Participating Leases.
YEAR ENDED DECEMBER 31, 1996 AND 1995
Revenue from golf operations increased 4.0% from $14,619,000 to $15,199,000.
Revenue per player increases $55.65 to $56.21, principally as a result of
increased green fees and golf cart rentals), while the total rounds played
increased 2.9% from 262,700 to 270,400. The increase in total number of rounds
is primarily due to the opening of the two Legends of Virginia courses in
mid-1996. Without these two courses the total number of rounds decreases 1.4% to
259,000. The Company believes that the late, harsh winter of 1996 in the midwest
and northeastern United States reduced vacation golfers' travel from these areas
and contributed to the decrease in the number of rounds played. Rounds played
were also adversely affected by two hurricanes during the
summer of 1996 that resulted in minimal damage to the Golf Courses but reduced
vacation golf travel to the area. The increase in total revenues in 1996 due to
the two new courses approximated $690,000. In January and February 1996,
management reduced available tee times and increased green 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.
Other revenue sources, including food and beverage and merchandise sales,
are influenced by the number of rounds played. While the number of rounds
increased 2.9%, the revenue increased 10.2% to $4,214,000 from $3,823,000,
principally due to a 22.6% increase in food and beverage sales resulting from
additional demand created by occupants of the newly constructed golf villas at
the Legends Resort. The rental units recently opened and additional units are
being developed. Management is unable to estimate the future impact on food and
beverage sales. However, food and beverage revenues are not included in the
calculation of Gross Golf Revenue and therefore do not affect Participating Rent
payments.
Operating expenses increased 31.7% to $15,956,000 from $12,113,000.
Principal components of the $3,843,000 increase were (i) initial operating costs
of approximately $3,178,000 associated with the two Legends of Virginia courses
opened in mid-1996, (ii) a one-time increase in chemical and fertilizer expense
of approximately $90,000, (iii) periodic resurfacing of cart paths totaling
$50,000, (iv) food and beverage operations of approximately $352,000 attributed
to an increase in revenue and (v) an increase in repair and maintenance expense.
Interest expense increased 56.2% to $1,589,000 from $1,017,000 as a result
of higher borrowings incurred in connection with the completion and pre-opening
costs of the two recently-opened Initial Courses.
Net income decreased 64.8% from $5,312,000 to $1,868,000 primarily as a
result of additional $3,178,000 of expenses associated with the two recently
opened Initial Courses.
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 revenue per player
(principally as a result of increased green fees and golf cart
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rentals) from $50.82 to $55.65. During this same period rounds played decreased
7.1% from 282,800 to 262,700 as a result of management's focus on increasing
green fees.
Other revenue decreased 19.1% from $4,725,000 to $3,823,000 principally due
to a contribution of land totaling $1,000,000, which was partially offset by
increased food and beverage and merchandise sales as a result of improved
merchandising efforts in the pro shop.
Operating expenses increased 1.7% to $12,113,000 from $11,913,000, 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 purchase of maintenance
equipment.
Net income decreased 14.1% to $5,312,000 from $6,185,000.
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. The Participating Mortgage has a 5% increase in the Base Interest
payment for up to five years, and 3% for an additional five years if the
Performance Option is exercised. As a result, the Company believes the effect of
inflation on the Company is not material.
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. The
operator of each of the Daily Fee Golf Courses may vary green fees based on
changes in demand.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued FAS No.
128, "EARNINGS PER SHARE," which established new standards for computations of
earnings per share. Statement No. 128 will be effective for periods ending after
December 15, 1997 and will require presentation of: (1) "Basic Earnings per
Share," computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding during the period and (2)
"Diluted Earnings per Share," which gives effect to all dilutive potential
common shares that were outstanding during the period, by increasing the
denominator to include the number of additional common shares that would have
been outstanding if the dilutive potential common shares had been issued. Had
FAS 128 been effective for the period from February 12, 1997 (period of
inception) through June 30, 1997, basic and diluted earnings per share would
have been as follows:
<TABLE>
<CAPTION>
Basic earnings per share............................................ $ .51
<S> <C>
Diluted earnings per share.......................................... $ .50
</TABLE>
In June 1997, the Financial Accountant Standards Board issued Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
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SFAS 130 is effective for financial statements for periods beginning after
December 15, 1997, and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable fully to evaluate the impact, if any, the standard may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementations of this standard.
CHANGES IN THE COMPANY'S CERTIFYING PUBLIC ACCOUNTANT
On February 26, 1997, the Company dismissed Price Waterhouse LLP as
independent accountants. Effective February 28, 1997, the Company engaged BDO
Seidman, LLP as principal accountants. The decision to change accountants was
approved by the Audit Committee and ratified by the Board of Directors of the
Company.
The Company was formed on November 8, 1996. Its balance sheet as of November
8, 1996 was audited by Price Waterhouse LLP. The balance sheet and the report of
Price Waterhouse LLP thereon were included in the Company's Form S-11 which was
declared effective by the Securities and Exchange Commission on February 6,
1997. In connection with Price Waterhouse LLP's audit of the November 8, 1996
balance sheet and through February 26, 1997, there were no disagreements between
the Company and Price Waterhouse LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Price Waterhouse LLP would
have caused them to make reference thereto in their report on the November 8,
1996 balance sheet and there were no reportable events (as defined in Regulation
S-K Item 304(a)(1)(v)).
The report of Price Waterhouse LLP on the Registrant's November 8, 1996
balance sheet did not contain an adverse opinion or a disclaimer of opinion and
the report was not qualified or modified as to uncertainty, audit scope or
accounting principles.
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
The preceding section, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and other sections of this Prospectus
contain various "forward-looking statements" within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act which represent the
Company's expectations or beliefs concerning future events, including, without
limitation, statements containing the words "believes," "anticipates," "expects"
and words of similar import; and also including, without limitation, the
following: statements regarding the Company's continuing ability to target and
acquire upscale golf courses; the continued availability of the Line of Credit
and other debt and equity financing; the sufficiency of the Company's working
capital, cash flow and financing to support the Company's future operating and
capital requirements; the Lessees' and other Golf Course Operators' future cash
flows, results of operations and overall financial performance; the Company's
continued strategic alliance with Starwood, the planned acquisition and/or
financing of certain golf courses; the expected completion and acquisition of
the Expansion Facilities; the expected dividend distribution rate; the intended
limit on the Company's level of consolidated indebtedness; the expected tax
treatment of the Company's operations; the Company's beliefs about continued
growth in the golf industry; statements regarding the possible redemption of OP
Units and exercise of the Lessee Performance Options; and the expected
completion of real estate developments near certain Golf Courses. Such
forward-looking statements relate to future events and the future financial
performance of the Company and the industry and involve known and unknown risks,
uncertainties and other important factors which could cause actual results,
performance or achievements of the Company or industry to differ materially from
the future results, performance or achievements expressed or implied by such
forward-looking statements.
Investors should carefully consider the various factors identified in the
section "Risk Factors," in "Management's Discussion and Analysis of Financial
Condition and Results of Operation," and elsewhere in this Prospectus that could
cause actual results to differ materially from the results predicted in the
forward-looking statements. Further, the Company specifically cautions investors
to consider the following important factors in
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conjunction with the forward-looking statements: the possible decline in the
Company's ability to locate and acquire quality golf courses and to negotiate
acceptable lease terms; the possibility that the Lessees and the Innisbrook
Resort Owner may be unable to make required payments under the Participating
Leases and the Participating Mortgage; the possibility that Company management
lacks the skill to manage the Company's planned process of acquisitions and
expansions; the possible adverse effect of changing economic conditions,
including interest rate movements and changes in the real estate market both
locally and nationally; the effect of severe weather or natural disasters; and
the effect of competitive pressures from other golf course acquirors and other
golf course lessors. Because of the foregoing factors, the actual results
achieved by the Company in the future may differ materially from the expected
results described in the forward-looking statements.
THE GOLF INDUSTRY
The Company believes the United States golf industry is entering a period of
significant growth. This belief is based, in part, on the fact that people over
the age of 50 play more golf than younger people, and the expectation that over
the next several years the number of people age 50 and older will increase
significantly as the "baby boomers" age. See "-- Demographics." The Company
expects that the aging population 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. There are
approximately 15,700 golf courses (approximately 12,900 eighteen-hole
equivalents) in the United States that the Company believes are owned by
approximately 13,000 different entities. The Company believes there are
relatively few owners of more than one course. The Company believes that the 15
largest golf course owners in the United States collectively own 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 it with an excellent opportunity for consolidation of the
ownership of upscale golf courses.
The Company believes the current fragmentation of golf course ownership
resulted from a variety of factors, including a scarcity of capital, the
entrepreneurial nature of many golf course owners and operators and their
associated pride of ownership. The Company believes that the 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 could lead to consolidation of golf
course ownership. In particular, the Company believes golf course owners will be
attracted to the Company's multiple independent lessee structure, which permits
the Company to acquire a course and then lease it back to an affiliate of the
seller. Such structure satisfies the owner's desire to remain involved in the
day-to-day operation of his course, while also satisfying his desire to obtain
liquidity. The Company further believes its ability to issue OP Units in
exchange for a golf course will attract potential sellers, who generally can
defer recognition of taxable gain on the exchange until they exercise their
Redemption Right. By offering golf course owners the tax planning benefit of OP
Units and the economic benefit of participating in the independent lessee
structure, including resulting economies of scale in operating golf courses, the
Company believes it is able to acquire desirable upscale courses that may not
otherwise be available for purchase. See "The Company -- Business Strategies and
Objectives -- Acquisitions and Expansions."
Largely in response to the 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 1996 an average of
approximately 240 new golf courses were opened each year, with a high of 336 new
golf course openings in 1995.
The emergence and popularity of younger professional golfers, including
Tiger Woods, Justin Leonard, Phil Mickelson and Karrie Webb, have increased
awareness and interest in golf. According to industry statistics,
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<PAGE>
19.4 million homes watched the final round of the four major golf championships
in 1996. In 1997, television viewership of the final four rounds of the four
major golf championships increased 56 percent to 30.3 million. The Company
believes this resurgent interest will result in increasing golf participation,
including increasing participation by women and younger golfers.
The golf industry generated approximately $15 billion in revenues in the
United States in 1996. The Company believes the game of golf has exhibited
strong growth in popularity in the past 16 years as illustrated below:
<TABLE>
<CAPTION>
1980 1996 % CHANGE
--------- --------- -------------
(MILLIONS)
<S> <C> <C> <C>
Number of golfers................................................... 15.0 24.7 65%
Rounds played....................................................... 358 477 33%
</TABLE>
The following table illustrates the growth in demand in the United States at
Daily Fee and private country clubs, as compared to municipal courses, which
tend to be of lesser quality.
<TABLE>
<CAPTION>
ROUNDS PLAYED (IN MILLIONS)
------------------------------------------
1986 1996 PERCENT CHANGE
-------------------- -------------------- -----------------
<S> <C> <C> <C> <C> <C>
Daily Fee................................ 156.4 38.9% 192.4 40.3% 23.0%
Municipal................................ 110.4 27.5% 121.3 25.4% 9.9%
Private.................................. 135.1 33.6% 163.7 34.3% 21.2%
--------- --------- --------- --------- ---
Total.................................... 401.9 100.0% 477.4 100.0% 18.8%
</TABLE>
The Company believes that upscale Daily Fee courses (including Resort
Courses), similar to those owned and targeted by the Company, are well situated
to take advantage of the changing demographics. As shown below, in recent years
the top 5% of Daily Fee golf courses have been able to increase weekend green
fees by an annual rate in excess of 10% from 1993 to 1995.
<TABLE>
<CAPTION>
DAILY FEE
GREEN FEES --
WEEKEND
------------------------ PERCENT ANNUAL
1993 1995 CHANGE 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>
DEMOGRAPHICS. 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 by 39% between 1996
and 2010, from 69.3 million to 96.3 million. The average number of rounds played
per golfer on an annual basis increases significantly as the golfer ages.
Golfers in their 50's play nearly 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 "baby boomers," the oldest of whom are now 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. Since 1991, the number of senior golfers (golfers age 50 and over)
has grown 16%, or by nearly 1 million golfers.
56
<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 representing average annual rounds played by golfers and the golfers' age
groups. The chart also shows the U.S. population by age groups 30-65. The graph
shows that golfers generally play more rounds of golf as they get older and
that, by 2010, there will be over one million more 50-year old Americans than
there was in 1996.
57
<PAGE>
THE GOLF COURSES
The Company believes that its acquisition of the 10 Initial Courses and its
acquisitions since the IPO are consistent with its goal of becoming a leading
owner of, and participating in increased revenue from, nationally or regionally
recognized golf courses. The Company's Golf Courses consist of 19 upscale
courses located in the mid-Atlantic, southeastern, midwestern 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 opened, including
Stonehouse Golf Club, which was named the Best New Upscale Course in 1996 by
GOLF DIGEST and Oyster Bay, which was named Best New Resort Course in the United
States in 1983 by GOLF DIGEST. The Copperhead Course at the Innisbrook Resort
was ranked 43rd in the 1996 survey by GOLF MAGAZINE of the "Top 100 Courses You
Can Play" and the Island Course at the Innisbrook Resort was rated by GOLF
DIGEST as one of the "Top 75 Resort Courses" in 1992. Heritage Golf Club was
ranked in the Top 50 Public Golf Courses by GOLF DIGEST in 1992.
The Golf Courses include 17 upscale Daily Fee courses (including 10 Resort
Courses) and two private country clubs. "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 from golf vacation
packages. The Company considers its Daily Fee and Resort Courses to be high-end
golf courses because of the quality and maintenance of each golf course. Private
country clubs generally are 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 green fees charged at each Golf Course, which significantly
exceed national averages. The Company believes its focus on upscale Daily Fee
golf courses and private country clubs, which attract golfers with attractive
demographic and economic profiles, will result in stronger and less cyclical
revenue growth in comparison to golf courses with lower green fees.
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 approximately 3.9 million rounds played in 1996, 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
contributed to the Company by The Legends Group, a leading golf course owner,
developer and operator in the southeast and mid-Atlantic regions of the United
States controlled by The Legends Group.
Five of the Golf Courses are located near Tampa, Florida. Of these, four are
located at the Innisbrook Resort, a destination golf resort that includes one of
the largest hotel and conference facilities in the state. The fifth course, Lost
Oaks, is located near the Innisbrook Resort, and all five courses are near the
the Gulf of Mexico. Additionally, the courses benefit from the millions of
tourists annually that visit Disneyworld-TM-, Busch Gardens-TM- and other
regional recreational attractions.
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 has a population of approximately 2.6 million within a 60 mile
radius. Williamsburg is an emerging golf resort destination, as evidenced by the
six new courses that have opened in the Williamsburg vicinity since 1995,
including two of the Company's courses. In addition to golf, Williamsburg and
the surrounding area offer shopping, dining, entertainment and historical
attractions. Both of the Golf Courses located in Williamsburg were developed and
contributed to the Company by The Legends Group.
The Company owns a fee simple interest in each of the Golf Courses with the
exception of Oyster Bay, which is subject to a long-term ground lease (with
approximately 35 years remaining), and the four Golf Courses at the Innisbrook
Resort, where the Company holds a first lien on the Golf Courses and all of the
related facilities (other than the separately-owned condominium units comprising
the hotel). The Company additionally holds an option to purchase the Innisbrook
Resort and such facilities at the expiration of the Participating Mortgage for
the lesser of its fair market value or a pre-determined number of shares of
Common Stock.
Certain unaudited information regarding each of the Golf Courses is set
forth on the following page:
58
<PAGE>
THE GOLF COURSES
<TABLE>
<CAPTION>
ROUNDS
-------------------------
TWELVE
MONTHS
ENDED
YARDAGE TYPE OF YEAR JUNE 30,
NAME LOCATION (1) COURSE OPENED 1995 1996 1997
- ---------------------------------------- ------------------ ---------- --------- ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL COURSES:
Heritage Club........................... Pawleys Island, SC 7,040 Resort 1986 55,094 52,382 52,884
Heathland............................... Myrtle Beach, SC 6,785 Resort 1990 49,312 50,294 50,937
Moorland................................ Myrtle Beach, SC 6,799 Resort 1990 49,590 51,102 51,754
Parkland................................ Myrtle Beach, SC 7,170 Resort 1992 46,564 47,331 48,437
Oyster Bay (6).......................... Sunset Beach, NC 6,685 Resort 1983 62,141 57,856 58,725
Woodlands............................... Gulf Shores, AL 6,584 Resort 1994 43,464 41,744 44,623
Providence Forge,
Royal New Kent (7)...................... VA 7,291 Daily Fee 1996 -- 5,743 12,948
Stonehouse Golf Club (8)................ Williamsburg, VA 6,963 Daily Fee 1996 -- 5,686 16,762
Olde Atlanta............................ Atlanta, GA 6,789 Daily Fee 1993 41,195 41,053 44,485
Northgate Country Club (9).............. Houston, TX 6,540 Private 1984 46,600 45,400 46,268
SUBSEQUENT ACQUISITIONS:
Tiburon Golf Club (10).................. Omaha, NE 7,005 Daily Fee 1989 56,496 53,160 60,644
Raintree Country Club................... Akron, OH 6,886 Daily Fee 1991 44,000 40,000 40,000
Eagle Watch............................. Atlanta, GA 6,896 Daily Fee 1989 36,484 36,322 40,126
Lost Oaks............................... Tampa, FL 6,500 Daily Fee 1975 40,072 52,760 67,708
Club of the Country..................... Kansas City, KS 6,412 Private 1979 15,747 17,575 19,093
Innisbrook Resort (6)(12)............... Tampa, FL 148,294 140,922 139,094
Copperhead............................ 7,087 Resort 1972
Island................................ 6,999 Resort 1970
Eagle's Watch (13).................... 6,245 Resort 1971
Hawk's Run (13)....................... 6,245 Resort 1971
Total .............................................................................................................
<CAPTION>
REVENUE PER PLAYER (2) GROSS GOLF REVENUE (3)
------------------------- -------------------------------------
TWELVE TWELVE
MONTHS MONTHS
ENDED ENDED
JUNE 30, JUNE 30, INITIAL BASE
NAME 1995 1996 1997 1995 1996 1997 RENT (4)
- ---------------------------------------- ------ ------ --------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL COURSES:
Heritage Club........................... $57.28 $59.96 $ 60.20 $ 3,156,000 $ 3,141,000 $ 3,184,000 $ 1,825,000
Heathland............................... 55.04 53.92 53.81 2,714,000 2,712,000 2,741,000 1,556,000(5)
Moorland................................ 55.03 54.79 55.20 2,729,000 2,800,000 2,857,000 1,556,000(5)
Parkland................................ 54.98 54.21 53.88 2,560,000 2,566,000 2,610,000 1,557,000(5)
Oyster Bay (6).......................... 55.66 56.83 55.98 3,459,000 3,288,000 3,312,000 1,856,000
Woodlands............................... 33.48 32.88 37.02 1,429,000 1,455,000 1,650,000 679,000
Royal New Kent (7)...................... -- 60.60 64.26 -- 348,000 832,000 1,817,000
Stonehouse Golf Club (8)................ -- 60.50 67.65 -- 344,000 1,134,000 1,890,000
Olde Atlanta............................ 37.53 41.39 41.14 1,546,000 1,699,000 1,830,000 845,000
Northgate Country Club (9).............. 59.40 64.27 66.05 2,768,000 2,918,000 3,056,000 1,407,000
SUBSEQUENT ACQUISITIONS:
Tiburon Golf Club (10).................. 21.33 23.19 21.37 1,205,000 1,233,000 1,296,000 682,000
Raintree Country Club................... 19.25 20.38 21.15 847,000 815,000 857,000 520,000
Eagle Watch............................. 38.67 39.23 38.03 1,411,000 1,425,000 1,526,000 703,000
Lost Oaks............................... 31.87 29.64 24.28 1,277,000 1,564,000 1,644,000 625,000(11)
Club of the Country..................... 43.69 43.93 41.01 688,000 772,000 783,000 330,000
Innisbrook Resort (6)(12)............... 95.35 101.23 103.53 14,140,000 14,265,000 14,400,000 6,739,000
Copperhead............................
Island................................
Eagle's Watch (13)....................
Hawk's Run (13).......................
----------- ----------- ----------- --------------
Total .............................. $39,909,000 $41,345,000 $43,710,000 $24,587,000
----------- ----------- ----------- --------------
----------- ----------- ----------- --------------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
59
<PAGE>
- ---------------
(1) Yardage is calculated from the championship tees.
(2) "Revenue Per Player" is calculated by dividing Gross Golf Revenue at the
applicable Golf Course by the number of rounds played at the applicable Golf
Course.
(3) Gross Golf Revenue is 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. In the case of the Innisbrook Resort the amounts shown
in the table include all revenue at the Innisbrook Resort, including golf
and hotel revenue, and food, beverage and merchandise sales, but exclude
various taxes and net of rental payments to individual condominium owners.
(4) In addition to Base Rent, Participating Rent may be payable by the Lessees
and Participating Interest may be payable by the Innisbrook Resort Owner.
Participating Rent is calculated based on increases in the Gross Golf
Revenue from a base year (1996 in the case of the Initial Courses), as
adjusted. For the Innisbrook Resort, Base Rent shown corresponds to the Base
Interest payment.
(5) Heathland, Moorland and Parkland are subject to a single Participating
Lease and the Base Rent is equally allocated among these Golf Courses.
(6) The Company acquired or has a contract to acquire the fee simple interest
in each of the Golf Courses except Oyster Bay, which is subject to a
long-term ground lease with a lessor not affiliated with the Prior Owner
thereof, and the Innisbrook Resort, which serves as collateral under the
Participating Mortgage.
(7) Opened in August 1996.
(8) Opened in June 1996.
(9) The Company has agreed to fund up to $3.0 million to construct an
additional nine holes located on land adjacent to this Golf Course. The
Company expects to acquire, upon completion, the additional nine holes.
Amounts shown for Northgate Country Club are for its fiscal year ended
December 20, or the twelve months ended June 30, as applicable.
(10) Tiburon Golf Club consists of 27 holes. Eighteen holes were built in 1989
with an additional nine holes built in 1994. With the exception of Initial
Base Rent, numbers are 18-hole equivalents. Yardage and year opened is for
the White/Blue course.
(11) The Company has agreed to fund up to $1.25 million to pay for additional
improvements at the Lost Oaks course. If this amount is fully advanced, the
Base Rent will be increased to $740,930.
(12) The Company has a participating mortgage interest in the Innisbrook Resort.
The facility currently has 63 holes with an additional nine holes under
construction. Under the terms of the Participating Mortgage, the Company
initially funded $69.975 million and has agreed to fund an additional $9
million to fund certain improvements at the Innisbrook Resort, including the
construction of the additional nine holes. Upon funding of the entire $9
million, the Base Interest will be increased to approximately $7.6 million.
(13) Eagle's Watch and Hawk's Run currently comprise the 27-hole Sandpiper
course at the Innisbrook Resort. An additional nine holes are under
construction, which is scheduled for completion in 1998. Yardage shown
reflects 18-hole equivalents for Sandpiper.
DESCRIPTIONS OF THE GOLF COURSES
Set forth below are brief descriptions of each of the Golf Courses. Unless
otherwise noted, the Company owns 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 from golf vacation packages. Some
Resort Courses are semi-private, in that they offer membership packages that
allow members special privileges at the golf course, but also allow public play.
HEATHLAND -- MYRTLE BEACH, SOUTH CAROLINA
Heathland, a Resort Course developed and currently managed by The Legends
Group, opened in 1990 and was named by GOLF MAGAZINE as one of the United
States' Top 10 New Courses that year. 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 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.
Heathland was designed by Tom Doak.
MOORLAND -- MYRTLE BEACH, SOUTH CAROLINA
Moorland, a Resort Course developed and currently managed 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
60
<PAGE>
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 and currently managed by The Legends
Group, opened in 1992 and is the latest golf course to be 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 GOLF CLUB -- PAWLEYS ISLAND, SOUTH CAROLINA
The Heritage Golf Club ("Heritage Club"), developed and currently managed by
The Legends Group, was designed by Dan Maples. It opened in 1986 and 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 an 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 and currently managed 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 currently is owned pursuant to a ground lease
with a remaining term of 35 years. The ground lessor is not affiliated with
either The Legends Group or the Company. 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.
WOODLANDS -- GULF SHORES, ALABAMA
Woodlands is a 6,600-yard par 72 course that 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. It was
developed and currently is managed by Bright's Creek Development, LLC. Gulf
Shores, Alabama, located near the Florida panhandle, is an emerging golf course
destination that includes 10 golf courses in the immediate area. Gulf Shores
includes over 30 miles of white sand beaches and the historic Civil War outposts
of Fort Morgan and Fort Gaines.
Subject to certain conditions, the Company has agreed to acquire a clubhouse
under construction at the course by the Lessee of Woodlands for the cost of
construction, which cost must be approved in advance by the Company. See "The
Company -- Business Strategies and Objectives -- Acquisitions and Expansions."
The Company believes that upon its scheduled completion in October 1997, the
clubhouse will permit the Lessee to attract more group and tournament play and
also may support an increase in green fees.
The Company has agreed to reconvey to the Prior Owner of 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 replacement golf holes at
Woodlands to the Company. All costs associated with such exchange shall be paid
for by the Prior Owner.
COPPERHEAD COURSE -- TAMPA, FLORIDA
Located within the 1,000-acre Innisbrook Resort, the Copperhead Course is
over 7,000 yards, has undulating hills, extremely narrow fairways and very tall
pine trees. GOLF DIGEST rated the Copperhead Course as the 5th "Best Public
Course" in Florida in 1996 and as the 43rd best under the 1996 category of "Top
100 Courses You Can Play."
61
<PAGE>
ISLAND COURSE -- TAMPA, FLORIDA
The Island Course, part of the Innisbrook Resort, has tight fairways, fast
and undulating greens and water in play on a number of the holes. The golf
course was ranked by GOLF DIGEST in the top 75 "Best Resort Courses" in the
United States for 1992.
HAWK'S RUN COURSE AND EAGLE'S WATCH COURSE -- TAMPA, FLORIDA
The Hawk's Run and Eagle's Watch courses, part of the Innisbrook Resort,
together currently consist of three sets of nine-holes known as the Sandpiper
course that can be played in various 18-hole combinations. Upon the completion
of an additional nine holes, which are presently under construction, there will
be two complete 18-hole courses. Designed by Larry Packwood, both courses lie on
hilly terrain featuring natural lakes and woodlands. At both courses, players
meander around streams, lakes and sand bunkers. Play at Eagle's Watch and Hawk's
Run is demanding because of their narrow fairways and small undulating greens.
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
respective markets. Some high-end daily fee courses are semi-private, in that
they offer membership packages but also allow public play.
STONEHOUSE GOLF CLUB -- WILLIAMSBURG, VIRGINIA
Located within a 10,000 acre master planned community under development by a
third party, Stonehouse Golf Club was developed and currently is managed by The
Legends Group. It 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 an understudy of Tom Fazio) 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.
Consistent with the original purchase agreement, the Lessee of this Golf
Course has commenced construction of a 6,600 square foot clubhouse at the Golf
Course at no cost to the Company. See "Risk Factors -- Real Estate Investment
Risks -- Illiquidity of Real Estate" and "-- Certain Matters Regarding
Stonehouse Golf Club and Royal New Kent."
ROYAL NEW KENT -- PROVIDENCE FORGE, VIRGINIA
Open in August 1996, Royal New Kent is located within a third party owned
master planned community outside Williamsburg, Virginia, Royal New Kent was
developed and is currently managed by The Legends Group. Royal New Kent is
located adjacent to Colonial Downs, which opened in September 1997 and currently
is 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" (Latin for "unconquerable") tees to accommodate the nearly 7,300 yards
of the course. Royal New Kent was fashioned after traditional links-style Irish
courses.
Consistent with the original purchase agreement, the Lessee of this Golf
Course has commenced construction of a 7,700 square foot clubhouse at the Golf
Course at no cost to the Company. See "Risk Factors -- Real Estate Investment
Risks -- Illiquidity of Real Estate" and "-- Certain Matters Regarding
Stonehouse Golf Club and Royal New Kent."
OLDE ATLANTA GOLF CLUB -- ATLANTA, GEORGIA
Olde Atlanta Golf Club ("Olde Atlanta") is open for public play as well as
for member play. Olde Atlanta was designed by Arthur Hills. It is located in
Suwanee, Georgia (a northeast Atlanta suburb), in the foothills of north
62
<PAGE>
Georgia, and is situated within a 594 acre master planned community consisting
of 645 homesites. 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. Olde Atlanta is managed
by The Crescent Company.
TIBURON GOLF CLUB -- OMAHA, NEBRASKA
Tiburon has three nine hole courses that are played as three 18-hole
combinations. The courses are characterized by rolling fairways with mounds,
berms and greenside bunkers. Two lakes come into play on the courses.
RAINTREE COUNTRY CLUB -- AKRON, OHIO
Raintree, located near Akron, Ohio, was cut out of a wooded area and
consequently has some narrow fairways demanding precision shots. Water hazards
come into play on seven of the holes.
EAGLE WATCH GOLF CLUB -- ATLANTA, GEORGIA
Eagle Watch is an 18-hole course designed by Arnold Palmer on rolling hills
cut out of the Georgia forest. The course is tight with tree-lined fairways
lining many of the holes. A number of ponds and lakes come into play. Routing of
the course capitalizes on the beauty of the existing natural features, creating
spectacular scenic views and elevation changes of up to 60 feet on some holes.
The course also includes a 12,000 square foot, two-level clubhouse.
LOST OAKS GOLF COURSE -- TAMPA, FLORIDA
Lost Oaks is located near the Innisbrook Resort in Palm Harbor, Florida.
Wildlife often wanders onto the course, and alligators can be seen at a safe
distance. Lost Oaks is leased to an affiliate of Starwood. The Company has
agreed to fund certain improvements at Lost Oaks in an amount not to exceed
$1.25 million in exchange for an increased Lease Payment.
PRIVATE CLUB COURSES
Private 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 country clubs generally are more stable
and predictable than those of public courses because the receipt of membership
dues generally is independent of the level of course utilization.
NORTHGATE COUNTRY CLUB -- HOUSTON, TEXAS
Northgate Country Club 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 fund up to $3.0 million to construct an
additional nine holes located on land adjacent to the existing Golf Course. The
Company's loan is secured by a first lien on the property where the new nine
holes is being constructed and the loan is cross-defaulted and
cross-collateralized with the existing lease at Northgate. The loan bears
interest at 10.47% per annum and is payable monthly in arrears. The Company has
agreed to acquire such additional holes, subject to certain conditions. See "The
Company -- Acquisitions and Expansions -- Expansions." The Golf Course is
located in a forested area north of Houston within a 440 acre high-end master
planned community.
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Northgate recently completed the construction of a tennis center building,
which includes 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 presently comprises 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.
CLUB OF THE COUNTRY -- KANSAS CITY, KANSAS
Club of the Country is an 18-hole course located approximately 20 miles
south of the Kansas City metropolitan area, in Louisburg, Kansas. Club of the
Country is noted for its outstanding greens and playability. Club of the Country
combines the serenity of a wooded countryside, meandering creeks and rolling
hills with the challenge of 18 holes of championship golf.
The following table sets forth certain information regarding the Golf
Courses.
THE GOLF COURSES -- RESORT COURSES
<TABLE>
<CAPTION>
FACILITIES AND SERVICES
-----------------------------------------
NO. OF YEAR PRACTICE CART FOOD &
COURSE NAME CITY, STATE HOLES YARDAGE OPENED FACILITIES RENTAL CLUBHOUSE BEVERAGE
- ------------------------------ ------------------------------ ------ ------- ------ ---------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Healthland.................... Myrtle Beach, South Carolina 18 6,785 1990 Yes Yes Yes Yes
Parkland...................... Myrtle Beach, South Carolina 18 7,170 1992 Yes Yes Yes Yes
Moorland...................... Myrtle Beach, South Carolina 18 6,799 1990 Yes Yes Yes Yes
Heritage Golf Club............ Pawleys Island, South Carolina 18 7,040 1986 Yes Yes Yes Yes
Oyster Bay.................... Sunset Beach, North Carolina 18 6,685 1983 Yes Yes Yes Yes
Woodlands..................... Gulf Shores, Alabama 18 6,584 1994 Yes Yes Yes(1) Yes
Copperhead Course............. Tampa, Florida 18 7,087 1972 Yes Yes Yes Yes
Island Course................. Tampa, Florida 18 6,999 1970 Yes Yes Yes Yes
Eagle's Watch (2)............. Tampa, Florida 18 6,245 1972 Yes Yes Yes Yes
Hawk's Run (2)................ Tampa, Florida 18 6,245 1972 Yes Yes Yes Yes
<CAPTION>
PRO
COURSE NAME SHOP
- ------------------------------ ----
<S> <C>
Healthland.................... Yes
Parkland...................... Yes
Moorland...................... Yes
Heritage Golf Club............ Yes
Oyster Bay.................... Yes
Woodlands..................... Yes
Copperhead Course............. Yes
Island Course................. Yes
Eagle's Watch (2)............. Yes
Hawk's Run (2)................ Yes
</TABLE>
- ---------------
(1) Woodlands has a temporary clubhouse and a permanent facility is under
construction. See "The Company -- Business Strategies and Objectives --
Acquisitions and Expansions -- Expansions."
(2) Eagle's Watch and Hawk's Run currently comprise the 27-hole Sandpiper
Course. An additional nine holes are under construction, which is scheduled
for completion in 1998. Numbers shown are 18-hole equivalents for Sandpiper.
THE GOLF COURSES -- HIGH-END DAILY FEE COURSES
<TABLE>
<CAPTION>
FACILITIES AND SERVICES
-----------------------------------------
NO. OF YEAR PRACTICE CART FOOD &
COURSE NAME LOCATION, CITY, STATE HOLES YARDAGE OPENED FACILITIES RENTAL CLUBHOUSE BEVERAGE
- ------------------------------ -------------------------- ------ ------- ------ ---------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Royal New Kent................ Providence Forge, Virginia 18 7,291 1996 Yes Yes Yes(1) Yes
Stonehouse Golf Club.......... Williamsburg, Virginia 18 6,963 1996 Yes Yes Yes(1) Yes
Olde Atlanta.................. Atlanta, Georgia 18 6,789 1993 Yes Yes Yes Yes
Tiburon....................... Omaha, Nebraska 27 7,005 1989 Yes Yes Yes Yes
Raintree...................... Akron, Ohio 18 6,886 1992 Yes Yes Yes Yes
Eagle Watch................... Atlanta, Georgia 18 6,896 1989 Yes Yes Yes Yes
Lost Oaks..................... Tampa, Florida 18 6,450 1977 Yes Yes Yes(2) Yes
<CAPTION>
PRO
COURSE NAME SHOP
- ------------------------------ ----
<S> <C>
Royal New Kent................ Yes
Stonehouse Golf Club.......... Yes
Olde Atlanta.................. Yes
Tiburon....................... Yes
Raintree...................... Yes
Eagle Watch................... Yes
Lost Oaks..................... Yes
</TABLE>
- ---------------
(1) These courses each have a temporary clubhouse and a permanent facility under
construction at the sole cost and expense of the applicable Lessee.
(2) The Company has agreed to fund up to $1.25 million for improvements,
including the reconstruction and renovation of the existing clubhouse after
which the Base Rent payable by the Lessee will be increased.
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<PAGE>
THE GOLF COURSES -- PRIVATE COUNTRY CLUB COURSES
<TABLE>
<CAPTION>
FACILITIES AND SERVICES
-----------------------------------------------
NO. OF YEAR PRACTICE CART FOOD & PRO
COURSE NAME LOCATION, CITY, STATE HOLES YARDAGE OPENED FACILITIES RENTAL CLUBHOUSE BEVERAGE SHOP
- ------------------------------ --------------------- ------ ------- ------ ---------- ------ --------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Northgate Country Club........ Houston, Texas 18(1) 6,540 1984 Yes Yes Yes Yes Yes
Club of the Country........... Kansas City, Kansas 18 6,357 1979 Yes Yes Yes Yes Yes
</TABLE>
- ---------------
(1) Nine additional holes are expected to open in 1998. The Company has agreed
to fund up to $3.0 million to construct an additional nine holes located on
land adjacent to this Golf Course. The Company has agreed to acquire such
additional holes subject to certain conditions, after which the Base Rent
payable by the Lessee will be increased. See "The Company -- Business
Strategies and Objectives -- Acquisitions and Expansions -- Expansions."
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<PAGE>
THE PARTICIPATING LEASES
THE FOLLOWING SUMMARY OF 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. PURSUANT TO
THE COMPANY'S MULTIPLE INDEPENDENT LESSEE STRUCTURE, LEASES ARE INDIVIDUALLY
NEGOTIATED AND CONSEQUENTLY VARY FROM ONE ANOTHER, AT TIMES IN MATERIAL WAYS.
All of the Participating Leases contain the same basic provisions described
below. The leases for any golf course properties acquired by the Company in the
future will contain such terms and conditions as are 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 below with respect
to the Participating Leases. The Company anticipates that each new lease will be
with an existing Lessee, with an affiliate of the seller or with an unaffiliated
third party experienced in the operation of similar courses.
LEASE TERM. Each Participating Lease was entered into upon the conveyance
to the Company of the underlying Golf Course. The Company's interest in each
leased Golf Course includes the land, buildings and improvements, related
easements and rights, and fixtures (collectively, the "Leased Property"). Each
Leased Property is leased to the respective Lessee under a Participating Lease
which has a primary term of 10 years (the "Fixed Term"). The Fixed Terms for the
Golf Courses acquired at the IPO end on December 31, 2006 and the Fixed Terms
for the Golf Courses acquired since the IPO end on December 31, 2007. In
addition, each Lessee has an option to extend the term of its Participating
Lease for up to six terms of five years each (the "Extended Terms") subject to
earlier termination upon the occurrence of certain contingencies described in
the Participating Lease.
In addition, at the expiration of the Fixed Term and the Extended Terms, the
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 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 practice facilities and sales of food and beverages.
BASE RENT; PARTICIPATING RENT. The initial Base Rent for the 15 Golf
Courses that the Company owns or is under agreement to purchase is set forth
below:
<TABLE>
<CAPTION>
INITIAL
NAME LOCATION BASE RENT (1)
- -------------------------------------------------------------------------------- -------------------- --------------
Heritage Golf Club.............................................................. Pawleys Island, SC $ 1,824,980
<S> <C> <C>
Heathland....................................................................... Myrtle Beach, SC 1,556,635(2)
Moorland........................................................................ Myrtle Beach, SC 1,556,635(2)
Parkland........................................................................ Myrtle Beach, SC 1,556,635(2)
Oyster Bay...................................................................... Sunset Beach, NC 1,855,979
Woodlands....................................................................... Gulf Shores, AL 679,029(3)
Royal New Kent.................................................................. Providence Forge, VA 1,816,501
Stonehouse Golf Club............................................................ Williamsburg, VA 1,889,835
Olde Atlanta.................................................................... Atlanta, GA 845,058
Northgate Country Club.......................................................... Houston, TX 1,406,843(3)
Tiburon......................................................................... Omaha, NE 682,455
Raintree........................................................................ Akron, OH 520,045
Eagle Watch..................................................................... Atlanta, GA 702,800
Lost Oaks....................................................................... Tampa, FL 625,307(3)
Club of the Country............................................................. Kansas City, KS 330,000
--------------
Total....................................................................... $17,848,737
--------------
--------------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
66
<PAGE>
(FOOTNOTES FOR PRECEDING PAGE)
- ---------------
(1) Amounts shown include payments for the Capital Replacement Fund. In addition
to Base Rent, Participating Rent may be payable by the Lessees.
Participating Rent generally is calculated based on increases in the Gross
Golf Revenue from a base year. No calculation of Participating Rent is
included in the table.
(2) The Heathland, Moorland and Parkland courses are subject to a single
Participating Lease providing for initial Base Rent of $4,669,905, and the
Base Rent is allocated equally among these three courses.
(3) The Company has agreed to acquire Expansion Facilities or make improvements
at these Golf Courses, at which time Base Rent payable will be increased.
The Participating Leases provide for the Company to receive, with respect to
each Golf Course, the greater of Base Rent or an amount equal to Participating
Rent plus the initial Base Rent payable under each Participating Lease.
Participating Rent is equal to 33 1/3% of any increase in Gross Golf Revenue
over Gross Golf Revenue for the base year, as adjusted in determining the
initial Base Rent, which base year will be reset to the year immediately
preceding the date on which the Prior Owner exercises the Lessee Performance
Option, if applicable. The base year is 1996 for the courses acquired at the IPO
and for Golf Courses acquired since the IPO is either 1996 or the trailing
12-month period prior to the determination of the Base Rent. Base Rent will
generally be increased annually by the Base Rent Escalator (generally, the
lesser of (i) 3% or (ii) 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. Annual increases in Lease Payments are limited to 5% during
the first five years of the initial lease terms. "Gross Golf Revenue" generally
is defined as all revenues from a Golf Course including green fees, golf cart
rentals, range fees, membership dues, membership initiation fees and transfer
fees, excluding, however, food and beverage and merchandise revenue. For the two
Virginia Golf Courses, which recently opened, the base year Gross Golf Revenue
is based on an estimate by the Company and the Lessee of such courses, which
estimate was also the basis for the valuation of those Golf Courses. Base Rent
is required to be paid monthly in arrears on the first day of each calendar
month and Participating Rent is payable either monthly or quarterly in arrears.
The Company believes that Gross Golf Revenue, and hence the amount of any
Participating Rent, will be favorably impacted by any significant capital
improvements undertaken by a Lessee, such as the planned clubhouses at
Woodlands, Stonehouse Golf Club and Royal New Kent and the planned renovations
and improvements at Lost Oaks and Eagle Watch. See "The Company -- Business
Strategies and Objectives -- Acquisitions and Expansions -- Expansions."
TRIPLE NET LEASES. The Participating Leases are structured as triple net
leases under which each Lessee is required to pay all real estate and personal
property taxes, insurance, utilities and services, golf course maintenance and
other operating expenses. See "-- Maintenance and Modifications."
SECURITY DEPOSIT. As security for its affiliated Lessee's obligations under
its Participating Leases, each prior owner of each Golf Course generally is
obligated to pledge 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. The security deposit generally will not be released for
two years. Beginning in the third year and any time thereafter, one-third of
pledged collateral will be released if the net operating income to lease payment
coverage ratio (the "Coverage Ratio") of the Lessee 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 Lessee shall be required to retain and not distribute profits until such
time as the Lessee has retained cash equal to at least six-months of
then-current Base Rent. In addition, the Participating Leases with the Legends
Lessees are cross-collateralized and cross-defaulted.
In connection with the lease of Tiburon, Granite Golf pledged to the Company
Common Stock of the Company with a value equal to approximately $600,000 and
Common Stock of Granite Golf with a value equal to approximately $1.2 million,
each value determined at the time of the pledge. The Company's Common Stock is
released 50% upon attaining a 130% Coverage Ratio and 50% upon attaining a 140%
Coverage Ratio. The Granite Golf stock is released 50% when certain post-closing
payments totaling up to $600,000 are made by
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<PAGE>
Granite Golf to the Prior Owner, which payment is guaranteed by the Company and
50% when a 120% Coverage Ratio is obtained.
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.
The collateral for Lost Oaks consists primarily of 70,980 shares of Common
Stock of the Company valued at approximately $1.9 million on the date of the
pledge. It is anticipated that 59,302 of the shares will be released when the
Coverage Ratio reaches 113.5%, and the balance will be released in three equal
installments when the Coverage Ratio reaches 120%, 130%, and 140%, respectively.
The collateral also includes a pledge of the proceeds of the Option Shares,
which will be released when the Coverage Ratio reaches 113.5%. The collateral
for the proposed Club of the Country lease is currently being negotiated by the
Company.
ADVISORY ASSOCIATION. Each Lessee is a member of the Advisory Association,
which participates in cross-marketing of the Golf Courses and identified 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 is
designed to provide the Lessees, collectively, greater purchasing power with
vendors than each would have individually. The Advisory Association attempts to
ensure a consistent, high-quality product at each member Golf Course. In
conjunction with management of the Company, the Advisory Association will review
and analyze any disputes between the Company and a Lessee concerning annual
capital and operating budgets and in conjunction with the Company also will
confirm each Lessee's compliance with its repair and maintenance obligations
under each Participating Lease.
MAINTENANCE AND MODIFICATIONS. Each Lessee at its sole cost and expense, is
required, to maintain and operate its respective Leased Property in good order,
repair and appearance and to make such structural and non-structural, interior
and exterior foreseen and unforeseen, and ordinary and extraordinary repairs as
are necessary and appropriate to keep such Leased Property in good order, repair
and appearance. Each Lessee also must maintain each Golf Course it leases in
substantially the same condition it was in at the commencement of the
Participating Lease and otherwise in a condition comparable to other comparable
golf courses in its vicinity. If the Company, in consultation with the Advisory
Association, determines that a Lessee has failed to comply with its maintenance
and operation obligations, then the Company shall provide a written list to the
Lessee of remedial work and/or steps to be performed. If the 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.
Out of the payment of Base Rent, the Company has established and will
maintain with respect to each Golf Course a capital replacement reserve (a
"Capital Replacement Fund") in an amount equal to between 2% and 5% of Gross
Golf Revenue 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 Lessee will agree on the use of funds in these reserves and the
Company has the right to approve each Lessee's annual and long-term capital
expenditure budgets. Funds in the Capital Replacement Fund shall be paid to a
Lessee to reimburse such Lessee for expenditures made in connection with
approved capital replacements. The Lessees generally are obligated to increase
their lease payment each year in an amount equal to the increase in the Capital
Replacement Fund from the prior year. Amounts in the Capital Replacement Fund
will be deemed to accrue interest at a money market rate. Any amounts in the
Capital Replacement Fund at the expiration of the applicable Participating Lease
will be retained by the Company.
Except for its obligation to fund the Capital Replacement Fund and except
for certain improvements the Company has agreed to fund at Lost Oaks and Eagle
Watch in exchange for an increase in the Base Rent, the Company is not 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
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<PAGE>
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 fund additional capital improvements on a Golf
Course, the Company generally will condition such election on an increase in
minimum rent under the Participating Lease with respect to such Golf Course to
reflect such expenditures.
During the Fixed Term and each Extended Term, each Lessee, at its sole cost
and expense, may make alterations, additions, changes and/or improvements
("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 Lessee Improvements will be subject to
all the terms and provisions of each applicable Participating Lease and will
become the property of the Company upon termination of such Participating Lease.
At the end of the Participating Lease, all remaining personal property at
each Leased Property will become the property of the Company.
INSURANCE. Each Lessee is required to maintain insurance on its Leased
Property under insurance policies providing for all-risk, liability, flood (if
carried by comparable golf course facilities in the area and otherwise available
at commercially reasonable rates) and worker's compensation coverage, which at
the time is usual and commonly obtained in connection with properties similar in
type of building size and use to the Leased Property located in the geographic
area where the Leased Property is located. Each insurance policy names the
Company as additional insured or loss payee, as applicable.
ASSIGNMENT AND SUBLETTING. A Lessee, without the prior written consent of
the Company (which consent may be withheld by the Company in its sole
discretion, except in limited instances), may not 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 Lessee, as if such
change of control were an assignment of the Participating Lease. However, each
Lessee has the right to assign its Participating Lease to its affiliates.
Each Prior Owner has retained the right to use the existing office
facilities in any clubhouse or other improvements on a Golf Course for its
continued business operations not associated with the Golf Course.
Each Lessee, with the Company's prior approval, which approval the Company
may withhold in its discretion, may be permitted to sublease portions of any
Leased Property to sublessees to operate portions (but not the entirety of the
operations customarily associated with or incidental to the operation of a golf
course (e.g., driving range, restaurant, etc.).
COMPANY'S RIGHT OF FIRST OFFER. In the event a 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
Lessee must give the Company written notice of its intent to sell, which shall
indicate the terms and conditions upon which such 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 Lessee proposes to sell its interest.
If the Company or its designee elects not to purchase the interest of the
Lessee, then such Lessee shall be free to sell its interest to a third party,
subject to the Company's approval as described above (see "-- Assignment and
Subletting"). However, if the terms on which the Lessee intends to sell its
interest are reduced by 5% or more, then such Lessee shall again offer the
Company the right to acquire its interest, provided the Company shall have only
15 days to accept such offer.
LESSEE'S RIGHT OF FIRST OFFER. The Company may sell a Golf Course, but must
first offer the Lessee of such course the right to purchase the Golf Course. The
Company must give the relevant Lessee written notice of its intent to sell,
which shall indicate the terms and conditions upon which the Company intends to
sell such Golf
69
<PAGE>
Course. Such 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 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 price at which the Company intends to sell the Golf Course is
reduced by 5% or more from the price offered to the Lessee, then the Company
again shall offer such Lessee the right to acquire the Golf Course at the
reduced price provided that such 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 caused by an insured risk, the 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 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 as a golf
course for a period of 12 months or more, the Lessee may terminate the
Participating Lease.
INDEMNIFICATION GENERALLY. Under each Participating Lease, the Lessee has
agreed to indemnify, and 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 or misuse by such Lessee of the Leased
Property, (iii) any impositions (which are the obligations of the relevant
Lessee to pay pursuant to the applicable provisions of such Participating Lease)
or the operations thereon, (iv) any failure on the part of the Lessee to perform
or comply with any of the terms of the Participating Lease or any sublease, (v)
any taxes levied against the Leased Property and (vi) any liability the Company
may incur or suffer as a result of any permitted contest by the Lessee under any
Participating Lease.
EVENTS OF DEFAULT. Events of Default are defined in each Participating
Lease generally to include, among others, the following:
(i) if a Lessee fails to make a rent payment when such payment becomes
due and payable and such failure is not cured by such Lessee within a period
of 10 days after receipt of written notice thereof from the Company;
(ii) if a Lessee fails to observe or perform any material term, covenant
or condition of a Participating Lease and such failure is not cured by such
Lessee within a period of 30 days after receipt by such Lessee of written
notice thereof from the Company, unless such failure cannot be cured with
due diligence within a period of 30 days, in which case such failure will
not constitute an Event of Default if such Lessee proceeds promptly and with
due diligence to cure the failure and diligently completes the curing
thereof within 120 days;
(iii) if a 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 receiver for 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 the Lessee is liquidated or dissolved;
(v) if the 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 the Lessee or an affiliate thereof is in default under any other
Participating Lease with the Company.
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If an Event of Default occurs and is continuing under a Participating Lease,
then the Company may terminate the Participating Lease by giving the 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 the Lessee under the
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.
THE PARTICIPATING MORTGAGE
THE FOLLOWING SUMMARY OF THE PARTICIPATING MORTGAGE BETWEEN THE COMPANY AND
THE INNISBROOK RESORT OWNER IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
PARTICIPATING MORTGAGE, A COPY OF WHICH IS FILED AS AN EXHIBIT TO THIS
REGISTRATION STATEMENT, OF WHICH THIS PROSPECTUS IS A PART. THE INNISBROOK
RESORT OWNER CURRENTLY IS REQUIRED TO FILE REPORTS AND OTHER INFORMATION WITH
THE COMMISSION PURSUANT TO THE EXCHANGE ACT. THE AUDITED FINANCIAL INFORMATION
FOR THE INNISBROOK RESORT OWNER INCLUDED HEREIN WAS DERIVED FROM THE INNISBROOK
RESORT OWNER'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AS FILED WITH THE
COMMISSION AND THE UNAUDITED FINANCIAL INFORMATION FOR THE INNISBROOK RESORT
OWNER CONTAINED HEREIN WAS DERIVED FROM THE INNISBROOK RESORT OWNER'S FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997 AS FILED WITH THE COMMISSION.
The Participating Mortgage transaction was structured in a manner that the
Company believes provides the Company with returns similar to those from the
Participating Leases used in the Company's standard purchase/ leaseback
structure. Through the Participating Mortgage, the Company will participate in
the growth in revenues at the Innisbrook Resort through a participating interest
feature and will have the right to purchase the Innisbrook Resort at the
expiration of the loan term.
AMOUNT. The maximum principal amount of the Participating Mortgage is
$78.975 million, $69.975 million of which has been funded. The Company is
obligated to make additional advances up to $9 million available to the
Innisbrook Resort Owner to fund the construction of an additional nine-holes and
renovation of the conference and resort facility. The advance for construction
purposes is subject to review and approval rights customarily granted to
construction lenders, including review and approval of plans and specifications.
In addition, the principal amount of the Participating Mortgage may be
increased by an amount calculated in a manner similar to the procedures for the
Lessee Performance Option. During years three through five of the Participating
Mortgage, the Innisbrook Resort Owner has the one-time right to require the
Company to advance an additional amount under the Participating Mortgage,
subject to certain qualifications and requirements, including attaining a
coverage ratio of 113.5%, after taking into account the increased amount of
interest. If such Performance Advance is made, interest on the Performance
Advance will be calculated to be accretive to the Company's Funds From
Operations on a per share basis, and the Innisbrook Resort Owner will be
required to purchase additional OP Units with that advance.
MORTGAGE TERM. The Participating Mortgage has a term of 30 years. The
Innisbrook Resort Owner has no right to prepay the Participating Mortgage for
the first 10 years of the Participating Mortgage, except upon a Transfer
Triggering Event (as herein defined). The Participating Mortgage is prepayable
on the tenth anniversary and thereafter at the end of each five-year period.
There are no extension rights associated with the Participating Mortgage. Any
prepayment will require a prepayment based on the discounted value of payments
under the Participating Mortgage, but in no event less than 10% of the
outstanding principal balance of the Participating Mortgage. In addition, the
Company will have the right to purchase the Innisbrook Resort upon a prepayment.
See "-- Purchase Option."
USE OF THE INNISBROOK RESORT. The Innisbrook Resort Owner is obligated to
use the Innisbrook Resort for the operation of a golf course and related hotel
and conference facilities, and other uses incidental or related thereto.
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BASE INTEREST; PARTICIPATING INTEREST. Annual Base interest payable on the
Participating Mortgage on the initial $69,975,000 of principal is equal to
$6,739,063, or 9.63% per annum. Advances on the remaining $9 million bear
interest at 9.75% per annum. Base Interest is payable monthly in arrears.
Base Interest is subject to annual increases of 5% per year for five years
and, if the Performance Advance is funded, 3% a year for an additional five
years.
The Participating Mortgage provides for the Company to receive, in addition
to Base Interest, Participating Interest. Participating Interest is equal to a
percentage of gross revenues at the Innisbrook Resort, including golf, food,
beverage and hotel room receipts, but excluding various taxes and net of
payments made to the condominium owners at the Innisbrook Resort, over a base
year revenue of $40.0 million in 1996. Participating Interest is payable in an
amount equal to 17% of gross revenue in excess of the base year's gross revenues
up to $43 million, 20% of gross revenue between $43 million and $50 million and
25% of gross revenue over $50 million (with the latter two thresholds subject to
annual CPI increases). Total annual increases in interest payments under the
Participating Mortgage are limited to of 7% for the first five years.
PURCHASE OF STOCK, OP UNITS AND WARRANTS. The Innisbrook Resort Owner used
$8,975,000 of the proceeds of the Participating Mortgage to purchase 274,039
newly issued OP Units, 159,326 newly issued shares of Common Stock and an option
to purchase up to 150,000 shares of Common Stock at a price of $26.00 per share
(the "Option Shares").
The right to purchase the Option Shares is exercisable at any time until
December 31, 1998. If at the time of exercise the Company does not then have an
effective shelf registration statement, the Innisbrook Resort Owner can defer
the date it purchases the Option Shares until the date 90 days following the
date the Company has an effective shelf registration statement. If the
Innisbrook Resort Owner elects to defer such purchase, then (i) it shall have
the continuing right to rescind its exercise, in which case its right to
purchase the Option Shares shall terminate, and (ii) the purchase price for the
Option Shares shall be increased to reflect the increase in the stock price of
the Company from the date the Innisbrook Resort Owner exercises its right to
purchase the Option Shares and the five-day average trading price of the
Company's stock for the period immediately preceding the date the Option Shares
are acquired.
COLLATERAL. Security for the Participating Mortgage consists of "Primary
Collateral" and "Additional Collateral." Primary Collateral is not released and
remains collateral for the Participating Mortgage throughout its terms.
Additional Collateral is subject to certain release provisions upon the
attainment of certain coverage ratios based on the net operating income of the
Innisbrook Resort compared to the payments under the Participating Mortgage.
The Primary Collateral consists of the Innisbrook Resort which is owned by
the Innisbrook Resort Owner. The hotel and conference facilities at the
Innisbrook Resort consists of common areas (generally the conference and
restaurant areas) and the hotel rooms. The hotel rooms are condominium units
that are individually owned by third parties (with the exception of three units
owned by the Innisbrook Resort Owner). The third party owners participate in a
rental pool program whereby they lease their units to the hotel operator in
return for a percentage of the room revenues. As a result, the Company will not
have any direct security interest in the lodging facilities located at the
Innisbrook Resort. The primary collateral will consist of the Golf Courses at
the Innisbrook Resort and the common area facilities.
In addition to the Primary Collateral, the Company has a security interest
in the Additional Collateral, namely (i) excess land at the Innisbrook Resort
which is used for residential and commercial development, (ii) 79,663 shares of
Common Stock and 274,039 OP Units owned by the Innisbrook Resort Owner (which
have an approximate value of $9.6 million based on the Offering Price) and (iii)
a first mortgage and a third mortgage on the Tamarron Golf Course and related
facilities, an 18-hole destination golf and resort facility owned by the
Innisbrook Resort Owner, located near Durango, Colorado.
The security interest of the Company in the excess land at the Innisbrook
Resort will be released by the Company at such time as the net operating income
for the Innisbrook Resort equals or exceeds 113.5% of the
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payment obligation (the "Participating Mortgage Coverage Ratio") under the
Participating Mortgage for any 12-month period.
The Tamarron Golf Course collateral consists of a first mortgage and a third
mortgage. The first mortgage is limited in amount to $250,000. A second mortgage
held by a party other than the Company in the amount of $5 million relates to
obligations incurred by the Innisbrook Resort Owner at the time the Innisbrook
Resort Owner acquired the Innisbrook Resort. The third mortgage secures the
balance of any amounts owing under the Participating Mortgage. The Company's
liens on the Tamarron Golf Course will be released at such time as the lien on
the excess land at the Innisbrook Resort is released.
The shares of Common Stock and OP Units pledged to the Company as collateral
for the Participating Mortgage will not be released for two years, and in no
event until the Innisbrook Resort Owner's right to receive the Performance
Advance has terminated. Beginning in the third year and any time thereafter,
one-third of the pledged OP Units and Common Stock will be released at such time
as the Participating Mortgage Coverage Ratio exceeds 120%, 130% and 140%,
respectively, for the prior two fiscal years. If the Participating Mortgage
Coverage Ratio falls below 120% at any time following the release of such
pledged shares of Common Stock and OP Units, then the Innisbrook Resort Owner
shall be required to retain and not distribute profits until such time as the
Innisbrook Resort Owner has retained cash equal to six-months of the
then-current Base Interest.
PURCHASE OPTION. The Company shall have the right to purchase the
Innisbrook Resort that is the collateral for the Participating Mortgage at the
expiration of the term of the Participating Mortgage, including any early
expiration resulting from a default by the borrower thereunder. The purchase
price shall equal the lesser of (i) the fair market value of the Innisbrook
Resort (but in no event less than the outstanding principal balance of the
Participating Mortgage), as determined by third party appraisal, or (ii) 400,000
shares (125,000 shares if a "Transfer Triggering Event" has occurred) of the
Company's Common Stock and cancellation of the outstanding principal balance of
the Participating Mortgage.
A "Transfer Triggering Event" is (i) issuance of an interest in the
Innisbrook Resort Owner, (ii) sale of all or substantially all of the assets of
the Innisbrook Resort Owner, (iii) any transaction pursuant to which the
Innisbrook Resort Owner is merged or consolidated into another entity or (iv)
any event that directly or indirectly results in the transfer of 5% of the
equity interest in the Innisbrook Resort Owner to a third party during the term
of the Participating Mortgage, whether voluntary or involuntary. Upon a Transfer
Triggering Event, the Company will accrue an additional amount of interest equal
to $19 million, discounted to present value on the date of the Transfer
Triggering Event, using a discount rate of 11.5% (the "Additional Interest
Amount"). The Company will lend such amount to the Borrower. As a result, the
Company will be required to recognize income equal to the Additional Interest
Amount, but will not receive any additional cash. Interest then accrues on such
Additional Interest Amount, but is not paid by the Borrower until the maturity
of the Participating Mortgage. See "Risk Factors -- Distribution to
Stockholders."
FIXED INTEREST RATE ESCALATION. The Company is required under GAAP to
report interest income from the Participating Mortgage on a straight-line basis
over the life of the Participating Mortgage. Based on the Company's estimate of
future revenue, the Company will report for GAAP purposes interest revenue
exclusive of the Participating Interest equal to approximately 11.5% per year,
which initially will exceed cash payments to the Company under the Participating
Mortgage.
TRANSFER RESTRICTIONS. Subject to the Company's purchase option and right
of first offer, the Innisbrook Resort Owner generally has the right to transfer
the Innisbrook Resort to a third party provided such third party has the
financial resources to permit it to satisfy the obligations of the borrower
under the Participating Mortgage. See "-- Reciprocal Right of First Offer" and
"-- Purchase Option."
CAPITAL EXPENDITURE RESERVE. The Innisbrook Resort Owner is obligated to
maintain a capital replacement reserve which provides additional collateral for
the performance of the Innisbrook Resort Owner's obligations under the
Participating Mortgage. The capital replacement reserve is equal to $1,076,850
for 1997 (pro rated for the period the Participating Mortgage is outstanding in
1997), $2 million in 1998, with such
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amount increased by 3% per annum through 2001 and 4% per annum thereafter. The
Innisbrook Resort Owner may use funds in such capital replacement reserve to
make capital repairs and improvements at the Innisbrook Resort, subject to
certain review and approval rights of the Company. The capital expenditure
reserve will be held by Westin.
WESTIN GUARANTY. Westin currently operates the Innisbrook Resort pursuant
to a long-term management agreement. Westin has agreed to pay up to $2.5 million
per year to the Innisbrook Resort Owner to supplement results of operations with
respect to the operations at the Innisbrook Resort. The Westin Guaranty, which
is for a period of up to five years, is released at such time as the operating
payments to the Innisbrook Resort Owner exceed 1.14 times the minimum guaranteed
payments. The Company has agreed with Westin that in the event the Company
forecloses its lien on the Innisbrook Resort, and provided Westin is not in
default of its obligations under the Westin management agreement, the Company
will permit Westin to continue to manage the Innisbrook Resort.
RECIPROCAL RIGHT OF FIRST OFFER. The Company has a right of first offer to
acquire the Innisbrook Resort if the Innisbrook Resort Owner elects to sell the
same on generally the same terms and conditions as granted the Company in
connection with a transfer by any lessee of its rights under a Participating
Lease. In addition, the Innisbrook Resort Owner has the right of first offer to
acquire the Participating Mortgage if the Company elects to sell the same,
generally on the same terms and conditions as the right of first offer granted
to the Lessees upon a sale by the Company of one of the Golf Courses. See " --
The Participating Leases -- Lessee's Right of First Offer."
INSURANCE. The Innisbrook Resort Owner is obligated to carry comparable
insurance to the insurance required to be carried by the Lessees under the
Participating Leases.
NON-RECOURSE. The Participating Mortgage is non-recourse to other assets of
the Innisbrook Resort Owner and in general may only be satisfied by the Company
foreclosing its lien on the Innisbrook Resort and any other collateral then held
by the Company.
RIGHT OF FIRST OFFER TO LEASE ADDITIONAL GOLF COURSES PROXIMATE TO THE
INNISBROOK RESORT. While the Participating Mortgage is outstanding, the Company
may not own or finance any existing golf course located within a 25 mile radius
of the Innisbrook Resort without giving the Innisbrook Resort Owner a right of
first offer to lease such golf course.
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 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 is self-administered and has 8 full-time employees, 3 of which
are 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
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owner. The Participating Leases provide that each Lessee is responsible for
claims based on personal injury and property damage at the Golf Courses which
are leased and require each 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 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 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.
Based on the results of the Phase I environmental audits, the Company is not
aware of any existing environmental liabilities. 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 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, as amended (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 Lessees are responsible
for any costs associated with ADA compliance.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors consists of seven (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 are independent directors who are
neither employees of the Company nor affiliates of any Prior Owner or any Lessee
(the "Independent Directors"). See "Partnership Agreement -- Management" and
"Capital Stock -- Corporate Governance." Subject to severance compensation
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 the Company's directors and
executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------- --- ---------------------------------------------------
<S> <C> <C>
W. Bradley Blair, 54 Chairman of the Board of Directors, Chief Executive
II................... Officer and President
David J. Dick........ 37 Executive Vice President, Director
Scott D. Peters...... 39 Senior Vice President and Chief Financial Officer
Larry D. Young....... 56 Director
Roy C. Chapman 56 Independent Director
(1)(2)...............
Raymond V. Jones 50 Independent Director
(1)..................
Fred W. Reams (2).... 54 Independent Director
Edward L. Wax 60 Independent Director
(1)(2)...............
</TABLE>
- ------------
(1) Audit Committee Member.
(2) Compensation Committee Member.
W. Bradley Blair, II is the Chairman of the Board of Directors, Chief
Executive Officer and President of the Company. From 1993 until the Company's
IPO, Mr. Blair served as Executive Vice President, Chief Operating Officer and
General Counsel for The Legends Group. As an officer of Legends Group Ltd., Mr.
Blair was responsible for all aspects of operations, including acquisitions,
development and marketing. From 1978 to 1993, Mr. Blair was the managing partner
at Blair, Conaway Bograd & Martin, P.A., a law firm, specializing in real
estate, finance, taxation and acquisitions. Mr. Blair received a Bachelor of
Science Degree in Business from Indiana University and a Juris Doctorate from
the University of North Carolina at Chapel Hill Law School.
David J. Dick is Executive Vice President of the Company. From 1993 until
the Company's IPO, Mr. Dick 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, finance, 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.
Scott D. Peters is Senior Vice President and Chief Financial Officer of the
Company. From 1992 through 1996, Mr. Peters served as Senior Vice President and
Chief Financial Officer of the Pacific Holding Company in Los Angeles, where he
participated in the management of a 4,000 acre real estate portfolio consisting
of residential, commercial and country club properties focusing on
master-planned golf communities. From 1988 to 1992, Mr. Peters served as Senior
Vice President and Chief Financial Officer of Castle & Cooke Homes, Inc; and
during 1990 and 1991 lectured on Real Estate Finance and Asset Management at
California State University at Bakersfield. Mr. Peters is a certified public
accountant and worked with Arthur Andersen & Co. and
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Laventhol & Horwath from 1981 to 1985. From 1986 to 1988, Mr. Peters worked with
a general partnership that managed the construction of the Scottsdale Princess
Resort. He received a Bachelor of Arts degree in Accounting and Finance with
honors from Kent State University and a Masters Degree in Taxation from the
University of Akron, Ohio.
Larry D. Young is a director of the Company and is the founder of The
Legends Group. Mr. Young has been involved in the golf business for 25 years,
and for 21 of those years in Myrtle Beach. 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 developed 10 courses during that time, three
of which were rated the best new course in their respective category in the year
developed by GOLF DIGEST. Mr. Young has served in numerous capacities in golf
industry related non-profit organizations.
Roy C. Chapman is an Independent Director. Mr. Chapman currently is the
Chairman, Chief Executive Officer and principal stockholder of Human Capital
Resources, Inc., which was formed to assist students to finance higher
education. From 1987 until his retirement in February 1993, he was Chairman and
Chief Executive Officer of Cache, Inc., the owner and operator of a nationwide
chain of upscale women's apparel stores. He has served as the Chief Financial
and Administrative Officer of Brooks Fashion Stores and was a partner in the
international accounting and consulting firm of Coopers & Lybrand LLP. Mr.
Chapman has also served as a member of the staff of the Division of Market
Regulation of the Securities and Exchange Commission and acted as a consultant
to the Special Task Force to Overhaul the Securities Investors Protection Act.
Raymond V. Jones is an Independent Director. Mr. Jones is the Executive Vice
President of Summit Properties Inc., where he has been employed since 1984.
Summit Properties Inc. is a publicly-traded REIT listed on the New York Stock
Exchange and is one of the largest developers and operators of luxury garden
multifamily apartment communities in the southeastern United States. While at
Summit Properties Inc., Mr. Jones has overseen the development of 26 communities
comprising nearly 6,500 apartment homes in Georgia, North Carolina, South
Carolina and Ohio. Prior to 1984, Mr. Jones served as General Operations Manager
for both the Charlotte and Houston divisions of Ryan Homes, Inc. Mr. Jones
earned a B.A. in Political Science from George Washington University.
Fred W. Reams is an Independent Director. Since 1981 Mr. Reams has served as
the President of Reams Asset Management Company, LLC ("Reams Management"), an
independent private investment firm, which he co-founded. Reams Management
employs a staff of 20 persons and manages approximately $2.5 billion in assets.
In addition, Mr. Reams has served as President of the Board of Directors of the
Otter Creek Golf Course since 1981. Otter Creek, located in Indiana and rated in
the top 25 public courses by GOLF DIGEST in 1990, recently expanded to 27 holes
and has hosted several noteworthy tournaments including multiple U.S. Open and
U.S. Senior Open Qualifiers and four American Junior Golf Association
Championships.
Edward L. Wax is an Independent Director. Since 1992 Mr. Wax has served as
Chairman and Chief Executive Officer of Saatchi & Saatchi Advertising Worldwide.
There, Mr. Wax is responsible for the operations of 143 offices, in 87
countries. Mr. Wax has been employed by Saatchi & Saatchi since 1982. Mr. Wax
was formerly Chairman of The American Association of Advertising Agencies as
well as a director of both the Ad Council and the Advertising Educational
Foundation. Mr. Wax holds an M.B.A. from the Wharton Graduate School of Business
and an undergraduate degree from Northeastern University.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Board of Directors has established an audit committee
consisting of three Independent Directors (the "Audit Committee"). Raymond V.
Jones is currently the chairman of the Audit Committee. The Audit Committee's
role is to make recommendations concerning the engagement of independent public
accountants, review with the independent public accountants the plans and
results of the audit engagement, approve professional services provided by the
independent public accountants, review the independence
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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. The Board of Directors has established a
compensation committee (the "Compensation Committee") to determine compensation,
including awards under the Company's Stock Incentive Plans, for the Company's
executive officers. The Compensation Committee consists of three Independent
Directors. The current chairman is Roy C. Chapman.
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.
COMPENSATION OF DIRECTORS
The Company pays its Independent Directors fees for their services as
directors. Directors receive annual compensation of $10,000 plus a fee of $1,000
for attendance at each meeting of the Board of Directors (whether in person or
telephonically) and $500 for attending committee meetings. Directors who are not
Independent Directors are not paid any director fees. The Company reimburses
directors for their reasonable and documented out-of-pocket travel expenses.
DIRECTORS AND OFFICERS INSURANCE
The Company maintains 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 that the Company shall indemnify its 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, pursuant to the Underwriting Agreement, 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 and
Certain Provisions of Maryland Law and of the Company's Charter and Bylaws."
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EXECUTIVE COMPENSATION
The Company has three executive officers. Prior to the IPO, the Company did
not pay any compensation to its executive officers. The following tables set
forth estimated 1997 compensation (on an annualized basis) and certain
information regarding stock option and restricted stock grants made through the
date hereof to the Company's executive officers.
SUMMARY COMPENSATION TABLE, 1997
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------
AWARDS
-----------------------
ANNUAL COMPENSATION SECURITIES
-------------------- RESTRICTED UNDERLYING
SALARY BONUS STOCK OPTIONS
NAME PRINCIPAL POSITION (1) (2) AWARDS (3) GRANTED
- ------------------------------ ------------------------ --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
W. Bradley Blair, II.......... Chief Executive Officer $ 250,000 $ 22,498 $785,325 400,000(4)
David J. Dick................. Executive Vice President $ 150,000 $ 18,702 $654,437 330,000(5)
Scott D. Peters............... Chief Financial Officer $ 138,500(6) $ 10,785 $392,663 140,000(7)
</TABLE>
- ---------------
(1) Amounts given are annualized projections for the year ending December 31,
1997. No salary was paid prior to completion of the Company's IPO on
February 12, 1997.
(2) Listed bonuses consist entirely of amounts paid in lieu of (first and second
quarter) dividends on then-pending restricted stock grants prior to the date
of issuance of such restricted stock. The named executives' employment
agreements also allow the Compensation Committee to award bonuses upon the
executives' achievement of performance-related criteria. To date, no such
criteria have been established.
(3) On September 19, 1997, pursuant to the New Incentive Plan, Messrs. Blair,
Dick and Peters were sold 30,000, 25,000 and 15,000 shares of restricted
stock, respectively, for the shares' par value. Beginning in 1998, such
grants will vest in four equal annual installments on the anniversary of the
date of grant. Vesting generally is contingent upon each named executive's
continued employment with the Company but is subject to acceleration upon
termination without cause, changes of control and certain other events
defined in such executive's employment agreement and in the award. The
amounts shown are the fair market value of the entire award (regardless of
vesting) on the date of grant (based on the closing price of $26.1875), less
the purchase price paid by each named executive. Under the New Incentive
Plan, dividends are payable on all restricted stock awards prior to vesting.
(4) Mr. Blair was granted: (a) on February 6, 1997, options to purchase 150,000
shares at $21.00 per share; (b) on April 25, 1997, options to purchase
90,000 shares at $24.875 per share; and (c) on May 19, 1997, options to
purchase 160,000 shares at $25.75 per shares. All such grants vest in three
equal annual installments beginning one year from the date of grant, subject
to provisions in Mr. Blair's employment agreement providing for accelerated
vesting upon changes of control, termination without "good reason" and
certain other events.
(5) Mr. Dick was granted: (a) on February 6, 1997, options to purchase 125,000
shares at $21.00 per share; (b) on April 25, 1997, options to purchase
75,000 shares at $24.875 per share; and (c) on May 19, 1997, options to
purchase 130,000 shares at $25.75 per shares. All such grants vest in three
equal annual installments beginning one year from the date of grant, subject
to provisions in Mr. Dick's employment agreement providing for accelerated
vesting upon changes of control, termination without "good reason" and
certain other events.
(6) Effective on July 1, 1997, Scott D. Peter's salary was increased from
$125,000 per year to $150,000 per year. Mr. Peter's employment with the
Company began on February 12, 1997, the closing date of the IPO. Prior to
such date, Mr. Peters was paid a consulting fee totalling $12,000 by The
Legends Group, which amount was subsequently reimbursed to The Legends Group
by the Company.
(7) Mr. Peters was granted: (a) on February 6, 1997, options to purchase 40,000
shares at $21.00 per share; (b) on April 25, 1997, options to purchase
20,000 shares at $24.875 per share; and (c) on May 19, 1997, options to
purchase 80,000 shares at $25.75 per shares. All such grants vest in three
equal annual installments beginning one year from the date of grant, subject
to provisions in Mr. Peter's employment agreement providing for accelerated
vesting upon changes of control, termination without "good reason" and
certain other events.
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OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------ ANNUAL RATES
NUMBER OF PERCENT OF OF STOCK PRICE
SHARES TOTAL OPTIONS APPRECIATION FOR
UNDER- LYING GRANTED TO EXERCISE OPTION TERM
DATE OF OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ----------------------
NAME GRANT GRANTED 1997 SHARE DATE 5% 10%
- --------------------------- --------- ----------- --------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
W. Bradley Blair, II....... 2/6/97 150,000 16.3% $ 21.00 2/5/2007 1,822,343 4,533,999
4/25/97 90,000 9.8% $ 24.875 4/24/2007 1,332,204 3,334,749
5/19/97 160,000 17.4% $ 25.75 5/18/2007 2,472,789 6,201,463
David J. Dick.............. 2/6/97 125,000 13.6% $ 21.00 2/5/2007 1,518,620 3,778,333
4/25/97 75,000 8.2% $ 24.875 4/24/2007 1,110,170 2,778,957
5/19/97 130,000 14.1% $ 25.75 5/18/2007 2,009,141 5,038,689
Scott D. Peters............ 2/6/97 40,000 4.3% $ 21.00 2/5/2007 485,958 1,209,066
4/25/97 20,000 2.2% $ 24.875 4/24/2007 296,045 741,055
5/19/97 80,000 8.7% $ 25.75 5/18/2007 1,236,394 3,100,731
</TABLE>
OPTION EXERCISES AND VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES ACQUIRED VALUE AT SEPTEMBER 30, 1997 AT SEPTEMBER , 1997 (1)
ON EXERCISE TO RECEIVED -------------------------- --------------------------
NAME DATE TO DATE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ --------------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
W. Bradley Blair, II.......... 400,000 -- -- 400,000 -- 1,291,250
David J. Dick................. 330,000 -- -- 330,000 -- 1,071,875
Scott D. Peters............... 140,000 -- -- 140,000 -- 382,500
</TABLE>
- ------------
(1) The closing price on the AMEX of the class of common stock underlying all
options was $27 on the given date.
STOCK-BASED COMPENSATION PLANS
The Company has established three stock-based incentive plans (collectively
the "Plans"): the Directors' Plan (as defined below) is for Independent
Directors and the two Stock Incentive Plans (as defined below) are for executive
officers and other key employees. Such plans are described next.
DIRECTORS' PLAN
On January 28, 1997 the Company's sole stockholder approved the Board of
Director's adoption of the Golf Trust of America 1997 Non Employee Directors'
Plan (the "Directors' Plan").
SHARE AUTHORIZATION. A maximum of 100,000 shares of Common Stock may be
issued under the "Directors' Plan" except that the share limitation and terms of
outstanding awards may 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 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. Pursuant to the Directors' Plan each director was awarded
nonqualified options to purchase 5,000 shares of Common Stock in connection with
the Company's IPO. Such initial grants are exercisable at the
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IPO price of $21.00 per share. Each subsequently elected eligible director will
receive nonqualified options to purchase 5,000 shares of Common Stock on the
date such Director is first elected or appointed to the Board of Directors. The
Directors' Plan also provides for an automatic annual grant to each eligible
Director of options to purchase 5,000 shares of Common Stock, beginning in 1998.
The exercise price of all options grants under the Directors' Plan is 100% of
the fair market value of the Common Stock on the date of grant. All awards under
the Directors' Plan vest immediately upon grant. 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 Directors' Plan, but the terms relating to the amount,
price and timing of awards may not be amended more than once every six months
other than to comport with changes in the Tax 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.
STOCK INCENTIVE PLANS
NEW INCENTIVE PLAN. On May 19, 1997 the Compensation Committee and the
Board of Directors adopted the Golf Trust of America, Inc. 1997 Stock-Based
Incentive Plan (the "New Incentive Plan"), subject to stockholder approval at
the next annual meeting of stockholders. A maximum of 600,000 shares of Common
Stock may be issued under the New Incentive Plan, which amount has been reserved
for issuance by the Board of Directors. Through the date hereof, the
Compensation Committee has awarded grants relating to 490,000 shares (such that
110,000 shares remain available for grant) under the New Incentive Plan.
ORIGINAL INCENTIVE PLAN. On January 28, 1997, the Company's sole
stockholder approved the Board of Director's adoption of the Golf Trust of
America 1997 Stock Incentive Plan (the "Original Incentive Plan" and, together
with the New Incentive Plan, the "Stock Incentive Plans"). The Original Plan
relates to a maximum of 500,000 shares of Common Stock, all of which are the
subject of current option grants. If any such grant fails to vest or is
otherwise terminated, the underlying shares will again be available for grant
under the Original Incentive Plan.
Certain terms common to both Stock Incentive Plans are described below.
PURPOSE. By enabling participants to share in ownership of the Company, the
Stock Incentive Plans provide additional means with which the Company can
attract, motivate, retain and reward its officers and key employees. The Stock
Incentive Plans are designed to provide incentives to officers and key employees
to maximize the Company's stock price and cash flow available for distribution.
At the Compensation Committee's discretion, awards under the Stock Incentive
Plans may take the form of stock options, stock appreciation rights ("SARs"),
restricted stock awards, performance share awards and/or stock bonuses
(collectively "Awards"). There is no limit on the number of Awards that may be
granted to any one individual under the Stock Incentive Plans so long as the
grants do not violate the Ownership Limit or otherwise cause the Company to fail
to qualify as a REIT for federal income tax purposes. See "Capital Stock --
Restrictions on Ownership."
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ADMINISTRATION. The Stock Incentive Plans are administered by the
Compensation Committee, which is authorized to select from among the eligible
employees of the Company the individuals to whom 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 is authorized to adopt, amend and
rescind rules relating to the administration of the Plan. No member of the
Compensation Committee is eligible to participate in the Stock Incentive Plans.
AWARDS UNDER THE STOCK INCENTIVE PLANS. The Stock Incentive Plans authorize
the Compensation Committee to make the following types of awards to eligible
employees:
- NONQUALIFIED STOCK OPTIONS, which provide for the right to purchase Common
Stock at a specified price that may be less than fair market value on the
date of grant (but not less than par value), and usually become
exercisable in installments after the grant date. Nonqualified stock
options may be granted for any reasonable term.
- INCENTIVE STOCK OPTIONS, which are designed to comply with the provisions
of the Tax Code and will be subject to restrictions contained in the Tax
Code, including exercise prices equal to at least 100% of fair market
value of the Common Stock on the grant date and a 10 year restriction on
their term, but may be subsequently modified to disqualify them from
treatment as incentive stock options.
- RESTRICTED STOCK, which 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. Consideration for restricted
stock may include notes and past services. 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, which 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.
- STOCK APPRECIATION RIGHTS may be granted under the New Incentive Plan only
and may be made in tandem with other Awards or independently. Each SAR
entitles the holder, upon exercise, to receive the difference between the
initial share value specified in the SAR Award and the fair market value
of a share of Common Stock on the date of exercise. At the Compensation
Committee's discretion, payments under SARs may be made in cash, shares of
Common Stock (valued at fair market value) or any combination thereof.
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 is invested in a separate trust account.
EMPLOYMENT AGREEMENTS
The Company has entered into written employment agreements with W. Bradley
Blair, II, David J. Dick and Scott D. Peters. The employment agreement with Mr.
Blair has a term of four years, commencing
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February 7, 1997, the employment agreement with Mr. Dick has a term of three
years, commencing February 7, 1997, and the employment agreement with Mr. Peters
has a term of two years commencing February 12, 1997. The employment agreements
provide for an annual salary of $250,000, $150,000 and $150,000 for Messrs.
Blair, Dick and Peters, respectively, with annual performance bonuses determined
by the Compensation Committee in connection with the achievement of performance
criteria to be determined by the Compensation Committee. In addition, each of
Messrs. Blair, Dick and Peters have received options to purchase shares of
Common Stock as described above under the heading "Executive Compensation." Each
of Messrs. Blair, Dick and Peters, or their estates would receive severance
payments and their stock-based compensation immediately would vest in full upon
the death, disability, termination or resignation of such executive, unless such
executive resigns without "good cause" or unless the Company terminates such
executive with "good reason," I.E., 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 material reduction in his compensation or benefits, material
breach or material default by the Company under his employment agreement or
following a change in control of the Company. The severance payments of Messrs.
Blair and Dick would be equal to base compensation plus bonus at the most recent
annual amount for the longer of the balance of the employment term or two years.
The severance payments of Mr. Peters would be equal to base compensation for a
period which varies from four months to one year depending upon the time and
cause of termination.
The Compensation Committee may establish additional incentive compensation
arrangements for its executive officers and certain key employees.
COVENANTS NOT TO COMPETE
In their employment agreements, Messrs. Blair, Dick and Peters have agreed
to devote substantially all of their time to the business of the Company and not
to engage in any competitive business. They have agreed further 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 and resort operations.
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LESSEES AND OPERATORS
Each of the Lessees is affiliated with the Prior Owner of the Golf Course
that it manages, except the Tiburon Lessee and the Lost Oaks Lessee. All of the
Lessees lease the Golf Courses under triple net leases. The Lessees derive
revenues from golf course operations 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 Lessee is a
single purpose entity with nominal assets.
THE INNISBROOK RESORT
Westin operates the hotel and conference facility pursuant to a long-term
management agreement. Westin owns, manages, franchises and represents over 105
hotels and resorts in 23 countries, with over 18 additional projects under
development. Westin was recognized as the number one upscale hotel chain by
readers of BUSINESS TRAVEL NEWS in its "1996 Survey of Top Hotel Chains."
Starwood, through an affiliate, operates the Golf Courses at the Innisbrook
Resort.
THE LEGENDS COURSES
The four Legends Lessees lease the seven golf courses contributed by The
Legends Group. The three Legends Resort Courses are leased pursuant to a single
Participating Lease, and two recently-opened Golf Courses. Each of the other
owned Golf Courses is leased to individual 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 contributed seven of the eight
courses it currently operates. The course which was not contributed did not meet
the Company's investment criteria because it is subject to a ground lease with a
short remaining term. The 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 and majority owner of The
Legends Group, has owned and managed golf courses for 25 years. During such
time, Mr. Young has also been involved in the design and development of 11 golf
courses, eight of which have been nationally recognized and three of which were
rated the best new course in their respective category in the year developed by
GOLF DIGEST. 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.
WOODLANDS
Woodlands was developed, and is 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 own and
operate another golf course located near Woodlands.
Mr. R.C. Craft has approximately 50 years of experience in real estate
ownership and management and, together with his son Mr. Robert S. 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), a member of 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 was 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
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developed the course in 1993, and the course is 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 two 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 three Daily Fee golf courses now managed by The Crescent Company
including Olde Atlanta and Eagle Watch. The golf courses are located in the
Atlanta, Georgia suburbs (2) and Augusta, Georgia area (1). Mr. Trogdon was
previously an Executive Vice President at The First National Bank of Chicago and
a senior officer at NationsBank.
NORTHGATE COUNTRY CLUB
Northgate Country Club was developed and is currently 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.
TIBURON GOLF CLUB
Tiburon Golf Club is leased to an affiliate of Granite Golf. Granite Golf
and its affiliates currently manage over 30 golf courses throughout the United
States.
RAINTREE COUNTRY CLUB
Raintree Country Club is leased to an affiliate of John Raineri, Sr., the
prior owner of the course. Mr. Raineri has been involved with golf course
management since 1963, built his first golf course in 1973, and has been a
member of the PGA for 35 years. In 1997 Mr. Raineri won the PGA Seniors
Tournament in Cooperstown, New York.
EAGLE WATCH GOLF CLUB
The Company leases Eagle Watch to an affiliate of the Lessee of Olde Atlanta
(see above).
LOST OAKS GOLF COURSE
Lost Oaks is leased to an affiliate of Starwood. The Company believes
Starwood, through its affiliates, is one of the United States leading golf
course management, development and consulting companies.
CLUB OF THE COUNTRY
Club of the Country is leased to its Prior Owner and managed by an affiliate
of Granite Golf pursuant to a sublease with the Prior Owner.
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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
First Amended and Restated Agreement of Limited Partnership of the Operating
Parnership (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 the 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 -- Lessee Right of First Offer."
FINANCING
The Company intends to maintain a ratio of debt-to-total market
capitalization of 50% or less. Following the completion of this Offering and the
use of net proceeds therefrom, the Company will have approximately $4.3 million
of indebtedness, which will constitute approximately 1.4% of its total market
capitalization after giving effect to the Offering. The Board of Directors,
however, from time to time may 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 Tax Code
concerning taxability of undistributed REIT income and REIT qualification), or a
combination of these methods.
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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 disposition of 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 also may 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 redeem 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.
CONFLICT OF INTEREST POLICIES
The Company's Board of Directors is subject to certain provisions of
Maryland law and of its Charter and Bylaws, 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 Independent Directors (i.e.,
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). The Charter provides that
such provisions relating to Independent Directors may not
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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 stockholder of the Company, must be approved by a
majority of the directors, including a majority of the disinterested 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 interests 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 contract or transaction is authorized,
approved or ratified, by the affirmative vote of a majority of the independant
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 contract or 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, as amended. 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 currently does not 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 Tax 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 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
OVERVIEW
GTA was incorporated in Maryland in November 1996 to take advantage of
opportunities in the golf course ownership business. GTA has two wholly-owned
subsidiaries, GTA GP, Inc. and GTA LP, Inc., which exist solely to hold the
Company's general and limited partnership interests in the Operating
Partnership. The board of directors of each subsidiary is comprised of the
executive officers of GTA. The Operating Partnership was formed in Delaware in
November 1996. GTA GP, Inc. is the sole general partner of the Operating
Partnership.
INITIAL PUBLIC OFFERING. In February 1997, the Company raised net proceeds
of approximately $73.0 million in the IPO and acquired the 10 Initial Courses
from their Prior Owners. Each Initial Course was then leased
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back to a lessee affiliated with the course's Prior Owner. 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 Lessees in the Company will
align the interests of the Lessees with the interests of stockholders. Each
Lessee's obligations under the Participating Lease is secured for a minimum of
two years by a pledge of OP Units or Common Stock or other securities having a
value equal to 15% of the Company's purchase price for the Golf Course, which
approximates 16 months of initial Base Rent under the applicable Participating
Lease. See "The Golf Courses -- The Participating Leases."
Prior to the IPO, the Chairman of the Board, Chief Executive Officer and
President of the Company, W. Bradley Blair, II, served as the Executive Vice
President and Chief Operating Officer of Legends Group, Ltd., a leading golf
course owner, developer and operator in the southeast and mid-Atlantic regions
of the United States. Upon completion of the IPO, Mr. Blair resigned from
Legends Group, Ltd. and no longer holds any interest in the golf operations of
The Legends Group.
Seven of the Golf Courses were acquired from The Legends Group. As part of
the Formation Transactions (as herein defined), the Company entered into an
Option to Purchase and Right of First Refusal Agreement relating to golf courses
owned, developed or acquired by The Legends Group. The initial Participating
Leases with the Legends Lessees are cross-collateralized and cross-defaulted.
FORMATION TRANSACTIONS
Prior to or simultaneously with the completion of the IPO, the Company, the
Operating Partnership, the Prior Owners and the initial Lessees completed in the
Formation Transactions described below.
- The Company, which was incorporated in Maryland in November 1996, sold
3,910,000 shares of Common Stock in the IPO and contributed all of the net
proceeds thereof, approximately $73 million, to GTA GP and GTA LP, which
in turn contributed such net proceeds to the Operating Partnership in
exchange for an aggregate of 3,910,000 OP Units.
- The Prior Owners contributed 100% of the assets related to each of the
Golf Courses to the Company in exchange for an aggregate of 4,106,606 OP
Units, approximately $6.2 million in cash and the repayment of
approximately $47.4 million of existing mortgages and other indebtedness
at the Golf Courses as follows:
-The Company acquired seven Golf Courses from The Legends Group for an
aggregate of 3,738,556 OP Units, the assumption and repayment of
approximately $34.8 million in existing indebtedness and the
reimbursement of approximately $522,500 of out-of-pocket expenses
incurred in connection with the Formation Transactions.
-The Company acquired three Golf Courses from parties unaffiliated with
the Company or The Legends Group for an aggregate amount of 368,050 OP
Units, $6.2 million in cash and the repayment of approximately $12.7
million in existing indebtedness.
- The Company, as lessor, leased the Golf Courses to the initial Lessees,
which were newly-formed entities affiliated with the Prior Owners,
pursuant to Participating Leases for initial terms of 10 years each, with
each Lessee having the right to extend the term of its Participating Lease
for up to six renewal terms of five years each. See "The Golf Courses --
The Participating Leases."
- Each Prior Owner was granted the right to receive additional OP Units
pursuant to the Lessee Performance Option. See "The Company -- Business
Strategy -- Internal Growth." OP Units may be redeemed for cash or, at the
Company's election, Common Stock on a one-for-one basis, beginning one
year after the completion of the IPO. See "The Partnership Agreement --
Redemption Rights."
- The Company entered into employment agreements with its executive
officers. See "Management -- Employment Agreements and Executive
Compensation."
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- The Company entered into the Option Agreement with The Legends Group
pursuant to which the Company was granted the option and right of first
refusal to acquire golf courses currently owned or subsequently acquired
or developed by The Legends Group. See "Certain Relationships and
Transactions -- Option to Purchase and Right of First Refusal."
- Upon completion of the IPO, the Company had outstanding approximately $4.3
million of indebtedness, which the Company intends to keep outstanding for
a period of up to 10 years to accommodate a Prior Owner's efforts to seek
to minimize certain adverse tax consequences. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Pro Forma
Liquidity and Capital Resources of the Company."
BENEFITS TO OFFICERS AND DIRECTORS
As a result of the Formation Transactions, executive officers and directors
of the Company and certain of their affiliates received the following benefits:
- Larry D. Young, a director of the Company and majority owner of The
Legends Group, and his affiliates received 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 IPO)
then were worth approximately $78.5 million (based on the IPO price) and
are more liquid than their interests in the Golf Courses now that a public
trading market for the Common Stock has commenced. The aggregate book
value of the interests contributed by The Legends Group was approximately
$36.3 million.
- The 12,500 OP Units owned by each of Mr. Blair and Mr. Dick increased in
value to $525,000, based on the IPO Price, a substantial increase over the
nominal purchase price paid by Messrs. Blair and Dick for such OP Units.
- Messrs. Blair, Dick and Peters, were granted options to acquire 150,000,
125,000 and 40,000 shares of Common Stock, respectively, at the IPO Price.
The options vest ratably over three years commencing on the first
anniversary of the date of grant. See "Management -- Executive
Compensation."
- Each Independent Director received options to acquire 5,000 shares of
Common Stock at the IPO Price.
- In connection with the acquisition of the Golf Courses owned by The
Legends Group, the Company repaid approximately $26.3 million of debt
personally guaranteed by Mr. Young.
- The Company paid to Mr. Young and his affiliates approximately $8.4
million in repayment of a loan made by such affiliates to Legends of
Virginia, LC in connection with the development of the two recently-opened
Golf Courses.
- The Company reimbursed The Legends Group $522,500 and Mr. Dick $62,000 for
direct out-of-pocket expenses incurred in connection with the Formation
Transactions.
- Mr. Young and his affiliates became entitled to receive additional OP
Units pursuant to the Lessee Performance Option. See "The Company --
Business Strategies and Objectives -- Internal Growth."
- Through the operation of seven of the Golf Courses, the Legends Lessees,
which are owned by Mr. Young or his affiliates, became 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
contribution of their interests in the Golf Courses were deferred.
- The Company entered into employment agreements with Messrs. Blair, Dick
and Peters providing for annual base salaries of $250,000, $150,000 and
$125,000 (which amount was subsequently amended to
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$150,000 effective July 1, 1997), respectively, and the possibility of
cash performance bonuses. See "Management -- Employment Agreements."
TRANSFER DOCUMENTS
The Company assumed certain past obligations of the Golf Course real estate
and all obligations arising after the transfer of the Golf Courses to the
Company. The agreements to transfer the Golf Courses contained representations
and warranties to the Company concerning the Golf Courses customarily found in
agreements of such type. Such representations and warranties generally survive
the closing of the transfer of title to the Golf Courses for one year.
The obligations of the Prior Owners to indemnify the Company for breaches of
their representations and warranties is secured by a pledge of OP Units from
each Prior Owner for a period of one year, which OP Units also secure the
obligations of the related Lessee under its Participating Lease.
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
RELATIONSHIPS AMONG OFFICERS AND DIRECTORS
Larry Young, a director of the Company, is the majority owner of The Legends
Group (which contributed seven of the Golf Courses to the Company) and the
Legends Lessees (which lease the same seven Golf Courses from the Company).
Until the IPO, Mr. Blair, who is Chairman of the Board, was the Executive Vice
President and Chief Operating Officer of Legends Group Ltd., the parent company
of The Legends Group. Upon completion of the IPO, Mr. Blair resigned from
Legends Group Ltd. and currently has no affiliation or interest in the golf
operations of The Legends Group. Mr. Blair is an inactive shareholder in Blair
Conaway Bograd & Martin, P.A., a law firm engaged on a limited basis to provide
real estate, corporate and labor law services to the Company.
ACQUISITION OF INTERESTS IN CERTAIN OF THE GOLF COURSES
Mr. Young and his affiliates received 3,738,556 OP Units in exchange for
their interests in certain of the Golf Courses. Upon exercise of their right to
redeem such OP Units (which rights are not exercisable until February 1998),
such persons and entities may receive an aggregate of 3,738,556 shares of Common
Stock or, at the Company's option, cash. See "Partnership Agreement --
Redemption Rights."
REPAYMENT OF INDEBTEDNESS
The Company repaid approximately $26.3 million of indebtedness guaranteed by
Mr. Young. The Company also paid to Mr. Young's affiliates approximately $8.4
million in repayment of a loan made to The Legends Group in connection with the
development of the two recently-opened Golf Courses.
Additionally, the Company reimbursed The Legends Group $522,500 and Mr. Dick
$62,000 for direct out-of-pocket expenses incurred in connection with the
Formation Transactions.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with W. Bradley Blair,
II, David J. Dick and Scott D. Peters, pursuant to which Mr. Blair will serve as
Chairman of the Board, Chief Executive Officer and President, Mr. Dick served as
Executive Vice President and Mr. Peters served as Senior Vice President and
Chief Financial Officer of the Company for a term of four years, three years and
two years, respectively, at an initial annual base compensation of $250,000,
$150,000 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, Dick and Peters will be
entitled to receive severance benefits and the immediate vesting of all
stock-based compensation. 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 has 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 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 purposes 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
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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 has 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 generally run for a
period of 10 years after the IPO.
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 have, subject to certain protective rights of the Limited
Partners described below, full, exclusive and complete responsibility and
discretion in the management and unilateral 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 Operating Partnership, 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.
PLEDGE
Each Limited Partner may pledge Partnership Units having a value, based on
the price of the Common Stock, equal to 85% of the purchase price of the Golf
Course contributed by it as collateral to institutional third party lenders. In
addition, for a period of at least two years, each Prior Owner must pledge to
the Company OP Units having a value, based on the price of the Common Stock,
equal to 15% of the purchase price of the Golf Course contributed by it (which
in the case of the courses acquired at the IPO, approximately 16 months of
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initial Base Rent, based on the IPO offering price) as collateral for the
Participating Lease of its affiliated Lessee, see "Percentage Lease -- Security
Deposit," and to secure its obligation to indemnify the Company for
representations and warranties made in connection with the contribution of the
Golf Courses. In addition, the OP Units pledged to the Company will also secure
indemnification obligations of 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, have 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 Company
may not make such election unless a registration statement is effective with
respect to the issuance of such shares. Further, the Redemption Rights may not
be exercised 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
Tax 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
Tax 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") with respect to 50% of each Limited Partner's OP
Units, at any time after one year following the completion of the IPO and with
respect to the other 50% of each Limited Partner's OP Units at any time after
two years following the completion of the IPO, provided that not more than four
redemptions by any Limited Partner 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 4,135,365. 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, contributed to the Operating
Partnership substantially all of the net proceeds of the IPO, in consideration
of which GTA GP received a 0.2% general partnership interest and GTA LP received
an approximate 48.4% 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 in exchange for
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additional interests in the Operating Partnership. Moreover, the Company is
authorized, through GTA GP and GTA LP, to cause the Operating Partnership to
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 until
December 31, 2071, or until sooner dissolved pursuant to the terms of the
Partnership Agreement.
TAX MATTERS
Pursuant to the Partnership Agreement, GTA GP is 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 Tax Code on behalf of the Operating
Partnership.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 known to the Company to be the beneficial owner of 5% or more
of the outstanding Common Stock as of September 30, 1997. 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
PERCENTAGE OF INTEREST IN
NUMBER OF SHARES SHARES OF COMMON NUMBER OF OPERATING
NAME OF BENEFICIAL OWNER OF COMMON STOCK STOCK OUTSTANDING OP UNITS (5) PARTNERSHIP
- ---------------------------------------------- ---------------- ------------------- ------------ -----------------
<S> <C> <C> <C> <C>
W. Bradley Blair, II.......................... 30,000(2) * 323,557(7) 7.0%
David J. Dick................................. 25,000(3) * 12,500 *
Scott D. Peters............................... 15,000(4) * -- --
Larry D. Young (1)............................ -- -- 3,738,556 80.93%
Roy C. Chapman................................ 500 * -- --
Raymond V. Jones.............................. 1,000 * -- --
Fred W. Reams................................. 25,000 * -- --
Edward L. Wax................................. 1,250 * -- --
Directors and officers as a group (8
persons)..................................... 97,750 2.44% 4,074,613 88.2%
Essex Investment Management Co. (7)........... 698,285(8) 17.16% -- --
FMR Corp. (9)................................. 449,000(10) .03% -- --
Edward C. Johnson III (11).................. -- * -- --
Abigail P. Johnson (11)..................... -- * -- --
Total (as a group)........................ 449,000 .03% -- --
Golf Hosts, Inc. (12)......................... 159,326 3.92% 274,039 5%
</TABLE>
- ------------
* Less than 1%.
(FOOTNOTES ON FOLLOWING PAGE)
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- ------------
(1) Address is c/o The Legends Group, 1500 Legends Drive, Myrtle Beach, South
Carolina 29577.
(2) Represents the 30,000 shares of restricted stock sold by the Company to Mr.
Blair, all of which remain subject to vesting conditions. See "Management --
Executive Compensation."
(3) Represents the 25,000 shares of restricted stock sold by the Company to Mr.
Dick, all of which remain subject to vesting conditions. See "Management --
Executive Compensation."
(4) Represents the 15,000 shares of restricted stock sold by the Company to Mr.
Peters, all of which remain subject to vesting conditions. See "Management
-- Executive Compensation."
(5) The Operating Partnership has 4,619,600 OP Units outstanding prior to the
completion of this Offering. 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 IPO and 50% after the second anniversary of the completion
of the IPO.
(6) Includes 311,057 OP Units held by the managing member (the "Managing
Member") of Legends of Virginia, L.C., a Prior Owner which contributed two
of the Initial Courses to the Company and which currently holds 598,187 OP
Units. Mr. Blair is a co-trustee of the Managing Member with no equity
interest and a 52% voting interest. Mr. Blair disclaims any beneficial
interest in such OP Units.
(7) Essex Investment Management Co. is located at 125 High Street, South Boston,
MA 02110.
(8) According to the Amendment to Schedule 13(G) filed with the SEC, the person
has sole voting power with respect to 547,660 of such shares and sole
dispositive power of all of such shares.
(9) FMR Corp. is located at 82 Devonshire Street, Boston MA 02104.
(10) According to Schedule 13(G) filed with the SEC, the person has sole
dispositive power of 449,000 of such shares. Fidelity Management & Research
Company ("Fidelity"), a wholly-owned subsidiary of FMR Corp. is the
beneficial owner of 449,000 shares of Common Stock as a result of acting as
investment advisor to various investment advisors. The ownership of one
investment company, Fidelity Contrafund, amounted to 375,100 shares or 9.02%
of the Common Stock.
(11) Edward C. Johnson, Chairman of FMR Corp., has, through control of Fidelity
and the Funds, sole power to dispose of the 449,000 shares. Members of the
Edward C. Johnson, 3d Family and trusts for their benefit are the
predominant owners of Class B Shares of Common Stock of FMR Corp. Mr.
Johnson owns 12.0% and Abigail Johnson owns 24.5% of the aggregate
outstanding voting stock of FMR Corp. Abigail Johnson is a director of FMR
Corp.
(12) Golf Hosts, Inc. is located at c/o Starwood Capital Group, L.P., Three
Pickwick Plaza, Suite 250, Greenwich, CT 06830.
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 class 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 class 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
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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 classes, to establish the number of shares in
each class and to fix the designation, powers, preferences and rights of each
such class 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
amendments to the Charter, any merger, consolidation or sale of all or
substantially all of the assets of the Company. 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 Tax 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 Tax Code to include certain
entities) during the last half of a taxable year (other than its 1997 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 (other than its 1997 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 a Lessee would not qualify as rents from real
property, which would likely 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 a Lessee within the meaning of Section 856(d)(2)(B)
of the Tax 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 of the
constructive ownership provisions of the Tax 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 Tax 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 Charter 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 Tax 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 Tax 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.
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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 Tax
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
Tax 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) 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 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 is 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
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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 Tax 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 Tax 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 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.
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.
TRANSFER AGENT AND REGISTRAR
The Company has appointed ChaseMellon Shareholder Services, L.L.C. as its
transfer agent and registrar.
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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.
Thereafter, any such business combination must be approved by two
supermajority stockholder votes unless, among other conditions, the stockholders
of common stock receive a minimum price (defined in the MGCL) for their shares
and the consideration is received as cash or in the same form as previously paid
by the Interested Stockholder for its Common Stock. Under the MGCL, an
"Interested Stockholder" includes any individual or entity beneficially 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 MGCL, 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.
LIMITATION OF LIABILITY OF DIRECTORS; INDEMNIFICATION AGREEMENTS
Maryland Law and the Bylaws provide that, to the maximum extent permitted by
law, a director or officer 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's Charter and Bylaws require the Company to indemnify its
directors, officers and certain other parties 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.
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.
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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.
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.
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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 with certain amendments requiring the affirmative vote of two-thirds 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 that certain amendments to the Bylaws require the affirmative vote of 80%
of the entire Board of Directors.
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SHARES AVAILABLE FOR FUTURE SALE
Upon the completion of this Offering, the Company will have outstanding
7,160,755 shares of Common Stock. The shares of Common Stock issued in this
Offering will be freely tradeable by persons other than "affiliates" of the
Company without restriction under 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 this Offering,
the Company may issue additional shares of Common Stock if the Prior Owners
exercise their Redemption Rights. Under the Partnership Agreement, the Prior
Owners will have the right to cause the Operating Partnership to redeem 50% of
their OP Units for cash or, at the Company's election, Common Stock on a
one-for-one basis, beginning one year after the completion of the IPO. The other
50% of their OP Units may be redeemed at any time after two years following the
completion of the IPO. See "The Partnership Agreement -- Redemption Rights." The
Company may not make an election to redeem OP Units for Common Stock unless a
registration statement is effective with respect to the issuance of such shares.
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, the Company has granted certain registration rights and
"piggyback" rights to the Prior Owners with respect to shares of Common Stock
issuable upon the redemption of their OP Units.
The Company intends to apply to list the shares of Common Stock offered
hereby on the AMEX. 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 affect
adversely 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
Under the Partnership Agreement, the Company may elect to purchase OP Units
offered for redemption with shares of Common Stock only pursuant to an effective
registration statement with respect to the issuance of such shares. To
facilitate such election, the Company has agreed to register one year from the
completion of the IPO 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. The Company will be obligated to maintain the effectiveness of such
registration statement until a date to be agreed upon or until such time as all
of the shares registered pursuant to such registration statement (i) have been
disposed of pursuant to such registration statement, (ii) have been otherwise
distributed pursuant to Rule 144 promulgated under the Securities Act ("Rule
144") or (iii) have been otherwise transferred in a transaction resulting in the
transferee receiving Common Stock not deemed to be "restricted securities" under
Rule 144. 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 must bear the expenses of satisfying the
registration requirements, except that the expenses shall not include any
underwriting discounts or commissions, Blue Sky registration fees, or transfer
taxes relating to the shares.
Under the Partnership Agreement, the Prior Owners will be entitled to
include within any registration statement under the Securities Act filed by the
Company with respect to any underwritten public offering of Common Stock (either
of its own account or the account of other security holders) at any time the
shares held by such holders upon exercise of their Redemption Rights, subject to
certain conditions and restrictions. The existence of such agreement to the
Company may affect adversely the terms upon which the Company can obtain
additional equity financing in the future.
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FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
regarding the Offering that may be relevant to a prospective holder of Common
Stock in the Company is based on current law. 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 circumstances, or to
certain types of stockholders (including insurance companies, tax-exempt
organizations (except as described below), financial institutions or
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States (except as described below)) 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 Tax Code, existing, temporary, and
currently proposed Treasury Regulations promulgated under the Tax Code, the
legislative history of the Tax 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 plans to make an election to be taxed as a REIT under
Sections 856 through 860 of the Tax Code, commencing with its short taxable year
beginning on February 11, 1997 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
Tax 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 Tax 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 Tax 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 Tax 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 Tax 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."
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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 subject to a 100% tax on the gross income
attributable to 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 or involuntarily converted
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 Tax 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 Tax Code; (iv) which is neither a financial institution nor
an insurance company subject to certain provisions of the Tax 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 Tax Code to include certain entities); and (vii)
which meets certain other tests, described below, regarding the nature of its
income and assets. The Tax 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. Additionally, if for any taxable year of the Company
beginning after December 31, 1997, the Company complies with regulations
requiring the maintenance of records to ascertain ownership of its outstanding
stock and the Company does not know or have reason to know that it failed to
satisfy condition (vi), it will be treated as having satisfied that condition
for any such taxable year.
The Company believes that it has issued sufficient shares pursuant to the
IPO 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 corporate subsidiaries and may have additional
corporate subsidiaries in the future. Tax 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,
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liabilities and items of income, deduction, and credit of the Company. Each of
the Company's current subsidiaries is a "qualified REIT subsidiary." The
Company's subsidiaries therefore will not be subject to federal corporate income
taxation, although they may be subject to state and local taxation.
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 Tax 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."
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. The 30% gross income test
however, need not be satisfied for any taxable year of the Company beginning
after December 31, 1997.
Pursuant to the Participating Leases, the 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
Lessees are 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, Tax 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
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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
Lessees intend for their relationship to be that of a lessor and lessee and such
relationship is documented by lease agreements, (ii) the 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 Lessees bear the cost of, and
are 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 Lessees bear all of the
costs and expenses of operating the Golf Courses (including the cost of any
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 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 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 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 Lessees' use,
management, maintenance or repair of the Golf Courses, (viii) the Lessees are
obligated to pay substantial Base Rent for the period of use of the Golf
Courses, and (ix) the 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 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 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 Tax 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"). The
Charter provides that no stockholder may own, directly or constructively, in
excess of 9.8% of the
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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. For taxable years of the Company beginning after
December 31, 1997, the Company may operate or manage the property or furnish or
render services to the tenants of such property without disqualifying any rents
received from such property as "rents from real property," provided that any
amounts received or accrued (directly or indirectly) by the Company for any such
activities or services do not exceed 1% of all amounts received or accrued
(directly or indirectly) by the Company with respect to such property. However,
any amounts received or accrued (directly or indirectly) by the Company for any
such activities or services will not qualify as "rents from real property," even
to the extent such amounts do not exceed the 1% threshold. 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) with the exception of one Golf Course 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
(subject to the 1% de minimis rule discussed above for taxable years of the
Company beginning after December 31, 1997). With respect to one Golf Course, a
portion of the revenues derived under the Participating Lease applicable to such
Golf Course (the portion attributable to personal property) will not be
considered as "rents from real property." The amount of the anticipated
disqualified income under such Participating Lease, however, will not prevent
the Company from qualifying as a REIT or subject it to any federal income
taxation.
The term "interest," as defined for purposes of the 75% and 95% gross income
tests, 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. In
addition, an amount received or accrued generally will not be excluded from the
term "interest" solely by reason of being based on the income or profits of a
debtor if the debtor derives substantially all of its gross income from the
related property through the leasing of substantially all of its interests in
the property, to the extent the amounts received by the debtor would be
characterized as "rents from real property" if received by a REIT. Furthermore,
to the extent that interest from a loan that is based on the cash proceeds from
the sale of the property securing the loan constitutes a "shared appreciation
provision" (as defined in the Tax Code), income attributable to such
participation feature will be treated as gain from the sale of the secured
property, which generally is qualifying income for purposes of the 75% and 95%
gross income tests.
Interest on obligations secured by mortgages on real property or on
interests in real property generally is qualifying income for purposes of the
75% gross income test. However, if the Company receives interest income with
respect to a loan that is secured by both real property and other property and
the highest principal amount of the loan outstanding during a taxable year
exceeds the fair market value of the real property on the date the Company
acquired the loan, the interest income from the loan will be apportioned between
the real property and the other property, which appointment may cause the
Company to recognize income that is not qualifying income for purposes of the
75% gross income test.
O'Melveny & Myers LLP is of the opinion that, for federal income tax
purposes, the Participating Mortgage will be treated either as a debt obligation
that produces qualifying interest income for purposes of both the 75% and the
95% gross income tests, or, alternatively, as a true lease that generates "rents
from real property." Investors should be aware that there are no controlling Tax
Code sections, Treasury Regulations, published
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rulings or judicial decisions involving loans with terms substantially the same
as the Participating Mortgage that discuss whether such an investment
constitutes debt for federal income tax purposes. Therefore, the opinion of
O'Melveny & Myers LLP is based upon all of the facts and circumstances and upon
judicial decisions that are considered to be analogous. Opinions of counsel are
not binding upon the Service of any court, and there can be no complete
assurance that the Service will not assert successfully a contrary position.
The Company will be subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75% gross income test), less expenses directly
connected with the production of such income. "Foreclosure property" is defined
as any real property (including interests in real property) and any personal
property incident to such real property (i) that is acquired by a REIT as the
result of such REIT having bid in such property at foreclosure, or having
otherwise reduced such property to ownership or possession by agreement or
process of law, after there was a default (or default was imminent) on a lease
of such property or on an indebtedness owed to the REIT that such property
secured, (ii) for which the related loan was acquired by the REIT at a time when
default was not imminent or anticipated and (iii) for which such REIT makes a
proper election to treat such property as foreclosure property. However, a REIT
will not be considered to have foreclosed on a property where such REIT takes
control of the property as a mortgagee-in-possession and cannot receive any
profit or sustain any loss except as a creditor of the mortgagor. Under the Tax
Code, property generally ceases to be foreclosure property with respect to a
REIT on the date that is two years after the date such REIT acquired such
property (or longer if an extension is granted by the Secretary of the
Treasury). The foregoing grace period is terminated and foreclosure property
ceases to be foreclosure property on the first day (i) on which a lease is
entered into with respect to such property that, by its terms, will give rise to
income that does not qualify under the 75% gross income test or any amount is
received or accrued, directly or indirectly, pursuant to a lease entered into on
or after such day that will give rise to income that does not qualify under the
75% gross income test, (ii) on which any construction takes place on such
property (other than completion of a building, or any other improvement, where
more than 10% of the construction of such building or other improvement was
completed before default became imminent) or (iii) that is more than 90 days
after the day on which such property was acquired by the REIT and the property
is used in a trade or business that is conducted by the REIT (other than through
an independent contractor from whom the REIT itself does not derive or receive
any income). As a result of the rules with respect to foreclosure property, if
the Lessee or the Innisbrook Resort Owner defaults on its obligations under a
Participating Lease or Participating Mortgage, as applicable, the Company
terminates the Lessee's leasehold interest or forecloses on the Innisbrook
Resort, and the Company is unable to find a replacement lessee within 90 days of
such foreclosure, gross income from the underlying property would cease to
qualify for the 75% and 95% gross income tests. In such event, the Company
likely would be unable to satisfy the 75% and 95% gross income tests and, thus,
would fail to qualify as a REIT.
The net income derived from a prohibited transaction is subject to a 100%
tax. The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property) that is held primarily
for sale to customers in the ordinary course of a trade or business. The Company
believes that no asset owned by the Company or the Operating Partnership will be
held for sale to customers and that a sale of any such asset will not be in the
ordinary course of the Company's or the Operating Partnership's business.
Whether an asset is held "primarily for sale to customers in the ordinary course
of a trade or business" depends, however, on the facts and circumstances in
effect from time to time, including those related to a particular asset.
Nevertheless, the Company will attempt to comply with the terms of safe-harbor
provisions in the Tax Code prescribing when asset sales will not be
characterized as prohibited transactions. Complete assurance cannot be given,
however, that the Company can comply with the safe-harbor provisions of the Tax
Code or avoid owning property that may be characterized as property held
"primarily for sale to customers in the ordinary course of a trade or business."
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The participating interest feature of the Participating Mortgage will cause
the Participating Mortgage to have original issue discount ("OID"), which is
treated as interest income. See "Annual Distribution Requirements" for a
discussion of the effect of OID on the ability of the Company to meet the REIT
distribution requirements.
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 Tax 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.
For any taxable year of the Company beginning after December 31, 1997, the
Company may elect to retain and pay taxes on all or a portion of its net
long-term capital gains for such year, in which case, the Company's stockholders
would include in their income as long-term capital gains their proportionate
share of such undistributed capital gains. The stockholders would be treated as
having paid their proportionate share of the capital gains tax paid by the
Company, which amounts would be credited or refunded to the stockholders.
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. For the Company's taxable years ending after December 31, 1997, the
Company may elect to retain and pay taxes on all or a portion of its net
long-term capital gains for such year, in which case the Company's stockholders
would include in income their proportionate
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share of such undistributed long-term capital gain and claim a credit for their
share of the taxes paid by the Company. 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 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 participating interest feature of the Participating Mortgage will cause
the Participating Mortgage to have OID, which will require the Company to
accrue, as interest income, the full amount of such OID even though the Company
may not be in receipt of a like amount of related cash payments during such
year. The inclusion of OID in income without the related cash may make it more
likely that the Company will have to borrow to meet the 95% distribution
requirement. For the Company's taxable years beginning after December 31, 1997,
OID will not be included in taxable income in determining whether the Company
has met the 95% distribution requirement, although the Company will still be
subject to tax on such income to the extent not distributed.
In addition, upon the happening of a "Transfer Triggering Event," the
Company will have to accrue the Additional Interest Amount without any related
cash payment in the year the "Transfer Triggering Event" occurs. The Company
will lend the Additional Interest Amount to the Innisbrook Resort Owner and
interest will accrue on the Additional Interest Amount but will not be paid
until the maturity of the Participating Mortgage. Accordingly, the Company will
have additional OID without any related cash payment from that date until the
maturity of the Participating Mortgage. If the "Transfer Triggering Event"
occurs during the Company's taxable year ending December 31, 1997, the Company
may have to borrow additional amounts to meet the 95% distribution requirement.
If the "Transfer Triggering Event" occurs after the Company's taxable year
ending December 31, 1997, such additional accrued interest will have no effect
on the ability of the Company to meet the 95% distribution requirement, although
the Company may have to borrow to pay a corporate income tax on such "phantom"
income.
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 other than the Golf Courses that secure the
Participating Mortgage. 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 and would have to rely on the payment of a "deficiency dividend" in
order to retain its REIT status.
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 amounts 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 Tax 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
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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, the limited partners have the right, beginning
one year after the formation of the partnership, to require the redemption of
their limited partnership interests in exchange for cash or REIT stock (at the
Company'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.
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 Tax 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 (or, for taxable years of the
Company beginning after December 31, 1997, net long-term capital gains retained
by the Company) 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
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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 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 Tax Code and the shares are not otherwise used in an unrelated trade or
business of the tax-exempt entity.
In certain circumstances, a pension trust that owns more than 10% of the
Company's stock will be required to treat a percentage of the dividends received
from the Company as UBTI (the "UBTI Percentage"). The UBTI Percentage is the
gross income derived by the Company from an unrelated trade or business
(determined as if the Company were a pension trust) divided by the gross income
of the Company for the year in which the dividends are paid. The UBTI Percentage
rule will apply to a pension trust holding more than 10% of the Company's stock
only if (i) the UBTI Percentage is at least 5%, (ii) the Company qualifies as a
REIT by reason of the modification of the 5/50 Rule that allows the
beneficiaries of the pension trust to be treated as holding shares of the
Company in proportion to their actuarial interests in the pension trust and
(iii) either (A) one pension trust owns more than 25% of the value of the
Company's stock or (B) a group of pension trusts individually holding more than
10% of the value of the Company's stock collectively owns more than 50% of the
value of the Company's stock.
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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 United 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 (or for
taxable years of the Company beginning after December 31, 1997, net long-term
capital gains retained and designated as capital gain dividends by the Company)
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 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
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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. However, because the shares of the Company are
publicly-traded, no assurance can be given that the Company will continue to be
a "domestically-controlled REIT." In addition, a Non-U.S. Stockholder that owns,
actually or constructively, 5% or less of the Company's stock throughout a
specified "look back" period will not recognize gain on the sale of his stock
taxable under FIRPTA if the shares are traded on an established securities
market. Furthermore, 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 is not expressly classified as a corporation under Section
301.7701-2(b)(1) through (8) of the Treasury Regulations; (ii) it does not elect
to be classified as an association taxable as a corporation; and (iii) 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 of this Offering, 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. Currently the Operating
Partnership is not expressly classified as, and will not elect to be classified
as, a corporation for federal income tax purposes. Unlike a tax ruling, an
opinion of counsel is not binding upon the Service, and no assurance can be
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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 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 Tax 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 OP 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 flow-through
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
flow-through entity 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 Tax 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 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
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status for tax purposes might be treated as a taxable event, in which case the
Company might incur a tax liability 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 Tax 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 Tax Code and the Treasury Regulations promulgated thereunder.
TAX ALLOCATIONS WITH RESPECT TO THE GOLF COURSES. Pursuant to Section
704(c) of the Tax 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 Tax 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.
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The Treasury Regulations under Section 704(c) of the Tax Code allow
partnerships to use any reasonable method of accounting for Book-Tax Differences
so that the contributing partner receives the tax benefits and 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.
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UNDERWRITING
The Underwriters named below, acting through their representatives,
BancAmerica Robertson Stephens, A.G. Edwards & Sons, Inc., Raymond James &
Associates, Inc. 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>
NUMBER OF
UNDERWRITER SHARES
- ---------------------------------------------------------------------------------- ----------
<S> <C>
BancAmerica Robertson Stephens....................................................
A.G. Edwards & Sons, Inc..........................................................
Raymond James & Associates, Inc...................................................
Wheat, First Securities, Inc......................................................
----------
Total......................................................................... 3,000,000
----------
----------
</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 this 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 450,000
additional shares of Common Stock at the same price per share as the Company
will receive for the 3,000,000 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 3,000,000 shares offered hereby. If purchased, such
additional shares will be sold by the Underwriters on the same terms as those on
which the 3,000,000 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 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 this
Offering, and the Company's issuance of options and stock under the Directors'
Plan without the prior written consent of BancAmerica Robertson Stephens. 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 IPO, they and their
affiliates will not, without prior written consent of BancAmerica Robertson
Stephens, 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 IPO. BancAmerica Robertson Stephens may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements.
The Company has received a commitment from a syndicate led by NationsBank,
N.A. and Bank of America NT & SA, an affiliate of BancAmerica Robertson
Stephens, to amend and restate the Company's Line of Credit. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase shares of Common Stock. As
an exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock.
In addition, if the Representatives over-allot (i.e., if they sell more
shares of Common Stock than are set forth on the cover page of this Prospectus)
and thereby create a short position in the Common Stock in connection with this
Offering, then the Representatives may reduce that short position by purchasing
Common Stock in the open market. The Representatives may also elect to reduce
any short position by exercising all or part of the over-allotment option
described herein.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might otherwise be in the absence of such purchases.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
EXPERTS
The balance sheet of the Company as of December 31, 1996 and the combined
financial statements of Legends Golf and the individual financial statements of
Golf Legends, Ltd., Heritage Golf Club, Ltd., Seaside Resorts, Ltd., Legends of
Virginia, LC and Northgate Country Club appearing in this Prospectus and
Registration Statement for the fiscal years ended December 31, 1996, 1995 and
1994 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 (Prior Owner of
The Woodlands) appearing in this Prospectus and Registration Statement as of
December 31, 1996 and 1995, and the years ended December 31, 1996 and 1995, and
the period from inception (May 17, 1994) through December 31, 1995 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 financial statements of Olde Atlanta Golf Club Limited Partnership and
Eagle Watch Golf Club Limited Partnership appearing in this Prospectus and
Registration Statement for the fiscal years ended December 31, 1996, 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.
The financial statements of Golf Host Resorts, Inc. (the Innisbrook Resort
Owner) appearing in this Prospectus and Registration Statement for the years
ended December 31, 1996, 1995 and 1994 have been audited by Arthur Andersen,
LLP, independent certified public accountants, as set forth in their report
appearing elsewhere herein and are included in reliance upon the authority of
such firm as experts in accounting and auditing.
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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 certain
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.
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, 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. 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 CitiCorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois
60661-2511. 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 is required to file reports and other information with the
Commission pursuant to the Exchange Act, in addition to any other legal or
American Stock Exchange requirements. The Company furnishes 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. The
Company intends to initially include in such reports annual audited and
quarterly unaudited financial statements for the Legends Lessees.
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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.
"ADDITIONAL INTEREST AMOUNT" means the additional interest of $19 million
that will accrue upon a Transfer Triggering Event.
"ADVISORY ASSOCIATION" means the association of Lessees, established to
facilitate the cross-marketing of the Golf Courses and to promote awareness of
the Golf Courses.
"AMEX" means the American Stock Exchange.
"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.
"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.
"AWARDS" means awards under the Stock Incentive Plans which may take the
form of stock options, SARs, restricted stock awards, performance share awards
and/or stock bonuses.
"BASE INTEREST" means 9.63% on the first $69.975 million of the
Participating Mortgage and 9.75% on any funds lent in excess of $69.975 million.
"BASE RENT" means the fixed base rent payable under the Participating
Leases.
"BASE RENT ESCALATOR" means the lesser of (i) 3% or (ii) 200% of the change
in the CPI for the prior year.
"BENEFICIARY" means the beneficiary of the Share Trust.
"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 5% 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.
"CLOSING PRICE" generally means the last sale price or the average of the
closing bid and asked prices.
"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,
together with its wholly-owned subsidiaries, GTA GP and GTA LP, and the
Operating Partnership, in which GTA GP is the sole general partner.
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"COMPENSATION COMMITTEE" means the committee established by the Board of
Directors to determine compensation for the Company's executive officers.
"CONTROL SHARES" means Voting Stock which entitles its owner to exercise up
to a majority of voting power.
"COVERAGE RATIO" means the ratio of an Lessee's net operating income to such
Lessee's Lease Payment or, in the case of the Participating Mortgage, the ratio
of the borrower's net operating income to the Mortgage Payment.
"CPI" means the United States Consumer Price Index, All Urban Consumers,
U.S. City Average, All Items (1982-84 = 100).
"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' Plan.
"DISQUALIFIED PERSONS" means persons who have specified relationships with
Plans.
"EAGLE WATCH" means Eagle Watch Golf Club.
"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 the planned new clubhouse to be
constructed at The Woodlands.
"EXTENDED TERMS" means the up to six consecutive five-year extension terms
after the Fixed Term of each Participating Lease, by which each Lessee may elect
to extend the term of each Participating Lease, subject to earlier termination
upon the occurrence of certain contingencies described in each Participating
Lease.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"FIXED TERM" means the initial 10 year term of each Participating Lease.
"FORMATION TRANSACTIONS" means the series of transactions described in "The
Formation Transactions" in this Prospectus.
"FUNDS FROM OPERATIONS" means 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).
"GAAP" means generally accepted accounting principles.
"GTA" means Golf Trust of America, Inc.
"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 19 golf courses in which the Company currently
holds or for which the Company has an agreement to acquire a participating
interest.
"GRANITE GOLF" means Granite Golf Group, Inc. and its affiliates.
"GROSS GOLF REVENUE" means all revenues received from or by reason of a Golf
Course including revenues from memberships, initiation fees, dues, greens fees,
range fees and income, fees to reserve tee times, 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.
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"INDEPENDENT DIRECTORS" means the directors who are unaffiliated with the
Prior Owners and the Lessees and are not officers or employees of the Company.
"INITIAL COURSES" means the first 10 Golf Courses acquired by the Company.
"INNISBROOK RESORT OWNER" means Golf Host Resorts, Inc., the owner of the
Innisbrook Resort.
"INTERESTED STOCKHOLDER" means according to the MCGL, any person who owns,
directly or indirectly, 10% or more of the voting power of the Corporation's
shares of capital stock.
"IPO" means the Company's initial public offering in February, 1997.
"LESSEE IMPROVEMENTS" means alteration, additions, changes and/or
improvements made by each Lessee at its sole cost and expense, with the
Company's prior written consent.
"LESSEES" means the multiple independent third party lessees which lease the
Golf Courses owned by the Company.
"LEASE PAYMENTS" 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 LESSEES" means the four Lessees which are affiliates of The Legends
Group and which lease the seven Golf Courses contributed by The Legends Group.
"LEGENDS GROUP" means Legends Group Ltd., headquartered in Myrtle Beach,
South Carolina and its affiliates and predecessors which are in the business of
owning and operating golf courses.
"LEGENDS RESORT COURSES" means the three Legends Group Golf Courses in
Myrtle Beach--Heathland, Moorland and Parkland--which share a common clubhouse,
driving range, golf carts, and other facilities.
"LESSEE PERFORMANCE OPTION" means the one-time right of each lessee or its
affiliate to elect to receive additional OP Units or Common Stock in exchange
for an increase in Base Rent as described in "The Company--Internal Growth."
"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 $100 million line of credit from NationsBank,
N.A. and three other lenders.
"LOST OAKS" means the Lost Oaks Golf Course, formerly known as Tarpon Woods
Golf & Country Club.
"MARKET PRICE" means the average of the Closing Price for the five
consecutive Trading Days ending on such date.
"MCGL" means the Maryland General Corporation Law
"MORTGAGE PAYMENT" means the Participating Interest together with the Base
Interest.
"NAREIT" means National Association of Real Estate Investment Trusts, Inc.
"NEW INCENTIVE PLAN" means the Company's 1997 Stock-Based Incentive Plan.
"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 shares of Common Stock of the Company,
pursuant to this Prospectus.
"OFFERING PRICE" means, for purposes of calculations included in this
Prospectus, an assumed price of $27.00 per share.
"OID" means original issue discount.
"OLDE ATLANTA" means Olde Atlanta Golf Course.
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"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, L.P., a Delaware
limited partnership in which GTA GP, a wholly-owned subsidiary of Golf Trust of
America, Inc., is the sole general partner.
"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.
"OPTION SHARES" means the Innisbrook Resort Owner's option to purchase up to
150,000 shares of Common Stock at a price of $26.00 per share.
"ORIGINAL INCENTIVE PLAN" means the Company's 1997 Stock Incentive Plan.
"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 INTEREST" means a participating interest feature of the
Participating Mortgage loan based upon the growth in Gross Golf Revenues and
other revenues at the Innisbrook Resort over a 1996 base year.
"PARTICIPATING LEASES" means the leases between the Operating Partnership,
as lessor, and the Lessees, as lessees.
"PARTICIPATING MORTGAGE" means a $78.975 million participating mortgage made
to Golf Host Resorts, Inc.
"PARTICIPATING MORTGAGE COVERAGE RATIO" means the ratio of the borrower's
net operating income to the Mortgage Payment.
"PARTICIPATING RENT" means the additional rent due annually to the Company
under the Participating Leases, in addition to Base Rent, in the amount of
33.33% of any increase in Gross Golf Revenue over Gross Golf Revenue over a base
year, as adjusted.
"PARTNERSHIP AGREEMENT" means the agreement of limited partnership of the
Operating Partnership.
"PARTNERSHIP PROVISIONS" means the provisions of the Tax Code relating to
partnerships.
"PERFORMANCE ADVANCE" means the Innisbrook Resort Owner's one-time right to
require the Company to advance an additional amount under the Participating
Mortgage.
"PERFORMANCE OPTION" means an incentive-based performance structure.
"PLANS" means the Company's three stock based incentive plans.
"PREFERRED STOCK" means preferred stock, par value $.01 per share, of the
Company.
"PRIOR OWNERS" means the owners of the Golf Courses immediately prior to the
Company's purchase of the Golf Courses.
"PROHIBITED OWNER" means the record holder of the Common or Preferred Stock
that are designated Shares-In-Trust.
"PTP REGULATIONS" means regulations governing the classification of
partnerships under Section 7704 of the Tax Code.
"RAINTREE" means Raintree Country Club.
"REDEMPTION RIGHTS" means those rights granted to the Limited Partners
(other than GTA LP), 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.
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"REIT" means real estate investment trust as defined in Section 856 of the
Tax Code.
"RELATED PARTY TENANT" under the Tax 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.
"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.
"SARS" means stock appreciation rights.
"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.
"STARWOOD" means Starwood Capital Group, LLC and its affiliates.
"STOCK INCENTIVE PLANS" means the Original Incentive Plan and the New
Incentive Plan.
"SUBSEQUENT ACQUISITIONS" means the Golf Courses acquired subsequent to the
IPO.
"TAX CODE" means Internal Revenue Code of 1986, as amended.
"TIBURON" means Tiburon Golf Club.
"TRADING DAY" generally means a day on which the principal national
securities exchanges on which the Company stock is traded are open.
"TRANSFER TRIGGERING EVENT" means any event that directly or indirectly
results in the transfer of 5% of the equity interest in the Innisbrook Resort
Owner to a third party during the term of the Participating Mortgage, whether
voluntary or involuntary.
"TREASURY REGULATIONS" means the income tax regulations that have been
promulgated under the Tax Code.
"TROON GOLF" means Troon Management Company LLC.
"UBTI" means "unrelated business taxable income" as defined in Section
512(a) of the Tax Code.
"UBTI PERCENTAGE" generally means the percentage of dividends received from
the Company as UBTI if a pension fund owns more than 10% of the Company's stock.
"VOTING STOCK" means stock which entitles its owner to vote generally in the
election of directors.
"WESTIN" means Westin Resorts & Hotels Company.
"WESTIN GUARANTY" means Westin's agreement to pay up to $2.5 million per
year to the Innisbrook Resort Owner to supplement results of operations with
respect to the operations of the Innisbrook Resort for a period of up to five
years.
"WOODLANDS" means the Woodlands Golf Course.
125
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
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GOLF TRUST OF AMERICA, INC.
Unaudited Pro Forma Condensed Consolidated Statements of Operations for the Year Ended December 31,
1996.................................................................................................. F-5
Unaudited Pro Forma Condensed Consolidated Statements of Operations for the Six Months Ended June 30,
1997.................................................................................................. F-6
Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations............................ F-7
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1997............................ F-8
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet....................................... F-9
Report of Independent Public Accountants -- BDO Seidman, LLP............................................ F-10
Consolidated Balance Sheet as of December 31, 1996 and June 30, 1997.................................... F-11
Consolidated Statement of Income -- Period from February 12 to June 30, 1997............................ F-12
Consolidated Statement of Shareholders' Equity -- Period from February 12, 1997 to June 30, 1997........ F-13
Consolidated Statement of Cash Flows -- Period from February 12 to June 30, 1997........................ F-14
Notes to Consolidated Financial Statements.............................................................. F-15
GOLF COURSES AND LEGENDS GROUP
Legends Golf Pro Forma Condensed Combined Statements of Operations -- Year Ended December 31, 1996 and
Six Months Ended June 30, 1997........................................................................ F-24
Golf Legends Pro Forma Condensed Statements of Operations -- Year Ended December 31, 1996 and Six Months
Ended June 30, 1997................................................................................... F-25
Heritage Golf Club Pro Forma Condensed Statements of Operations -- Year Ended December 31, 1996 and Six
Months Ended June 30, 1997............................................................................ F-26
Seaside Resorts Pro Forma Condensed Statements of Operations -- Year Ended December 31, 1996 and Six
Months Ended June 30, 1997............................................................................ F-27
Legends of Virginia Pro Forma Condensed Statements of Operations -- Year Ended December 31, 1996 and Six
Months Ended June 30, 1997............................................................................ F-28
Notes to Pro Forma Condensed Financial Statements....................................................... F-29
LEGENDS GOLF, LTD. COMBINED FINANCIAL STATEMENTS
Report of Independent Public Accountants -- BDO Seidman, LLP............................................ F-31
Combined Balance Sheets -- December 31, 1995 and 1996 and June 30, 1997................................. F-32
Combined Statements of Income -- Years Ended December 31, 1994, 1995, and 1996 and Six Months Ended June
30, 1996 and 1997..................................................................................... F-33
Combined Statements of Owners' Equity -- Years Ended December 31, 1994, 1995, and 1996 and Six Months
Ended June 30, 1997................................................................................... F-34
</TABLE>
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<TABLE>
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Combined Statements of Cash Flows -- Years Ended December 31, 1994, 1995, and 1996 and Six Months Ended
June 30, 1996 and 1997................................................................................ F-35
Notes to Combined Financial Statements.................................................................. F-36
GOLF LEGENDS, LTD.
Report of Independent Public Accountants -- BDO Seidman, LLP............................................ F-44
Combined Balance Sheets -- December 31, 1995 and 1996 and June 30, 1997................................. F-45
Combined Statements of Income and Retained Earnings -- Years Ended December 31, 1994, 1995, and 1996 and
Six Months Ended June 30, 1996 and 1997............................................................... F-46
Combined Statements of Cash Flows -- Years Ended December 31, 1994, 1995, and 1996 and Six Months Ended
June 30, 1996 and 1997................................................................................ F-47
Summary of Significant Accounting Policies.............................................................. F-48
Notes to Combined Financial Statements.................................................................. F-50
HERITAGE GOLF CLUB, LTD.
Report of Independent Public Accountants -- BDO Seidman, LLP............................................ F-56
Balance Sheets -- December 31, 1995 and 1996 and June 30, 1997.......................................... F-57
Statements of Income and Retained Earnings -- Years Ended December 31, 1994, 1995, and 1996 and Six
Months Ended June 30, 1996 and 1997................................................................... F-58
Statements of Cash Flows -- Years Ended December 31, 1994, 1995, and 1996 and Six Months Ended June 30,
1996 and 1997......................................................................................... F-59
Summary of Significant Accounting Policies.............................................................. F-60
Notes to Financial Statements........................................................................... F-62
SEASIDE RESORTS, LTD.
Report of Independent Public Accountants -- BDO Seidman, LLP............................................ F-67
Balance Sheets -- December 31, 1995 and 1996 and June 30, 1997.......................................... F-68
Statements of Income and Retained Earnings -- Years Ended December 31, 1994, 1995, and 1996 and Six
Months Ended June 30, 1996 and 1997................................................................... F-69
Statements of Cash Flows -- Years Ended December 31, 1994, 1995, and 1996 and Six Months Ended June 30,
1996 and 1997......................................................................................... F-70
Summary of Significant Accounting Policies.............................................................. F-71
Notes to Financial Statements........................................................................... F-73
LEGENDS OF VIRGINIA, LC
Report of Independent Public Accountants -- BDO Seidman, LLP............................................ F-78
Balance Sheets -- December 31, 1995 and 1996 and June 30, 1997.......................................... F-79
Statements of Operations and Members' Accumulated Deficit -- Years Ended December 31, 1994, 1995, and
1996 and Six Months Ended June 30, 1996 and 1997...................................................... F-80
</TABLE>
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<TABLE>
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Statements of Cash Flows -- Years Ended December 31, 1994, 1995, and 1996 and Six Months Ended June 30,
1996 and 1997......................................................................................... F-81
Summary of Significant Accounting Policies.............................................................. F-82
Notes to Financial Statements........................................................................... F-84
NORTHGATE COUNTRY CLUB
Report of Independent Public Accountants -- BDO Seidman, LLP............................................ F-89
Consolidated Balance Sheets -- December 20, 1994, 1995 and 1996 and February 12, 1997................... F-90
Consolidated Statements of Operations and Partners' Equity -- Years Ended December 20, 1994, 1995, and
1996 and Six Months Ended June 30, 1996 and Period from December 21, 1996 through February 12, 1997... F-91
Statements of Cash Flows -- Years Ended December 20, 1994, 1995, and 1996 and Six Months Ended June 30,
1996 and Period from December 21, 1996 through February 12, 1997...................................... F-92
Notes to Combined Financial Statements.................................................................. F-93
BRIGHT'S CREEK DEVELOPMENT, LLC
Report of Independent Public Accountants -- Coopers & Lybrand L.L.P..................................... F-97
Balance Sheets -- December 31, 1995 and 1996 and February 12, 1997...................................... F-98
Statements of Operations -- Period from Inception (May 17, 1994) through December 31, 1994 and Years
Ended December 31, 1995 and 1996 and Six Months Ended June 30, 1996 and the Period from January 1 1997
to February 11, 1997.................................................................................. F-99
Statements of Members' Deficit -- Period May 17, 1994 through February 11, 1997......................... F-100
Statements of Cash Flows -- Period from Inception (May 17, 1994) through December 31, 1994 and Years
Ended December 31, 1995 and 1996 and Six Months Ended June 30, 1996 and the Period from January 1 1997
to February 11, 1997.................................................................................. F-101
Notes to Financial Statements........................................................................... F-102
OLDE ATLANTA GOLF CLUB LIMITED PARTNERSHIP
Report of Independent Public Accountants -- Crowe, Chizek and Company LLP............................... F-105
Balance Sheets -- December 31, 1995 and 1996 and February 12, 1997 (Unaudited).......................... F-106
Statements of Income (Loss) -- Years Ended December 31, 1994, 1995, and 1996 and Six Months Ended June
30, 1996 (Unaudited) and the Period from January 1 1997 to February 12, 1997 (Unaudited).............. F-107
Statements of Changes in Partners' Capital -- Years ended December 31, 1994, 1995 and 1996 and the
Period from January 1, 1997 to February 12, 1997 (Unaudited).......................................... F-108
Statements of Cash Flows -- Years Ended December 31, 1994, 1995, and 1996 and Six Months Ended June 30,
1996 (Unaudited) and Period from January 1, 1997 to February 12, 1997 (Unaudited)..................... F-109
Notes to Financial Statements........................................................................... F-110
</TABLE>
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INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
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<S> <C>
EAGLE WATCH GOLF CLUB LIMITED PARTNERSHIP
Report of Independent Public Accountants -- Crowe, Chizek and Company LLP............................... F-113
Balance Sheets -- December 31, 1995 and 1996 and June 30, 1997 (Unaudited).............................. F-114
Statements of Operations -- Years Ended December 31, 1994, 1995, and 1996 and Six Months Ended June 30,
1996 (Unaudited) and 1997 (Unaudited)................................................................. F-115
Statements of Changes in Partners' Capital -- Years Ended December 31, 1994, 1995 and 1996 and the
Period from January 1, 1997 to June 30, 1997 (Unaudited).............................................. F-116
Statements of Cash Flows -- Years Ended December 31, 1994, 1995, and 1996 and Six Months Ended June 30,
1996 (Unaudited) and 1997 (Unaudited)................................................................. F-117
Notes to Financial Statements........................................................................... F-118
GOLF HOSTS RESORTS, INC.
Report of Independent Public Accountants -- Arthur Andersen, LLP........................................ F-121
Balance Sheets -- December 31, 1995 and 1996 and June 30, 1997.......................................... F-122
Statements of Income -- Years Ended December 31, 1994, 1995, and 1996................................... F-123
Statements of Income -- Six Months Ended June 30, 1996 and 174 Day Period Ended June 23, 1997 and 7-Day
Period Ended June 30, 1997............................................................................ F-124
Statements of Shareholders' Investment -- Years ended December 31, 1995 and 1996 and Six Months Ended
June 30, 1997......................................................................................... F-125
Statements of Cash Flows -- Years Ended December 31, 1994, 1995, and 1996............................... F-126
Statements of Cash Flows -- Six Months Ended June 30, 1996 and 174 Day Period Ended June 23, 1997 and
7-Day Period Ended June 30, 1997...................................................................... F-127
Notes to Financial Statements........................................................................... F-128
The following financial statements supplementary dates of the Company required to be included in Item 14(a)(2) is
listed below:
Schedule III--Real Estate and Accumulated Depreciation.................................................... F-137
Schedule IV--Mortgage Loans on Real Estate................................................................ F-138
All other schedules are omitted because they are not applicable or not required.
</TABLE>
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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 years ended December 31, 1996, and the six months ended June
30, 1997, are presented as if the completion of the Formation Transactions,
Subsequent Acquisitions and the Offering had occurred as of January 1, 1996, and
carried forward through each period presented. The Company was formed in
November 1996 and has no operating history prior to the Formation Transactions
on February 12, 1997. In management's opinion, all adjustments necessary to
reflect the effects of the Formation Transactions, Subsequent Acquisitions and
the Offering 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, Subsequent
Acquisitions and the Offering 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>
SUBSEQUENT ACQUISITIONS
ACQUISITIONS ------------------------
THROUGH
HISTORICAL JUNE 30, 1997 TIBURON RAINTREE
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1996
Leases......................................................... $ -- $ 13,141 $ 682 $ 520
Mortgage....................................................... -- 8,067 -- --
--- ------------- --- ---
Participating revenue (A)...................................... -- 21,208 682 520
--- ------------- --- ---
Depreciation and amortization (B).............................. -- 3,671 422 437
General and administrative (C)................................. -- 2,097 -- --
Interest expense (D)........................................... -- 368 -- --
--- ------------- --- ---
Total expenses................................................. -- 6,136 422 437
--- ------------- --- ---
Income before minority interest................................ -- 15,072 $ 260 $ 83
--- ---
--- ---
Minority interest (E).......................................... -- 7,783
--- -------------
Net income applicable to common shareholders................... $ -- $ 7,289
--- -------------
--- -------------
Net income per share of common stock...........................
Weighted average shares of common stock outstanding............
<CAPTION>
CLUB OF
EAGLE WATCH LOST OAKS THE COUNTRY PRO FORMA
----------- --------- --------------- -----------
<S> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1996
Leases......................................................... $ 703 $ 573 $ 330 $ 15,949
Mortgage....................................................... -- -- -- 8,067
--- --------- --- -----------
Participating revenue (A)...................................... 703 573 330 24,016
--- --------- --- -----------
Depreciation and amortization (B).............................. 397 263 127 5,317
General and administrative (C)................................. -- -- -- 2,097
Interest expense (D)........................................... -- -- -- 368
--- --------- --- -----------
Total expenses................................................. 397 263 127 7,782
--- --------- --- -----------
Income before minority interest................................ $ 306 $ 310 $ 203 16,234
--- --------- ---
--- --------- ---
Minority interest (E).......................................... 6,104
-----------
Net income applicable to common shareholders................... $ 10,130
-----------
-----------
Net income per share of common stock........................... $ 1.42
-----------
-----------
Weighted average shares of common stock outstanding............ 7,161
-----------
-----------
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-5
<PAGE>
GOLF TRUST OF AMERICA, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (A)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SUBSEQUENT ACQUISITIONS
ACQUISITIONS ------------------------
THROUGH
HISTORICAL JUNE 30, 1997 TIBURON RAINTREE
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED JUNE 30, 1997
Leases......................................................... $ -- $ 7,603 $ 341 $ 260
Mortgage....................................................... -- 4,034 -- --
--- ------------- --- ---
Participating revenue (B)...................................... -- 11,637 341 260
--- ------------- --- ---
Depreciation and amortization (C).............................. -- 2,126 211 219
General and administrative (D)................................. -- 1,300 -- --
Interest expense (E)........................................... -- 184 -- --
--- ------------- --- ---
Total expenses................................................. -- 3,610 211 219
--- ------------- --- ---
Income before minority interest................................ -- 8,027 $ 130 $ 41
--- ---
--- ---
Minority interest (F).......................................... -- 3,852
--- -------------
Net income applicable to common shareholders................... $ -- $ 4,175
--- -------------
--- -------------
Net income per share of common stock...........................
Weighted average shares of common stock outstanding............
<CAPTION>
CLUB OF
EAGLE WATCH LOST OAKS THE COUNTRY PRO FORMA
----------- --------- --------------- -----------
<S> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED JUNE 30, 1997
Leases......................................................... $ 351 $ 313 $ 165 $ 9,033
Mortgage....................................................... -- -- -- 4,034
--- --------- --- -----------
Participating revenue (B)...................................... 351 313 165 13,067
--- --------- --- -----------
Depreciation and amortization (C).............................. 198 132 64 2,950
General and administrative (D)................................. -- -- -- 1,300
Interest expense (E)........................................... -- -- -- 184
--- --------- --- -----------
Total expenses................................................. 198 132 64 4,434
--- --------- --- -----------
Income before minority interest................................ $ 153 $ 181 $ 101 8,633
--- --------- ---
--- --------- ---
Minority interest (F).......................................... 3,384
-----------
Net income applicable to common shareholders................... $ 5,249
-----------
-----------
Net income per share of common stock........................... $ 0.73
-----------
-----------
Weighted average shares of common stock outstanding............ 7,161
-----------
-----------
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-6
<PAGE>
GOLF TRUST OF AMERICA, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(A) The Company, as sole general partner of the Operating Partnership, will
have, subject to certain protective rights of the Limited Partners, full,
exclusive and complete responsibility and discretion in the management and
unilateral control of the Operating Partnership. Such responsibilities
permit the Company 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. Further, the Company may not be replaced
as general partner 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.
(B) Represents payments of Base Rent from the 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, except for Legends of Virginia, the Initial
Lessee of Stonehouse Golf Club and Royal New Kent, which courses opened in
June 1996 and August 1996, respectively. Pro forma Participating Lease
revenue payable by Legends of Virginia reflects only the periods during
which such Golf Courses were actually operating. If Stonehouse and Royal New
Kent had been operating during the entire year presented, Participating
Lease revenue would have been $1,847 higher for the year ended December 31,
1996, for a total of $17,856.
The Company has abated the Capital Replacement Fund portion of the initial
year rent for Lost Oaks. If this portion of the rent had not been abated,
Participating Lease revenue would have been $52 higher.
(C) 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, 15 years for improvements and 3 to 10 years for furniture and
equipment. If Stonehouse and Royal New Kent had been operating during the
entire period presented, depreciation expense would have been $580 higher
for the year ended December 31, 1996, for a total of $5,897.
(D) Represents legal, audit, office costs, salaries and other general and
administrative expenses to be paid by the Company as follows:
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------- -----------
<S> <C> <C>
Operations.......................................................... $ 895 $ 614
Acquisitions........................................................ 273 192
Accounting.......................................................... 458 346
Shareholder services................................................ 387 133
Other............................................................... 84 15
------------- -----------
$ 2,097 $ 1,300
------------- -----------
------------- -----------
</TABLE>
Salaries and benefits for executive officers are based upon agreements with
the respective officers. Other amounts are based upon management's estimates
of expenses to be incurred given the Company's estimated level of operations
and related administrative requirements.
(E) Reflects interest expense at 8.5% per annum to be paid on the initial
borrowing of $4,325 and loan costs amortized as interest expense. Loan
costs, aggregating $72, include estimated fees and legal costs of obtaining
the Company's initial borrowing and are amortized over the expected two year
term of the initial borrowing.
(F) Calculated as approximately 37.6% and 39.2% of the Operating Partnership's
net income for the year ended December 31, 1996, and June 30, 1997,
respectively based on the weighted average of OP Units outstanding. The
minority interest effect of the subsequent acquisitions has not been
individually determined.
F-7
<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 Subsequent Acquisitions and the application of the net proceeds of the
Offering had occurred on June 30, 1997. This unaudited Pro Forma Condensed
Consolidated Balance Sheet is not necessarily indicative of what the Company's
actual financial position would have been assuming formation such transactions
had been completed as of June 30, 1997, nor does it purport to represent the
future financial position of the Company.
<TABLE>
<CAPTION>
SUBSEQUENT ACQUISITIONS
HISTORICAL ----------------------------------------------
JUNE 30, EAGLE LOST
1997 TIBURON RAINTREE WATCH OAKS
----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Properties, net (A)................................................. $ 45,805 $ 4,256 $ 2,550 $ 4,483 $ 3,608
Land (A)............................................................ 15,919 1,744 2,000 1,917 2,267
Mortgage notes receivable........................................... 61,680 -- -- -- --
Cash (A)............................................................ 2,271 -- --
Accounts receivable................................................. 1,451 -- -- --
Other assets........................................................ 1,495 -- -- -- --
----------- ----------- ----------- --------- ---------
Total assets...................................................... $ 128,621 $ 6,000 $ 4,550 $ 6,400 $ 5,875
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
LIABILITIES AND EQUITY
Notes payable (A)................................................... $ 43,900 5,400 1,147 4,523 5,875
Accounts payable and accrued expenses............................... 873 -- -- -- --
Minority interest (A)............................................... 43,487 -- 3,403 1,877 --
Common stock (A).................................................... 41 1 -- -- --
Additional paid-in capital (A)...................................... 42,429 599 -- -- --
Note receivable from stock sale..................................... (3,298) -- -- -- --
Retained earnings................................................... 1,189 -- -- -- --
----------- ----------- ----------- --------- ---------
Total liabilities and equity...................................... $ 128,621 $ 6,000 $ 4,550 $ 6,400 $ 5,875
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
<CAPTION>
CLUB OF THE (B) (B)
COUNTRY OFFERING CONSOLIDATED
----------- ----------- ------------
<S> <C> <C> <C>
ASSETS
Properties, net (A)................................................. $ 870 $ -- $ 61,572
Land (A)............................................................ 2,180 -- 26,027
Mortgage notes receivable........................................... -- -- 61,680
Cash (A)............................................................ 16,475 18,746
Accounts receivable................................................. -- -- 1,451
Other assets........................................................ -- -- 1,495
----------- ----------- ------------
Total assets...................................................... $ 500 $ 16,475 $ 170,971
----------- ----------- ------------
----------- ----------- ------------
LIABILITIES AND EQUITY
Notes payable (A)................................................... $ 2,550 (59,000) $ 4,325
Accounts payable and accrued expenses............................... -- -- 873
Minority interest (A)............................................... 500 -- 49,267
Common stock (A).................................................... -- 30 72
Additional paid-in capital (A)...................................... -- 75,515 118,543
Note receivable from stock sale..................................... -- -- (3,298)
Retained earnings................................................... -- -- 1,189
----------- ----------- ------------
Total liabilities and equity...................................... $ 500 $ 16,475 $ 170,971
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-8
<PAGE>
GOLF TRUST OF AMERICA, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
(A) Reflects the acquisition of property and equipment from Tiburon, Raintree,
Lost Oaks, Club of the Country, and Eagle Watch, which includes, but is not
limited to, the Golf Courses and related land, buildings, improvements,
fixed assets and equipment (except golf carts) as follows:
<TABLE>
<S> <C>
Cash and assumption of debt........................................ $ 19,495
Issuance of 232,347 OP Units and shares of Common Stock............ 6,380
---------
Consideration paid for acquired Golf Courses and land.............. $ 25,875
---------
---------
</TABLE>
The increase in basis has been allocated to the assets of the Other Acquired
Golf Courses as summarized below. The allocation is preliminary and is based
upon management's best estimate of the fair value of the assets acquired.
<TABLE>
<CAPTION>
ACQUIRED
GOLF GOLF
TRUST COURSES PRO FORMA
--------- --------- ---------
<S> <C> <C> <C>
Land............................................................................. $ 15,919 $ 10,108 $ 26,027
Golf course improvements......................................................... 43,964 5,259 49,223
Buildings........................................................................ 8,659 4,890 13,549
Furniture and equipment.......................................................... 5,159 5,618 10,777
--------- --------- ---------
Total properties................................................................. 73,701 25,875 99,576
Accumulated depreciation......................................................... 11,977 -- 11,977
--------- --------- ---------
Total property, net $ 61,724 $ 25,875 $ 87,599
--------- --------- ---------
--------- --------- ---------
</TABLE>
(B) Reflects the following proposed transaction
<TABLE>
<S> <C>
Gross proceeds from sale of 3,000,000 shares of Common Stock of
underwriting discount assuming $27.00 per share price............ $ 76,545
Expenses of the offering.......................................... (1,000)
Repayment of line-of-credit....................................... (59,070)
---------
$ 16,475
---------
---------
</TABLE>
F-9
<PAGE>
REPORT OF INDEPENDENT CERTIFIED ACCOUNTANTS
To the Board of Directors and
Shareholders of Golf Trust of America, Inc.
We have audited the accompanying balance sheet of GOLF TRUST OF AMERICA,
INC. as of December 31, 1996. This financial statement is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of GOLF TRUST OF AMERICA, INC. at
December 31, 1996, in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Charlotte, North Carolina
March 26, 1997
F-10
<PAGE>
GOLF TRUST OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
1997
DECEMBER 31, -----------
1996
------------- (UNAUDITED)
<S> <C> <C>
ASSETS
Property and equipment:
Land................................................................................ $ -- $ 15,919
Golf course improvements............................................................ -- 43,964
Buildings........................................................................... -- 8,659
Furniture, fixtures, and equipment.................................................. -- 5,159
------------- -----------
Total property and equipment.......................................................... -- 73,701
Less accumulated depreciation....................................................... -- 11,977
------------- -----------
Property and equipment, net........................................................... -- 61,724
------------- -----------
Mortgage notes receivable............................................................. -- 61,680
Cash and cash equivalents............................................................. -- 2,271
Rents and interest receivable......................................................... -- 1,451
Other................................................................................. -- 1,495
------------- -----------
Total assets.......................................................................... $ -- $ 128,621
------------- -----------
------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Notes payable......................................................................... $ -- $ 43,900
Accounts payable and other liabilities................................................ -- 873
------------- -----------
Total liabilities..................................................................... -- 44,773
------------- -----------
Minority interest..................................................................... -- 43,487
------------- -----------
Commitments and contingencies
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, 4,069,326 shares issued
and outstanding................................................................... -- 41
Additional paid-in capital............................................................ -- 42,429
Note receivable from stock sale..................................................... -- (3,298)
Retained earnings................................................................... -- 1,189
------------- -----------
Stockholders' equity.................................................................. -- 40,361
------------- -----------
Total liabilities and stockholders' equity............................................ $ -- $ 128,621
------------- -----------
------------- -----------
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements
F-11
<PAGE>
GOLF TRUST OF AMERICA, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 12 TO
JUNE 30, 1997
---------------
(UNAUDITED)
<S> <C>
REVENUES:
Minimum rents.................................................................................... $ 5,503
Capital expenditure reserve...................................................................... 247
Percentage rents................................................................................. 109
Mortgage interest................................................................................ 181
------
Total revenues..................................................................................... 6,040
------
EXPENSES:
Depreciation and amortization.................................................................... 1,149
General and administrative....................................................................... 910
------
Total expenses..................................................................................... 2,059
------
Operating income................................................................................... 3,981
------
OTHER INCOME (EXPENSE):
Interest income.................................................................................. 448
Interest expense................................................................................. (290)
------
Total other income (expense)....................................................................... 158
------
Net income before minority interest................................................................ 4,139
Income applicable to minority interest............................................................. 2,129
------
Net income......................................................................................... 2,010
------
Net income per common share........................................................................ $ .50
------
------
Weighted average number of common shares outstanding............................................... 4,007
------
------
Distribution declared per common share outstanding................................................. $ .62
------
------
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-12
<PAGE>
GOLF TRUST OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTE
ADDITIONAL RECEIVABLE TOTAL
PAID-IN RETAINED FOR STOCK STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SALE EQUITY
--------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, February 12, 1997.................... -- $ -- $ -- $ -- $ -- $ --
Issuance of stock............................. 4,068 41 42,429 -- (3,298) 39,172
Net income.................................... -- -- -- (821) -- (821)
Dividends..................................... -- -- -- 2,010 -- 2,010
--
--------- ----------- ----------- ----------- -------------
BALANCE, June 30, 1997........................ 4,069 $ 41 $ 42,429 $ 1,189 $ (3,298) $ 40,361
--
--
--------- ----------- ----------- ----------- -------------
--------- ----------- ----------- ----------- -------------
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-13
<PAGE>
GOLF TRUST OF AMERICA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 12
TO
JUNE 30, 1997
-------------
(UNAUDITED)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................................................... $ 2,010
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................................. 1,149
Income applicable to minority interest......................................................... 2,492
Increase in rents and interest receivable...................................................... (1,451)
Increase in other assets....................................................................... (1,495)
Increase in accounts payable and other liabilities............................................. 873
-------------
Net cash used in operating activities.............................................................. 3,578
-------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Golf course acquisitions......................................................................... (54,554)
Increase in mortgage notes receivable............................................................ (61,599)
Capital additions................................................................................ (344)
-------------
Net cash used in investing activities.............................................................. (116,497)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt..................................................................... 43,825
Net proceeds from offering....................................................................... 73,055
Dividends paid................................................................................... (1,690)
-------------
Net cash provided by financing activities.......................................................... 115,190
-------------
Net increase in cash............................................................................... 2,271
Cash and cash equivalents, beginning of period..................................................... --
-------------
Cash and cash equivalents, end of period........................................................... $ 2,271
-------------
-------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-14
<PAGE>
GOLF TRUST OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1997 IS UNAUDITED)
(IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
Golf Trust of America, Inc. (the "Company") was incorporated in Maryland on
November 8, 1996. The Company is a self-administered real estate investment
trust ("REIT") formed to capitalize upon consolidation opportunities in the
ownership of golf courses in the United States. The principal business strategy
of the Company is to acquire high quality golf courses and to lease the golf
courses to qualified third party operators, including affiliates of the sellers.
Title to the acquired courses is held by Golf Trust of America, L.P., a Delaware
limited partnership (the "Operating Partnership"), in which the Company is the
sole general partner.
Golf Trust of America, Inc., through its wholly owned subsidiaries GTA GP,
Inc. ("GTA GP") and GTA LP, Inc. ("GTA LP"), holds a 48.0% interest in the
Operating Partnership. GTA GP is the sole general partner of the Operating
Partnership and owns a 0.2% interest therein. GTA LP is a limited partner in the
Operating Partnership and owns a 47.8% interest therein.
In February 1997, the Company raised net proceeds of approximately $73
million in its initial public offering ("the IPO"). In the IPO the Company sold
3,910,000 shares of common stock at $21.00 per share (including 510,000 shares
sold pursuant to the underwriters' over-allotment option, which was exercised in
full). The Company contributed the net proceeds of the IPO to the Operating
Partnership in exchange for 48.6% interest in the Operating Partnership.
Concurrently with the closing of the IPO, the Operating Partnership acquired ten
golf courses (the "Initial Courses") from their prior owners ( the "Prior
Owners").
The Prior Owners were paid an aggregate of approximately $6.2 million in
cash and approximately $43.1 million in repayment of mortgage and other
indebtedness and were issued approximately 4.1 million OP units which represents
a 51% limited partnership interest in the Operating Partnership. Control of the
Operating Partnership remains in the Company as the sole general partner.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of the Company, its wholly owned subsidiaries, and the Operating
Partnership. All significant intercompany transactions and balances have been
eliminated in consolidation.
REVENUE RECOGNITION
The Company recognizes rental revenue on an accrual basis over the terms of
the leases. The Company recognizes interest income ratable over the term of the
loan.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company has cash and cash equivalents in a financial institution which
is insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000
per institution. As June 30, 1997, the Company had amounts in excess of FDIC
limits. The Company limits its risk by placing its cash and cash equivalents in
a high
F-15
<PAGE>
GOLF TRUST OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1997 IS UNAUDITED)
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
quality financial institution. Rents and interest receivable from the Company's
lessees and mortgagee are payable in arrears for the preceding month were
collected subsequent to the issuance of this report.
PROPERTY AND EQUIPMENT
Property and equipment is carried at the lower of cost or net realizable
value. Depreciation is computed on a straight-line basis over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Golf course improvements................ 15 years
Buildings and improvements.............. 30 years
Furniture and equipment................. 3-8 years
</TABLE>
The leases presently provide that at the end or termination of the existing
leases, all improvements and fixtures placed on the rental property become
property of the Company. In addition, the leases provide for a capital
replacement reserve to be established by the Company for each property. The
Company will approve disbursements from this fund for capital improvements to
the properties.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued FAS No.
128, "Earnings per Share," which established new standards for computations of
earnings per share. Statement No. 128 will be effective for periods ending after
December 15, 1997 and will require presentation of: (1) "Basic Earnings per
Share," computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding during the period and (2)
"Diluted Earnings per Share," which gives effect to all dilutive potential
common shares that were outstanding during the period, by increasing the
denominator to include the number of additional common shares that would have
been outstanding if the dilutive potential common shares had been issued. Had
FAS 128 been effective for the period from February 12, 1997 (period of
inception) through June 30, 1997, basic and diluted earnings per share would
have been as follows:
<TABLE>
<CAPTION>
Basic earnings per share................ $ .51
<S> <C>
Diluted earnings per share.............. $ .50
</TABLE>
In June 1997, the Financial Accountant Standards Board issued Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
SFAS 130 is effective for financial statements for periods beginning after
December 15, 1997, and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, the standard may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementations of this standard.
F-16
<PAGE>
GOLF TRUST OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1997 IS UNAUDITED)
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, (SFAS 131)
which supersedes SFAS No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS
ENTERPRISE. SFAS 131 establishes standards for the way that public companies
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of a company about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997, and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, it may have on future financial
statement disclosures. Results of operations and financial position, however,
will be unaffected by implementation of this standard.
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.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the period from February 12 to June 30,
1997, 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
necessary indicative of the results to be obtained for the full year.
3. ACQUISITION OF GOLF COURSES
On February 12, 1997, concurrent with the initial public offering of the
Company's stock, the Company acquired the ten initial golf courses in exchange
for $4.1 million Operating Partnership units, assumptions of $48.3 million of
notes payable and affiliate debt and $6.2 million cash. The debt was repaid
concurrent with the acquisition. The seven golf courses acquired from The
Legends Group have been accounted for at historical cost as The Legends Group is
considered the accounting acquirer under APB No. 16. The other three courses
have
F-17
<PAGE>
GOLF TRUST OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1997 IS UNAUDITED)
(IN THOUSANDS)
3. ACQUISITION OF GOLF COURSES (CONTINUED)
been accounted for as a purchase. The following is a summary of the golf courses
and related property and equipment at the acquisition:
<TABLE>
<CAPTION>
OTHER
LEGENDS COURSES TOTAL
--------- --------- ---------
<S> <C> <C> <C>
Land......................................................... $ 4,532 $ 11,387 $ 15,919
Golf course improvements..................................... 35,063 8,901 43,964
Buildings and improvements................................... 4,254 4,405 8,659
Furniture and equipment...................................... 3,299 1,516 4,815
--------- --------- ---------
Net property and equipment................................... 47,148 26,209 73,357
Less accumulated depreciation and amortization............... (10,827) -- (10,827)
--------- --------- ---------
Total property and equipment................................. $ 36,321 $ 26,209 $ 62,530
--------- --------- ---------
--------- --------- ---------
</TABLE>
4. MORTGAGE NOTES RECEIVABLE
On June 23, 1997, the Operating Partnership closed and funded an initial
$69.9 million participating loan to Golf Host Resorts, Inc., which is affiliated
with Starwood Capital Group LLC. The loan is secured by the Innisbrook Resort, a
63-hole destination golf and conference facility located near Tampa, Florida.
The Operating Partnership funded the loan with net proceeds from the
Company's initial public offering which closed in February 1997 and with
borrowings under the credit facility from NationsBank, N.A. described in Note 6.
The initial loan of $69.9 million will be followed by up to a $9 million
additional loan, a portion of which was funded at closing, which will be used
for a nine-hole expansion and other improvements to the Innisbrook Resort
facilities, currently underway. The loan term is 30 years, with an initial base
interest rate of 9.63% per annum, annual increases (of at least 5% but no more
than 7%) in the interest payment for up to the first five years, and a
participating interest feature throughout the term based upon the growth in
revenues, if any, over the base year.
Golf Host Resorts, Inc. has been admitted to the Operating Partnership as a
limited partner. Golf Host Resorts, Inc. used $8,975,000 of the proceeds of the
loan to purchase 274,039 OP Units (i.e., units of limited partnership interest
in the Operating Partnership) together with 159,326 shares of common stock of
the Company and an option to purchase an additional 150,000 shares of common
stock of the Company at a price (subject to certain adjustments) of $26 per
share, exercisable before December 31, 1997 (subject to extension in certain
circumstances). The purchase of shares and OP Units by Golf Host Resorts, Inc.
gives it an approximate 3.92% equity interest in the Company and an approximate
3.23% limited partner's interest in the Operating Partnership. Such interests
represents an approximate 5.11% economic interest in the Company and the
Operating Partnership, considered as one entity. The Company retains an
aggregate approximate 47.99% limited and general partner's interest in the
Operating Partnership through its two wholly owned subsidiaries, GTA LP, Inc.
and GTA GP, Inc.
The $5,675,000 used to purchase the OP Units has been recorded as an
adjustment to minority interest and the $3,298,000 used to purchase common stock
has been recorded as a reduction of stockholders' equity.
F-18
<PAGE>
GOLF TRUST OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1997 IS UNAUDITED)
(IN THOUSANDS)
4. MORTGAGE NOTES RECEIVABLE (CONTINUED)
According to SFAS No. 91 "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases," the present value of the future payments should be recognized over the
life of the loan. Accordingly, the Company recognizes revenue on a straight-line
basis. Income recognized is approximately $30,000 in excess of the cash received
for the three months ended June 30, 1997, and the period from February 12 to
June 30, 1997.
5. LEASES
The Company leases its Golf Courses to affiliates of the prior owners under
non-cancelable lease agreements over an initial period of ten years. From the
minimum lease payments, the Company is required to make available a reserve
(totaling $264,000 as of June 30, 1997) of 2-5% of the annual gross golf revenue
of each course for course capital expenditure reimbursement to the lessor.
Capital expenditures are approved in advance by the Company.
Future minimum rents to be received by the Company under the Leases for the
next five years ending December 31 and in total thereafter are as follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
1997.................................... $ 13,222
1998.................................... 14,988
1999.................................... 14,988
2000.................................... 14,988
2001.................................... 14,988
Thereafter.............................. 74,940
----------
$ 148,114
----------
----------
</TABLE>
The non-cancelable leases provide for the Company to receive, the greater of
the Base Rent Escalation or an amount equal to Participating Rent plus the Base
Rent Escalation payable under each non-cancelable lease. Participating rent will
be paid to the Company each year in the amount, if any, by which the sum of 33
and 1/3% of Gross Golf Revenue exceeds the cumulative Base Rent Escalation since
the commencement date of such Leases. The base rent will be increased each year
by the lesser of (i) 3% or (ii) 200% of the annual percentage increase in the
Consumer Price Index ("CPI"). Annual increases in lease payments are limited to
5% during the first five years of the initial lease term.
Each Lessee has options to extend the term of its lease for up to six
consecutive five year periods.
6. NOTE PAYABLE
The Company has obtained a $100 million secured revolving credit facility
(the "Credit Facility") from a group of four commercial banks led by
NationsBank, N.A. Borrowings under the Credit Facility carry a floating interest
rate of LIBOR plus 2.0% (7.4% at September 30, 1997) with provisions for the
rate to be reduced upon the attainment of Senior Debt Rating. The Credit
Facility availability is limited to a borrowing base calculation for each
"stabilized" location (as defined in the Credit Facility). Additional financial
covenants include net worth, liquidity and cash flow covenants. Non-financial
covenants include restrictions on loans outstanding,
F-19
<PAGE>
GOLF TRUST OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1997 IS UNAUDITED)
(IN THOUSANDS)
6. NOTE PAYABLE (CONTINUED)
construction in progress, loans to officers and changes to Board of Directors.
At the present time, these covenants have been met.
On September 24, 1997, the Company received a commitment letter from
NationsBank, NA and Bank of America NT & SA to amend and restate the Credit
Facility. The restated Credit Facility would increase the amount available to
$125 million on an unsecured basis and adjust the interest rate to LIBOR plus
1.75%. Up to 20% of the Credit Facility may be used for working capital needs.
7. COMMON STOCK AND EMPLOYEE INCENTIVE PLANS
In February, 1997, the Company adopted the 1997 Stock Incentive Plan (the
"1997 Plan") and the 1997 Non-Employee Directors' Plan (the "Directors' Plan").
The 1997 Plan authorized by the Compensation Committee of the Board of Directors
may grant stock awards relating to 500,000 shares of Common Stock. Under the
Directors' Plan, the Compensation Committee is authorized to grant stock awards
to purchase up to 100,000 shares of the Company's common stock at prices equal
to the fair value of the stock on the date of grant. Under the Directors' Plan,
20,000 options have been granted to date. Option grants under the 1997 Plan vest
ratably over a period of three years from the date of grant and expire ten years
from the date of grant. Options granted under the Directors' Plan vest
immediately.
In May 1997, the Company adopted the 1997 Stock-Based Incentive Plan (the
"New Stock Incentive Plan"). Under the New Stock Incentive Plan, the
Compensation Committee of the Board of Directors is authorized to grant awards
relating in the aggregate up to 600,000 shares of the Company's common stock.
Option grants generally vest ratably over a period of three years from the date
of grant and expire ten years from the date of grant. Restricted stock grants
generally vest at the end of four years from the date of grant.
Transactions involving both plans are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTION SHARES SHARES PRICE
- ---------------------------------------- --------- -------------
<S> <C> <C>
Outstanding at December 31, 1996........ -- $ --
Granted................................. 940,000 23.88
Exercised............................... -- --
Expired and/or canceled................. -- --
--------- ------
Outstanding at June 30, 1997............ 940,000 $ 23.88
--------- ------
--------- ------
</TABLE>
On September 19, the Company issued 70,000 restricted common shares to
officers of the Company under the New 1997 Plan.
8. COMMON STOCK AND EMPLOYEE INCENTIVE PLANS
The Company has adopted Statement of Financial Accounting Standards (SFAS)
123, "Accounting for Stock-Based Compensation," effective February, 1997. In
accordance with the provisions of SFAS No. 123, the Company continues to apply
APB Opinion 25 and related interpretation in accounting for its stock option
plans and, accordingly, has not recognized compensation cost. If the Company had
elected to recognize compensation cost based on fair value of the options
granted at the grant date as prescribed by SFAS No. 123, net income per
F-20
<PAGE>
GOLF TRUST OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1997 IS UNAUDITED)
(IN THOUSANDS)
8. COMMON STOCK AND EMPLOYEE INCENTIVE PLANS (CONTINUED)
quarter and earnings per share would have been reduced to the pro forma amounts
indicated in the table below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 12 TO
JUNE 30, 1997
---------------
<S> <C>
Net income -- as reported............... $ 2,010
Net income -- pro forma................. $ 1,067
Earnings per share -- as reported....... $ .50
Earnings per share -- pro forma......... $ .27
</TABLE>
The fair value of each option grant is estimated on the date of grand using
the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 12 TO
JUNE 30, 1997
-----------------
<S> <C>
Expected dividend yield................. 5.9%
Expected stock price volatility......... 13.4%
Risk-free interest rate................. 6.25%
Expected life of options................ 4 years
</TABLE>
The weighted average fair value of options granted during 1997 was $3.81.
9. MINORITY INTEREST
Minority interest consisting of OP Units is redeemable for cash or
convertible into shares of stock of the Company at the request of the OP Unit
holder subject to certain limitations.
10. SUBSEQUENT EVENTS
DECLARATION OF DIVIDENDS
On July 25, 1997, the Board of Directors declared a dividend distribution of
$.41 per share for the quarter ended June 30, 1997, to stockholders of record on
August 4, 1997, which were paid on August 15, 1997. On October 15, 1997, the
Board of Directors declared a dividend distribution of $.41 per share for the
quarter ended September 30, 1997, to stockholders of record on October 27, 1997.
PROPOSED PUBLIC OFFERING
The Company has filed a Form S-11 registration statement with the Securities
and Exchange Commission in connection with a proposed offering of shares to the
public.
ACQUISITIONS
On August 19, 1997, the Company acquired Tiburon Golf Club, a 27-hole,
upscale golf course located in Omaha, Nebraska for $5.4 million in cash and
Common Stock valued at approximately $600,000.
F-21
<PAGE>
GOLF TRUST OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1997 IS UNAUDITED)
(IN THOUSANDS)
10. SUBSEQUENT EVENTS (CONTINUED)
On September 2, 1997, the Company acquired Raintree Country Club, an 18-hole
golf course facility located in Akron, Ohio, for $1,147,000 in cash and OP Units
valued at approximately $3,403,000.
On October 3, 1997, the Company acquired Lost Oaks Golf Course (formerly,
Tarpon Woods), an 18-hole golf course located in Tampa, Florida for
approximately $5.9 million in cash including closing costs.
On September 30, 1997, the Company acquired Eagle Watch Golf Club an 18-hole
golf course located in Atlanta, Georgia for $4.5 million cash and OP Units
valued at approximately $1.9 million.
On October 17, 1997, the Company acquired Club of the Country, an 18-hole
private country club located in Kansas, for $2.6 million in cash and OP Units
valued at approximately $.5 million.
F-22
<PAGE>
GOLF COURSES AND THE LEGENDS GROUP
PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited Pro Forma Condensed Financial Statements of the
Legends Group give effect to the 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 Legends Group Prior
Owners to the Legends 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 Legends Initial
Lessees as if such events had occurred on June 30, 1997. The unaudited Pro Forma
Condensed Statements of Operations for the year ended December 31, 1996 and the
six months ended June 30, 1997 are based upon the individual historical
statements of operations of each of the Golf Courses and have been prepared to
reflect the operating results of the Legends 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 the Legends Group 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 nor are they indicative of future results
F-23
<PAGE>
LEGENDS GOLF
PRO FORMA CONDENSED COMBINED 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, 1996
Revenue from golf operations.......................................... $ 15,040 $ -- $ 15,040
Other revenue......................................................... 4,373 -- 4,373
----------- ------- -----------
Total revenue......................................................... 19,413 -- 19,413
----------- ------- -----------
Participating lease payments.......................................... -- 9,279(D) 9,279
Operating expenses.................................................... 13,556 (818)(E,F,G) 12,738
Interest expense...................................................... 1,590 (1,463)(B) 127
Depreciation.......................................................... 2,401 (2,091)(C) 310
----------- ------- -----------
Total expenses........................................................ 17,547 4,907 22,454
----------- ------- -----------
Net income (loss)..................................................... $ 1,866 $ (4,907) $ (3,041)
----------- ------- -----------
----------- ------- -----------
Cash provided by operating activities (I)............................. $ 4,675 $ (6,998)
----------- ------- -----------
----------- ------- -----------
Cash used in investing activities (J)................................. $ (8,579) $ --
----------- -----------
----------- -----------
Cash used in financing activities (K)................................. $ 4,345 $ --
----------- -----------
----------- -----------
EBITDA (H)............................................................ $ 5,857 $ (2,604)
----------- -----------
SIX MONTHS ENDED JUNE 30, 1997
Revenue from golf operations.......................................... $ 9,950 $ -- $ 9,950
Other revenue......................................................... 3,046 -- 3,046
----------- ------- -----------
Total revenue......................................................... 12,996 -- 12,996
----------- ------- -----------
Participating lease payments.......................................... 4,941 1,399(D) 6,340
Operating expenses.................................................... 7,599 (67)(E,F,G) 7,532
Interest expense...................................................... 420 (405)(B) 15
Depreciation and amortization......................................... 808 (723)(C) 85
----------- ------- -----------
Total expenses........................................................ 13,768 204 13,972
----------- ------- -----------
Equity in earnings of Golf Trust of America, LP....................... 1,916 (1,916) --
----------- ------- -----------
Net income (loss)..................................................... $ 1,144 $ (2,120) $ (976)
----------- ------- -----------
----------- ------- -----------
Cash provided by operating activities (I)............................. $ 310 $ (891)
----------- -----------
----------- -----------
Cash used in investing activities (J)................................. $ (2,509) $ --
----------- -----------
----------- -----------
Cash used in financing activities (K)................................. $ 2,477 $ --
----------- -----------
----------- -----------
EBITDA (H)............................................................ $ 456 $ (876)
----------- -----------
----------- -----------
</TABLE>
F-24
<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, 1996
Revenue from golf operations.............................................. $ 8,078 $ -- $ 8,078
Other revenue............................................................. 2,534 -- 2,534
----------- ------------ -----------
Total revenue............................................................. 10,612 -- 10,612
----------- ------------ -----------
Participating lease payments.............................................. -- 4,670(D) 4,670
Operating expenses........................................................ 6,558 (585)(E) 5,973
Interest expense.......................................................... 865 (771)(B) 94
Depreciation.............................................................. 1,250 (1,101)(C) 149
----------- ------------ -----------
Total expenses............................................................ 8,673 2,213 10,886
----------- ------------ -----------
Net income (loss)......................................................... $ 1,939 $ (2,213) $ (274)
----------- ------------ -----------
----------- ------------ -----------
Cash provided by operating activities (I)................................. $ 2,960 $ (125)
----------- -----------
----------- -----------
Cash used in investing activities (J)..................................... $ (2,350) $ --
----------- -----------
----------- -----------
Cash used in financing activities (K)..................................... $ (535) $ --
----------- -----------
----------- -----------
EBITDA (H)................................................................ $ 4,054 $ (31)
----------- -----------
----------- -----------
SIX MONTHS ENDED JUNE 30, 1997
Revenue from golf operations.............................................. $ 4,853 $ -- $ 4,853
Other revenue............................................................. 1,692 -- 1,692
----------- ------------ -----------
Total revenue............................................................. 6,545 -- 6,545
----------- ------------ -----------
Participating lease payments.............................................. 1,793 542(D) 2,335
Operating expenses........................................................ 3,690 (37)(E) 3,653
Interest expense.......................................................... 156 (147)(B) 9
Depreciation and amortization............................................. 252 (200)(C) 52
----------- ------------ -----------
Total expenses............................................................ 5,891 158 6,049
----------- ------------ -----------
Equity in earnings of Golf Trust of America, LP........................... 785 (785) --
----------- ------------ -----------
Net income (loss)......................................................... $ 1,439 $ (943) $ 496
----------- ------------ -----------
----------- ------------ -----------
Cash provided by operating activities (I)................................. $ 3,121 $ 548
----------- -----------
----------- -----------
Cash used in investing activities (J)..................................... $ (2,742) $ --
----------- -----------
----------- -----------
Cash used in financing activities (K)..................................... $ (533) $ --
----------- -----------
----------- -----------
EBITDA (H)................................................................ $ 3,209 $ 557
----------- -----------
----------- -----------
</TABLE>
F-25
<PAGE>
HERITAGE GOLF CLUB
COURSE: HERITAGE GOLF CLUB
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, 1996
Revenue from golf operations.............................................. $ 3,141 $ -- $ 3,141
Other revenue............................................................. 745 -- 745
----------- ------------ -----------
Total revenue............................................................. 3,886 -- 3,886
----------- ------------ -----------
Participating lease payments.............................................. -- 1,825(D) 1,825
Operating expenses........................................................ 2,329 (213)(F) 2,116
Interest expense.......................................................... 59 (45)(B) 14
Depreciation.............................................................. 290 (249)(C) 41
----------- ------------ -----------
Total expenses............................................................ 2,678 1,318 3,996
----------- ------------ -----------
Net income (loss)......................................................... $ 1,208 $ (1,318) $ (110)
----------- ------------ -----------
----------- ------------ -----------
Cash provided by operating activities (I)................................. $ 1,491 $ (69)
----------- -----------
----------- -----------
Cash used in investing activities (J)..................................... $ (1,251) $ --
----------- -----------
----------- -----------
Cash used in financing activities (K)..................................... $ (140) $ --
----------- -----------
----------- -----------
EBITDA (H)................................................................ $ 1,557 $ (55)
----------- -----------
----------- -----------
SIX MONTHS ENDED JUNE 30, 1997
Revenue from golf operations.............................................. $ 1,811 $ -- $ 1,811
Other revenue............................................................. 585 -- 585
----------- ------------ -----------
Total revenue............................................................. 2,396 -- 2,396
----------- ------------ -----------
Participating lease payments.............................................. 701 212(D) 913
Operating expenses........................................................ 1,194 (9)(F) 1,185
Interest expense.......................................................... 14 (11)(B) 3
Depreciation.............................................................. 64 (48)(C) 16
----------- ------------ -----------
Total expenses............................................................ 1,973 144 2,117
----------- ------------ -----------
Equity in earnings of Golf Trust of America, LP........................... 411 (411) --
----------- ------------ -----------
Net income (loss)......................................................... $ 834 $ (555) $ 279
----------- ------------ -----------
----------- ------------ -----------
Cash provided by operating activities (I)................................. $ 517 $ 295
----------- -----------
----------- -----------
Cash used in investing activities (J)..................................... $ (699) $ --
----------- -----------
----------- -----------
Cash used in financing activities (K)..................................... $ 168 $ --
----------- -----------
----------- -----------
EBITDA (H)................................................................ $ 912 $ 298
----------- -----------
----------- -----------
</TABLE>
F-26
<PAGE>
SEASIDE RESORT
COURSE: OYSTER BAY
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, 1996
Revenue from golf operations.............................................. $ 3,288 $ -- $ 3,288
Other revenue............................................................. 784 -- 784
----------- ------ -----------
Total revenue............................................................. 4,072 -- 4,072
----------- ------ -----------
Participating lease payments.............................................. -- 1,856(D) 1,856
Operating expenses........................................................ 2,177 (20)(G) 2,157
Interest expense.......................................................... 75 (56)(B) 19
Depreciation.............................................................. 175 (55)(C) 120
----------- ------ -----------
Total expenses............................................................ 2,427 1,725 4,152
----------- ------ -----------
Net income (loss)......................................................... $ 1,645 $ (1,725) $ (80)
----------- ------ -----------
----------- ------ -----------
Cash provided by operating activities (I)................................. $ 1,843 $ 40
----------- -----------
----------- -----------
Cash used in investing activities (J)..................................... $ (1,077) $ --
----------- -----------
----------- -----------
Cash used in financing activities (K)..................................... $ (685) $ --
----------- -----------
----------- -----------
EBITDA (H)................................................................ $ 1,895 $ 59
----------- -----------
----------- -----------
SIX MONTHS ENDED JUNE 30, 1997
Revenue from golf operations.............................................. $ 2,012 $ -- $ 2,012
Other revenue............................................................. 517 -- 517
----------- ------ -----------
Total revenue............................................................. 2,529 -- 2,529
----------- ------ -----------
Participating lease payments.............................................. 713 215(D) 928
Operating expenses........................................................ 1,153 (5)(G) 1,148
Interest expense.......................................................... 16 (13)(B) 3
Depreciation.............................................................. 44 (27)(C) 17
----------- ------ -----------
Total expenses............................................................ 1,926 170 2,096
----------- ------ -----------
Equity in earnings of Golf Trust of America, LP........................... 413 (413) --
----------- ------ -----------
Net income (loss)......................................................... $ 1,016 $ (583) $ 433
----------- ------ -----------
----------- ------ -----------
Cash provided by operating activities (I)................................. $ 765 $ 450
----------- -----------
----------- -----------
Cash used in investing activities (J)..................................... $ (781) $ --
----------- -----------
----------- -----------
Cash used in financing activities (K)..................................... $ 24 $ --
----------- -----------
----------- -----------
EBITDA (H)................................................................ $ 1,076 $ 453
----------- -----------
----------- -----------
</TABLE>
F-27
<PAGE>
LEGENDS OF VIRGINIA
COURSE: ROYAL NEW KENT, STONEHOUSE GOLF CLUB
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, 1996
Revenue from golf operations.............................................. $ 692 $ -- $ 692
Other revenue............................................................. 151 -- 151
----------- ----- -----------
Total revenue............................................................. 843 -- 843
----------- ----- -----------
Participating lease payments.............................................. -- 928(D) 928
Operating expenses........................................................ 2,492 -- 2,492
Interest.................................................................. 591 (591)(B) --
Depreciation.............................................................. 686 (686)(C) --
----------- ----- -----------
Total expenses............................................................ 3,769 (349) 3,420
----------- ----- -----------
Net income (loss)......................................................... $ (2,926) $ 349 $ (2,577)
----------- ----- -----------
----------- ----- -----------
Cash provided by operating activities (I)................................. $ (1,619) $ (2,577)
----------- -----------
----------- -----------
Cash used in investing activities (J)..................................... $ (3,901) $ --
----------- -----------
----------- -----------
Cash used in financing activities (K)..................................... $ 5,706 $ --
----------- -----------
----------- -----------
EBITDA (H)................................................................ $ (1,649) $ (2,577)
----------- -----------
----------- -----------
SIX MONTHS ENDED JUNE 30, 1997
Revenue from golf operations.............................................. $ 1,274 $ -- $ 1,274
Other revenue............................................................. 252 -- 252
----------- ----- -----------
Total revenue............................................................. 1,526 -- 1,526
----------- ----- -----------
Participating lease payments.............................................. 1,423 430(D) 1,853
Operating expenses........................................................ 1,873 (16)(G) 1,857
Interest expense.......................................................... 448 (448)(B) --
Depreciation and amortization............................................. 234 (234)(C) --
----------- ----- -----------
Total expenses............................................................ 3,978 (268) 3,710
----------- ----- -----------
Equity in earnings of Golf Trust of America, LP........................... 307 (307) --
----------- ----- -----------
Net income (loss)......................................................... $ (2,145) $ (39) $ (2,184)
----------- ----- -----------
----------- ----- -----------
Cash provided by operating activities (I)................................. $ (2,409) $ (2,184)
----------- -----------
----------- -----------
Cash used in investing activities (J)..................................... $ (143) $ --
----------- -----------
----------- -----------
Cash used in financing activities (K)..................................... $ 2,334 $ --
----------- -----------
----------- -----------
EBITDA (H)................................................................ $ (1,463) $ (2,184)
----------- -----------
----------- -----------
</TABLE>
F-28
<PAGE>
GOLF COURSES AND THE LEGENDS GROUP
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
(A) Reflects the Prior Owner's Historical Condensed Combined Statements of
Operations for the year ended December 31, 1996, and the six months ended
June 30, 1997.
(B) Decrease relates to a reduction in interest expense associated with debt
payoff from the Use of Proceeds.
(C) Decrease relates to a reduction in depreciation expense on the assets
contributed to the Operating Partnership.
(D) Represents Participating Lease payments as calculated in accordance with the
Participating Lease 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 $3,706 for the year ended
December 31, 1996.
(E) Represents the elimination of the following expenses not expected to recur
as a result of the Formation Transactions:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31 ENDED JUNE 30,
1996 1997
--------------- -----------------
<S> <C> <C>
Land lease payment to the stockholder.......................... $ 533 $ 21
Allocable portion of executive vice president compensation and
related benefits eliminated as a result of the elimination of
the position.................................................. 52 16
--
---
$ 585 $ 37
--
--
---
---
</TABLE>
(F) Represents the elimination of the following expenses not expected to recur
as a result of the Formation Transactions:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31 ENDED JUNE 30,
1996 1997
--------------- -----------------
<S> <C> <C>
Land lease payment to the stockholder.......................... $ 193 $ 4
Allocable portion of executive vice president compensation and
related benefits eliminated as a result of the elimination of
the position.................................................. 20 5
--
---
$ 213 $ 9
--
--
---
---
</TABLE>
(G) Represents the elimination of the allocable portion of executive vice
president compensation and related benefits eliminated as a result of the
elimination of the position.
(H) EBITDA represents earnings before interest, taxes, depreciation and
amortization.
The aforementioned adjustments do not reflect any allocable share of the
income or distributions from the interest in the OP Units received by the Prior
Owner as a result of the Formation Transactions as these pro forma statements
are intended to reflect the accounts of the newly formed Initial Lessees only.
(I) Represents the Initial Lessees' pro forma income adjusted for non-cash
depreciation and amortization. Estimated pro forma cash flows from operating
activities excludes cash provided by (used in) operating activities due to
changes in working capital resulting from changes in current assets and
current liabilities.
F-29
<PAGE>
As the Initial Lessees will be newly formed entities, the Company does not
believe these excluded items are material to cash flows from operating
activities.
(J) Cash flows from investing activities would primarily include capital
improvements to the Golf Course. As such improvements will generally be
funded through a capital expenditure reserve funded by the Company, cash
flows from investing activities are not expected to be material.
(K) Cash flows from financing activities would primarily include transactions
with the Initial Lessees' owners and borrowings and repayments on loans.
Such cash flows have been excluded in the determination of cash flows from
financing activities as the Company does not believe these excluded items
are material to cash flows from financing activities.
F-30
<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, 1996 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, 1996. 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 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 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, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
BDO SEIDMAN, LLP
Charlotte, North Carolina
March 21, 1997
F-31
<PAGE>
LEGENDS GOLF
COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- --------- JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTE 6)
CURRENT:
Cash......................................................................... $ 400 $ 841 $ 1,119
Accounts receivable (Note 3):
Golf packages.............................................................. 580 984 1,907
Related parties............................................................ 45 246 --
Stockholder................................................................ -- 1 --
Other...................................................................... 37 59 --
Inventories.................................................................. 294 498 429
Prepaid assets............................................................... 2 4 --
--------- --------- -----------
Total current assets..................................................... 1,358 2,633 3,455
--------- --------- -----------
Property and equipment, less accumulated depreciation and amortization (Notes
4 and 6)................................................................... 33,099 35,060 2,314
--------- --------- -----------
Other assets:
Investment in Golf Trust of America, LP...................................... -- -- 2,959
Advances to affiliates (Note 3).............................................. 7,803 11,673 13,237
Other........................................................................ 40 438 54
--------- --------- -----------
Total other assets....................................................... 7,843 12,111 16,250
--------- --------- -----------
$ 42,300 $ 49,804 $ 22,019
--------- --------- -----------
--------- --------- -----------
<CAPTION>
LIABILITIES AND OWNERS' EQUITY:
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable............................................................. $ 430 $ 1,417 $ 1,023
Accrued expenses:
Rent (Note 7).............................................................. -- 5 1,060
Retirement plan (Note 5)................................................... 71 95 113
Other...................................................................... 308 633 555
Current maturities of long-term debt (Note 6)................................ 1,710 26,697 --
--------- --------- -----------
Total current liabilities................................................ 2,519 28,847 2,751
Advances from affiliates (Note 3).............................................. 8,787 13,167 7,520
Long-term debt, less current maturities (Note 6)............................... 24,666 616 748
--------- --------- -----------
Total liabilities........................................................ 35,972 42,630 11,019
--------- --------- -----------
Commitments and contingencies (Notes 5 and 7)
Owners' equity:
Common stock, $1 par -- shares authorized, 300,000; outstanding 1,000........ 3 3 3
Members' contributions....................................................... 1 1 7
Additional paid-in capital................................................... 300 300 3,832
Members' accumulated deficit................................................. 956 (1,970) (2,742)
Retained earnings (Note 6)................................................... 5,068 8,840 9,900
--------- --------- -----------
Total owners' equity..................................................... 6,328 7,174 11,000
--------- --------- -----------
$ 42,300 $ 49,804 $ 22,019
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes to combined financial statements.
F-32
<PAGE>
LEGENDS GOLF
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Green fees............................................... $ 9,931 $ 10,147 $ 10,476 $ 6,139 $ 7,025
Cart rentals............................................. 4,364 4,373 4,564 2,374 2,925
Membership dues.......................................... 76 99 159 128 132
Food and beverage sales.................................. 1,652 1,708 2,095 1,127 1,419
Pro shop merchandise sales............................... 1,857 2,021 2,089 1,122 1,276
Other income (Note 8).................................... 1,216 94 30 35 219
--------- --------- --------- --------- ---------
Total revenues......................................... 19,096 18,442 19,413 10,925 12,996
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
General and administrative (Note 3)...................... 4,150 3,998 5,171 2,256 3,273
Repairs and maintenance.................................. 2,319 2,386 3,642 1,279 2,063
Depreciation and amortization............................ 1,830 1,791 2,400 1,004 808
Cost of merchandise sold................................. 911 983 1,053 552 584
Rents (Note 6)........................................... 956 982 1,098 539 4,941
Pro shop operations...................................... 765 857 1,107 432 658
Cost of food and beverage sold........................... 565 604 817 400 581
Food and beverage operations............................. 417 512 668 299 440
--------- --------- --------- --------- ---------
Total costs and expenses............................... 11,913 12,113 15,956 6,761 13,348
--------- --------- --------- --------- ---------
Operating income (loss).................................... 7,183 6,329 3,457 4,164 (352)
Equity in earnings of Golf Trust of America, LP............ -- -- -- -- 1,916
Interest expense........................................... (998) (1,017) (1,589) (515) (420)
--------- --------- --------- --------- ---------
Net income................................................. $ 6,185 $ 5,312 $ 1,868 $ 3,649 $ 1,144
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to combined financial statements.
F-33
<PAGE>
LEGENDS GOLF
COMBINED STATEMENTS OF OWNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
MEMBERS' PAID-IN RETAINED ACCUMULATED
SHARES AMOUNT CONTRIBUTIONS CAPITAL EARNINGS DEFICIT
----------- ----------- --------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994 3 $ 3 $ -- $ 300 $ 1,960 $ --
Net income.................................. -- -- -- -- 5,185 1,000
Cash dividends.............................. -- -- -- -- (4,677) --
Members' contributions...................... -- -- 1 -- -- --
--
--- --- ----------- ----------- ------------
BALANCE, December 31, 1994.................. 3 3 1 300 2,468 1,000
Net income (loss)........................... -- -- -- -- 5,357 (44)
Cash dividends.............................. -- -- -- -- (2,757) --
--
--- --- ----------- ----------- ------------
BALANCE, December 31, 1995.................. 3 3 1 300 5,068 956
Net income (loss)........................... -- -- -- -- 4,794 (2,926)
Cash dividends.............................. -- -- -- -- (1,022) --
--
--- --- ----------- ----------- ------------
BALANCE, December 31, 1996.................. 3 3 1 300 8,840 (1,970)
Net income (loss)........................... -- -- -- -- 1,916 (772)
Cash dividends.............................. -- -- -- -- (856) --
Owners' contributions....................... -- -- 6 3,532 -- --
--
--- --- ----------- ----------- ------------
BALANCE, June 30, 1997 (unaudited).......... 3 $ 3 $ 7 $ 3,832 $ 9,900 $ (2,742)
--
--
--- --- ----------- ----------- ------------
--- --- ----------- ----------- ------------
</TABLE>
See accompanying notes to combined financial statements.
F-34
<PAGE>
LEGENDS GOLF
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 6,185 $ 5,312 $ 1,868 $ 3,649 $ 1,144
Contribution of land (Note 8).............................. (1,000) -- -- -- --
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 1,830 1,791 2,400 956 808
Equity in earnings of Golf Trust of America, LP.......... -- -- -- -- (1,916)
Loss on disposal of property and equipment............... -- 5 78 -- --
Decrease (increase) in:
Accounts receivable.................................... 374 (135) (627) (1,118) (617)
Inventories............................................ (98) 135 (204) (79) 73
Prepaid expenses/other assets.......................... (16) 7 (182) (315) 142
Increase (decrease) in:
Accounts payable....................................... 293 (87) 987 725 (319)
Accrued expenses....................................... 777 (458) 355 437 995
--------- --------- --------- --------- ---------
Net cash provided by operating activities.................... 8,345 6,570 4,675 4,255 310
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions........................... (1,049) (12,213) (5,271) (2,571) (534)
Increase in investment in Golf Trust of America, LP........ -- -- -- -- (173)
Distribution from Golf Trust of America, LP................ -- -- -- -- 785
Proceeds from sale of property and equipment............... -- 124 612 -- --
Increase in advances to affiliates......................... (698) (4,843) (3,920) (4,173) (2,587)
--------- --------- --------- --------- ---------
Net cash used in investing activities........................ (1,747) (16,932) (8,579) (6,744) (2,509)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of dividends...................................... (3,599) (2,757) (1,021) -- (856)
Proceeds from long-term debt............................... 1,175 11,448 2,497 1,413 202
Payments on long-term debt................................. (1,660) (812) (1,560) (211) (70)
Increase (decrease) in advances from affiliates............ (2,526) 2,903 4,429 1,145 3,412
Decrease in advances from stockholder...................... -- (525) -- -- (211)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities.......... (6,610) 10,257 4,345 2,347 2,477
--------- --------- --------- --------- ---------
Net increase (decrease) in cash.............................. (12) (105) 441 (142) 278
Cash, beginning of period.................................... 517 505 400 400 841
--------- --------- --------- --------- ---------
Cash, end of period.......................................... $ 505 $ 400 $ 841 $ 258 $ 1,119
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to combined financial statements.
F-35
<PAGE>
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1996 AND 1997 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, 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 2). All
significant intercompany balances and transactions have been eliminated.
Additionally, certain classifications may vary from those of the individual
companies' financial statements.
Minority interest attributed to the minority shareholder of Legends of
Virginia, LC is not reflected as the company is in a capital deficit position.
Therefore, the total deficit is attributed to the majority owner.
The Companies financial statements are being presented on a combined basis
as under the terms of the operating leases to be implemented under the Formation
Transactions, the lease obligations are cross-collateralized among all four
Legends lessees. This presentation better presents the ability of the lessees to
service the leases.
2. CONTRIBUTION OF ASSETS
On February 12, 1997, the Companies contributed the golf course land and
improvements, buildings and certain equipment with a net book value of $36,321
net of related debt of $26,454 to Golf Trust of America, LP (GTA, LP).
Concurrently with the contribution of assets, the majority owner contributed the
underlying land for four of the courses to the Companies. The majority owner's
basis in the land was $3,532. The contribution was concurrent with an initial
public offering of the common stock of Golf Trust of America, Inc. (GTA, Inc.),
its general partner. The Companies received limited partnership units
convertible to common shares of GTA, Inc. and cash of $8.4 million which was
used to repay certain affiliate indebtedness.
Concurrent with the contribution of assets, the Companies transferred the
operations of the golf courses along with related assets and liabilities to four
newly formed affiliated lessee companies, Oyster Bay Golf Management, LLC;
Heritage Golf Management, LLC; Legends Golf Management, LLC; and Virginia Golf
Management, LLC (Legends Lessees) which have entered into lease agreements with
GTA, LP (Note 3).
The remaining assets of the Companies consist of limited partnership units
in GTA, LP and receivables and payables from affiliates.
3. 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.
F-36
<PAGE>
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with a maturity of
three months or less to be cash equivalents.
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 course improvements............................................................... 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.
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.
F-37
<PAGE>
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 1996, Legends Golf had no
significant concentration of credit risk.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accountant Standards Board issued Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
SFAS 130 is effective for financial statements for periods beginning after
December 15, 1997, and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, the standard may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementations of this standard.
ADVERTISING
Legends Golf expenses advertising costs as incurred. Advertising costs
included in general and administrative expenses were $446, $403, and $672 for
the years ended December 31, 1994, 1995, and 1996, and $229 and $276 for the six
months ended June 30, 1996 and 1997, respectively.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1996 and
1997, 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.
4. RELATED PARTY TRANSACTIONS
Legends Golf 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.
F-38
<PAGE>
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
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................................................................................. $ 934
1995................................................................................. $ 1,065
1996................................................................................. $ 1,185
<CAPTION>
SIX MONTHS ENDED JUNE 30,
- -------------------------------------------------------------------------------------
<S> <C>
1996................................................................................. $ 543
1997................................................................................. $ 753
</TABLE>
Advances to and from affiliated companies, stockholder receivable and
accrued land lease (Note 7), as shown on the combined 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 7 percent.
5. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996 JUNE 30, 1997
--------- --------- -------------
<S> <C> <C> <C>
Land................................................................ $ 1,000 $ -- $ --
Golf course improvements............................................ 15,297 36,006 --
Buildings........................................................... 3,835 4,790 637
Machinery and equipment............................................. 3,549 2,830 212
Furniture........................................................... 727 558 289
Golf carts.......................................................... 1,439 1,372 1,111
Construction-in-progress............................................ 16,821 332 279
--------- --------- ------
42,668 45,888 2,528
Less accumulated depreciation....................................... 9,569 10,828 214
--------- --------- ------
Net property and equipment.......................................... $ 33,099 $ 35,060 $ 2,314
--------- --------- ------
--------- --------- ------
</TABLE>
F-39
<PAGE>
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
6. 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 Golf equal to the level
funding amount as calculated and 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>
1994............................................................................... $ 93
1995............................................................................... $ 71
1996............................................................................... $ 99
<CAPTION>
SIX MONTHS ENDED JUNE 30,
- -------------------------------------------------------------------------------------
<S> <C>
1996............................................................................... $ 51
1997............................................................................... $ 18
</TABLE>
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996 JUNE 30, 1997
--------- --------- ---------------
<S> <C> <C> <C>
6.25% note payable to bank, collateralized by substantially all assets (1).... $ 14,122 $ 13,917 $ --
Note payable to bank at prime (8.25% as of December 31, 1996) (2)............. 11,048 12,537 --
Payable to bank, due in monthly installments of principal and interest of $20,
calculated by multiplying the capitalized cost by a rental factor, which is
adjusted by a percentage of each basis point change in the 30-day LIBOR rate;
due in 2000; collateralized by golf carts having a net book value of $1,000
at December 31, 1996......................................................... 687 781 748
Note payable to bank, due in monthly installments of principal and interest at
9.25% to October 10, 1998; collateralized by golf carts having a book value
of $76 at December 31, 1996.................................................. -- 78 --
Paid in 1996.................................................................. 519 -- --
--------- --------- ---
26,376 27,313 748
Less current maturities....................................................... 1,710 26,697 --
--------- --------- ---
$ 24,666 $ 616 $ 748
--------- --------- ---
--------- --------- ---
</TABLE>
- ------------
(1) Legends Golf, along with certain affiliated companies (The Legends Group,
Ltd. and Marsh Harbour, Ltd.), participates in a debt agreement with a bank
consisting of two term notes totaling $17,547 as of December 31, 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.
F-40
<PAGE>
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
7. LONG-TERM DEBT (CONTINUED)
(2) On April 19, 1995, 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 two new golf courses, New Kent and Stonehouse, and existing affiliated
courses and clubhouses and other assets of the majority member.
The above notes were paid out in full on February 13, 1997.
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 has obtained a waiver of certain of the covenants as of December 31,
1995 and 1996.
Legends Golf is jointly liable as a guarantor, along with the sole
stockholder, and other affiliated entities for additional amounts totaling
$3,035.
Total debt of all affiliated entities of which the Company is jointly liable
is approximately $33,118 at December 31, 1996.
The aggregate annual maturities for the above mortgage notes payable at
December 31, 1996, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, AMOUNT
- ----------------------------------------------------------------------------------- ---------
<S> <C>
1997............................................................................. $ 26,698
1998............................................................................. 240
1999............................................................................. 220
2000............................................................................. 156
---------
Total............................................................................ $ 27,314
---------
---------
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
LEASES
Legends Golf leases the land for two entities included in the combined
financials from the sole stockholder. Legends 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 percent of
F-41
<PAGE>
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
monthly green fees as defined in the lease agreements. The leases do not contain
an option to purchase the land. Total rental expense approximated the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, STOCKHOLDER THIRD PARTY
- -------------------------------------------------------------------- ------------- -----------
<S> <C> <C>
1994.............................................................. $ 728 $ 228
1995.............................................................. $ 734 $ 248
1996.............................................................. $ 726 $ 231
<CAPTION>
SIX MONTHS ENDED JUNE 30,
- --------------------------------------------------------------------
<S> <C> <C>
1996.............................................................. $ 445 $ 138
1997.............................................................. $ 27 $ 4,914
</TABLE>
Minimum lease commitments for noncancelable operating leases for various
equipment and golf carts in effect at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31. AMOUNT
- ------------------------------------------------------------------------------------- ---------
<S> <C>
1997............................................................................... $ 531
1998............................................................................... 531
1999............................................................................... 494
2000............................................................................... 86
---------
Total.............................................................................. $ 1,642
---------
---------
</TABLE>
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 companies of $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, 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-42
<PAGE>
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
9. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ------------------------------------------------------------------------------------- ---------
<S> <C>
1994............................................................................... $ 1,016
1995............................................................................... $ 1,574
1996............................................................................... $ 2,012
<CAPTION>
SIX MONTHS ENDED JUNE 30,
- -------------------------------------------------------------------------------------
<S> <C>
1996............................................................................... $ 725
1997............................................................................... $ 420
</TABLE>
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 1994, the Company acquired $2,365 of construction costs through
advances from an unaffiliated company.
On May 11, 1994, the Company received contributed land on which to build two
golf courses. The value of the land has been estimated at $1,000,000 based on
management's estimates of the relationship of assessed value to fair value. The
$1,000,000 has been recognized as revenue in the period in which the Company
entered into the contract.
During 1995, the Company acquired $14,895 of property and equipment through
advances from an affiliated company.
During 1995, $898 of land lease payable to stockholder were netted against
receivables from the stockholder.
During 1996, equipment having a net book value of $711 and cash of $399 was
exchanged for similar new equipment having a value of $1,110.
F-43
<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 1996, and the related statements of income and retained
earnings, and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully described in the notes to the financial statements, GOLF
LEGENDS, LTD. 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 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
BDO SEIDMAN, LLP
Charlotte, North Carolina
March 21, 1997
F-44
<PAGE>
GOLF LEGENDS, LTD.
COMINBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- --------- JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTE 5)
CURRENT ASSETS:
Cash......................................................................... $ 216 $ 291 $ 356
Accounts receivable (Note 2)................................................. 356 766 779
Inventories.................................................................. 98 200 167
--------- --------- -----------
Total current assets..................................................... 670 1,257 1,302
--------- --------- -----------
Property and equipment (Notes 3 and 5), less accumulated depreciation........ 11,654 10,817 1,446
--------- --------- -----------
Other assets:
Investment in Golf Trust of America, LP.................................... -- -- 1,070
Advances to affiliates (Note 1)............................................ 4,924 6,859 7,522
Other...................................................................... 39 69 8
--------- --------- -----------
Total other assets....................................................... 4,963 6,928 8,600
--------- --------- -----------
$ 17,287 $ 19,002 $ 11,348
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................. $ 257 $ 494 $ 453
Accrued expenses:
Retirement plan (Note 4)..................................................... 36 38 45
Other........................................................................ 200 271 656
Current maturities of long-term debt (Note 5)................................ 882 12,366 --
--------- --------- -----------
Total current liabilities................................................ 1,375 13,169 1,154
Advances from affiliates (Notes 1 and 5)....................................... 1,064 971 1,296
Long-term debt, less current maturities (Note 5)............................... 12,061 348 415
--------- --------- -----------
Total liabilities........................................................ 14,500 14,488 2,865
--------- --------- -----------
Commitments and contingencies (Notes 4 and 6)..................................
Stockholder's equity:
Common stock, $1 par -- shares authorized, 100,000; outstanding, 1,000....... 1 1 1
Members' contribution........................................................ -- -- 2
Additional paid-in capital................................................... 300 300 3,507
Members retained earnings.................................................... -- -- 1,028
Retained earnings (Note 5)................................................... 2,486 4,213 3,945
--------- --------- -----------
Total stockholder's equity............................................... 2,787 4,514 8,483
--------- --------- -----------
$ 17,287 $ 19,002 $ 11,348
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes to combined financial statements.
F-45
<PAGE>
GOLF LEGENDS, LTD.
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Green fees.................................................. $ 5,582 $ 5,610 $ 5,598 $ 3,411 $ 3,414
Cart rentals................................................ 2,452 2,393 2,480 1,313 1,439
Food and beverage sales..................................... 905 969 1,292 700 828
Pro shop merchandise sales.................................. 1,009 1,119 1,183 646 687
Other income................................................ 98 89 59 32 177
--------- --------- --------- --------- ---------
Total revenues.......................................... 10,046 10,180 10,612 6,102 6,545
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
General and administrative (Note 1)......................... 2,458 2,412 2,486 1,183 1,570
Repairs and maintenance..................................... 1,368 1,259 1,526 638 837
Depreciation and amortization............................... 1,291 1,256 1,250 637 252
Cost of merchandise sold.................................... 489 537 581 294 300
Rents (Note 6).............................................. 531 534 560 325 1,846
Pro shop operations......................................... 331 357 456 230 288
Cost of food and beverage sold.............................. 311 361 532 264 362
Food and beverage operations................................ 219 279 417 209 280
--------- --------- --------- --------- ---------
Total costs and expenses.................................. 6,998 6,995 7,808 3,780 5,735
--------- --------- --------- --------- ---------
Operating income.............................................. 3,048 3,185 2,804 2,322 810
Equity in earnings of Golf Trust of America, LP............... -- -- -- -- 785
Interest expense.............................................. (857) (877) (865) (397) (156)
--------- --------- --------- --------- ---------
Net income.................................................... 2,191 2,308 1,939 1,925 1,439
Retained earnings, beginning of period........................ 919 212 2,486 2,486 4,213
Dividends (Notes 5 and 7)..................................... (2,898) (34) (212) -- (679)
--------- --------- --------- --------- ---------
Retained earnings, end of period.............................. $ 212 $ 2,486 $ 4,213 $ 4,411 $ 4,973
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to combined financial statements.
F-46
<PAGE>
GOLF LEGENDS, LTD.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................... $ 2,191 $ 2,308 $ 1,939 $ 1,924 $ 1,439
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 1,291 1,257 1,250 638 252
Equity in earnings of Golf Trust of America, LP............ -- -- -- -- (785)
Loss (gain) on sale of property............................ -- -- 40 -- --
Decrease (increase) in:
Accounts receivable...................................... 186 (54) (410) (440) (13)
Inventories.............................................. (55) 83 (102) (26) 33
Prepaid expenses/other assets............................ -- (8) (69) -- 61
Increase (decrease) in:
Accounts payable......................................... 148 (25) 237 59 (41)
Accrued expenses......................................... 551 (24) 75 298 392
--------- --------- --------- --------- ---------
Net cash provided by operating activities...................... 4,312 3,537 2,960 2,453 1,338
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions............................. (747) (639) (560) (164) (436)
Proceeds from sale of property and equipment................. -- -- 145 -- --
Increase in investment in Golf Trust of America, LP.......... -- -- -- -- (87)
Distribution from Golf Trust of America, LP.................. -- -- -- -- 322
Increase in advances to affiliates........................... (886) (2,733) (1,935) (2,234) (663)
--------- --------- --------- --------- ---------
Net cash used in investing activities........................ (1,633) (3,372) (2,350) (2,398) (864)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of dividends........................................ (2,370) (34) (212) -- (679)
Proceeds from long-term debt................................. 733 53 469 -- --
Payments on long-term debt................................... (1,123) (715) (699) (147) (55)
Increase (decrease) in advances from affiliates.............. 7 1,057 (93) (50) 325
Decrease in advances from stockholder........................ -- (525) -- -- --
--------- --------- --------- --------- ---------
Net cash used in financing activities.......................... (2,753) (164) (535) (197) (409)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash................................ (74) 1 75 (142) 65
Cash, beginning of period...................................... 289 215 216 216 291
--------- --------- --------- --------- ---------
Cash, end of period............................................ $ 215 $ 216 $ 291 $ 74 $ 356
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying summary of significant accounting policies
and notes to financial statements.
F-47
<PAGE>
GOLF LEGENDS, LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
ORGANIZATION AND BASIS OF PRESENTATION
The accompanying combined financial statements include the accounts of one S
Corporation (Golf Legends, Ltd.) and one limited liability company (Golf Legends
Management, LLC) affiliated through common ownership. The entities, referred to
collectively as Golf Legends, own and operate three golf courses, "Heathland
Links," "Moorland Links," and "Parkland Links," located in Myrtle Beach, South
Carolina.
The entities' financial statements are being presented on a combined basis
as Golf Legends Management, LLC was formed in February 1997 to operate the golf
course previously owned by Golf Legends, Ltd. under the terms of the operating
leases implemented under the formation transactions.
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.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flow, the Company considers all
highly liquid debt instruments with a maturity of three months or less to be
cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets using straight-line method for financial
reporting purposes and accelerated methods for income tax purposes.
Estimated useful lives for major asset categories approximate:
<TABLE>
<CAPTION>
DESCRIPTION YEARS
- --------------------------------------------------------------------------------------- -----
<S> <C>
Golf course improvements............................................................... 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.
F-48
<PAGE>
GOLF LEGENDS, LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
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 credit card 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 1996, the Company had no
significant concentration of credit risk.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accountant Standards Board issued Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
SFAS 130 is effective for financial statements for periods beginning after
December 15, 1997, and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, the standard may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementations of this standard.
ADVERTISING
Golf Legends expenses advertising costs as incurred. Advertising costs
included in general and administrative costs in the amounts of $234, $258, and
$218 for December 31, 1994, 1995, and 1996, and $50 and $82 for the six months
ended June 30, 1996 and 1997, respectively.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1996 and
1997, 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-49
<PAGE>
GOLF LEGENDS, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1996 AND 1997 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. 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>
1994............................................................................... $ 560
1995............................................................................... $ 639
1996............................................................................... $ 639
SIX MONTHS ENDED JUNE
- -------------------------------------------------------------------------------------
1996............................................................................... $ 320
1997............................................................................... $ 337
</TABLE>
Advances to and from affiliated companies, stockholder receivable and
accrued land lease, 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,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
Golf packages....................................................... $ 311 $ 436 $ 779
Related parties..................................................... 45 330 --
--- --- ---
$ 356 $ 766 $ 779
--- --- ---
--- --- ---
</TABLE>
F-50
<PAGE>
GOLF LEGENDS, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
3. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
Golf course improvements...................................... $ 11,642 $ 11,804 $ --
Buildings..................................................... 2,567 2,644 539
Machinery and equipment....................................... 1,648 1,347 85
Furniture..................................................... 256 259 82
Golf carts.................................................... 877 857 643
Construction-in-progress...................................... 27 2 279
--------- --------- -----------
17,017 16,913 1,628
Less accumulated depreciation................................. 5,363 6,096 246
--------- --------- -----------
Net property and equipment.................................... $ 11,654 $ 10,817 $ 1,382
--------- --------- -----------
--------- --------- -----------
</TABLE>
4. RETIREMENT PLAN
The Company and its affiliates sponsor a defined-contribution retirement
plan for all eligible employees of Golf Legends and other affiliated companies
including officers. The plan provides for contributions by Company equal to the
level funding amount as calculated and 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>
1994............................................................................... $ 54
1995............................................................................... $ 36
1996............................................................................... $ 39
SIX MONTHS ENDED JUNE 30,
- -------------------------------------------------------------------------------------
1996............................................................................... $ 18
1997............................................................................... $ 6
</TABLE>
F-51
<PAGE>
GOLF LEGENDS, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
6.25% note payable to bank, collateralized by substantially all
assets (1)............................................................. $ 12,455 $ 12,244 $ --
Notes payable to bank, due in monthly installments of principal
and interest of $12, calculated by multiplying the capitalized cost by
a rental factor, which is adjusted by a percentage for each basis point
change in the 30 day LIBOR rate; due in 2000; collateralized by golf
carts having a net book value of $578 at December 31, 1996............. 435 470 415
Paid in 1996............................................................ 53 -- --
--------- --------- ---
12,943 12,714 415
Less current maturities................................................. 882 12,366 --
--------- --------- ---
$ 12,061 $ 348 $ 415
--------- --------- ---
--------- --------- ---
</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 $17,547 as of December 31, 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.
The Company's portion of these notes were repaid on February 12, 1997. The
affiliates' portion were transferred to a related entity and repaid.
The outstanding balance at December 31, 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................................................................. $ 3,630
Seaside Resorts, Ltd............................................................... 947
Golf Legends, Ltd.................................................................. 12,244
Heritage Golf Club, Ltd............................................................ 726
---------
$ 17,547
---------
---------
</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 ($12,536 outstanding at December 31, 1996). These funds are to be used
for construction of golf courses by an affiliated entity, Legends of Virginia,
LC.
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,
F-52
<PAGE>
GOLF LEGENDS, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
5. LONG-TERM DEBT (CONTINUED)
changes in the nature of the business and significant other limitations as to
the use of funds. The Company has obtained a waiver of certain of the covenants
as of December 31, 1995 and 1996.
The Company is jointly liable as a guarantor, along with the sole
stockholder, with other affiliated entities for additional amounts totaling
$3,035.
Total debt of all affiliated entities of which the Company is jointly liable
is approximately $33,118 at December 31, 1996. On February 12, 1997, concurrent
with the transfer of certain assets of affiliated entities to another company,
this debt was repaid.
The aggregate annual maturities for the above notes payable at December 31,
1996, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, AMOUNT
- ----------------------------------------------------------------------------------- ---------
<S> <C>
1997............................................................................. $ 12,366
1998............................................................................. 122
1999............................................................................. 132
2000............................................................................. 94
---------
Total.......................................................................... $ 12,714
---------
---------
</TABLE>
6. COMMITMENTS
LEASES
The Company leased the land for the golf courses from the sole stockholder.
As of December 31, 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
percent of monthly green fees as defined in the lease agreements. The total
rental expense approximated the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ------------------------------------------------------------------------------------- -----------
<S> <C>
1994............................................................................... $ 531
1995............................................................................... $ 534
1996............................................................................... $ 533
SIX MONTHS ENDED JUNE 30,
- -------------------------------------------------------------------------------------
1996............................................................................... $ 325
1997............................................................................... $ 21
</TABLE>
F-53
<PAGE>
GOLF LEGENDS, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
6. COMMITMENTS (CONTINUED)
Minimum lease commitments for noncancelable operating leases for various
equipment in effect at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------------------------------------------------------------------- -----------
<S> <C>
1997............................................................................... 113
1998............................................................................... 113
1999............................................................................... 103
---
Total............................................................................ $ 329
---
---
</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 $20 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.
7. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ------------------------------------------------------------------------------------- -----------
<S> <C>
1994............................................................................... $ 873
1995............................................................................... $ 876
1996............................................................................... $ 862
SIX MONTHS ENDED JUNE 30,
- -------------------------------------------------------------------------------------
1996............................................................................... $ 397
1997............................................................................... $ 155
</TABLE>
During 1994, $528 of receivables from the sole stockholder were settled
through the declaration of a dividend.
During 1994, equipment having a net book value of $419 and cash of $226 was
exchanged for similar equipment having a value of $645.
During 1995, $898 of land lease payable to stockholder were netted against
receivables from the stockholder.
F-54
<PAGE>
GOLF LEGENDS, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
7. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (CONTINUED)
During 1996, equipment having a net book value of $403 and cash of $240 was
exchanged for similar equipment having a value of $643.
During 1996, $533 of land lease payable to stockholder were netted against
receivables from the stockholder.
8. SUBSEQUENT EVENT
On February 12, 1997, the Company along with Heritage Golf Club, Ltd.;
Legends of Virginia, LC; and Seaside Resorts, Ltd. contributed the land and
improvements, buildings and certain equipment with a net book value of $33,136
net of related debt of $26,385 to Golf Trust of America, LP (GTA, LP). The
contribution was concurrent with an initial public offering of the common stock
of Golf Trust of America, Inc. (GTA, Inc.), its general partner. The Companies
received limited partnership units convertible to common shares of GTA, Inc. and
cash of $8.4 million.
Concurrent with the contribution of assets, the Companies transferred the
operations of the golf courses along with related assets and liabilities to four
newly formed affiliated lessee companies (Legends Lessees) which have entered
into lease agreements with GTA, LP. Under the terms of the leases, the Legends
Lessees will pay annual base rent of approximately $12,057 plus percentage rent
based on the increase in gross golf revenues as defined. The Legends Lessees are
responsible for all expense related to the operations of the courses.
The remaining assets of the Companies consist of limited partnership units
in GTA, LP and receivables and payables from affiliates.
F-55
<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 1996, and the related statements of income and
retained earnings, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully described in the notes to the financial statements, HERITAGE
GOLF CLUB, LTD. 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 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
BDO SEIDMAN, LLP
Charlotte, North Carolina
March 21, 1997
F-56
<PAGE>
HERITAGE GOLF CLUB, LTD.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- --------- JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTE 5)
CURRENT ASSETS:
Cash........................................................................... $ 75 $ 175 $ 161
Accounts receivable (Note 2)................................................... 144 247 254
Inventories.................................................................... 76 75 72
Prepaid expenses............................................................... 2 2 --
--------- --------- -----------
Total current assets......................................................... 297 499 487
Property and equipment (Notes 3 and 5), less accumulated depreciation............ 2,160 2,018 196
Investment in Golf Trust of America, LP.......................................... -- -- 1,770
Advances to affiliates (Note 1).................................................. 956 2,049 2,748
Other............................................................................ -- 36 --
--------- --------- -----------
$ 3,413 $ 4,602 $ 5,201
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................... $ 108 $ 209 $ 64
Accrued expenses:
Retirement plan (Note 4)..................................................... 23 21 25
Other........................................................................ 85 106 243
Current maturities of long-term debt (Note 5).................................... 89 766 --
--------- --------- -----------
Total current liabilities.................................................. 305 1,102 332
Advances from affiliates (Note 1)................................................ 595 570 754
Long-term debt, less current maturities (Note 5)................................. 773 116 140
--------- --------- -----------
Total liabilities.......................................................... 1,673 1,788 1,226
--------- --------- -----------
Commitments and contingencies (Notes 4 and 6)
Owners' equity:
Common stock, $1 par -- shares authorized, 100,000; outstanding, 1,000......... 1 1 1
Members' contributions......................................................... -- -- 2
Additional paid-in capital..................................................... -- -- 325
Retained earnings (Note 5)..................................................... 1,739 2,813 3,221
Members' retained earnings..................................................... -- -- 426
--------- --------- -----------
Total owners' equity....................................................... 1,740 2,814 3,975
--------- --------- -----------
$ 3,413 $ 4,602 $ 5,201
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying summary of significant accounting policies
and notes to financial statements.
F-57
<PAGE>
HERITAGE GOLF CLUB, LTD.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Green fees..................................................... $ 2,075 $ 2,108 $ 2,031 $ 1,262 $ 1,244
Cart rentals................................................... 937 949 951 514 567
Membership dues................................................ 76 99 159 128 132
Food and beverage sales........................................ 419 405 410 226 264
Pro shop merchandise sales..................................... 375 377 342 197 189
Other income (expense)......................................... 53 -- (7) -- --
--------- --------- --------- --------- ---------
Total revenues............................................... 3,935 3,938 3,886 2,327 2,396
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
General and administrative (Note 1)............................ 985 895 956 443 459
Repairs and maintenance........................................ 549 619 467 155 293
Depreciation................................................... 358 319 290 155 64
Cost of merchandise sold....................................... 176 188 180 96 87
Rents (Note 6)................................................. 197 200 193 120 723
Pro shop operations............................................ 199 232 202 106 115
Cost of food and beverage sold................................. 167 149 164 84 117
Food and beverage operations................................... 138 159 167 83 101
--------- --------- --------- --------- ---------
Total costs and expenses..................................... 2,769 2,761 2,619 1,242 1,959
--------- --------- --------- --------- ---------
Operating income................................................. 1,166 1,177 1,267 1,085 437
Equity in earnings of Golf Trust America, LP..................... -- -- -- -- 411
Interest expense................................................. (63) (63) (59) (27) (14)
--------- --------- --------- --------- ---------
Net income....................................................... 1,103 1,114 1,208 1,058 834
Retained earnings, beginning of period........................... 858 1,264 1,739 1,739 2,813
Dividends (Notes 5 and 7)........................................ 697 639 134 -- --
Retained earnings, end of period................................. $ 1,264 $ 1,739 $ 2,813 $ 2,797 $ 3,647
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying summary of significant accounting policies
and notes to financial statements.
F-58
<PAGE>
HERITAGE GOLF CLUB, LTD.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 1,103 $ 1,114 $ 1,208 $ 1,058 $ 834
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on sale of assets.......................... -- 5 11 -- --
Depreciation.................................... 358 319 290 155 64
Equity in earnings of Golf Trust of America,
LP............................................ -- -- -- -- (411)
(Increase) decrease in:
Accounts receivable........................... 112 (52) (103) (221) (7)
Inventories................................... (27) 22 1 (6) 3
Prepaid expenses/other assets................. (16) 14 (36) -- 38
Increase (decrease) in:
Accounts payable.............................. 74 (30) 101 (31) (145)
Accrued expenses.............................. 210 (423) 19 112 141
--------- --------- --------- --------- ---------
Net cash provided by operating activities........... 1,814 969 1,491 1,067 517
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions.................. (91) (82) (193) (25) (132)
Proceeds from sale of assets...................... -- 124 35 -- --
Distribution from Golf Trust of America, LP....... -- -- -- -- 168
Increase in investment in Golf Trust of America,
LP.............................................. -- -- -- -- (36)
Increase in advances to affiliates................ (1) (955) (1,093) (985) (699)
--------- --------- --------- --------- ---------
Net cash used in investing activities............... (92) (913) (1,251) (1,010) (699)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of dividends............................. (146) (639) (134) -- --
Proceeds from long-term debt...................... 222 -- 156 -- --
Payments on long-term debt........................ (266) (89) (137) (32) (16)
Increase (decrease) in advances from affiliates... (1,499) 595 (25) 1 184
--------- --------- --------- --------- ---------
Net cash used in financing activities............... (1,689) (133) (140) (31) 168
--------- --------- --------- --------- ---------
Net increase (decrease) in cash................... 33 (77) 100 26 (14)
Cash, beginning of period......................... 119 152 75 75 175
--------- --------- --------- --------- ---------
Cash, end of period............................... $ 152 $ 75 $ 175 $ 101 $ 161
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-59
<PAGE>
HERITAGE GOLF CLUB, LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
ORGANIZATION AND BASIS OF PRESENTATION
The accompanying combined financial statements include the accounts of one S
Corporation (Heritage Golf Club, Ltd.) and one limited liability company
(Heritage Golf Management, LLC) affiliated through common ownership. The
entities, referred to collectively as Heritage Golf Club, owned and operates
Heritage Golf Club, located in the Pawleys Island, South Carolina area.
The entities' financial statements are being presented on a combined basis
as Heritage Golf Management, LLC was formed in February 1997 to operate the golf
course previously owned by Heritage Golf Club, Ltd. under the terms of the
operating leases implemented under the formation transactions.
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.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flow, the Company considers all
highly liquid debt instruments with a maturity of three months or less to be
cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets using straight-line method for financial
reporting purposes and accelerated method for income tax purposes.
Estimated useful lives for major asset categories approximate:
<TABLE>
<CAPTION>
DESCRIPTION YEARS
- ---------------------------------------- -----
<S> <C>
Golf course improvements................ 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.
F-60
<PAGE>
HERITAGE GOLF CLUB, LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
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, 1995 and 1996, the Company had no significant
concentration of credit risk
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accountant Standards Board issued Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
SFAS 130 is effective for financial statements for periods beginning after
December 15, 1997, and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, the standard may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementations of this standard.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising costs
included in general and administrative costs in the amounts of $76, $84, and $80
for December 31, 1994, 1995, and 1996, and $22 and $15 for the six months ended
June 30, 1996 and 1997, respectively.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1996 and
1997, 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-61
<PAGE>
HERITAGE GOLF CLUB, LTD.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1996 AND 1997 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. 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>
1994.................................. $ 187
1995.................................. $ 213
1996.................................. $ 213
<CAPTION>
SIX MONTHS ENDED JUNE 30, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1996.................................. $ 107
1997.................................. $ 112
</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. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
Golf packages....................................................... $ 144 $ 225 $ 254
Related parties..................................................... -- 19 --
Other............................................................... -- 3 --
--- --- ---
$ 144 $ 247 $ 254
--- --- ---
--- --- ---
</TABLE>
F-62
<PAGE>
HERITAGE GOLF CLUB, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
3. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
Golf course improvements................ $ 2,511 $ 2,626 $ --
Machinery and equipment................. 758 679 6
Furniture and fixtures.................. 366 231 207
Buildings............................... 1,032 1,052 --
Golf carts.............................. 296 273 234
--------- --------- ---
4,963 4,861 447
Less accumulated depreciation........... 2,803 2,843 251
--------- --------- ---
Net property and equipment.............. $ 2,160 $ 2,018 $ 196
--------- --------- ---
--------- --------- ---
</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 and
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>
1994.................................. $ 26
1995.................................. $ 24
1996.................................. $ 21
<CAPTION>
SIX MONTHS ENDED JUNE 30,
- ----------------------------------------
<S> <C>
1996.................................. $ 11
1997.................................. $ 4
</TABLE>
F-63
<PAGE>
HERITAGE GOLF CLUB, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
6.25% note payable to bank, collateralized by substantially all
assets(1).......................................................... $ 736 $ 726 $ --
Note payable to bank, due in monthly installments of principal and
interest at 9.25% to October 10, 1998; collateralized by golf carts
having a book value of $211 at December 31, 1996................... 126 156 140
--- --- ---
862 882 140
Less current maturities............................................. 89 766 --
--- --- ---
$ 773 $ 116 $ 140
--- --- ---
--- --- ---
</TABLE>
- ------------
(1) The Company, along with certain affiliated companies (The Legends Group,
Ltd.; Seaside Resorts, Ltd.; Marsh Harbour, Ltd.; and Golf Legends, Ltd.),
participates in a debt agreement with a bank consisting of two term notes
totaling $17,547 as of December 31, 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.
The Company's portion of these notes were repaid on February 12, 1997. The
outstanding balance at December 31, 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...................... $ 3,630
Seaside Resorts, Ltd.................... 947
Golf Legends, Ltd....................... 12,244
Heritage Golf Club, Ltd................. 726
---------
17,547
---------
---------
</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 ($12,536 outstanding at December 31, 1996). These
funds are to be used for construction of golf courses by an affiliated
entity, Legends of Virginia, LC.
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 has obtained a waiver of certain of the covenants as of
December 31, 1995 and 1996.
The Company is jointly liable as a guarantor, along with the sole
stockholder, with other affiliated entities for additional amounts totaling
$3,035.
Total debt of all affiliated entities of which the Company is jointly liable
is approximately $33,118 at December 31, 1996. On February 12, 1997,
concurrent with the transfer of certain assets of affiliated entities to
another company, this debt was repaid.
F-64
<PAGE>
HERITAGE GOLF CLUB, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
5. LONG-TERM DEBT (CONTINUED)
The aggregate annual maturities for the above notes payable at December 31,
1996, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, AMOUNT
- ---------------------------------------- ---------
<S> <C>
1997.................................... $ 766
1998.................................... 41
1999.................................... 44
2000.................................... 31
---------
Total................................. $ 882
---------
---------
</TABLE>
6. 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 agreement. The total rental expense
for the land approximates:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1994.................................. $ 197
1995.................................. $ 200
1996.................................. $ 193
<CAPTION>
SIX MONTHS ENDED JUNE 30,
- ----------------------------------------
<S> <C>
1996.................................. $ 120
1997.................................. $ 6
</TABLE>
Minimum lease commitments for noncancelable operating leases in effect at
December 31, 1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------------------------------------------------------------------- -----------
<S> <C>
1997................................................................................. $ 45
1998................................................................................. 45
1999................................................................................. 42
2000................................................................................. 2
---
Total.............................................................................. $ 134
---
---
</TABLE>
The Company leases various equipment under operating leases.
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 $20 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-65
<PAGE>
HERITAGE GOLF CLUB, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 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
Cash paid during the year for interest:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1994.................................. $ 64
1995.................................. $ 63
1996.................................. $ 58
<CAPTION>
SIX MONTHS ENDED JUNE 30,
- ----------------------------------------
<S> <C>
1996.................................. $ 27
1997.................................. $ 14
</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 1996, equipment having a net book value of $154 and cash of $80 was
exchanged for similar new equipment having a value of $234.
8. SUBSEQUENT EVENT
On February 12, 1997, the Company along with Golf Legends, Ltd.; Legends of
Virginia, LC; and Seaside Resorts, Ltd. contributed the land and improvements,
buildings and certain equipment with a net book value of $33,136 net of related
debt of $26,385 to Golf Trust of America, LP (GTA, LP). The contribution was
concurrent with an initial public offering of the common stock of Golf Trust of
America, Inc. (GTA, Inc.), its general partner. The Companies received limited
partnership units convertible to common shares of GTA, Inc. and cash of $8.4
million.
Concurrent with the contribution of assets, the Companies transferred the
operations of the golf courses along with related assets and liabilities to four
newly formed affiliated lessee companies (Legends Lessees) which have entered
into lease agreements with GTA, LP. Under the terms of the leases, the Legends
Lessees will pay annual base rent of approximately $12,057 plus percentage rent
based on the increase in gross golf revenues as defined. The Legends Lessees are
responsible for all expense related to the operations of the courses. The
remaining assets of the Companies consist of limited partnership units in GTA,
LP and receivables and payables from affiliates.
F-66
<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 1996, and the related statements of income and retained
earnings, and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully described in the notes to the financial statements, SEASIDE
RESORTS, LTD. 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 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
BDO SEIDMAN, LLP
Charlotte, North Carolina
March 21, 1997
F-67
<PAGE>
SEASIDE RESORTS, LTD.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- --------- JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (Note 5)
CURRENT ASSETS:
Cash........................................................................... $ 109 $ 190 $ 198
Accounts receivable (Note 2)................................................... 162 245 309
Inventories.................................................................... 120 142 111
--------- --------- -----------
Total current assets....................................................... 391 577 618
Property and equipment (Notes 3 and 5), less accumulated depreciation............ 1,055 983 187
Investment in Golf Trust of America, LP.......................................... -- -- 34
Advances to affiliates (Note 1).................................................. 1,863 2,813 3,763
Other............................................................................ -- 36 4
--------- --------- -----------
$ 3,309 $ 4,409 $ 4,606
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................... $ 65 $ 157 $ 122
Accrued expenses:
Retirement plan (Note 4)..................................................... 12 10 12
Other........................................................................ 23 74 209
Current maturities of long-term debt (Note 5)................................ 116 987 --
--------- --------- -----------
Total current liabilities.................................................. 216 1,228 343
Advances from affiliates (Note 1)................................................ 1,253 1,250 1,470
Long-term debt, less current maturities (Note 5)................................. 996 116 137
--------- --------- -----------
Total liabilities.......................................................... 2,465 2,594 1,950
--------- --------- -----------
Commitments (Notes 4 and 6)
Shareholder's equity:
Common stock, $1 par--shares authorized, 100,000; outstanding, 1,000........... 1 1 1
Members' contributions......................................................... -- -- 2
Members' retained earnings..................................................... -- -- 644
Retained earnings (Note 5)..................................................... 843 1,814 2,009
--------- --------- -----------
Total shareholder's equity................................................. 844 1,815 2,656
--------- --------- -----------
$ 3,309 $ 4,409 $ 4,606
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements
F-68
<PAGE>
SEASIDE RESORTS, LTD.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Green fees..................................................... $ 2,274 $ 2,429 $ 2,311 $ 1,449 $ 1,423
Cart rentals................................................... 975 1,030 977 544 589
Food and beverage sales........................................ 329 334 349 204 215
Pro shop merchandise sales..................................... 474 526 453 274 262
Other income (expense)......................................... 63 5 (18) -- 40
--------- --------- --------- --------- ---------
Total revenues............................................. 4,115 4,324 4,072 2,471 2,529
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
General and administrative (Note 1)............................ 707 676 724 336 391
Repairs and maintenance........................................ 403 508 592 215 277
Depreciation and amortization.................................. 181 187 175 95 44
Cost of merchandise sold....................................... 247 259 229 135 108
Rents (Note 6)................................................. 228 248 231 139 875
Pro shop operations............................................ 234 267 235 124 109
Cost of food and beverage sold................................. 87 94 98 56 64
Food and beverage operations................................... 59 74 68 38 42
--------- --------- --------- --------- ---------
Total costs and expenses................................... 2,146 2,313 2,352 1,138 1,910
--------- --------- --------- --------- ---------
Operating income................................................. 1,969 2,011 1,720 1,333 619
Equity in earnings of GTA LP..................................... -- -- -- -- 413
Interest expense................................................. (78) (77) (75) (35) (16)
--------- --------- --------- --------- ---------
Net income....................................................... 1,891 1,934 1,645 1,298 1,016
Retained earnings, beginning of period........................... 184 993 843 843 1,814
Dividends (Notes 5 and 7)........................................ 1,082 2,084 674 -- (177)
--------- --------- --------- --------- ---------
Retained earnings, end of period................................. $ 993 $ 843 $ 1,814 $ 2,141 $ 2,653
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-69
<PAGE>
SEASIDE RESORTS, LTD.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................... $ 1,891 $ 1,934 $ 1,645 $ 1,298 $ 1,016
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 181 187 175 96 44
Equity in earnings of Golf Trust of America, LP............ -- -- -- -- (413)
Gain (loss) on disposal of assets.......................... -- -- 24 -- --
(Increase) decrease in:
Accounts receivable...................................... 77 (29) (83) (457) (64)
Inventories.............................................. (16) 31 (22) (23) 31
Prepaid expenses/other assets............................ -- -- (36) -- 49
Increase (decrease) in:
Accounts payable......................................... 70 (32) 92 34 (35)
Accrued expenses......................................... 15 (11) 48 26 137
--------- --------- --------- --------- ---------
Net cash provided by operating activities...................... 2,218 2,080 1,843 974 765
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions............................. (209) (51) (195) -- --
Proceeds from sale of assets................................. -- -- 69 (14) --
Distribution from Golf Trust of America, LP.................. -- -- -- -- 169
Increase (decrease) in advances to affiliates................ 189 (1,156) (951) (954) (950)
--------- --------- --------- --------- ---------
Net cash used in investing activities.......................... (20) (1,207) (1,077) (968) (781)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of dividends........................................ (1,082) (2,084) (674) -- (177)
Proceeds from long-term debt................................. 220 26 160 -- --
Payments on long-term debt................................... (272) (96) (169) (32) (19)
Increase (decrease) in advances from affiliates.............. (1,035) 1,252 (2) -- 220
--------- --------- --------- --------- ---------
Net cash used in financing activities.......................... (2,169) (902) (685) (32) 24
--------- --------- --------- --------- ---------
Net increase (decrease) in cash................................ 29 (29) 81 (26) 8
Cash, beginning of period...................................... 109 138 109 109 190
--------- --------- --------- --------- ---------
Cash, end of period............................................ $ 138 $ 109 $ 190 $ 83 $ 198
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements
F-70
<PAGE>
SEASIDE RESORTS, LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
ORGANIZATION AND BASIS OF PRESENTATION
The accompanying combined financial statements include the accounts of one S
Corporation (Seaside Resorts, Ltd.) and one limited liability company (Oyster
Bay Golf Management, LLC) affiliated through common ownership. The entities,
referred to collectively as Oyster Bay, owned and operates Oyster Bay Golf Links
located in Sunset Beach, North Carolina.
The entities' financial statements are being presented on a combined basis
as Oyster Bay Golf Management, LLC was formed in February 1997 to operate the
golf course previously owned by Seaside Resorts, Ltd. under the terms of the
operating leases implemented under the Formation Transactions.
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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with a maturity of
three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets using straight-line method for financial
reporting purposes and accelerated method for income tax purposes.
Estimated useful lives for major asset categories approximate:
<TABLE>
<CAPTION>
DESCRIPTION YEARS
- --------------------------------------------------------------------------------------- -----
<S> <C>
Golf course improvements............................................................... 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.
F-71
<PAGE>
SEASIDE RESORTS, LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
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 credit card 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, 1995, and 1996, the Company had no significant concentration of credit risk.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accountant Standards Board issued Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
SFAS 130 is effective for financial statements for periods beginning after
December 15, 1997, and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, the standard may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementations of this standard.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising costs
included in general and administrative costs in the amounts of $93, $80, and $71
for December 31, 1994, 1995, and 1996, and $15 and $13 for the six months ended
June 30, 1996 and 1997, respectively.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1996 and
1997, 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-72
<PAGE>
SEASIDE RESORTS, LTD.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1996 AND 1997 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. 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>
1994............................................................................... $ 187
1995............................................................................... $ 213
1996............................................................................... $ 213
<CAPTION>
SIX MONTHS ENDED JUNE 30,
- -------------------------------------------------------------------------------------
<S> <C>
1996............................................................................... $ 107
1997............................................................................... $ 112
</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,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
Golf package receivables............................................ $ 125 $ 191 $ 278
Related parties..................................................... -- 20 --
Other............................................................... 37 34 31
--- --- ---
$ 162 $ 245 $ 309
--- --- ---
--- --- ---
</TABLE>
F-73
<PAGE>
SEASIDE RESORTS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
3. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
Golf course improvements......................................... $ 1,144 $ 1,240 $ --
Buildings........................................................ 236 257 --
Machinery and equipment.......................................... 679 502 --
Furniture and fixture............................................ 104 26 --
Golf carts....................................................... 265 242 242
--------- --------- ---
2,428 2,267 242
Less accumulated depreciation.................................... 1,373 1,284 55
--------- --------- ---
Net property and equipment....................................... $ 1,055 $ 983 $ 187
--------- --------- ---
--------- --------- ---
</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
and 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>
1994............................................................................... $ 12
1995............................................................................... $ 13
1996............................................................................... $ 10
<CAPTION>
SIX MONTHS ENDED JUNE 30,
- -------------------------------------------------------------------------------------
<S> <C>
1996............................................................................... $ 6
1997............................................................................... $ 2
</TABLE>
F-74
<PAGE>
SEASIDE RESORTS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
6.25% note payable to bank, collateralized by substantially all
assets(1)....................................................... $ 960 $ 947 $ --
Payable to bank, due in monthly installments of principal and
interest of $20, calculated by multiplying the capitalized cost
by a rental factor, which is adjusted by a percentage of each
basis point change in the 30-day LIBOR rate; due in 2000;
collateralized by golf carts having a net book value of $211 at
December 31, 1996............................................... 125 156 137
Paid in 1996..................................................... 27 -- --
--------- --------- ---
1,112 1,103 137
Less current maturities.......................................... 116 987 --
--------- --------- ---
$ 996 $ 116 $ 137
--------- --------- ---
--------- --------- ---
</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 $17,547 as of December 31, 1996. The aforementioned companies
are jointly liable for the debt and the shareholder has guaranteed the
loans.
Effective October 26, 1996, the rate was adjusted to the bank's prime rate.
The Company's portion of these notes were repaid on February 12, 1997.
The outstanding balance at December 31, 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................................................................. $ 3,630
Seaside Resorts, Ltd............................................................... 947
Golf Legends, Ltd.................................................................. 12,244
Heritage Golf Club, Ltd............................................................ 726
---------
$ 17,547
---------
---------
</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 ($12,536 outstanding at December 31, 1996). These
funds are to be used for construction of golf courses by an affiliated
entity, Legends of Virginia, LC.
F-75
<PAGE>
SEASIDE RESORTS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 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
shareholder, capital expenditures, indebtedness, liens, changes in the
nature of the business and significant other limitations as to the use of
funds. The Company has obtained a waiver of certain of the covenants as of
December 31, 1995 and 1996.
The Company is jointly liable as a guarantor, along with the shareholder,
with other affiliated entities for additional amounts totaling $3,035.
Total debt of all affiliated entities of which the Company is jointly liable
is approximately $33,118 at December 31, 1996. On February 12, 1997,
concurrent with the transfer of certain assets of affiliated entities to
another company, this debt was repaid.
The aggregate annual maturities for the above notes payable at December 31,
1996, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, AMOUNT
- ------------------------------------------------------------------------------------- ---------
<S> <C>
1997............................................................................... $ 987
1998............................................................................... 41
1999............................................................................... 44
2000............................................................................... 31
---------
Total.............................................................................. $ 1,103
---------
---------
</TABLE>
6. COMMITMENTS
LEASES
The Company leases land for the golf course. The lease has a term of fifty
years expiring April 2032. The lease requires rental payments of 10% of monthly
green fees, as defined in the lease agreement. The lease does not contain an
option to purchase the land. The total rental expense approximated the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ------------------------------------------------------------------------------------- -----------
<S> <C>
1994............................................................................... $ 228
1995............................................................................... $ 248
1996............................................................................... $ 231
<CAPTION>
SIX MONTHS ENDED JUNE 30, AMOUNT
- ------------------------------------------------------------------------------------- -----------
<S> <C>
1996............................................................................... $ 139
1997............................................................................... $ 875
</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 $20 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-76
<PAGE>
SEASIDE RESORTS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 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
Cash paid during the year for interest:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ------------------------------------------------------------------------------------- -----------
<S> <C>
1994............................................................................... $ 79
1995............................................................................... $ 77
1996............................................................................... $ 74
<CAPTION>
SIX MONTHS ENDED JUNE 30, AMOUNT
- ------------------------------------------------------------------------------------- -----------
<S> <C>
1996............................................................................... $ 35
1997............................................................................... $ 16
</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.
During 1996, equipment having a net book value of $154 and cash of $80 was
exchanged for similar new equipment having a value of $234.
8. SUBSEQUENT EVENT
On February 12, 1997, the Company along with Heritage Golf Club, Ltd.; Golf
Legends, Ltd.; and Legends of Virginia, LC contributed the land and
improvements, buildings and certain equipment with a total net book value of
$33,136 net of related debt of $26,385 to Golf Trust of America, LP (GTA, LP).
The contribution was concurrent with an initial public offering of the common
stock of Golf Trust of America, Inc. (GTA, Inc.), its general partner. The
Companies received limited partnership units convertible to common shares of
GTA, Inc. and cash of $8.4 million.
Concurrent with the contribution of assets, the Companies transferred the
operations of the golf courses along with related assets and liabilities to four
newly formed affiliated lessee companies (Legends Lessees) which have entered
into lease agreements with GTA, LP. Under the terms of the leases, the Legends
Lessees will pay annual base rent of approximately $12,057 plus percentage rent
based on the increase in gross golf revenues as defined. The Legends Lessees are
responsible for all expense related to the operations of the courses.
The remaining assets of the Companies consist of limited partnership units
in GTA, LP and receivables and payables from affiliates.
F-77
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
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 1996, and the related statements of operations and
members' accumulated deficit, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully described in the notes to the financial statements, LEGENDS OF
VIRGINIA, LC has material transactions with its members 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 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
BDO SEIDMAN, LLP
Charlotte, North Carolina
March 21, 1997
F-78
<PAGE>
LEGENDS OF VIRGINIA, LC
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- --------- JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTE 5)
CURRENT ASSETS:
Cash......................................................................... $ -- $ 186 $ 404
Accounts receivable (Note 2)................................................. -- 31 584
Inventories.................................................................. -- 80 79
Prepaid expenses............................................................. -- 3 --
--------- --------- -----------
Total current assets....................................................... -- 300 1,067
Advances to affiliates (Note 1)................................................ 60 1 220
Investment in Golf Trust of America, LP........................................ -- -- 85
Property and equipment (Notes 3 and 5), less accumulated
depreciation.................................................................. 18,231 21,243 401
Other.......................................................................... -- 297 5
--------- --------- -----------
$ 18,291 $ 21,841 $ 1,778
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................................................... $ -- $ 558 $ 329
Retirement plan (Note 4)....................................................... -- 25 31
Other liabilities.............................................................. -- 187 508
Current maturities of long-term debt (Note 5).................................. 622 12,578 --
--------- --------- -----------
Total current liabilities.................................................. 622 13,348 868
Advances from affiliates (Note 1).............................................. 5,876 10,425 5,022
Long-term debt (Note 5)........................................................ 10,836 37 --
--------- --------- -----------
Total liabilities.......................................................... 17,334 23,810 5,890
--------- --------- -----------
Commitments (Notes 4 and 6)
Members' equity (deficit):
Members' contributions....................................................... 1 1 3
Members' accumulated equity (deficit)........................................ 956 (1,970) (4,115)
--------- --------- -----------
Total members' equity (deficit)............................................ 957 (1,969) (4,112)
--------- --------- -----------
$ 18,291 $ 21,841 $ 1,778
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying summary of significant accounting
policies and notes to financial statements.
F-79
<PAGE>
LEGENDS OF VIRGINIA, LC
STATEMENTS OF OPERATIONS AND MEMBERS' ACCUMULATED DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Green fees................................................... $ -- $ -- $ 536 $ 17 $ 944
Cart rentals................................................. -- -- 156 4 330
Food and beverage sales...................................... -- -- 44 1 112
Pro shop merchandise sales................................... -- -- 110 3 138
Other income (expense) (Note 7).............................. 1,000 -- (3) -- 2
--------- --------- --------- --------- ---------
Total revenues............................................. 1,000 -- 843 25 1,526
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
General and administrative (Note 1).......................... -- 15 1,004 280 853
Repairs and maintenance...................................... -- -- 1,058 184 656
Depreciation and amortization................................ -- 29 686 69 448
Cost of merchandise sold..................................... -- -- 63 23 89
Rent (Note 6)................................................ -- -- 114 -- 1,497
Pro shop operations.......................................... -- -- 213 45 146
Cost of food and beverage sold............................... -- -- 24 1 38
Food and beverage operations................................. -- -- 16 -- 17
--------- --------- --------- --------- ---------
Total costs and expenses................................... -- 44 3,178 602 3,744
--------- --------- --------- --------- ---------
Operating income (loss)........................................ 1,000 (44) (2,335) (577) (2,218)
Equity of earnings of GTA, LP.................................. -- -- -- -- 307
Interest expense............................................... -- -- (591) (55) (234)
--------- --------- --------- --------- ---------
Net income (loss).............................................. 1,000 (44) (2,926) (632) (2,145)
Members' accumulated equity (deficit), beginning of
period........................................................ -- 1,000 956 (1,970) (1,970)
--------- --------- --------- --------- ---------
Members' accumulated equity (deficit), end of period........... $ 1,000 $ 956 $ (1,970) $ (2,602) $ (4,115)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying summary of significant accounting
policies and notes to financial statements.
F-80
<PAGE>
LEGENDS OF VIRGINIA, LC
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ 1,000 $ (44) $ (2,926) $ (632) $ (2,145)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:.......
Contribution of land (Note 7)................ (1,000) -- -- -- --
Depreciation and amortization................ -- 29 686 69 448
Equity in earnings of Golf Trust of America,
LP......................................... -- -- -- -- (307)
Loss (gain) from sale of assets.............. -- -- 3 -- --
(Increase) decrease in:
Accounts receivable........................ -- -- (31) -- (553)
Inventories................................ -- -- (80) (24) 1
Prepaid expenses/other assets.............. -- -- (41) (315) 49
Increase (decrease) in:
Accounts payable........................... -- -- 558 660 (229)
Other liabilities.......................... -- -- 212 -- 327
--------- --------- --------- --------- ---------
Net cash used in operating activities............ -- (15) (1,619) (242) (2,409)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions............... -- (11,443) (4,323) (2,366) --
Proceeds from sale of assets................... -- -- 363 -- --
Distributions from Golf Trust of America, LP... -- -- -- -- 126
Increase in investment in Golf Trust of
America, LP.................................. -- -- -- -- (50)
(Increase) decrease in advances to
affiliates................................... -- -- 59 -- (219)
--------- --------- --------- --------- ---------
Net cash used in investing activities............ -- (11,443) (3,901) (2,366) (143)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt................... -- 11,458 1,712 1,413 --
Increase (decrease) in advances from
affiliates................................... -- -- 4,549 1,195 2,770
Payments of long-term debt..................... -- -- (555) -- --
--------- --------- --------- --------- ---------
Net cash provided by financing activities........ -- 11,458 5,706 2,608 2,770
--------- --------- --------- --------- ---------
Net increase in cash............................. -- -- 186 -- 218
Cash, beginning of period........................ -- -- -- -- 186
--------- --------- --------- --------- ---------
Cash, end of period.............................. $ -- $ -- $ 186 $ -- $ 404
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO
FINANCIAL STATEMENTS.
F-81
<PAGE>
LEGENDS OF VIRGINIA, LC
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
ORGANIZATION AND BASIS OF PRESENTATION
The accompanying combined financial statements include the accounts of one S
Corporation (Legends of Virginia, LC) and one limited liability company
(Virginia Legends Management, LLC) affiliated through common ownership. The
entities, referred to collectively as Legends of Virginia, is in the business of
operating two golf courses near Williamsburg, Virginia, Stonehouse Golf Club,
and Royal New Kent which opened in June and August 1996, respectively.
The entities' financial statements are being presented on a combined basis
as Virginia Legends Management, LLC was formed in February 1997 to operate the
golf course previously owned by Legends of Virginia, Ltd. under the terms of the
operating leases implemented under the formation transactions.
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.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flow, the Company considers all
highly liquid debt instruments with a maturity of three months or less to be
cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets using various accelerated and straight-line
methods for financial reporting.
Estimated useful lives for major asset categories approximate:
<TABLE>
<CAPTION>
DESCRIPTION YEARS
- --------------------------------------------------------------------------------------- -----
<S> <C>
Golf course improvements............................................................... 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
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.
F-82
<PAGE>
LEGENDS OF VIRGINIA, LC
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
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 1996, the Company had no
significant concentration of credit risk.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accountant Standards Board issued Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
SFAS 130 is effective for financial statements for periods beginning after
December 15, 1997, and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, the standard may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementations of this standard.
ADVERTISING
The Company expenses advertising costs as incurred. The Company incurred no
advertising costs in 1994 and 1995. Amounts expended were $0 and $299 for the
years ended December 31, 1995 and 1996, and $143 and $165 for the six months
ended June 30, 1996 and 1997, respectively.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1996 and
1997, 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-83
<PAGE>
LEGENDS OF VIRGINIA, LC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1996 AND 1997 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. 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>
1994............................................................................... $ --
1995............................................................................... $ --
1996............................................................................... $ 120
<CAPTION>
SIX MONTHS ENDED JUNE 30,
- -------------------------------------------------------------------------------------
<S> <C>
1996............................................................................... $ 10
1997............................................................................... $ 191
</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,
------------------------
1995 1996 JUNE 30, 1997
--- --- ---------------
<S> <C> <C> <C>
Golf packages................................................... $ -- $ 29 $ 429
Related parties................................................. -- 1 155
-- --
---
$ -- $ 30 $ 584
-- --
-- --
---
---
</TABLE>
F-84
<PAGE>
LEGENDS OF VIRGINIA, LC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
3. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996 JUNE 30, 1997
--------- --------- ---------------
<S> <C> <C> <C>
Land (Note 7)............................................. $ 1,000 $ -- $ --
Golf course improvements.................................. -- 20,336 --
Buildings................................................. -- 837 71
Machinery and equipment................................... 465 302 --
Furniture................................................. -- 42 --
Construction-in-progress.................................. 16,795 330 330
--------- --------- ---
18,260 21,847 401
Less accumulated depreciation............................. 29 604 --
--------- --------- ---
Net property and equipment................................ $ 18,231 $ 21,243 $ 401
--------- --------- ---
--------- --------- ---
</TABLE>
4. RETIREMENT PLAN
The Company and its sponsor affiliates 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 and 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>
1994............................................................................... $ --
1995............................................................................... $ --
1996............................................................................... $ 40
<CAPTION>
SIX MONTHS ENDED JUNE 30,
- -------------------------------------------------------------------------------------
<S> <C>
1996............................................................................... $ 16
1997............................................................................... $ 6
</TABLE>
F-85
<PAGE>
LEGENDS OF VIRGINIA, LC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
Note payable to bank at prime (8.25% at December 31, 1996)(1)..................... $ 11,048 $ 12,537 $ --
Note payable to bank, due in monthly installments of principal and interest at
9.25% to October 10, 1998; collateralized by golf carts having a net book value
of $76 at December 31, 1996...................................................... -- 78 --
Paid in 1996...................................................................... 410 -- --
--------- --------- ---
11,458 12,615 --
Less current maturities........................................................... 622 12,578 --
--------- --------- ---
Total long-term debt.............................................................. $ 10,836 $ 37 $ --
--------- --------- ---
--------- --------- ---
</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.
Certain affiliated companies (Legends Group, Ltd.; Golf Legends, Ltd.;
Seaside Resorts, Ltd.; Heritage Golf Club, Ltd.; and Marsh Harbour, Ltd.)
participate in a debt agreement with a bank consisting of two term notes
totaling $17,547 as of December 31, 1996. The aforementioned companies are
jointly liable for the debt and the majority member has guaranteed the
loans.
Effective October 26, 1996, the rate was adjusted to the bank's prime rate.
The Company's portion of these notes were repaid on February 12, 1997.
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 has obtained a waiver of certain of the covenants as of
December 31, 1995 and 1996.
The Company is jointly liable as a guarantor, with the sole stockholder and
other affiliated entities for additional amounts totaling $3,035.
Total debt of all affiliated entities of which the Company is jointly liable
is approximately $33,118 at December 31, 1996. On February 12, 1997,
concurrent with the transfer of certain assets of affiliated entities to
another company, this debt was repaid.
F-86
<PAGE>
LEGENDS OF VIRGINIA, LC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
5. LONG-TERM DEBT (CONTINUED)
The aggregate annual maturities are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ----------------------------------------------------------------------------------- ---------
<S> <C>
1997............................................................................. $ 12,578
1998............................................................................. 37
1999............................................................................. --
---------
Total.......................................................................... $ 12,615
---------
---------
</TABLE>
6. COMMITMENTS
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.
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 $20 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.
LEASES
Minimum lease commitments for noncancelable operating leases for various
equipment and golf carts in effect at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------------------------------------------------------------------- ---------
<S> <C>
1997............................................................................... $ 373
1998............................................................................... 373
1999............................................................................... 349
2000............................................................................... 84
---------
Total............................................................................ $ 1,179
---------
---------
</TABLE>
Total rent expense approximates the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
- -------------------------------------------------------------------------------------
<S> <C>
1996............................................................................... $ --
1997............................................................................... $ 1,497
</TABLE>
F-87
<PAGE>
LEGENDS OF VIRGINIA, LC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
7. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ------------------------------------------------------------------------------------- ---------
<S> <C>
1994............................................................................... $ --
1995............................................................................... $ 558
1996............................................................................... $ 1,019
<CAPTION>
SIX MONTHS ENDED JUNE 30,
- -------------------------------------------------------------------------------------
<S> <C>
1996............................................................................... $ 55
1997............................................................................... $ 234
</TABLE>
On May 11, 1994, the Company received contributed land on which to build two
golf courses. The value of the land has been estimated at $1 million based on
management's estimates of the relationship of assessed value to fair value. The
$1 million has been recognized as revenue in the period in which the Company
entered into the contract.
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.
8. SUBSEQUENT EVENT
On February 12, 1997, the Company along with Golf Legends, Ltd.; Heritage
Golf Club, Ltd.; and Seaside Resorts, Ltd. contributed the land and
improvements, buildings and certain equipment with a net book value of $33,136
net of related debt of $26,385 to Golf Trust of America, LP (GTA, LP). The
contribution was concurrent with an initial public offering of the common stock
of Golf Trust of America, Inc. (GTA, Inc.), its general partner. The Companies
received limited partnership units convertible to common shares of GTA, Inc. and
cash of $8.4 million.
Concurrent with the contribution of assets, the Companies transferred the
operations of the golf courses along with related assets and liabilities to four
newly formed affiliated lessee companies (Legends Lessees) which have entered
into lease agreements with GTA, LP. Under the terms of the leases, the Legends
Lessees will pay annual base rent of approximately $12,057 plus percentage rent
based on the increase in gross golf revenues as defined. The Legends Lessees are
responsible for all expense related to the operations of the courses.
The remaining assets of the Companies consist of limited partnership units
in GTA, LP and receivables and payables from affiliates.
F-88
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Northgate Country Club
We have audited the accompanying balance sheets of NORTHGATE COUNTRY CLUB as
of December 31, 1995 and 1996, and the related statements of income and retained
earnings, and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NORTHGATE COUNTRY CLUB at
December 31, 1995 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
BDO SEIDMAN, LLP
Charlotte, North Carolina
September 26, 1997
F-89
<PAGE>
NORTHGATE COUNTRY CLUB
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 20,
------------------------------- FEBRUARY 12,
1994 1995 1996 1997
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 97 $ 20 $ 21 $ 4
Accounts receivable, net of allowance for doubtful accounts of
$26, $12, $18, and $18, respectively........................... 515 539 495 385
Receivable from affiliate........................................ 70 1,953 1,308 1,306
Inventories...................................................... 99 99 104 121
Prepaid expenses................................................. 42 176 35 145
--------- --------- --------- ------------
Total current assets........................................... 823 2,787 1,963 1,961
Property and equipment, net........................................ 10,567 10,594 10,410 10,191
--------- --------- --------- ------------
Total assets................................................... $ 11,390 $ 13,381 $ 12,373 $ 12,152
--------- --------- --------- ------------
--------- --------- --------- ------------
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................. $ 214 $ 262 $ 89 $ 1
Notes payable--current portion................................... 88 31 103 92
Accrued liabilities.............................................. 166 32 41 42
Deferred revenue................................................. 229 249 167 64
Other liabilities................................................ 352 345 315 258
--------- --------- --------- ------------
Total current liabilities...................................... 1,049 919 715 457
Membership deposits.............................................. 1,649 1,482 1,435 1,413
Notes payable.................................................... 4,839 6,719 6,000 5,995
--------- --------- --------- ------------
Total liabilities.............................................. 7,537 9,120 8,150 7,865
--------- --------- --------- ------------
Contingencies (Note 6)
Partners' equity................................................. 3,853 4,261 4,223 4,287
--------- --------- --------- ------------
Total liabilities and partners' equity......................... $ 11,390 $ 13,381 $ 12,373 $ 12,152
--------- --------- --------- ------------
--------- --------- --------- ------------
</TABLE>
F-90
<PAGE>
NORTHGATE COUNTRY CLUB
CONSOLIDATED STATEMENTS OF OPERATIONS
AND PARTNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 20, SIX MONTHS DECEMBER 21, 1996
------------------------------- ENDED JUNE THROUGH
1994 1995 1996 30, 1996 FEBRUARY 12, 1997
--------- --------- --------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES:
Revenue from golf operations......................... $ 2,594 $ 2,768 $ 2,918 $ 1,436 $ 356
Food and beverage sales............................ 1,170 1,370 1,398 672 132
Pro shop merchandise sales......................... 363 393 379 185 16
Revenue from other services........................ 35 35 32 23 2
--------- --------- --------- ----------- ------
Total revenues................................... 4,162 4,566 4,727 2,316 506
--------- --------- --------- ----------- ------
OPERATING COSTS AND EXPENSES:
Operating expenses................................. 1,194 1,149 1,333 651 135
Costs of goods sold................................ 594 731 693 316 57
General and administrative......................... 580 517 590 242 70
Repairs and maintenance............................ 746 743 716 402 90
Depreciation and amortization...................... 401 323 351 171 43
--------- --------- --------- ----------- ------
Total operating costs and expenses............... 3,515 3,463 3,683 1,782 395
--------- --------- --------- ----------- ------
Operating income................................... 647 1,103 1,044 534 111
--------- --------- --------- ----------- ------
OTHER EXPENSES:
Interest expense..................................... 475 485 490 248 97
--------- --------- --------- ----------- ------
Net (loss) income.................................... 172 618 554 286 14
Capital contributions................................ 201 577 112 10 50
Capital distributions................................ (522) (787) (704) (258) --
Partners' equity, beginning of period................ 4,002 3,853 4,261 4,261 4,223
--------- --------- --------- ----------- ------
Partners' equity, end of period...................... $ 3,853 $ 4,261 $ 4,223 $ 4,299 $ 4,287
--------- --------- --------- ----------- ------
--------- --------- --------- ----------- ------
</TABLE>
F-91
<PAGE>
NORTHGATE COUNTRY CLUB
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS DECEMBER 21,
YEAR ENDED DECEMBER 20, ENDED 1996 THROUGH
------------------------------- JUNE 30, FEBRUARY 12,
1994 1995 1996 1996 1997
--------- --------- --------- ----------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 172 $ 618 $ 554 $ 286 $ 14
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 401 323 351 171 43
Disposal of fixed assets................................ -- -- -- -- 176
Decrease (increase) in:
Accounts receivable................................... (17) (24) 44 446 110
Inventories........................................... 7 -- (5) (13) (17)
Prepaid expenses...................................... (2) (134) 141 136 (110)
Increase (decrease) in:
Accounts payable...................................... 127 48 (173) (193) (88)
Accrued liabilities................................... 8 (134) 9 4 1
Deferred revenue...................................... 7 20 (82) (71) (103)
Other liabilities..................................... (42) (7) (30) (6) (57)
Membership deposits................................... (77) (167) (47) (21) (22)
--------- --------- --------- ----------- -----
Net cash provided by operating activities................. 584 543 762 739 (53)
--------- --------- --------- ----------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...................... (81) (347) (167) (41) --
--------- --------- --------- ----------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt............ -- 7,000 -- -- --
Principal payments on notes payable..................... (115) (5,180) (647) (445) (16)
Increase (decrease) in receivables from affiliates...... (70) (1,883) 645 -- 2
Contributions........................................... 201 577 112 10 50
Distributions........................................... (522) (787) (704) (258) --
--------- --------- --------- ----------- -----
Net cash used in financing activities..................... (506) (273) (594) (693) 36
--------- --------- --------- ----------- -----
Net increase (decrease) in cash........................... (3) (77) 1 5 (17)
Cash, beginning of year................................... 100 97 20 20 21
--------- --------- --------- ----------- -----
Cash, end of year......................................... $ 97 $ 20 $ 21 $ 25 $ 4
--------- --------- --------- ----------- -----
--------- --------- --------- ----------- -----
</TABLE>
The accompanying notes to are an integral part to these financial statements.
F-92
<PAGE>
NORTHGATE COUNTRY CLUB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1996 AND FEBRUARY 1, 1997 IS UNAUDITED)
(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 Impairment 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>
<CAPTION>
DESCRIPTION YEARS
- ---------------------------------------- ------
<S> <C>
Buildings............................... 30
Land improvements....................... 20
Equipment............................... 3-10
</TABLE>
Significant expenditures which extend the useful lives of existing assets
are capitalized. All other maintenance and repair costs are charged to current
operations.
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 date. The Partnership believes that no liability
exists for membership contracts which have been downgraded or terminated
subsequent to the origination date and accordingly has not reflected a liability
for the related membership deposits in
F-93
<PAGE>
NORTHGATE COUNTRY CLUB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND FEBRUARY 1, 1997 IS UNAUDITED)
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the financial statements, Any liability which may arise from these downgraded or
terminated membership contracts has been assumed by Jack A. Thoner.
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.
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 Partnerships 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 20, 1996, 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 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 Partnerships 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 FINANCIAL STATEMENTS
The financial statements for the six months ended June 30, 1996 and the
period from December 21, 1996 through February 12, 1997, are unaudited; however,
in the opinion of the management, the financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the
F-94
<PAGE>
NORTHGATE COUNTRY CLUB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND FEBRUARY 1, 1997 IS UNAUDITED)
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
results for the period. The results of operations for the interim period ended
June 30, 1996, 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 20,
-------------------- FEBRUARY 12,
1995 1996 1997
--------- --------- ------------
<S> <C> <C> <C>
Land.................................... $ 7,144 $ 7,144 $ 7,144
Golf course improvements................ 2,640 2,666 2,655
Buildings............................... 3,018 3,037 2,970
Furniture, fixtures, machinery and
equipment.............................. 1,579 1,701 1,728
--------- --------- ------------
14,381 14,548 14,497
Less accumulated depreciation........... (3,787) (4,138) (4,306)
--------- --------- ------------
$ 10,594 $ 10,410 $ 10,191
--------- --------- ------------
--------- --------- ------------
</TABLE>
4. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 20,
-------------------- FEBRUARY 12,
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
Notes payable to purchase equipment.......................... $ 49 $ 32 $ 29
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 6,071 6,058
--------- --------- ------
$ 6,750 $ 6,103 $ 6,087
--------- --------- ------
--------- --------- ------
</TABLE>
The Partnership 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. The
Partnership 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.
F-95
<PAGE>
NORTHGATE COUNTRY CLUB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND FEBRUARY 1, 1997 IS UNAUDITED)
(IN THOUSANDS)
4. NOTES PAYABLE (CONTINUED)
The Greyrock note is collateralized by the golf course land as well as 21
additional real estate lots deeded to the Partnership by various affiliates
solely for the purpose of collateralizing and obtaining the loan. Accordingly,
the Partnership has not recorded the 21 additional lots on the financial
statements.
<TABLE>
<CAPTION>
YEAR ENDED AMOUNT
- ---------------------------------------- ---------
<S> <C>
1997.................................... $ 103
1998.................................... 105
1999.................................... 108
2000.................................... 113
2001.................................... 125
Thereafter.............................. 5,549
---------
$ 6,103
---------
---------
</TABLE>
5. RELATED PARTY TRANSACTIONS
During 1995 the Partnership refinanced its note payable 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 Partnership (LIBOR plus 4 1/2% per annum) and represent
amounts borrowed from the Partnership and loan fees paid on behalf of the
affiliate by the Company
6. CONTINGENCIES
The Partnership is involved in various legal proceedings incidental to the
conduct of its normal business operations. The Partnership's management believes
that none of these legal proceedings will have a material impact on the
financial condition or results of operations of the Partnership.
7. SUBSEQUENT EVENTS
On February 12, 1997, the Partnership transferred substantially all of its
operating assets to Golf Trust of America, L.P. (GTA), the operating partnership
of a publicly held real estate investment trust. The tax free exchange price was
$12,593. The debt of $6,058 to Greyrock Capital Group, Inc. was assumed by GTA
and subsequently paid off. In connection with this transaction, the Company
received units in GTA valued at $3,797.
On February 12, 1997, the Northgate Country Club, L.L.C., was formed by the
Partners of the Partnership. This entity entered into an agreement with GTA, to
lease and operate the golf course and its related equipment.
F-96
<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 (the Company), as of December 31, 1996 and 1995, and the
related statements of operations and cash flows for the years ended December 31,
1996 and 1995, the period from inception (May 17, 1994) through December 31,
1994, and the six-month period ended June 30, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 December 31, 1996 and 1995, and the results of its operations and
cash flows for the years ended December 31, 1996 and 1995, the period from
inception (May 17, 1994) through December 31, 1994, and the six-month period
ended June 30, 1996, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
September 4, 1997
F-97
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- --------- FEBRUARY 12,
-------------
1997
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash........................................................................... $ 51 $ 44 $ 21
Accounts receivable............................................................ 10 76 86
Notes receivable............................................................... 155 155 155
Inventory...................................................................... 43 41 41
Other.......................................................................... 3 3 3
--------- --------- ------
Total current assets....................................................... 262 319 306
--------- --------- ------
LAND, BUILDINGS, AND EQUIPMENT:
Land........................................................................... 1,001 1,001 1,001
Golf course improvements....................................................... 2,596 2,625 2,650
Buildings...................................................................... 312 312 312
Furniture and equipment........................................................ 230 207 207
Automobiles.................................................................... 37 36 36
--------- --------- ------
4,176 4,181 4,206
Less accumulated depreciation.................................................... (350) (588) (616)
--------- --------- ------
Net land, building, and equipment.......................................... 3,826 3,593 3,590
--------- --------- ------
OTHER ASSETS:
Deposits....................................................................... 1 1 1
Loan costs, net................................................................ 52 50 50
--------- --------- ------
53 51 51
--------- --------- ------
Total assets............................................................... $ 4,141 $ 3,963 $ 3,947
--------- --------- ------
--------- --------- ------
LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses............................................ $ 35 $ 35 $ 56
Current maturities of long-term debt............................................. 413 387 403
Accrued litigation settlement.................................................... -- 60 20
--------- --------- ------
Total current liabilities.................................................. 448 482 479
Long-term debt................................................................... 3,855 3,692 3,682
--------- --------- ------
Total liabilities.......................................................... 4,303 4,174 4,161
Members' deficit................................................................. (162) (211) (214)
--------- --------- ------
Total liabilities and members' deficit..................................... $ 4,141 $ 3,963 $ 3,947
--------- --------- ------
--------- --------- ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MAY 17, 1994) YEAR ENDED SIX MONTHS
THROUGH DECEMBER 31, ENDED
DECEMBER 31, -------------------- JUNE 30,
1994 1995 1996 1996
--------------- --------- --------- ----------- PERIOD FROM
JANUARY 1,
1997
THROUGH
FEBRUARY 11,
1997
---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Golf revenues..................................... $ 376 $ 1,429 $ 1,455 $ 755 $ 174
Food and beverage................................. 56 169 160 79 10
Pro shop.......................................... 23 116 125 60 7
Other income...................................... 8 26 28 14 2
------ --------- --------- ----------- ---
Total revenues................................ 463 1,740 1,768 908 193
------ --------- --------- ----------- ---
COSTS AND EXPENSES:
Golf course maintenance........................... 122 302 349 171 33
Pro shop costs and expenses....................... 85 335 374 179 41
Food and beverage costs and expenses.............. 43 124 122 60 10
General and administrative expenses............... 113 313 301 128 52
Depreciation and amortization..................... 104 247 249 123 28
Settlement of employment litigation............... -- -- (60) -- --
------ --------- --------- ----------- ---
Total operating expenses...................... 467 1,321 1,455 661 164
------ --------- --------- ----------- ---
Operating income (loss)............................. (4) 419 313 247 29
Interest expense.................................... (134) (424) (362) (183) (32)
Other income........................................ 1 6 14 11 --
------ --------- --------- ----------- ---
Net income (loss)................................... $ (137) $ 1 $ (35) $ 75 $ (3)
------ --------- --------- ----------- ---
------ --------- --------- ----------- ---
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-99
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
STATEMENT OF MEMBERS' DEFICIT
(IN THOUSANDS)
<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 loss............................................................................. (35)
Distributions to members............................................................. (14)
---------
BALANCE, December 31, 1996........................................................... (211)
Net loss (unaudited)................................................................. (3)
---------
BALANCE, February 11, 1997 (unaudited)............................................... $ (214)
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-100
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MAY 17, YEAR ENDED DECEMBER
1994) THROUGH 31, SIX MONTHS
DECEMBER 31, -------------------- ENDED JUNE
1994 1995 1996 30, 1996
------------- --------- --------- -----------
PERIOD FROM
JANUARY 1,
1997 THROUGH
FEBRUARY 11,
1997
-------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ (137) $ 1 $ (35) $ 75 $ (3)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization........... 104 247 249 123 28
Settlement of employment litigation..... -- -- 60
Decrease (increase) in:
Accounts receivable................... (12) 2 (1) 4 4
Inventory............................. (23) (20) 2 2 --
Other assets.......................... (1) (2) -- -- --
Deposits.............................. (1) -- -- -- --
Accrued litigation settlement......... -- -- -- -- (40)
Increase (decrease) in accounts payable
and accrued expenses.................. 44 (8) -- 10 21
------------- --------- --------- ----- ---
Net cash provided by (used in) operating
activities................................. (26) 220 275 214 10
------------- --------- --------- ----- ---
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of golf course................ (3,416) -- -- -- --
Capital expenditures...................... (731) (33) (28) (8) (25)
Notes receivable issued by related
parties................................. (183) -- -- -- --
Payments received from related parties.... -- 28 -- -- --
Accumulation of cost associated with the
REIT transaction (Note 7)............... -- -- (65) -- (14)
------------- --------- --------- ----- ---
Net cash used in investing activities....... (4,330) (5) (93) (8) (39)
------------- --------- --------- ----- ---
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common units 1 -- -- -- --
Distributions to members.................. -- (25) -- -- --
Principal reductions of debt.............. -- (13) (147) (72) (9)
Net change in revolving credit balances... -- 30 120 (30) 15
Proceeds from bank borrowings............. 4,000 -- -- -- --
Proceeds from related party borrowings.... 433 -- -- (135) --
Payments made to related parties.......... -- (182) (162) -- --
Payment of loan financing costs........... (52) -- -- -- --
------------- --------- --------- ----- ---
Net cash provided by (used in) financing
activities................................. 4,382 (190) (189) (237) 6
------------- --------- --------- ----- ---
Net increase in cash and equivalents........ 26 25 (7) (31) (23)
Cash, beginning of year..................... -- 26 51 51 44
------------- --------- --------- ----- ---
Cash, end of year........................... $ 26 $ 51 $ 44 $ 20 $ 21
------------- --------- --------- ----- ---
------------- --------- --------- ----- ---
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest.... $ 118 $ 437 $ 362 $ 184 $ 32
------------- --------- --------- ----- ---
------------- --------- --------- ----- ---
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-101
<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.
The February 11, 1997, unaudited financial statements have been prepared by
management in accordance with generally accepted accounting principles and have
been prepared on a basis substantially consistent with that of the December 31,
1996, financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included.
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 and replacements and improvements that extend the
useful life of assets are capitalized as incurred. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
The Company has adopted Statement of Financial Accounting Standards No. 121
(SFAS 121), ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS, which
establishes guidance for recognizing and measuring impairment losses and
requires that the carrying amount of impaired assets be reduced to fair value.
The adoption of SFAS 121 did not have a material effect on the financial
statements of the Company.
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.
F-102
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
3. NOTES PAYABLE
Notes payable at December 31, 1995 and 1996, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Note payable to Colonial Bank, dated December 1, 1995; payable in monthly installments
beginning December 31, 1995 of $42, including interest at .5% over the Colonial Bank base rate
(9.25% at December 31, 1996); final payment due at maturity on November 30, 2000;
collateralized by real estate, guaranteed by Robert S. Craft and Craft Turf Farms............. $ 3,987 $ 3,840
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................................ 251 89
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
December 12, 1997; unsecured.................................................................. 30 150
--------- ---------
$ 4,268 $ 4,079
--------- ---------
--------- ---------
</TABLE>
The aggregate maturities of notes payable at December 31, 1996, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ------------------------------------------------------------------------------------- ---------
<S> <C>
1997............................................................................... $ 387
1998............................................................................... 163
1999............................................................................... 179
2000............................................................................... 3,350
---------
$ 4,079
---------
---------
</TABLE>
F-103
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
4. LEASES
The Company rents certain machinery, equipment, and buildings under
operating leases in the normal course of business.
Total rent expense for the year ended December 31, 1996, amounted to
approximately $128. Minimum commitments under noncancelable operating leases as
of December 31, 1996, are $76 payable in 1997.
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 amount of $58 at
December 31, 1996 and 1995. 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 December 31, 1996 and 1995. 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 the Colonial
BancGroup, Inc., the parent company of the Company's primary lender.
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 one year. Funding is discretionary
by the members of the Company. Total funding for the year ended December 31,
1996, amounted to approximately $11.
7. SUBSEQUENT EVENT
On February 12, 1997, the Company transferred substantially all of its golf
course assets to Golf Trust of America, L.P. (GTA), the operating partnership of
a publicly held real estate investment trust. The tax free exchange price was
$6,047. The debt of $3,831 to Colonial Bank was assumed by GTA and subsequently
paid off. In connection with this transaction, the Company received units in GTA
valued at $2,216 and as of December 31, 1996, had incurred costs of
approximately $65. These costs are included in accounts receivable and were
reimbursed by GTA subsequent to December 31, 1996.
On February 12, 1997, the Woodlands Management Company, L.L.C., was formed
by the members of the Company. This entity entered into an agreement with GTA,
to lease and operate the golf course.
F-104
<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, 1996 and 1995, and the related statements
of income, changes in partners' capital and cash flows for each of the three
years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
CROWE, CHIZEK AND COMPANY LLP
Oak Brook, Illinois
September 4, 1997
F-105
<PAGE>
OLDE ATLANTA GOLF CLUB LIMITED PARTNERSHIP
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- --------- FEBRUARY 12,
1997
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash........................................................................... $ 66 $ 101 $ 89
Accounts receivable............................................................ 43 63 92
Inventories.................................................................... 64 79 75
Other current assets........................................................... 20 23 39
Deferred offering costs........................................................ -- 77 148
--------- --------- ------
Total current assets......................................................... 193 343 443
--------- --------- ------
PROPERTY AND EQUIPMENT:
Land........................................................................... 2,229 2,229 2,229
Land improvements.............................................................. 1,167 1,167 1,197
Buildings and equipment........................................................ 1,696 1,730 1,750
--------- --------- ------
5,092 5,126 5,176
Accumulated depreciation....................................................... 625 866 891
--------- --------- ------
Total property and equipment................................................. 4,467 4,260 4,285
Intangible assets.............................................................. 293 195 184
--------- --------- ------
$ 4,953 $ 4,798 $ 4,912
--------- --------- ------
--------- --------- ------
LIABILITIES AND CAPITAL
CURRENT LIABILITIES:
Bank line-of-credit (Notes 2 and 5)............................................ $ -- $ 15 $ 100
Current maturities of long-term debt (Notes 3 and 5)........................... 65 67 67
Accounts payable............................................................... 7 11 2
Deferred revenue............................................................... 232 238 400
Accrued property taxes......................................................... 53 53 7
Other current liabilities...................................................... 39 55 24
--------- --------- ------
Total current liabilities.................................................... 396 439 600
LONG-TERM DEBT (NOTES 3 AND 5)................................................. 2,591 2,527 2,522
CAPITAL:
General partners............................................................... 20 19 18
Limited partners............................................................... 1,946 1,813 1,772
--------- --------- ------
Total capital................................................................ 1,966 1,832 1,790
--------- --------- ------
$ 4,953 $ 4,798 $ 4,912
--------- --------- ------
--------- --------- ------
</TABLE>
See accompanying notes to financial statements.
F-106
<PAGE>
OLDE ATLANTA GOLF CLUB LIMITED PARTNERSHIP
STATEMENTS OF INCOME (LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS PERIOD FROM
YEAR ENDED DECEMBER 31, ENDED JANUARY 1,
------------------------------- JUNE 30, 1997 TO
1994 1995 1996 1996 FEBRUARY 12,
--------- --------- --------- ----------- 1997
---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SALES:
Golf revenue............................................ $ 1,413 $ 1,546 $ 1,699 $ 911 $ 184
Food and beverage....................................... 246 261 286 148 19
Pro shop................................................ 186 200 219 97 15
Other income............................................ 10 5 8 5 2
--------- --------- --------- ----------- ---
Total revenues........................................ 1,855 2,012 2,212 1,161 220
--------- --------- --------- ----------- ---
COSTS AND EXPENSES:
Cost of sales -- food and beverage...................... 70 94 115 59 17
Cost of sales -- pro shop............................... 166 158 165 71 14
Operating expenses...................................... 1,605 1,557 1,688 813 204
--------- --------- --------- ----------- ---
Total operating costs and expenses.................... 1,841 1,809 1,968 943 235
--------- --------- --------- ----------- ---
Operating income (loss)................................... 14 203 244 218 (15)
Interest expense.......................................... 143 202 224 112 27
--------- --------- --------- ----------- ---
Net income (loss)......................................... $ (129) $ 1 $ 20 $ 106 $ (42)
--------- --------- --------- ----------- ---
--------- --------- --------- ----------- ---
</TABLE>
See accompanying notes to financial statements.
F-107
<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 loss........................................................................... (1) (128) (129)
--- --------- ---------
Partners' capital at December 31, 1994............................................. 32 3,150 3,182
Purchase of limited partnership interest........................................... -- (21) (21)
Distributions...................................................................... (12) (1,184) (1,196)
Net income......................................................................... -- 1 1
--- --------- ---------
Partners' capital at December 31, 1995............................................. 20 1,946 1,966
Distributions...................................................................... (2) (152) (154)
Net income......................................................................... 1 19 20
--- --------- ---------
Partners' capital at December 31, 1996............................................. 19 1,813 1,832
Net loss (unaudited)............................................................... (1) (41) (42)
--- --------- ---------
Partners' capital at February 12, 1997 (unaudited)................................. $ 18 $ 1,772 $ 1,790
--- --------- ---------
--- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-108
<PAGE>
OLDE ATLANTA GOLF CLUB LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------- JUNE 30,
1994 1995 1996 1996
--------- --------- --------- ------------- PERIOD FROM
JANUARY 1,
1997 TO
FEBRUARY 12,
1997
---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ (129) $ 1 $ 20 $ 106 $ (42)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation.......................................... 352 278 240 112 25
Amortization.......................................... 91 98 98 50 11
Initiation fees amortization.......................... (23) (30) (31) (14) (4)
(Increase) decrease in:
Accounts receivable................................. (49) 13 (20) (38) (29)
Inventory........................................... (30) (7) (15) (22) 4
Other assets........................................ (11) (1) (80) (12) (87)
Increase (decrease) in:
Accounts payable.................................... (79) -- 4 19 (9)
Other current liabilities........................... 198 23 53 (19) 89
--------- --------- --------- ----- ---
Net cash provided by (used in) operating activities....... 320 375 269 182 (42)
--------- --------- --------- ----- ---
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...................... (196) (69) (33) (19) (50)
Proceeds from sale of equipment......................... -- 16 -- -- --
--------- --------- --------- ----- ---
Net cash used in investing activities..................... (196) (53) (33) (19) (50)
--------- --------- --------- ----- ---
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of limited partnership interest................ -- (21) -- -- --
Payment of financing fees (41) (22) -- -- --
Proceeds from bank debt................................. 1,835 900 15 -- 85
Payments on bank debt................................... (1,702) (52) (62) (31) (5)
Partner distributions................................... (164) (1,196) (154) (72) --
--------- --------- --------- ----- ---
Net cash provided by (used in) financing activities....... (72) (391) (201) (103) 80
--------- --------- --------- ----- ---
Net increase (decrease) in cash........................... 52 (69) 35 60 (12)
Cash, beginning of period................................. 83 135 66 66 101
--------- --------- --------- ----- ---
Cash, end of period....................................... $ 135 $ 66 $ 101 $ 126 $ 89
--------- --------- --------- ----- ---
--------- --------- --------- ----- ---
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest................ $ 143 $ 202 $ 224 $ 112 $ 19
--------- --------- --------- ----- ---
--------- --------- --------- ----- ---
</TABLE>
See accompanying notes to financial statements.
F-109
<PAGE>
OLDE ATLANTA GOLF CLUB LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1996 AND FEBRUARY 12, 1997 IS UNAUDITED)
(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 in Suwanee, 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, 1995 and 1996 and February 12, 1997, was $195, $293
and $304, respectively.
REVENUE RECOGNITION
Green fees, cart fees, and driving range fees are recognized as revenue when
the rounds are played. Membership dues are recognized in the period in which
they relate, Deferred revenue consists of nonrefundable initiation fees which
are amortized over the estimated term of membership.
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 STATEMENTS
The interim financial statements for the periods ended June 30, 1996 and
February 12, 1997 (through the period prior to transfer) are unaudited; however,
in the opinion of management, the interim financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the
F-110
<PAGE>
OLDE ATLANTA GOLF CLUB LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND FEBRUARY 12, 1997 IS UNAUDITED)
(IN THOUSANDS)
1. NATURE OF BUSINESS AND OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
results of 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.
2. BANK LINE-OF-CREDIT
Bank line-of-credit represents the amount outstanding on a $100
line-of-credit with Peoples Bank of Forsyth County. The line bears interest at
9.25%, is secured by equipment and is due September 30, 1997.
3. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995 and 1996 and
February 12, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- FEBRUARY 12,
1995 1996 1997
--------- --------- -------------
<S> <C> <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...... $ 1,767 $ 1,724 $ 1,722
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...... 889 870 867
--------- --------- ------
2,656 2,594 2,589
Current maturities of long-term debt......................... 65 67 67
--------- --------- ------
Long-term debt............................................... $ 2,591 $ 2,527 $ 2,522
--------- --------- ------
--------- --------- ------
Maturities of long-term debt are due as follows:
1997................................................................ $ 67
1998................................................................ $ 75
1999................................................................ $ 2,447
</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.
4. COMMITMENTS
The Partnership leases golf carts under an operating lease which expires in
November 1997. Minimum future rentals under this lease as of February 12, 1997,
are $38.
Total rent expense for the years ended December 31, 1994, 1995, and 1996 and
the period ended February 12, 1997, was $51, $55, $63, and $9, respectively.
F-111
<PAGE>
OLDE ATLANTA GOLF CLUB LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND FEBRUARY 12, 1997 IS UNAUDITED)
(IN THOUSANDS)
4. COMMITMENTS (CONTINUED)
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 $54, $78, $122, and $22 for the years ended December
31, 1994, 1995, and 1996 and the period ended February 12, 1997, respectively.
5. SUBSEQUENT EVENT
On February 12, 1997, the Partnership sold the golf course and related
improvements and equipment, with a book value of $4,285, to Golf Trust of
America, Inc. for approximately $7,550. All bank debt was repaid in conjunction
with the sale.
F-112
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners
Eagle Watch Golf Club Limited Partnership
Woodstock, Georgia
We have audited the accompanying balance sheets of Eagle Watch Golf Club
Limited Partnership as of December 31, 1996 and 1995, and the related statements
of income, changes in partners' capital and cash flows for each of the three
years in the period ended December 31, 1996. 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 Eagle Watch Golf Club
Limited Partnership as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
CROWE, CHIZEK AND COMPANY LLP
Oak Brook, Illinois
September 4, 1997
F-113
<PAGE>
EAGLE WATCH GOLF CLUB LIMITED PARTNERSHIP
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash........................................................................... $ 16 $ 91 $ 104
Accounts receivable............................................................ 29 49 126
Inventories.................................................................... 90 69 95
Other current assets........................................................... 1 6 10
--------- --------- -----------
Total current assets......................................................... 136 215 335
--------- --------- -----------
PROPERTY AND EQUIPMENT:
Land........................................................................... 2,681 2,681 2,681
Land improvements.............................................................. 1,152 1,152 1,165
Buildings and equipment........................................................ 2,303 2,270 2,292
--------- --------- -----------
6,136 6,103 6,138
Accumulated depreciation......................................................... 830 1,103 1,227
--------- --------- -----------
Total property and equipment................................................. 5,306 5,000 4,911
--------- --------- -----------
OTHER ASSETS:
Intangible assets.............................................................. 50 32 24
Restricted cash (Note 2)....................................................... 119 63 22
--------- --------- -----------
Total other assets........................................................... 169 95 46
--------- --------- -----------
$ 5,611 $ 5,310 $ 5,292
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND CAPITAL
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 2).................................. $ 1,024 $ 137 $ 265
Notes payable--related party (Note 3).......................................... -- 75 --
Accounts payable............................................................... 106 76 125
Deferred revenue............................................................... 225 288 300
Other current liabilities...................................................... 85 115 72
--------- --------- -----------
Total current liabilities.................................................... 1,440 691 762
Long-term debt (Note 2).......................................................... 1,951 1,824 1,757
CAPITAL:
General partners............................................................... 15 19 19
Limited partners............................................................... 2,205 2,776 2,754
--------- --------- -----------
Total capital................................................................ 2,220 2,795 2,773
--------- --------- -----------
$ 5,611 $ 5,310 $ 5,292
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes to financial statements.
F-114
<PAGE>
EAGLE WATCH GOLF CLUB LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SALES:
Golf revenue.................................................. $ 1,520 $ 1,411 $ 1,425 $ 697 $ 798
Food and beverage............................................. 412 400 361 171 225
Pro shop...................................................... 234 219 191 85 117
Other income.................................................. 67 51 51 29 29
--------- --------- --------- --------- ---------
Total revenues.............................................. 2,233 2,081 2,028 982 1,169
--------- --------- --------- --------- ---------
OPERATING COSTS AND EXPENSES:
Cost of sales -- food and beverage............................ 140 134 141 65 94
Cost of sales -- pro shop..................................... 177 195 158 78 92
General and administrative expenses........................... 1,947 2,004 1,850 937 919
Privatization expenses........................................ 273 30 -- -- --
--------- --------- --------- --------- ---------
Total operating costs and expenses.......................... 2,537 2,363 2,149 1,080 1,105
--------- --------- --------- --------- ---------
Operating income (loss)....................................... (304) (282) (121) (98) 64
Interest expense.............................................. 278 268 207 129 86
--------- --------- --------- --------- ---------
Net loss...................................................... $ (582) $ (550) $ (328) $ (227) $ (22)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-115
<PAGE>
EAGLE WATCH 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................................................ $ (5) $ 2,229 $ 2,224
Distributions....................................................................... (1) (90) (91)
Contributions....................................................................... 33 1,211 1,244
Net loss............................................................................ (6) (576) (582)
--
----------- ---------
Partners' capital at December 31, 1994.............................................. 21 2,774 2,795
Distributions....................................................................... -- (25) (25)
Net loss............................................................................ (6) (544) (550)
--
----------- ---------
Partners' capital at December 31, 1995.............................................. 15 2,205 2,220
Distributions....................................................................... -- (8) (8)
Contributions....................................................................... 7 904 911
Net loss............................................................................ (3) (325) (328)
--
----------- ---------
Partners' capital at December 31, 1996.............................................. 19 2,776 2,795
Net loss (unaudited)................................................................ -- (22) (22)
--
----------- ---------
Partners' capital at June 30, 1997 (unaudited)...................................... $ 19 $ 2,754 $ 2,773
--
--
----------- ---------
----------- ---------
</TABLE>
See accompanying notes to financial statements.
F-116
<PAGE>
EAGLE WATCH GOLF CLUB LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................... $ (582) $ (550) $ (328) $ (227) $ (22)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation..................................................... 444 367 310 156 125
Amortization..................................................... 16 19 18 9 8
Initiation fees amortization..................................... -- (27) (38) (18) (21)
Gain on sale of equipment........................................ -- -- (2) -- --
(Increase) decrease in:
Accounts receivable............................................ (42) 29 (20) (70) (77)
Inventory...................................................... (10) 37 21 24 (26)
Other assets................................................... (10) 12 (5) (17) (5)
Increase (decrease) in:
Accounts payable............................................... 27 53 (30) (4) 49
Other current liabilities...................................... 6 194 129 92 (9)
--------- --------- --------- --------- ---
Net cash provided by (used in) operating activities.................. (151) 134 55 (55) 22
--------- --------- --------- --------- ---
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................................. (63) (330) (16) (4) (35)
Proceeds from sale of equipment.................................... -- -- 14 10 --
(Increase) decrease in restricted cash............................. -- (5) 56 41 40
--------- --------- --------- --------- ---
Net cash provided by (used in) investing activities.................. (63) (335) 54 47 5
--------- --------- --------- --------- ---
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable -- related party....................... -- -- 75 50 --
Payments on related party loans.................................... (367) -- -- -- (75)
Payment for financing fees......................................... (4) (3) -- -- --
Proceeds from long-term debt....................................... -- 245 -- -- 123
Payments on long-term debt......................................... (807) (92) (1,012) (515) (62)
Partner contributions.............................................. 1,244 -- 911 643 --
Partner distributions.............................................. (91) (25) (8) (8) --
--------- --------- --------- --------- ---
Net cash provided by (used in) financing activities.................. (25) 125 (34) 170 (14)
--------- --------- --------- --------- ---
Net increase (decrease) in cash...................................... (239) (76) 75 162 13
Cash, beginning of period............................................ 331 92 16 16 91
--------- --------- --------- --------- ---
Cash, end of period.................................................. $ 92 $ 16 $ 91 $ 178 $ 104
--------- --------- --------- --------- ---
--------- --------- --------- --------- ---
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --
Cash paid during the period for interest............................. $ 278 $ 268 $ 207 $ 129 $ 86
--------- --------- --------- --------- ---
--------- --------- --------- --------- ---
</TABLE>
See accompanying notes to financial statements.
F-117
<PAGE>
EAGLE WATCH GOLF CLUB LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
1. NATURE OF BUSINESS AND OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS
Eagle Watch Golf Club Limited Partnership (the Partnership) owns and
operates a golf course, Eagle Watch Golf Club, in Woodstock, Georgia. The
Partnership was organized as a limited partnership 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 and organization costs.
Financing fees are being amortized on the straight-line method over the period
of the underlying loan. Organization costs are being amortized on the
straight-line method over 60 months. Accumulated amortization at December 31,
1995 and 1996 and June 30, 1997, was $36, $54 and $62, respectively.
REVENUE RECOGNITION
Green fees, cart fees, and driving range fees are recognized as revenue when
the rounds are played. Membership dues are recognized in the period in which
they relate, Deferred revenue consists of nonrefundable initiation fees which
are amortized over the estimated term of membership.
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.
PRIVATIZATION EXPENSES
Included in the Statements of Income for the years ended December 31, 1994
and 1995, are expenses related to an unsuccessful attempt to privatize the Golf
Club.
F-118
<PAGE>
EAGLE WATCH GOLF CLUB LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
1. NATURE OF BUSINESS AND OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1996 and
1997, are unaudited; however, in the opinion of management, the interim
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of 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.
2. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995 and 1996 and
June 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
Loan with NationsBank, dated December 8, 1993, due in monthly payments of
$19 including interest, with a balloon payment due December 1, 1998;
interest at 8.25%, secured by the golf course including all
improvements.In addition, the Partnership is required to maintain a debt
reserve account balance which is classified as restricted cash in the
accompanying balance sheet................................................ $ 1,850 $ 1,767 $ 1,722
Loan with Bank One, dated November 30, 1993, paid at maturity, July 1,
1996; interest payable quarterly at 1% above prime, secured by the limited
partnership subscriptions receivable...................................... 897 -- --
Loan with Regions Bank, dated July 12, 1995, due in monthly payments of $3
including interest using amortization period of 5 years, interest at
9.25%, secured by maintenance equipment................................... 153 125 110
Loan with NationsBank, dated February 21, 1995, due in monthly principal
installments of $1 plus interest through December 1, 1998; interest at
9.12%, secured by the golf course including all improvements.............. 75 69 67
Line of credit with Regions Bank dated January 14, 1997, due September 30,
1997, interest at 75% over commercial base rate, secured by maintenance
equipment................................................................. -- -- 123
--------- --------- -----------
2,975 1,961 2,022
Current maturities of long-term debt....................................... 1,024 137 265
--------- --------- -----------
Long-term debt............................................................. $ 1,951 $ 1,824 $ 1,757
--------- --------- -----------
--------- --------- -----------
</TABLE>
Maturities of long-term debt as of June 30, 1997, are as follows:
<TABLE>
<CAPTION>
AMOUNT
---------
<S> <C>
1998................................................................................. $ 265
1999................................................................................. $ 1,727
2000................................................................................. $ 30
</TABLE>
F-119
<PAGE>
EAGLE WATCH GOLF CLUB LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
2. LONG-TERM DEBT (CONTINUED)
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. NOTES PAYABLE -- RELATED PARTY
Notes payable -- related party represents unsecured notes payable due March
5, 1997, and bear interest at 8.25%.
4. COMMITMENTS
The Partnership leases golf carts under an operating lease which expires in
February 1999. Minimum future rentals under this lease as of June 30, 1997, are
as follows:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
1998................................................................................. $ 53
1999................................................................................. $ 35
</TABLE>
Rent expense for the years ended December 31, 1994, 1995, and 1996 and the
six months ended June 30, 1997, was $56, $68, $56, and $34, 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 $54 to be paid by the Partnership. Total expense
plus the termination fee incurred in 1994 amounted to $113.
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 $51, $122, $111, and $63 for the years ended December
31, 1994, 1995, and 1996 and the six months ended June 30, 1997, respectively.
5. SUBSEQUENT EVENT
Subsequent to June 30, 1997, the Partnership signed a commitment letter to
transfer the golf course and related improvements and equipment to Golf Trust of
America.
F-120
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Golf Hosts Resorts, Inc.
We have audited the accompanying balance sheets of Golf Hosts Resorts, Inc.
(a Colorado corporation and an 80%-owned subsidiary of Golf Hosts, Inc.) as of
December 31, 1996 and 1995, and the related statements of operations,
shareholders' investment and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Golf Hosts Resorts, Inc. as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Tampa, Florida
March 21, 1997
F-121
<PAGE>
GOLF HOST RESORTS, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
-------- -------- JUNE 30,
1997
--------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (SUBSTANTIALLY ALL PLEDGED, NOTE 3)
CURRENT ASSETS:
Cash............................................ $ 313 $ 489 $ 6,957
Accounts receivable............................. 4,472 4,380 4,384
Notes receivable................................ 628 164 --
Inventories and supplies........................ 4,392 5,124 4,948
Prepaid expenses and other...................... 1,207 956 706
Intercompany receivables........................ 567 724 740
-------- -------- --------
Total current assets........................ 11,579 11,837 17,735
LONG-TERM RECEIVABLES, less amount currently
due.............................................. 1,012 1,021 --
OTHER DEFERRED CHARGES............................ -- 239 715
INTANGIBLES....................................... -- -- 17,425
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation and amortization.................... 40,231 40,038 44,020
-------- -------- --------
$ 52,822 $ 53,135 $79,895
-------- -------- --------
-------- -------- --------
LIABILITIES AND SHAREHOLDER'S INVESTMENT
CURRENT LIABILITIES:
Notes payable................................... $ 1,286 $ 734 $ --
Maturing long-term obligations.................. 1,854 2,789 --
Accounts payable................................ 1,911 2,259 2,091
Accrued expenses................................ 4,274 4,578 5,781
Deposits and prepaid fees....................... 2,681 2,755 2,212
-------- -------- --------
Total current liabilities................... 12,006 13,115 10,084
-------- -------- --------
LONG-TERM OBLIGATIONS, less current maturities.... 20,660 17,777 75,775
-------- -------- --------
LONG-TERM CONTINGENCY (Note 8).................... 2,078 2,222 --
-------- -------- --------
LONG-TERM INTERCOMPANY............................ 4,124 4,952 3,303
-------- -------- --------
SHAREHOLDERS' INVESTMENT:
Common stock, $1 par, 5,000 shares authorized
and outstanding............................... 5 5 5
Cumulative preferred, 5.6% cumulative preferred
stock, $1 par, 4,577,000 shares authorized and
outstanding................................... 4,577 4,577 4,577
Paid-in capital................................. 2,329 2,329 (13,557 )
Retained earnings............................... 7,043 8,158 (292 )
-------- -------- --------
Total shareholders' investment.............. 13,954 15,069 (9,267 )
-------- -------- --------
$ 52,822 $ 53,135 $79,895
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to financial statements.
F-122
<PAGE>
GOLF HOST RESORTS, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Resort operations............................... $ 51,793 $ 55,365 $ 56,936
Real estate activities.......................... 781 1,171 775
-------- -------- --------
52,574 56,536 57,711
-------- -------- --------
COSTS AND OPERATING EXPENSES:
Resort operations............................... 45,844 47,415 49,444
Real estate activities.......................... 408 617 275
General and administrative...................... 3,633 4,251 3,951
-------- -------- --------
49,885 52,283 53,670
-------- -------- --------
Operating income.................................. 2,689 4,253 4,041
Interest, net..................................... 2,084 2,125 1,880
-------- -------- --------
605 2,128 2,161
Parent income tax charge.......................... 211 752 790
-------- -------- --------
Net income before dividend requirements on
preferred stock.................................. 394 1,376 1,371
Dividend requirements on preferred stock.......... 256 256 256
-------- -------- --------
Net income available to common shareholders....... $ 138 $ 1,120 $ 1,115
-------- -------- --------
-------- -------- --------
Earnings per common share:
Net income before dividend requirements on
preferred stock............................... 78.78 275.18 274.10
Dividend requirements on preferred stock........ (51.26) (51.26) (51.26)
-------- -------- --------
Net income available to common shareholders..... 27.52 223.92 222.84
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to financial statements.
F-123
<PAGE>
GOLF HOST RESORTS, INC.
STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS 174-DAY 7-DAY
ENDED PERIOD ENDED PERIOD ENDED
JUNE 30, JUNE 23, JUNE 30,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Resort operations....................................... $ 32,605 $ 31,570 $ 981
Real estate activities.................................. (14 ) 180 --
------------ ------------ ------
32,591 31,750 981
------------ ------------ ------
COSTS AND OPERATING EXPENSES:
Resort operations....................................... 25,655 25,595 972
Real estate activities.................................. 2,092 2,374 136
General and administrative.............................. -- 91 --
------------ ------------ ------
27,747 28,060 1,108
------------ ------------ ------
Operating income.......................................... 4,844 3,690 (127 )
Interest, net............................................. 996 945 160
------------ ------------ ------
3,848 2,745 (287 )
Parent income tax charge.................................. 1,425 968 --
------------ ------------ ------
Net income before extraordinary items..................... 2,423 1,777 (287 )
Loss on early extinguishment of long-term debt
(net of taxes of $155)................................... -- (289 ) --
------------ ------------ ------
Net income before dividend requirements on preferred
stock.................................................... 2,423 1,488 (287 )
Dividend requirements on preferred stock.................. 128 123 5
------------ ------------ ------
Net income available to common shareholders............... $ 2,295 $ 1,365 $ (292 )
------------ ------------ ------
------------ ------------ ------
Earnings (loss) per common share.......................... 459.07 272.98 (58.35 )
------------ ------------ ------
------------ ------------ ------
</TABLE>
See accompanying notes to financial statements.
F-124
<PAGE>
GOLF HOST RESORTS, INC.
STATEMENTS OF STOCKHOLDERS' INVESTMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
5.6% CUMULATIVE
$1 PAR VALUE
COMMON STOCK PREFERRED STOCK
-------------------------- -------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------------ ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994.................................. 5 $5 4,577 $ 4,577 $ 2,329
Net income available to common shareholder.............. -- -- -- -- --
--- --- ----- ------ ------------
Balance, December 31, 1994................................ 5 5 4,577 4,577 2,329
Net income available to common shareholder.............. -- -- -- -- --
--- --- ----- ------ ------------
Balance, December 31, 1995................................ 5 5 4,577 4,577 2,329
Net income available to common shareholder.............. -- -- -- -- --
--- --- ----- ------ ------------
Balance, December 31, 1996................................ 5 5 4,577 4,577 2,329
Notes receivable distribution (Note 1) (unaudited)...... -- -- -- -- --
Net income available to common shareholder
(unaudited)........................................... -- -- -- -- --
--- --- ----- ------ ------------
Balance, June 23, 1997 (unaudited)........................ 5 $ 5 4,577 $ 4,577 $ 2,329
--- --- ----- ------ ------------
--- --- ----- ------ ------------
Balance, June 24, 1997 (unaudited)........................ 5 5 4,577 4,577 (4,582)
Distribution to shareholder (unaudited)................. -- -- -- -- (8,975)
Net income (loss) available to common shareholder
(unaudited)........................................... -- -- -- -- --
--- --- ----- ------ ------------
Balance, June 30, 1997 (unaudited)........................ 5 $5 4,577 $ 4,577 $ (13,557)
--- --- ----- ------ ------------
--- --- ----- ------ ------------
<CAPTION>
TOTAL
RETAINED STOCKHOLDERS'
(DEFICIT) (DEFICIT)
EARNINGS EQUITY
------------ ------------
<S> <C> <C>
Balance, January 1, 1994.................................. $ 5,785 $ 12,696
Net income available to common shareholder.............. 138 138
------ ------------
Balance, December 31, 1994................................ 5,923 12,834
Net income available to common shareholder.............. 1,120 1,120
------ ------------
Balance, December 31, 1995................................ 7,043 13,954
Net income available to common shareholder.............. 1,115 1,115
------ ------------
Balance, December 31, 1996................................ 8,158 15,069
Notes receivable distribution (Note 1) (unaudited)...... (3,942 ) (3,942 )
Net income available to common shareholder
(unaudited)........................................... 1,365 1,365
------ ------------
Balance, June 23, 1997 (unaudited)........................ $ 5,581 $ 12,492
------ ------------
------ ------------
Balance, June 24, 1997 (unaudited)........................ -- --
Distribution to shareholder (unaudited)................. -- (8,975 )
Net income (loss) available to common shareholder
(unaudited)........................................... (292 ) (292 )
------ ------------
Balance, June 30, 1997 (unaudited)........................ $ (292 ) $ (9,267 )
------ ------------
------ ------------
</TABLE>
See accompanying notes to financial statements.
F-125
<PAGE>
GOLF HOST RESORTS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income before dividend requirements on preferred
stock................................................. $ 394 $ 1,376 $ 1,371
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 2,268 2,402 2,570
Deferred profit....................................... 124 (5) (119)
Changes in operating working capital other than cash
(Note 6)............................................ 689 (936) 180
------ ------ ------
Net cash provided by operating activities................. 3,475 2,837 4,002
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increases in other deferred charges..................... -- -- (239)
Purchases of property and equipment..................... (2,681) (3,778) (2,448)
Recovery of cost of property and equipment sold......... 122 4 71
Reductions in notes receivable.......................... 94 165 739
Additions to notes receivable........................... (514) (624) (165)
------ ------ ------
Net cash used in investing activities..................... (2,979) (4,233) (2,042)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in notes payable............................ (762) 1,286 (551)
Increases in long-term obligations...................... 1,323 1,699 861
Decreases in long-term obligations...................... (2,075) (2,670) (2,809)
Increase in long-term contingency....................... 823 265 144
Increase in long-term intercompany...................... 471 304 571
------ ------ ------
Net cash provided by (used in) financing activities....... (220) 884 (1,784)
------ ------ ------
Net increase (decrease) in cash........................... 276 (512) 176
Cash, beginning of year................................... 549 825 313
------ ------ ------
Cash, end of year......................................... $ 825 $ 313 $ 489
------ ------ ------
------ ------ ------
</TABLE>
See accompanying notes to financial statements.
F-126
<PAGE>
GOLF HOST RESORTS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS 174-DAY 7-DAY
ENDED PERIOD ENDED PERIOD ENDED
JUNE 30, JUNE 30, JUNE 30,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income before dividend requirements on preferred
stock................................................. $ 2,423 $ 1,488 $ (287 )
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 1,240 1,240 50
Changes in operating working capital other than cash
(Note 6)............................................ 16 417 242
------ ------ ------
Net cash provided by operating activities................. 3,679 3,145 5
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increases in other deferred charges..................... (249 ) 62 --
Purchases of property and equipment..................... (1,143 ) (1,517 ) --
Recovery of cost of property and equipment sold......... 12 (56 ) --
Reductions in notes receivable.......................... 556 413 --
Additions to notes receivable........................... (17 ) (379 ) --
------ ------ ------
Net cash used in investing activities..................... (841 ) (1,477 ) --
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in notes payable............................ (1,285 ) (734 ) --
Increases in long-term obligations...................... 467 -- --
Decreases in long-term obligations...................... (1,023 ) (436 ) --
Net proceeds from merger transactions................... -- 5,966 --
Increase in long-term contingency....................... 70 127 --
Increase in long-term intercompany...................... 1,084 (123 ) (5 )
------ ------ ------
Net cash used in financing activities..................... (687 ) 4,800 (5 )
------ ------ ------
Net increase in cash...................................... 2,151 6,468 --
Cash, beginning of year................................... 313 489 6,957
------ ------ ------
Cash, end of year......................................... $ 2,464 $ 6,957 $ 6,957
------ ------ ------
------ ------ ------
</TABLE>
See accompanying notes to financial statements.
F-127
<PAGE>
GOLF HOST RESORTS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
Golf Host Resorts, Inc. (the Company or GHR) is an 80%-owned subsidiary of
Golf Hosts, Inc. (GHI). The minority shareholders of the Company are also the
major shareholders of GHI. The Company is engaged in the operation of Innisbrook
Hilton Resort (Innisbrook) in Tarpon Springs, Florida and Tamarron Hilton Resort
(Tamarron) in Durango, Colorado (the Resorts). The Resorts offer hotel
accommodations, restaurant and conference facilities, and recreational
activities including golf, swimming and tennis. The majority of the condominium
apartment owners at the Resorts provide such apartments as hotel accommodations
under rental pool lease operations. The Resorts are the lessees under the lease
operation agreements, which provide for the distribution of a percentage of room
revenues, as defined, to participating condominium apartment owners.
FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management's estimates.
Amounts included in these Notes to Consolidated Financial Statements, unless
otherwise indicated, are as of December 31, 1996 and 1995, or for the years
ended December 31, 1996, 1995 and 1994, respectively, as applicable. Certain
reclassifications have been made to the 1995 and 1994 financial statements to
conform to the 1996 presentation.
PARTICIPATING RENTAL UNITS
GHR operates Innisbrook Hilton and Tamarron Hilton, Both recreation-oriented
resorts. Condominium apartments at these resorts are provided as hotel
accommodations under rental pool lease operations in which GHR is the lessee.
Revenue from resort operations includes rental revenues from condominium
apartments partipating in these rental pool lease operations. If these rental
units were owned by GHR normal costs associated with ownership such as
depreciation, interest real estate taxes, maintenance, etc. would have been
incurred. Instead, resort operating expenses include rental pool distributions
approximating $9,783, $9,358, and $8,692.
MANAGEMENT AGREEMENTS
Hilton Hotels Corporation (HHC) has managed Innisbrook and Tamarron since
April 1993 and December 1995, respectively. The related agreements have 20-year
terms with provisions for earlier termination by either party. In addition to
annual management fees and certain cost reimbursements, HHC will receive a
portion of earnings, as defined, above certain specified levels which have not
yet been attained. HHC has advanced GHR $3.5 million relative to the Innisbrook
agreement and $784 of a maximum $1.5 million under the Tamarron agreement (see
Note 7).
INTERCOMPANY ALLOCATIONS AND ADVANCES
GHI charges administrative and other expenses to the Company on the basis of
estimated time and expenses incurred as determined by GHI. The amounts charged
to the Company were approximately $656, $970, and $770.
F-128
<PAGE>
GOLF HOST RESORTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company has three affiliates, Golf Host Securities, Inc. (Securities),
Golf Host Realty, Inc. (Realty) and Golf Host Development, Inc. (Development),
all of which are wholly owned subsidiaries of GHI. Securities and Realty are
engaged in brokerage activity with respect to the resale of condominiums of
Innisbrook and Tamarron, respectively. Realty also serves as agent for the sale
of Estates of Tamarron residential homesites. Development is currently inactive.
REAL ESTATE DEVELOPMENT COSTS
Capitalized real estate costs related to the development of residential
homesites at Tamarron-High Point and Pine Ridge include the original cost of
land, engineering, surveying, road construction, utilities, interest and other
costs. Costs are allocated to individual properties using the relative sales
value method.
Approximately $81 and $96 of such costs are included in inventory related to
the Estates at Tamarron-High Point. Estates at Tamarron-High Point is comprised
of nine homesites of which all have been sold, with the last closing in January
1997. Approximately $898 and $116 of such costs are included in inventory
related to the Estates at Tamarron-Pine Ridge. Estates at Tamarron-Pine Ridge
consists of nine homesites, two of which were sold and closed during 1996.
REVENUE RECOGNITION
Revenue from resort operations as recognized in the related service is
performed. Profit is recognized on real estate sales either when the closing
occurs, or under the installment sales or cost recovery methods, as appropriate.
The approximately $120 of deferred profit reflected in the 1995 financial
statements was recognized during 1996.
EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution Employee Thrift and Investment
Plan (the Plan) which provides retirement benefits for all eligible employees
electing participation. Employees may contribute a percentage of their
compensation, as defined, to the Plan with the Company matching the lesser of
one-half of the first 4% or four hundred dollars per employee annually. Company
contributions required under the Plan approximated $120, $130, and $118, and are
fully funded.
The Company's parent also provides a supplemental retirement income plan for
officers who meet certain eligibility requirements upon retirement. The Company
has included its portion of the related liability in long-term obligaitons.
During 1995, the Company replaced its self-funded employee health insurance
plan with fully insured plans. The financial statements include $15 and $277 of
related termination costs in costs and operating expenses.
INTEREST, NET
The Company's cash management policy requires the utilization of cash
resources to minimize net interest expense, through either temporary cash
investments or reductions in existing interest-bearing obligations, as is most
appropriate in the circumstances. Accordingly, temporary cash investments and
interest income may vary
F-129
<PAGE>
GOLF HOST RESORTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
significantly from period to period. Interest expense is net of interest income
of approximately $154, $257, and $153. Temporary cash investments were not
significant.
ACCOUNTS RECEIVABLE
Accounts receivable is net of allowances of approximately $43 and $60 for
doubtful accounts.
NOTES RECEIVABLE
Notes receivable bear interest at rates ranging from 5.75% to 10.25%.
INVENTORIES AND SUPPLIES
The Company records its materials and supplies inventory primarily at the
lower of first-in, first-out cost or market.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book value of all financial instruments other than the long-term
contingency approximates the fair value. It is not practicable to determine the
fair value of the long-term contingency. The fair value of the Company based on
the foregoing is not a market valuation of the Company as a whole.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVE ASSETS
In March 1995, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF (SFAS 121) which
addresses when and how impairments to the value of long-lived assets should be
recognized. SFAS 121 is effective for fiscal years beginning after December 15,
1995, and therefore, was implemented by the Company in 1996 and did not have a
material effect on the Company's financial statements.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements are unaudited and were prepared from the
books and records of the Company. In the opinion of management, they include all
adjustments necessary for a fair presentation of the
F-130
<PAGE>
GOLF HOST RESORTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company's operations and financial position. Certain of the Company's operations
are seasonal in nature and, therefore, interim results from operations are not
necessarily indicative of a full year.
2. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
Undeveloped land.................................. $ 1,327 $ 1,327
Land and land improvements........................ 6,103 6,363
Building.......................................... 23,255 22,598
Golf courses and recreational facilities.......... 10,051 10,185
Machinery and equipment........................... 23,958 25,781
Construction-in-progress.......................... 153 111
------- -------
64,847 66,365
Less accumulated depreciation..................... (24,616) (26,327)
------- -------
$ 40,231 $ 40,038
------- -------
------- -------
</TABLE>
The Company provides depreciation for financial statement purposes using the
straight-line unit method for buildings, vehicles and certain golf course and
recreational facilities and the straight-line composite method for other
components. The estimated useful lives used in computing annual depreciation are
as follows:
<TABLE>
<CAPTION>
DESCRIPTION YEARS
- -------------------------------------------------- ------
<S> <C>
Land improvements................................. 28-30
Buildings......................................... 50
Golf courses and recreational facilities.......... 30-75
Machinery and equipment........................... 10-15
</TABLE>
The costs of maintenance and repairs of property and equipment used in
operations are charge to expense incurred. Costs of renewals and betterments are
capitalized. When properties are replaced, retired or otherwise disposed of, the
costs of such properties are deducted from the asset and accumulated
depreciation accounts. Gains or losses on sales or retirements of buildings,
vehicles and certain golf course and recreational facilities are recorded in
income. Gains or losses on sales or retirements of all other property and
equipment are recorded in the applicable accumulated depreciation accounts in
accordance with the composite method.
3. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
The note payable is outstanding under a $6,000 line of credit, primarily for
accounts receivable financing with interest payable at the prime rate (8.25% at
December 31, 1996). Approximately $3,786 was available for immediate use at
December 31, 1996. Letters of credit of $509 were also outstanding.
F-131
<PAGE>
GOLF HOST RESORTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
3. NOTES PAYABLE AND LONG-TERM OBLIGATIONS (CONTINUED)
The components of long-term obligations are:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1996
-------------- -------------- JUNE 30,
1997
--------------
(UNAUDITED)
<S> <C> <C> <C>
Participating mortgage note at varying increasing
pay rates maturing in 2027 (Note 8).............. $ -- $ -- $ 70,775
Mortgage note at 6.34% maturing in 2002........... -- -- 5,000
Mortgage notes at rates ranging from 8.05% to 9%,
maturing primarily from 1998 to 2007............. 16,810 15,487 --
$5,000 equipment revolving credit line at prime
maturing serially from 1997 to 2001, $1,108 was
available for use at December 31, 1996........... 3,863 3,892 --
$2,000 revolving credit line at 9% maturing in
2007. A letter of credit of $632, issued during
1996 and reducing the amount available, was
decreased by $586 in 1997........................ 2,000 1,368 --
Other............................................. 347 286 --
Unamortized debt discount and expense............. (506) (467) --
------- ------- -------
22,514 20,566 --
Less current maturities........................... (1,854) (2,789) --
------- ------- -------
$ 20,660 $ 17,777 $ 75,775
------- ------- -------
------- ------- -------
</TABLE>
The maturities of long-term obligations are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- -------------------------------------------------- --------------
<S> <C>
1998.............................................. $ 2,760
1999.............................................. 2,126
2000.............................................. 1,729
2001.............................................. 1,561
2002.............................................. 1,594
Thereafter........................................ 8,007
-------
$ 17,777
-------
-------
</TABLE>
Substantially all property and equipment is pledged as collateral for
long-term obligations. Generally, covenants of existing loan agreements prohibit
the disposition of assets other than in the ordinary course of business, limit
the amount of additional debt, limit the payment of dividends, and require the
maintenance of certain minimum financial ratios.
The Company obtained waivers for or was in compliance with all debt
covenants at December 31, 1996.
F-132
<PAGE>
GOLF HOST RESORTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
4. LEASES
Total rent expense on all operating leases approximated $156, $160, and $232
and there were no contingent rentals or operating subleases.
Future minimum rental payments on the Company's operating leases are not
significant.
5. ACCRUED EXPENSES
The components of accrued expenses are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1996
------- ------- SIX MONTHS
ENDED
JUNE 30,
1997
--------------
(UNAUDITED)
<S> <C> <C> <C>
Rental pool lease distribution.................... $ 1,760 $ 2,135 $ 2,239
Salaries.......................................... 1,400 1,456 2,043
Taxes, other than income taxes.................... 742 243 767
Other............................................. 372 744 732
------ ------ ------
$ 4,274 $ 4,578 $ 5,781
------ ------ ------
------ ------ ------
</TABLE>
6. INCOME TAX ALLOCATION AND SHARING POLICY
The Company joins with GHI in filing consolidated income tax returns. For
financial reporting purposes, GHI has an income tax allocation and sharing
policy which defines the manner in which income tax charges and benefits are
allocated among GHI and its affiliates. The policy provides that the Company's
charge (benefit) from GHI for income taxes be based on each affiliate's taxable
income before income tax times the statutory tax rate.
All income taxes are credited to the long-term intercompany liability to GHI
as incurred and GHI accepts the future liability for the payment of the
Company's deferred income taxes as they become due. The deferred taxes recorded
by GHI result primarily from differences in the accounting for financial
reporting and Federal income tax purposes of depreciation of property and
equipment and the recognition of accruals and prepayments.
7. LONG-TERM CONTINGENCY AND ADVANCE
The Company has drawn $1,721 under the Innisbrook HHC agreement primarily to
acquire GHR property and equipment. $403 of interest has been accrued at 8% per
annum on this amount. These amounts are included in long-term contingency.
Repayment is contingent upon Innisbrook exceeding certain not yet attained
earnings levels. HHC's opportunity to collect under the agreement expires during
2013, or in the event of early termination by Hilton.
The Company entered into an agreement with the Lessors' Advisory Committee
of the Innisbrook Rental Pool (the IRP) to fund certain improvements to the
condominiums and common areas. A total of $1,779 was advanced on similar terms
to the Company by HHC, with HHC's opportunity to collect these advances expiring
F-133
<PAGE>
GOLF HOST RESORTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
7. LONG-TERM CONTINGENCY AND ADVANCE (CONTINUED)
during 2003, or in the event of early termination by Hilton. The amount advanced
GHR, together with accrued interest thereon, exceeds the amount due from IRP by
$97. This excess is included in long-term contingency. Repayment of the advances
is contingent upon the IRP distribution exceeding a specified level. This has
resulted in repayment requirements of $364 and $150 by the IRP to the Company,
with equal and offsetting amounts due HHC from the Company.
The amounts contingently due HHC under the Inisbrook management agreement
and the amount contingently due the Company from IRP are, under certain
circumstances, subject to acceleration and nonpayment, respectively.
The Company also entered into a loan agreement with the Tamarron Association
of Condominium Owners (TACO) to fund certain improvements to the condominiums
and common areas up to a maximum of $1,500 of which $784 has been advanced.
Also, HHC has advanced amounts to the Company on similar terms which exceed the
TACO amount by $30. Repayments of the advances were due in seven equal
installments commencing November 15, 1998. Under certain circumstances, the
advances due HHC under the Tamarron management agreement are subject to
acceleration, and varying portions of the amount due the Company from TACO may
not require payment.
F-134
<PAGE>
GOLF HOST RESORTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
8. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in Operating Working Capital Other Than Cash -- The (increases)
decreases in operating working capital other than cash are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- ----------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Accounts receivable (Note 1)........................ $ (829) $ (708) $ 91 $ 261 $ (1)
Inventories and supplies............................ (759) 32 (731) (380) 50
Prepaid expenses and other (Note 5)................. 213 17 251 459 41
Intercompany........................................ 506 (260) (157) 23 (63)
Accounts payable.................................... 247 429 348 221 (27)
Accrued expenses.................................... 692 (42) 304 (88) 331
Deposits and prepaid fees........................... 619 (404) 74 (480) (89)
--------- --------- --------- --------- -----------
Changes in operating working capital other than
cash............................................... $ 689 $ (936) $ 180 $ 16 $ 242
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
NONCASH INVESTING ACTIVITIES:
Land and land development costs transferred to
inventory.......................................... $ 25 $ 64 $ -- $ -- $ 70
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Machinery and equipment obtained through a
trade-in........................................... $ -- $ 351 $ -- $ -- $ --
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Received land and related improvements from an
affiliate in exchange for a long-term intercompany
obligation......................................... $ 236 $ -- $ -- $ -- $ --
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Satisfied its preferred stock dividend liability to
GHI through the intercompany account............... $ 256 $ 256 $ 256 $ 128 $ 128
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
OTHER INFORMATION --
Interest paid, net of amounts capitalized........... $ 2,249 $ 2,100 $ 2,029 $ -- $ --
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
</TABLE>
9. EVENTS SUBSEQUENT TO AUDITORS' REPORT--UNAUDITED
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
On June 23, 1997 TM Golf Hosts, Inc. (TMGHI) acquired all of the outstanding
stock of GHI, previously an 80% owner of the Company, and the 20% of the
company's stock not held by GHI. Concurrently, TMGHI and GHI merged with the
legal survivor being GHI, which now owns 100% of the Company. Total
consideration for the acquisition of the outstanding stock of GHI and the
Company was approximately $63 million, including assumption of certain
liabilities. The transaction was financed with new borrowing and all previous
indebtedness of the Company was repaid, resulting in an extraordinary loss on
early retirement of debt primarily relating
F-135
<PAGE>
GOLF HOST RESORTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS)
9. EVENTS SUBSEQUENT TO AUDITORS' REPORT--UNAUDITED (CONTINUED)
to the write-off of unamortized debt discounts and related deferred expenses.
The acquisition was accounted for as a purchase and the associated debt was
recognized by the Company under push down accounting rules.
Under the terms of the agreement, certain long-term receivables were
transferred to the selling shareholders immediately prior to the transaction. In
addition, certain marketable securities and investments with ascribed value
aggregating $8,975 were distributed from the Company to its parent, GHI,
subsequent to the transaction.
INCOME TAXES
Effective concurrently with the merger, the Company and GHI elected to be
subsequently treated as S-Corporations for federal and state tax purposes. As a
result, the Company will generally no longer be subject to federal and state
income taxes and the tax effects of its activities will accrue to the
shareholders of GHI. The Company will be responsible for entity level corporate
taxes on certain built-in gains (where the fair market value of the related
assets at the effective date the election was made exceeds the carryover tax
basis) on property if sold within a ten year period. Estimated deferred tax
liabilities relating to these potential entity level taxes, based on
management's current plans, have been reflected in these financial statements as
of June 30, 1997.
NOTES PAYABLE AND LONG-TERM OBLIGATIONS
All previously existing long-term obligations were replaced by a mortgage
note with Golf Trust of America, L.P. The participating mortgage is for a term
of 30 years and is secured by certain real and personal property of the Company
and guaranteed by GHI. The loan allows for certain additional borrowings for
capital improvements. The loan has an initial base pay rate increasing annually.
The loan also includes participation in certain revenue of the Innisbrook
property securing the loan above certain predefined levels.
CHANGE IN INNISBROOK PROPERTY MANAGER
Effective July 15, 1997, the Company entered into an agreement to terminate
the existing Innisbrook hotel operation management agreement for a $600,000
termination fee. A new hotel property manager was engaged effective on that
date. Such termination fee was included in determining the cost of the
acquisition.
F-136
<PAGE>
SCHEDULE III
GOLF TRUST OF AMERICA, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
JUNE 30, 1997
<TABLE>
<CAPTION>
COST GROSS AMOUNTS OF WHICH
CAPITALIZED SUBSEQUENT
INITIAL COST CARRIED AT END OF PERIOD
-------------------------- TO ACQUISITION --------------------------
BUILDINGS & ------------------------------ BUILDING &
PROPERTY/LOCATION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS OTHER LAND IMPROVEMENTS
- ------------------------- --------------- --------- --------------- ----------------- ----------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Golf Legends -- Myrtle
Beach, SC.............. -- $ 3,207 $ 15,609 -- -- $ 3,207 $ 15,609
Heritage Golf Club --
Pawleys Island, SC..... $ 4,325 325 4,475 -- -- 325 4,475
Northgate -- Houston,
TX..................... -- 7,144 5,449 -- -- 7,144 5,449
Royal New Kent --
Providence Forge, VA... -- 500 10,445 -- -- 500 10,445
Olde Atlanta --
Atlanta, GA............ -- 3,242 4,327 -- -- 3,242 4,327
Oyster Bay -- Sunset
Beach, NC.............. -- -- 2,016 -- -- -- 2,016
Stonehouse --
Williamsburg, VA....... -- 500 10,071 -- -- 500 10,071
Woodlands -- Gulf Shores,
AL..................... -- 1,001 5,046 -- -- 1,001 5,046
------ --------- ------- --- --- --------- -------
$ 15,438 $ 57,782 $ 15,919 $ 57,438
------ --------- ------- --- --- --------- -------
------ --------- ------- --- --- --------- -------
<CAPTION>
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT OF
ACCUMULATED DATE OF DATE OPERATION IS
PROPERTY/LOCATION TOTAL DEPRECIATION CONSTRUCTION ACQUIRED COMPLETED
- ------------------------- --------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Golf Legends -- Myrtle
Beach, SC.............. $ 18,816 $ 6,456 1990-1992 2/12/97 3-30 years
Heritage Golf Club --
Pawleys Island, SC..... 4,800 2,741 1986 2/12/97 3-30 years
Northgate -- Houston,
TX..................... 12,593 162 1984 2/12/97 3-30 years
Royal New Kent --
Providence Forge, VA... 10,445 629 1996 2/12/97 3-30 years
Olde Atlanta --
Atlanta, GA............ 7,569 70 1993 2/12/97 3-30 years
Oyster Bay -- Sunset
Beach, NC.............. 2,016 1,277 1983 2/12/97 3-30 years
Stonehouse --
Williamsburg, VA....... 10,571 594 1996 2/12/97 3-30 years
Woodlands -- Gulf Shores,
AL..................... 6,047 46 1994 2/12/97 3-30 years
--------- -------------
$ 73,357 $ 11,977
--------- -------------
--------- -------------
</TABLE>
F-137
<PAGE>
SCHEDULE IV
GOLF TRUST OF AMERICA, INC.
MORTGAGE LOANS ON REAL ESTATE
JUNE 30, 1997
<TABLE>
<CAPTION>
FINAL
INTEREST MATURITY PRIOR FACE AMOUNT
DESCRIPTION RATE DATE PERIOD PAYMENT TERMS LIENS OF MORTGAGE
- -------------------- ----------- --------- ------------------------------------------------ ----- ------------
<S> <C> <C> <C> <C> <C>
Golf Host Resorts, 9.63%-9.75% 6/20/2027 Note payable interest of $561,589 monthly with $ -- $61,680
Inc. 5% increases beginning in year two and
continuing until year five. Amounts drawn on $9M
Tranche II, $625,000 at June 30, 1997, loan
bears interest at 9.75%.
<CAPTION>
PRINCIPAL AMOUNT OF
LOANS SUBJECT TO
CARRYING DELINQUENT
AMOUNTS OF PRINCIPAL OR
DESCRIPTION MORTGAGE INTEREST
- -------------------- ------------- -------------------
<S> <C> <C>
Golf Host Resorts, $1,057 $--
Inc.
</TABLE>
F-138
<PAGE>
(On the back inside cover, there are pictures of the following golf courses:
Copperhead, Eagle Watch, Lost Oaks, Legends Resort, Olde Atlanta, Innsbrook
Resort, Club of the Country, Tiburon, Heritage Club, Stonehouse Golf Club,
Woodlands, Oyster Bay, Raintree and Northgate Country Club.)
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 31. 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 American Stock Exchange listing fees.
<TABLE>
<CAPTION>
AMOUNT TO BE PAID
-----------------
<S> <C>
SEC Registration fee....................................................... $ 28,227
NASD filing fee............................................................ 9,815
American Stock Exchange listing fees....................................... 17,500
Printing and engraving..................................................... 350,000
Legal fees and expenses of the Company..................................... 300,000
Accounting fees and expenses............................................... 227,500
Transfer Agent and Registrar fees.......................................... 2,500
Miscellaneous.............................................................. 24,458
-----------------
Total.................................................................... $ 960,000
-----------------
-----------------
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES.
See Item 33 below.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
On November 11, 1996, one 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. On February 12, 1997 the Operating Partnership
issued 4,135,356 OP Units to the Prior Owners in exchange for their interests in
the Initial Golf Courses. One June 23, 1997 the Company sold 159,326 shares of
Common Stock and the Operating Partnership sold 274,039 OP Units to Golf Hosts,
Inc. On August 18, 1997 the Company issued 21,429 shares of Common Stock to
Granite Golf in connection with the acquisition of Tiburon Golf Club. On
September 2, 1997 the Operating Partnership issued 121,529 OP Units to the Prior
Owner of Raintree Country Club in exchange for its interest in the Raintree
Country Club. On September 19, 1997, the Company sold 70,000 shares of Common
Stock to its executive officers pursuant to the New Stock Incentive Plan. On
September 30, 1997, the Company issued 70,158 OP Units to the Prior Owner of
Eagle Watch. On October 17, 1997, the Company issued 19,231 OP Units to the
Prior Owner of Club of the Country. 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 34. 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
II-1
<PAGE>
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS. (CONTINUED)
such company. The MGCL also provides that the Company may purchase insurance on
behalf of any such director, officer, employee or agent.
Maryland law 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 (a) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by the company and (b) a written
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.
The Company has agreed to indemnify its directors and officers to the
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 stockholders 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
stockholders 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 stockholders to obtain other
relief, such as an injunction or rescission.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 36. 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 Articles of Amendment and Restatement of the Company, as filed with the State Department of
Assessments and Taxation of Maryland on January 31, 1997, (previously filed as Exhibit 3.1A to the
Company's Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 2
(filed January 30, 1997) and incorporated herein by reference).
</TABLE>
II-2
<PAGE>
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS. (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT NO.
- -------------
<C> <S>
3.2 Bylaws of the Company as currently in effect (previously filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 1 (filed January
15, 1997) and incorporated herein by reference).
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 certain tax matters.
10.1.0 First Amended and Restated Agreement of Limited Partnership of the Operating Partnership (the
"Partnership Agreement") (previously filed as Exhibit 10.1 to the Company's Annual Report on Form
10-K (Commission File No. 000-22091), filed March 31, 1997, and incorporated herein by reference).
10.1.1** Exhibit A to the Partnership Agreement, as revised through the date hereof.
10.2.0 Form of Participating Lease between the Operating Partnership and the Lessees relating to the
Initial Courses (previously filed as Exhibit 10.2 to the Company's Registration Statement on Form
S-11 (Commission File No. 333-15965) Amendment No. 1 (filed January 15, 1997) and incorporated
herein by reference).
10.2.1 Schedule of material differences among the Participating Leases for the Initial Courses (included
in lieu of the full text of each lease pursuant to Instruction 2 to Item 601 of Regulation S-K)
(previously filed as Exhibit 10.2.1 to the Company's Annual Report on Form 10-K (Commission File
No. 000-22091), filed March 31, 1997, and incorporated herein by reference).
10.3 Option to Purchase and Right of First Refusal Agreement between (i) the Company and the Operating
Partnership and (ii) Larry D. Young dated as of February 12, 1997 (previously filed as Exhibit 10.3
to the Company's Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment No.
2 (filed January 30, 1997) and incorporated herein by reference).
10.4.0 Form of Contribution and Leaseback Agreement between the Operating Partnership and the Prior Owners
relating to the Initial Courses (previously filed as Exhibit 10.4 to the Company's Registration
Statement on Form S-11 (Commission File No. 333-15965) (filed November 12, 1996) and incorporated
herein by reference).
10.4.1 Schedule of material differences among the Contribution and Leaseback Agreements relating to the
Initial Courses (included in lieu of the full text of each agreement pursuant to Instruction 2 to
Item 601 of Regulation S-K)(previously filed as Exhibit 10.4.1 to the Company's Annual Report on
Form 10-K (Commission File No. 000-22091), filed March 31, 1997, and incorporated herein by
reference).
10.4.2* Contribution and Leaseback Agreement, dated as of August 29, 1997, by and among John J. Rainieri,
Sr., Betty Rainieri and Raintree Country Club, Inc. and Golf Trust of America, L.P.
10.5* Purchase and Sale Agreement, dated as of May 19, 1997, by and between Tiburon Limited Partnership,
as seller, and Granite Golf Group, Inc., as buyer.
10.6* Assignment and Assumption of Purchase and Sale Agreement, dated as of August 18, 1997, by and among
Granite Golf Group, Inc., as assignor, and Golf Trust of America, L.P., as assignee.
</TABLE>
II-3
<PAGE>
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS. (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT NO.
- -------------
<C> <S>
10.7 Credit Agreement, dated as of June 20, 1997, by and among Golf Trust of America, L.P., as Borrower,
Golf Trust of America, Inc., GTA GP, Inc. and GTA LP, Inc., as Guarantors, the Lenders referred to
therein, and NationsBank N.A., as Agent (previously filed as Exhibit 10.1 to the Company's Current
Report on Form 8-K, dated June 20, 1997 and filed August 12, 1997, and incorporated herein by
reference).
10.8 Loan Agreement, dated as of June 20, 1997, by and between Golf Host Resorts, Inc., as Borrower, and
Golf Trust of America, L.P., as Lender (previously filed as Exhibit 10.2 to the Company's Current
Report on Form 8-K, dated June 20, 1997 and filed August 12, 1997, and incorporated herein by
reference).
10.9 1997 Non-Employee Directors' Plan (previously filed as Exhibit 10.7 to the Company's Registration
Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 1 (filed January 15, 1997) and
incorporated herein by reference).
10.10 Golf Trust of America, Inc. 1997 Stock Incentive Plan of the Company (previously filed as Exhibit
10.6 to the Company's Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment
No. 1 (filed January 15, 1997) and incorporated herein by reference).
10.11 Golf Trust of America, Inc. 1997 Stock-Based Incentive Plan (the New Stock Incentive Plan)
(previously filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q (Commission File
No. 000-22091), filed August 15, 1997, and incorporated herein by reference).
10.12 Form of Nonqualified Stock Option Agreement for use under the New Stock Incentive Plan (previously
filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q (Commission File No.
000-22091), filed August 15, 1997, and incorporated herein by reference).
10.13 Form of Employee Incentive Stock Option Agreement for use under the New Stock Incentive Plan
(previously filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q (Commission File
No. 000-22091), filed August 15, 1997, and incorporated herein by reference).
10.14* General Provisions Applicable to Restricted Stock Awards Granted Under the New Stock Incentive
Plan.
10.15* Form of Restricted Stock Award Agreement for use under the New Stock Incentive Plan.
10.16 Employment Agreement between the Company and W. Bradley Blair, II dated February 7, 1997
(previously filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K (Commission File No.
000-22091), filed March 31, 1997, and incorporated herein by reference).
10.17* Amended and Restated Employment Agreement between the Company and David J. Dick, dated July 25,
1997.
10.18* Amended and Restated Employment Agreement between the Company and Scott D. Peters, dated July 25,
1997.
16.1 Letter of Price Waterhouse LLP, former independent accountants of the Company (previously filed as
Exhibit 16.1 to the Company's amended Current Report on Form 8-K dated February 26, 1997 (filed
March 17, 1997) and incorporated herein by reference).
</TABLE>
II-4
<PAGE>
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS. (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT NO.
- -------------
<C> <S>
21.1 List of Subsidiaries of the Company (previously filed as Exhibit 22.1 to the Company's Registration
Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 1 (filed January 15, 1997) and
incorporated herein by reference).
23.1* Consent of BDO Seidman LLP.
23.2* Consent of Coopers & Lybrand L.L.P.
23.3** Consent of Arthur Andersen, LLP.
23.4* Consent of Crowe, Chizek and Company LLP.
23.5 Consent of Ballard Spahr Andrews & Ingersoll (included within the opinion filed as Exhibit 5.1).
23.6 Consent of O'Melveny & Myers LLP (included within the opinion filed as Exhibit 8.1).
24.1 Powers of Attorney.
</TABLE>
- ------------
* Previously Filed.
** Filed Herewith.
ITEM 37. 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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Amendment No. 2 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the city of Charleston, state of South Carolina,
on October 31, 1997.
<TABLE>
<S> <C> <C>
GOLF TRUST OF AMERICA, INC.
By: /s/ W. BRADLEY BLAIR, II
-----------------------------------------
W. Bradley Blair, II
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
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.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ W. BRADLEY BLAIR, II President, Chief Executive
- ------------------------------ Officer and Chairman of October 31, 1997
W. Bradley Blair, II the Board of Directors
/s/ DAVID J. DICK
- ------------------------------ Executive Vice President October 31, 1997
David J. Dick and Director
/s/ SCOTT D. PETERS
- ------------------------------ Senior Vice President and October 31, 1997
Scott D. Peters Chief Financial Officer
/s/ LARRY D. YOUNG*
- ------------------------------ Director October 31, 1997
Larry D. Young
/s/ ROY C. CHAPMAN*
- ------------------------------ Director October 31, 1997
Roy C. Chapman
/s/ RAYMOND V. JONES*
- ------------------------------ Director October 31, 1997
Raymond V. Jones
/s/ FRED W. REAMS*
- ------------------------------ Director October 31, 1997
Fred W. Reams
/s/ EDWARD L. WAX*
- ------------------------------ Director October 31, 1997
Edward L. Wax
By: /s/ W. BRADLEY BLAIR,
II
-------------------------
W. Bradley Blair, II
ATTORNEY-IN-FACT
II-6
<PAGE>
EXHIBIT INDEX
Pursuant to Item 601(a)(2) of Regulation S-K, this exhibit index immediately
precedes the exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Articles of Amendment and Restatement of the Company, as filed with the State Department of
Assessments and Taxation of Maryland on January 31, 1997, (previously filed as Exhibit 3.1A to the
Company's Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 2 (filed
January 30, 1997) and incorporated herein by reference).
3.2 Bylaws of the Company as currently in effect (previously filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 1 (filed January 15,
1997) and incorporated herein by reference).
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 certain tax matters.
10.1.0 First Amended and Restated Agreement of Limited Partnership of the Operating Partnership (the
"Partnership Agreement") (previously filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K
(Commission File No. 000-22091), filed March 31, 1997, and incorporated herein by reference).
10.1.1** Exhibit A to the Partnership Agreement, as revised through the date hereof.
10.2.0 Form of Participating Lease between the Operating Partnership and the Lessees relating to the Initial
Courses (previously filed as Exhibit 10.2 to the Company's Registration Statement on Form S-11
(Commission File No. 333-15965) Amendment No. 1 (filed January 15, 1997) and incorporated herein by
reference).
10.2.1 Schedule of material differences among the Participating Leases for the Initial Courses (included in
lieu of the full text of each lease pursuant to Instruction 2 to Item 601 of Regulation S-K)
(previously filed as Exhibit 10.2.1 to the Company's Annual Report on Form 10-K (Commission File No.
000-22091), filed March 31, 1997, and incorporated herein by reference).
10.3 Option to Purchase and Right of First Refusal Agreement between (i) the Company and the Operating
Partnership and (ii) Larry D. Young dated as of February 12, 1997 (previously filed as Exhibit 10.3 to
the Company's Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 2
(filed January 30, 1997) and incorporated herein by reference).
10.4.0 Form of Contribution and Leaseback Agreement between the Operating Partnership and the Prior Owners
relating to the Initial Courses (previously filed as Exhibit 10.4 to the Company's Registration
Statement on Form S-11 (Commission File No. 333-15965) (filed November 12, 1996) and incorporated
herein by reference).
10.4.1 Schedule of material differences among the Contribution and Leaseback Agreements relating to the
Initial Courses (included in lieu of the full text of each agreement pursuant to Instruction 2 to Item
601 of Regulation S-K) (previously filed as Exhibit 10.4.1 to the Company's Annual Report on Form 10-K
(Commission File No. 000-22091), filed March 31, 1997, and incorporated herein by reference).
10.4.2* Contribution and Leaseback Agreement, dated as of August 29, 1997, by and among John J. Rainieri, Sr.,
Betty Rainieri and Raintree Country Club, Inc. and Golf Trust of America, L.P.
10.5* Purchase and Sale Agreement, dated as of May 19, 1997, by and between Tiburon Limited Partnership, as
seller, and Granite Golf Group, Inc., as buyer.
10.6* Assignment and Assumption of Purchase and Sale Agreement, dated as of August 18, 1997, by and among
Granite Golf Group, Inc., as assignor, and Golf Trust of America, L.P., as assignee.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------------
<C> <S>
10.7 Credit Agreement, dated as of June 20, 1997, by and among Golf Trust of America, L.P., as Borrower,
Golf Trust of America, Inc., GTA GP, Inc. and GTA LP, Inc., as Guarantors, the Lenders referred to
therein, and NationsBank N.A., as Agent (previously filed as Exhibit 10.1 to the Company's Current
Report on Form 8-K, dated June 20, 1997 and filed August 12, 1997, and incorporated herein by
reference).
10.8 Loan Agreement, dated as of June 20, 1997, by and between Golf Host Resorts, Inc., as Borrower, and
Golf Trust of America, L.P., as Lender (previously filed as Exhibit 10.2 to the Company's Current
Report on Form 8-K, dated June 20, 1997 and filed August 12, 1997, and incorporated herein by
reference).
10.9 1997 Non-Employee Directors' Plan (previously filed as Exhibit 10.7 to the Company's Registration
Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 1 (filed January 15, 1997) and
incorporated herein by reference).
10.10 Golf Trust of America, Inc. 1997 Stock Incentive Plan of the Company (previously filed as Exhibit 10.6
to the Company's Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 1
(filed January 15, 1997) and incorporated herein by reference).
10.11 Golf Trust of America, Inc. 1997 Stock-Based Incentive Plan (the "New Stock Incentive Plan")
(previously filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q (Commission File No.
000-22091), filed August 15, 1997, and incorporated herein by reference).
10.12 Form of Nonqualified Stock Option Agreement for use under the New Stock Incentive Plan (previously
filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q (Commission File No. 000-22091),
filed August 15, 1997, and incorporated herein by reference).
10.13 Form of Employee Incentive Stock Option Agreement for use under the New Stock Incentive Plan
(previously filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q (Commission File No.
000-22091), filed August 15, 1997, and incorporated herein by reference).
10.14* General Provisions Applicable to Restricted Stock Awards Granted Under the New Stock Incentive Plan.
10.15* Form of Restricted Stock Award Agreement for use under the New Stock Incentive Plan.
10.16 Employment Agreement between the Company and W. Bradley Blair, II dated February 7, 1997 (previously
filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K (Commission File No. 000-22091),
filed March 31, 1997, and incorporated herein by reference).
10.17* Amended and Restated Employment Agreement between the Company and David J. Dick, dated July 25, 1997.
10.18* Amended and Restated Employment Agreement between the Company and Scott D. Peters, dated July 25,
1997.
16.1 Letter of Price Waterhouse LLP, former independent accountants of the Company (previously filed as
Exhibit 16.1 to the Company's amended Current Report on Form 8-K dated February 26, 1997 (filed March
17, 1997) and incorporated herein by reference).
21.1 List of Subsidiaries of the Company (previously filed as Exhibit 22.1 to the Company's Registration
Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 1 (filed January 15, 1997) and
incorporated herein by reference).
23.1* Consent of BDO Seidman LLP.
23.2* Consent of Coopers & Lybrand LLP.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------------
<C> <S>
23.3** Consent of Arthur Andersen, LLP.
23.4* Consent of Crowe, Chizek and Company LLP.
23.5 Consent of Ballard Spahr Andrews & Ingersoll (included within the opinion filed as Exhibit 5.1).
23.6 Consent of O'Melveny & Myers LLP (included within the opinion filed as Exhibit 8.1).
24.1* Powers of Attorney.
</TABLE>
- ------------
* Previously filed.
** Filed herewith.
<PAGE>
EXHIBIT A
SCHEDULE OF PARTNERS,
ALLOCATION OF PARTNERSHIP UNITS, PERCENTAGE INTERESTS AND
THE AGREED VALUE OF NON-CASH CAPITAL CONTRIBUTIONS
<TABLE>
<CAPTION>
Value of non- Approximate
Date cash capital Partnership Percentage
Admitted Name and address of partners contribution units issued Interests
- -------- ---------------------------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
2/12/97 Golf Legends Ltd., Inc. $30,647,030 1,532,352 17.63%
1500 Legends Drive
Myrtle Beach, SC 29577
2/12/97 Seaside Resorts Ltd. $16,129,118 806,456 9.28%
1500 Legends Drive
Myrtle Beach, SC 29577
2/12/97 Heritage Golf Club, Ltd., Inc. $16,031,230 801,561 9.22%
1500 Legends Drive
Myrtle Beach, SC 29577
2/12/97 Legends of Virginia LC $11,963,738 598,187 6.88%
1500 Legends Drive
Myrtle Beach, SC 29577
2/12/97 Northgate $3,797,071 189,854 2.18%
16450 Northgate Forest Drive
Houston, TX 77068
2/12/97 Olde Atlanta Golf Club Limited Partnership $1,444,926 72,246 0.83%
c/o The Crescent Company
1580 S. Milwaukee Ave., Suite 208
Libertyville, IL 60048
2/12/97 Bright's Creek Development Company, LLC $2,119,005 105,950 1.22%
104 Cotton Creek Drive
Gulf Shores, AL 36542
10/31/96 David J. Dick 0 12,500 0.14%
14 North Adger's Wharf
Charleston, SC 29401
2/04/97 W. Bradley Blair, II 0 12,500 0.14%
14 North Adger's Wharf
Charleston, SC 29401
2/04/97 James Hoppenrath 0 3,750 0.04%
109 E. Bay Street
Charleston, SC 29401
6/20/97 Golf Host Resorts, Inc. 0 274,039 3.15%
c/o Starwood Capital Group, L.P.
Three Pickwick Plaza, Suite 250
Greenwich, CT 06830
9/02/97 John J. Rainieri, Sr. $3,402,306 121,529 1.4%
Betty Rainieri
Raintree Country Club, Inc.
4350 Mayfair Road
Uniontown, Ohio 44685
9/30/97 Eagle Watch Golf Club Limited Partnership $1,890,682 70,158 .81%
c/o E. Neal Trogdon
The Crescent Company
1580 South Milwaukee Avenue, Suite 208
Libertyville, Illinois 60048
<PAGE>
<CAPTION>
Value of non- Approximate
Date cash capital Partnership Percentage
Admitted Name and address of partners contribution units issued Interests
- -------- ---------------------------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
10/17/97 Properties of the Country, Inc. $580,783 19,231 .22%
P.O. Box 7030
Shawnee Mission, Kansas 66207
2/04/97 GTA LP, Inc. 0 4,051,947 46.63%
14 North Adger's Wharf
Charleston, SC 29401
2/04/97 GTA GP, Inc. 0 17,379 0.20%
14 North Adger's Wharf
Charleston, SC 29401
Total Partnership Units 8,689,639 100.00%
</TABLE>
<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 March 26, 1997,
relating to the financial statements of Golf Trust of America, Inc.
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form S-11 of our reports dated March 21, 1997,
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 hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form S-11 of our reports dated September 26, 1997,
relating to the financial statements of Northgate Country Club.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO SEIDMAN, LLP
Charlotte, North Carolina
October 31, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion of this registration of Golf Trust of America,
Inc. on Form S-11 of our report dated September 4, 1997, on our audits of the
financial statements of Bright's Creek Development, L.L.C. as of December 31,
1996 and 1995 and the years ended December 31, 1996 and 1995, the period from
inception (May 17, 1994) through December 31, 1994, and the six-month period
ended June 30, 1996. We also consent to the reference of our firm under the
caption "Experts."
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
October 31, 1997
<PAGE>
EXHIBIT 23.3
CONSENT TO USE OF REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of
our report (and to all references to our firm) included in or made a part of
Registration Statement File # 333-36847.
ARTHUR ANDERSEN LLP
Tampa, Florida,
September 29, 1997
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement of Golf Trust of
America, Inc. on Form S-11, of our reports dated September 4, 1997 on the
December 31, 1996 financial statements of Olde Atlanta Golf Club Limited
Partnership and Eagle Watch Golf Club Limited Partnership. We also consent to
the reference of our firm under the caption "Experts" in the Prospectus, which
is part of this Registration Statement.
CROWE, CHIZEK AND COMPANY LLP
Oak Brook, Illinois
October 31, 1997
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
Each of the undersigned officers and directors of Golf Trust of America,
Inc. (the "Company"), hereby constitutes and appoint W. Bradley Blair, II and
David J. Dick, and each of them, his true and lawful attorneys-in-fact and
agents, each with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign the initial filing
of the Company's registration statement on form S-11 any and all amendments to
thereto, including post-effective amendments and any registration statement
filed pursuant to Rule 426(b), and to file the same, with exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby, ratifying and
confirming all that each of said attorneys-in-fact and agents, or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ W. BRADLEY BLAIR, II President, Chief Executive
- ------------------------------ Officer and Chairman of September 30, 1997
W. Bradley Blair, II the Board of Directors
/s/ DAVID J. DICK
- ------------------------------ Executive Vice President September 30, 1997
David J. Dick and Director
/s/ SCOTT D. PETERS
- ------------------------------ Senior Vice President and September 30, 1997
Scott D. Peters Chief Financial Officer
/s/ LARRY D. YOUNG
- ------------------------------ Director September 30, 1997
Larry D. Young
/s/ ROY C. CHAPMAN
- ------------------------------ Director October 1, 1997
Roy C. Chapman
/s/ RAYMOND V. JONES
- ------------------------------ Director September 30, 1997
Raymond V. Jones
/s/ FRED W. REAMS
- ------------------------------ Director September 30, 1997
Fred W. Reams
/s/ EDWARD L. WAX
- ------------------------------ Director October 1, 1997
Edward L. Wax
