<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 30, 1997
REGISTRATION NO. 333-15965
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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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190 King Street
Charleston, South Carolina 29401
(803) 768-8300
(Address of Principal Executive Offices)
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W. Bradley Blair, II
Chief Executive Officer
Golf Trust of America, Inc.
190 King Street
Charleston, South Carolina 29401
(803) 768-8300
(Name and Address 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 900 South Gay Street
San Francisco, California 94111 Knoxville, Tennessee 37902
(415) 984-8833 (423) 549-7700
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / / ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per
share........................... 3,294,750 Shares $21.00 $69,189,750 $20,967
</TABLE>
(1) Includes 429,750 shares of Common Stock which may be purchased by the
Underwriters to cover over-allotments, if any.
(2) Estimated based on a bona fide estimate of the maximum offering price of
$21.00 solely for the purpose of calculating the registration fee pursuant
to Rule 457(a) of the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO RULE 501(a) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEMS AND CAPTIONS LOCATION OR HEADING IN PROSPECTUS
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<C> <S> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Inside Front Cover Page; Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ Outside Front Cover Page; Prospectus Summary; Risk
Factors; Distribution Policy; The Golf Courses;
Certain Relationships and Transactions
4. Determination of Offering Price................... Underwriting
5. Dilution.......................................... Dilution
6. Selling Security Holders.......................... Not Applicable
7. Plan of Distribution.............................. Underwriting
8. Use of Proceeds................................... Use of Proceeds
9. Selected Financial Data........................... Selected Historical Financial Information
10. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. Management's Discussion and Analysis of Financial
Condition and Results of Operations
11. General Information as to Registrant.............. Prospectus Summary; The Company; The Golf
Industry; The Golf Courses; Management;
Partnership Agreement; Principal Stockholders of
the Company and Principal Partners in the
Operating Partnership
12. Policy with Respect to Certain Activities......... Policies and Objectives With Respect to Certain
Activities
13. Investment Policies of Registrant................. Policies and Objectives With Respect to Certain
Activities
14. Description of Real Estate........................ Management's Discussion and Analysis of Financial
Condition and Results of Operations; The Golf
Courses
15. Operating Data.................................... The Golf Courses
16. Tax Treatment of Registrant and Its Security
Holders.......................................... Federal Income Tax Considerations
17. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters.... Risk Factors; Principal Stockholders of the
Company and Principal Partners in the Operating
Partnership; Distribution Policy; Shares
Available for Future Sale
18. Description of Registrant's Securities............ Capital Stock
19. Legal Proceedings................................. The Golf Courses -- Legal Proceedings
20. Security Ownership of Certain Beneficial Owners
and Management................................... Principal Stockholders of the Company and
Principal Partners in the Operating Partnership
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEMS AND CAPTIONS LOCATION OR HEADING IN PROSPECTUS
- ------------------------------------------------------- --------------------------------------------------
<C> <S> <C>
21. Directors and Executive Officers.................. Management
22. Executive Compensation............................ Management
23. Certain Relationships and Related Transactions.... Risk Factors; The Golf Courses; Management; The
Formation Transactions; Certain Relationships and
Transactions; Partnership Agreement; Principal
Stockholders of the Company and Principal
Partners in the Operating Partnership
24. Selection, Management and Custody of Registrant's
Investments...................................... Risk Factors; Policies and Objectives With Respect
to Certain Activities; The Golf Courses
25. Policies with Respect to Certain Transactions..... Risk Factors; The Golf Courses; Policies and
Objectives with Respect to Certain Activities;
Management; Certain Relationships and
Transactions; Partnership Agreement; Principal
Stockholders of the Company and Principal
Partners in the Operating Partnership
26. Limitations of Liability.......................... Capital Stock -- Limitation of Liability of
Directors; Indemnification Agreements
27. Financial Statements and Information.............. Index to Financial Statements
28. Interests of Named Experts and Counsel............ Experts; Legal Matters
29. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... Management
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 30, 1997
[LOGO]
GOLF TRUST OF AMERICA, INC.
2,865,000 SHARES
COMMON STOCK
Golf Trust of America, Inc. (collectively with its subsidiaries, the
"Company") has been created to capitalize upon consolidation opportunities in
the ownership of golf courses in the United States. The principal business
strategy of the Company, which will be operated as a self-administered real
estate investment trust ("REIT"), will be to acquire high quality golf courses
and to lease the golf courses to multiple independent lessees, including
newly-formed affiliates of the sellers of such courses.
Upon completion of the offering (the "Offering") and the Formation
Transactions (as herein defined), the Company will be one of only two publicly
traded REITs in the United States focused on owning and acquiring golf courses
and will own 10 courses (the "Golf Courses") located in South Carolina (4),
Virginia (2), Alabama, Georgia, North Carolina and Texas. The Golf Courses will
be leased to lessees (the "Initial Lessees") affiliated with the Prior Owners
(as herein defined) under leases ("Participating Leases") which provide for the
payment of fixed base rent and participating rent based on growth in revenue at
the Golf Courses. The Company believes it will benefit from the continuity of
golf course management provided by the Initial Lessees, whose affiliates
developed and have operated each of the Golf Courses since their opening.
Neither the Company nor its executive officers will own any interest in, or
participate in the management of, the Initial Lessees. The Company intends to
make regular quarterly distributions to stockholders beginning with the quarter
ending March 31, 1997.
All of the shares of common stock (the "Common Stock") offered hereby are
being sold by the Company. Upon completion of the Formation Transactions, the
Prior Owners of the Golf Courses will own approximately 59.1% of the Company
through partnership interests redeemable for Common Stock. Prior to the
completion of the Offering, there has been no public market for the Common
Stock. It is currently anticipated that the initial public offering price per
share of Common Stock will be between $19.00 and $21.00. See "Underwriting" for
a discussion of the factors to be considered in determining the initial public
offering price. The Common Stock has been approved for listing on the American
Stock Exchange, subject to official notice of issuance, under the symbol "GTA".
SEE "RISK FACTORS" COMMENCING ON PAGE 17 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK INCLUDING:
- On a pro forma basis for the nine months ended September 30, 1996,
operations at four of the Golf Courses, including the two recently opened
Golf Courses, would not have generated net operating income for the
applicable Initial Lessee;
- Risks associated with the fact that two of the Golf Courses recently
opened and have limited operating history;
- Dependence on Lease Payments (as herein defined) from the Initial Lessees
for substantially all of the Company's income;
- Risks associated with the length of the Participating Leases, which with
extensions may have terms of up to 40 years, which may have an adverse
effect on the Company's ability to sell a Golf Course;
- Risks associated with the fact that the holders of at least 66.7% of the
interests in the Operating Partnership (as herein defined), including the
Company, which initially will own only a 40.9% interest in the Operating
Partnership, 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;
- The lack of appraisals of the Golf Courses and the possibility that the
purchase prices paid by the Company for the Golf Courses may exceed the
fair market value of one or more of the Golf Courses;
- Risks associated with the Company's limited control over the day-to-day
management and operation of the Golf Courses due to the tax restrictions
that prevent a REIT from operating golf courses; and
- Risks affecting golf course operations generally, including competition,
uninsured losses, increases in operating costs, inclement weather and
seasonality, oversupply and decrease in demand, all of which could
adversely affect an Initial Lessee's ability to make its Lease Payment.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
<S> <C> <C> <C>
Per Share.......................... $ $ $
Total(2)........................... $ $ $
</TABLE>
(1) Before deducting expenses payable by the Company, estimated at $ .
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 429,750 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ ,
respectively.
----------------------
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order in
whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California on or about , 1997.
ROBERTSON, STEPHENS & COMPANY WHEAT FIRST BUTCHER SINGER
The date of this Prospectus is , 1997
<PAGE>
Inside Front Cover w/ two foldout pages
[Large Photo depicting golf course green and adjacent sandtrap, including a
superimposed medal with the words "Best New Upscale Course, 1996, Golf Digest
Magazine." The caption reads, "Stonehouse Golf Club, Williamsburg, VA."
Map of United States showing the locations of the ten Golf Courses, with
each identified by name, in Texas, Alabama, Georgia, South Carolina, North
Carolina and Virginia.
Large Photo depicting golf course fairway, green, sandtraps, and waterhole.
Small Photo depicting two storey building with three wings behind a golf
course green. The caption reads "Legends Resort, Myrtle Beach, SC."
Small Photo depicting aerial view of golf course including fairways, greens,
trees and water. The caption reads, "Moorland, Myrtle Beach, SC."
Small Photo depicting aerial view of golf course including a green, multiple
sandtraps, a marshy area, and trees. The caption reads, "Parkland, Myrtle Beach,
SC."
Large Photo depicting aerial view of golf course fairway and adjacent lake
and trees. The caption reads, "Oyster Bay, Sunset Beach, NC."
Large Photo depicting aerial view of golf course fairway, golf cart path,
golf cart, golfers and surrounding trees. The caption reads, "Northgate Country
Club, Houston, TX."
Small photo depicting four golfers and two golf carts on a green with water
in foreground and trees in background.
Small photo of the driveway approach to a two storey stone building with a
brick sign in the foreground that reads "Northgate."
Small Photo of water hazard between two golf fairways, one of which is being
traversed by a golf cart, with trees in the background.
Medium size photo of lake and adjacent sandtrap and golf green with an
orange flag. The caption reads "Woodlands, Golf Shores, AL."
Medium size photo depicting golf fairway, sandtraps, water hazards, path and
trees.
Small aerial photo of golf course fairways, paths, sandtraps, rough, and
trees.
[Inside of back cover page]
Large aerial photo of golf course clubhouse surrounded by trees, and
adjacent golf green and water hazard.
Small photo inset of golf clubhouse with trees and bright pink flowering
bushes in the foreground. The caption reads, "Heritage Plantation, Pawleys
Island, SC."
Small photo of yellow flag on golf course green surrounded by tall grass.
The caption reads, "Royal New Kent, Williamsburg, VA."
Small photo of two storey white building with a porch with four columns and
a yard of grass, bushes and flowers.
Small photo of golfers on a green with adjacent water hazard and trees.
Small photo of single storey white building with circular drive.
Photo depicting a building partially obscured by trees, with golf green and
sandtraps in foreground. The caption reads, "Olde Atlanta, Atlanta, GA."]
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUMMARY................................ 1
The Company..................................... 1
Risk Factors.................................... 2
The Golf Industry............................... 4
The Golf Courses................................ 5
Business Strategies and Objectives.............. 7
The Formation Transactions...................... 9
Benefits to Officers and Directors.............. 11
Distribution Policy............................. 11
Tax Status...................................... 12
The Offering.................................... 13
Summary Financial Data.......................... 14
RISK FACTORS...................................... 18
Initial Lessee Pro Forma Net Income............. 18
Acquisition of Golf Courses with Limited
Operating History.............................. 18
Dependence on Payments under the Participating
Leases......................................... 18
Duration of Lease; No Right to Terminate
Participating Leases on a Sale................. 18
Need for Certain Consents from the Limited
Partners....................................... 18
Lack of Appraisals.............................. 19
Lack of Control Over Day-to-Day Operations and
Management of the Golf Courses................. 19
Golf Industry Risks............................. 19
Dependence Upon Key Personnel................... 20
Lack of Operating History....................... 20
Risks Related to the Company's Growth
Strategy....................................... 21
Benefits to Officers and Directors.............. 21
Concentration of Investments.................... 22
Real Estate Investment Risks.................... 22
Immediate and Substantial Dilution.............. 23
Conflicts of Interest........................... 23
Real Estate Investment Trust and Partnership
Qualification.................................. 24
Competition for Management Time for the Initial
Lessees........................................ 24
Risks of Leverage; No Limitations on
Indebtedness................................... 25
Market for Common Stock; Adverse Effect of
Increase in Market Interest Rates.............. 25
<CAPTION>
PAGE
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<S> <C>
Changes in Investment and Financing Policies.... 25
Limits on Changes in Control.................... 26
Dependence on Acquisitions to Increase Cash
Available for Distribution..................... 26
Distribution to Stockholders.................... 26
ERISA Risks..................................... 26
Adverse Effect of Shares Available for Future
Issuance and Sale on Market Price of Common
Stock.......................................... 26
Ownership Limit................................. 27
Anti-takover Effect on Certain Provisions of
Maryland Law and the Company's Charter and
Bylaws......................................... 27
THE COMPANY....................................... 29
Business Strategies and Objectives.............. 30
Acquisitions and Expansions..................... 30
Internal Growth................................. 32
The Operating Partnership....................... 33
USE OF PROCEEDS................................... 33
DISTRIBUTION POLICY............................... 35
CAPITALIZATION.................................... 37
DILUTION.......................................... 38
SELECTED FINANCIAL INFORMATION.................... 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............. 42
Overview........................................ 42
The Legends Group Prior Owners.................. 44
Northgate Country Club.......................... 48
The Woodlands................................... 50
Olde Atlanta.................................... 51
Inflation....................................... 52
Seasonality..................................... 52
THE GOLF INDUSTRY................................. 53
Demographics.................................... 53
THE GOLF COURSES.................................. 56
Descriptions of the Golf Courses................ 57
The Participating Leases........................ 60
Competition..................................... 65
Employees....................................... 65
Legal Proceedings............................... 65
Government Regulation........................... 66
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
MANAGEMENT........................................ 67
Directors, Proposed Directors and Executive
Officers....................................... 67
Committees of the Board of Directors............ 68
Compensation of Directors....................... 69
Directors and Officers Insurance................ 69
Indemnification................................. 69
Executive Compensation.......................... 69
Stock Incentive Plan............................ 70
Directors' Plan................................. 71
Deferred Compensation Plan...................... 71
Employment Agreements........................... 72
INITIAL LESSEES................................... 72
Golf Course Operations.......................... 73
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN
ACTIVITIES...................................... 73
Investment Objectives and Policies.............. 74
Dispositions.................................... 74
Financing....................................... 74
Working Capital Reserves........................ 75
Conflict of Interest Policies................... 75
Other Policies.................................. 76
THE FORMATION TRANSACTIONS........................ 76
Benefits to Officers and Directors.............. 77
Transfer Documents.............................. 78
CERTAIN RELATIONSHIPS AND TRANSACTIONS............ 79
Relationships Among Officers and Directors...... 79
Acquisition of Interests in Certain of the Golf
Courses........................................ 79
Repayment of Indebtedness....................... 79
Employment Agreements........................... 79
Option to Purchase and Right of First Refusal... 79
PARTNERSHIP AGREEMENT............................. 80
Management...................................... 80
Transferability of OP Units..................... 80
Pledge.......................................... 80
Redemption Rights............................... 80
Capital Contribution............................ 81
<CAPTION>
PAGE
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<S> <C>
Term............................................ 81
Tax Matters..................................... 82
PRINCIPAL STOCKHOLDERS OF THE COMPANY AND
PRINCIPAL PARTNERS IN THE OPERATING
PARTNERSHIP..................................... 82
CAPITAL STOCK..................................... 83
General......................................... 83
Corporate Governance............................ 83
Restrictions on Ownership....................... 83
Limitations on Changes in Control............... 86
Limitation of Liability of Directors;
Indemnification Agreements..................... 86
Transfer Agent and Registrar.................... 86
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
COMPANY'S CHARTER AND BYLAWS.................... 87
Maryland Business Combination Law............... 87
Control Share Acquisitions...................... 87
Interested Director Transactions................ 88
Amendments to the Charter and Bylaws............ 88
SHARES AVAILABLE FOR FUTURE SALE.................. 89
Registration Rights............................. 89
FEDERAL INCOME TAX CONSIDERATIONS................. 90
Taxation of the Company......................... 90
Partnership Anti-Abuse Rule..................... 95
Failure to Qualify.............................. 96
Taxation of Taxable Domestic Stockholders....... 96
Backup Withholding.............................. 96
Taxation of Tax-Exempt Stockholders............. 97
Taxation of Foreign Stockholders................ 97
State and Local Taxes........................... 98
Tax Aspects of the Operating Partnership........ 98
UNDERWRITING...................................... 102
EXPERTS........................................... 103
LEGAL MATTERS..................................... 103
ADDITIONAL INFORMATION............................ 104
GLOSSARY.......................................... 105
FINANCIAL STATEMENTS.............................. F-1
</TABLE>
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THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING, WITHOUT LIMITATION, STATEMENTS
CONTAINING THE WORDS "BELIEVES," "ANTICIPATES," "EXPECTS" AND WORDS OF SIMILAR
IMPORT. SUCH FORWARD-LOOKING STATEMENTS RELATE TO FUTURE EVENTS, THE FUTURE
FINANCIAL PERFORMANCE OF THE COMPANY, AND INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE
OR ACHIEVEMENTS OF THE COMPANY OR INDUSTRY RESULTS TO BE MATERIALLY DIFFERENT
FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY
SUCH FORWARD-LOOKING STATEMENTS. PROSPECTIVE INVESTORS SHOULD SPECIFICALLY
CONSIDER THE VARIOUS FACTORS IDENTIFIED IN THIS PROSPECTUS WHICH COULD CAUSE
ACTUAL RESULTS TO DIFFER, INCLUDING THOSE DISCUSSED IN THE SECTIONS ENTITLED
"PROSPECTUS SUMMARY," "RISK FACTORS," "THE GOLF INDUSTRY," "THE GOLF COURSES"
AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." THE COMPANY DISCLAIMS ANY OBLIGATION TO UPDATE ANY SUCH FACTORS OR
TO PUBLICLY ANNOUNCE THE RESULT OF ANY REVISIONS TO ANY OF THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN TO REFLECT FUTURE EVENTS OR DEVELOPMENTS. THE LAWS
CITED ABOVE MAY NOT BE APPLICABLE TO INITIAL PUBLIC OFFERINGS SUCH AS THIS
OFFERING.
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, THE
INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT (I) THE INITIAL PUBLIC
OFFERING PRICE PER SHARE OF COMMON STOCK WILL BE $20.00 (WHICH IS THE MIDPOINT
OF THE RANGE OF THE ESTIMATED INITIAL PUBLIC OFFERING PRICE SET FORTH ON THE
FRONT COVER OF THIS PROSPECTUS) (THE "OFFERING PRICE"), AND (II) THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. UNLESS THE CONTEXT
OTHERWISE REQUIRES, THE TERM "COMPANY," AS USED HEREIN, INCLUDES GOLF TRUST OF
AMERICA, INC., GTA GP, INC. ("GTA GP"), GTA LP, INC. ("GTA LP"), EACH OF WHICH
IS A WHOLLY-OWNED SUBSIDIARY OF GOLF TRUST OF AMERICA, INC., AND GOLF TRUST OF
AMERICA, L.P., A DELAWARE LIMITED PARTNERSHIP (THE "OPERATING PARTNERSHIP"). THE
TERM "OP UNITS" MEANS UNITS OF LIMITED PARTNERSHIP INTEREST IN THE OPERATING
PARTNERSHIP WHICH ARE REDEEMABLE AT THE ELECTION OF THE HOLDER FOR CASH OR, AT
THE ELECTION OF THE COMPANY, FOR SHARES OF COMMON STOCK ON A ONE-FOR-ONE BASIS.
SEE "GLOSSARY" FOR THE DEFINITIONS OF CERTAIN TERMS USED IN THIS PROSPECTUS.
THE COMPANY
The Company has been created as a self-administered real estate investment
trust ("REIT") to capitalize upon consolidation opportunities in the ownership
of golf courses in the United States. The principal business strategy of the
Company will be to acquire high quality golf courses and to lease the golf
courses to qualified third party operators, including newly-formed affiliates of
the sellers of such courses. The Company believes its utilization of a multiple
independent lessee structure, together with the substantial industry knowledge,
experience and relationships within the golf community of its senior management
and of management of the Initial Lessees (affiliates of whom collectively will
own an initial 59.1% equity interest in the Company upon completion of the
Formation Transactions (as herein defined)) will provide it with a distinct
competitive advantage in the acquisition of high quality golf courses, including
some which might not otherwise be available for purchase.
Upon completion of the offering of the Common Stock (the "Offering") and the
Formation Transactions, the Company will be one of only two publicly traded
REITs in the United States focused on owning and acquiring golf courses and will
own 10 courses (the "Golf Courses") located in South Carolina (4), Virginia (2),
Alabama, Georgia, North Carolina and Texas. See "The Golf Courses -- Description
of the Golf Courses." The Golf Courses will be leased to lessees (the "Initial
Lessees") affiliated with the Prior Owners (as herein defined) under leases (the
"Participating Leases") which provide for the payment of fixed base rent ("Base
Rent") and participating rent based on growth in revenue at the Golf Courses
("Participating Rent" and, together with Base Rent, the "Lease Payment"). See
"The Golf Courses -- The Participating Leases." The Company believes it will
benefit from the continuity of golf course management provided by the Initial
Lessees, whose affiliates developed and have operated each of the Golf Courses
since its opening. See "Initial Lessees." Neither the Company nor its executive
officers will own any interest in or participate in the management of the
Initial Lessees.
The Company's goal is to increase cash available for distribution and to
enhance stockholder value by becoming a leading owner of, and participating in
increased revenue from, nationally or regionally recognized high quality 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 the recently opened Stonehouse Golf Club, which in November 1996 was
named the Best New Upscale Course of 1996 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. All of the Golf Courses were developed and
have been continuously operated by the entities contributing the Golf Courses to
the Company (the "Prior Owners"). The Initial Lessees will be newly-formed
special purpose entities affiliated with the Prior Owners, and will lease the
Golf Courses from the Company pursuant to the Participating Leases. The Company
believes the continuity of management provided by these experienced operators
will facilitate the Company's growth and profitability. The Company believes
that the substantial ownership interest of affiliates of the Initial Lessees in
the Company will align the interests of the Initial Lessees with those of the
stockholders of the
1
<PAGE>
Company. As security for its affiliated Initial Lessee's obligations under the
Participating Lease, each Prior Owner will pledge to the Company for a minimum
of two years OP Units having a value, based on the Offering Price, equal to 15%
of the Company's purchase price for the Golf Course, which approximates 16
months of initial Base Rent under the applicable Participating Lease. See "The
Golf Courses -- The Participating Leases."
The Chairman of the Board, Chief Executive Officer and President of the
Company, W. Bradley Blair, II, currently serves as the Executive Vice President
and Chief Operating Officer of Legends Group Ltd. (together with its affiliates,
"The Legends Group"), a leading golf course owner, developer and operator in the
southeast and mid-Atlantic regions of the United States. After the Offering, Mr.
Blair will not have any interest in the golf operations of The Legends Group.
Seven of the eight golf courses currently owned by The Legends Group are being
contributed to the Company. The one course not being contributed is owned by The
Legends Group pursuant to a ground lease with a short remaining term, which does
not presently meet the Company's investment criteria. The Company will have an
option and right of first refusal to acquire any golf courses owned, developed
or acquired by The Legends Group. See "Certain Relationships and Transactions --
Option to Purchase and Right of First Refusal." The initial Participating Leases
with affiliates of The Legends Group (the "Legends Lessees") will be
cross-collateralized and cross-defaulted.
The Company will acquire the Golf Courses from the Prior Owners, and expects
to acquire additional golf courses from other owners utilizing an innovative
lease structure. The lease structure, including the Lessee Performance Option,
is designed to encourage growth in revenue at the Golf Courses as well as to
facilitate the Company's consolidation strategy within the golf industry by
allowing the Company to acquire golf courses which it believes have growth
potential and which might not otherwise be available for purchase. During years
three through five of each Participating Lease, the applicable Prior Owner,
subject to certain qualifications and restrictions, may elect one time to
increase the Base Rent payable under such Participating Lease in order to
receive additional OP Units (the "Lessee Performance Option"). A Prior Owner may
exercise the Lessee Performance Option only if the current year net operating
income of the applicable Initial Lessee, inclusive of a 113.5% lease payment
coverage ratio, exceeds such Initial Lessee's then current year Lease Payment
obligation. The Lessee Performance Option is designed to be accretive to the
Company's Funds From Operations (as herein defined) on a per share basis. See
"The Company -- Business Strategies and Objectives."
Following completion of the Offering, the Company expects to have access to
a variety of debt and equity financing sources to fund acquisitions, including
the ability to issue OP Units, which can provide deferral of gain recognition
for sellers of golf courses. The Company expects to have a $75 million line of
credit (the "Line of Credit") which will be used primarily for the acquisition
of additional golf courses. The Company has not, however, finalized negotiations
on the Line of Credit and there can be no assurance that the Company will have
access to sufficient debt and equity financing to allow it to successfully
pursue its acquisition strategy. The Company will have approximately $4.3
million of outstanding indebtedness upon completion of the Offering, which will
be incurred in connection with the acquisition of one of the Golf Courses. The
Company believes its initial low level of debt, coupled with the Line of Credit,
will provide the Company with significant financial flexibility in pursuing golf
course acquisition opportunities. The Company intends to maintain a capital
structure which limits consolidated indebtedness to no more than 50% of its
total market capitalization. See "Policies and Objectives with Respect to
Certain Activities -- Financing."
RISK FACTORS
INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER "RISK
FACTORS" PRIOR TO MAKING AN INVESTMENT DECISION REGARDING THE COMMON STOCK
OFFERED HEREBY. SUCH RISKS INCLUDE:
- On a pro forma basis for the nine months ended September 30, 1996,
operations at four of the Golf Courses, including the two recently opened
Golf Courses, would not have generated pro forma net operating income for
the applicable Initial Lessee.
- Two of the Golf Courses recently opened, have limited operating history
and may not achieve sufficient revenue to enable the Initial Lessee to pay
the initial Base Rent for such Golf Courses.
2
<PAGE>
- Dependence on Lease Payments from the Initial Lessees for substantially
all of the Company's income.
- Risks associated with the length of the Participating Leases, which, with
extensions, may have terms of up to 40 years, which may have an adverse
effect on the Company's ability to sell a Golf Course.
- Risks associated with the fact that the holders of at least 66.7% of the
interests in the Operating Partnership, including the Company, which
initially will own only a 40.9% interest in the Operating Partnership,
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.
- The lack of appraisals for the Golf Courses and the possibility that the
purchase prices paid by the Company for the Golf Courses may exceed the
fair market value of one or more of the Golf Courses.
- Risks associated with the Company's limited control over the day-to-day
management and operation of the Golf Courses due to the tax restrictions
that prevent a REIT from operating golf courses.
- Risks associated with a substantial number of OP Units becoming
redeemable, at the option of the holder, beginning one year following the
Offering, for cash or, at the election of the Company shares of Common
Stock on a one-for-one basis and the risks associated with a substantial
increase in the number of shares of Common Stock available for future
sale.
- Risks affecting golf course operations generally, including competition,
uninsured casualties, increases in operating costs, inclement weather and
seasonality and decrease in demand, all of which could adversely affect an
Initial Lessee's ability to make its Lease Payments.
- Risks associated with the Company's dependence upon 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 lack of an operating history for the Company and the fact that
management has no experience operating a public company or a REIT and
limited experience working together as a management team.
- Risks associated with rapid growth and the implementation of the Company's
growth strategy, including competition for acquisitions from
well-established owners and operators.
- Risks associated with the substantial number of new golf courses opened in
recent years and currently under development or planned for development,
which could increase competition for golfers at the Golf Courses and
adversely affect the number of rounds played and an Initial Lessee's
ability to make its Lease Payments.
- Receipt by executive officers and one of the directors of the Company of
material benefits from the Formation Transactions.
- Risks associated with the concentration of five of the Golf Courses in the
Myrtle Beach, South Carolina vicinity and two of the Golf Courses in the
Williamsburg, Virginia area.
- Taxation of the Company as a regular corporation if it fails to qualify as
a REIT, treatment of the Operating Partnership as an association taxable
as a corporation if it fails to qualify as a partnership, and the
resulting decrease in cash available to pay dividends as a result thereof.
- Risks normally associated with debt financing and the fact that there is
no limitation on the amount of debt the Company may incur.
- The restrictions on the ownership of outstanding shares of Common Stock
intended to ensure compliance with certain requirements related to
qualification of the Company as a REIT and certain other provisions in the
Company's Charter and Bylaws (as herein defined), which may inhibit a
change in control of the Company even where such a change in control might
be beneficial to the Company's stockholders.
3
<PAGE>
- The lack of a prior market for the Common Stock, the potential impact of
market interest rate increases and other factors on the trading price of
the Common Stock and the ability of the Company to maintain or increase
its initial estimated distribution rate.
- Immediate and substantial dilution of $11.46 per share in the net tangible
book value of the Common Stock purchased from the Offering Price.
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.
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 over the next several
years the number of people aged 50 and older is expected to increase
significantly. See "The Golf Industry -- Demographics." The Company expects that
this growth will contribute to an increase in the number of rounds played and
Gross Golf Revenues (as herein defined) at the Golf Courses and golf courses
subsequently acquired by the Company. Golf course ownership in the United States
is highly fragmented. There are approximately 15,400 golf courses in the United
States which the Company believes are owned by approximately 11,000 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 or lease fewer than 5% of the total number of
golf courses and that fewer than 10 golf course owners own more than 10 golf
courses. The Company believes that this fragmented ownership provides it an
excellent opportunity for consolidation of the ownership of high quality golf
courses. See "The Golf Industry."
The Company believes the current fragmentation of the ownership of golf
courses has resulted from a variety of factors, including scarcity of capital,
the entrepreneurial nature of many golf course owners and operators and the
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 will lead to consolidation of golf
course ownership. Following completion of the Offering, the Company believes it
will be well positioned to pursue opportunities to acquire high-quality courses,
because of its multiple independent lessee structure and financial flexibility.
See "The Company -- Business Strategies and Objectives -- Acquisitions and
Expansions."
Largely in response to the increasing popularity of golf, the construction
of golf courses in the United States has increased significantly in recent
years. New golf course openings from the mid-1970's through 1987 averaged
approximately 150 golf courses per year. For the period 1987 through 1995 an
average of 275 new golf courses were opened each year, with a high of 336 new
golf course openings in 1995.
The golf industry generated approximately $15 billion in revenues in the
United States in 1995. The Company believes the game of golf has exhibited
strong growth in popularity in the past 15 years as illustrated below:
<TABLE>
<CAPTION>
1980 1995 % CHANGE
---- ---- --------
(MILLIONS)
<S> <C> <C> <C>
Number of golfers............. 15 25 67%
Rounds played................. 358 490 37%
</TABLE>
Additionally, the Company believes the game of golf will benefit from
favorable demographic trends. The United States Census Bureau estimates that the
population age 50 and over will increase 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
4
<PAGE>
"baby boomers," the oldest of whom are in their early 50's today, 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. See "The Golf Industry -- Demographics."
THE GOLF COURSES
The Golf Courses consist of 10 nationally or regionally recognized high
quality courses located in the mid-Atlantic, southeastern and southwestern
United States. Four of the Golf Courses were ranked among the Top Ten New
Courses by either GOLF DIGEST or GOLF MAGAZINE in the year opened, including the
recently opened Stonehouse Golf Club, which was named the Best New Upscale
Course of 1996 by GOLF DIGEST. Two of the established courses (Oyster Bay and
Heritage Golf Club) have been ranked in the Top 50 Public Golf Courses by GOLF
DIGEST.
The Golf Courses include nine high quality Daily Fee courses (including six
Resort Courses) and one private country club. "Daily Fee" courses are open to
the public and generate revenues principally through green fees, golf cart
rentals, food and beverage operations, merchandise sales and driving range
charges. "Resort Courses" are Daily Fee golf courses that attract a significant
percentage of players from outside the immediate area in which the golf course
is located and generate a significant amount of revenue from golf vacation
packages. The Company considers the Daily Fee and Resort Courses to be high-end
golf courses because of the quality and maintenance of each golf course and the
average green fees, which are significantly above the averages for golf courses
in their respective geographic markets. Private country clubs are generally
closed to the public and derive revenues principally from membership dues,
initiation fees, transfer fees, golf cart rentals, guest fees, food and beverage
operations and merchandise sales.
The Company believes that the overall quality of the Golf Courses is
reflected in the green fees charged at each Golf Course, which significantly
exceed national averages. The Company believes its focus on high quality Daily
Fee golf courses and private 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 more than 3.9 million rounds played in 1995, according to the MYRTLE BEACH
GOLF HOLIDAY-TM-. In addition to golf courses, Myrtle Beach offers a mix of
entertainment, shopping and dining, as well as proximity to beaches. All of the
Golf Courses located in the Myrtle Beach vicinity were developed and are
currently owned and operated by The Legends Group.
Two of the Golf Courses are located in the Williamsburg, Virginia area and
were opened in June and August, 1996. Williamsburg is a leading tourist
destination and an emerging golf resort location, with a population of
approximately 2.6 million within a 60 mile radius, providing the area with an
opportunity to attract both resort and local golfers. Since 1995, five new
courses have opened in the Williamsburg vicinity, including two of the Golf
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 currently are owned and
operated by The Legends Group.
One of the Golf Courses is located in Gulf Shores, Alabama, a popular golf
and vacation destination area located near the Florida panhandle. In addition to
six area golf clubs, Gulf Shores offers 32 miles of beaches, historic sites and
water sports. The remaining two Golf Courses are located within upscale master
planned communities in Houston, Texas and Atlanta, Georgia.
The Company will acquire a 100% interest in each of the Golf Courses.
Certain information respecting each of the Golf Courses is set forth on the
following page.
5
<PAGE>
<TABLE>
<CAPTION>
ROUNDS
------------------------
TWELVE
MONTHS
ENDED
SEPT.
YARDAGE TYPE OF YEAR 30,
NAME LOCATION (1) COURSE OPENED 1994 1995 1996
- ---------------- ------------------ ------- ------- ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Heritage Golf
Club........... Pawleys Island, SC 7,040 Resort 1986 59,524 55,094 51,108
Heathland....... Myrtle Beach, SC 6,785 Resort 1990 55,393 49,312 48,728
Moorland........ Myrtle Beach, SC 6,799 Resort 1990 54,383 49,590 49,293
Parkland........ Myrtle Beach, SC 7,170 Resort 1992 50,508 46,564 46,314
Oyster Bay
(6)............ Sunset Beach, NC 6,685 Resort 1983 62,962 62,141 55,567
The
Woodlands
(7)............ Gulf Shores, AL 6,584 Resort 1994 13,490 43,459 41,120
Royal New Providence Forge, Daily
Kent (8)....... VA 7,291 Fee 1996 -- -- 2,724
Stonehouse Golf Daily
Club (9)....... Williamsburg, VA 6,963 Fee 1996 -- -- 2,227
Olde Atlanta.... Daily
Atlanta, GA 6,789 Fee 1993 43,415 41,195 40,007
Northgate
Country Club
(10)........... Houston, TX 6,540 Private 1984 44,370 46,600 45,680
Total..................................................................................
<CAPTION>
REVENUE PER PLAYER (2)
-------------------------- GROSS GOLF REVENUE (3)
TWELVE -------------------------------------
MONTHS TWELVE
ENDED MONTHS
SEPT. ENDED
30, SEPT. 30, INITIAL BASE
NAME 1994 1995 1996 1994 1995 1996 RENT (4)
- ---------------- ------- ------- -------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Heritage Golf
Club........... $ 51.89 $ 57.28 $ 60.62 $ 3,088,000 $ 3,156,000 $ 3,098,000 $ 1,825,000
Heathland....... $ 50.12 $ 55.03 $ 55.32 2,776,000 2,714,000 2,695,000 1,556,000(5)
Moorland........ $ 50.12 $ 55.03 $ 55.70 2,726,000 2,729,000 2,746,000 1,556,000(5)
Parkland........ $ 50.12 $ 55.03 $ 55.29 2,532,000 2,560,000 2,561,000 1,557,000(5)
Oyster Bay
(6)............ $ 51.60 $ 55.66 $ 58.90 3,249,000 3,459,000 3,273,000 1,856,000
The
Woodlands
(7)............ $ 28.43 $ 33.49 $ 35.17 384,000 1,455,000 1,446,000 679,000
Royal New
Kent (8)....... -- -- $ 66.08 -- -- 180,000 1,817,000
Stonehouse Golf
Club (9)....... -- -- $ 65.08 -- -- 145,000 1,890,000
Olde Atlanta....
$ 32.55 $ 37.53 $ 41.17 1,413,000 1,546,000 1,647,000 845,000
Northgate
Country Club
(10)........... $ 58.46 $ 59.40 $ 64.21 2,594,000 2,768,000 2,933,000 1,407,000
----------- ----------- ----------- ---------------
Total......... $18,762,000 $20,387,000 $20,724,000 $14,988,000
----------- ----------- ----------- ---------------
----------- ----------- ----------- ---------------
</TABLE>
- ---------------
(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. See "Glossary."
(4) Participating Rent is calculated based on increases in the Gross Golf
Revenue from a base year of 1996, as adjusted. Consequently, no
Participating Rent is payable on a pro forma basis for 1996.
(5) The Heathland, Moorland and Parkland Golf Courses are subject to a single
Participating Lease, and the Base Rent is equally allocated among these Golf
Courses.
(6) The Company will acquire 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. See "The Golf Courses --
Descriptions of the Golf Courses."
(7) Opened in August 1994. The Company expects to acquire, upon completion, a
clubhouse at this Golf Course. See "The Company -- Business Strategies and
Objectives -- Acquisitions and Expansions -- Expansions."
(8) Opened in August 1996.
(9) Opened in June 1996.
(10) The Company expects to acquire, upon completion, an additional nine holes
at this Golf Course. See "The Company -- Business Strategies and Objectives
-- Acquisitions and Expansions -- Expansions."
6
<PAGE>
BUSINESS STRATEGIES AND OBJECTIVES
The Company's primary objective will be to increase Cash Available for
Distribution to stockholders and enhance stockholder value by acquiring
additional golf courses that meet the Company's investment criteria and by
participating in increased revenue from the Golf Courses and any subsequently
acquired golf courses through the Participating Leases.
ACQUISITIONS AND EXPANSIONS
ACQUISITIONS. The Company intends to acquire additional golf courses,
including multi-course portfolios, that meet one or more of its investment
criteria as generally described below. The Company believes its multiple
independent lessee structure and the Lessee Performance Option, together with
the industry knowledge, experience and relationships of management of the
Company and the Initial Lessees, will permit the Company to acquire high quality
golf courses, including those which might not otherwise be available for
purchase. The Company expects to have access to a variety of debt and equity
financing sources to fund acquisitions, including the Line of Credit and the
ability to issue OP Units, which can provide a means of deferring recognition of
gain for certain sellers. OP Units are redeemable for cash, or at the Company's
option, shares of Common Stock on a one-for-one basis. See "Partnership
Agreement -- Redemption Rights." The Company's structure is designed to offer
sellers of golf courses the following benefits: (i) tax deferral and increased
liquidity associated with owning OP Units; (ii) the ability to continue to
operate the golf courses by leasing the golf course from the Company; (iii) the
ability to obtain additional OP Units through the Lessee Performance Option;
(iv) marketing and purchasing economies of scale gained from participation in
the Advisory Association (as herein defined); and (v) the ability to diversify a
seller's investment in golf courses by participating as an equity owner in the
Company's portfolio of golf courses.
The Company intends to concentrate its investment activities on golf courses
available at attractive prices that meet one or more of the following criteria:
- high quality Daily Fee courses that target avid golfers, who the Company
believes generally are willing to pay the higher green fees associated
with high quality golf courses;
- resort courses that offer superior facilities and service and attract a
relatively high number of affluent destination golfers;
- courses owned by multi-course owners and operators who have a strong
regional presence and afford the Company the opportunity to expand in a
particular region;
- private golf courses with proven operating histories;
- newly developed, well-designed golf courses with high growth potential;
and
- high quality, well-maintained golf courses with proven operating histories
located in areas where significant barriers to entry exist.
The Company has recently entered into a non-binding letter of intent to
enter into a strategic alliance with Troon Golf, LLC ("Troon Golf"), an
affiliate of Starwood Capital Group, LLC ("Starwood"). The Company believes
Troon Golf is one of the United States' leading golf course management,
development and consulting companies. The non-binding letter of intent provides
that the Company will enter into purchase agreements on substantially the same
terms and conditions under which the Golf Courses are being acquired, including
the purchase price calculation, to acquire certain golf courses which Troon Golf
is currently negotiating to acquire. The Company anticipates that it would
acquire such courses directly from the third-party sellers through assignments
of the purchase agreements. Any such agreements would be subject to customary
due diligence and closing conditions. The letter of intent provides that,
subject to the consummation of the Company's acquisition of courses from Troon
Golf, Starwood will have the right to nominate one member of the Company's Board
of Directors. Pursuant to the proposed alliance, the Company would be granted a
limited right of first offer to acquire golf courses identified by Troon Golf in
the future, which courses would then be leased to Troon Golf
7
<PAGE>
under Participating Leases. In addition, the Company would grant Troon Golf a
limited right of first offer to lease up to five newly-acquired courses annually
that the Company does not intend to lease to affiliates of the sellers in
certain geographic areas for an initial period of two years. However, the
Company and Troon Golf have not entered into any definitive agreements with
respect to the terms of the strategic alliance or the acquisition of golf
courses and there can be no assurances that the Company and Troon Golf will
consummate any transactions contemplated by the non-binding letter of intent.
The Company anticipates entering into a definitive agreement, if terms can be
mutually agreed upon, by March 1, 1997.
The Company believes the proposed strategic alliance with Troon Golf will
provide the Company with a source of additional acquisition opportunities.
Further, the Company believes it will benefit from the proposed strategic
alliance because of the geographic diversity of Troon Golf's operations and the
expertise of Troon Golf's management.
The Company's ability to make acquisitions will depend on its access to
financing. Although as a public company the Company expects to have access to
several sources of financing, no commitments relating to such financing have
been finalized. There can be no assurance that the Company will be able to
acquire golf courses that meet its investment criteria. Moreover, acquisitions
entail risks that acquired courses will fail to perform in accordance with
expectations. See "Risk Factors -- Real Estate Investment Risks -- General" and
"Dependence on Acquisitions to Increase Cash Available for Distribution."
EXPANSIONS. The Prior Owner of Northgate Country Club currently plans to
add nine holes to that Golf Course, and the Prior Owner of The Woodlands
currently intends to build a new clubhouse (collectively, the "Expansion
Facilities"). Subject to satisfaction of certain conditions, the Company has
agreed that it will acquire the Expansion Facilities when fully completed and
operational. The Company will acquire each Expansion Facility for a price equal
to the cost of construction, which cost must be approved in advance by the
Company and which may include an allowance for land. No development fee will be
paid to the Prior Owners of Northgate or the Woodlands 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 and The Woodlands 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 per
share, and 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."
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 have been structured to provide
the Initial Lessees with incentives to operate and maintain the Golf Courses in
a manner designed to increase revenue and, as a result, increase Lease Payments
to the Company under the Participating Leases. The Company believes that
management of the Initial Lessees has 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 "Initial Lessees" and "The Golf
Industry."
PARTICIPATING LEASES. The Participating Leases provide that for any
calendar year, the Company will 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 at the Golf Course. Participating Rent is equal to 33 1/3% of
any increase in Gross Golf Revenue over Gross Golf Revenue at the Golf Course in
1996, as adjusted in determining the initial Base Rent. Base Rent under each
Participating Lease will increase 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 initial lease terms. "Gross Golf Revenue" is generally
defined as all revenues from a Golf Course including green
8
<PAGE>
fees, golf cart rentals, range fees, membership dues, member initiation fees and
transfer fees, excluding, however, food and beverage and merchandise revenue.
Gross Golf Revenue is affected in part by the number of rounds played at a Golf
Course, which decreased from 1994 to 1995 at six of the seven Golf Courses that
had a full year of operations in 1994. However, Revenue Per Player increased at
each of the Golf Courses during the same period as a result of green fee
increases, and Gross Golf Revenue increased from 1994 to 1995 at five of the
seven Golf Courses that had a full year of operations in 1994. See "The Golf
Courses" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
LESSEE PERFORMANCE OPTION. The Company will acquire the Golf Courses from
the Prior Owners, and expects to acquire additional golf courses from other
owners, utilizing an innovative lease structure. The lease structure, including
the Lessee Performance Option, is designed to encourage aggressive growth in
revenue at the Golf Courses as well as to facilitate the Company's acquisition
of golf courses by allowing the Company to acquire golf courses which it
believes have high growth potential and which might not otherwise be available
for purchase. Under the Lessee Performance Option, during years three through
five of each Participating Lease, the applicable Prior Owner, subject to certain
qualifications and restrictions, may elect one time to increase the Base Rent
payable in order to receive additional OP Units. The Prior Owner of the
Northgate Country Club will have an additional two-year period to exercise the
Lessee Performance Option if it elects to construct the planned nine hole
expansion. A Prior Owner may exercise the Lessee Performance Option only if the
current year net operating income of the applicable Initial Lessee, inclusive of
a 113.5% lease payment coverage ratio, exceeds such Initial Lessee's then
current year Lease Payment obligation. The Lessee Performance Option is designed
to be accretive to the Company's Funds From Operations on a per share basis
because the formula used to calculate the number of OP Units issuable in
exchange for increased Base Rent provides that the increase in Base Rent will
initially exceed the expected annual distributions payable on such OP Units.
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. A
Prior Owner's ability to exercise the Lessee Performance Option and the number
of OP Units issuable to such Prior Owner in connection therewith will depend on
future operating results at the applicable Golf Course and therefore cannot be
calculated at the time of the completion of the Offering.
THE FORMATION TRANSACTIONS
Prior to or simultaneously with the completion of the Offering, the Company,
the Operating Partnership, the Prior Owners and the Initial Lessees will engage
in a series of transactions (collectively, the "Formation Transactions")
described below.
- The Company, which was incorporated in Maryland in November 1996, will
sell 2,865,000 shares of Common Stock in the Offering and will contribute
all of the net proceeds thereof, estimated to be $49.9 million based on
the Offering Price, to its wholly-owned subsidiaries, GTA GP and GTA LP,
which will in turn contribute such net proceeds to the Operating
Partnership. Upon completion of the Offering and the Formation
Transactions, the Company will, through GTA GP and GTA LP, own an
approximately 40.9% ownership interest in the Operating Partnership. GTA
GP will be the sole general partner of the Operating Partnership.
- The Prior Owners will contribute 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 in existing indebtedness at the Golf Courses
as follows:
-The Company will acquire seven of the 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.
-The Company will acquire three of the Golf Courses from parties
unaffiliated with the Company or The Legends Group for an aggregate of
368,050 OP Units, $6.2 million in cash and the repayment of
approximately $12.7 million in existing indebtedness.
9
<PAGE>
- The Company, as lessor, will lease the Golf Courses to the Initial
Lessees, which are newly-formed entities affiliated with the Prior Owners,
pursuant to the Participating Leases for initial terms of ten years each,
with each Initial Lessee having the right to extend the term of its
Participating Lease for up to six renewal terms of five years each. See
"The Golf Courses -- Participating Leases."
- Each Prior Owner will be granted the right to receive additional OP Units
pursuant to the Lessee Performance Option. See "The Company -- Business
Strategies and Objectives -- Internal Growth."
- The Company will enter into employment agreements with its executive
officers, including Mr. Blair, who currently serves as the Executive Vice
President and Chief Operating Officer of Legends Group Ltd., an affiliate
of certain of the Prior Owners and the Legends Lessees. See "Management --
Employment Agreements."
- The Company will enter into the Option Agreement (as herein defined) with
The Legends Group pursuant to which the Company will be granted the option
and right of first refusal to acquire golf courses currently owned or
subsequently acquired or developed by The Legends Group. See "Certain
Relationships and Transactions -- Option to Purchase and Right of First
Refusal."
- Upon completion of the Offering, the Company will have outstanding
approximately $4.3 million of indebtedness, which the Company intends to
keep outstanding for a period of up to 10 years to accomodate 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."
OWNERSHIP STRUCTURE
Following completion of the Formation Transactions, the structure and
relationships of the Company, the Operating Partnership, the Prior Owners,
management and the Initial Lessees will be as follows:
[CHART]
[Chart including four boxes. The top box reads "Golf Trust of America, Inc. (the
"Company") 40.9% General and Limited Partner Interest." That box is connected by
one line to a lower box which reads "Golf Trust of America, L.P. (the "Operating
Partnership") (10 Golf Courses)." This second box is connected by a single line
to a third box on the right which reads "Prior Owners and Management (1) 59.1%
Limited Partner Interest." The second box is
10
<PAGE>
also connected by two arrows, one running in each direction, to a fourth box
which reads "Affiliates of the Prior Owners (the "Initial Lessees")(2)." The
arrow running to the fourth box has a caption which reads "Participating
Leases." The arrow running back to the second box has a caption which reads
"Lease Payments."]
(1) The percentage interest of the Prior Owners and management may be increased
upon exercise of the Lessee Performance Option by one or more Prior Owners.
Mr. Young, a director of the Company and majority owner of The Legends
Group, together with his affiliates, will initially own a 53.4% interest in
the Operating Partnership. Mr. Blair and Mr. Dick, collectively, will own a
0.6% interest in the Operating Partnership.
(2) Mr. Young and his affiliates will own the Legends Lessees, which will lease
seven of the Golf Courses.
BENEFITS TO OFFICERS AND DIRECTORS
As a result of the Formation Transactions, executive officers and directors
of the Company and certain of their affiliates will receive the following
benefits:
- Larry D. Young, a director of the Company and majority owner of The
Legends Group, and his affiliates will receive 3,738,556 OP Units, as
consideration for their interests in the Golf Courses owned by The Legends
Group. The OP Units to be received by Mr. Young and his affiliates (which
are redeemable for cash or, at the Company's option, Common Stock on a
one-for-one basis, beginning one year after the completion of the
Offering) will be worth approximately $74.8 million (based on the Offering
Price) and will be more liquid than their interests in the Golf Courses
once a public trading market for the Common Stock commences. As of
September 30, 1996, the aggregate book value of the interests to be
contributed by The Legends Group was approximately $36.1 million.
- The 12,500 OP Units owned by each of Mr. Blair, Chairman of the Board of
Directors, Chief Executive Officer and President of the Company, and David
J. Dick, Executive Vice President and a director of the Company, will be
worth $500,000, based on the Offering Price, a substantial increase over
the nominal purchase price paid by Messrs. Blair and Dick for such OP
Units.
- Mr. Blair, Mr. Dick and Scott D. Peters, Senior Vice President and Chief
Financial Officer of the Company, will be granted options to acquire
150,000, 125,000 and 40,000 shares of Common Stock, respectively, at the
Offering Price. The options vest ratably over three years commencing on
the first anniversary of the date of grant.
- Each Independent Director (as herein defined) will receive options to
acquire 5,000 shares of Common Stock at the Offering Price.
- In connection with the acquisition of the Golf Courses owned by The
Legends Group, the Company will repay approximately $26.3 million of debt
personally guaranteed by Mr. Young.
- The Company will pay to Mr. Young's affiliates approximately $8.4 million
in repayment of loans made by such affiliates to Legends of Virginia, LC
in connection with the development of the two recently opened Golf
Courses.
- The Company will reimburse The Legends Group $522,500 and Mr. Dick $62,000
for direct out-of-pocket expenses incurred in connection with the
Formation Transactions.
- Through the operation of seven of the Golf Courses, the Legends Lessees,
which are owned by Mr. Young and his affiliates, will be entitled to all
cash flow from such Golf Courses after payment of the Lease Payments under
the applicable Participating Leases and other operating expenses.
- Mr. Young and his affiliates will be entitled to receive additional OP
Units pursuant to the Lessee Performance Option. See "The Company --
Business Strategy -- Internal Growth."
- Certain tax consequences to Mr. Young and his affiliates from the
contribution by The Legends Group of certain of the Golf Courses will be
deferred.
11
<PAGE>
- The Company will enter into employment agreements with Mr. Blair, Mr. Dick
and Mr. Peters providing for annual base salaries of $250,000, $150,000
and $125,000, respectively, and the possibility of cash performance
bonuses.
DISTRIBUTION POLICY
Subsequent to the completion of the Offering, the Company intends to make
regular quarterly distributions to its stockholders. The Board of Directors, in
its sole discretion, will determine the actual distribution rate based on the
Company's actual results of operations, economic conditions, tax considerations
(including those related to REITs) and other factors. The Company's first
distribution, for the period from the completion of the Offering to March 31,
1997, is expected to equal a pro rata share of the anticipated initial quarterly
distribution of $.40625 per share of Common Stock, which, on an annualized
basis, will represent a distribution rate of $1.625 per share, or 8.125% of the
Offering Price. The Company estimates that none of the initial annual
distribution will represent a return of capital for federal income tax purposes
since 100% of the expected distribution will be paid out of current earnings and
profits. In order to maintain its status as a REIT for federal income tax
purposes, the Company is currently required to distribute at least 95% of its
annual taxable income. Based on the Company's pro forma results of operations
for the twelve months ended September 30, 1996, the Company would have been
required to distribute approximately $4.0 million, or $1.44 per share to
maintain its REIT tax status. On a pro forma basis for the twelve months ended
September 30, 1996, the estimated initial distribution represents 91.9% of
estimated Cash Available for Distribution (as defined herein). 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." The
Company does not expect to adjust the estimated initial distribution rate if the
Underwriters' over-allotment option is exercised.
The Company has established the initial distribution rate based upon the
Company's estimate of Cash Available for Distribution, which has been derived
from the pro forma condensed statement of operations of the Company for the
twelve months ended September 30, 1996. The Company believes the pro forma
financial information for the twelve months ended September 30, 1996 constitutes
a reasonable basis for setting the initial distribution rate.
TAX STATUS
The Company will elect to be taxed as a REIT under sections 856 through 860
of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with
its taxable year ending December 31, 1997. If the Company qualifies for taxation
as a REIT, with certain exceptions, the Company will not be subject to federal
income tax at the corporate level on its taxable income that is distributed to
its stockholders. A REIT is subject to a number of organizational and
operational requirements, including a requirement that it 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 will receive
at the completion of the Offering the opinion of its legal counsel, O'Melveny &
Myers LLP, as to its REIT status, which opinion will be based on certain
assumptions and representations and will not be binding on the Service or any
court. Even if the Company qualifies for taxation as a REIT, the Company may be
subject to certain state and local taxes on its income and property. In
connection with the Company's election to be taxed as a REIT, the Company's
Charter will impose restrictions on the transfer of shares of Common Stock. The
Company will adopt the calendar year as its taxable year. See "Risk Factors --
Real Estate Investment Trust and Partnership Qualification", "-- Limits on
Changes in Control" and "-- Ownership Limit" and "Federal Income Tax
Considerations" and "Capital Stock -- Restrictions on Ownership."
12
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company.......................... 2,865,000 shares (1)(2)
Common Stock and OP Units to be
outstanding after completion of
the Offering..................... 7,000,356 shares (1)(2)
Use of Proceeds................... To repay mortgage and other existing indebtedness in
connection with the acquisition of the Golf Courses, to
pay the cash portion of the purchase price for the Golf
Courses and certain closing costs, and for working
capital.
Proposed American Stock Exchange
Symbol........................... GTA
</TABLE>
- ------------
(1) Assumes no exercise of the Underwriters' overallotment option. See
"Underwriting."
(2) Does not include an aggregate of 600,000 shares reserved for issuance
pursuant to the Company's Stock Incentive Plan and the Directors' Plan (each
as herein defined). See "Management -- Stock Incentive Plan" and "Management
-- Directors' Plan." Also does not include additional OP Units that may be
issued pursuant to the Lessee Performance Option. See "The Company --
Business Strategies and Objectives -- Internal Growth -- Lessee Performance
Option."
13
<PAGE>
SUMMARY FINANCIAL DATA
The following tables set forth (i) unaudited selected consolidated pro forma
financial information for the Company and (ii) selected historical financial
information for the Prior Owners. The pro forma operating information is
presented as if the Formation Transactions had occurred as of January 1, 1995
and therefore incorporates certain assumptions that are included in the Notes to
Pro Forma Condensed Statements of Operations included elsewhere in this
Prospectus. The pro forma balance sheet information is presented as if the
Formation Transactions had occurred on September 30, 1996. The pro forma
information does not purport to represent what the Company's or the Initial
Lessees' financial position or results of operations actually would have been
had the Formation Transactions, in fact, occurred on such date or at the
beginning of the period indicated, or to project the Company's or the Initial
Lessees' financial position or results of operations at any future date or any
future period.
GOLF TRUST OF AMERICA, INC.
UNAUDITED SUMMARY CONSOLIDATED PRO FORMA FINANCIAL DATA
(in thousands, except per share and footnote data)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
OPERATING DATA:
Participating Lease revenue (1)...................................................... $ 11,282 $ 9,395
------------- -------------
Depreciation and amortization (1).................................................... 1,819 1,691
General and administrative (2)....................................................... 1,639 1,229
Interest expense..................................................................... 366 275
------------- -------------
Total expenses....................................................................... 3,824 3,195
------------- -------------
Income before minority interest...................................................... 7,458 6,200
Minority interest (3)................................................................ 4,406 3,662
------------- -------------
Net income applicable to common shareholders (1)..................................... $ 3,052 $ 2,538
------------- -------------
------------- -------------
Net income per share of Common Stock................................................. $ 1.07 $ 0.89
Shares of Common Stock outstanding................................................... 2,865 2,865
CASH FLOW DATA:
Cash flows from operating activities (4)............................................. $ 9,297 $ 7,906
Cash flows used in investing activities (5).......................................... 609 457
Cash flows used in financing activities (6).......................................... 7,050 4,206
OTHER DATA:
Cash Available for Distribution (7).................................................. $ 12,375 $ 9,280
Common Stock and OP Units outstanding................................................ 7,000 7,000
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
BALANCE SHEET DATA:
Investment in Golf Courses......................................................................... $ 63,532
Mortgages and notes payable........................................................................ 4,325
Minority interest in Operating Partnership......................................................... 34,730
Total stockholders' equity......................................................................... 24,061
</TABLE>
(NOTES ON PAGE 17)
14
<PAGE>
THE LEGENDS GROUP AND ACQUIRED GOLF COURSE OPERATIONS
UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA (8)
(in thousands)
<TABLE>
<CAPTION>
SEASIDE
RESORTS TOTAL NORTHGATE
GOLF HERITAGE (OYSTER LEGENDS OF LEGENDS COUNTRY THE OLDE
LEGENDS GOLF CLUB BAY) VIRGINIA (9) GOLF CLUB WOODLANDS ATLANTA TOTAL
------- --------- ------- ------------ --------- ---------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1995
OPERATING DATA:
Revenue from golf course
operations.............. $8,003 $3,156 $3,459 -- $ 14,619 $ 2,803 $1,455 $1,546 $20,423
Other revenue............ 2,177 782 865 -- 3,823 1,763 291 466 6,343
------- --------- ------- ------------ --------- ---------- --------- ------- -------
Total revenue............ 10,180 3,938 4,324 -- 18,442 4,566 1,746 2,012 26,766
Participating Lease
payments (1)............ 4,670 1,825 1,856 -- 8,351 1,407 679 845 11,282
Other operating expenses
(10).................... 5,372 2,300 2,173 15 9,860 3,124 1,074 1,442 15,500
------- --------- ------- ------------ --------- ---------- --------- ------- -------
Net income (loss)........ $ 138 $ (187) $ 295 $ (15) $ 231 $ 35 $ (7) $ (275) $ (16)
------- --------- ------- ------------ --------- ---------- --------- ------- -------
------- --------- ------- ------------ --------- ---------- --------- ------- -------
CASH FLOW DATA:
Cash flows from (used in)
operating activities
(11).................... $ 307 $ (126) $ 348 $ (15) $ 514 $ 60 $ (7) $ (275) $ 292
Cash flows from investing
activities (12)......... -- -- -- -- -- -- -- -- --
Cash flows from financing
activities (13)......... -- -- -- -- -- -- -- -- --
OTHER DATA:
EBITDA (14).............. $ 359 $ (111) $ 362 $ (15) $ 595 $ 60 $ (7) $ (275) $ 373
NINE MONTHS ENDED
SEPTEMBER 30, 1996
OPERATING DATA:
Revenue from golf course
operations.............. $6,126 $2,413 $2,490 $ 325 $ 11,354 $ 2,214 $1,206 $1,375 $16,149
Other revenue............ 1,888 555 591 62 3,095 1,215 244 402 4,956
------- --------- ------- ------------ --------- ---------- --------- ------- -------
Total revenue............ 8,014 2,968 3,081 387 14,449 3,429 1,450 1,777 21,105
Participating Lease
payments................ 3,503 1,369 1,392 933 7,197 1,055 509 634 9,395
Other operating expenses
(10).................... 4,499 1,543 1,679 1,746 9,466 2,469 841 1,221 13,997
------- --------- ------- ------------ --------- ---------- --------- ------- -------
Net income (loss)........ $ 12 $ 56 $ 10 ($2,292) $ (2,214) $ (95) $ 100 $ (78) $(2,287)
------- --------- ------- ------------ --------- ---------- --------- ------- -------
------- --------- ------- ------------ --------- ---------- --------- ------- -------
CASH FLOW DATA:
Cash flows from (used in)
operating activities
(11).................... $ 131 $ 94 $ 106 ($2,292) $ (1,961) $ (77) $ 100 $ (78) $(2,016)
Cash flows from investing
activities (12)......... -- -- -- -- -- -- -- -- --
Cash flows from financing
activities (13)......... -- -- -- -- -- -- -- -- --
OTHER DATA:
EBITDA (14).............. $ 155 $ 101 $ 116 ($2,292) $ (1,920) $ (77) $ 100 $ (78) $(1,975)
</TABLE>
LEGENDS GOLF
SUMMARY COMBINED HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(UNAUD.)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA:
Revenue from golf course operations............. $10,373 $11,724 $13,455 $14,371 $14,619 $11,276 $11,354
Other revenue................................... 2,647 2,931 3,438 4,725 3,823 2,881 3,095
------- ------- ------- ------- ------- ------- -------
Total revenue................................... 13,020 14,655 16,893 19,096 18,442 14,157 14,449
Operating expenses (11)......................... 7,702 8,895 9,882 10,083 10,322 7,841 9,800
Depreciation and amortization................... 1,253 1,406 1,564 1,830 1,791 1,303 1,579
Interest expense................................ 892 648 619 998 1,017 759 883
------- ------- ------- ------- ------- ------- -------
Net income (loss)............................... $ 3,173 $ 3,706 $ 4,828 $ 6,185 $ 5,312 $4,254 $ 2,187
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
BALANCE SHEET DATA:
Investment in Golf Courses and related
equipment...................................... $14,917 $17,425 $16,663 $19,301 $33,099 $34,989
Total assets.................................... 20,853 20,484 22,719 24,649 42,300 49,905
Mortgages, notes payable and advances from
affiliates and stockholders.................... 12,944 16,293 19,285 18,638 35,163 39,243
Capital lease obligations....................... 850 332 -- -- -- --
Total owners' equity............................ 5,199 2,086 2,263 3,772 6,328 7,494
</TABLE>
(NOTES ON PAGE 17)
15
<PAGE>
THE GOLF COURSES
SUMMARY HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
HERITAGE
GOLF LEGENDS GOLF CLUB OYSTER BAY
--------------------- --------------------- ---------------------
YEAR ENDED YEAR ENDED YEAR ENDED
--------------------- --------------------- ---------------------
12/31/94 12/31/95 12/31/94 12/31/95 12/31/94 12/31/95
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue from golf operations.................. $ 8,034 $ 8,003 $ 3,088 $ 3,156 $ 3,249 $ 3,459
Other revenue................................. 2,012 2,177 847 782 866 865
--------- --------- --------- --------- --------- ---------
Total revenue................................. 10,046 10,180 3,935 3,938 4,115 4,324
--------- --------- --------- --------- --------- ---------
Operating expenses............................ 5,707 5,739 2,411 2,442 1,965 2,126
Depreciation and amortization................. 1,291 1,256 358 319 181 187
Interest...................................... 857 877 63 63 78 77
--------- --------- --------- --------- --------- ---------
Total expenses................................ 7,855 7,872 2,832 2,824 2,224 2,390
--------- --------- --------- --------- --------- ---------
Net income (loss)............................. $ 2,191 $ 2,308 $ 1,103 $ 1,114 $ 1,891 $ 1,934
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
CASH FLOW DATA:
Cash Flows from operating activities........ $ 4,312 $ 3,537 $ 1,814 $ 969 $ 2,218 $ 2,080
Cash Flows from investing activities........ $ (1,633) $ (3,372) $ (92) $ (913) $ (20) $ (1,207)
Cash Flows from financing activities........ $ (2,753) $ (164) $ (1,689) $ (133) $ (2,169) $ (902)
OTHER DATA:
EBITDA (14)................................. $ 4,339 $ 4,441 $ 1,524 $ 1,496 $ 2,150 $ 2,198
<CAPTION>
LEGENDS OF NORTHGATE COUNTRY
VIRGINIA (9) TOTAL LEGENDS GOLF CLUB
--------------------- --------------------- ---------------------
YEAR ENDED YEAR ENDED YEAR ENDED
--------------------- --------------------- ---------------------
12/31/94 12/31/95 12/31/94 12/31/95 12/20/94 12/20/95
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING DATA:
Revenue from golf operations.................. -- -- $ 14,371 $ 14,619 $ 2,594 $ 2,768
Other revenue................................. $ 1,000 -- 4,725 3,823 1,568 1,798
--------- --------- --------- --------- --------- ---------
Total revenue................................. 1,000 -- 19,096 18,442 4,162 4,566
--------- --------- --------- --------- --------- ---------
Operating expenses............................ -- $ 15 10,083 10,322 3,114 3,140
Depreciation and amortization................. -- 29 1,830 1,791 401 323
Interest...................................... -- -- 998 1,017 475 485
--------- --------- --------- --------- --------- ---------
Total expenses................................ -- 44 12,911 13,130 3,990 3,948
--------- --------- --------- --------- --------- ---------
Net income (loss)............................. $ -- $ (44) $ 6,185 $ 5,312 $ 172 $ 618
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
CASH FLOW DATA:
Cash Flows from operating activities........ $ -- $ (15) $ 8,345 $ 6,570 $ 584 $ 543
Cash Flows from investing activities........ $ -- $(11,443) $ (1,747) $ (16,932) $ (81) $ (347)
Cash Flows from financing activities........ $ -- $ 11,458 $ (6,610) $ (10,257) $ (506) $ (273)
OTHER DATA:
EBITDA (14)................................. $ 1,000 $ (15) $ 9,013 $ 8,120 $ 1,048 $ 1,426
<CAPTION>
THE WOODLANDS (15) OLDE ATLANTA
--------------------- ---------------------
YEAR ENDED YEAR ENDED
--------------------- ---------------------
12/31/94 12/31/95 12/31/94 12/31/95
--------- --------- --------- ---------
OPERATING DATA:
Revenue from golf operations.................. $ 384 $ 1,455 $ 1,413 $ 1,546
Other revenue................................. 80 291 442 466
--------- --------- --------- ---------
Total revenue................................. 464 1,746 1,855 2,012
--------- --------- --------- ---------
Operating expenses............................ 363 1,074 1,398 1,434
Depreciation and amortization................. 104 247 443 375
Interest...................................... 134 424 143 202
--------- --------- --------- ---------
Total expenses................................ 601 1,745 1,984 2,011
--------- --------- --------- ---------
Net income (loss)............................. $ (137) $ 1 $ (129) $ 1
--------- --------- --------- ---------
--------- --------- --------- ---------
CASH FLOW DATA:
Cash Flows from operating activities........ $ (26) $ 220 $ 320 $ 375
Cash Flows from investing activities........ $ (4,330) $ (5) $ (196) $ (53)
Cash Flows from financing activities........ $ 4,382 $ (190) $ (72) $ (391)
OTHER DATA:
EBITDA (14)................................. $ 101 $ 672 $ 457 $ 578
</TABLE>
<TABLE>
<CAPTION>
HERITAGE
GOLF LEGENDS GOLF CLUB OYSTER BAY
--------------------- --------------------- ---------------------
NINE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED
--------------------- --------------------- ---------------------
9/30/95 9/30/95 9/30/95
(UNAUD.) 9/30/96 (UNAUD.) 9/30/96 (UNAUD.) 9/30/96
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue from golf operations................. $ 6,128 $ 6,126 $ 2,472 $ 2,413 $ 2,676 $ 2,490
Other revenue................................ 1,615 1,888 599 555 667 591
--------- --------- --------- --------- --------- ---------
Total revenue................................ 7,743 8,014 3,071 2,968 3,343 3,081
--------- --------- --------- --------- --------- ---------
Operating expenses........................... 4,303 4,805 1,866 1,662 1,672 1,588
Depreciation and amortization................ 928 945 238 225 137 137
Interest..................................... 654 602 47 41 58 52
--------- --------- --------- --------- --------- ---------
Total expenses............................... 5,885 6,352 2,151 1,928 1,867 1,777
--------- --------- --------- --------- --------- ---------
Net income (loss)............................ $ 1,858 $ 1,662 $ 920 $ 1,040 $ 1,476 $ 1,304
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
CASH FLOW DATA:
Cash Flows from operating activities....... $ 1,710 $ 3,121 $ 711 $ 1,516 $ 1,629 $ 1,591
Cash Flows from investing activities....... $ (1,744) $ (2,742) $ (888) $ (1,371) $ (939) $ (956)
Cash Flows from financing activities....... $ (135) $ (533) $ 85 $ (181) $ (804) $ (718)
OTHER DATA:
EBITDA (14)................................ $ 3,440 $ 3,209 $ 1,205 $ 1,306 $ 1,671 $ 1,493
<CAPTION>
LEGENDS OF NORTHGATE
VIRGINIA (9) TOTAL LEGENDS GOLF COUNTRY CLUB
--------------------- --------------------- ---------------------
NINE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED
--------------------- --------------------- ---------------------
9/30/95 9/30/95 9/20/95
(UNAUD.) 9/30/96 (UNAUD.) 9/30/96 (UNAUD.) 9/20/96
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING DATA:
Revenue from golf operations................. -- $ 325 $ 11,276 $ 11,354 $ 2,060 $ 2,190
Other revenue................................ -- 62 2,881 3,095 1,193 1,239
--------- --------- --------- --------- --------- ---------
Total revenue................................ -- 387 14,157 14,449 3,253 3,429
--------- --------- --------- --------- --------- ---------
Operating expenses........................... -- 1,746 7,841 9,800 2,360 2,482
Depreciation and amortization................ -- 272 1,303 1,579 245 241
Interest..................................... -- 188 759 883 356 389
--------- --------- --------- --------- --------- ---------
Total expenses............................... -- 2,206 9,903 12,262 2,961 3,112
--------- --------- --------- --------- --------- ---------
Net income (loss)............................ $ -- $ (1,819) $ 4,254 $ 2,187 $ 292 $ 317
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
CASH FLOW DATA:
Cash Flows from operating activities....... $ -- $ (1,054) $ 4,041 $ 5,174 $ 211 $ 573
Cash Flows from investing activities....... $ -- $ (36) $ (3,563) $ 5,105 $ (129) $ (155)
Cash Flows from financing activities....... $ -- $ 1,188 $ (854) $ (244) $ (178) $ (423)
OTHER DATA:
EBITDA (14)................................ $ -- ($ 1,359) $ 6,316 $ 4,649 893 $ 947
<CAPTION>
THE WOODLANDS OLDE ATLANTA
--------------------- ---------------------
NINE MONTHS NINE MONTHS
ENDED ENDED
--------------------- ---------------------
9/30/95 9/30/95
(UNAUD.) 9/30/96 (UNAUD.) 9/30/96
--------- --------- --------- ---------
OPERATING DATA:
Revenue from golf operations................. $ 1,215 $ 1,206 $ 1,272 $ 1,375
Other revenue................................ 236 244 351 402
--------- --------- --------- ---------
Total revenue................................ 1,451 1,450 1,623 1,777
--------- --------- --------- ---------
Operating expenses........................... 795 841 1,035 1,282
Depreciation and amortization................ 184 186 284 243
Interest..................................... 320 274 145 167
--------- --------- --------- ---------
Total expenses............................... 1,299 1,301 1,464 1,692
--------- --------- --------- ---------
Net income (loss)............................ $ 152 $ 149 $ 159 $ 85
--------- --------- --------- ---------
--------- --------- --------- ---------
CASH FLOW DATA:
Cash Flows from operating activities....... $ 365 $ 334 $ 401 $ 252
Cash Flows from investing activities....... $ (3) $ (29) $ (64) $ (19)
Cash Flows from financing activities....... $ (214) $ (301) $ (318) $ (200)
OTHER DATA:
EBITDA (14)................................ $ 656 609 $ 588 $ 495
</TABLE>
(NOTES ON PAGE 17)
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<PAGE>
- ---------------
(1) Represents payments of Base Rent from the Initial Lessees to the Company
calculated on a pro forma basis as if the beginning of the period presented
was the beginning of a lease year, 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 period
presented, (i) Participating Lease revenue would have been $3,706 and $1,846
higher for the periods ended December 31, 1995 and September 30, 1996,
respectively, for a total of $14,988 and $11,241, respectively, (ii)
depreciation and amortization would have been $1,307 and $654 higher for the
periods ended December 31, 1995 and September 30, 1996, respectively, for a
total of $3,126 and $2,345, respectively, and (iii) net income would have
been $982 and $487 higher, respectively, for a total of $4,034 and $3,025,
respectively.
(2) Represents legal, audit, office, franchise taxes, salaries and other
general and administrative expenses to be paid by the Company.
(3) Calculated as approximately 59.1% of the Operating Partnership's net
income.
(4) Represents the Company's income before minority interest adjusted for
non-cash depreciation and amortization. Estimated pro forma cash flows from
operating 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.
(5) Represents the amount of the reserve which the Company will be required to
make available annually under the Participating Leases to fund capital
expenditures, calculated as 2.0% to 3.0% of Gross Golf Revenue at the Golf
Courses.
(6) Represents estimated initial distributions to be paid based on the
anticipated initial annual dividend rate of $1.625 per share of Common Stock
and OP Unit and an aggregate of 7,000,356 shares of Common Stock and OP
Units outstanding and initial debt of $4,325,000.
(7) Cash Available for Distribution represents Funds From Operations, less pro
forma reserves for capital expenditures under the Participating Leases.
(8) Pro forma amounts are presented as if the Formation Transactions occurred
as of the beginning of the periods presented.
(9) 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.
(10) Represents operating costs and expenses, general and administrative,
repairs and maintenance, utilities, marketing and management fees.
(11) 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. The Initial Lessees are newly formed entities, and the
Company does not believe these excluded items are material to cash flows
from operating activities.
(12) Cash flows from investing activities would consist 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 Initial Lessees are not
expected to be material.
(13) 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.
(14) EBITDA is defined as operating income before interest, income taxes,
depreciation and amortization. Management considers EBITDA to be an
important measure of the cash flows from operations of the Initial Lessees
(before payment of debt service obligations and non-cash depreciation
charges). EBITDA does not represent cash generated from operating activities
in accordance with generally accepted accounting principles and 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.
(15) The Woodlands commenced operations in August 1994.
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<PAGE>
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 THE OFFERING.
INITIAL LESSEE PRO FORMA NET INCOME
On a pro forma basis for the nine months ended September 30, 1996,
operations at four of the Golf Courses, including the two recently opened Golf
Courses, would not have generated net operating income for the applicable
Initial Lessee. If an Initial Lessee is unable to generate an operating profit
on a consolidated basis, taking into account all Golf Courses leased by that
Initial Lessee or its affiliates, and if it is unlikely to generate an operating
profit in the future, then it is likely that such Initial Lessee will default on
its obligations under the applicable Participating Lease. In that event, the
Company's Cash Available for Distribution to its stockholders will be adversely
affected. Operations at the Olde Atlanta Golf Course were significantly impacted
by an unusually severe series of winter storms in 1995 and 1996 which damaged
the golf course and resulted in lost revenue. The pro forma loss for the nine
months ended September 30, 1996 at Northgate Country Club reflects, in part, the
fact that the Golf Course generally experiences stronger results in the fourth
quarter of each year.
ACQUISITION OF GOLF COURSES WITH LIMITED OPERATING HISTORY
Two of the Golf Courses recently opened and have limited operating history.
The Base Rent for these Golf Courses is based on the Company's and the Initial
Lessee's estimates of Gross Golf Revenue and net operating income and
constitutes a substantial portion of the Company's pro forma Lease revenue. The
Company will be subject to risks that these Golf Courses will not achieve
anticipated Gross Golf Revenues or net operating income and, therefore, that the
Initial Lessees of such Golf Courses will be unable to make the Lease Payments.
DEPENDENCE ON PAYMENTS UNDER THE PARTICIPATING LEASES; DIFFICULTY OF FINDING
REPLACEMENT LESSEES
The Company's ability to make distributions to stockholders will depend
solely upon the ability of the Initial Lessees to make Lease Payments under
Participating Leases (which will be dependent primarily on the Initial Lessees'
ability to generate sufficient revenues in excess of operating expenses from the
Golf Courses). Any failure or delay by an Initial Lessee in making Lease
Payments may adversely affect the Company's ability to make anticipated
distributions to stockholders. Such failure or delay may be caused by reductions
in revenue from the Golf Courses or in the net operating income of an Initial
Lessee or otherwise. In addition, the Initial Lessees are newly-organized
limited purpose entities and have nominal capitalization. Although failure on
the part of an Initial Lessee 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 would then 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.
DURATION OF LEASE; NO RIGHT TO TERMINATE PARTICIPATING LEASES ON A SALE
The Participating Leases, which, with extensions, may have terms of up to 40
years, do not terminate when a Golf Course is sold. It may therefore be more
difficult to sell a Golf Course, and the value to a prospective buyer, and
therefore the price paid to the Company for a Golf Course, may be less than if
the Participating Leases were to terminate upon a sale. See "The Golf Courses --
The Participating Leases."
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
initially will own only a 40.9% interest in the Operating Partnership, 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
18
<PAGE>
director of the Company, and his affiliates will initially own a 53.4% interest
in the Operating Partnership and thus initially will effectively hold veto power
over such extraordinary transactions. See "Partnership Agreement -- Management."
LACK OF APPRAISALS
No third-party valuations of the Golf Courses were obtained in connection
with the Formation Transactions. The valuation of the Company is based upon the
capitalization of the Company's estimated Cash Available for Distribution and
the factors set forth in this Prospectus in the section "Underwriting." There
can be no assurance that the price paid by the Company for the Golf Courses does
not exceed the fair market value of one or more of the Golf Courses. With
respect to the Golf Courses contributed by the Legends Group, the affiliation
with The Legends Group of Mr. Blair, the President of the Company, and Mr.
Young, a director of the Company, may have affected the valuation of such
courses. See "-- Conflicts of Interest."
LACK OF CONTROL OVER DAY-TO-DAY OPERATIONS AND MANAGEMENT OF THE GOLF COURSES
In order to qualify as a REIT for federal income tax purposes, the Company
may not operate the Golf Courses or participate in the decisions affecting the
operations of the Golf Courses. Each Initial Lessee will control the operations
of the Golf Courses it leases under the Participating Leases, which have initial
terms of 10 years and may be extended at the option of each Initial Lessee for
up to six five-year renewal terms. The Company will not have the authority to
require any Initial Lessee to operate the Golf Courses in a particular manner,
or to govern any particular aspect of their operation (e.g., setting green
fees), except as set forth in the Participating Leases. Thus, even if the
Company believes an Initial Lessee is operating the Golf Courses it leases
inefficiently or in a manner that does not result in a maximization of
Participating Rent to the Company under the Participating Leases and, therefore,
does not increase Cash Available for Distribution to the stockholders, the
Company may not require an Initial Lessee to change its method of operation. The
Company is limited to seeking redress only if an Initial Lessee violates the
terms of the Participating Lease, in which case the Company's primary remedy is
to terminate one or more of the Participating Leases and seek to recover damages
from such Initial Lessee. 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."
GOLF INDUSTRY RISKS
OPERATING RISKS
The Golf Courses will be subject to all operating risks common to the golf
industry. These risks include, among other things (i) increases in operating
costs due to inflation and other factors, which increases may not be offset by
increased dues and fees; (ii) dependence on tourism, particularly for the Resort
Courses, which may fluctuate and be seasonal; and (iii) adverse effects of
general and local economic conditions. These factors could adversely affect an
Initial Lessee's ability to generate revenues and to make Lease Payments and,
therefore, the Company's ability to make expected distributions to the Company's
stockholders.
SUPPLY OF GOLF COURSES
There have been a substantial number of new golf courses opened in recent
years and a number of new courses currently are under development or planned for
development including golf courses located near the Golf Courses. These new golf
courses could increase the competition faced by one or more of the Golf Courses
and reduce the rounds played and revenues associated with one or more of the
Golf Courses. Any such decrease in revenues may adversely affect the net
operating income of an Initial Lessee and, therefore, its ability to make its
Lease Payments.
INVESTMENT IN SINGLE INDUSTRY
The Company's current strategy is to acquire only golf courses and related
facilities. As a result, the Company will be subject to risks inherent in
investments in a single industry. The effects on Cash Available for Distribution
to stockholders resulting from a downturn in the golf industry will be more
pronounced than if the Company had diversified its investments.
19
<PAGE>
SEASONALITY
The golf industry is seasonal. Seasonal variations in revenue at the Golf
Courses may require the Initial Lessees to supplement revenue at the applicable
Golf Course to pay Base Rent. Failure of an Initial Lessee to properly manage
its cash flow may result in an Initial Lessee having insufficient cash to make
its Lease Payments during low seasons and, therefore, adversely affect Cash
Available for Distribution to stockholders.
ADVERSE WEATHER CONDITIONS
Several climatological factors beyond the control of the Initial Lessees may
influence the revenues at the Golf Courses, including adverse weather such as
hurricanes, heat waves, frosts and floods. In the event of adverse weather or
destruction of the turf grass at a Golf Course, the number of rounds played at
such Golf Course could decrease, which could have a negative impact on any
Participating Rent received from the affected Golf Course and the ability of the
applicable Initial Lessee to make its Lease Payment. The six Golf Courses in the
Myrtle Beach and Gulf Shores areas are susceptible to damage from hurricanes,
which damage (including loss of revenue) is not generally insurable at
commercially reasonable rates. Consequently, a hurricane may adversely affect
both the value of the Company's investment in a particular Golf Course as well
as the ability of the Initial Lessee of such Golf Course to make Lease Payments.
Additionally, hurricanes may damage local accommodations such as hotels and
condominiums, thereby limiting play, particularly at Resort Courses.
FACTORS AFFECTING GOLF PARTICIPATION
The success of efforts to attract and retain members at private country
clubs and the number of rounds played at public golf courses historically has
been dependent upon discretionary spending by consumers, which may be adversely
affected by regional and economic conditions. A decrease in the number of
golfers or their rates of participation or in consumer spending on golf could
have an adverse effect on the Gross Golf Revenue generated per Golf Course and,
therefore, the Lease Payments to be paid under the Participating Leases.
COURSE CONDITIONS
General turf grass conditions must be satisfactory to attract play on the
Golf Courses. Severe weather or other factors, including disease 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 availability and quantity of
water available is affected by various factors, many of which are beyond the
control of the Company. There can be no assurance that certain conditions,
including drought, governmental regulation or environmental concerns, which
could adversely affect the supply of water to a particular Golf Course, may not
arise in the future.
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 will serve as the Company's
Chief Executive Officer and President, David J. Dick, who will serve as
Executive Vice President, and Scott D. Peters, who will serve as Senior Vice
President and Chief Financial Officer. See "Management -- Directors, Proposed
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 maintain qualified personnel.
LACK OF OPERATING HISTORY
The Company has been recently organized and has no operating history. There
can be no assurance that the Company will be able to generate sufficient revenue
from operations to make anticipated distributions. The Company also will be
subject to the risks generally associated with the formation of any new
business. The Company's management has no experience operating a public company
or a REIT and limited experience working together.
20
<PAGE>
RISKS RELATED TO THE COMPANY'S GROWTH STRATEGY
COMPETITION FOR ACQUISITIONS
The Company will compete for golf course acquisition opportunities with
entities organized for purposes substantially similar to the Company's
objectives as well as other purchasers of golf courses. The Company may be
competing for such golf course acquisition opportunities with entities which
have substantially greater financial resources than the Company and a broader
geographic knowledge base. These entities may also generally be able to accept
more risk than the Company prudently can manage. Thus, competition may generally
reduce the number of suitable golf course acquisition opportunities available to
the Company. See "The Golf Courses -- Competition."
POSSIBLE UNAVAILABILITY OF CAPITAL
The success of the Company's growth strategy will, in part, depend upon its
access to capital necessary to acquire additional golf courses through use of
excess cash flow, borrowings or subsequent issuances of Common Stock, OP Units
or other securities.
INABILITY TO MANAGE GROWTH EFFECTIVELY
The Company's success will depend upon the ability of each Initial Lessee
effectively to operate all of the Golf Courses it leases, as well as the ability
of the Company to continue to select an appropriate lessee for each additional
Golf Course it acquires. There can be no assurance that the Company will have
access to capital or that an Initial Lessee or other future lessees will
effectively operate the Golf Courses it leases. In the event the Company fails
to obtain access to capital or an Initial Lessee fails effectively to operate
the Golf Courses it leases, Cash Available for Distribution to stockholders
could be adversely affected.
RISKS RELATED TO EXPANSION OPPORTUNITIES
The Company is obligated under certain conditions to acquire additional
facilities to be developed at two of the Golf Courses. See "The Company --
Business Strategies and Objectives -- Acquisitions and Expansions." Such
acquisitions will be subject to risks associated with any newly acquired project
without an operating history, including the ability of the additional facilities
to generate the expected revenues.
BENEFITS TO OFFICERS AND DIRECTORS
The Company's officers and directors will receive material benefits from the
Formation Transactions that will not be received by purchasers of Common Stock
in the Offering. Such benefits include (i) receipt by Mr. Young, one of the
Company's directors, and his affiliates of 3,738,556 OP Units (valued at
approximately $74.8 million based on the Offering Price) in exchange for their
interests in the Golf Courses contributed by The Legends Group, (ii) a
substantial increase in the value of the OP Units held by Mr. Blair and Mr. Dick
over the nominal purchase price paid for such OP Units prior to the commencement
of the Offering, which OP Units will be worth $500,000 based on the Offering
Price, (iii) repayment of approximately $26.3 million of indebtedness personally
guaranteed by Mr. Young, (iv) receipt by the executive officers of options to
acquire 315,000 shares of Common Stock at the Offering Price, (v) receipt by
each Independent Director of options to acquire 5,000 shares of Common Stock at
the Offering Price, and (vi) payment to affiliates of Mr. Young of approximately
$8.4 million in repayment of an outstanding loan to Legends of Virginia, LC
incurred in connection with the development of the two recently opened Golf
Courses. The OP Units issued to officers and directors are redeemable, at the
election of the holder, for cash or, at the Company's option, Common Stock on a
one-for-one basis beginning one year after completion of the Offering. In
addition, the Prior Owners affiliated with Mr. Young may receive additional OP
Units upon exercise of the Lessee Performance Option. The Legends Lessees, which
will lease the Golf Courses contributed by The Legends Group and which are owned
by Mr. Young and his affiliates, will be entitled to all cash flow from the Golf
Courses leased to the Legends Lessees after payment of the Lease Payments and
other operating expenses. Thus, the Company's officers and certain of its
directors may have interests that conflict with the interests of persons
acquiring Common Stock in the Offering. See "The Formation Transactions."
21
<PAGE>
CONCENTRATION OF INVESTMENTS
Five of the Golf Courses are located in the Myrtle Beach, South Carolina
area and two of the Golf Courses are located in the Williamsburg, Virginia area.
The concentration of the Company's investments in these areas could result in
adverse events or conditions which affect those areas in particular, such as
competition, hurricanes and other weather conditions, overbuilding, and economic
recession which affect that area in particular, having a more significant
negative impact on the operations of the Golf Courses located there, and
ultimately Cash Available for Distribution to the Company's stockholders, than
if the Company's investments were more geographically diverse.
REAL ESTATE INVESTMENT RISKS
GENERAL
Acquisitions of the Golf Courses and any additional golf courses in which
the Company may invest in the future are subject to risks typically associated
with investments in real estate. Such risks include the possibility that the
Golf Courses and any additional golf courses will generate rent and capital
appreciation, if any, at rates lower than those anticipated or will yield
returns lower than those available through other investments. Income from the
Golf Courses may be affected by many factors, including changes in government
regulation, general or local economic conditions, the available local supply of
golf courses, a decrease in the number of golfers, adverse weather conditions or
other factors.
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 and the prior owner of
the land on which Stonehouse Golf Club and Royal New Kent are located each have
a right of first refusal to acquire such Golf Courses upon any proposed sale of
such Golf Courses by the Company. The rights of first refusal affecting
Stonehouse Golf Club and Royal New Kent run for a period of five years following
the completion of the respective Golf Courses. The Initial Lessee of Stonehouse
Golf Club and Royal New Kent has agreed with the developer of the communities
surrounding such Golf Courses to construct and complete a clubhouse at each such
Golf Course by December 31, 1997. Under the terms of the applicable
Participating Lease, the Initial Lessee for such Golf Courses is responsible for
constructing the necessary clubhouses. Failure of such Initial Lessee to
complete the clubhouse by such date could result in the Company losing its
investment in the applicable Golf Course. In addition, each of the Initial
Lessees has a right of first offer to acquire the Golf Course(s) leased by it in
the event of a proposed sale by the Company. 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 reveal all potential environmental liabilities,
that no prior or adjacent owner created any material environmental condition not
known to the Company or the independent
22
<PAGE>
consultant or that future uses or conditions (including, without limitation,
changes in applicable environmental laws and regulations) will not result in
imposition of environmental liability to the Company. While the Participating
Leases provide that the Initial Lessees will indemnify the Company for certain
potential environmental liabilities at the Golf Courses, the Initial Lessees are
newly-formed entities with nominal capitalization. See "The Golf Courses --
Government Regulation."
UNINSURED LOSSES
The Participating Leases require that each Initial Lessee maintain insurance
with respect to each of the Golf Courses it leases, including comprehensive
liability, fire, flood (but only to the extent comparable golf courses in the
area carry such insurance and such insurance is available at commercially
reasonable rates) and extended coverage insurance. There are, however, certain
types of losses (such as from hurricanes, floods or earthquakes) which may be
either uninsurable or not economically insurable. Should an uninsured loss
occur, the Company could lose both its invested capital in and anticipated
profits from the applicable golf course. See "The Golf Courses -- The
Participating Leases."
GROUND LEASE
One of the Golf Courses, Oyster Bay, is operated pursuant to a ground lease
with a remaining term of 35 years. The ground lessor may terminate the ground
lease in accordance with its terms or may choose not to renew such ground lease.
If the ground lease is terminated or is not renewed, the Company would lose its
investment in the Oyster Bay Golf Course.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of shares of Common Stock in the Offering will experience
immediate and substantial dilution of $11.46 per share in the net tangible book
value of the shares of Common Stock from the Offering Price. See "Dilution."
CONFLICTS OF INTEREST
VALUATION OF THE GOLF COURSES
The valuation of the Golf Courses, including the seven Golf Courses to be
contributed by The Legends Group, was determined by management of the Company,
including Mr. Blair, currently the Executive Vice President and Chief Operating
Officer of Legends Group Ltd., and Mr. Young, a director of the Company and the
majority owner of The Legends Group. Had such agreements been negotiated on an
arm's length basis, the price paid for such Golf Courses, as well as the terms
of such agreements, may have been more favorable to the Company.
SALE OF GOLF COURSES
One of the directors of the Company and his affiliates will have unrealized
gain in their interests in certain of the Golf Courses transferred to the
Company. The sale of such courses by the Company may cause adverse tax
consequences to such director and his affiliates. See "Federal Income Tax
Considerations -- Tax Aspects of the Operating Partnership -- Tax Allocations
with Respect to the Golf Courses." Therefore, the interests of the Company and
such director and his affiliates could be different in connection with the
disposition of such Golf Courses.
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 is contributing seven of the Golf Courses to 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.
COMPETITION FROM OTHER GOLF COURSES OPERATED BY THE INITIAL LESSEES
Excluding the Golf Courses, affiliates of the Initial Lessees currently own
and/or manage five golf courses and related facilities. Some of these golf
courses and related facilities are located in the same geographic areas as the
Golf Courses and may compete with the Golf Courses. In particular, affiliates of
the Initial Lessee of The
23
<PAGE>
Woodlands will continue to own and operate a 27-hole golf facility near The
Woodlands. Affiliates of any Initial Lessee may continue to acquire, develop or
manage golf courses that compete with the Company's golf courses. Accordingly,
an Initial Lessee's decisions relating to the operation of a Golf Course that is
in competition with other golf courses managed by it may be adverse to the
interests of the Company.
OTHER POSSIBLE CONFLICTS
Other transactions involving the Company and affiliates of the Initial
Lessees may also give rise to possible conflicts of interest, such as future
acquisitions of golf courses and selection of operators for such golf courses.
REAL ESTATE INVESTMENT TRUST AND PARTNERSHIP QUALIFICATION
The Company intends to operate so as to qualify as a REIT under the Code.
Although the Company believes that it will be so organized and will operate in
such a manner and has received an opinion of its legal counsel, O'Melveny &
Myers LLP, as to its REIT status (which opinion is based on certain assumptions
and representations), no assurance can be given that the Company will qualify or
remain qualified as a REIT. Qualification as a REIT involves the application of
highly technical and complex Code provisions for which there are only limited
judicial or administrative interpretations. The complexity of these provisions
and of the applicable income tax regulations that have been promulgated under
the Code (the "Treasury Regulations") is greater in the case of a REIT that
holds its assets in partnership form. The determination of various factual
matters and circumstances not entirely within the Company's control may affect
its ability to qualify as a REIT. In addition, no assurance can be given that
legislation, new regulations, administrative interpretations or court decisions
will not significantly change the tax laws with respect to qualification as a
REIT or the federal income tax consequences of such qualification. See "Federal
Income Tax Considerations."
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would not be allowed a deduction for distributions to stockholders in
computing taxable income and would be subject to federal income tax on its
taxable income at regular corporate rates. Unless entitled to relief under
certain statutory provisions, the Company would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification was lost. As a result, the funds available for distribution to the
Company's stockholders would be reduced for each of the years involved. Although
the Company currently intends to operate in a manner designed to qualify as a
REIT, it is possible that future economic, market, legal, tax or other
considerations may cause the Company to fail to qualify as a REIT or may cause
the Board of Directors to revoke the REIT election. See "Federal Income Tax
Considerations."
The Operating Partnership has been structured to be classified as a
partnership for federal income tax purposes. If the Service were to challenge
successfully the tax status of the Operating Partnership as a partnership for
federal income tax purposes, the Operating Partnership would be treated as an
association taxable as a corporation. In such event, the character of the
Company's assets and items of gross income would change and preclude the Company
from satisfying the asset tests and possibly the income tests (imposed by the
Code as discussed below) and, in turn, would prevent the Company from qualifying
as a REIT. See "Federal Income Tax Considerations -- Taxation of the Company --
Requirements for Qualification." In addition, the imposition of a corporate tax
on the Operating Partnership would reduce the amount of Funds From Operations
available for distribution to the Company and its stockholders. See "Federal
Income Tax Considerations -- Tax Aspects of the Operating Partnership."
COMPETITION FOR MANAGEMENT TIME FOR THE INITIAL LESSEES
Management of the Initial Lessees will continue to devote significant time
to other business interests, including in many instances resort and residential
development on property adjacent to the Golf Courses and the operation of golf
courses not being contributed to the Company. As a result, management of the
Initial Lessees may be subject to competing demands on their time, and may not
devote sufficient time to the operations of the Golf Courses, which may result
in less revenue being generated from the Golf Courses.
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RISKS OF LEVERAGE; NO LIMITATIONS ON INDEBTEDNESS
Upon completion of the Offering, the Company will have outstanding
indebtedness of approximately $4.3 million incurred in connection with the
acquisition of one of the Golf Courses and expects to have a $75 million Line of
Credit. 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 completion of the Offering to accommodate a Prior Owner's
efforts to minimize certain adverse tax consequences. In the event that the
Company fails to maintain such indebtedness, the Company will be liable for any
resulting income tax liabilities to the Prior Owner.
There can be no assurance that the Company, upon the incurrence of debt,
will be able to meet its debt service obligations and, to the extent that it
cannot, the Company risks the loss of some or all of its assets, including any
Golf Courses securing such debt, to foreclosure, which could result in a
financial loss to the Company. Adverse economic conditions could result in
higher interest rates on variable rate debt, including borrowings under the Line
of Credit, which could decrease Cash Available for Distribution and increase the
risk of loss upon a sale or from a foreclosure.
MARKET FOR COMMON STOCK; ADVERSE EFFECT OF INCREASE IN MARKET INTEREST RATES
Prior to the completion of the Offering, there has been no public market for
the Common Stock, and there can be no assurance that an active trading market
will develop or be sustained or that the Common Stock may be resold at or above
the Offering Price. The Offering Price will be determined through negotiations
between the Company and the Underwriters and may not be indicative of the market
price for the Common Stock after the completion of the Offering. See
"Underwriting."
In addition, one of the factors that may influence the price of the Common
Stock in public trading markets will be the annual yield from distributions by
the Company on the Common Stock as compared to yields on other financial
instruments. Thus, an increase in market interest rates will result in higher
yields on other financial instruments, which could adversely affect the market
price of the Common Stock.
CHANGES IN INVESTMENT AND FINANCING POLICIES
The Board of Directors of the Company (the "Board of Directors") determines
the Company's investment and financing policies and policies with respect to
certain other activities, including its growth, capitalization, distributions
and operating policies. Although the Board of Directors has no present intention
to amend or revise these policies, the Board of Directors may do so at any time
without a vote of the Company's stockholders. See "Policies and Objectives With
Respect to Certain Activities -- Investment Objectives and Policies."
LIMITS ON CHANGES IN CONTROL
The restrictions on the ownership of outstanding shares of Common Stock
intended to ensure compliance with certain requirements related to continued
qualification of the Company as a REIT and restrictions on changes in control
contained in the Company's Charter and Bylaws, including a staggered Board of
Directors and the ability of the Board of Directors to issue preferred stock
without stockholder approval, may have the effect of inhibiting a change in
control of the Company, even where such a change of control could be beneficial
to the Company's stockholders. See also "-- Anti-takeover Effect of Certain
Provisions of Maryland Law and the Company's Charter and Bylaws."
DEPENDENCE ON ACQUISITIONS TO INCREASE CASH AVAILABLE FOR DISTRIBUTION
The Company's success in implementing its growth plan will depend
significantly on the Company's ability to acquire additional golf courses at
attractive prices. Because of the structure of the Participating Leases, which
limit increases in Lease Payments to 5% annually for the first five years,
internal growth through increases in revenues of the Golf Courses is not
expected to provide as much growth in Cash Available for Distribution to
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stockholders as will the acquisition of additional golf courses. See " -- Risks
of Leverage; No Limitation on Indebtedness" and "-- Risks Related to the
Company's Growth Strategy." If the Company is unable to acquire additional golf
courses at attractive prices, the Company's ability to grow and maintain or
increase Cash Available for Distribution per share may be adversely affected.
DISTRIBUTION TO STOCKHOLDERS
The Company's ability to make distributions to its stockholders will be
based principally on Lease Payments under the Participating Leases. In the event
of a default by an Initial Lessee under its Participating Lease, there could be
a decrease or cessation of Lease Payments from such Initial Lessee. In addition,
the amount available to the Company to make distributions to its stockholders
may decrease on a per share basis if golf courses acquired in the future yield
lower than expected revenues. In addition, if the Company incurs additional
indebtedness in the future, it will require additional funds to service such
indebtedness and Cash Available for Distribution may decrease. Distributions by
the Company will also be dependent on a number of other factors, including the
amount of Funds From Operations available for distribution, the Company's
financial condition, any decision to reinvest funds rather than to distribute
such funds, capital expenditures, the annual distribution requirements under the
REIT provisions of the Code (see "Federal Income Tax Considerations -- Taxation
of the Company -- Requirements for Qualifications -- Annual Distribution
Requirements") and such other factors as the Company deems relevant.
In order to qualify as a REIT, the Company generally will be required to
distribute to its stockholders at least 95% of its net taxable income each year.
In addition, the Company will be subject to a 4% nondeductible excise tax on the
amount, if any, by which certain distributions paid by it with respect to any
calendar year are less than the sum of 85% of its ordinary income, 95% of its
capital gain net income and undistributed income from prior years.
The Company intends to make distributions to its stockholders to comply with
the 95% distribution requirements of the Code and to avoid the nondeductible
excise tax. The Company's income and cash flow will consist primarily of rent
payments under the Participating Leases. Differences in timing between the
receipt of income and the payment of expenses in arriving at taxable income and
the effect of required debt amortization payments could require the Company to
borrow funds on a short-term basis to meet the distribution requirements that
are necessary to achieve the tax benefits associated with qualifying as a REIT.
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 Code, and the effect of the "plan asset" regulations issued by the
U.S. Department of Labor.
ADVERSE EFFECT OF SHARES AVAILABLE FOR FUTURE ISSUANCE AND SALE ON MARKET PRICE
OF COMMON STOCK
Sales of a substantial number of shares of Common Stock or the perception
that such sales could occur, may adversely affect prevailing market prices for
the Common Stock. In addition to the shares of Common Stock offered by the
Company in the Offering, an aggregate of 4,135,356 OP Units will be outstanding
upon completion of the Formation Transactions. See "The Formation Transactions".
Fifty percent of the OP Units may be redeemed by the holders of such OP Units at
any time after the first anniversary of the completion of the Offering and the
remaining 50% of such OP Units may be redeemed at any time after the second
anniversary of the completion of the Offering for cash, or at the Company's
option, for shares of Common Stock on a one-for-one basis. See "Shares Available
for Future Sale." At the conclusion of the periods described above, the shares
of Common Stock issuable upon redemption of the OP Units may be sold in the
public market pursuant to a shelf registration statement which the Company is
obligated to file with respect to the issuance of such shares, or pursuant to
any available exemptions from registration. The Company also has granted the
Prior Owners certain "piggyback" registration rights commencing on the first
anniversary of the completion of the Offering (see "Shares Available for Future
Sale -- Registration Rights").
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The Company's acquisition strategy will depend in part on access to
additional capital through sales and issuances of equity securities, including
OP Units. The market price of the Common Stock may be adversely affected by the
availability for future sale and issuance of shares of Common Stock that may be
issued upon redemption of the OP Units as well as any additional OP Units issued
in future acquisitions or in connection with an Initial Lessee's exercise of the
Lessee Performance Option. See "The Company -- Acquisitions and Expansions." No
predictions can be made as to the effect, if any, that future sales of shares,
or the perception that such sales could occur will have on the price of the
Common Stock.
OWNERSHIP LIMIT
In order for the Company to qualify and to maintain its qualification as a
REIT, not more than 50% in value of its outstanding stock may be owned, directly
or constructively, by five or fewer individuals (as defined in the Code). In
addition, rent from related party tenants is not qualifying income for purposes
of the gross income tests under the Code. See "Federal Income Tax Considerations
- -- Taxation of the Company." Two sets of constructive ownership rules (one to
determine whether a REIT is closely held and one to determine whether rent is
from a related party tenant) apply in determining whether these requirements are
met. For the purpose of preserving the Company's REIT qualification, the Charter
prohibits direct or constructive ownership of more than 9.8% of the lesser of
the total number or value of the outstanding shares of the Common Stock or more
than 9.8% of the outstanding preferred stock (if any) of the Company (the
"Ownership Limit"). The constructive ownership rules are complex and may cause
Common Stock owned, directly or constructively, by a group of related
individuals and/or entities to be deemed to be constructively owned by one
individual or entity. As a result, the acquisition of less than 9.8% of the
Common Stock (or the acquisition of an interest in an entity which owns Common
Stock) by an individual or entity could cause that individual or entity (or
another individual or entity) to own constructively in excess of 9.8% of the
Common Stock, and thus subject such Common Stock to the Ownership Limit. See
"Capital Stock -- Restrictions on Ownership." Direct or constructive ownership
of shares of Common Stock in excess of the Ownership Limit would cause the
violative transfer or ownership to be void, or cause such shares to be
designated as "Shares-in-Trust", as herein defined. See "Capital Stock --
Restrictions on Ownership."
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 SHARES.
The Charter authorizes the Board of Directors to issue Preferred Stock 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 General Stock -- Preferred
Stock."
STAGGERED BOARD.
The Board of Directors of the Company will have three classes of directors.
The initial terms of the first, second and third classes will expire in 1998,
1999 and 2000, respectively. Directors for each class will be chosen for a
three-year term upon the expiration of the initial term. The affirmative vote of
two-thirds of the outstanding Common Stock 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,
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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 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 manner. "Control Shares" are voting shares of beneficial interest which, 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 having previously 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
The Company has been created as a self-administered REIT to capitalize upon
consolidation opportunities in the ownership of golf courses in the United
States. The principal business strategy of the Company will be to acquire high
quality golf courses and to lease the golf courses to qualified third-party
operators, including affiliates of the sellers of such courses. The Company
believes its utilization of a multiple independent lessee structure and the
Lessee Performance Option, together with the substantial industry knowledge,
experience and relationships within the golf community of its senior management
and of management of the Initial Lessees (affiliates of whom collectively will
own an initial 59.1% equity interest in the Company upon completion of the
Formation Transactions) will provide it with a distinct competitive advantage in
the acquisition of high quality golf courses, including some which might not
otherwise be available for purchase.
Upon completion of the Offering and the Formation Transactions, the Company
will be one of only two publicly traded REITs in the United States focused on
owning and acquiring golf courses and will own 10 courses located in South
Carolina (4), Virginia (2), Alabama, Georgia, North Carolina and Texas. See "The
Golf Courses -- Description of the Golf Courses." The Golf Courses will be
leased to the Initial Lessees affiliated with the Prior Owners under the
Participating Leases, which provide for the payment of fixed Base Rent and
Participating Rent based on growth in revenue at the Golf Courses. See "The Golf
Courses -- The Participating Leases." The Company believes it will benefit from
the continuity of golf course management provided by the Initial Lessees, whose
affiliates developed and have operated each of the Golf Courses since their
opening. See "Initial Lessees." Neither the Company nor its executive officers
will own any interest in or participate in the management of the Initial
Lessees.
The Company's goal is to generate cash available for distribution and to
enhance stockholder value by becoming a leading owner of, and participating in
increased revenue from, nationally or regionally recognized high quality 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 the recently opened Stonehouse Golf Club, which in November 1996 was
named the Best New Upscale Course of 1996 by GOLF DIGEST. Two of the established
courses (Oyster Bay and Heritage Club) have been ranked in the Top 50 Public
Golf Courses by Golf Digest. The Company believes that the quality of the Golf
Courses is further reflected in their average green fees, which significantly
exceed national industry averages. All of the Golf Courses were developed and
have been continuously operated by the Prior Owners. The Initial Lessees will be
newly-formed special purpose entities affiliated with the Prior Owners, and will
lease the Golf Courses from the Company pursuant to the Participating Leases.
The Company believes the continuity of management provided by these experienced
operators will facilitate the Company's growth and profitability. The Company
believes that the substantial ownership interest of affiliates of the Initial
Lessees in the Company will align the interests of the Initial Lessees with
those of the stockholders of the Company. As security for its affiliated Initial
Lessee's obligations under the Participating Lease, each Prior Owner will pledge
to the Company for a minimum of two years OP Units having a value, based on the
Offering Price, equal to 15% of the purchase price for the Golf Course, which
approximates 16 months of initial Base Rent under the applicable Participating
Lease. See "The Golf Courses -- The Participating Leases."
The Chairman of the Board, Chief Executive Officer and President of the
Company, W. Bradley Blair, II, currently serves as the Executive Vice President
and Chief Operating Officer of Legends Group Ltd., a leading golf course owner,
developer and operator in the southeast and mid-Atlantic regions of the United
States. After the Offering, Mr. Blair will not have any interest in the golf
operations of The Legends Group. Seven of the eight golf courses currently owned
by The Legends Group are being contributed to the Company. The one course not
being contributed is owned by The Legends Group pursuant to a ground lease with
a short remaining term which does not presently meet the Company's investment
criteria. The Company will have an option and right of first refusal to acquire
any golf courses owned, developed or acquired by The Legends Group pursuant to
the Option Agreement. See "Certain Relationships and Transactions -- Option to
Purchase and Right of First Refusal." The initial Participating Leases with the
Legends Lessees will be cross-collateralized and cross-defaulted.
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Following completion of the Offering, the Company expects to have access to
a variety of debt and equity financing sources to fund acquisitions, including
the ability to issue OP Units, which can provide deferral of gain recognition
for sellers of golf courses. The Company expects to have a $75 million line of
credit which will be used primarily for the acquisition of additional golf
courses. The Company has not, however, finalized negotiations on the Line of
Credit and there can be no assurance that the Company will have access to
sufficient debt and equity financing to allow it to successfully pursue its
acquisition strategy. The Company will have approximately $4.3 million of
outstanding indebtedness upon completion of the Offering, which will be incurred
in connection with the acquisition of one of the Golf Courses. The Company
believes its initial low level of debt, coupled with the Line of Credit will
provide the Company with significant financial flexibility in pursuing golf
course acquisition opportunities. The Company intends to maintain a capital
structure which limits consolidated indebtedness to no more than 50% of its
total market capitalization. See "Policies and Objectives with Respect to
Certain Activities -- Financing." As a comparison, The Legends Group, which will
be contributing seven Golf Courses to the Operating Partnership, had a debt to
equity ratio in excess of 5 to 1 as of December 31, 1995, based upon the
historical book value of the equity and debt of the contributed Golf Courses.
The Company's executive offices are located at 190 King Street, Charleston,
South Carolina 29401 and its telephone number is (803) 768-8300.
BUSINESS STRATEGIES AND OBJECTIVES
The Company will seek to maximize its Cash Available for Distribution to
stockholders and enhance stockholder value by acquiring additional golf courses
that meet one or more of the Company's investment criteria and by participating
in increased revenue from the Golf Courses and any subsequently acquired golf
courses through the Participating Leases.
ACQUISITIONS AND EXPANSIONS
ACQUISITIONS. The Company intends to acquire additional golf courses,
including multi-course portfolios, that meet one or more of its investment
criteria as generally described below. The Company believes its multiple
independent lessee structure, together with the industry knowledge, experience
and relationships of management of the Company and the Initial Lessees, will
permit the Company to acquire high quality golf courses, including those which
might not otherwise be available for purchase. The Company expects to have
access to a variety of debt and equity financing sources to fund acquisitions,
including the Line of Credit and the ability to issue OP Units, which can
provide a means of deferring recognition of gain for certain sellers. OP Units
are redeemable, at the election of the holder, for cash, or at the Company's
option, shares of Common Stock on a one-for-one basis under certain conditions.
See "Partnership Agreement -- Redemption Rights." The Company believes its
structure offers sellers of golf courses the following benefits: (i) tax
deferral and increased liquidity associated with owning OP Units; (ii) the
ability to continue to operate of the golf course by leasing the golf course
from the Company; (iii) the ability to obtain additional OP Units through the
Lessee Performance Option; (iv) marketing and purchasing economies of scale
gained from participation in the Advisory Association; and (v) the ability to
diversify a seller's investment in Golf Courses by participating as an equity
owner in the Company's portfolio of golf courses.
The Company intends to concentrate its investment activities on golf courses
available at attractive prices that meet one or more of the following criteria:
- high quality Daily Fee courses that target avid golfers, who the Company
believes are generally willing to pay the higher green fees associated
with high quality golf courses;
- courses that offer superior facilities and service and attract a
relatively high number of affluent destination golfers;
- courses owned by multi-course owners and operators who have a strong
regional presence and afford the Company the opportunity to expand in a
particular region;
- private or semi-private golf courses with proven operating histories;
- newly developed, well-designed courses with high growth potential; and
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- high quality, well-maintained golf courses with proven operating histories
located in areas where significant barriers to entry exist.
The Company will undertake a sophisticated analysis with respect to golf
courses to be considered for acquisition, including an evaluation of the
following:
- condition of course and agronomy review;
- competitive position in market;
- barriers to entry in development of new golf courses;
- irrigation -- quantity, quality and cost (watershed, wells, etc.);
- strength of the lodging industry, including hotels and condominiums, in
destination golf areas; and
- product and service differentiation.
The Company has recently entered into a non-binding letter of intent to
enter into a strategic allegiance with Troon Golf, an affiliate of Starwood
Capital Group LLC. The Company believes Troon Golf is one of the United States'
leading golf course management, development and consulting companies. The
non-binding letter of intent provides that the Company will enter into purchase
agreements on substantially the same terms and conditions under which the Golf
Courses are being acquired, including the purchase price calculation, to acquire
certain golf courses which Troon Golf is presently negotiating to acquire. The
Company anticipates that it would acquire such courses directly from the
third-party sellers through assignments of the purchase agreements. Any such
agreements would be subject to customary due diligence and closing conditions.
The letter of intent provides that, subject to the consummation of the Company's
acquisition of courses from Troon Golf, Starwood will have the right to nominate
one member of the Company's Board of Directors. Pursuant to the proposed
alliance, the Company would be granted a limited right of first offer to acquire
golf courses identified by Troon Golf in the future, which courses would then be
leased to Troon Golf under Participating Leases. In addition, the Company would
grant Troon Golf a limited right of first offer to lease up to five newly-
acquired courses annually that the Company does not intend to lease to
affiliates of the sellers in certain geographic areas for an initial period of
two years. However, the Company and Troon Golf have not entered into any
definitive agreements with respect to the terms of the strategic alliance or the
acquisition of golf courses, and there can be no assurances that the Company and
Troon Golf will consummate the transactions contemplated by the non-binding
letter of intent. The Company anticipates entering into a definitive agreement,
if terms can be mutually agreed upon, by March 1, 1997.
The Company believes the proposed strategic alliance with Troon Golf will
provide the Company with a source of additional acquisition opportunities.
Further, the Company believes it will benefit from the proposed strategic
alliance with Troon Golf because of the geographic diversity of Troon Golf's
operations and the expertise of Troon Golf 's management.
The Company's ability to make acquisitions will depend on its access to
financing. Although as a public company the Company expects to have access to
several sources of financing, no commitments relating to such financing have
been finalized. There can be no assurance that the Company will be able to
acquire courses that meet its investment criteria. Moreover, acquisitions entail
risks that acquired courses will fail to perform in accordance with
expectations. See "Risk Factors -- Real Estate Investment Risks -- General" and
"-- Dependence on Acquisitions to Increase Cash Available for Distribution."
EXPANSIONS. The Prior Owner of Northgate Country Club currently plans to
add nine holes to that Golf Course, and the Prior Owner of The Woodlands
currently intends to build a new clubhouse. Subject to satisfaction of certain
conditions, the Company has agreed that it will acquire the Expansion Facilities
when fully completed and operational. The Company will acquire each Expansion
Facility for a price equal to the cost of
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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 the Prior
Owners of Northgate or The Woodlands 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 and The Woodlands 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 per
share, and the applicable Prior Owner will be required to pledge for a minimum
of two years additional OP Units (or cash or security acceptable to the Company)
equal to 15% of the purchase price paid by the Company for the applicable
Expansion Facility.
INTERNAL GROWTH
Based on the experience of its management, the Company believes the Golf
Courses offer opportunities for revenue growth through continued effective
marketing and efficient operations. See "The Golf Courses -- The Participating
Leases -- Advisory Association." The Participating Leases have been structured
to provide the Initial Lessees with incentives to operate and maintain the Golf
Courses in a manner designed to increase revenue and, as a result, increase
Lease Payments to the Company under the Participating Leases. The Company
believes that management of the Initial Lessees has 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 "Initial Lessees" and
"The Golf Industry."
PARTICIPATING LEASES. The Participating Leases provide that for any
calendar year, the Company will 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 at the Golf Course. Participating Rent is equal to 33 1/3% of
any increase in Gross Golf Revenue over Gross Golf Revenue at the Golf Course in
1996, as adjusted in determining the initial Base Rent. Base Rent under each
Participating Lease will increase annually by the Base Rent Escalator (i.e. the
lesser of (i) 3% or (ii) 200% of the change in the CPI for the prior year)
during each of the first five years of such Participating Lease and, if the
Lessee Performance Option is exercised, for an additional five years thereafter.
Annual increases in Lease Payments are limited to 5% during the first five years
of the initial lease terms. Gross Golf Revenue is affected in part by the number
of rounds played at a Golf Course, which decreased from 1994 to 1995 at six of
the seven Golf Courses that had a full year of operations in 1994. However,
Revenue Per Player increased at each of the Golf Courses during the same period
as a result of green fees increases, and Gross Golf Revenue increased from 1994
to 1995 at five of the seven Golf Courses that had a full year of operations in
1994. "Gross Golf Revenue" is generally defined as all revenues from a Golf
Course including green fees, golf cart rental fees, 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."
LESSEE PERFORMANCE OPTION. The Company will acquire the Golf Courses from
the Prior Owners, and expects to acquire additional golf courses from other
owners, utilizing an innovative lease structure. The Company's lease structure,
including the Lessee Performance Option, is designed to encourage aggressive
growth in revenue at the Golf Courses as well as to facilitate the Company's
acquisition of golf courses by allowing the Company to acquire golf courses
which it believes have high growth potential and which might not otherwise be
available for purchase. Under the Lessee Performance Option, during years three
through five of each Participating Lease, the applicable Prior Owner, subject to
certain qualifications and restrictions, may elect one time to increase the Base
Rent payable in order to receive additional OP Units. The Prior Owner of the
Northgate Country Club will have an additional two-year period to exercise the
Lessee Performance Option if it elects to construct the planned nine hole
expansion at that course. OP Units issued pursuant to the exercise of a Lessee
Performance Option will be redeemable at the election of the holder for cash or,
at the Company's election, Common Stock on a one-for-one basis, beginning one
year after their issuance. See "Partnership Agreement -- Redemption Rights." A
Prior Owner may exercise the Lessee Performance Option only if the current year
net operating income of the applicable Initial Lessee, inclusive of a 113.5%
coverage ratio, exceeds such Initial Lessee's then current year Lease Payment
obligation. Each Prior Owner may only increase the Base
32
<PAGE>
Rent payable by the applicable Initial Lessee up to the incremental positive
difference between such Initial Lessee's net operating income (inclusive of
113.5% coverage ratio) and its total lease payment obligation. The Lessee
Performance Option is designed to be accretive to the Company's Funds From
Operations on a per share basis because the formula used to calculate the number
of OP Units issuable in exchange for increased Base Rent provides that the
increase in Base Rent will initially exceed the expected annual distributions
payable on such OP Units. 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. A Prior Owner's ability to exercise the Lessee
Performance Option and the number of OP Units issuable to such Prior Owner in
connection therewith will depend upon future operating results at the applicable
Golf Course and therefore cannot be calculated at the time of the completion of
the Offering.
THE OPERATING PARTNERSHIP
Upon contribution of the net proceeds of the Offering to the Operating
Partnership, the Company, through GTA GP and GTA LP, will acquire an
approximately 40.9% interest in the Operating Partnership, a Delaware limited
partnership. The Operating Partnership will own all of the Golf Courses and will
lease the Golf Courses to the Initial Lessees pursuant to the Participating
Leases. GTA GP will be the sole general partner of the Operating Partnership and
will own a 0.2% general partnership interest in the Operating Partnership. GTA
LP will be one of the Operating Partnership's limited partners and will own an
approximately 40.7% limited partnership interest in the Operating Partnership.
The other Limited Partners of the Operating Partnership will include the Prior
Owners and Messrs. Blair and Dick. In their capacity as such, the Limited
Partners will have limited authority to transact business for, or participate in
the management, activities or decisions of, the Operating Partnership. The
Limited Partners (other than GTA LP) will be entitled to vote on certain
matters, including the sale of all or substantially all the Company's assets or
the merger or consolidation of the Partnership, which will require the approval
of the holders of at least 66.7% of the interests in the Operating Partnership.
The OP Units held by the Limited Partners other than GTA LP are redeemable 50%
beginning one year after completion of the Offering and 50% beginning two years
after completion of the Offering for cash or, at the election of the Company,
for shares of Common Stock on a one-for-one basis.
USE OF PROCEEDS
Based on the Offering Price, the net proceeds to the Company from the
Offering, after payment of estimated expenses of $3.4 million incurred in
connection with the Offering, are estimated to be approximately $49.9 million.
The Company intends to apply the net proceeds of the Offering as follows:
<TABLE>
<CAPTION>
DOLLARS IN
THOUSANDS
-----------
<S> <C>
Repayment of existing third-party mortgages and other indebtedness (net of cash proceeds from
initial borrowing of $4.3 million).......................................................... $ 34,693
Repayment of indebtedness to affiliates (1).................................................. 8,433
Payment of cash portion of the purchase price for the Golf Courses, and related closing costs
(2)......................................................................................... 6,197
Working capital.............................................................................. 544
-----------
Total........................................................................................ $ 49,867
-----------
-----------
</TABLE>
- ------------
(1) This amount represents repayment of a loan made by Mr. Young's affiliates in
connection with the development of the two recently opened Golf Courses.
(2) Includes payment of a $120,000 prepayment penalty.
Offering expenses include approximately $522,500 that will be used to
reimburse The Legends Group and $62,000 to reimburse Mr. Dick for direct
out-of-pocket expenses incurred in connection with the Formation Transactions.
33
<PAGE>
The balance of the purchase price for the Golf Courses will be paid with the
issuance of 4,106,606 OP Units. For a discussion of the redemption rights of
holders of the OP Units, see "Partnership Agreement -- Redemption Rights." If
the Underwriters' over-allotment option is exercised, the Company intends to use
the additional net proceeds of approximately $8.0 million for the acquisition of
additional golf courses and for working capital. The Company has entered into a
non-binding letter of intent to enter into a strategic alliance with Troon
Management which is expected to provide the Company with additional acquisition
opportunities. See "The Company -- Business Strategies and Objectives --
Acquisitions and Expansions." However, as of the date hereof there are no
binding commitments to acquire any golf courses other than the Golf Courses.
Pending the uses described above, the net proceeds will be invested in
interest-bearing accounts and short-term, interest-bearing securities, which are
consistent with the Company's intention to qualify for taxation as a REIT. Such
investments may include, for example, government and government agency
securities, certificates of deposit and interest bearing bank deposits.
Third-party mortgages and other indebtedness to be repaid with the net
proceeds of the Offering is as follows (dollars in thousands):
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY AMOUNT
GOLF COURSE BALANCE (1) RATE DATE REPAID (2)
- ------------------------------------------------------ ----------- ------------------- ----------- -----------
<S> <C> <C> <C> <C>
Heathland, Moorland and Parkland...................... $ 12,414 Prime rate Oct. 1999
Heritage Golf Club.................................... 736 Prime rate Oct. 1999
Oyster Bay............................................ 960 Prime rate Oct. 1999
Stonehouse Golf Club and Royal New Kent (3)........... 12,646 Prime rate Oct. 1999
-----------
Total Legends Golf Courses............................ $ 26,756 $ 26,327
-----------
-----------
Northgate Country Club (4)............................ $ 6,092 LIBOR + 4.5% Feb. 2000 6,118
The Woodlands......................................... $ 3,878 Prime rate +.5% Nov. 2000 3,827
Olde Atlanta Golf Club................................ $ 1,735 8.00% Apr. 1999
875 9.25% Apr. 1999
-----------
Total Olde Atlanta Golf Club.......................... $ 2,610 2,706
----------- -----------
-----------
Total debt payoff..................................... 38,978
Less: net proceeds from initial borrowing............. 4,285
-----------
Debt payoff, net of proceeds from initial borrowing... $ 34,693
-----------
-----------
</TABLE>
- ------------
(1) As of September 30, 1996.
(2) Estimated payoff, including accrued interest, as of consummation of
Formation Transactions.
(3) Approximately $1.2 million of such indebtedness was incurred by Legends of
Virginia, LC in the past year and used to fund a portion of the development
of the two recently opened Golf Courses (Stonehouse Golf Club and Royal New
Kent).
(4) Payment of a $120,000 prepayment penalty is included in "Payment of cash
portion of the purchase price for the Golf Courses."
34
<PAGE>
DISTRIBUTION POLICY
Subsequent to the completion of the Offering, the Company intends to make
regular quarterly distributions to its stockholders. The Board of Directors, in
its sole discretion, will determine the actual distribution rate based on the
Company's actual results of operations, economic conditions, tax considerations
(including those related to REITs) and other factors that the Board deems
relevant. The Company's first distribution, for the period from the completion
of the Offering to March 31, 1997, is expected to equal a pro rata share of the
estimated initial quarterly distribution of $.40625 per share of Common Stock,
which, on an annualized basis, will represent a distribution rate of $1.625 per
share, or 8.125% of the Offering Price. On a pro forma basis for the twelve
months ended September 30, 1996, the estimated initial distribution represents
91.9% of estimated Cash Available for Distribution. Holders of OP Units will
receive distributions on a per unit basis equal to the per share distributions
to owners of Common Stock. The Company does not expect to adjust the estimated
initial distribution rate if the Underwriters' over-allotment option is
exercised. See "Partnership Agreement."
The Company has established the initial distribution rate based upon the
Company's estimate of Cash Available for Distribution, which has been derived
from the pro forma condensed statement of operations of the Company for the
twelve months ended September 30, 1996. The Company believes the pro forma
financial information for the twelve months ended September 30, 1996 constitutes
a reasonable basis for setting the initial distribution rate.
The following table sets forth certain financial information for the twelve
months ended September 30, 1996, which has been used to establish the expected
initial distribution per share of Common Stock.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30, 1996
-------------------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C>
Pro forma income before minority interest (1)................................................ $ 8,064
Pro forma depreciation....................................................................... 2,146
-------
Pro forma Funds From Operations (2) 10,210
Adjustments:
Additional Base Rent for Golf Courses not operational during entire period (3)............. 2,774
Estimated capital expenditures (4)......................................................... (609)
-------
Estimated Cash Available for Distribution.................................................... 12,375
-------
-------
Expected initial annual distribution (5)..................................................... 11,375
Expected initial distribution per OP Unit and per share of Common Stock...................... $ 1.625
Expected payout ratio based on estimated Cash Available for Distribution (6)................. 91.9%
</TABLE>
- ---------------
(1) Minority interest in pro forma income for the twelve months ended September
30, 1996 is approximately $5.4 million (approximately 59.1%).
(2) Management and industry analysts generally consider Funds From Operations to
be one measure of the financial performance of an equity REIT that provides
a relevant basis for comparison among REITs and it is presented to assist
investors in analyzing the performance of the Company. "Funds From
Operations" is defined as income before minority interest (computed in
accordance with generally accepted accounting principles), excluding gains
(losses) from debt restructuring and sales of property and real estate
related depreciation and amortization (excluding amortization of financing
costs). Funds From Operations does not represent cash generated from
operating activities in accordance with generally accepted account
principles and is not necessarily indicative of cash available to fund cash
needs. Funds From Operations should not be considered an alternative to net
income as an indication of the Company's financial performance or as an
alternative to cash flows from operating activities as a measure of
liquidity and may be determined differently from similarly titled measures
used by other REITs.
(3) Pro forma income before minority interest for the twelve months ended
September 30, 1996 reflects base rent from Legends of Virginia for the
period during which the Golf Courses it is contributing to the Company,
Stonehouse Golf Club and Royal New Kent, were actually operating (Stonehouse
opened in June 1996 and Royal New Kent opened in August 1996). The
adjustment reflects additional Base Rent which will be payable during the
Golf Courses' initial year of operations (i.e., to reflect a full year's
Base Rent) and is provided to arrive at estimated Cash Available for
Distribution.
(4) The Participating Leases require the Company to reserve annually between 2%
and 3% of the Gross Golf Revenues of the Golf Courses to fund capital
expenditures. Any capital expenditures in excess of such amounts will be
funded by the Initial Lessees.
(5) Represents expected initial annual distribution per share of Common Stock
and OP Unit times the 7,000,356 shares of Common Stock and OP Units to be
outstanding upon completion of the Formation Transactions.
(6) Represents the anticipated initial aggregate annual distribution divided by
Cash Available for Distribution.
35
<PAGE>
The Company expects to maintain its initial distribution rate unless actual
results of operations, economic conditions or other factors differ from the pro
forma results for the twelve months ended September 30, 1996. The Company's
actual Cash Available for Distribution will be affected by a number of factors,
including Gross Golf Revenues generated at the Golf Courses. The Company
anticipates that Cash Available for Distribution will not exceed earnings and
profits because the Company's non-cash expenses, primarily depreciation and
amortization, are not expected to be significant due to the long depreciation
life assigned to the Golf Courses for earnings and profits purposes by the
Company. Distributions by the Company to the extent of its current and
accumulated earnings and profits for federal income tax purposes, other than
capital gain dividends, will be taxable to stockholders as ordinary dividend
income. Any dividends designated by the Company as capital gain dividends
generally will give rise to capital gain for stockholders. Distributions in
excess of the Company's current and accumulated earnings and profits generally
will be treated as a non-taxable reduction of a stockholder's basis in the
Common Stock to the extent thereof, and thereafter as capital gain.
Distributions treated as non-taxable reduction in basis will have the effect of
deferring taxation until the sale of a stockholder's Common Stock or future
distributions in excess of the stockholder's basis in the Common Stock. Based
upon the total estimated Cash Available for Distribution set forth in the table
above, the Company believes that none of the Company's expected annual
distribution would represent a return of capital for federal income tax
purposes. See "Federal Income Tax Considerations -- Taxation of the Company --
Annual Distribution Requirements." If actual Cash Available for Distribution or
taxable income vary from these amounts, or if the Company is not treated as the
owner of one or more of the Golf Courses, the percentage of distributions which
represents a return of capital may be materially different.
In order to maintain its qualification as a REIT, the Company must make
annual distributions to its stockholders of at least 95% of its annual taxable
income (excluding net capital gains). Based on the Company's pro forma results
of operations for the twelve months ended September 30, 1996, the Company would
have been required to distribute approximately $4.0 million, or approximately
$1.44 per share, in order to maintain its status as a REIT. Under certain
circumstances, the Company may be required to make distributions in excess of
Cash Available for Distribution in order to meet such distribution requirements.
In such event, the Company would seek to borrow the amount of the deficiency or
sell assets to obtain the cash necessary to make distributions to retain its
qualification as a REIT for federal income tax purposes.
The Board of Directors, in its sole discretion, will determine the actual
distribution rate based on a number of factors, including the amount of Cash
Available for Distribution, the Company's financial condition, capital
expenditure requirements for the Company's properties, the annual distribution
requirements under the REIT provisions of the Code and such other factors as the
Board of Directors deems relevant. For a discussion of the tax treatment of
distributions to holders of Common Stock, see "Federal Income Tax
Considerations."
36
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of The Legends
Group and the pro forma capitalization of the Company as of September 30, 1996,
assuming completion of the Offering and Formation Transactions and use of the
proceeds from the Offering as described in "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------------
THE LEGENDS GROUP COMPANY PRO
HISTORICAL (1) FORMA
------------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Mortgages notes payable and due to affiliates........................ $ 39,243 $ 4,325
Minority interest in Operating Partnership........................... -- 35,321
Stockholders' equity:
Preferred Stock, $0.01 par value, 10,000,000 shares authorized, no
shares issued and outstanding..................................... -- --
Common Stock, $0.01 par value per share, 90,000,000 shares
authorized, 2,865,000 shares issued and outstanding, as adjusted
(2)............................................................... 4 27
Additional paid in capital......................................... 300 24,443
Accumulated earnings............................................... 7,190
------- ------------
Total stockholders' equity......................................... 7,355 24,470
------- ------------
Total capitalization............................................. $ 46,737 $ 64,116
------- ------------
------- ------------
</TABLE>
- ------------
(1) Reflects The Legends Group prior to the Formation Transactions.
(2) Excludes 4,135,356 shares issuable upon redemption of OP Units outstanding
prior to the Offering and issued in connection with the Formation
Transactions.
37
<PAGE>
DILUTION
The initial price per share to the public of Common Stock offered hereby
exceeds the net tangible book value per share. Therefore, purchasers of Common
Stock in the Offering will realize an immediate and substantial dilution of the
net tangible book value of their shares. Net pro forma tangible book value is
determined by subtracting total liabilities from total tangible assets and
dividing the remainder by the number of shares of Common Stock and OP Units that
will be outstanding after the Offering. The following table illustrates the
dilution to purchasers of Common Stock sold in the Offering, based on the
Offering Price.
<TABLE>
<S> <C> <C>
Offering Price (1).................................................... $ 20.00
Pro forma net tangible book value prior to the Offering (2)........... 2.40
Increase in net tangible book value attributable to shares issued in
the Offering......................................................... 6.14
---
Pro forma net tangible book value after Formation Transactions (3).... 8.54
---------
Dilution per share purchased in the Offering.......................... $ 11.46
---------
---------
</TABLE>
- ------------
(1) Before deducting underwriting discount and estimated expenses of the
Offering.
(2) Pro forma net tangible book value prior to the Offering is determined by
subtracting total liabilities from total tangible assets of Operating
Partnership prior to the Company's contribution, divided by the total number
of shares of Common Stock and OP Units to be issued by the Operating
Partnership in the Formation Transactions.
(3) Based on the total pro forma net tangible book value of the Company,
including minority interest, of $59,791,000, divided by the sum of the pro
forma total shares of Common Stock (2,865,000) and OP Units (4,135,356)
outstanding (total shares and OP Units of 7,000,356). These totals include
28,750 OP Units to be issued to Company management as part of the Formation
Transactions. This does not include shares of Common Stock related to stock
options to be granted to the Company's executive officers and directors.
The following table summarizes, as of September 30, 1996, the difference
between contributions to be made to the Company by purchasers of shares in the
Offering (before deducting expenses of the Offering) and the OP Units to be
issued by the Operating Partnership in the Formation Transactions:
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
ISSUED BY THE COMPANY
AND OP UNITS ISSUED BY
THE OPERATING TOTAL CONTRIBUTIONS TO
PARTNERSHIP THE COMPANY
---------------------- ------------------------- AVERAGE PRICE PER
NUMBER PERCENT PERCENT SHARE/OP UNIT
---------- ---------- AMOUNT ---------- ------------------
-------------
(IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
Shares of Common Stock sold by the Company in
the Offering................................ 2,865,000 40.9% $ 57,300 85.2% $ 20.00(1)
OP Units issued in the Formation
Transactions................................ 4,135,356 59.1% 9,924 14.8% 2.40(2)
---------- ----- ------------- ----------
Total........................................ 7,000,356 100.0% $ 67,224 100.0%
---------- ----- ------------- ----------
---------- ----- ------------- ----------
</TABLE>
- ------------
(1) Based on the Offering Price before deducting underwriting discount and
estimated expenses of the Offering.
(2) Based on the value of assets to be contributed to the Operating Partnership
in the Formation Transactions.
38
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables set forth (i) unaudited selected consolidated pro forma
financial information for the Company and (ii) selected historical financial
information for the Prior Owners. The pro forma operating information is
presented as if the Formation Transactions had occurred as of January 1, 1995
and therefore incorporates certain assumptions that are included in the Notes to
Pro Forma Condensed Statements of Operations included elsewhere in this
Prospectus. The pro forma balance sheet information is presented as if the
Formation Transactions had occurred on September 30, 1996. The pro forma
information does not purport to represent what the Company's financial position
or results of operations actually would have been had the Formation
Transactions, in fact, occurred on such date or at the beginning of the period
indicated, or to project the Company's financial position or results of
operations at any future date or any future period.
The following selected historical financial information for the Prior
Owners, insofar as it relates to each of the years ended December 31, 1994 and
1995 and the nine months ended September 30, 1996, has been derived from annual
audited financial statements of the Prior Owners, including the consolidated
balance sheets at December 31, 1994 and 1995 and at September 30, 1996 and the
related consolidated statements of income and of cash flows for the years ended
December 31, 1994 and 1995 and the nine months ended September 30, 1996, and
notes thereto appearing elsewhere herein. The data for the nine months ended
September 30, 1995 has been derived from unaudited financial statements also
appearing herein and which, in the opinion of management of the Prior Owners,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the unaudited interim periods.
GOLF TRUST OF AMERICA, INC.
UNAUDITED SELECTED CONSOLIDATED PRO FORMA FINANCIAL INFORMATION
(in thousands, except per share and footnote data)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
OPERATING DATA:
Participating Lease revenue (1)...................................................... $ 11,282 $ 9,395
------------- -------------
Depreciation and amortization (1).................................................... 1,819 1,691
General and administrative (2)....................................................... 1,639 1,229
Interest expense..................................................................... 366 275
------------- -------------
Total expenses....................................................................... 3,824 3,195
------------- -------------
Income before minority interest...................................................... 7,458 6,200
Minority interest (3)................................................................ 4,406 3,662
------------- -------------
Net income applicable to common shareholders (1)..................................... $ 3,052 $ 2,538
------------- -------------
------------- -------------
Net income per share of Common Stock................................................. $ 1.07 $ .89
Shares of Common Stock outstanding................................................... 2,865 2,865
CASH FLOW DATA:
Cash flows from operating activities (4)............................................. $ 9,297 $ 7,906
Cash flows used in investing activities (5).......................................... 609 457
Cash flows used in financing activities (6).......................................... 7,050 4,206
OTHER DATA:
Cash Available for Distribution (7).................................................. $ 12,375 $ 9,280
Common Stock and OP Units outstanding................................................ 7,000 7,000
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
BALANCE SHEET DATA:
Investment in Golf Courses......................................................................... $ 63,532
Mortgages and notes payable........................................................................ 4,325
Minority interest in Operating Partnership......................................................... 34,730
Total stockholders' equity......................................................................... 24,061
</TABLE>
(NOTES ON PAGE 41)
39
<PAGE>
THE PRIOR OWNERS AND GOLF COURSES
SELECTED HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
HERITAGE
GOLF LEGENDS GOLF CLUB OYSTER BAY
--------------------- --------------------- ---------------------
YEAR ENDED YEAR ENDED YEAR ENDED
--------------------- --------------------- ---------------------
12/31/94 12/31/95 12/31/94 12/31/95 12/31/94 12/31/95
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue from golf
operations................... $ 8,034 $ 8,003 $ 3,088 $ 3,156 $ 3,249 $ 3,459
Other revenue................. 2,012 2,177 847 782 866 865
--------- --------- --------- --------- --------- ---------
Total revenue................. 10,046 10,180 3,935 3,938 4,115 4,324
--------- --------- --------- --------- --------- ---------
Operating expenses............ 5,707 5,739 2,411 2,442 1,965 2,126
Depreciation and
amortization................. 1,291 1,256 358 319 181 187
Interest...................... 857 877 63 63 78 77
--------- --------- --------- --------- --------- ---------
Total expenses................ 7,855 7,872 2,832 2,824 2,224 2,390
--------- --------- --------- --------- --------- ---------
Net income (loss)............. $ 2,191 $ 2,308 $ 1,103 $ 1,114 $ 1,891 $ 1,934
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
CASH FLOW DATA:
Cash Flows from operating
activities................. $ 4,312 $ 3,537 $ 1,814 $ 969 $ 2,218 $ 2,080
Cash Flows from investing
activities................. $ (1,633) $ (3,372) $ (92) $ (913) $ (20) $ (1,207)
Cash Flows from financing
activities................. $ (2,753) $ (164) $ (1,689) $ (133) $ (2,169) $ (902)
OTHER DATA:
EBITDA (9).................. $ 4,339 $ 4,441 $ 1,524 $ 1,496 $ 2,150 $ 2,198
<CAPTION>
LEGENDS OF NORTHGATE
VIRGINIA (8) TOTAL LEGENDS GOLF COUNTRY CLUB
--------------------- --------------------- ---------------------
YEAR ENDED YEAR ENDED YEAR ENDED
--------------------- --------------------- ---------------------
12/31/94 12/31/95 12/31/94 12/31/95 12/20/94 12/20/95
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING DATA:
Revenue from golf
operations................... -- -- $ 14,371 $ 14,619 $ 2,594 $ 2,768
Other revenue................. $ 1,000 -- 4,725 3,823 1,568 1,798
--------- --------- --------- --------- --------- ---------
Total revenue................. $ 1,000 -- 19,096 18,442 4,162 4,566
--------- --------- --------- --------- --------- ---------
Operating expenses............ -- $ 15 10,083 10,322 3,114 3,140
Depreciation and
amortization................. -- 29 1,830 1,791 401 323
Interest...................... -- -- 998 1,017 475 485
--------- --------- --------- --------- --------- ---------
Total expenses................ -- 44 12,911 13,130 3,990 3,948
--------- --------- --------- --------- --------- ---------
Net income (loss)............. $ -- $ (44) $ 6,185 $ 5,312 $ 172 $ 618
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
CASH FLOW DATA:
Cash Flows from operating
activities................. $ -- $ (15) $ 8,345 $ 6,570 $ 584 $ 543
Cash Flows from investing
activities................. $ -- $ (11,443) $ (1,747) $ (16,932) $ (81) $ (347)
Cash Flows from financing
activities................. $ -- $ 11,458 $ (6,610) $ (10,257) $ (506) $ (273)
OTHER DATA:
EBITDA (9).................. $ 1,000 $ (15) $ 9,013 $ 8,120 $ 1,048 $ 1,426
<CAPTION>
THE WOODLANDS (10) OLDE ATLANTA
--------------------- ---------------------
YEAR ENDED YEAR ENDED
--------------------- ---------------------
12/31/94 12/31/95 12/31/94 12/31/95
--------- --------- --------- ---------
OPERATING DATA:
Revenue from golf
operations................... $ 384 $ 1,455 $ 1,413 $ 1,546
Other revenue................. 80 291 442 466
--------- --------- --------- ---------
Total revenue................. 464 1,746 1,855 2,012
--------- --------- --------- ---------
Operating expenses............ 363 1,074 1,398 1,434
Depreciation and
amortization................. 104 247 443 375
Interest...................... 134 424 143 202
--------- --------- --------- ---------
Total expenses................ 601 1,745 1,984 2,011
--------- --------- --------- ---------
Net income (loss)............. $ (137) $ 1 $ (129) $ 1
--------- --------- --------- ---------
--------- --------- --------- ---------
CASH FLOW DATA:
Cash Flows from operating
activities................. $ (26) $ 220 $ 320 $ 375
Cash Flows from investing
activities................. $ (4,330) $ (5) $ (196) $ (53)
Cash Flows from financing
activities................. $ 4,382 $ (190) $ (72) $ (391)
OTHER DATA:
EBITDA (9).................. $ 101 $ 672 $ 457 $ 578
</TABLE>
<TABLE>
<CAPTION>
HERITAGE
GOLF LEGENDS GOLF CLUB OYSTER BAY
--------------------- --------------------- ---------------------
NINE MONTHS ENDED NINE MONTHS HENDED NINE MONTHS ENDED
--------------------- --------------------- ---------------------
9/30/95 9/30/95 9/30/95
(UNAUD.) 9/30/96 (UNAUD.) 9/30/96 (UNAUD.) 9/30/96
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue from golf
operations................... $ 6,128 $ 6,126 $ 2,472 $ 2,413 $ 2,676 $ 2,490
Other revenue................. 1,615 1,888 599 555 667 591
--------- --------- --------- --------- --------- ---------
Total revenue................. 7,743 8,014 3,071 2,968 3,343 3,081
--------- --------- --------- --------- --------- ---------
Operating expenses............ 4,303 4,805 1,866 1,662 1,672 1,588
Depreciation and
amortization................. 928 945 238 225 137 137
Interest...................... 654 602 47 41 58 52
--------- --------- --------- --------- --------- ---------
Total expenses................ 5,885 6,352 2,151 1,928 1,867 1,777
--------- --------- --------- --------- --------- ---------
Net income (loss)............. $ 1,858 $ 1,662 $ 920 $ 1,040 $ 1,476 $ 1,304
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
CASH FLOW DATA:
Cash Flows from operating
activities................. $ 1,710 $ 3,121 $ 711 $ 1,516 $ 1,629 $ 1,591
Cash Flows from investing
activities................. $ (1,744) $ (2,742) $ (888) $ (1,371) $ (939) $ (956)
Cash Flows from financing
activities................. $ (135) $ (533) $ 85 $ (181) $ (804) $ (718)
OTHER DATA:
EBITDA (9).................. $ 3,440 $ 3,209 $ 1,205 $ 1,306 $ 1,671 $ 1,493
<CAPTION>
LEGENDS OF NORTHGATE
VIRGINIA (8) TOTAL LEGENDS GOLF COUNTRY CLUB
--------------------- --------------------- ---------------------
NINE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
--------------------- --------------------- ---------------------
9/30/95 9/30/95 9/20/95
(UNAUD.) 9/30/96 (UNAUD.) 9/30/96 (UNAUD.) 9/20/96
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING DATA:
Revenue from golf
operations................... $ -- $ 325 $ 11,276 $ 11,354 $ 2,060 $ 2,190
Other revenue................. -- 62 2,881 3,095 1,193 1,239
--------- --------- --------- --------- --------- ---------
Total revenue................. -- 387 14,157 14,449 3,253 3,429
--------- --------- --------- --------- --------- ---------
Operating expenses............ -- 1,746 7,841 9,800 2,360 2,482
Depreciation and
amortization................. -- 272 1,303 1,579 245 241
Interest...................... -- 188 759 883 356 389
--------- --------- --------- --------- --------- ---------
Total expenses................ -- 2,206 9,903 12,262 2,961 3,112
--------- --------- --------- --------- --------- ---------
Net income (loss)............. $ -- $ (1,819) $ 4,254 $ 2,187 $ 292 $ 317
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
CASH FLOW DATA:
Cash Flows from operating
activities................. $ -- $ (1,054) $ 4,041 $ 5,174 $ 211 $ 573
Cash Flows from investing
activities................. $ -- $ (36) $ (3,563) $ (5,105) $ (129) $ (155)
Cash Flows from financing
activities................. $ -- $ 1,188 $ (854) $ (244) $ (178) $ (423)
OTHER DATA:
EBITDA (9).................. $ -- $ (1,359) $ 6,316 $ 4,649 893 $ 947
<CAPTION>
THE WOODLANDS OLDE ATLANTA
--------------------- ---------------------
NINE MONTHS ENDED NINE MONTHS ENDED
--------------------- ---------------------
9/30/95 9/30/95
(UNAUD.) 9/30/96 (UNAUD.) 9/30/96
--------- --------- --------- ---------
OPERATING DATA:
Revenue from golf
operations................... $ 1,215 $ 1,206 $ 1,272 $ 1,375
Other revenue................. 236 244 351 402
--------- --------- --------- ---------
Total revenue................. 1,451 1,450 1,623 1,777
--------- --------- --------- ---------
Operating expenses............ 795 841 1,035 1,282
Depreciation and
amortization................. 184 186 284 243
Interest...................... 320 274 145 167
--------- --------- --------- ---------
Total expenses................ 1,299 1,301 1,464 1,692
--------- --------- --------- ---------
Net income (loss)............. $ 152 $ 149 $ 159 $ 85
--------- --------- --------- ---------
--------- --------- --------- ---------
CASH FLOW DATA:
Cash Flows from operating
activities................. $ 365 $ 334 $ 401 $ 252
Cash Flows from investing
activities................. $ (3) $ (29) $ (64) $ (19)
Cash Flows from financing
activities................. $ (214) $ (301) $ (318) $ (200)
OTHER DATA:
EBITDA (9).................. $ 656 609 $ 588 $ 495
</TABLE>
(NOTES ON PAGE 41)
40
<PAGE>
- ---------------
(1) Represents payments of Base Rent from the Initial Lessees to the Company
calculated on a pro forma basis as if the beginning of the period presented
was the beginning of a lease year except for Legends of Virginia which
reflects base rent from Stonehouse Golf Club and Royal New Kent which opened
in June 1996 and August 1996, respectively. Participating Lease revenue
reflects the periods during which the Golf Courses were actually operating.
If Stonehouse and Royal New Kent had been operating during the entire period
presented, (i) Participating Lease revenue would have been $3,706 and $1,846
higher for the periods ended December 31, 1995 and September 30, 1996,
respectively, for a total of $14,988 and $11,241, respectively; (ii)
depreciation and amortization would have been $1,307 and $654 higher for the
periods ended December 31, 1995 and September 30, 1996, respectively, for a
total of $3,126 and $2,345, respectively; and (iii) net income would have
been $982 and $487 higher, respectively, for a total of $4,034 and $3,025,
respectively.
(2) Represents legal, audit, office, franchise taxes, salaries and other
general and administrative expenses to be paid by the Company.
(3) Calculated as approximately 59.1% of the Operating Partnership's net
income.
(4) Represents the Company's income before minority interest adjusted for
non-cash depreciation and amortization. Estimated pro forma cash flows from
operating 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.
(5) Represents the amount of the reserve which the Company will be required to
make available annually under the Participating Leases to fund capital
expenditures, calculated as 2.0% to 3.0% of Gross Golf Revenue at the Golf
Courses.
(6) Represents estimated initial distributions to be paid based on the
anticipated initial annual dividend rate of $1.625 per share of Common Stock
and OP Unit and an aggregate of 7,000,356 shares of Common Stock and OP
Units outstanding and initial debt of $4,325,000.
(7) Cash Available for Distribution represents Funds From Operations, less pro
forma reserves for capital expenditures under the Participating Leases.
(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.
(9) EBITDA is defined as operating income before interest, income taxes,
depreciation and amortization. Management considers EBITDA to be an
important measure of the cash flows from operations of the Initial Lessees
(before payment of debt service obligations and non-cash depreciation
charges). EBITDA does not represent cash generated from operating activities
in accordance with generally accepted accounting principles and 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.
(10) The Woodlands commenced operations in August 1994.
41
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Upon completion of the Offering and the Formation Transactions, the
Operating Partnership will own the Golf Courses, and the Company, through its
wholly owned subsidiaries, GTA GP and GTA LP, will own an approximately 40.9%
interest in the Operating Partnership. GTA GP will be the sole general partner
of the Operating Partnership. The Company's primary source of revenue will be
the Lease Payments under the Participating Leases. Each Initial Lessee will have
nominal capitalization and an Initial Lessee's ability to make the Lease
Payments to the Company under the Participating Leases will be dependent upon
the Initial Lessee's ability to generate sufficient cash flow from the operation
of the Golf Course(s) leased by it. Each Golf Course will be leased by a
separate Initial Lessee except for the Heathland, Moorland and Parkland courses
(collectively, the "Legends Resort Courses"), which share a common clubhouse,
driving range, golf carts and other facilities, and Royal New Kent and
Stonehouse Golf Club, both of which were recently opened and are located in
close proximity to each other. Each of these two groups of courses will be
leased by a single Legends Lessee pursuant to two Participating Leases. The
Participating Leases provide for the Company to receive 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 the
increase in Gross Golf Revenues over the Gross Golf Revenues for the Golf Course
for the year ended December 31, 1996, as adjusted by the Company 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 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.
As a result of the Formation Transactions, substantially all of the
indebtedness of the Prior Owners related to the Golf Courses will be repaid, the
Golf Courses will be contributed to the Company and the Company and the Initial
Lessees will enter into the Participating Leases providing for the Lease
Payments to the Company. In addition, depreciation of the Golf Courses will be
reflected in the results of operations of the Company following completion of
the Formation Transactions. In addition to the repayment of debt, the Initial
Lessees are expected to benefit from economies of scale resulting from their
affiliation with the Company and their participation in the Advisory
Association. Consequently, the results of operations for the Initial Lessees
following the Formation Transactions will differ significantly from the
historical results for the Prior Owners.
Management believes the principal source of growth in Gross Golf Revenues at
the Golf Courses will be increased green fees, cart fees and other related fees
(revenues per player). In order to achieve higher revenues per player,
management believes the Initial Lessees will need to continue to offer golfers a
high quality golf experience as it relates to the pace of play, condition of the
Golf Course and overall quality of the facilities.
The Company intends to acquire additional golf courses that meet one or more
of its investment criteria. The Company believes its multiple independent lessee
structure, together with the industry knowledge, experience and relationships of
management of the Company and the Initial Lessees will permit the Company to
acquire high quality golf courses. See "The Company -- Acquisitions and
Expansions -- Acquisitions." The Company expects to have access to a variety of
debt and equity financing sources to fund acquisitions, including the Line of
Credit and the ability to issue OP Units. See " -- Pro Forma Liquidity and
Capital Resources of the Company." OP Units represent limited partnership
interests in the Operating Partnership. When a golf course owner contributes a
golf course in exchange for OP Units, the owner does not recognize ordinary
income or capital gain (or loss) for federal income tax purposes until the
exercise of the OP Units' Redemption Rights. See "Partnership Agreement --
Redemption Rights." The Company believes its ability to issue OP Units will
facilitate the acquisition of quality golf courses that might not otherwise be
available for purchase.
The following discussion and analysis of financial condition and pro forma
results of operations of the Company, the Prior Owners and the Initial Lessees
is based upon the pro forma consolidated financial
42
<PAGE>
statements of the Company and the Initial Lessees which are presented elsewhere
in this Prospectus, and the historical financial statements of the Prior Owners.
In establishing the Base Rent for the Golf Courses, in addition to actual
historical results of operations the Company and the Initial Lessees considered
a number of other factors which, under the accounting rules of the Securities
and Exchange Commission, cannot be reflected in the pro forma financial
information for the Initial Lessees. Such factors include (i) declines in
revenues at certain of the Golf Courses in 1995 as a result of unusually severe
weather conditions (affecting Olde Atlanta and The Woodlands), (ii) cost savings
expected to be achieved by the Initial Lessees as a result of operational
changes following completion of the Formation Transactions (affecting The
Legends Group courses and Olde Atlanta), (iii) revenue enhancing programs which
certain Initial Lessees intend to implement following completion of the
Formation Transactions (affecting the Legends Resort Courses, Oyster Bay and
Heritage Golf Club, and (iv) estimated revenues and expenses at the two recently
opened Golf Courses (Royal New Kent and Stonehouse Golf Club). The pro forma
financial information for the Company and the Initial Lessees reflects initial
Base Rent and no Participating Rent.
PRO FORMA RESULTS OF OPERATIONS OF THE COMPANY
On a pro forma basis for the year ended December 31, 1995 and the nine
months ended September 30, 1996, the Company would have received $11,282,000 and
$9,395,000, respectively, in revenue from the Participating Leases for the Golf
Courses. This amount does not include $3,706,000 and $1,846,000 in rent from
Legends of Virginia LC for the year ended December 31, 1995 and the nine months
ended September 30, 1996, respectively, 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 is contractually entitled to receive rent of approximately $14,988,000
in its first full year of operation.
Total pro forma expenses before minority interest, totaling $3,824,000 and
$3,195,000 for the year ended December 31, 1995 and the nine months ended
September 30, 1996, 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, 1995 and
nine months ended September 30, 1996 do not include depreciation related to the
Legends of Virginia Golf Courses totaling $1,307,000 and $654,000 related to
periods these courses were not operational in 1995 and 1996. If these courses
had been operational in 1995 and all of 1996, total pro forma expenses for the
year ended December 31, 1995 and the nine months ended September 30, 1996 would
have been $5,131,000 and $3,849,000, respectively.
Minority interest totaling $4,406,000 for the year ended December 31, 1995
($5,823,000 if the Legends of Virginia Golf Courses had been fully operational)
and $3,662,000 for the nine months ended September 30, 1996 ($4,367,000 if the
Legends of Virginia Golf Courses had been fully operational) reflects the 59.1%
interest of the Prior Owners and management in the pro forma net income of the
Operating Partnership.
Pro forma net income for the year ended December 31, 1995 is $3,052,000
($4,034,000 if the Legends of Virginia Golf Courses had been fully operational).
Pro forma net income for the nine months ended September 30, 1996 is $2,538,000
($3,025,000 if the Legends of Virginia Golf Courses had been fully operational).
PRO FORMA LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
On a pro forma basis, cash flow from operating activities for the year ended
December 31, 1995, excluding changes in working capital, would have been
$9,297,000 ($13,003,000 if the Legends of Virginia Golf Courses had been fully
operational). This reflects net income before minority interest, plus non-cash
charges to income for depreciation and loan fee amortization. Cash flows used in
investing activities reflects capital expenditures of $609,000, calculated based
upon the Company's capital expenditure reserves required by the terms of the
Participating Leases. Cash flows used in financing activities, totaling
$7,050,000, represents distributions (based upon an initial estimated per share
and OP Unit distribution rate of $1.625) to holders of the Common Stock and OP
Units and the amount of the initial borrowing of $4,325,000.
43
<PAGE>
The Company's principal source of cash to meet its cash requirements,
including distributions to its stockholders, will be its share of the Operating
Partnership's cash flow. The Operating Partnership's sole source of revenue will
be Lease Payments under the Participating Leases. The Initial Lessees have
nominal capitalization and the ability of the Initial Lessees to make Lease
Payments to the Operating Partnership and, therefore, the Company's liquidity,
including the ability to make distributions to its stockholders, will depend
upon the Initial Lessees' ability to generate sufficient cash flow from their
operations at their respective Golf Courses.
Concurrent with the completion of the Formation Transactions, the Company
will borrow approximately $4,325,000 which, together with the net proceeds of
the Offering, will be used to retire mortgage indebtedness and other debt, to
fund the cash portion of the purchase of the Golf Courses and to provide
approximately $544,000 in initial working capital ($8,537,000 if the
underwriters' overallotment option is exercised). The Company has agreed to
maintain approximately $4,325,000 of indebtedness for up to 10 years to
accommodate a Prior Owner's efforts to seek to minimize certain adverse tax
consequences from the contribution of one of the Golf Courses to the Company.
Subsequent to the closing of the Offering, the Company expects to have a $75
million Line of Credit, which will be used primarily for the acquisition of
additional golf courses. The Company has not, however, finalized negotiations on
the Line of Credit and there can be no assurance that the Company will have
access to sufficient debt and equity financing to allow it successfully to
pursue its acquisition strategy. The Company anticipates that the terms of the
Line of Credit will impose certain conditions on the Company's ability to draw
on the Line of Credit. Such conditions may include borrowing base limitations,
which initially could limit the availability of funds under the Line of Credit,
a requirement that draws be used primarily to fund acquisitions and a
requirement that the lender be granted a security interest in any golf courses
acquired with proceeds from borrowings under of the Line of Credit as well as
other Golf Courses owned by the Company. If the Company is not able to
successfully finalize the Line of Credit, the Company anticipates that future
acquisitions would be funded with debt financing to be secured by the particular
acquisition property 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.
The Company believes its acquisition capabilities will be enhanced by its
initial capital structure. Upon completion of the Offering and the Formation
Transactions, consolidated indebtedness will comprise approximately 3% of the
total market capitalization of the Company on a pro forma basis. The Company
intends to maintain a capital structure with consolidated indebtedness
representing no more than 50% of its total market capitalization. As a
comparison, The Legends Group, which will be contributing seven Golf Courses to
the Operating Partnership, had a debt to equity ratio in excess of 5 to 1 as of
December 31, 1995, based upon the historical book value of the equity and debt
of the contributed Golf Courses.
The Company will invest in additional golf courses as suitable opportunities
arise, and the Company will not undertake investments unless adequate sources of
financing are available. Future acquisitions of golf courses will be financed,
in whole or in part, with proceeds from the Line of Credit, additional issuances
of OP Units or shares of Common Stock, borrowings under financing arrangements
or other securities issuances. The Company currently has no binding agreement to
acquire any golf course, other than the Golf Courses, and there can be no
assurance that the Company will make any acquisitions of any other golf courses.
Pursuant to the Participating Leases, the Company is obligated to reserve
annually an amount equal to between 2% and 3% of Gross Golf Revenue at each Golf
Course to fund capital expenditures approved by the Company, including the
periodic replacement or refurbishment of improvements and equipment. Capital
expenditures in excess of that reserve are required to be funded by the Initial
Lessees. The Company anticipates entering into similar arrangements with respect
to golf courses it acquires in the future.
THE LEGENDS GROUP PRIOR OWNERS
Pursuant to the Formation Transactions, the Company will acquire the
following seven Golf Courses from The Legends Group: Heritage Golf Club,
Heathland, Moorland, Parkland, Oyster Bay, Royal New Kent and
44
<PAGE>
Stonehouse Golf Club. These seven Golf Courses will be operated by four Legends
Lessees. The Legends Resort Courses -- Heathland, Moorland and Parkland -- share
a common clubhouse, driving range, golf carts and other facilities and will be
leased by a single Legends Lessee pursuant to a single Participating Lease. The
newly-opened Golf Courses -- Royal New Kent and Stonehouse Golf Club -- are in
similar stages of operation and will be leased by a single Legends Lessee
pursuant to a single Participating Lease. Each of the two other Legends Golf
Courses will be leased by a separate Legends Lessee. Aggregate Base Rent under
the Participating Leases with the Legends Lessees represents approximately 80.4%
of the Company's pro forma revenue under the Participating Leases for the year
ended December 31, 1995. The Legends Group Prior Owners will receive OP Units
representing approximately 53.4% of the outstanding Common Stock and OP Units
upon completion of the Formation Transactions.
The following discussion and analysis addresses the combined historical
results of operations of the 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 1995 and 1996 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 being 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
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenue from golf operations increased 0.7% to $11,354,000 from $11,278,000.
Revenue per player increased 4.0% to $57.93 from $55.69, principally as a result
of increased green fees and golf cart rentals. Total rounds played decreased
3.3% from 202,500 to 196,000. 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. 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.
Other revenue sources, including food and beverage and merchandise sales are
significantly influenced by the number of rounds played. Despite the decrease in
the number of rounds played, other revenue increased 7.5% to $3,095,000 from
$2,881,000 principally due to a 18.7% 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 24.4% to $11,379,000 from $9,144,000. Principal
components of the $2,235,000 increase were initial operating costs of
approximately $2,018,000 associated with the two recently
45
<PAGE>
opened Golf Courses, (ii) a one time increase in chemicals and fertilizer
expense of approximately $90,000, (iii) periodic resurfacing of cart paths
totaling $50,000, and (iv) food and beverage costs attributed to an increase in
revenues.
Interest expense increased 16.3% to $883,000 from $759,000 as a result of
higher borrowings incurred in connection with the completion and pre-opening
costs of the two recently opened Golf Courses.
Net income decreased 48.6% from $4,254,000 to $2,187,000 primarily as a
result of the additional $2,018,000 of expenses associated with the two recently
opened Golf 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 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 the Company'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.
YEAR ENDED DECEMBER 31, 1994 AND 1993
Revenue from golf operations increased 6.8% to $14,371,000 from $13,455,000.
The increase resulted primarily from a 1.8% increase in the number of rounds
played, from 277,700 to 282,800, and a 4.6% increase in revenue per player
(principally as a result of increased green fees and golf cart rentals), from
$48.32 to $50.55. The growth in the number of rounds played, as well as the
increase in the revenue per player, reflected the general growth in total rounds
played in the Myrtle Beach area. New golf courses continued to open in the
region reflecting the expansion of Myrtle Beach as a golf destination resort
area.
Operating expenses increased 4.1% to $11,913,000 from $11,446,000. Repairs
and maintenance costs and depreciation and amortization expenses increased as a
result of full stabilization of operations at the Parkland course, which opened
in 1992. Offsetting these increases was a decline in general and administrative
costs in early 1993 due to the elimination of costs associated with the start-up
of operations at Parkland.
Interest expense increased 61.2% to $998,000 from $619,000. The increase
resulted from higher levels of borrowing incurred in connection with the
commencement of construction of the two recently opened Golf Courses.
Net income increased 7.4% to $5,185,000 from $4,828,000.
46
<PAGE>
LEGENDS LESSEES
On a pro forma basis, assuming the Formation Transactions had occurred as of
the beginning of the respective periods, the pro forma results of operations of
the Legends Lessees for the year ended December 31, 1995 and the nine months
ended September 30, 1996 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
GOLF COURSES DECEMBER 31, 1995 SEPTEMBER 30, 1996
- ------------------------------------------------------ ----------------- ------------------
<S> <C> <C>
GOLF LEGENDS
(Heathland, Moorland and Parkland)
Total revenue....................................... $ 10,180 $ 8,014
Participating Lease payment......................... 4,670 3,503
Net income (loss)................................... 138 12
Cash flows from operating activities (1)............ 307 131
Cash flows from investing activities (2)............ -- --
Cash flows from financing activities (3)............ -- --
EBITDA (4).......................................... 359 155
HERITAGE GOLF CLUB
Total revenue....................................... $ 3,938 $ 2,968
Participating Lease payment......................... 1,825 1,369
Net income (loss)................................... (187) 56
Cash flows from operating activities (1)............ (126) 94
Cash flows from investing activities (2)............ -- --
Cash flows from financing activities (3)............ -- --
EBITDA (4).......................................... (111) 101
OYSTER BAY
Total revenue....................................... $ 4,324 $ 3,081
Participating Lease payment......................... 1,856 1,392
Net income (loss)................................... 295 10
Cash flows from operating activities (1)............ 348 106
Cash flows from investing activities (2)............ -- --
Cash flows from financing activities (3)............ -- --
EBITDA (4).......................................... 362 116
LEGENDS OF VIRGINIA (5)
(Royal New Kent and Stonehouse Golf Club)
Total revenue....................................... $ -- $ 387
Participating Lease payment......................... -- 933
Net loss............................................ (15) (2,292)
Cash flows from operating activities (1)............ (15) (2,292)
Cash flows from investing activities (2)............ -- --
Cash flows from financing activities (3)............ -- --
EBITDA (4).......................................... (15) (2,292)
LEGENDS GOLF
(Totals for above seven courses)
Total revenue....................................... $ 18,442 $ 14,449
Participating Lease payment......................... 8,351 7,197
Net income (loss)................................... 231 (2,214)
Cash flows from operating activities (1)............ 514 (1,961)
Cash flows from investing activities (2)............ -- --
Cash flows from financing activities (3)............ -- --
EBITDA (4).......................................... 595 (1,920)
</TABLE>
(NOTES ON PAGE 48)
47
<PAGE>
- ------------
(1) Represents the applicable Initial Lessee's 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 liabilities. The Initial Lessees are newly formed
entities, and the Company does not believe these excluded items are material
to cash flows from operating activities.
(2) Cash flows from investing activities would consist 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 Initial Lessees are not
expected to be material.
(3) 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.
(4) EBITDA is defined as operating income before interest, income taxes,
depreciation and amortization. Management considers EBITDA to be an
important measure of the cash flows from operations of the Initial Lessees
(before payment of debt service obligations and non-cash depreciation
charges). EBITDA does not represent cash generated from operating activities
in accordance with generally accepted accounting principles and is not to be
considered as an alternative to net income as an indication of financial
performance or to cash flows from operating activities as a measure of
liquidity.
(5) Reflects four months of operations for the Stonehouse Golf Club and two
months of operations for Royal New Kent for the period ended September 30,
1996. Annual initial Base Rent for Royal New Kent and Stonehouse Golf Club
is $3,706,000. Royal New Kent and Stonehouse Golf Club opened in June and
August 1996, respectively.
NORTHGATE COUNTRY CLUB
In 1982, an affiliate of the Prior Owner of Northgate Country Club began
development of the 430 acres of Northgate Forest as a master planned, upscale
country club residential subdivision. The Golf Course opened in 1984. When
completed, the development is expected to contain approximately 310 homesites,
approximately 30 acres of complementary commercial development, and Northgate
Country Club, which ultimately will have 27 holes of golf. Currently, the Golf
Course has 18 holes. To date, approximately one-fourth of the residential
building sites in the Northgate Forest development have homes constructed on
them. Management believes that revenue growth at the Northgate Golf Course will
come from both future Northgate Forest residents, as well as from non-Northgate
residents who are attracted to the Northgate Country Club because of the quality
of the golf experience as well as because of the exclusive and upscale quality
of the development that surrounds the clubhouse and Golf Course.
Northgate is a private country club. Besides revenue generated by full
country club members, Northgate generates revenues from golf tournaments,
private parties and non-golf club memberships.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 20, 1996 AND 1995
Golf revenues increased 6.3% to $2,190,000 from $2,060,000. The growth in
revenues was primarily a result of an increase in fees from club membership
sales and annual membership renewal fees and private golf outing events. The
Company believes that the additional memberships are attributable to concerted
marketing efforts to sell full and special purpose memberships. The enhanced
usage of the club is attributable to intensified sales and service efforts, as
well as the construction of an additional restaurant and a tennis center. The
Company believes that the new restaurant and tennis center are partially
responsible for the increase in memberships and anticipates that they will
continue to have a positive impact on operations. Other revenue increased 3.9%
to $1,239,000 from $1,193,000 which reflects increased usage of the club.
Operating costs and expenses increased 4.5% to $2,723,000 from $2,605,000.
This increase resulted from an increase in food and beverage costs as well as
the increase in non-golf course facilities maintenance and repair costs.
Interest expense increased 9.3% to $389,000 from $356,000 primarily as a
result of increasing interest rates and average outstanding balances.
Net income increased 8.6% to $317,000 from $292,000.
48
<PAGE>
YEAR ENDED DECEMBER 20, 1995 AND 1994
Golf revenues increased 6.7% to $2,768,000 from $2,594,000. The increase is
primarily attributable to a net gain in club membership and usage of the club by
the new members, as well as rate increases in major fee categories (monthly
dues, guest fees, golf cart rentals) imposed in 1995. Revenue per player
increased 1.6% to $59.40 from $58.46. Other revenue increased 14.7% to
$1,798,000 from $1,568,000 due to increases in food and beverage revenue
resulting from growth in rounds played and banquet functions.
Operating costs and expenses decreased 1.5% to $3,463,000 from $3,515,000
primarily due to improved operating efficiencies.
Interest expense increased 2.1% to $485,000 from $475,000.
Net income increased 259.3% to $618,000 from $172,000.
YEAR ENDED DECEMBER 20, 1994 AND 1993
Golf revenues increased by 5.4% to $2,594,000 from $2,461,000, primarily as
a result of a net gain in club members, and usage of the club by the new
members. The additional memberships are attributable to increased marketing
efforts to sell full and special purpose memberships. Other revenue increased
1.1% to $1,568,000 from $1,551,000.
Operating costs and expenses increased 4.0% to $3,515,000 from $3,379,000,
consistent with the increase in club usage.
Interest expense declined 48.0% to $475,000 from $914,000 primarily as a
result of $462,000 of lender participation fees incurred in 1993. No lender
participation fees were incurred in 1994.
Net income increased to $172,000 from a net loss of $281,000.
NORTHGATE LESSEE
On a pro forma basis, assuming the Formation Transactions had occurred as of
the beginning of the respective periods, the pro forma results of operations of
the Initial Lessee for Northgate Country Club were as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 20, 1995 SEPTEMBER 20, 1996
------------------- -------------------
<S> <C> <C>
Total revenue......................................... $ 4,566 $ 3,429
Participating Lease payment........................... 1,407 1,055
Net income (loss)..................................... 35 (95)
Cash flows from operating activities (1).............. 60 (77)
Cash flows from investing activities (2).............. -- --
Cash flows from financing activities (3).............. -- --
EBITDA (4)............................................ 60 (77)
</TABLE>
- ---------------
(1) Represents the Northgate Initial Lessee's 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. As the Northgate Initial Lessee will
be a newly formed entity, the Company does not believe these excluded items
are material to cash flows from operating activities.
(2) 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 funded by the Northgate Initial Lessee are
not expected to be material.
(3) Cash flows from financing activities would primarily include transactions
with the Northgate Initial Lessee's 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.
(4) EBITDA is defined as operating income before interest, income taxes,
depreciation and amortization. Management considers EBITDA to be an
important measure of the cash flows from operations of the Initial Lessees
(before payment of debt service obligations and non-cash depreciation
charges). EBITDA does not represent cash generated from operating activities
in accordance with generally accepted accounting principles and is not to be
considered as an alternative to net income as an indication of financial
performance or to cash flows from operating activities as a measure of
liquidity.
49
<PAGE>
THE WOODLANDS
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Golf revenues decreased 0.7% to $1,206,000 from $1,215,000, primarily as a
result of a 6.4% decrease in rounds played from 36,431 to 34,087. The decline in
rounds played resulted primarly from the closure of nine holes for 16 days
during June 1996 due to unusually harsh winter weather and resulting turf
damage. Prior to the closing of the Golf Course, revenues had increased $24,204
or 3.8% through the first five months of the year as compared to the same period
in 1995. Since the reopening of the nine holes, revenues for the third quarter
of 1996 increased $22,820 or 5.6% as compared to the same period in 1995.
Revenue per player increased 6.0% to $34.71 from $32.75 as a result of a
6.0% increase in daily golf fees. Management believes that golf revenues will
continue to be favorably impacted by the formation in 1995 of the Gulf Shores
Golf Association, an association of golf course owners in the Gulf Shores area.
The Association's goal is to promote Gulf Shores as a golf destination.
Food and beverage revenues decreased 8.5% to $130,000 from $142,000 as a
result of the decrease in rounds played during the period. The Company believes
food and beverage revenues per golfer at The Woodlands are lower than the Gulf
Shores market average principally because of the temporary clubhouse facility
which the Woodlands Initial Lessee plans to replace with a new permanent
facility in 1997. See "The Company -- Acquisitions and Expansions --
Expansions."
Despite the decrease in rounds played, merchandise revenues increased 10.7%
to $103,000 from $93,000. This increase is due largely to discount sales of
merchandise. Management of The Woodlands also hired an assistant director of
golf in 1995 whose focus is largely merchandising inventory.
Operating costs and expenses increased 4.9% to $1,027,000 from $979,000
principally as a result of an increase in maintenance expenses resulting from an
unusually cold winter that significantly damaged the greens at the course.
Additional fertilizer and topdressing expenses were incurred to reestablish the
damaged greens.
Interest expense decreased 14.4% to $274,000 from $320,000 due to a
reduction in outstanding borrowings.
Net income decreased 2.0% to $149,000 from $152,000.
YEAR ENDED DECEMBER 31, 1995
Comparisons between the years ended December 31, 1995 and 1994 are not
meaningful since the course opened in August 1994.
Total rounds played during the year were 43,459. Golf revenues were
$1,455,000. The Company believes revenues were favorably impacted by marketing
efforts of the recently formed Gulf Shores Golf Association. Revenue per player
increased 17.8% to $33.49 from $28.43.
Food and beverage revenues were $169,000. Merchandise revenues were
$116,000.
Operating costs and expenses were $1,321,000. Interest expense was $424,000
and net income was $1,000 after depreciation of $247,000 for the first full year
of operations.
YEAR ENDED DECEMBER 31, 1994
The course opened in August 1994. Total rounds played were 13,490. Golf
revenues for 1994 were $384,000 or an average of $28.43 per player. Management
of the course priced golf fees $6 to $10 below the market average to encourage
golfers to try the new facility. Golf fees were increased in 1995. Food and
beverage revenues were $56,000. Merchandise revenues were $23,000.
50
<PAGE>
Operating costs and expenses were $467,000, primarily due to costs
associated with the opening of the golf course. Start-up costs included expenses
incurred for operating supplies, increased labor and increased maintenance.
Fertilization and turf grass replacement expenses were above normal daily
maintenance due to immature turf grass at the course. The course also had
extensive irrigation and drainage work performed after it was opened.
A net loss of $137,000 was recognized after depreciation of $104,000.
THE WOODLANDS LESSEE
On a pro forma basis, assuming the Formation Transactions had occurred as of
the beginning of the respective periods, the pro forma results of operations of
the Initial Lessee for The Woodlands were as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- -------------------
<S> <C> <C>
Total revenue......................................... $ 1,746 $ 1,450
Participating Lease payment........................... 679 509
Net income (loss)..................................... (7) 100
Cash flows from operating activities (1).............. (7) 100
Cash flows from investing activities (2).............. -- --
Cash flows from financing activities (3).............. -- --
EBITDA (4)............................................ (7) 100
</TABLE>
- ---------------
(1) Represents The Woodlands Initial Lessee's 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. As The Woodlands Initial Lessee will
be a newly formed entity, the Company does not believe these excluded items
are material to cash flows from operating activities.
(2) 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 funded by The Woodlands Initial Lessee are
not expected to be material.
(3) Cash flows from financing activities would primarily include transactions
with The Woodlands Initial Lessee's 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.
(4) EBITDA is defined as operating income before interest, income taxes,
depreciation and amortization. Management considers EBITDA to be an
important measure of the cash flows from operations of the Initial Lessees
(before payment of debt service obligations and non-cash depreciation
charges). EBITDA does not represent cash generated from operating activities
in accordance with generally accepted accounting principles and is not to be
considered as an alternative to net income as an indication of financial
performance or to cash flows from operating activities as a measure of
liquidity.
OLDE ATLANTA
Olde Atlanta, a high-end daily fee course that sells a significant number of
annual memberships, was opened in late 1993 and as of September 30, 1996 had
approximately 375 active annual memberships. Revenues at Olde Atlanta include
membership fees and dues as well as daily fees. Olde Atlanta was built in
conjunction with a 615 homesite planned community which is approximately 80%
completed.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Golf revenues increased 8.1% to $1,375,000 from $1,272,000, despite
unusually severe winter weather which resulted in approximately 1,800 fewer
rounds played. Other revenue increased 14.5% or $51,000. Total revenues
increased 9.5% or $154,000.
Operating costs and expenses increased 15.6% to $1,525,000 from $1,319,000
primarily reflecting an increase in the number of employees as operations at the
Golf Course stabilized. The remaining expense increases included legal, survey,
accounting and other costs attributable to efforts to market the course for sale
and increased promotional, incentive compensation and management fees.
Interest expense increased 15.2% or $22,000 as outstanding mortgage debt was
increased in 1995.
Net income declined 46.5% to $85,000 from $159,000.
51
<PAGE>
YEAR ENDED DECEMBER 31, 1995 AND 1994
Golf Revenues increased 9.4%, to $1,546,000 from $1,413,000. Revenue per
player grew from $32.55 to $37.53. Other revenue increased 5.4% to $466,000 from
$442,000.
Rounds played declined 5.1% to 41,195 from 43,415. Such decline was
attributable to poor weather in the first and fourth quarters of 1995 which
reduced the number of playable days. Rounds played increased during the second
and third quarters from the prior year's period.
Operating costs and expenses decreased by 1.7% to $1,809,000 from $1,841,000
primarily as a result of lower depreciation and amortization. Interest expense
increased 41.3% to $202,000 from $143,000 due to an increase in outstanding
borrowings to $2,656,000 from 1,808,000.
Net income declined to $23,000 from $81,000.
OLDE ATLANTA LESSEE
On a pro forma basis, assuming the Formation Transactions had occurred as of
the beginning of the respective periods, the pro forma results of operations of
the Initial Lessee for Olde Atlanta were as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- -------------------
<S> <C> <C>
Total revenue......................................... $ 2,012 $ 1,777
Participating Lease payment........................... 845 634
Net loss.............................................. (275) (78)
Cash flows from operating activities (1).............. (275) (78)
Cash flows from investing activities (2).............. -- --
Cash flows from financing activities (3).............. -- --
EBITDA (4)............................................ (275) (78)
</TABLE>
- ---------------
(1) Represents the Olde Atlanta Initial Lessee's 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. As the Olde Atlanta Initial Lessee
will be a newly formed entity, the Company does not believe these excluded
items are material to cash flows from operating activities.
(2) 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 funded by the Olde Atlanta Initial Lessee
are not expected to be material.
(3) Cash flows from financing activities would primarily include transactions
with the Olde Atlanta Initial Lessee's 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.
(4) EBITDA is defined as operating income before interest, income taxes,
depreciation and amortization. Management considers EBITDA to be an
important measure of the cash flows from operations of the Initial Lessees
(before payment of debt service obligations and non-cash depreciation
charges). EBITDA does not represent cash generated from operating activities
in accordance with generally accepted accounting principles and is not to be
considered as an alternative to net income as an indication of financial
performance or to cash flows from operating activities as a measure of
liquidity.
INFLATION
All of the Participating Leases provide for initial terms of 10 years with
Base Rent and Participating Rent features. Base Rent will increase by the Base
Rent Escalator for each year during the first five years of the term of each
Participating Lease (and for an additional five years if the Lessee Performance
Option is exercised). All of such leases are triple net leases requiring the
Initial Lessees to pay for all maintenance and repair, insurance, utilities and
services, thereby minimizing the effect of inflation on the Company.
SEASONALITY
The golf industry is seasonal in nature based on weather conditions and
fewer available tee times in the rainy season and the winter months. Each of the
Initial Lessees operating a Daily Fee course may vary green fees based on
changes in demand.
52
<PAGE>
THE GOLF INDUSTRY
The Company believes the United States golf industry is entering a period of
significant growth. As described below, the number of golfers in the United
States increased by 67% between 1980 and 1995, from 15 million to 25 million
golfers. The Company expects that this growth will contribute to an increase in
the number of rounds played and Gross Golf Revenues at the Golf Courses and golf
courses subsequently acquired by the Company. Golf course ownership in the
United States is highly fragmented. There are approximately 15,400 golf courses
in the United States which the Company believes are owned by approximately
11,000 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 or lease fewer than 5% of the total
number of golf courses and that fewer than 10 golf course owners own more than
10 golf courses. The Company believes that this fragmented ownership provides an
excellent opportunity for consolidation of the ownership of high quality golf
courses.
The Company believes the current lack of consolidation in the golf course
industry has resulted from a variety of factors, including scarcity of capital,
the entrepreneurial nature of many golf course owners and operators and the
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 will gradually lead to consolidation
of golf course ownership. Following the Offering, the Company believes it will
be well positioned to take advantage of opportunities to acquire select
high-quality courses because of its multiple independent lessee format, lease
structure and financial flexibility. See "The Company -- Business Strategies and
Objectives -- Acquisitions and Expansions."
Largely in response to the increasing popularity of golf, the construction
of golf courses in the United States has increased significantly in recent
years. New golf course openings from the mid 1970's through 1987 averaged
approximately 150 golf courses per year. For the period 1987 through 1995 an
average of 275 new golf courses were opened each year, with a high of 336 new
golf course openings in 1995.
The golf industry generated approximately $15 billion in revenues in the
United States in 1995. The Company believes the game of golf has exhibited
strong growth in popularity in the past 15 years as shown below:
<TABLE>
<CAPTION>
1980 1995 % CHANGE
---(MILLIONS)--- -------------
<S> <C> <C> <C>
Number of golfers.................................................... 15 25 67%
Rounds played........................................................ 358 490 37%
</TABLE>
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 anticipates that the number of
golfers, as well as the total number of rounds played, will increase as the
average age of the population continues to increase. The Company believes that
the "baby boomers," the oldest of whom are in their early 50's today, 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.
53
<PAGE>
The following graph sets forth the difference in age dispersion in the
United States between 1996 and 2010 and the effect on the number of golf rounds
played as an individual ages.
DEMOGRAPHICS
Columns Represent Average Annual Rounds/Golfer per Age Group
Graph depicting the average number of rounds of golf played in different age
groups. Graph also depicts the age dispersion in the United States between 1996
and 2010.
54
<PAGE>
The following table illustrates the growth in demand in the United States at
Daily Fee courses, as compared to municipal courses, which tend to be of lesser
quality, and private country clubs.
<TABLE>
<CAPTION>
ROUNDS PLAYED
(IN MILLIONS)
-------------------- PERCENT
1994 1995 CHANGE
--------- --------- -----------
<S> <C> <C> <C>
Daily Fee........................................................... 194.1 220.2 13.4%
Municipal........................................................... 143.7 144.1 0.3%
Private............................................................. 127.0 125.9 (0.9%)
--------- --------- ---
Total............................................................. 464.8 490.2 5.4%
</TABLE>
The Company believes that high quality Daily Fee courses (including Resort
Courses), similar to those targeted by the Company, are well situated to take
advantage of the changing demographics. High quality golf courses have generated
increased revenues by charging higher green fees in response to golfer demand.
The following table illustrates the percentage increase in weekend green fees at
Daily Fee courses.
<TABLE>
<CAPTION>
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>
55
<PAGE>
THE GOLF COURSES
The Golf Courses consist of 10 nationally or regionally recognized high
quality courses located in the mid-Atlantic, southeastern and southwestern
United States. Four of the Golf Courses were ranked among the Top Ten New
Courses by either GOLF DIGEST OR GOLF MAGAZINE in the year opened, including the
recently opened Stonehouse Golf Club, which in November 1996 was named the Best
New Upscale Course of 1996 by GOLF DIGEST. Two of the established courses
(Oyster Bay and Heritage Golf Club) have been ranked in the Top 50 Public Golf
Courses by GOLF DIGEST.
The Golf Courses include nine high quality Daily Fee courses (including six
Resort Courses) and one private country club. "Daily Fee" courses are open to
the public and generate revenues principally through green fees, golf cart
rentals, food and beverage operations, merchandise sales and driving range
charges. "Resort Courses" are Daily Fee golf courses that attract a significant
percentage of players from outside the immediate area in which the golf course
is located and generate a significant amount of revenue from golf vacation
packages. The Company considers the Daily Fee and Resort Courses to be high-end
golf courses because of the quality and maintenance of each golf course and the
average green fees, which are significantly above the averages for golf courses
in their respective geographic markets. Private country clubs are generally
closed to the public and derive revenues principally from membership dues,
initiation fees, transfer fees, golf cart rentals, guest fees, food and beverage
operations and merchandise sales.
The Company believes that the overall quality of the Golf Courses is
reflected in the green fees charged at each Golf Course, which significantly
exceed national averages. The Company believes its focus on high quality Daily
Fee golf courses and private 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 more than 3.9 million rounds played in 1995, according to the MYRTLE BEACH
GOLF HOLIDAY-TM-. In addition to golf courses, Myrtle Beach offers a mix of
entertainment, shopping and dining, as well as proximity to beaches. All of the
Golf Courses located in the Myrtle Beach vicinity (Heritage Golf Club,
Heathland, Moorland, Parkland and Oyster Bay) were developed and are currently
owned and operated by The Legends Group.
Two of the Golf Courses, Stonehouse Golf Club and Royal New Kent, are
located in the Williamsburg, Virginia area and were opened in June and August of
1996, respectively. Williamsburg is a leading tourist destination and an
emerging golf resort location, with a population of approximately 2.6 million
within a 60 mile radius, providing the area with an opportunity to attract both
resort and local golfers. Since 1995, five new courses have opened in the
Williamsburg vicinity, including two of the Golf 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 currently are owned and operated by The Legends Group.
One of the Golf Courses, The Woodlands, is located in Gulf Shores, Alabama,
a popular golf and vacation destination located near the Florida panhandle. In
addition to six area golf clubs, Gulf Shores offers 32 miles of sandy beaches,
historic sites and water sports. The remaining two Golf Courses, Northgate
Country Club and Olde Atlanta, are located within upscale master planned
communities in Houston, Texas and Atlanta, Georgia.
56
<PAGE>
The Company will acquire a 100% interest in each of the Golf Courses.
Certain information respecting each of the Golf Courses is set forth below:
<TABLE>
<CAPTION>
REVENUE PER
ROUNDS PLAYER (2)
--------------------------------- --------------------
TWELVE
MONTHS
TYPE OF YEAR ENDED SEPT.
NAME LOCATION YARDAGE (1) COURSE OPENED 1994 1995 30, 1996 1994 1995
- ------------------- ----------------- ------------- --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Heritage Golf Pawleys Island,
Club.............. SC 7,040 Resort 1986 59,524 55,094 51,108 $ 51.89 $ 57.28
Heathland.......... Myrtle Beach, SC 6,785 Resort 1990 55,393 49,312 48,728 $ 50.12 $ 55.03
Moorland........... Myrtle Beach, SC 6,799 Resort 1990 54,383 49,590 49,293 $ 50.12 $ 55.03
Parkland........... Myrtle Beach, SC 7,170 Resort 1992 50,508 46,564 46,314 $ 50.12 $ 55.03
Oyster Bay (6)..... Sunset Beach, NC 6,685 Resort 1983 62,962 62,141 55,567 $ 51.60 $ 55.66
The Woodlands Gulf Shores, AL
(7)............... 6,584 Resort 1994 13,490 43,459 41,120 $ 28.43 $ 33.49
Royal New Kent Providence Forge,
(8)............... VA 7,291 Daily Fee 1996 -- -- 2,724 -- --
Stonehouse Golf Williamsburg, VA
Club (9).......... 6,963 Daily Fee 1996 -- -- 2,227 -- --
Olde Atlanta....... Atlanta, GA 6,789 Daily Fee 1993 43,415 41,195 40,007 $ 32.55 $ 37.53
Northgate Country Houston, TX
Club (10)......... 6,540 Private 1984 44,370 46,600 45,680 $ 58.46 $ 59.40
Total ..........................................................................................................................
<CAPTION>
GROSS GOLF REVENUE (3)
----------------------------------
TWELVE
TWELVE MONTHS
MONTHS ENDED
ENDED SEPT. SEPT. 30, INITIAL BASE
NAME 30, 1996 1994 1995 1996 RENT(4)
- ------------------- ----------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Heritage Golf
Club.............. $ 60.62 $3,088,000 $3,156,000 $3,098,000 $1,825,000
Heathland.......... $ 55.22 2,776,000 2,714,000 2,695,000 1,556,000(5)
Moorland........... $ 55.70 2,726,000 2,729,000 2,746,000 1,556,000(5)
Parkland........... $ 55.29 2,532,000 2,560,000 2,561,000 1,557,000(5)
Oyster Bay (6)..... $ 58.90 3,249,000 3,459,000 3,273,000 1,856,000
The Woodlands
(7)............... $ 35.17 384,000 1,455,000 1,446,000 679,000
Royal New Kent
(8)............... $ 66.08 -- -- 180,000 1,817,000
Stonehouse Golf
Club (9).......... $ 65.08 -- -- 145,000 1,890,000
Olde Atlanta....... $ 41.17 1,413,000 1,546,000 1,647,000 845,000
Northgate Country
Club (10)......... $ 64.21 2,594,000 2,768,000 2,933,000 1,407,000
---------- ---------- ---------- ------------
Total ......... $18,762,000 $20,387,000 $20,724,000 $14,988,000
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
</TABLE>
- ---------------
(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. See "Glossary."
(4) Participating Rent is calculated based on increases in the Gross Golf
Revenue from a base year of 1996, as adjusted. Consequently, no
Participating Rent is payable on a pro forma basis for 1996.
(5) The Heathland, Moorland and Parkland Golf Courses are subject to a single
Participating Lease, and the Base Rent is equally allocated among these Golf
Courses.
(6) The Company will acquire 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. See "The Golf Courses --
Description of the Golf Courses."
(7) Opened in August 1994. The Company expects to acquire, upon completion, a
clubhouse at this Golf Course. See "The Company -- Business Strategies and
Objectives -- Acquisitions and Expansions -- Expansions."
(8) Opened in August of 1996.
(9) Opened in June of 1996.
(10) The Company expects to acquire, upon completion, an additional nine holes
at this Golf Course. See "The Company -- Business Strategies and Objectives
-- Acquisitions and Expansions -- Expansions."
DESCRIPTIONS OF THE GOLF COURSES
GENERAL
Set forth below are brief descriptions of each of the Golf Courses. Unless
otherwise noted, the Company will own fee title to the Golf Courses, free and
clear of any material liens.
RESORT COURSES
Resort Courses are Daily Fee golf courses that draw a high percentage of
players from outside the immediate area in which the course is located and
generate a significant amount of revenue 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
57
<PAGE>
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.
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 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 last golf course that was opened at the Legends Resort. Parkland
demonstrates the diversity and beauty of the local natural terrain by its
combination of tree-lined fairways, vast natural areas, deep-faced bunkers
and massive multi-level greens.
HERITAGE GOLF CLUB -- PAWLEYS ISLAND, SOUTH CAROLINA. Heritage Club was
developed and is currently managed by The Legends Group. 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 is currently operated 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.
THE WOODLANDS -- GULF SHORES, ALABAMA. The Woodlands is a 6,600-yard par 72
course which opened in 1994. The course, featuring lakes, marshes and
tree-lined fairways, was designed by Larry Nelson, former United States Open
champion and two-time PGA Championship winner. It is owned and currently
managed by Bright's Creek Development, LLC. Gulf Shores, Alabama, located
near the Florida panhandle, is an emerging golf course destination area that
includes 10 golf courses in the immediate area. Gulf Shores includes over 30
miles of white sand beaches and the historical Civil War outposts of Fort
Morgan and Fort Gaines.
Subject to certain conditions, the Company has agreed to acquire a
clubhouse to be constructed at the course by the Initial Lessee of The
Woodlands (See "The Company -- Business Strategies and Objectives --
Acquisitions and Expansions"). The Company believes that the construction of
the clubhouse will permit the Initial Lessee to attract more group and
tournament play and also permit an increase in green fees.
The Company has agreed to reconvey to the Prior Owner of The Woodlands
the land on which a portion of certain of the existing holes are located at
such time as the Prior Owner is prepared to contribute comparable
replacement golf holes at the Woodlands to the Company. All costs associated
with such exchange shall be paid for by the Prior Owner.
58
<PAGE>
HIGH-END DAILY FEE COURSES
The Company considers its Daily Fee courses to be high-end courses,
reflected in the quality and maintenance standards of the golf courses, and the
green fees, which are generally higher than other golf courses in their market.
STONEHOUSE GOLF CLUB -- WILLIAMSBURG, VIRGINIA. Located within a 10,000
acre master planned community under development by a third party, Stonehouse
Golf Club was developed and is currently managed by The Legends Group.
Stonehouse Golf Club opened in June 1996 and was named by GOLF DIGEST as the
Best New Upscale Course for 1996. Stonehouse Golf Club was designed by Mike
Strantz (formerly 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. The Initial Lessee of this Golf
Course is obligated to complete construction of a clubhouse at the Golf
Course by December 31, 1997. 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. 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. It opened
in August, 1996. Royal New Kent is located adjacent to Colonial Downs, which
is scheduled to open in 1997 and will be the only pari-mutual horse racing
facility in Virginia. Royal New Kent also was designed by Mike Strantz and
includes five sets of tees, including the "Invicta" (which is 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.
The Initial Lessee of this Golf Course is obligated to complete construction
of a clubhouse at the Golf Course by December 31, 1997. 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 and located in Suwanee, Georgia (a northeast
Atlanta suburb), in the foothills of north Georgia 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. Currently, Olde Atlanta is owned by Olde
Atlanta Golf Club Limited Partnership and managed by The Crescent Company.
PRIVATE COUNTRY CLUB COURSES
Private country clubs are generally closed to the public and generate
revenue principally through initiation fees and membership dues, golf cart
rentals and guest green fees. Initiation fees and membership dues are determined
according to the particular market segment in which the club operates.
Revenue and cash flows of private country clubs are generally 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
("Northgate"), is a full service upscale country club with a championship
golf course designed by Robert von Haggie and Bruce Devlin, which opened in
1984. An additional nine holes are expected to open at the course in 1998.
The Company has agreed to acquire such additional holes, subject to certain
conditions. 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. Northgate is currently owned and
managed by Northgate Partnership.
59
<PAGE>
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.
The following table sets forth certain information regarding the Golf
Courses.
THE GOLF COURSES -- RESORT COURSES
<TABLE>
<CAPTION>
FACILITIES AND SERVICES
---------------------------------------
LOCATION NO. OF YEAR PRACTICE
COURSE NAME CITY, STATE HOLES YARDAGE OPENED FACILITIES CART RENTAL CLUBHOUSE
- ------------------------- --------------------------- ----------- ----------- --------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Heathland................ Myrtle Beach, South 18 6,785 1990 Yes Yes Yes
Carolina
Parkland................. Myrtle Beach, South 18 7,170 1992 Yes Yes Yes
Carolina
Moorland................. Myrtle Beach, South 18 6,799 1990 Yes Yes Yes
Carolina
Heritage Golf Club....... Pawleys Island, South 18 7,040 1986 Yes Yes Yes
Carolina
Oyster Bay............... Sunset Beach, North 18 6,685 1983 Yes Yes Yes
Carolina
The Woodlands............ Gulf Shores, Alabama 18 6,584 1994 Yes Yes Yes(1)
<CAPTION>
FOOD &
COURSE NAME BEVERAGE PRO SHOP
- ------------------------- --------- ---------
<S> <C> <C>
Heathland................ Yes Yes
Parkland................. Yes Yes
Moorland................. Yes Yes
Heritage Golf Club....... Yes Yes
Oyster Bay............... Yes Yes
The Woodlands............ Yes Yes
</TABLE>
- ---------------
(1) The Woodlands has a temporary clubhouse which the Company expects will be
replaced with a permanent facility. See "The Company -- Business Stategies
and Objectives -- Acquisitions and Expansions -- Expansions."
THE GOLF COURSES -- HIGH-END DAILY FEE COURSES
<TABLE>
<CAPTION>
FACILITIES AND SERVICES
---------------------------------------
LOCATION NO. OF YEAR PRACTICE
COURSE NAME CITY, STATE HOLES YARDAGE OPENED FACILITIES CART RENTAL CLUBHOUSE
- ----------------------------- ----------------------- ----------- ----------- --------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Royal New Kent............... Providence Forge, 18 7,291 1996 Yes Yes Yes(1)
Virginia
Stonehouse Golf Club......... Williamsburg, Virginia 18 6,963 1996 Yes Yes Yes(1)
Olde Atlanta................. Atlanta, Georgia 18 6,789 1993 Yes Yes Yes
<CAPTION>
FOOD &
COURSE NAME BEVERAGE PRO SHOP
- ----------------------------- --------- ---------
<S> <C> <C>
Royal New Kent............... Yes Yes
Stonehouse Golf Club......... Yes Yes
Olde Atlanta................. Yes Yes
</TABLE>
- ---------------
(1) These courses each have a temporary clubhouse which the Initial Lessee for
such courses is obligated to replace with a permanent facility by December
31, 1997. The construction of the permanent facilities will be at the sole
cost and expense of the applicable Initial Lessee.
THE GOLF COURSES -- PRIVATE COUNTRY CLUB COURSE
<TABLE>
<CAPTION>
FACILITIES AND SERVICES
---------------------------------------
LOCATION NO. OF YEAR PRACTICE
COURSE NAME CITY, STATE HOLES YARDAGE OPENED FACILITIES CART RENTAL CLUBHOUSE
- --------------------------------- ------------------ ----------- ----------- --------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Northgate Country Club........... Houston, Texas 18(1) 6,540 1984 Yes Yes Yes
<CAPTION>
FOOD &
COURSE NAME BEVERAGE PRO SHOP
- --------------------------------- --------- ---------
<S> <C> <C>
Northgate Country Club........... Yes Yes
</TABLE>
- ---------------
(1) Nine additional holes are expected to open in 1998. The Company has agreed
to acquire such additional holes subject to certain conditions. See "The
Company -- Business Stategies and Objectives -- Acquisitions and Expansions
-- Expansions."
THE PARTICIPATING LEASES
THE FOLLOWING SUMMARY OF THE PARTICIPATING LEASES BETWEEN THE COMPANY AND
THE INITIAL LESSEES (THE "PARTICIPATING LEASES") IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE PARTICIPATING LEASES, A FORM OF WHICH IS FILED AS AN EXHIBIT TO
THE REGISTRATION STATEMENT, OF WHICH THIS PROSPECTUS IS A PART. THE FOLLOWING
DESCRIPTION OF THE PARTICIPATING LEASES DOES NOT PURPORT TO BE COMPLETE BUT
CONTAINS A SUMMARY OF THE MATERIAL PROVISIONS THEREOF.
All of the Participating Leases will 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 may be agreed
upon between the lessee and the Company at the time of such acquisitions, and
such terms and
60
<PAGE>
conditions may vary from the terms and conditions described herein with respect
to the Participating Leases. The Company anticipates that any new leases will be
with either existing Initial Lessees, affiliates of sellers of courses or
unaffiliated third parties experienced in the operation of similar courses.
LEASE TERM. The Participating Leases will be entered into upon the
conveyance to the Company of the Golf Courses. The Company's interest in each
Golf Course includes the land, buildings and improvements, related easements and
rights, and fixtures (collectively, the "Leased Property"). Each Golf Course
will be leased to the respective Initial Lessee under a Participating Lease
which will have a primary term of 10 years ending on December 31, 2006 (the
"Fixed Term"). In addition, each Initial Lessee will have options to extend the
term of each Participating Lease (the "Extended Terms") for six terms of five
years each, subject to earlier termination upon the occurrence of certain
contingencies described in the Participating Lease. (The term of the
Participating Lease for Oyster Bay, which is leased pursuant to a ground lease
with 35 years remaining, will have four extension terms of five years each.)
In addition, at the expiration of the Fixed Term and the Extended Terms, the
Initial Lessee will have a right of first offer to continue to lease the Golf
Course on the terms and conditions pursuant to which the Company intends to
lease the Golf Course to a third party.
USE OF THE GOLF COURSES. Each Participating Lease permits the Initial
Lessee to operate the Leased Property as a golf course, along with a clubhouse
and other activities customarily associated with or incidental to the operation
of a golf course and other facilities located at the golf course, including,
where applicable, swim and tennis operations. Operations may include sale or
rental of golf-related merchandise, sale of memberships, furnishing of lessons,
operation of practice facilities, and sales of food and beverages, including
liquor sales.
BASE RENT; PARTICIPATING RENT. The initial Base Rent for each of the Golf
Courses is set forth below:
<TABLE>
<CAPTION>
INITIAL
NAME LOCATION BASE RENT (1)
- -------------------------------------------------- ------------------------ ---------------
<S> <C> <C>
Heritage Golf Club................................ Pawleys Island, SC $ 1,824,980
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
The Woodlands..................................... Gulf Shores, AL 679,029
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
---------------
Total......................................... $ 14,988,130
---------------
---------------
</TABLE>
- ---------------
(1) In addition to Base Rent, beginning in 1997 Participating Rent may be
payable by the Initial Lessees. Participating Rent is calculated based on
increases in the Gross Golf Revenue from a base year of 1996 as adjusted.
Consequently, no calculation of Participating Rent is included above.
(2) The Heathland, Moorland and Parkland courses are subject to a single
Participating Lease providing for gross Base Rent of $4,669,905, and the
Base Rent is allocated equally among these three courses.
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 1996 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. Base Rent will increase annually by the Base Rent
Escalator (i.e. 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
61
<PAGE>
in Lease Payments are limited to 5% during the first five years of the initial
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, membership initiation fees and transfer fees, excluding, however, food and
beverage and merchandise revenue. For the recently opened Golf Courses, the base
year Gross Golf Revenue is based on an estimate by the Company and the Initial
Lessee of such courses, which estimate was also the basis for the valuation of
those Golf Courses. Increases in the Lease Payments under the Participating
Leases are limited to 5% during the first five years. Base Rent is required to
be paid monthly in arrears on the first day of each calendar month and
Participating Rent is payable quarterly in arrears. 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 an
Initial Lessee, such as the planned clubhouses at The Woodlands, Stonehouse Golf
Club and Royal New Kent. 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 Initial Lessee will be required to pay all real estate
and personal property taxes, insurance, utilities and services and other
operating expenses. See "-- Maintenance and Modifications."
SECURITY DEPOSIT. As security for an Initial Lessee's obligations under the
Participating Leases, each prior owner of each Golf Course will pledge, on
behalf of its affiliated Initial Lessee, OP Units (or cash or other collateral
acceptable to the Company) with a value initially equal to 15% of the purchase
price for the applicable Golf Course, which approximates 16 months of the
initial Base Rent (with OP Units valued at the Offering Price). The security
deposit will not be released for two years. Beginning in the third year and any
time thereafter, one-third of pledged OP Units will be released if the net
operating income to lease payment coverage ratio (the "Coverage Ratio") of the
Initial 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 Initial Lessee shall be required to
retain and not distribute profits until such time as the Initial Lessee has
retained cash equal to at least six months of then current Base Rent. In
addition, the Participating Leases with the Legends Lessees will be
cross-collateralized and cross-defaulted.
The security deposit will be increased following the exercise of any Lessee
Performance Option to equal approximately 15% of the sum of the initial purchase
price of such Golf Course and the value of any additional OP Units issued in
connection with the exercise of the Lessee Performance Option. If the Company
acquires any Expansion Facility, the security deposit also will be increased by
an amount equal to approximately 15% of the purchase price of the Expansion
Facility.
ADVISORY ASSOCIATION. Each Initial Lessee will be a member of the Advisory
Association, which will participate in cross-marketing of the Golf Courses and
will identify each Golf Course as owned by the Company, thereby increasing the
golfing consumer's brand name awareness of the Company. Membership in the
Advisory Association also is designed to provide the Initial Lessees greater
purchasing power with vendors than individual Initial Lessees. The Advisory
Association is expected to provide a means of ensuring a consistent, high-
quality product at each of the Golf Courses. In conjunction with management of
the Company, the Advisory Association will review and analyze any disputes
between the Company and an Initial Lessee concerning annual capital and
operating budgets and will also, in conjunction with the Company, confirm each
Initial Lessee's compliance with its repair and maintenance obligations under
each Participating Lease.
MAINTENANCE AND MODIFICATIONS. Each Initial Lessee will, at its sole cost
and expense, maintain and operate its respective Leased Property in good order,
repair and appearance and will make structural and non-structural, interior and
exterior foreseen and unforeseen, and ordinary and extraordinary repairs which
may be necessary and appropriate to keep such Leased Property in good order,
repair and appearance. Each Initial Lessee will also maintain each Golf Course
it leases in accordance with the condition of the Golf Course at the
commencement of the Participating Lease and otherwise in a condition comparable
to other comparable golf courses in the vicinity of that Golf Course. If the
Company, in consultation with the Advisory Association, determines that an
Initial Lessee has failed to comply with its maintenance and operation
obligations, then the
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<PAGE>
Company shall provide a written list to the Initial Lessee setting forth a list
of remedial work and/or steps to be performed. If the Initial Lessee disputes
the Company's assertions, then the matter shall be handled by a committee
composed of members of the Advisory Association and representatives of the
Company.
Out of the payment of Base Rent, the Company will establish and maintain
with respect to each Golf Course a capital replacement reserve (a "Capital
Replacement Fund") in an amount equal to between 2% and 3% 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 Initial Lessee will agree on the use of funds in these reserves and the
Company has the right to approve each Initial Lessee's annual and long-term
capital expenditure budgets. Funds in the Capital Replacement Fund shall be paid
to an Initial Lessee to reimburse such Initial Lessee for expenditures made in
connection with capital replacements. Amounts in the Capital Replacement Fund
will be deemed to accrue interest at a money market rate. 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, the Company
will not be required to build or rebuild any improvements on any Leased
Property, or to make any repairs, replacements, alterations, restorations or
renewals of any nature or description to any Leased Property, whether ordinary
or extraordinary, structural or non-structural, foreseen or unforeseen, or to
make any expenditure whatsoever with respect thereto, in connection with any
Participating Lease, or to maintain any Leased Property in any way. In the event
that the Company elects to fund additional capital improvements on a Golf
Course, the Company will generally condition such election on an increase in
minimum rent under the Participating Lease with respect to such Golf Course to
reflect such expenditures.
During the Fixed Term and each Extended Term, each Initial Lessee, at its
sole cost and expense, may make alterations, additions, changes and/or
improvements ("Initial Lessee Improvements") to each Leased Property, without
the Company's prior written consent, provided such alterations do not diminish
the value or appearance of the Golf Course. All such Initial Lessee Improvements
will be subject to all the terms and provisions of each applicable Lease and
will become the property of the Company upon termination of such 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 Initial Lessee will maintain insurance on each Leased
Property it leases under insurance policies providing for all-risk, liability,
flood (if carried by comparable golf course facilities in the area and is
otherwise available at commercially reasonable rates) and worker's compensation,
which at the time is usual and commonly obtained in connection with the
properties similar in type of building size and use to the Leased Property and
located in the geographic area where the Leased Property is located. Each
insurance policy will name the Company as additional insured or loss payee, as
applicable.
ASSIGNMENT AND SUBLETTING. An Initial Lessee may not, without the prior
written consent of the Company (which consent may be withheld by the Company in
its sole discretion, except in limited instances), assign, mortgage, pledge,
hypothecate, encumber or otherwise transfer any Participating Lease or any
interest therein, all or any part of the Leased Property or suffer or permit any
lease or the leasehold estate created thereby or any other rights arising under
any Participating Lease to be assigned, transferred, mortgaged, pledged,
hypothecated or encumbered, in whole or in part, whether voluntarily,
involuntarily or by operation of law. An assignment of a Participating Lease
will be deemed to include any change of control of such Initial Lessee, as if
such change of control were an assignment of the Participating Lease. Each
Initial Lessee shall have the right to assign its Participating Lease to its
affiliates.
Each Prior Owner shall retain the right to use the existing office
facilities in any club house or other improvements on a Golf Course for its
continued business operations not associated with the Golf Course.
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<PAGE>
Each Initial Lessee may, with the Company's prior approval, which approval
the Company may withhold in its discretion, be permitted to sublease portions of
any Leased Property to 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 the Initial Lessee desires to
sell its interest in its Participating Lease to an unaffiliated third party, it
must first offer the Company or its designee the right to purchase such
interest. The Initial Lessee must give the Company written notice of its intent
to sell, which shall indicate the terms and conditions upon which such Initial
Lessee intends to sell its interest in the Participating Lease. The Company or
its designee shall thereafter have a period of 60 days to elect to purchase the
leasehold interest on the terms and conditions at which such Initial Lessee
proposes to sell its interest. If the Company or its designee elects not to
purchase the interest of the Initial Lessee, then such Initial Lessee shall be
free to sell its interest to a third party, subject to the Company's approval as
described above (see "-- Assignment and Subletting"). However, if the terms on
which the Initial Lessee intends to sell its interest are reduced by 5% or more
then such Initial Lessee shall again offer the Company the right to acquire its
interest, provided the Company shall have only 15 days to accept such offer.
INITIAL LESSEE'S RIGHT OF FIRST OFFER. The Company may sell a Golf Course,
but must first offer the Initial Lessee of such course the right to purchase the
Golf Course. The Company must give the relevant Initial Lessee written notice of
its intent to sell, which shall indicate the terms and conditions upon which the
Company intends to sell such Golf Course. Such Initial Lessee shall thereafter
have a period of 60 days to elect to purchase the Golf Course on the terms and
conditions at which the Company proposes to sell the Golf Course. If such
Initial Lessee elects not to purchase the Golf Course, then the Company shall be
free to sell the Golf Course to a third party. However, if the price at which
the Company intends to sell the Golf Course is reduced by 5% or more from the
price offered to the Initial Lessee, then the Company shall again offer such
Initial Lessee the right to acquire the Golf Course at the reduced price
provided that such Initial Lessee shall have only 15 days to accept such offer.
DAMAGE TO, OR CONDEMNATION OF, A LEASED PROPERTY. In the event of damage to
or destruction of any Leased Property which is caused by an insured risk, the
Initial Lessee will be obligated to diligently restore the Leased Property to
substantially the same condition as existed immediately prior to such damage or
destruction and, to the extent the insurance proceeds and the Capital
Replacement Fund are insufficient to do so, such Initial Lessee will be
obligated to contribute the excess funds needed to restore the Leased Property.
Any excess insurance proceeds will be paid to the Company. Notwithstanding the
foregoing, in the event the damage or destruction of the Leased Property renders
the Leased Property unsuitable for use as a golf course for a period of 12
months or more, the Initial Lessee may terminate the Participating Lease.
INDEMNIFICATION GENERALLY. Under each Participating Lease, the Initial
Lessee will agree to indemnify, and is obligated to hold harmless, the Company
from and against all liabilities, obligations, claims, actual or consequential
damages, penalties, causes of action, costs and expenses (including reasonable
attorneys' fees and expenses) imposed upon or asserted against the Company as
owner of the applicable Leased Property on account of, among other things, (i)
any accident, injury to or death of a person or loss of or damage to property on
or about the Leased Property, (ii) any use, non-use, condition, maintenance or
repair misuse, by such Initial Lessee of the Leased Property, (iii) any
impositions (which are the obligations of the relevant Initial Lessee to pay
pursuant to the applicable provisions of such Participating Lease) or the
operations thereon, (iv) any failure on the part of the Initial 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 Initial Lessee under any Participating Lease.
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EVENTS OF DEFAULT. Events of Default are defined in each Participating
Lease to include, among others, the following:
(i) if an Initial Lessee fails to make a rent payment when such payment
becomes due and payable and such failure is not cured by such Initial Lessee
within a period of 10 days after receipt of written notice thereof from the
Company;
(ii) if an Initial Lessee fails to observe or perform any material term,
covenant or condition of a Participating Lease and such failure is not cured
by such Initial Lessee within a period of 30 days after receipt by such
Initial Lessee of written notice thereof from the Company, unless such
failure cannot with due diligence be cured within a period of 30 days, in
which case such failure will not constitute an Event of Default if such
Initial Lessee proceeds promptly and with due diligence to cure the failure
and diligently completes the curing thereof, within 120 days;
(iii) if an Initial Lessee: (a) admits in writing its inability to pay
its debts generally as they become due, (b) files a petition in bankruptcy
or a petition to take advantage of any insolvency act, (c) makes an
assignment for the benefit of its creditors, (d) is unable to pay its debts
as they mature, (e) consents to the appointment of a 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 Initial Lessee is liquidated or dissolved;
(v) if the Initial Lessee voluntarily ceases operations on the Leased
Property, except as a result of damage, destruction or a partial or complete
condemnation or other unavoidable delays; or
(vi) if the Initial Lessee or an affiliate thereof is in default under
any other Participating Lease with the Company.
If an Event of Default occurs and is continuing under a Participating Lease,
then the Company may terminate the Participating Lease by giving the Initial
Lessee not less than 10 days notice (only if required by the Participating
Lease) of such termination and upon the expiration of such time, the Fixed or
Extended Term, as the case may be, will terminate and all rights of the Initial
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.
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 will be self-administered and will have eight full-time
employees, three of which will be devoted primarily to acquisitions.
LEGAL PROCEEDINGS
Owners and operators of golf courses are subject to a variety of legal
proceedings arising in the ordinary course of operating a golf course, including
proceedings relating to personal injury and property damage. Such proceedings
are generally brought against the operator of a golf course, but may also be
brought against the owner. Each of the Prior Owners has represented to the
Company that the Golf Course(s) contributed by it
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currently is not subject to any material legal proceedings. The Participating
Leases provide that the each Initial Lessee is responsible for claims based on
personal injury and property damage at the Golf Courses it leases and require
each Initial Lessee to maintain insurance for such purposes. See "Participating
Leases" and "Risk Factors -- Real Estate Investment Risks -- Uninsured Losses."
GOVERNMENT REGULATION
ENVIRONMENTAL MATTERS. Operations of the Golf Courses involve the use and
storage of various hazardous materials such as herbicides, pesticides,
fertilizers, motor oils and gasoline. Under various federal, state and local
laws, ordinances and regulations, an owner or operator of real property may
become liable for the costs of removal or remediation of certain hazardous
substances released on or in its property. Such laws often impose such liability
without regard to whether the owner or operator knew of, or was responsible for,
the release of such hazardous substances. The presence of such substances, or
the failure to remediate such substances properly when released, may adversely
affect the owner's ability to sell such real estate or to borrow using such real
estate as collateral. The Company has not been notified by any governmental
authority of any material non-compliance, liability or other claim in connection
with any of the Golf Courses and the Company is not aware of any other
environmental condition with respect to any of the Golf Courses that is likely
to be material for which the Company is being indemnified by the Initial Lessees
or Prior Owners. All of the Golf Courses have been subjected to a Phase I
environmental audit (which does not involve invasive procedures, such as soil
sampling or ground water analysis) by an independent environmental consultant.
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 Initial Lessees will indemnify the Company
for certain potential environmental liabilities at the Golf Courses. See
"Participating Leases."
AMERICANS WITH DISABILITIES ACT. The Golf Courses are subject to the
Americans with Disabilities Act of 1990 (the "ADA"). The ADA has separate
compliance requirements for "public accommodations" and "commercial facilities"
but generally requires that public facilities such as clubhouses and recreation
areas be made accessible to people with disabilities. These requirements became
effective in 1992. Compliance with the ADA requirements could require removal of
access barriers and other capital improvements at the Golf Courses.
Noncompliance could result in imposition of fines or an award of damages to
private litigants. Under the Participating Leases, the Initial Lessees will be
responsible for any costs associated with ADA compliance.
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MANAGEMENT
DIRECTORS, PROPOSED DIRECTORS AND EXECUTIVE OFFICERS
Upon completion of the Offering, the Board of Directors will consist of 7
members. The directors include W. Bradley Blair II, Chairman, Chief Executive
Officer and President, David J. Dick, Executive Vice President and Larry D.
Young, founder of The Legends Group. The remaining initial directors will be
independent directors who are neither employees of the Company nor affiliates of
any Prior Owner or Initial 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 directors and executive
officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- --- ---------------------------------------------------------
<S> <C> <C>
W. Bradley Blair, II 53 Chairman of the Board of Directors, Chief Executive
Officer and President of the Company
David J. Dick 37 Executive Vice President, Director
Scott D. Peters 38 Senior Vice President and Chief Financial Officer
Larry D. Young 55 Director
Roy C. Chapman 55 Proposed Director
Raymond V. Jones 49 Proposed Director
Fred W. Reams 53 Proposed Director
Edward L. Wax 60 Proposed Director
</TABLE>
W. Bradley Blair, II is the Chairman of the Board, Chief Executive Officer
and President of the Company. Prior to the completion of the Offering Mr. Blair
served as Executive Vice President, Chief Operating Officer and General Counsel
for The Legends Group since 1993. As an officer of 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
and currently is of counsel at Blair, Conaway Bograd & Martin, P.A., a law firm,
specializing in real estate, finance, taxation and acquisitions. Several clients
of Blair, Conaway Bograd and Martin are golf course owners, operators and
developers as well as companies involved in golf course financing. 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. Since 1993 Mr.
Dick has worked with the Inland Group, Inc. as a consultant specializing in real
estate investment banking and golf course finance. From 1983 to 1992 Mr. Dick
served as Vice President of Development and Asset/Portfolio Management for
Thoner & Birmingham Development Corporation, a golf and country club community
developer that is affiliated with the owner of Northgate Country Club. While
with Thoner & Birmingham Development Corporation, Mr. Dick's responsibilities
included many aspects of golf course and country club development, 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 Laventhol & Horwath from
1981 to 1985. From 1986 to 1988, Mr. Peters worked with a general partnership
that
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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 ten 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 has consented to become a director of the Company upon
completion of the Offering. He is the Chairman, Chief Executive Officer and
principal shareholder 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 has consented to become a director of the Company upon the
completion of the Offering. 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 that 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 twenty-six 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 has consented to become a director of the Company upon
completion of the Offering. Since 1981 he 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 has consented to become director of the Company upon
completion of the Offering. Since 1992 he 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. Promptly following the Offering, the Board of Directors
will establish an audit committee that will consist of three Independent
Directors (the "Audit Committee"). The Audit Committee will 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 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.
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COMPENSATION COMMITTEE. Promptly following the Offering, the Board of
Directors will establish a compensation committee (the "Compensation Committee")
to determine compensation, including awards under the Company's Stock Incentive
Plan, for the Company's executive officers. The Company expects that the
Compensation Committee will consist of three Independent Directors.
The 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 intends to pay its Independent Directors fees for their services
as directors. Directors will receive annual compensation of $10,000 plus a fee
of $1,000 for attendance at each meeting of the Board of Directors, but not
committee meetings. Directors who are not Independent Directors will not be paid
any director fees. The Company will reimburse directors for their out-of-pocket
travel expenses.
DIRECTORS AND OFFICERS INSURANCE
The Company will have directors and officers liability insurance. Directors
and officers liability insurance insures (i) the officers and directors of the
Company from any claim arising out of an alleged wrongful act by such persons
while acting as directors and officers of the Company, and (ii) the Company to
the extent that it has indemnified the directors and officers for such loss.
INDEMNIFICATION
The Charter provides for the indemnification of the Company's officers and
directors against certain liabilities to the fullest extent permitted under
applicable law. The Charter also provides that the directors and officers of the
Company be exculpated from monetary damages to the fullest extent permitted
under applicable law. In addition, 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."
EXECUTIVE COMPENSATION
To date, the Company has not paid any compensation to its executive
officers. The following table sets forth the estimated 1997 compensation, on an
annualized basis, expected to be paid to the most highly compensated executive
officers of the Company (I.E. those whose cash compensation from the Company in
1997 on an annualized basis is expected to exceed $100,000.)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR (1) SALARY OPTIONS/SARS (2)
- ----------------------------------------------------------- --------- ---------- ---------------
<S> <C> <C> <C>
W. Bradley Blair, II....................................... 1997 $ 250,000 150,000
Chairman of the Board of Directors/Chief Executive
Officer/President
David J. Dick.............................................. 1997 $ 150,000 125,000
Executive Vice President
Scott D. Peters............................................ 1997 $ 125,000 40,000
Senior Vice President/Chief Financial Officer
</TABLE>
- ------------
(1) Amounts given are annualized projections for the year ending December 31,
1997.
(2) Options to purchase an aggregate of 335,000 shares of Common Stock will be
granted to directors and executive officers of the Company effective upon
closing of the Offering. See "-- Stock Incentive Plan."
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STOCK INCENTIVE PLAN
The Company intends to establish a stock incentive plan (the "Plan") to
enable executive officers and other key employees of the Company to participate
in the ownership of the Company. The Plan is designed to attract and retain
executive officers and other key employees of the Company and to provide
incentives to such persons to maximize the Company's cash flow available for
distribution. The Plan provides for the award to executive officers and other
key employees of the Company (subject to the Ownership Limit) of a broad variety
of stock-based compensation alternatives such as nonqualified stock options,
incentive stock options, restricted stock and performance awards.
The Plan will be administered by the Compensation Committee, which is
authorized to select from among the eligible employees of the Company the
individuals to whom options, restricted stock purchase rights and performance
awards are to be granted and to determine the number of shares to be subject
thereto and the terms and conditions thereof. The Compensation Committee will
select the individuals to whom nonqualified stock options are to be granted and
will determine the number of shares to be subject thereto and the terms and
conditions thereof. The Compensation Committee is also authorized to adopt,
amend and rescind rules relating to the administration of the Plan. No member of
the Compensation Committee will be eligible to participate in the Plan following
completion of the Offering.
AWARDS UNDER THE PLAN
NONQUALIFIED STOCK OPTIONS will provide for the right to purchase Common
Stock at a specified price which may be less than fair market value on the date
of grant (but not less than par value), and usually will become exercisable in
installments after the grant date. Nonqualified stock options may be granted for
any reasonable term.
INCENTIVE STOCK OPTIONS will be designed to comply with the provisions of
the Code and will be subject to restrictions contained in the Code, including
exercise prices equal to at least 100% of fair market value of the Common Stock
on the grant date and a ten year restriction on their term, but may be
subsequently modified to disqualify them from treatment as an incentive stock
option.
RESTRICTED STOCK may be sold to participants at various prices (but not
below par value) and made subject to such restrictions as may be determined by
the Compensation Committee. 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 may be granted by the Compensation Committee on an
individual or group basis. Generally, these awards will be based upon specific
agreements and may be paid in cash or in Common Stock or in a combination of
cash and Common Stock. Performance awards may include "phantom" stock awards
that provide for payments based upon increases in the price of the Company's
Common Stock over a predetermined period. Performance awards may also include
bonuses which may be granted by the Compensation Committee on an individual or
group basis and which may be payable in cash or in Common Stock or in a
combination of cash and Common Stock.
The Board of Directors will approve prior to the completion of the Offering
the grant of options to Messrs. Blair, Dick and Peters to purchase up to
150,000, 125,000 and 40,000 shares of Common Stock, respectively at the Offering
Price. The options will become exercisable in three equal installments,
commencing upon the first anniversary of the date of grant and each of the two
years thereafter. The options will be exercisable for 10 years from the date of
grant.
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A maximum of 185,000 additional shares of Common Stock will be reserved for
issuance under the Plan. There is no limit on the number of awards that may be
granted to any one individual so long as the grant does not violate the
Ownership Limit or cause the Company to fail to qualify as a REIT for federal
income tax purposes. See "Capital Stock -- Restrictions on Ownership."
DIRECTORS' PLAN
SHARE AUTHORIZATION. A maximum of 100,000 shares of Common Stock may be
issued under the Company's Non-Employee Directors' Plan (the "Directors' Plan").
The share limitation and terms of outstanding awards shall be adjusted, as the
Compensation Committee deems appropriate, in the event of a stock dividend,
stock split, combination, reclassification, recapitalization or other similar
event.
ELIGIBILITY. The Directors' Plan provides for the grant of options to
purchase Common Stock to each eligible director of the Company. No director who
is an employee of the Company or a Prior Owner is eligible to participate in the
Directors' Plan.
OPTIONS. The Directors' Plan provides that each eligible director who is a
member of the Board of Directors as of the date that the registration statement
relating to the Offering is declared effective by the SEC will be awarded
nonqualified options to purchase 5,000 shares of Common Stock on that date (each
such director, a "Founding Director"). Each eligible director who is not a
Founding Director (a "Non-Founding Director") will receive nonqualified options
to purchase 5,000 shares of Common Stock on the date the Non-Founding Director
is first elected or appointed to the Board of Directors. The options granted to
Founding Directors upon effectiveness of the registration statement relating to
the Offering will have an exercise price equal to the initial public Offering
Price and will vest on the date of grant. The exercise price of options under
future grants will be 100% of the fair market value of the Common Stock on the
date of grant and will vest in the same manner. The exercise price may be paid
in cash, cash equivalents, Common Stock or a combination thereof acceptable to
the Compensation Committee. Options granted under the Directors' Plan are
exercisable for 10 years from the date of grant.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES RELATING TO OPTIONS. Generally, an
eligible director does not recognize any taxable income, and the Company is not
entitled to a deduction upon the grant of an option. Upon the exercise of an
option the eligible director recognizes ordinary income equal to the excess of
the fair market value of the shares acquired over the option exercise price, if
any. Special rules may apply as a result of Section 16 of the Exchange Act. The
Company is generally entitled to a deduction equal to the compensation taxable
to the eligible director as ordinary income. Eligible directors may be subject
to backup withholding requirements for federal income tax.
AMENDMENT AND TERMINATION. The Directors' Plan provides that the Board may
amend or terminate the Plan, but the terms of the Plan relating to the amount,
price and timing of awards under the Plan may not be amended more than once
every six months other than to comport with changes in the Code, or the rules
and regulations thereunder. An amendment will not become effective without
stockholder approval if the amendment materially (i) increases the number of
shares that may be issued under the Directors' Plan, (ii) changes the
eligibility requirements, or (iii) increases the benefits that may be provided
under the Directors' Plan. No options may be granted under the Directors' Plan
after December 31, 2006.
DEFERRED COMPENSATION PLAN
The Company intends to establish a deferred compensation plan under which
executive officers of the Company may elect to defer receiving a portion of
their cash compensation otherwise payable in one tax year until a later tax year
and thereby postpone payment of tax on the deferred amount. Prior to the
beginning of any taxable year, such executive officers may elect to defer
receipt of such amount of cash compensation until a future date or until an
event selected by such persons pursuant to the terms of the plan. Deferred
compensation will be invested in a separate trust account.
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EMPLOYMENT AGREEMENTS
The Company will enter into written employment agreements with W. Bradley
Blair, II, David J. Dick and Scott D. Peters. The employment agreement for Mr.
Blair will have a term of four years, the employment agreement for Mr. Dick will
have a term of three years and the employment agreement with Mr. Peters will
have a term of one year. The employment agreements will provide for an annual
salary of $250,000, $150,000 and $125,000 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 "Stock Incentive Plan." Each of Messrs. Blair,
Dick and Peters shall receive severance payments 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.
Following the completion of the Offering, the Compensation Committee may
establish incentive compensation arrangements for its executive officers and
certain key employees.
COVENANTS NOT TO COMPETE. 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 further agreed not to compete
directly with the Company in a business similar to that of the Company for a
period of one year following any termination of employment. Mr. Blair may
continue to invest with Mr. Young and his affiliates in certain residential real
estate developments and resort operations.
INITIAL LESSEES
The Initial Lessees, each of which will be owned by an affiliate of the
Prior Owners will lease the Golf Courses under triple net leases. The Initial
Lessees will derive revenues from the operation of golf courses principally
through receipt of green fees, membership initiation fees, food and beverage
operations, sale of merchandise, membership dues, golf cart rentals and driving
range charges. Each Initial Lessee will be a single purpose entity with nominal
assets.
THE LEGENDS LESSEES
The four Legends Lessees will lease the seven golf courses contributed by
The Legends Group. The three Legends Resort Courses will be leased pursuant to a
single Participating Lease, as will the two recently opened Golf Courses. Each
of the other Golf Courses will be leased to individual Initial Lessees pursuant
to separate Participating Leases. Each Participating Lease with the Legends
Lessees will be cross-defaulted and cross-collateralized. Mr. Young and his
affiliates will own each of the Legends Lessees. The Legends Group is
contributing seven of the eight courses it currently operates. The course not
being contributed did not meet the Company's investment criteria because it is
subject to a ground lease with a short remaining term. That course may be
acquired by the Company at a later date should the ground lease be extended. See
"Certain Transactions -- Option to Purchase and Right of First Refusal."
Mr. Young, who is a director of the Company 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
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Myrtle Beach, South Carolina, where he started what was to become The Legends
Group, a company specializing in development, construction, management and
ownership of golf courses. Mr. Young has served in numerous capacities in golf
industry related non-profit organizations.
THE WOODLANDS
The Woodlands was developed, is currently owned, and will be leased to an
affiliate of Craft Farms. Craft Farms is operated by the father and son team of
R.C. and Robert Craft, longtime residents of Gulf Shores, Alabama. In addition
to developing Craft Farms, a successful golf community encompassing both resort
and residential properties, the Crafts operate a successful turf grass farm.
R.C. and Robert Craft have a total of approximately 20 years experience in the
golf industry and own and operate another golf course located near The
Woodlands.
Mr. R. C. Craft has approximately 50 years of experience in real estate
ownership and management and, together with 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 will be conveyed to the Company by Olde Atlanta Golf
Club Limited Partnership, a partnership in which The Crescent Company is the
general partner. Olde Atlanta Golf Club Limited Partnership developed the course
in 1993, and the course will be leased to an affiliate thereof. Senior
management at The Crescent Company, including its president E. Neal Trogdon,
have a combined 30 years of experience in the golf industry and affiliates of
The Crescent Company currently own and manage three other golf courses.
Mr. Trogdon is the President of The Crescent Company. Since his first golf
course acquisition in 1989, Mr. Trogdon has served as managing general partner
for the four Daily Fee golf courses now managed by The Crescent Company
including Olde Atlanta. The golf courses are located in the Atlanta, Georgia
suburbs (2) and Augusta, Georgia area (2). Mr. Trogdon was previously an
Executive Vice President at The First National Bank of Chicago and a senior
officer at NationsBank.
NORTHGATE COUNTRY CLUB
Northgate Country Club was developed, is currently owned and will be leased
to an affiliate of Jack Thoner. Mr. Thoner has over 35 years of experience in
real estate development and has owned and operated Northgate Country Club for 12
years. Mr. Thoner's real estate development includes the construction of over
5,000 multi-family units, as well as hotel and office properties.
GOLF COURSE OPERATIONS
Prior to the completion of the Offering, the Golf Courses were owned (or
leased pursuant to long-term ground leases) and operated by the Prior Owners,
all of which are affiliates of the Initial Lessees. The Initial Lessees will
operate the Golf Courses under the Participating Leases with the Company. See
"The Golf Courses -- The Participating Leases." Each Initial Lessee has
developed sophisticated operating systems and procedures in all areas of golf
course operations that the Company believes enable it to provide high quality
service and products to its customers.
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES
Set forth below is a discussion of the Company's investment objectives and
policies, financing policies and policies with respect to certain other
activities. These policies are determined by the Board of Directors and may be
amended or revised from time to time at the discretion of the Board of Directors
without a vote of the Company's stockholders.
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As the sole general partner of the Operating Partnership, the Company also
will determine the investment policies of the Operating Partnership. Under the
Partnership Agreement, all future investments generally must be made through the
Operating Partnership. See "Partnership Agreement -- Management."
INVESTMENT OBJECTIVES AND POLICIES
The Company's investment objective is to maximize both current income and
long-term growth in income. The Company will seek to accomplish its objective
through its ownership of 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 -- Initial Lessee Right of First
Offer".
FINANCING
The Company presently intends to maintain a ratio of debt-to-total market
capitalization of 50% or less. (As a comparison, The Legends Group, which will
be contributing seven of the Golf Courses to the Operating Partnership, had a
debt to equity ratio in excess of 5 to 1 as of December 31, 1995, based on the
historical book value of the equity and debt of the contributed Golf Courses.)
Following the completion of the Offering and the use of net proceeds therefrom,
the Company will have approximately $4.3 million of indebtedness, which
constitutes approximately 3% of its total market capitalization. The Board of
Directors may, however, from time to time re-evaluate this policy and decrease
or increase such ratio accordingly. The Company will determine its financing
policies in light of then current economic conditions, relative costs of debt
and equity capital, market values of properties, growth and acquisition
opportunities and other factors. If the Board of Directors determines that
additional funding is desirable, the Company may raise such funds through
additional equity offerings, debt financing or retention of cash flow (subject
to provisions in the Code concerning taxability of undistributed REIT income and
REIT qualification), or a combination of these methods.
In connection with the acquisition of one of the Golf Courses, the Company
has agreed to maintain, for a period of 10 years following the completion of the
Offering, at least $4.3 million of indebtedness to accommodate the effort to
minimize certain adverse tax consequences of the Prior Owner of such Golf
Course. Such indebtedness may be reduced upon certain taxable events relating to
the 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.
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It is anticipated that borrowings will be made through the Operating
Partnership, although the Company may also incur indebtedness that may be
re-loaned to the Operating Partnership on the same terms and conditions as are
applicable to the Company's borrowing of such funds. See "Partnership
Agreement." Indebtedness may be in the form of purchase money obligations to the
Prior Owners, publicly or privately placed debt instruments, or financing from
banks, institutional investors or other lenders, any of which indebtedness may
be unsecured or may be secured by mortgages or other interests in the property
owned by the Company. There are no limits on the number or amount of mortgages
or other interests which may be placed on any one property. In addition, such
indebtedness may be recourse to all or any part of the property of the Company
or may be limited to the particular property to which the indebtedness relates.
The proceeds from any borrowings may be used for the payment of distributions,
working capital, to 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 will adopt certain policies and enter into certain agreements
designed to minimize potential conflicts of interest. The Company's Board of
Directors is subject to certain provisions of Maryland law, which are designed
to eliminate or minimize certain potential conflicts of interest. However, there
can be no assurance that these policies always will be successful in eliminating
the influence of such conflicts, and if they are not successful, decisions could
be made that might fail to reflect fully the interests of all stockholders.
CHARTER AND BYLAW PROVISIONS
The Company's Charter, with limited exceptions, requires that a majority of
the Company's Board of Directors be comprised of persons who are not officers or
employees of the Company or Affiliates of any advisor to the Company under an
advisory agreement, any lessee or management company operating any property of
the Company, any subsidiary of the Company or any partnership that is an
Affiliate of the Company (each such person, an "Independent Director"). The
Charter provides that such provisions relating to Independent Directors may not
be amended, altered or repealed without the affirmative vote of two-thirds of
all the votes entitled to be cast on the matter. In addition, the Company's
Bylaws provide that any purchase, sale, lease or mortgage involving the Company
in which a director or officer of the Company or any affiliate of the foregoing
has any direct or indirect interest, other than solely as a result of his status
as a director, officer or shareholder of the Company, must be approved by a
majority of the directors, including a majority of the Independent Directors.
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PROVISIONS OF MARYLAND LAW
Pursuant to Maryland law (the jurisdiction under which the Company is
organized), each director is required to discharge his duties in good faith,
with the care an ordinarily prudent person in a like position would exercise
under similar circumstances and in a manner he reasonably believes to be in the
best interest of the Company. In addition, under Maryland law, a contract or
transaction between the Company and any of its directors or between the Company
and a corporation, firm or other entity in which a director is a director or has
a material financial interest is not void or voidable solely because of (a) the
common directorship or interest, (b) the presence of the director at the meeting
of the Board or a committee of the Board that authorizes or approves or ratifies
the contract or transaction or (c) the counting of the vote of the director for
the authorization, approval or ratification of the contract or transaction if
(i) after disclosure of the interest, the transaction is authorized, approved or
ratified, by the affirmative vote of a majority of the disinterested directors,
or by the affirmative vote of a majority of the votes cast by stockholders
entitled to vote other than the votes of shares owned of record or beneficially
by the interested director or corporation, firm or other entity, or (ii) the
transaction is fair and reasonable to the Company.
OTHER POLICIES
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company does not intend
(i) to invest in the securities of other issuers (other than the Operating
Partnership) for the purpose of exercising control over such issuer, (ii) to
underwrite securities of other issuers or (iii) to trade actively in loans or
other investments.
The Company may make investments other than as previously described,
although it does not currently intend to do so. The Company has authority to
repurchase or otherwise reacquire Common Stock or any other securities it may
issue and may engage in such activities in the future. The Board of Directors
has no present intention of causing the Company to repurchase any of the shares
of Common Stock, and any such action would be taken only in conformity with
applicable federal and state laws and the requirements for qualifying as a REIT
under the Code and the Treasury Regulations. Although it may do so in the
future, except in connection with the Formation Transactions, the Company has
not issued Common Stock or any other securities in exchange for property, nor
has it reacquired any of its Common Stock or any other securities. See "The
Formation Transactions." The Company may make loans to third parties, including,
without limitation, to its officers and to joint ventures in which it decides to
participate. The Company has not engaged in trading, underwriting or agency
distribution or sale of securities of other issuers, nor has the Company
invested in the securities of other issuers other than the Operating Partnership
for the purpose of exercising control.
THE FORMATION TRANSACTIONS
Prior to or simultaneously with the completion of the Offering, the Company,
the Operating Partnership, the Prior Owners and the Initial Lessees will engage
in the Formation Transactions described below.
- The Company, which was incorporated in Maryland in November 1996, will
sell 2,865,000 shares of Common Stock in the Offering and will contribute
all of the net proceeds thereof, estimated to be $49.9 million based on
the Offering Price, to GTA GP and GTA LP, which will in turn contribute
such net proceeds to the Operating Partnership. Upon completion of the
Offering and the Formation Transactions, the Company will, through GTA GP
and GTA LP, own an approximately 40.9% ownership interest in the Operating
Partnership. GTA GP will be the sole general partner of the Operating
Partnership.
- The Prior Owners will contribute 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:
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- The Company will acquire seven of the 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 will acquire three of the 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, will lease the Golf Courses to the Initial
Lessees, which are newly-formed entities affiliated with the Prior Owners,
pursuant to the Participating Leases for initial terms of ten years each,
with each Initial Lessee having the right to extend the term of its
Participating Lease for up to six renewal terms of five years each. See
"The Golf Courses -- The Participating Leases."
- Each Prior Owner will be granted the right to receive additional OP Units
pursuant to the Lessee Performance Option. See "The Company -- Business
Strategy -- Internal Growth." OP Units will be redeemable for cash or, at
the Company's election, Common Stock on a one-for-one basis, beginning one
year after the completion of the offering. See "The Partnership Agreement
-- Redemption Rights."
- The Company will enter into employment agreements with its executive
officers, including Mr. Blair, who currently serves as the Executive Vice
President of Legends Group Ltd. (an affiliate of certain of the Prior
Owners and Initial Lessees), which will include the grant of stock
options. See "Management -- Employment Agreements."
- The Company will enter into the Option Agreement with The Legends Group
pursuant to which the Company will be granted the option and right of
first refusal to acquire golf courses currently owned or subsequently
acquired or developed by The Legends Group. See "Certain Relationships and
Transactions -- Option to Purchase and Right of First Refusal."
- Upon completion of the Offering, the Company will have outstanding
approximately $4.3 million of indebtedness, which the Company intends to
keep outstanding for a period of up to 10 years to accomodate a Prior
Owner's efforts to seek to minimize certain adverse tax consequences. See
"Management's Discussion and Anaylsis 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 will receive the following
benefits:
- Larry D. Young, a director of the Company and majority owner of The
Legends Group, and his affiliates will receive 3,738,556 OP Units, as
consideration for their interests in the Golf Courses owned by The Legends
Group. The OP Units to be received by Mr. Young and his affiliates (which
are redeemable for cash or, at the Company's option, Common Stock on a
one-for-one basis, beginning one year after the completion of the
Offering) will be worth approximately $74.8 million (based on the Offering
Price) and will be more liquid than their interests in the Golf Courses
once a public trading market for the Common Stock commences. As of
September 30, 1996, the aggregate book value of the interests to be
contributed by The Legends Group was approximately $36.1 million.
- The 12,500 OP Units owned by each of Mr. Blair and Mr. Dick will be worth
$500,000, based on the Offering Price, a substantial increase over the
nominal purchase price paid by Messrs. Blair and Dick for such OP Units.
- Messrs. Blair, Dick and Peters, will be granted options to acquire
150,000, 125,000 and 40,000 shares of Common Stock, respectively, at the
Offering Price. The options vest ratably over three years commencing on
the first anniversary of the date of grant.
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- Each Independent Director will receive options to acquire 5,000 shares of
Common Stock at the Offering Price.
- In connection with the acquisition of the Golf Courses owned by The
Legends Group, the Company will repay approximately $26.3 million of debt
personally guaranteed by Mr. Young.
- The Company will pay 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 will reimburse 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 will be 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, will be entitled to all
cash flow from such Golf Courses after payment of the Lease Payments under
the applicable Participating Leases and other operating expenses.
- Certain tax consequences to Mr. Young and his Affiliates from the
contribution of their interests in the Golf Courses will be deferred.
- The Company will enter into employment agreements with Messrs. Blair, Dick
and Peters providing for annual base salaries of $250,000, $150,000 and
$125,000, respectively, and the possibility of cash performance bonuses.
See "Management -- Employment Agreements."
TRANSFER DOCUMENTS
The transfer of the Golf Courses is subject to the completion of the
Offering as well as the normal and customary conditions to the closing of real
estate transactions. The Company will assume certain past obligations and all
obligations arising after the transfer of the Golf Courses to the Company. The
agreements to transfer the Golf Courses will contain representations and
warranties to the Company concerning the Golf Courses customarily found in
agreements of such type. Such representations and warranties will generally
survive the closing of the transfer of title to the Golf Courses for one year.
The obligations of the Prior Owners to indemnify the Company for breaches of
their representations and warranties will be secured by a pledge of OP Units
from each Prior Owner for a period of one year, which OP Units will also secure
the obligations of the related Initial Lessee under the applicable Participating
Lease.
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
RELATIONSHIPS AMONG OFFICERS AND DIRECTORS
Larry Young is a director of the Company and the majority owner of The
Legends Group and the Legends Lessees. Mr. Blair, upon completion of the
Offering, will resign as Executive Vice President and Chief Operating Officer of
Legends Group Ltd. and will not have any continuing affiliation or interest in
the golf operations of The Legends Group.
ACQUISITION OF INTERESTS IN CERTAIN OF THE GOLF COURSES
Mr. Young and his affiliates will receive 3,738,556 OP Units in exchange for
their interests in certain of the Golf Courses. Upon exercise of his right to
redeem such OP Units (which rights are not exercisable until beginning one year
after the completion of the Offering), such persons and entities may receive an
aggregate of 3,738,556 shares of Common Stock or, at the Company's option, cash
(approximately $74.8 million based on the Offering Price). See "Partnership
Agreement -- Redemption Rights."
REPAYMENT OF INDEBTEDNESS
The Company will repay approximately $26.3 million of indebtedness
guaranteed by Mr. Young. The Company also will pay 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 will reimburse 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 will enter 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 will
serve as Executive Vice President and Mr. Peters will serve as Senior Vice
President and Chief Financial Officer of the Company for a term of four years,
three years and one year, respectively, at an initial annual base compensation
of $250,000, $150,000 and $125,000, 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. See "Management -- Employment
Agreements."
OPTION TO PURCHASE AND RIGHT OF FIRST REFUSAL
The Legends Group currently owns a golf course that is not being contributed
to the Company, because it is subject to a ground lease with a short remaining
term, and may acquire or develop additional golf courses in the future. The
Company will have an option and right of first refusal to acquire all such golf
courses, pursuant to an Option to Purchase and Right of First Refusal Agreement
(the "Option Agreement"). Commencing four years after the public opening of a
golf course developed by The Legends Group, or 24 months after the acquisition
of 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 the Company
shall have the right to purchase the developed golf course pursuant to the right
of first refusal described below. The Company anticipates that any such
developed golf course will have achieved stabilized operating revenues before
the Company would consider purchasing such developed golf course from The
Legends Group or any affiliate of The Legends Group.
If the Company does not elect to exercise its option to acquire a golf
course owned, acquired or developed by The Legends Group, or if the parties are
unable to agree on the adjustments to net operating income for purposes of the
pricing formula, then the Company will have a right of first refusal under the
Option Agreement
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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 Offering.
PARTNERSHIP AGREEMENT
THE FOLLOWING SUMMARY OF THE PARTNERSHIP AGREEMENT, INCLUDING THE
DESCRIPTIONS OF CERTAIN PROVISIONS SET FORTH ELSEWHERE IN THIS PROSPECTUS, IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PARTNERSHIP AGREEMENT, WHICH IS
FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A
PART.
MANAGEMENT
The Operating Partnership is organized as a Delaware limited partnership
pursuant to the terms of the Partnership Agreement. Pursuant to the Partnership
Agreement, the Company, as the sole general partner of the Operating
Partnership, will 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 up to 85% of its OP Units as collateral to
institutional third party lenders. In addition, for a period of at least two
years, each Prior Owner will pledge to the Company OP Units having a value based
on the Offering Price equal to 15% of the purchase price of the Golf Course
contributed by it (approximately 16 months of initial Base Rent, at the Offering
Price) as collateral for the Participating Lease of its affiliated Initial
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, will receive rights which will enable them to cause the Operating
Partnership to redeem each OP Unit for cash equal to the value of a share of
Common Stock (or, at the Company's election, the Company may purchase each OP
Unit offered for redemption for one share of Common Stock) (the "Redemption
Rights"). The 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
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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
Code, (iv) cause the Company to own, actually or constructively, 10% or more of
the ownership interests in a tenant of the Company's or the Operating
Partnership's real property, within the meaning of section 856(d)(2)(B) of the
Code, or (v) cause the acquisition of shares of Common Stock by such redeeming
Limited Partner to be "integrated" with any other distribution of shares of
Common Stock for purposes of complying with the Securities Act. The Redemption
Rights may be exercised (subject to certain lock-up agreements described in
"Underwriting") with respect to 50% of each Limited Partner's OP Units, at any
time after one year following the completion of the Offering 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 Offering, 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, will contribute to the Operating
Partnership substantially all of the net proceeds of the Offering, in
consideration of which GTA GP will receive a 0.2% general partnership interest
and GTA LP will receive an approximate 40.7% limited partnership interest in the
Operating Partnership. The Partnership Agreement provides that if the Operating
Partnership requires additional funds at any time or from time to time in excess
of funds available to the Operating Partnership from borrowing or capital
contributions, the Company may borrow such funds from a financial institution or
other lender and lend such funds to the Operating Partnership on the same terms
and conditions as are applicable to the Company's borrowing of such funds. Under
the Partnership Agreement, the Company generally is obligated to contribute,
through GTA GP and GTA LP, the proceeds of a share offering as additional
capital to the Operating Partnership in exchange for 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.
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TAX MATTERS
Pursuant to the Partnership Agreement, the general partner will be the tax
matters partner of the Operating Partnership and, as such, will have authority
to handle tax audits and to make tax elections under the Code on behalf of the
Operating Partnership.
PRINCIPAL STOCKHOLDERS OF THE COMPANY AND
PRINCIPAL PARTNERS IN THE OPERATING PARTNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of Common Stock and OP Units by each director, by each named executive
officer of the Company, by all directors and officers of the Company as a group
and by each person who is expected to be the beneficial owner of 5% or more of
the outstanding Common Stock immediately following the completion of the
Offering. As of the date of this Prospectus each person named in the table has
sole voting and investment power with respect to all of the shares of Common
Stock or OP Units shown as beneficially owned by such person, except as
otherwise set forth in the notes to the table.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES OF PERCENTAGE INTEREST
NUMBER OF SHARES OF COMMON STOCK NUMBER OF OP IN OPERATING
NAME AND ADDRESS OF BENEFICIAL OFFICER COMMON STOCK OUTSTANDING UNITS (2) PARTNERSHIP
- --------------------------------------- --------------------- ----------------------- ------------- -------------------
<S> <C> <C> <C> <C>
W. Bradley Blair....................... -- -- 12,500 *
David J. Dick.......................... -- -- 12,500 *
Scott D. Peters........................ -- -- -- --
Larry D. Young (1)..................... -- -- 3,738,556 53.4%
Directors and officers
as a group (8 persons)................ -- -- 3,763,556 53.8%
</TABLE>
- ------------
* Less than 1%.
(1) Address is The Legends Group, 1500 Legends Drive, Myrtle Beach, South
Carolina 29577.
(2) The Operating Partnership will have 7,000,356 OP Units outstanding as of the
Offering, of which 2,865,000 will be owned by the Company. The numbers and
percentages set forth in this table assume that all outstanding OP Units are
redeemed for shares of Common Stock. The OP Units (other than those owned by
the Company) may be redeemed as follows: 50% after the first anniversary of
the completion of the Offering and 50% after the second anniversary of the
completion of the Offering.
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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 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 class, 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, mergers and acquisition. In addition, certain actions
relating to the Operating Partnership and the Company's interest therein require
approval of the Limited Partners. See "Partnership Agreement -- Management."
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares of capital
stock. Specifically, not more than 50% in value of the Company's outstanding
shares of capital stock may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities) during the last
half of a taxable year, and the Company must be beneficially owned by 100 or
more persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year. See "Federal Income Tax
Considerations -- Requirements for Qualification." In addition, the Company must
meet certain requirements regarding the nature of its gross income in order to
qualify as a REIT. One such requirement is that at least 75% of the Company's
gross income for each year must consist of rents from real property and income
from certain other real property investments. The rents received by the
Operating Partnership from an Initial Lessee would not qualify as rents from
real property, which would 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 an Initial Lessee within the meaning of Section
856(d)(2)(B) of the Code. See "Federal Income Tax Considerations -- Requirements
for Qualification -- Income Tests."
Because the Board of Directors believes it is essential for the Company to
qualify as a REIT, the Charter, subject to certain exceptions described below,
provides that no person may own, or be deemed to own by virtue of the
constructive ownership provisions of the Code, more than 9.8% of the lesser in
value of the total number
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or value of the outstanding shares of Common Stock or more than 9.8% of the
outstanding shares of Preferred Stock (the "Ownership Limit"). The constructive
ownership rules of the Code are complex and may cause shares owned actually or
constructively by two or more related individuals and/or entities to be
constructively owned by one individual or entity. As a result, the acquisition
of less than 9.8% of the outstanding shares of Common Stock or 9.8% of the
shares of Preferred Stock (or the acquisition of an interest in an entity which
owns the shares) by an individual or entity could cause that individual or
entity (or another individual or entity) to own constructively in excess of 9.8%
of the outstanding shares of Common Stock or 9.8% of the outstanding shares of
Preferred Stock, and thus subject such shares to the Ownership Limit provisions
of the Charter. The Ownership Limit also prohibits any transfer of Common or
Preferred Stock that would (i) result in the Common and Preferred Stock being
owned by fewer than 100 persons (determined without reference to any rules of
attribution), (ii) result in the Company being "closely held" within the meaning
of Section 856(h) of the Code, or (iii) cause the Company to own, directly or
constructively, 10% or more of the ownership interests in a tenant of the
Company's real property, within the meaning of Section 856(d)(2)(B) of the Code.
Except as otherwise provided below, any such acquisition or transfer of the
Company's capital stock (including any constructive acquisition or transfer of
ownership) shall be null and void, and the intended transferee or owner will
acquire no rights to, or economic interests in, the shares.
Subject to certain exceptions described below, any purported transfer of
Common or Preferred Stock that would (i) result in any person owning, directly
or indirectly, Common or Preferred Stock in excess of the Ownership Limit, (ii)
result in the Common and Preferred Stock being owned by fewer than 100 persons
(determined without reference to any rules of attribution), (iii) result in the
Company being "closely held" within the meaning of Section 856(h) of the Code,
or (iv) cause the Company to own, directly or constructively, 10.0% or more of
the ownership interests in a tenant of the Company's or the Partnership's real
property, within the meaning of Section 856(d)(2)(B) of the Code, will be
designated as "Shares-in-Trust" and transferred automatically to a trust (the
"Share Trust") effective on the day before the purported transfer of such Common
or Preferred Stock. The record holder of the Common or Preferred Stock that are
designated as Shares in Trust (the "Prohibited Owner") will be required to
submit such number of Common or Preferred Stock to the Share Trust for
designation in the name of the Share Trustee. The Share Trustee will be
designated by the Company. The beneficiary of the Share Trust (the
"Beneficiary") will be one or more charitable organizations that are named by
the Company.
Shares-in-Trust will remain issued and outstanding Common or Preferred Stock
and will be entitled to the same rights and privileges as all other shares of
the same class or series. The Share Trust will receive all dividends and
distributions on the Shares-in-Trust and will hold such dividends or
distributions in trust for the benefit of the Beneficiary. The Share Trustee
will vote all Shares-in-Trust. The Share Trustee will designate a permitted
transferee of the Shares-in-Trust, provided that the permitted transferee (i)
purchases such Shares-in-Trust for valuable consideration and (ii) acquires such
Shares-in-Trust without such acquisition resulting in a transfer to another
Share Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required to
repay to the Share Trust the amount of any dividends or distributions received
by the Prohibited Owner (i) that are attributable to any Shares-in-Trust and
(ii) that the record date of which was on or after the date that such shares
became Shares-in-Trust. The Prohibited Owner generally will receive from the
Share Trustee the lesser of (i) the price per share such Prohibited Owner paid
for the Common or Preferred Stock that were designated as Shares-in-Trust (or,
in the case of a gift or devise, the Market Price (as defined below) per share
on the date of such transfer) and (ii) the price per share received by the Share
Trustee from the sale or other disposition of such Shares-in-Trust. Any amounts
received by the Share Trustee in excess of the amounts to be paid to the
Prohibited Owner will be distributed to the Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Shares-in-Trust (or, in the
case of a gift or devise, the Market Price per share on the date of such
transfer) or (ii) the Market Price per share on the date that the Company, or
its designee, accepts such offer. The Company will have the right to
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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 and asked prices as furnished by a professional
market maker making a market in the Common or Preferred Stock as selected by the
Board of Directors. "Trading Day" shall mean a day on which the principal
national securities exchange on which the shares of Common or Preferred Stock
are listed or admitted to trading is open for the transaction of business or, if
the shares of Common or Preferred Stock are not listed or admitted to trading on
any national securities exchange, shall mean any day other than a Saturday, a
Sunday or a day on which banking institutions in the State of New York are
authorized or obligated by law or executive order to close.
Any person who acquires or attempts to acquire Common or Preferred Stock in
violation of the foregoing restrictions, or any person who owned shares of
Common or Preferred Stock that were transferred to a Share Trust, will be
required (i) to give immediately written notice to the Company of such event and
(ii) to provide to the Company such other information as the Company may request
in order to determine the effect, if any, of such transfer on the Company's
status as a REIT.
All persons who own, directly or indirectly, more than 5% (or such lower
percentages as required pursuant to regulations under the Code) of the
outstanding shares of Common and Preferred Stock must within 30 days after
January 1 of each year, provide to the Company a written statement or affidavit
stating the name and address of such direct or indirect owner, the number of
shares of Common and Preferred Stock owned directly or indirectly, and a
description of how such shares are held. In addition, each direct or indirect
stockholder shall provide to the Company such additional information as the
Company may request in order to determine the effect, if any, of such ownership
on the Company's status as a REIT and to ensure compliance with the Ownership
Limit.
The Ownership Limit generally will not apply to the acquisitions of shares
of Common or Preferred Stock by an underwriter that participates in a public
offering of such shares. In addition, the Board of Directors, upon receipt of a
ruling from the Service or an opinion of counsel and upon such other conditions
as the Board of Directors may direct, may exempt a person from the Ownership
Limit under certain circumstances. The foregoing restrictions will continue to
apply until the Board of Directors, with the approval of the holders of at least
two-thirds of the outstanding shares of all votes entitled to vote on such
matter at a regular or special meeting of the stockholders of the Company,
determines to terminate its status as a REIT.
The Ownership Limit will not be automatically removed even if the REIT
provisions of the Code are changed so as to remove any ownership concentration
limitation. Any change of the Ownership Limit would require an amendment to the
Charter. Such amendment requires the affirmative vote of holders holding at
least 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.
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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.
LIMITATION OF LIABILITY OF DIRECTORS; INDEMNIFICATION AGREEMENTS
The Charter provides 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.
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.
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
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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.
INTERESTED DIRECTOR TRANSACTIONS
The MGCL provides that a contract or other transaction between a corporation
and any of its directors or between a corporation and any other entity in which
any of its directors is a director or has a material financial interest is not
void or voidable by reason of such common directorship or interest if: (i) the
fact of the common directorship or interest is disclosed or known to the board
of directors and the board of directors ratifies or approves the contract or
transaction by the affirmative vote of a majority of its disinterested
directors; (ii) the fact of the common directorship or interest is disclosed or
known to the stockholders entitled to vote, and the contract or transaction is
authorized, approved or ratified by a majority of the votes cast by the
stockholders entitled to vote, other than the votes of shares owned of record or
beneficially by the interested director or corporation; or (iii) the contract or
transaction is fair and reasonable to the corporation. In addition, the
Company's Charter contains a provision for approval by the disinterested
directors that is substantially similar to the provision of the MGCL referred to
in clause (i) of the preceding sentence.
AMENDMENTS TO THE CHARTER AND BYLAWS
The Charter provides generally that its provisions may be amended only by
the affirmative vote of a majority of all the votes entitled to be cast on the
matter.
The Bylaws provide that the Board of Directors has the exclusive power to
adopt, alter or repeal any provision of the Bylaws and to make new Bylaws,
except 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 the Offering, the Company will have outstanding
2,865,000 shares of Common Stock. The shares of Common Stock issued in the
Offering will be freely tradeable by persons other than "affiliates" of the
Company without restriction under the Securities Act of 1933, as amended (the
"Securities Act"), subject to the limitations on ownership set forth in the
Charter. See "Capital Stock -- Restrictions on Ownership." In addition to the
shares of Common Stock issued in the Offering, the Company may issue additional
shares of Common Stock if the Prior Owners exercise their Redemption Rights.
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 Offering. The other 50% of their OP Units may be
redeemed at any time after two years following the completion of the Offering.
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.
Prior to the date of this Prospectus, there has been no public market for
the Common Stock. The Common Stock has been approved for listing on the American
Stock Exchange subject to official notice of issuance. No prediction can be made
as to the effect, if any, that future sales of shares, or the availability of
shares for future sale, will have on the market price prevailing from time to
time. Sales of substantial amounts of Common Stock or the perception that such
sales could occur, could adversely affect prevailing market prices of the Common
Stock. See "Risk Factors -- Adverse effect of Shares Available for Future Sale
on Market Price of Common Stock."
For a description of certain restrictions on transfers of Common Stock held
by certain stockholders of the Company, see "Underwriting" and "Capital Stock --
Restrictions on Ownership."
REGISTRATION RIGHTS
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 Offering all of the shares of Common Stock issuable to Prior
Owners upon redemption of their OP Units pursuant to the exercise of their
Redemption Rights. 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 adversely affect 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, financial institutions or broker-dealers, foreign corporations
and persons who are not citizens or residents of the United States) subject to
special treatment under the federal income tax laws.
The statements in this discussion and the opinion of O'Melveny & Myers LLP
are based on current provisions of the Code, existing, temporary, and currently
proposed Treasury Regulations promulgated under the Code, the legislative
history of the Code, existing administrative rulings and practices of the
Service, and judicial decisions. No assurance can be given that future
legislative, judicial, or administrative actions or decisions, which may be
retroactive in effect, will not affect the accuracy of any statements in this
Prospectus with respect to the transactions entered into or contemplated prior
to the effective date of such changes.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND
SALE OF THE COMMON STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REAL
ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER
TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
GENERAL. The Company currently has in effect an election to be taxed as a
pass-through entity under subchapter S of the Code, but intends to revoke its S
election on the day prior to the completion of the Offering. The Company plans
to make an election to be taxed as a REIT under Sections 856 through 860 of the
Code, commencing with its short taxable year beginning on the day prior to the
completion of the Offering and ending on December 31, 1997. The Company believes
that, commencing with its initial taxable year, it will be organized and will
operate in such a manner as to qualify for taxation as a REIT under the Code,
and the Company intends to operate in such a manner, but no assurance can be
given that it will operate in a manner so as to qualify or remain qualified as a
REIT.
These sections of the Code are highly technical and complex. The following
sets forth the material aspects of the sections that govern the federal income
tax treatment of a REIT and its stockholders. This summary is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretations thereof. O'Melveny &
Myers LLP has acted as tax counsel to the Company in connection with the
Offering.
In the opinion of O'Melveny & Myers LLP, commencing with the Company's
taxable year ending December 31, 1997, the Company will be organized in
conformity with the requirements for qualification as a REIT, and its proposed
method of operation will enable it to meet the requirements for qualification
and taxation as a REIT under the Code. It must be emphasized that this opinion
is based on various assumptions and is conditioned upon certain representations
made by the Company as to factual matters. In addition, this opinion is based
upon the factual representations of the Company concerning its business and
properties as set forth in this Prospectus and assumes that the actions
described in this Prospectus are completed in a timely fashion. Moreover, such
qualification and taxation as a REIT depends upon the Company's ability to meet,
through actual annual operating results, distribution levels, diversity of stock
ownership, and the various other qualification tests imposed under the Code
discussed below, the results of which will not be reviewed by O'Melveny & Myers
LLP. Accordingly, no assurance can be given that the actual results of the
Company's operation for any particular taxable year will satisfy such
requirements. See "-- Failure to Qualify."
In any year in which the Company qualifies as a REIT, in general it will not
be subject to federal income tax on that portion of its taxable income or
capital gain which is distributed to stockholders. The Company will, however, be
subject to tax at normal corporate rates upon any taxable income or capital gain
not distributed.
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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 greater of the
amount by which the Company fails either the 75% or the 95% test, multiplied by
a fraction intended to reflect the Company's profitability. The Company will
also be subject to a tax of 100% on net income from "prohibited transactions"
(which are, in general, certain sales or other dispositions of property held
primarily for sale to customers in the ordinary course of business, other than
foreclosure property) and, if the Company has (i) net income from the sale or
other disposition of "foreclosure property" (generally, property acquired by
reason of a default on indebtedness or a lease) which is held primarily for sale
to customers in the ordinary course of business or (ii) other non-qualifying
income from foreclosure property, it will be subject to tax on such income from
foreclosure property at the highest corporate rate. In addition, if the Company
should fail to distribute during each calendar year at least the sum of (i) 85%
of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net
income for such year, and (iii) any undistributed taxable income from prior
years, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. The Company may
also be subject to the corporate "alternative minimum tax," on its items of tax
preference, as well as tax in certain situations not presently contemplated.
REQUIREMENTS FOR QUALIFICATION. The Code defines a REIT as a corporation,
trust or association (i) which is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (iii) which would be
taxable as a domestic corporation, but for Sections 856 through 859 of the Code;
(iv) which is neither a financial institution nor an insurance company subject
to certain provisions of the Code; (v) the beneficial ownership of which is held
by 100 or more persons; (vi) during the last half of each taxable year not more
than 50% in value of the outstanding stock of which is owned, directly or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities); and (vii) which meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides that conditions
(i) to (iv), inclusive, must be met during the entire taxable year and that
condition (v) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
Conditions (v) and (vi) will not apply until after the first taxable year for
which an election is made to be taxed as a REIT.
The Company believes that it will have issued sufficient shares pursuant to
the Offering to allow it to satisfy conditions (v) and (vi). In addition, the
Company's Charter provides for restrictions regarding the transfer and ownership
of shares, which restrictions are intended to assist the Company in continuing
to satisfy the share ownership requirements described in (v) and (vi) above.
Such transfer and ownership restrictions are described in "Capital Stock --
Restrictions on Ownership."
The Company currently has two subsidiaries and may have additional
subsidiaries in the future. Code Section 856(i) provides that a corporation that
is a "qualified REIT subsidiary" shall not be treated as a separate corporation,
and all assets, liabilities, and items of income, deduction, and credit of a
"qualified REIT subsidiary" shall be treated as assets, liabilities, and items
of income, deduction, and credit of the REIT. A "qualified REIT subsidiary" is a
corporation, all of the capital stock of which has been held by the REIT at all
times during the period such corporation was in existence. Thus, in applying the
requirements described herein, any "qualified REIT subsidiaries" acquired or
formed by the Company will be ignored, and all assets, liabilities, and items of
income, deduction, and credit of such subsidiaries will be treated as assets,
liabilities and items of income, deduction, and credit of the Company. Each of
the Company's current subsidiaries is a "qualified REIT subsidiary." 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 Code, including satisfying the gross income tests
and the asset tests. Thus, the Company's proportionate share of the
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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.
Pursuant to the Participating Leases, the Initial Lessees lease from the
Company the land, buildings, improvements and equipment comprising the Golf
Courses for a 10-year period, with, except in one instance, options to extend
for six additional terms of five years each. The Participating Leases provide
that the Initial Lessees will be obligated to pay to the Company (i) Base Rent
and, if applicable, Participating Rent and (ii) certain other additional
charges.
In order for the Base Rent, the Participating Rent and the additional
charges to constitute "rents from real property," the Participating Leases must
be respected as true leases for federal income tax purposes and not treated as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the Participating Leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties, (ii) the form of the agreement, (iii)
the degree of control over the property that is retained by the property owner
(e.g., whether the lessee has substantial control over the operation of the
property or whether the lessee was required simply to use its best efforts to
perform its obligations under the agreement), and (iv) the extent to which the
property owner retains the risk of loss with respect to the property (e.g.,
whether the lessee bears the risk of increases in operating expenses or the risk
of damage to the property).
In addition, Code Section 7701(e) provides that a contract that purports to
be a service contract (or a partnership agreement) is treated instead as a lease
of property if the contract is properly treated as such, taking into account all
relevant factors, including whether or not: (i) the service recipient is in
physical possession of the property, (ii) the service recipient controls the
property, (iii) the service recipient has a significant economic or possessory
interest in the property (e.g., the property's use is likely to be dedicated to
the service recipient for a substantial portion of the useful life of the
property, the recipient shares the risk that the property will decline in value,
the recipient shares in any appreciation in the value of the property, the
recipient shares in savings in the property's operating costs, or the recipient
bears the risk of damage to or loss of the property), (iv) the service provider
does not bear any risk of substantially diminished receipts or substantially
increased expenditures if there is nonperformance under the contract, (v) the
service provider does not use the property concurrently to provide significant
services to entities unrelated to the service recipient, and (vi) the total
contract price does not substantially exceed the rental value of the property
for the contract period. Since the determination whether a service contract
should be treated as a lease is inherently factual, the presence or absence of
any single factor may not be dispositive in every case.
O'Melveny & Myers LLP is of the opinion that each Participating Lease will
be treated as a true lease for federal income tax purposes. Such opinion is
based, in part, on the following facts: (i) the Operating Partnership and the
Initial Lessees intend for their relationship to be that of a lessor and lessee
and such relationship is documented by lease agreements, (ii) the Initial
Lessees have the right to exclusive possession and use and quiet
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enjoyment of the Golf Courses during the term of the Participating Leases, (iii)
the Initial Lessees bear the cost of, and will be responsible for, day-to-day
maintenance and repair of the Golf Courses, other than the cost of certain
capital expenditures, and dictate how the Golf Courses are operated, maintained,
and improved, (iv) the Initial Lessees bear all of the costs and expenses of
operating the Golf Courses (including the cost of any inventory used in their
operation) during the term of the Participating Leases other than the cost of
certain furniture, fixtures and equipment, and certain capital expenditures),
(v) the Initial Lessees benefit from any savings in the costs of operating the
Golf Courses during the term of the Participating Leases, (vi) in the event of
damage or destruction to a Golf Course, the Initial Lessees are at economic risk
because they will be obligated either (A) to restore the property to its prior
condition, in which event they will bear all costs of such restoration in excess
of any insurance proceeds or (B) in certain circumstances, terminate the
Participating Lease, (vii) the Initial Lessees have indemnified the Operating
Partnership against all liabilities imposed on the Operating Partnership during
the term of the Participating Leases by reason of (A) injury to persons or
damage to property occurring at the Golf Courses or (B) the Initial Lessees'
use, management, maintenance or repair of the Golf Courses, (viii) the Initial
Lessees are obligated to pay substantial Base Rent for the period of use of the
Golf Courses, and (ix) the Initial Lessees stand to incur substantial losses (or
reap substantial gains) depending on how successfully they operate the Golf
Courses. Such opinion is also based upon the representation of the Company to
the effect that upon termination of the Participating Leases (including the
optional fixed-rate renewal periods), each such Golf Course is expected to have
a remaining useful life equal to at least 20% of its expected useful life when
contributed to the Operating Partnership, and a fair market value equal to at
least 20% of its fair market value when contributed to the Operating
Partnership.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Participating Leases that discuss whether
such leases constitute true leases for federal income tax purposes. Therefore,
the opinion of O'Melveny & Myers LLP with respect to the relationship between
the Operating Partnership and the Initial Lessees is based upon all of the facts
and circumstances and upon rulings and judicial decisions involving situations
that are considered to be analogous. Opinions of counsel are not binding upon
the Service or any court, and there can be no complete assurance that the
Service will not assert successfully a contrary position. If the Participating
Leases are recharacterized as service contracts or partnership agreements,
rather than true leases, part or all of the payments that the Operating
Partnership receives from the Initial Lessees may not be considered rent or may
not otherwise satisfy the various requirements for qualification as "rents from
real property." In that case, the Company likely would not be able to satisfy
either the 75% or 95% gross income tests and, as a result, would lose its REIT
status.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as "rents from real property" in satisfying the gross
income tests if the REIT, or an owner of 10% or more of the REIT, directly or
constructively owns 10% or more of such tenant (a "Related Party Tenant"). The
Charter provides that no stockholder may own, directly or constructively, in
excess of 9.8% of the Common Stock. Third, if rent attributable to personal
property, leased in connection with a lease of real property, is greater than
15% of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." Finally, for rents received to qualify as "rents from real property,"
the REIT generally must not operate or manage the property or furnish or render
services to the tenants of such property, other than through an independent
contractor from whom the REIT derives no revenue, provided, however, the Company
may directly perform certain services that are "usually or customarily rendered"
in connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant" of the property. The Company does not and
will not (i) charge rent for any property that is based in whole or in part on
the income or profits of any person (except by reason of being based on a
percentage of receipts or sales, as described above), (ii) rent any property to
a Related Party Tenant, (iii) with the exception of one Golf Course derive
rental income attributable to personal property (other than personal
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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. 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" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will be generally available if the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of these relief provisions. As
discussed above in "General," even if these relief provisions apply, a tax would
be imposed with respect to the excess net income.
ASSET TESTS. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by real
estate assets (including (i) its allocable share of real estate assets held by
partnerships in which the Company owns an interest and (ii) stock or debt
instruments held for not more than one year purchased with the proceeds of a
stock offering or long-term (at least five years) debt offering of the Company),
cash, cash items and government securities. Second, not more than 25% of the
Company's total assets may be represented by securities other than those in the
75% asset class. Third, of the investments not included in the 75% asset class,
the value of any one issuer's securities owned by the Company may not exceed 5%
of the value of the Company's total assets and the Company may not own more than
10% of any one issuer's outstanding voting securities (except for its ownership
interest in the stock of a qualified REIT subsidiary).
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied all of the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets and
the asset requirements either did not exist immediately after the acquisition of
any particular asset or was not wholly or partly caused by such an acquisition
(i.e., the discrepancy arose from changes in the market values of its assets).
If the condition described in clause (ii) of the preceding sentence were not
satisfied, the Company still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the quarter in which it arose.
ANNUAL DISTRIBUTION REQUIREMENTS. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its stockholders in an amount at least equal to (i) the sum of (a) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (b) 95% of the net income
(after tax), if any, from foreclosure property, minus (ii) the sum of certain
items of noncash income. Such distributions must be paid in the taxable year to
which they relate, or in the following taxable year if declared before the
Company timely files its tax return for such year and if paid on or before the
first regular dividend payment after such declaration. To the extent that the
Company does not distribute all of its net capital gain or distributes at least
95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be
subject to tax thereon at regular ordinary and capital gain corporate tax rates.
Furthermore, if the Company should fail to distribute during each calendar year
at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95%
of its REIT capital gain income for such year, and (iii) any
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undistributed taxable income from prior periods, the Company will be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. The Company intends to make timely distributions
sufficient to satisfy this annual distribution requirement.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses and (ii) the inclusion of such income and deduction of
such expenses in arriving at taxable income of the Company. In the event that
such timing differences occur, in order to meet the 95% distribution
requirement, the Company may find it necessary to arrange for short-term, or
possibly long-term, borrowings or to pay dividends in the form of taxable stock
dividends.
The Company intends to calculate its "REIT taxable income" based upon the
conclusion that the Operating Partnership is the owner for federal income tax
purposes of all of the Golf Courses. As a result, the Company expects that
depreciation deductions with respect to all such Golf Courses will reduce its
"REIT taxable income". This conclusion is consistent with the opinion of
O'Melveny & Myers LLP as described above, which in turn is based upon
representations from the Company as to the expected useful life and future fair
market value of each such Golf Course. If the Service were to successfully
challenge this position, the Company might be deemed retroactively to have
failed to meet the distribution requirement 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 Code (the
"Partnership Provisions") that authorizes the Service, in certain "abusive"
transactions involving partnerships, to disregard the form of the transaction
and recast it for federal tax purposes as the Service deems appropriate. The
Anti-Abuse Rule applies where a partnership is formed or utilized in connection
with a transaction (or series of related transactions) with a principal purpose
of substantially reducing the present value of the partners' aggregate federal
tax liability in a manner inconsistent with the intent of the Partnership
Provisions. The Anti-Abuse Rule states that the Partnership Provisions are
intended to permit taxpayers to conduct joint business (including investment)
activities through a flexible economic arrangement that accurately reflects the
partners' economic agreement and clearly reflects the partners' income without
incurring any entity-level tax. The purposes for structuring a transaction
involving a partnership are determined based on all of the facts and
circumstances, including a comparison of the purported business purpose for a
transaction and the claimed tax benefits resulting from the transaction. A
reduction in the present value of the partners' aggregate federal tax liability
through the use of a partnership does not, by itself, establish inconsistency
with the intent of the Partnership Provisions.
The Anti-Abuse Rule contains an example in which a corporation that elects
to be treated as a REIT contributes substantially all of the proceeds from a
public offering to a partnership in exchange for a general partner interest. The
limited partners of the partnership contribute real property assets to the
partnership, subject to liabilities that exceed their respective aggregate bases
in such property. In addition, 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
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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 Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, the Company will also be
disqualified from taxation as a REIT for the four taxable years following the
year during which qualification was lost. It is not possible to state whether in
all circumstances the Company would be entitled to such statutory relief.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable domestic stockholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be taken into
account by them as ordinary income and will not be eligible for the dividends
received deduction for corporations. Distributions that are designated as
capital gain dividends will be taxed as long-term capital gain (to the extent
they do not exceed the Company's actual net capital gain for the taxable year)
without regard to the period for which the stockholder has held its stock.
However, corporate stockholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Distributions in excess of current
and accumulated earnings and profits will not be taxable to a stockholder to the
extent that they do not exceed the adjusted basis of the stockholder's shares,
but rather will reduce the adjusted basis of such shares. To the extent that
such distributions exceed the adjusted basis of a stockholder's shares they will
be included in income as long-term capital gain (or short-term capital gain if
the shares have been held for one year or less) assuming the shares are a
capital asset in the hands of the stockholder. In addition, any dividend
declared by the Company in October, November or December of any year payable to
a stockholder of record on a specified date in any such month shall be treated
as both paid by the Company and received by the stockholder on December 31 of
such year, provided that the dividend is actually paid by the Company during
January of the following calendar year. Stockholders may not include in their
individual income tax returns any net operating losses or capital losses of the
Company.
In general, any loss upon a sale or exchange of shares by a stockholder who
has held such shares for six months or less (after applying certain holding
period rules), will be treated as a long-term capital loss to the extent of
distributions from the Company required to be treated by such stockholder as
long-term capital gain.
BACKUP WITHHOLDING
The Company will report to its domestic stockholders and the Service the
amount of dividends paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a stockholder may be
subject to backup withholding at the rate of 31% with respect to dividends paid
unless such holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (b) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A stockholder that does not provide the Company with his
correct taxpayer identification number may also be subject to penalties imposed
by the Service. Any amount paid as backup withholding will be creditable against
the stockholder's income tax liability. In addition, the Company may be required
to withhold a portion of capital gain distributions made to any stockholders who
fail to certify their non-foreign status to the Company. The Service issued
proposed regulations in April 1996 that would alter the technical requirements
relating to backup withholding compliance as applied to foreign stockholders.
See "-- Taxation of Foreign Stockholders."
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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 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.
TAXATION OF FOREIGN STOCKHOLDERS
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. Prospective
Non-U.S. Stockholders should consult with their own tax advisors to determine
the impact of federal, state and local income tax laws with regard to an
investment in shares, including any reporting requirements.
Distributions by the Company that are not attributable to gain from sales or
exchanges by the Company of United States real property interests and not
designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions, ordinarily,
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the Common Stock is treated as
effectively connected with the conduct by the Non-U.S. Stockholder of a United
States trade or business, the Non-U.S. Stockholder generally will be subject to
a tax at graduated rates, in the same manner as U.S. stockholders are taxed with
respect to such dividends (and may also be subject to the 30% branch profits tax
in the case of a Non-U.S. Stockholder that is a foreign corporation). The
Company expects to withhold United States income tax at the rate of 30% on the
gross amount of any such dividends made to a Non-U.S. Stockholders unless (i) a
lower treaty rate applies or (ii) the Non-U.S. Stockholder files an Service Form
4224 with the Company certifying that the investment to which the distribution
relates is effectively connected to a Untied States trade or business of such
Non-U.S. Stockholder. Lower treaty rates applicable to dividend income may not
necessarily apply to dividends from a REIT, however. The Service issued proposed
regulations in April 1996 that would modify the manner in which the Company
complies with the withholding requirements. Distributions in excess of current
and accumulated earnings and profits of the Company will not be taxable to a
stockholder to the extent that they do not exceed the adjusted basis of the
stockholder's shares, but rather will reduce the adjusted basis of such shares.
To the extent that such distributions exceed the adjusted basis of a Non-U.S.
Stockholder's shares, they will give rise to tax liability if the Non-U.S.
Stockholder otherwise is subject to tax on any gain from the sale or disposition
of his shares in the Company (as described below). If it cannot be determined at
the time a distribution is made whether or not such distribution will be in
excess of current and accumulated earnings and profits, the distribution will be
subject to withholding at the same rate applicable to dividends. However,
amounts thus withheld are refundable if it is subsequently determined that such
distribution was, in fact, in excess of current and accumulated earnings and
profits of the Company.
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In August 1996, the U.S. Congress passed the Small Business Job Protection
Act of 1996, which requires the Company to withhold 10% of any distribution in
excess of the Company's current and accumulated earnings and profits. That
statute is effective for distributions made after August 20, 1996. Consequently,
although the Company intends to withhold at a rate of 30% on the entire amount
of any distribution, to the extent that the Company does not do so, any portion
of a distribution not subject to withholding at a rate of 30% will be subject to
withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of United States
real property interests will be taxed to a Non-U.S. Stockholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980, as
amended ("FIRPTA"). Under FIRPTA, these distributions are taxed to a Non-U.S.
Stockholder as if such gain were effectively connected with a United States
trade or business. Non-U.S. Stockholders would thus be taxed at the same capital
gain rates applicable to U.S. stockholders (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals). Also, distributions subject to FIRPTA may be subject to a
30% branch profits tax in the hands of a foreign corporate stockholder not
entitled to treaty relief or exemption. The Company is required by applicable
Treasury Regulations to withhold 35% of any distribution that could be
designated by the Company as a capital gains dividend. This amount is creditable
against the Non-U.S. Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of shares generally
will not be taxed under FIRPTA if the Company is a "domestically controlled
REIT," defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the stock was held directly or
indirectly by foreign persons. It is currently anticipated that the Company will
be a "domestically controlled REIT," and therefore the sale of shares will not
be subject to taxation under FIRPTA. However, because the shares will be
publicly-traded, no assurance can be given that the Company will continue to be
a "domestically-controlled REIT." In addition, gain not subject to FIRPTA will
be taxable to a Non-U.S. Stockholder if (i) investment in the shares is
effectively connected with the Non-U.S. Stockholder's United States trade or
business, in which case the Non-U.S. Stockholder will be subject to the same
treatment as U.S. stockholders with respect to such gain (except that a
stockholder that is a foreign corporation may also be subject to the 30% branch
profits tax), or (ii) the Non-U.S. Stockholder is a nonresident alien individual
who was present in the United States for 183 days or more during the taxable
year and has a "tax home" in the United States, in which case the nonresident
alien individual will be subject to a 30% tax on the individual's capital gains.
If the gain on the sale of shares were to be subject to taxation under FIRPTA,
the Non-U.S. Stockholder will be subject to the same treatment as U.S.
stockholders with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals and, in the case of foreign corporations, subject to the
possible application of the 30% branch profits tax).
STATE AND LOCAL TAXES
The Company, any of its subsidiaries, the Operating Partnership or the
Company's stockholders may be subject to state and local tax in various states
and localities, including those states and localities in which it or they
transact business, own property, or reside. The state tax treatment of the
Company and the stockholders in such jurisdictions may differ from the federal
income tax treatment described above. Consequently, prospective stockholders
should consult their own tax advisors regarding the effect of state and local
tax laws upon an investment in the Common Stock.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
The following discussion summarizes certain federal income tax
considerations applicable to the Company's investment in the Operating
Partnership. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
CLASSIFICATION AS A PARTNERSHIP. The Company will be entitled to include in
its income its distributive share of the Operating Partnership's income and to
deduct its distributive share of the Operating Partnership's losses only if the
Operating Partnership is classified for federal income tax purposes as a
partnership rather than as a corporation or an association taxable as a
corporation. An organization formed as a partnership will be
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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
Section301.7701-2(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, O'Melveny & Myers LLP will deliver its opinion that, based on the
provisions of the Partnership Agreement, certain factual assumptions and certain
representations described in the opinion, the Operating Partnership will be
treated for federal income tax purposes as a partnership and not as an
association taxable as a corporation. Unlike a tax ruling, an opinion of counsel
is not binding upon the Service, and no assurance can be given that the Service
will not challenge the status of the Operating Partnership as a partnership for
federal income tax purposes. If such challenge were sustained by a court, the
Operating Partnership would be treated as a corporation for federal income tax
purposes, as described below. In addition, the opinion of O'Melveny & Myers LLP
is based on existing law, which is to a great extent the result of
administrative and judicial interpretation. No assurance can be given that
administrative or judicial changes would not modify the conclusions expressed in
the opinion.
Under Section 7704 of the Code, a partnership is treated as a corporation
for federal income tax purposes if it is a "publicly traded partnership" (except
in situations in which 90% or more of the partnership's gross income is of a
specified type). A partnership is deemed to be publicly traded if its interests
are either (i) traded on an established securities market, or (ii) readily
tradable on a secondary market (or the substantial equivalent thereof). While
the OP Units will not be traded on an established securities market, they could
possibly be deemed to be traded on a secondary market or its equivalent due to
the Redemption Rights enabling the partners to dispose of their Units.
The Treasury Department recently issued regulations (the "PTP Regulations")
governing the classification of partnerships under Section 7704. These
regulations provide that the classification of partnerships is generally based
on a facts and circumstances analysis. However, the regulations also provide
limited "safe harbors" which preclude publicly traded partnership status.
Pursuant to one of those safe harbors, interests in a partnership will not be
treated as readily tradable on a secondary market or the substantial equivalent
thereof if (i) all interests in the partnership were issued in a transaction (or
transactions) that was not required to be registered under the Securities Act,
and (ii) the partnership does not have more than 100 partners at any time during
the partnership's taxable year. In determining the number of partners in a
partnership for this purpose, a person owning an interest in a flowthrough
entity (i.e., a partnership, grantor trust, or S corporation) that owns an
interest in the partnership is treated as a partner in such partnership only if
(x) substantially all of the value of the person's interest in the flow-through
entity is attributable to the flow-through entity's interest (direct or
indirect) in the partnership and (y) a principal purpose of the use of the
tiered arrangement is to permit the partnership to satisfy the 100-partner
limitation.
The Operating Partnership is expected to have less than 100 partners
(including persons owning interests through flow-through entities). The
Operating Partnership has not issued any OP Units required to be registered
under the Securities Act. Thus, the Operating Partnership presently qualifies
for the safe harbors provided in the PTP Regulations. If the Operating
Partnership were to have more than 100 partners (including, in certain
circumstances, persons owning interests through flow-through entities), it
nevertheless would be treated as a partnership for federal income tax purposes
(rather than an association taxable as a corporation) if at least 90% of its
gross income in each taxable year (commencing with the year in which it is
treated as a publicly traded partnership) consists of "qualifying income" with
the meaning of Section 7704(c)(2) of the Code (including interest, dividends,
"real property rents" and gains from the disposition of real property (the "90%
Passive-Type Income Exception"). Because of the substantial ownership of the
Operating Partnership by the Initial Lessees (or their affiliates), the
Operating Partnership currently would not be eligible for the 90% Passive-Type
Income Exception. Thus, if the Operating Partnership were to have more than 100
partners (including, in certain circumstances, persons owning interests through
flow-through entities), the Company would be required to place appropriate
restrictions on the ability of the Limited Partners to exercise their Redemption
Rights as and if
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deemed necessary to ensure that the Operating Partnership does not constitute a
publicly traded partnership. However, there is no assurance that the Operating
Partnership will at all times in the future be able to avoid treatment as a
publicly traded partnership. The opinion of O'Melveny & Myers LLP as to the
classification of the Partnership is based on an assumption that the Operating
Partnership will continue to fall within a safe harbor from publicly traded
partnership status.
If for any reason the Operating Partnership were taxable as a corporation,
rather than as a partnership, for federal income tax purposes, the Company would
not be able to satisfy the income and asset requirements for REIT status. See
"Federal Income Tax Considerations -- Requirements for Qualification -- Income
Tests" and "-- Requirements for Qualification -- Asset Tests." In addition, any
change in the Operating Partnership's status for tax purposes might be treated
as a taxable event, in which case the Company might incur a tax liability
without any related cash distribution. See "Federal Income Tax Considerations --
Requirements for Qualification -- Distribution Requirements." Further, items of
income and deduction of the Operating Partnership would not pass through to its
partners, and its partners would be treated as stockholders for tax purposes.
Consequently, the Operating Partnership would be required to pay income tax at
corporate tax rates on its net income, and distributions to its partners would
constitute dividends that would not be deductible in computing the Operating
Partnership's taxable income.
The following discussion assumes that the Operating Partnership will be
treated as a partnership for federal income tax purposes.
PARTNERSHIP ALLOCATIONS. Although a partnership agreement will generally
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes if they do not comply with the provisions
of Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder. Generally, Section 704(b) and the Treasury Regulations promulgated
thereunder require that partnership allocations respect the economic arrangement
of the partners.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners with respect to such item. The Operating Partnership's allocations of
taxable income and loss are intended to comply with the requirements of Section
704(b) of the Code and the Treasury Regulations promulgated thereunder.
TAX ALLOCATIONS WITH RESPECT TO THE GOLF COURSES. Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to appreciated
or depreciated property (such as the Golf Courses) that is contributed to a
partnership in exchange for an interest in the partnership must be allocated in
a manner such that the contributing partner is charged with, or benefits from,
respectively, the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of such unrealized gain or
unrealized loss is generally equal to the difference between the fair market
value of contributed property at the time of contribution and the adjusted tax
basis of such property at the time of contribution (a "Book-Tax Difference").
Such allocations are solely for federal income tax purposes and do not affect
the book capital accounts or other economic or legal arrangements among the
partners. The Operating Partnership was formed by way of contributions of
appreciated property (including the Golf Courses). Consequently, the Partnership
Agreement will require such allocations to be made in a manner consistent with
Section 704(c) of the Code.
In general, the Prior Owners will be allocated depreciation deductions for
tax purposes which are lower than such deductions would be if determined on a
pro rata basis. In addition, in the event of the disposition of any of the
contributed assets (including the Golf Courses) which have a Book-Tax
Difference, all income attributable to such Book-Tax Difference will generally
be allocated to the Prior Owners and the Company will generally be allocated
only its share of capital gains attributable to appreciation, if any, occurring
after the closing of the Offering. This will tend to eliminate the Book-Tax
Difference over the life of the Operating Partnership. However, the special
allocation rules of Section 704(c) do not always entirely eliminate the Book-Tax
Difference on an annual basis or with respect to a specific taxable transaction
such as a sale. Thus, the carryover basis of the contributed assets in the hands
the Operating Partnership will cause the Company to be
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allocated lower depreciation and other deductions, and possibly an amount of
taxable income in the event of a sale of such contributed assets in excess of
the economic or book income allocated to it as a result of such sale. This may
cause the Company to recognize taxable income in excess of cash proceeds, which
might adversely affect the Company's ability to comply with the REIT
distribution requirements. See "-- Taxation of the Company -- Annual
Distribution Requirements." The foregoing principles also apply in determining
the earnings and profits of the Company for purposes of determining the portion
of distributions taxable as dividend income. The application of these rules over
time may result in a higher portion of distributions being taxed as dividends
than would have occurred had the Company purchased the contributed assets at
their agreed values.
The Treasury Regulations under Section 704(c) of the Code allow partnerships
to use any reasonable method of accounting for Book-Tax Differences so that the
contributing partner receives the tax benefits and 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,
Robertson, Stephens & Company LLC and Wheat, First Securities, Inc. (the
"Representatives"), have severally agreed with the Company, subject to the terms
and conditions of the Underwriting Agreement, to purchase the numbers of shares
of Common Stock set forth opposite their respective names below. The
Underwriters are committed to purchase and pay for all such shares if any are
purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- -------------------------------------------------------------------------------------------- ----------
<S> <C>
Robertson, Stephens & Company LLC...........................................................
Wheat, First Securities, Inc................................................................
----------
Total..................................................................................... 2,865,000
----------
----------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the Offering Price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession of not in excess of $ per share, of which $ may be
reallowed to other dealers. After the Offering, the Offering Price, concession
and reallowance to dealers may be reduced by the Representatives. No such
reduction shall change the amount of proceeds to be received by the Company as
set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 429,750
additional shares of Common Stock, at the same price per share as the Company
will receive for the 2,865,000 shares that the Underwriters have agreed to
purchase from the Company. To the extent that the Underwriters exercise this
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage of such additional shares that the number of
shares of Common Stock to be purchased by it shown in the above table represents
as a percentage of the 2,865,000 shares offered hereby. If purchased, such
additional shares will be sold by the Underwriters on the same terms as those on
which the 2,865,000 shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.
The Company has agreed with the Representatives for a period of 180 days
after the consummation of the Offering, subject to certain exceptions, not to
offer to sell, contract to sell, or otherwise sell, dispose of, or grant any
rights with respect to any shares of Common Stock, any options or warrants to
purchase any shares of Common Stock, or any securities convertible into or
exchangeable for shares of Common Stock other than the Company's sales of shares
in the Offering, and the Company's issuance of options and stock under the
Directors' Plan without the prior written consent of Robertson, Stephens &
Company LLC. In addition, Mr. Young and each of the officers of the Company have
agreed that, for a period of 18 months following the completion of the Offering,
they and their affiliates will not, without prior written consent of Robertson,
Stephens & Company LLC, subject to certain exceptions, issue, sell, contract to
sell, or otherwise dispose of, any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock or any securities convertible
into, exercisable for or exchangeable for shares of Common Stock. At the
expiration of such 18 month period, transfers of 50% of any such securities held
by such officers and Mr. Young shall continue to be restricted until 30 months
following the completion of the Offering. Robertson, Stephens & Company LLC may,
in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements.
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Prior to the completion of the Offering, there has been no public market for
the Common Stock of the Company. Consequently, the Offering Price is being
determined through negotiations among the Company and the Representatives. Among
the factors considered in such negotiations are prevailing market conditions,
certain financial information of the Company, market valuations of other
companies that the Company and the Representatives believe to be comparable to
the Company, estimates of the business potential of the Company, the present
state of the Company's development and other factors deemed relevant.
The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
EXPERTS
The balance sheet of the Company as of November 8, 1996 and the consolidated
financial statements of Northgate Country Club as of September 30, 1996,
December 20, 1995 and 1994, the nine months ended September 30, 1996 and for
each of three fiscal years ended in the period ended December 20, 1995 included
in this Prospectus have been so included in reliance on the reports of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
The combined financial statements of Legends Golf and the individual
financial statements of Golf Legends, Ltd., Heritage Golf Club, Ltd., Seaside
Resorts, Ltd. and Legends of Virginia, LC appearing in this Prospectus and
Registration Statement for the nine months ended September 30, 1996 and fiscal
years ended December 31, 1995, 1994, and 1993 have been audited by BDO Seidman,
LLP, independent auditors, as set forth in their reports appearing elsewhere
herein and are included in reliance upon such report given the authority of such
firm as experts in accounting and auditing.
The financial statements of Bright's Creek Development, LLC (current owner
of The Woodlands) appearing in this Prospectus and Registration Statement as of
September 30, 1996 and December 31, 1995 and 1994, and for the nine months ended
September 30, 1996, the year ended December 31, 1995, and the period from
inception (May 17, 1994) through December 31, 1994 have been audited by Coopers
& Lybrand L.L.P., independent accountants, as set forth in their report
appearing elsewhere herein and are included in reliance upon such report given
the authority of such firm as experts in accounting and auditing.
The financial statements of Olde Atlanta Golf Club Limited Partnership
appearing in this Prospectus and Registration Statement for the nine month
period ended September 30, 1996 and fiscal years ended December 31, 1995 and
1994 have been audited by Crowe, Chizek and Company LLP, independent auditors,
as set forth in their reports appearing elsewhere herein and are included in
reliance upon such report given the authority of such firm as experts in
accounting and auditing.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by O'Melveny & Myers LLP, San Francisco, California, and
certain legal matters will be passed upon for the Underwriters by Hunton &
Williams. O'Melveny & Myers LLP and Hunton & Williams will rely as to all
matters of Maryland law on the opinion of Ballard Spahr Andrews & Ingersoll,
Baltimore, Maryland. In addition, the description of federal income tax
consequences contained in this Prospectus entitled "Federal Income Tax
Considerations" is based upon the opinion of O'Melveny & Myers LLP.
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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 will be 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 intends to furnish to its
stockholders annual reports containing audited financial statements examined by
its independent public accountants and quarterly reports containing unaudited
financial information for the first three quarters of each fiscal year. The
Company intends to initially include in such reports annual audited and
quarterly unaudited financial statements for the Legends Lessee.
104
<PAGE>
GLOSSARY
Unless the context otherwise requires, the following capitalized terms shall
have the meanings set forth below for the purposes of this Prospectus:
"ADA" means the Americans with Disabilities Act of 1990, as amended.
"ANTI-ABUSE RULE" means the regulation that authorizes the Service, in
certain "abusive" transactions involving partnerships, to disregard the form of
the transaction and recast it for federal tax purposes as the Service deems
appropriate.
"ADVISORY ASSOCIATION" means the association of Initial Lessees, established
to facilitate the cross-marketing of the Golf Courses and to promote awareness
of the Golf Courses.
"AUDIT COMMITTEE" means the committee established by the Board of Directors
to make recommendations concerning the Company's accounting practices, including
the engagement and review of independent public accountants.
"BASE RENT" means the fixed base rent payable under the Participating
Leases.
"BASE RENT ESCALATOR" means the lesser of (i) 3% or (ii) 200% of the change
in the CPI for the prior year.
"BOARD OF DIRECTORS" means the board of directors of the Company.
"BOOK-TAX DIFFERENCES" means the difference between the fair market value of
property contributed to a partnership and the adjusted tax basis of such
property at the time of contribution.
"BUILT-IN GAIN" means the difference between the fair market value and the
adjusted basis of a Built-in Gain Asset as determined by the Operating
Partnership in consultation with the REIT and with the advice of counsel.
"BUILT-IN GAIN ASSET" means an asset acquired by the Company in certain
transactions from a corporation which is or has been a C corporation.
"BUSINESS COMBINATIONS" means any business combination as defined in the
Charter.
"BYLAWS" means the bylaws of the Company, as amended.
"CAPITAL REPLACEMENT FUND" means the fund established by the Company in
amounts ranging from 2% to 3% of Gross Golf Revenue at each Golf Course, to fund
capital expenditures.
"CASH AVAILABLE FOR DISTRIBUTION" means net income (loss) computed in
accordance with generally accepted accounting principles of the Company plus
depreciation and amortization and minority interest minus capital expenditures
and principal payments on indebtedness.
"CHARTER" means the Articles of Incorporation of the Company.
"CODE" means Internal Revenue Code of 1986, as amended.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means common stock, par value $.01 per share, of the Company.
"COMPANY" means Golf Trust of America, Inc., a Maryland corporation.
"COMPENSATION COMMITTEE" means the committee established by the Board of
Directors to determine compensation for the Company's executive officers.
"COVERAGE RATIO" means the ratio of an Initial Lessee's net operating income
to such Initial Lessee's Lease Payment.
"CPI" means the United States Consumer Price Index, All Urban Consumers,
U.S. City Average, All Items (1982-84 = 100).
105
<PAGE>
"DAILY FEE" means those Golf Courses that are open to the public and
generate revenues principally through green fees, golf cart rentals, merchandise
sales, driving range charges, and food and beverage operations.
"DIRECTORS' PLAN" means the Company's Non-Employee Directors' Plan.
"DISQUALIFIED PERSONS" means persons who have specified relationships with
Plans.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXPANSION FACILITIES" means the planned expansion of the Northgate Country
Club course (nine additional holes), and 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 Initial 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).
"GTA GP" means GTA GP, Inc., a wholly-owned subsidiary of the Company.
"GTA LP" means GTA LP, Inc., a wholly-owned subsidiary of the Company.
"GOLF COURSES" means the 10 golf courses to be acquired by the Company in
the Formation Transactions.
"GROSS GOLF REVENUE" means all revenues received from or by reason of a Golf
Course including revenues from memberships, initiation fees, dues, greens fees,
range fees and income, fees to reserve tee time, golf related guest fees, golf
cart rental and surcharges, fees and other charges paid to sponsors of any golf
tournament; provided, however, that Gross Golf Revenue does not include revenue
relating to food and beverage operations, golf professional shops, parking,
fitness centers, tennis facilities, locker rentals, bag storage, video games,
vending machines, fees paid by the providers of golf lessons, certain
uncollectible amounts relating to sales or excise taxes, uncollectible debts
(i.e., checks and charges), interest paid by customers for the extension of
credit and certain other revenues relating to marketing programs, refunds and
employees.
"INDEPENDENT DIRECTORS" means the directors who are unaffiliated with the
Prior Owners and the Initial Lessees and are not officers or employees of the
Company.
"INITIAL LESSEES" means the seven separate lessees entering into the
Participating Leases.
"INITIAL LESSEE IMPROVEMENTS" means alteration, additions, changes and/or
improvements made by each Initial Lessee at its sole cost and expense, with the
Company's prior written consent.
"LEASE PAYMENT" means the rent payable to the Company under the
Participating Leases, consisting of the Base Rent plus any Participating Rent.
"LEASED PROPERTY" means the Company's interest in each Golf Course,
including land, buildings and improvements, related easements and rights, and
fixtures.
106
<PAGE>
"LEGENDS LESSEES" means the four Initial Lessees which are affiliates of The
Legends Group and will lease the seven Golf Courses contributed by The Legends
Group.
"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 Prior Owner to
elect to receive additional OP Units 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 line of credit for which the Company is seeking a
commitment, which the Company expects to obtain following the Offering, to be
utilized primarily to fund the acquisition of additional golf courses by the
Company.
"NGF" means the National Golf Foundation, an industry trade association.
"NON-U.S. STOCKHOLDERS" means nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign stockholders.
"OFFERING" means the offering of shares of Common Stock of the Company,
pursuant to this Prospectus.
"OFFERING PRICE" means the initial public offering price of the Common
Stock, which is estimated to be $20, the mid-point of the range set forth on the
cover page of the Prospectus.
"OP UNITS" means units of limited partnership interest in the Operating
Partnership held by the Limited Partners other than GTA LP.
"OPERATING PARTNERSHIP" means Golf Trust of America Partnership, L.P., a
Delaware limited partnership.
"OPTION AGREEMENT" means the Option to Purchase and Right of First Refusal
Agreement between the Company and The Legends Group, pursuant to which the
Company will have an option and right of first refusal to purchase any golf
courses currently owned or subsequently acquired or developed in the future by
The Legends Group or its affiliates.
"OWNERSHIP LIMIT" means the direct or constructive ownership by any
stockholder or group of affiliated stockholders of more than 9.8% of the
outstanding Common Stock.
"OWNERSHIP LIMIT PROVISION" means the provision of the Charter that
prohibits the direct or constructive ownership by any stockholder or group of
affiliated stockholders of more than 9.8% of the outstanding Common Stock.
"PARTICIPATING LEASES" means the leases between the Operating Partnership,
as lessor, and the Initial Lessees, as lessees.
"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 in 1996, as
adjusted.
"PARTNERSHIP AGREEMENT" means the agreement of limited partnership of the
Operating Partnership.
"PARTNERSHIP PROVISIONS" means the provisions of the Code relating to
partnerships.
"PLAN" means the Company's Stock Incentive Plan.
"PREFERRED STOCK" means preferred stock, par value $.01 per share, of the
Company.
"PRIOR OWNERS" means the owners of the Golf Courses prior to the Formation
Transactions who will contribute their interests in the Golf Courses to the
Company and who will be Limited Partners of the Operating Partnership.
107
<PAGE>
"RECOGNITION PERIOD" means the recognition period pertaining the Built-in
Gain as defined pursuant to Treasury Regulations to be issued under Section
337(d) of the Code.
"REDEMPTION RIGHTS" means those rights granted to the Limited Partners
(other than 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.
"REIT" means real estate investment trust as defined in Section 856 of the
Code.
"RELATED PARTY TENANT" under the Code means with respect to the Company a
tenant of which the Company, or an owner of 10% or more of the Company, directly
or constructively owns a 10% or greater ownership interest.
"RESORT COURSES" means Daily Fee courses that attract a significant
percentage of players from outside the immediate area in which the course is
located, generating significant revenue through golf packages.
"RULE 144" means Rule 144 promulgated under the Securities Act.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SERVICE" means the Internal Revenue Service.
"SHARES-IN-TRUST" means the separate class of stock into which shares of
Common Stock directly or constructively owned by an individual in excess of the
Ownership Limit will be automatically exchanged.
"STARWOOD" MEANS STARWOOD CAPITAL GROUP, LLC.
"THE 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.
"TREASURY REGULATIONS" means the income tax regulations that have been
promulgated under the Code.
"TROON GOLF" MEANS TROON GOLF, LLC.
"UBTI" means "unrelated business taxable income" as defined in Section
512(a) of the Code.
108
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
GOLF TRUST OF AMERICA, INC.:
Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1995
(unaudited)............................................................................................ F-5
Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 1996
(unaudited)............................................................................................ F-5
Notes to Pro Forma Condensed Consolidated Statements of Operations...................................... F-6
Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1996 (unaudited)..................... F-7
Notes to Pro Forma Condensed Consolidated Balance Sheet................................................. F-8
Report of Independent Accountants -- Price Waterhouse LLP............................................... F-10
Balance Sheet as of November 8, 1996.................................................................... F-11
Notes to Balance Sheet.................................................................................. F-11
GOLF COURSES AND INITIAL LESSEES PRO FORMA CONDENSED FINANCIAL STATEMENTS:
LEGENDS GOLF:
Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1995 (unaudited)... F-14
Pro Forma Condensed Combined Statement of Operations for the nine months ended September 30, 1996
(unaudited)............................................................................................ F-14
Pro Forma Condensed Combined Balance Sheet as of September 30, 1996 (unaudited)......................... F-15
GOLF LEGENDS:
Pro Forma Condensed Statement of Operations for the year ended December 31, 1995 (unaudited)............ F-16
Pro Forma Condensed Statement of Operations for the nine months ended September 30, 1996 (unaudited).... F-16
Pro Forma Condensed Balance Sheet as of September 30, 1996 (unaudited).................................. F-17
HERITAGE GOLF CLUB:
Pro Forma Condensed Statement of Operations for the year ended December 31, 1995 (unaudited)............ F-18
Pro Forma Condensed Statement of Operations for the nine months ended September 30, 1996 (unaudited).... F-18
Pro Forma Condensed Balance Sheet as of September 30, 1996 (unaudited).................................. F-19
SEASIDE RESORTS:
Pro Forma Condensed Statement of Operations for the year ended December 31, 1995 (unaudited)............ F-20
Pro Forma Condensed Statement of Operations for the nine months ended September 30, 1996 (unaudited).... F-20
Pro Forma Condensed Balance Sheet as of September 30, 1996 (unaudited).................................. F-21
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
LEGENDS OF VIRGINIA:
Pro Forma Condensed Statement of Operations for the year ended December 31, 1995 (unaudited)............ F-22
Pro Forma Condensed Statement of Operations for the nine months ended September 30, 1996 (unaudited).... F-22
Pro Forma Condensed Balance Sheet as of September 30, 1996 (unaudited).................................. F-23
NORTHGATE COUNTRY CLUB:
Pro Forma Condensed Consolidated Statement of Operations for the year ended December 20, 1995
(unaudited)............................................................................................ F-24
Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 20, 1996
(unaudited)............................................................................................ F-24
Pro Forma Condensed Consolidated Balance Sheet as of September 20, 1996 (unaudited)..................... F-25
BRIGHT'S CREEK DEVELOPMENT, LLC
Pro Forma Condensed Statement of Operations for the year ended December 31, 1995 (unaudited)............ F-26
Pro Forma Condensed Statement of Operations for the nine months ended September 30, 1996 (unaudited).... F-26
Pro Forma Condensed Balance Sheet as of September 30, 1996 (unaudited).................................. F-27
OLDE ATLANTA GOLF CLUB
Pro Forma Condensed Statement of Operations for the year ended December 31, 1995 (unaudited)............ F-28
Pro Forma Condensed Statement of Operations for the nine months ended September 30, 1996 (unaudited).... F-28
Pro Forma Condensed Balance Sheet as of September 30, 1996 (unaudited).................................. F-29
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS....................................................... F-30
LEGENDS GOLF COMBINED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants -- BDO Seidman, LLP.................................. F-33
Combined Balance Sheets -- December 31, 1994 and 1995 and September 30, 1996............................ F-34
Combined Statements of Income -- years ended December 31, 1993, 1994 and 1995 and nine months ended
September 30, 1995 (unaudited) and 1996................................................................ F-35
Combined Statements of Owners' Equity -- years ended December 31, 1993, 1994 and 1995 and nine months
ended September 30, 1996............................................................................... F-36
Combined Statements of Cash Flows -- years ended December 31, 1993, 1994 and 1995 and nine months ended
September 30, 1995 (unaudited) and 1996................................................................ F-37
Notes to Combined Financial Statements.................................................................. F-38
</TABLE>
F-2
<PAGE>
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
GOLF LEGENDS, LTD. FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants -- BDO Seidman, LLP.................................. F-45
Balance Sheets -- December 31, 1994 and 1995 and September 30, 1996..................................... F-46
Statements of Income and Retained Earnings -- years ended December 31, 1993, 1994 and 1995 and nine
months ended September 30, 1995 (unaudited) and 1996................................................... F-47
Statements of Cash Flows -- years ended December 31, 1993, 1994 and 1995 and nine months ended September
30, 1995 (unaudited) and 1996.......................................................................... F-48
Summary of Significant Accounting Policies.............................................................. F-49
Notes to Financial Statements........................................................................... F-51
HERITAGE GOLF CLUB, LTD. FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants -- BDO Seidman, LLP.................................. F-56
Balance Sheets -- December 31, 1994 and 1995 and September 30, 1996..................................... F-57
Statements of Income and Retained Earnings -- years ended December 31, 1993, 1994 and 1995 and nine
months ended September 30, 1995 (unaudited) and 1996................................................... F-58
Statements of Cash Flows -- years ended December 31, 1993, 1994 and 1995 and nine months ended September
30, 1995 (unaudited) and 1996.......................................................................... F-59
Summary of Significant Accounting Policies.............................................................. F-60
Notes to Financial Statements........................................................................... F-62
SEASIDE RESORTS, LTD. FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants -- BDO Seidman, LLP.................................. F-66
Balance Sheets -- December 31, 1994 and 1995 and September 30, 1996..................................... F-67
Statements of Income and Retained Earnings -- years ended December 31, 1993, 1994 and 1995 and nine
months ended September 30, 1995 (unaudited) and 1996................................................... F-68
Statements of Cash Flows -- years ended December 31, 1993, 1994 and 1995 and nine months ended September
30, 1995 (unaudited) and 1996.......................................................................... F-69
Summary of Significant Accounting Policies.............................................................. F-70
Notes to Financial Statements........................................................................... F-72
LEGENDS OF VIRGINIA, LC FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants -- BDO Seidman, LLP.................................. F-76
Balance Sheets -- December 31, 1994 and 1995 and September 30, 1996..................................... F-77
Statements of Loss and Members' Deficit -- year ended December 31, 1995 and nine months ended September
30, 1996............................................................................................... F-78
Statements of Cash Flows -- year ended December 31, 1995 and nine months ended September 30, 1996....... F-79
Summary of Significant Accounting Policies.............................................................. F-80
Notes to Financial Statements........................................................................... F-82
</TABLE>
F-3
<PAGE>
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
NORTHGATE COUNTRY CLUB FINANCIAL STATEMENTS:
Report of Independent Accountants -- Price Waterhouse LLP............................................... F-86
Consolidated Balance Sheets -- December 20, 1994 and 1995 and September 20, 1996........................ F-87
Consolidated Statements of Operations and Partners' Equity -- years ended December 20, 1993, 1994 and
1995 and nine-month periods ended September 20, 1995 (unaudited) and 1996.............................. F-88
Consolidated Statements of Cash Flows -- years ended December 20, 1993, 1994 and 1995 and nine-month
periods ended September 20, 1995 (unaudited) and 1996.................................................. F-89
Notes to Consolidated Financial Statements.............................................................. F-90
BRIGHT'S CREEK DEVELOPMENT, LLC FINANCIAL STATEMENTS:
Report of Independent Accountants -- Coopers & Lybrand L.L.P............................................ F-94
Balance Sheets -- December 31, 1994 and 1995 and September 30, 1996..................................... F-95
Statements of Operations -- for the period from inception (May 17, 1994) through December 31, 1994, the
year ended December 31, 1995 and the nine-month periods ended September 30, 1995 (unaudited) and
1996................................................................................................... F-96
Statements of Members' Deficit -- for the period from inception (May 17, 1994) through December 31,
1994, the year ended December 31, 1995 and the nine-month period ended September 30, 1996.............. F-97
Statements of Cash Flows -- for the period from inception (May 17, 1994) through December 31, 1994, the
year ended December 31, 1995 and the nine-month period ended September 30, 1995 (unaudited) and 1996... F-98
Notes to Financial Statements........................................................................... F-99
OLDE ATLANTA GOLF CLUB FINANCIAL STATEMENTS:
Report of Independent Auditors -- Crowe, Chizek and Company LLP......................................... F-102
Balance Sheets -- December 31, 1994 and 1995 and September 30, 1996..................................... F-103
Statements of Income -- years ended December 31, 1994 and 1995 and nine-month periods ended September
30, 1995 (unaudited) and 1996.......................................................................... F-104
Statements of Changes in Partners' Capital -- years ended December 31, 1994, and 1995 and nine-month
period ended September 30, 1996........................................................................ F-105
Statements of Cash Flows -- years ended December 31, 1994 and 1995 and nine-month periods ended
September 30, 1995 (unaudited) and 1996................................................................ F-106
Notes to Financial Statements........................................................................... F-107
</TABLE>
F-4
<PAGE>
GOLF TRUST OF AMERICA, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company's unaudited Pro Forma Condensed Consolidated Statements of
Operations for the year ended December 31, 1995 and the nine months ended
September 30, 1996 are presented as if the completion of the Formation
Transactions had occurred as of January 1, 1995 and carried forward through each
period presented. The Company was formed in November 1996 and has no operating
history. In management's opinion, all adjustments necessary to reflect the
effects of the Formation Transactions have been made.
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations are not necessarily indicative of what actual results of operations
of the Company would have been assuming such Formation Transactions had been
completed as of the beginning of the periods presented, nor do they purport to
represent the results of operations for future periods.
<TABLE>
<CAPTION>
(F)
FOR THE YEAR ENDED DECEMBER 31, 1995 HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Participating lease revenue................ -- $ 11,282(A) $ 11,282
----------- ----------- -----------
Depreciation and amortization.............. -- 1,819(B) 1,819
General and administrative................. -- 1,639(C) 1,639
Interest expense........................... -- 366(D) 366
----------- ----------- -----------
Total expenses............................. -- 3,824 3,824
----------- ----------- -----------
Income before minority interest............ -- 7,458 7,458
Minority interest.......................... -- 4,406(E) 4,406
----------- ----------- -----------
Net income applicable to common
shareholders.............................. -- $ 3,052 $ 3,052
----------- ----------- -----------
----------- ----------- -----------
Net income per share of Common Stock....... $ 1.07
-----------
-----------
Shares of Common Stock outstanding......... 2,865
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<S> <C> <C> <C>
Participating lease revenue................ -- $ 9,395(A) $ 9,395
--- ----------- -----------
Depreciation and amortization.............. -- 1,691(B) 1,691
General and administrative................. -- 1,229(C) 1,229
Interest expense........................... -- 275(D) 275
--- ----------- -----------
Total expenses............................. -- 3,195 3,195
--- ----------- -----------
Income before minority interest............ -- 6,200 6,200
Minority interest.......................... -- 3,662(E) 3,662
--- ----------- -----------
Net income applicable to common
shareholders.............................. -- $ 2,538 $ 2,538
--- ----------- -----------
--- ----------- -----------
Net income per shares of Common Stock...... $ .89
-----------
-----------
Shares of Common Stock outstanding......... 2,865
-----------
-----------
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-5
<PAGE>
GOLF TRUST OF AMERICA, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(A) Represents payments of Base Rent from the Initial Lessees to the 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 period presented,
Participating Lease revenue would have been $3,706 and $1,846 higher for the
periods ended December 31, 1995 and September 30, 1996, respectively, for a
total of $14,988 and $11,241, respectively.
(B) Represents depreciation on buildings, improvements, and furniture and
equipment and amortization. Depreciation is computed using the straight-line
method and is based upon the estimated useful lives of 30 years for
buildings, 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 $1,307 and
$654 higher for the periods ended December 31, 1995 and September 30, 1996,
respectively, for a total of $3,126 and $2,345, respectively.
(C) Represents legal, audit, office costs, salaries and other general and
administrative expenses to be paid by the Company as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- -------------------
<S> <C> <C>
Salaries and benefits -- executive officers................ $ 697 $ 523
Other salaries and benefits................................ 121 91
Directors & officers insurance............................. 200 150
Legal and accounting....................................... 185 139
Directors fees and travel.................................. 77 57
SEC reporting and other stockholder costs.................. 110 82
Office rent, telephone, supplies and other administrative
costs..................................................... 165 124
Other...................................................... 84 63
------ ------
$ 1,639 $ 1,229
------ ------
------ ------
</TABLE>
Salaries and benefits for executive officers are based upon tentative
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.
(D) Reflects interest expense at 8% per annum to be paid on the initial
borrowing of $4,325 and loan costs amortized as interest expense. Loan
costs, aggregrating $40, 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.
(E) Calculated as approximately 59.1% of the Operating Partnership's net income.
(F) 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.
F-6
<PAGE>
GOLF TRUST OF AMERICA, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
The unaudited Pro Forma Condensed Consolidated Balance Sheet is presented as
if the completion of the Formation Transactions and the application of the net
proceeds of the Offering as set forth under the caption "Use of Proceeds" had
occurred on September 30, 1996. It should be read in conjunction with the
Financial Statements listed in the Index at Page F-1 of this Prospectus. The
contribution of the interest in the Golf Courses to the Operating Partnership by
The Legends Group represents a reorganization of the interests of The Legends
Group in the contributed Golf Courses and has been accounted for at historical
cost as a transfer between parties under common control. In accordance with APB
No. 16, the contribution of the Golf Courses by the other Prior Owners to the
Operating Partnership (Other Acquired Golf Courses) has been accounted for using
the purchase method. In management's opinion, all adjustments necessary to
reflect the effects of the Formation Transactions have been made.
This unaudited Pro Forma Condensed Consolidated Balance Sheet is not
necessarily indicative of what the Company's actual financial position would
have been assuming formation such transactions had been completed as of
September 30, 1996, nor does it purport to represent the future financial
position of the Company.
<TABLE>
<CAPTION>
OTHER ACQUIRED (F)
LEGENDS GOLF COURSES COMBINED PRO FORMA
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS CONSOLIDATED
---------- -------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Properties, net............................ $ 33,989 $ 8,060 $ 42,049 $ 6,574 $ 48,623
Land....................................... 1,000 10,377 11,377 3,532 14,909
Cash....................................... 225 169 394 150 544
Advances to affiliates..................... 12,547 1,467 14,014 (14,014)
Other assets............................... 2,144 1,445 3,589 (3,549) 40
---------- -------------- ---------- ----------- ------------
Total assets............................. $ 49,905 $ 21,518 $ 71,423 $ (7,307) $ 64,116
---------- -------------- ---------- ----------- ------------
---------- -------------- ---------- ----------- ------------
LIABILITIES & EQUITY
Due to affiliates.......................... $ 12,044 $ 12,044 $ (12,044)
Notes payable.............................. 27,198 $ 12,706 39,904 (35,579) $ 4,325
Accounts payable and accrued expenses...... 3,169 467 3,636 (3,636)
Other liabilities.......................... 2,230 2,230 (2,230)
Minority interest.......................... 35,321 35,321
Common stock............................... 4 6,115 6,119 (6,092) 27
Additional paid in capital................. 300 300 24,143 24,443
Retained earnings.......................... 7,190 7,190 (7,190)
---------- -------------- ---------- ----------- ------------
Total liablities and equity.............. $ 49,905 $ 21,518 $ 71,423 $ (7,307) $ 63,116
---------- -------------- ---------- ----------- ------------
---------- -------------- ---------- ----------- ------------
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-7
<PAGE>
GOLF TRUST OF AMERICA, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS - DR.(CR.) LIABILITIES - (DR.)CR.
--------------------------------------------------------- ----------------------------------------------
ADVANCES
TO OTHER DUE TO NOTES ACCOUNTS OTHER
ADJUSTMENTS PROPERTIES LAND CASH AFFILIATES ASSETS AFFILIATES PAYABLE PAYABLE LIABILITIES
- ------------------------ ----------- --------- --------- ----------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Eliminate Legends Group
assets and liabilities
not acquired (A)....... $ (1,198) $ (225) $ (12,547) $ (2,144) $ (3,611) $ (871) $ (3,169)
Contribution of
additional Legends land
(A).................... $ 3,532
Eliminate assets and
liabilities of acquired
courses not acquired... (58) (169) (1,467) (1,445) (55) (467) $ (2,230)
Record acquisition of
acquired courses
(B).................... 7,830 (6,197)
Initial borrowing
(C).................... 4,285 40 4,325
Repayment of outstanding
mortgages.............. (47,411) (8,433) (38,978)
Sales of shares by the
Company (D)............ 49,867
Record minority interest
(E)....................
----------- --------- --------- ----------- --------- --------- --------- ----------- -----------
Total adjustments....... $ 6,574 $ 3,532 $ 150 $ (14,014) $ (3,549) $ (12,044) $ (35,579) $ (3,636) $ (2,230)
----------- --------- --------- ----------- --------- --------- --------- ----------- -----------
----------- --------- --------- ----------- --------- --------- --------- ----------- -----------
<CAPTION>
ADDITIONAL
MINORITY COMMON PAID IN RETAINED
ADJUSTMENTS INTEREST STOCK CAPITAL EARNINGS
- ------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Eliminate Legends Group
assets and liabilities
not acquired (A)....... $ (973) $ (300) $ (7,190)
Contribution of
additional Legends land
(A).................... 3,532
Eliminate assets and
liabilities of acquired
courses not acquired... (387)
Record acquisition of
acquired courses
(B).................... 1,633
Initial borrowing
(C)....................
Repayment of outstanding
mortgages..............
Sales of shares by the
Company (D)............ 25,424 24,443
Record minority interest
(E).................... $ 35,321 (35,321)
----------- ----------- ----------- -----------
Total adjustments....... $ 35,321 $ (6,092) $ 24,143 $ (7,190)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
(A) The Legends Group Prior Owners are contributing the following Golf Courses
and related facilities and equipment (except golf carts) to the Operating
Partnership: Parkland, Healthland and Moorland (Golf Legends), Oyster Bay
(Seaside Resorts), Heritage Golf Club, and Stonehouse Golf Club and Royal
New Kent (Legends of Virginia LC). The contribution of Stonehouse and Royal
New Kent includes land owned by Legends of Virginia on which the two Golf
Courses are situated. An affiliate of the Prior Owners of Golf Legends and
Heritage is separately contributing to the Operating Partnership the land on
which these Golf Courses are situated. The land on which Oyster Bay is
situated is subject to a ground lease.
(B) Reflects the acquisition of property and equipment from Northgate Country
Club, Bright's Creek Development and Olde Atlanta Golf Club which includes,
but is not limited to, the Golf Courses and related land, buildings,
improvements, fixed assets and equipment (except golf carts) as follows:
<TABLE>
<S> <C>
Cash............................................................... $ 6,197
Assumption of debt................................................. 12,651
Issuance of 368,050 OP Units....................................... 7,361
---------
Consideration paid for acquired Golf Courses and land.............. 26,209
Less: Historical basis in acquired Golf Courses and land........... 18,379
---------
Increase in basis of acquired Golf Courses and land................ $ 7,830
---------
---------
Historical basis of equity of acquired courses..................... $ 6,115
Equity not acquired................................................ (387)
---------
Equity of acquired courses in contributed assets................... 5,728
Less: Issuance of 368,050 OP Units to Prior Owners of acquired
courses........................................................... 7,361
---------
Increase in equity on contribution of acquired courses............. $ 1,633
---------
---------
</TABLE>
F-8
<PAGE>
GOLF TRUST OF AMERICA, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
(C) Reflects initial borrowing obtained by the Company and related loan costs
($40).
(D) Reflects the following proposed transaction:
<TABLE>
<S> <C>
Gross proceeds from sale of 2,865,000 shares of Common Stock, net
of underwriting discount.......................................... $ 53,289
Expenses of the Offering........................................... (3,422)
---------
$ 49,867
---------
---------
</TABLE>
(E) Reflects the following:
<TABLE>
<S> <C>
Legends Golf equity as of September 30, 1996....................... $ 7,494
Legends Golf equity not acquired by the Company.................... (8,463)
---------
Deficit upon contribution to Operating Partnership of properties
and debt of Legends Golf.......................................... (969)
Contributions of land subsequent to September 30, 1996 by Legends
Golf's Prior Owner................................................ 3,532
Issuance of 368,050 OP Units to Prior Owners for acquisition of
Golf Courses...................................................... 7,361
Contribution of capital to Operating Partnerships by Company....... 49,867
---------
59,791
Minority Interest percentage....................................... 59.1%
---------
$ 35,321
---------
---------
</TABLE>
(F) 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
by as general partner by the Limited Partners, except in certain limited
circumstances.
F-9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Golf Trust of America, Inc.
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of Golf Trust of America, Inc. at
November 8, 1996, in conformity with generally accepted accounting principles.
The balance sheet is the responsibility of the Company's management; our
responsibility is to express an opinion on the balance sheet based on our audit.
We conducted our audit of the balance sheet in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall presentation. We believe that our audit provides a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
Costa Mesa, California
November 8, 1996
F-10
<PAGE>
GOLF TRUST OF AMERICA, INC.
BALANCE SHEET
NOVEMBER 8, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash............................................................................... $ 100
------
------
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, 10,000,000 shares authorized, no shares issued.... $ --
Common Stock, $.01 par value, 90,000,000 shares authorized, 1 share issued and
outstanding....................................................................... --
Additional paid-in capital......................................................... 100
------
Total stockholders' equity........................................................... $ 100
------
------
</TABLE>
NOTES TO BALANCE SHEET
1. ORGANIZATION
Golf Trust of America, Inc. (the "Company") was incorporated in Maryland on
November 8, 1996. The authorized capital stock of the Company consists of
90,000,000 shares of Common Stock having a par value of $.01 per share and
10,000,000 shares of Preferred Stock having a par value of $.01 per share.
The Company will own a 0.2% sole general partnership interest and an
approximately 40.7% limited partnership interest in Golf Trust of America, L.P.
(the "Operating Partnership") currently in the process of formation. The
Operating Partnership will acquire and own resort golf courses, private golf
courses and daily fee golf courses throughout the United States.
The Company as sole general partner of the Operating Partnership will have,
subject to certain protective rights of the Limited Partner, 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, the Company is considered to
control the Operating Partnership and intends to present its accounts on a
consolidated basis with the Operating Partnership.
Holders of limited partnership interests in the Operating Partnership ("OP
Units") will have the opportunity after one year following the receipt of such
OP Units, subject to certain restrictions, to have their OP Units exchanged for
cash in an amount equal to the fair market value of an equivalent number of
shares of Common Stock or, at the election of the Company, for Common Stock on a
one-for-one basis. The Company currently expects that it will elect to issue
Common Stock in connection with such exchange, unless it is prohibited from
doing so because of the ownership restrictions in its Charter.
2. INCOME TAXES
After the completion of the Offering, the Company intends to make an
election to be taxed as a real estate investment trust ("REIT") under Sections
856 through 860 of the Code. As a REIT, the Company generally will not be
subject to federal income tax if it distributes at least 95% of its REIT taxable
income to its stockholders. REITs are subject to a number of organizational and
operational requirements. If the Company fails to qualify as a REIT in any
taxable year, the Company will be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
tax rates. Even if the Company qualifies for taxation as a REIT, the Company may
be subject to state and local taxes on its income and property and to federal
income and excise taxes on its undistributed income.
F-11
<PAGE>
3. INCENTIVE PLANS
The Company intends to establish a stock incentive plan to be administered
by the Compensation Committee of the Board of Directors. Awards under the plan
take the form of nonqualified stock options, incentive stock options, restricted
stock or performance awards:
NONQUALIFIED STOCK OPTIONS will provide for the right to purchase common
stock at a specified price which may be less than the fair market value on the
date of grant and usually will become exercisable in installments after the
grant date.
INCENTIVE STOCK OPTIONS will be designed to comply with the provisions of
the Internal Revenue Service Code and subject to related restrictions, including
exercise prices equal to at least 100% of the fair market value of the common
stock at the date of the grant and a ten year restriction on their term.
RESTRICTED STOCK may be sold to participants at various prices and made
subject to such restrictions as may be determined by the Compensation Committee.
PERFORMANCE AWARDS may be granted to individuals or groups of employees
based upon specific agreements. Such awards may be payable in common stock, cash
or some combination of the two. Performance awards may include bonus payments
based upon increases in the price of the Company's stock.
In addition, a maximum of 100,000 shares of Common Stock may be issued under
the Company's Non-Employee Directors' Plan.
In accordance with Statement of Financial Accounting Standards No. 123, the
Company intends to adopt the intrinsic value based approach to accounting for
stock-based compensation, supplemented by footnote disclosure of pro forma net
income and earnings per share using a fair value based method of accounting for
stock-based compensation.
4. 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.
F-12
<PAGE>
GOLF COURSES AND INITIAL LESSEES
PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited Pro Forma Condensed Financial Statements give effect
to the proposed contribution of assets and liabilities to the Operating
Partnership in connection with the Formation Transactions and the contribution
of certain other assets and liabilities by the Prior Owners to the Initial
Lessees. The unaudited Pro Forma Condensed Balance Sheets are based upon the
individual historical balance sheets of each of the Prior Owners and have been
prepared to reflect the contribution of assets and liabilities by the Prior
Owners to the Operating Partnership and Initial Lessees as if such events had
occurred on September 30, 1996 (September 20, 1996 with respect to Northgate
Country Club). The unaudited Pro Forma Condensed Statements of Operations for
the year ended December 31, 1995 (December 20, 1995 with respect to Northgate
Country Club) and the nine months ended September 30, 1996 (September 20, 1996
with respect to Northgate Country Club) 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 Initial Lessees as if such events had
occurred as of the beginning of the period presented and carried forward through
each period presented. The pro forma condensed financial information has been
prepared by the management of each of the Prior Owners. These Pro Forma
Condensed Financial Statements may not be indicative of the results that
actually would have occurred if the proposed transactions had occurred on the
dates indicated nor are they indicative of future results.
F-13
<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, 1995
Revenue from golf operations..................................... $14,619 $-- $14,619
Other revenue.................................................... 3,823 -- 3,823
-------- ------- -----------
Total revenue.................................................... 18,442 -- 18,442
-------- ------- -----------
Participating Lease payments..................................... -- 8,351(F) 8,351
Operating expenses............................................... 10,322 (826)(O,P,R) 9,496
Interest expense................................................. 1,017 (936)(D) 81
Depreciation..................................................... 1,791 (1,508)(E) 283
-------- ------- -----------
Total expenses................................................... 13,130 5,081 18,211
-------- ------- -----------
Net income (loss)................................................ $ 5,312 $(5,081) $ 231
-------- ------- -----------
-------- ------- -----------
Cash provided by operating activities (AA)....................... $ 6,570 $ 514
-------- -----------
-------- -----------
Cash used in investing activities (AB)........................... $(16,932) $--
-------- -----------
-------- -----------
Cash used in financing activities (AC)........................... $10,257 $--
-------- -----------
-------- -----------
EBITDA (U)....................................................... $ 8,120 $ 595
-------- -----------
-------- -----------
NINE MONTHS ENDED SEPTEMBER 30, 1996
Revenue from golf operations..................................... $11,354 $-- $11,354
Other revenue.................................................... 3,095 -- 3,095
-------- ------- -----------
Total revenue.................................................... 14,449 -- 14,449
-------- ------- -----------
Participating Lease payments..................................... -- 7,197(F) 7,197
Operating expenses............................................... 9,800 (628)(O,P,R) 9,172
Interest expense................................................. 883 (842)(D) 41
Depreciation and amortization.................................... 1,579 (1,326)(E) 253
-------- ------- -----------
Total expenses................................................... 12,262 4,401 16,663
-------- ------- -----------
Net income (loss)................................................ $ 2,187 $(4,401) $(2,214)
-------- ------- -----------
-------- ------- -----------
Cash provided by operating activities (AA)....................... $ 5,174 $(1,961)
-------- -----------
-------- -----------
Cash used in investing activities (AB)........................... $(5,105) $--
-------- -----------
-------- -----------
Cash used in financing activities (AC)........................... $ (244) $--
-------- -----------
-------- -----------
EBITDA (U)....................................................... $ 4,649 $(1,920)
-------- -----------
-------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
F-14
<PAGE>
LEGENDS GOLF
PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
PRIOR PRO FORMA LESSEE
OWNER (B) ADJUSTMENTS PRO FORMA
----------- -------------------- -----------
<S> <C> <C> <C>
Current assets................................... $ 2,070 $ (1,418)(V,W,Q,T) $ 653
Property and equipment........................... 34,989 (33,791)(H,N,X) 1,198
Advances to affiliates........................... 12,547 (12,546)(V,W,Q,T) --
Other............................................ 299 (299)(C,V,T) --
----------- -------- -----------
Total assets..................................... $ 49,905 $ (48,054) $ 1,851
----------- -------- -----------
----------- -------- -----------
Current liabilities.............................. $ 3,168 $ -- $ 3,168
Current maturities of long-term debt............. 813 (398)(I) 415
Long-term debt................................... 26,386 (26,386)(I) --
Advances from affiliates......................... 12,044 (12,044)(V,W,Q,S) --
----------- -------- -----------
Total liabilities................................ 42,411 (38,828) 3,583
Owners' equity................................... 7,494 (9,226)(V,W,Q,T) (1,732)
----------- -------- -----------
Total liabilities and owners' equity............. $ 49,905 $ (48,054) $ 1,851
----------- -------- -----------
----------- -------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-15
<PAGE>
GOLF LEGENDS
COURSES: PARKLAND, HEATHLAND, MOORLAND
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
PRIOR PRO FORMA LESSEE
OWNER (A) ADJUSTMENTS PRO FORMA
-------- --------------- -----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Revenue from golf operations............................................. $ 8,003 $-- $8,003
Other revenue............................................................ 2,177 -- 2,177
-------- ------- -----------
Total revenue............................................................ 10,180 -- 10,180
-------- ------- -----------
Participating Lease payments............................................. -- 4,670(F) 4,670
Operating expenses....................................................... 5,739 (588)(O) 5,151
Interest expense......................................................... 877 (825)(D) 52
Depreciation............................................................. 1,256 (1,087)(E) 169
-------- ------- -----------
Total expenses........................................................... 7,872 2,170 10,042
-------- ------- -----------
Net income (loss)........................................................ $ 2,308 $(2,170) $ 138
-------- ------- -----------
-------- ------- -----------
Cash provided by operating activities (AA)............................... $ 3,537 $ 307
-------- -----------
-------- -----------
Cash used in investing activities (AB)................................... $(3,372) $--
-------- -----------
-------- -----------
Cash used in financing activities (AC)................................... $ (164) $--
-------- -----------
-------- -----------
EBITDA (U)............................................................... $ 4,441 $ 359
-------- -----------
-------- -----------
NINE MONTHS ENDED SEPTEMBER 30, 1996
Revenue from golf operations............................................. $ 6,126 $-- $6,126
Other revenue............................................................ 1,888 -- 1,888
-------- ------- -----------
Total revenue............................................................ 8,014 -- 8,014
-------- ------- -----------
Participating Lease payments............................................. -- 3,503(F) 3,503
Operating expenses....................................................... 4,805 (449)(O) 4,356
Interest expense......................................................... 602 (578)(D) 24
Depreciation and amortization............................................ 945 (826)(E) 119
-------- ------- -----------
Total expenses........................................................... 6,352 1,650 8,002
-------- ------- -----------
Net income (loss)........................................................ $ 1,662 $(1,650) $ 12
-------- ------- -----------
-------- ------- -----------
Cash provided by operating activities (AA)............................... $ 3,121 $ 131
-------- -----------
-------- -----------
Cash used in investing activities (AB)................................... $(2,742) $--
-------- -----------
-------- -----------
Cash used in financing activities (AC)................................... $ (533) $--
-------- -----------
-------- -----------
EBITDA (U)............................................................... $ 3,209 $ 155
-------- -----------
-------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-16
<PAGE>
GOLF LEGENDS
COURSES: PARKLAND, HEATHLAND, MOORLAND
PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
PRIOR PRO FORMA LESSEE
OWNER (B) ADJUSTMENTS PRO FORMA
----------- ---------------- -----------
<S> <C> <C> <C>
Current assets....................................... $ 1,128 $ (805)(V) $ 323
Property and equipment............................... 10,739 (9,829)(H,N,X) 910
Advances to affiliates............................... 7,484 (7,484)(V) --
Other................................................ 4 (4)(C,V) --
----------- -------- -----------
Total assets......................................... $ 19,355 $ (18,122) $ 1,233
----------- -------- -----------
----------- -------- -----------
Current liabilities.................................. $ 1,431 $ -- $ 1,431
Current maturities of long-term debt................. 429 (171)(I) 258
Long-term debt....................................... 12,244 (12,244)(I) --
Advances from affiliates............................. 1,014 (1,014)(V) --
----------- -------- -----------
Total liabilities.................................... 15,118 (13,429) 1,689
Owners' equity....................................... 4,237 (4,693)(V) (456)
----------- -------- -----------
Total liabilities and owners' equity................. $ 19,355 $ (18,122) $ 1,233
----------- -------- -----------
----------- -------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-17
<PAGE>
HERITAGE GOLF CLUB
COURSE: HERITAGE GOLF CLUB
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
LESSEE
PRIOR PRO FORMA PRO
OWNER (A) ADJUSTMENTS FORMA
-------- ----------- --------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Revenue from golf operations............................................... $ 3,156 $ -- $ 3,156
Other revenue.............................................................. 782 -- 782
-------- ----------- --------
Total revenue............................................................ 3,938 -- 3,938
-------- ----------- --------
Participating Lease payments............................................... -- 1,825(F) 1,825
Operating expenses......................................................... 2,442 (218)(P) 2,224
Interest expense........................................................... 63 (48)(D) 15
Depreciation............................................................... 319 (258)(E) 61
-------- ----------- --------
Total expenses........................................................... 2,824 1,301 4,125
-------- ----------- --------
Net income (loss)........................................................ $ 1,114 $(1,301) $ (187)
-------- ----------- --------
-------- ----------- --------
Cash provided by (used in) operating activities (AA)....................... $ 969 $ (126)
-------- --------
-------- --------
Cash used in investing activities (AB)..................................... $ (913) $ --
-------- --------
-------- --------
Cash used in financing activities (AC)..................................... $ (133) $ --
-------- --------
-------- --------
EBITDA (U)............................................................... $ 1,496 $ (111)
-------- --------
-------- --------
NINE MONTHS ENDED SEPTEMBER 30, 1996
Revenue from golf operations............................................... $ 2,413 $ -- $ 2,413
Other revenue.............................................................. 555 -- 555
-------- ----------- --------
Total revenue............................................................ 2,968 -- 2,968
-------- ----------- --------
Participating Lease payments............................................... -- 1,369(F) 1,369
Operating expenses......................................................... 1,662 (164)(P) 1,498
Interest expense........................................................... 41 (34)(D) 7
Depreciation............................................................... 225 (187)(E) 38
-------- ----------- --------
Total expenses........................................................... 1,928 984 2,912
-------- ----------- --------
Net income (loss)........................................................ $ 1,040 $ (984) $ 56
-------- ----------- --------
-------- ----------- --------
Cash provided by operating activities (AA)................................. $ 1,516 $ 94
-------- --------
-------- --------
Cash used in investing activities (AB)..................................... $(1,371) $ --
-------- --------
-------- --------
Cash used in financing activities (AC)..................................... $ (181) $ --
-------- --------
-------- --------
EBITDA (U)............................................................... $ 1,306 $ 101
-------- --------
-------- --------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-18
<PAGE>
HERITAGE GOLF CLUB
COURSE: HERITAGE GOLF CLUB
PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
PRIOR PRO FORMA LESSEE
OWNER (B) ADJUSTMENTS PRO FORMA
--------- ---------------- ---------
<S> <C> <C> <C>
Current assets........................ $ 381 $ (250)(W) $131
Property and equipment................ 1,914 (1,773)(H)(X) 141
Advances to affiliates................ 2,301 (2,301)(W) --
--------- ------- ---------
Total assets........................ $4,596 $(4,324) $272
--------- ------- ---------
--------- ------- ---------
Current liabilities................... $ 541 $-- $541
Current maturities of long-term
debt................................. 89 (10)(I) 79
Long-term debt........................ 726 (726)(I) --
Advances from affiliates.............. 595 (595)(W) --
--------- ------- ---------
Total liabilities................... 1,951 (1,331) 620
Owners' equity...................... 2,645 (2,993)(W) (348)
--------- ------- ---------
Total liabilities and owners
equity............................. $4,596 $(4,324) $272
--------- ------- ---------
--------- ------- ---------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-19
<PAGE>
SEASIDE RESORTS
COURSE: OYSTER BAY
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
LESSEE
PRIOR PRO FORMA PRO
OWNER (A) ADJUSTMENTS FORMA
-------- ----------- --------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Revenue from golf operations............................................... $ 3,459 $ -- $ 3,459
Other revenue.............................................................. 865 -- 865
-------- ----------- --------
Total revenue............................................................ 4,324 -- 4,324
-------- ----------- --------
Participating Lease payments................................................. -- 1,856(F) 1,856
Operating expenses......................................................... 2,126 (20)(R) 2,106
Interest expense........................................................... 77 (63)(D) 14
Depreciation............................................................... 187 (134)(E) 53
-------- ----------- --------
Total expenses........................................................... 2,390 1,639 4,029
-------- ----------- --------
Net income............................................................... $ 1,934 $(1,639) $ 295
-------- ----------- --------
-------- ----------- --------
Cash provided by operating activities (AA)................................. $ 2,080 $ 348
-------- --------
-------- --------
Cash used in investing activities (AB)..................................... $(1,207) $ --
-------- --------
-------- --------
Cash used in financing activities (AC)..................................... $ (902) $ --
-------- --------
-------- --------
EBITDA (U)............................................................... $ 2,198 $ 362
-------- --------
-------- --------
NINE MONTHS ENDED SEPTEMBER 30, 1996
Revenue from golf operations............................................... $ 2,490 -- $ 2,490
Other revenue.............................................................. 591 -- 591
-------- ----------- --------
Total revenue............................................................ 3,081 -- 3,081
-------- ----------- --------
Participating Lease payments............................................... -- 1,392(F) 1,392
Operating expenses......................................................... 1,588 (15)(R) 1,573
Interest expense........................................................... 52 (42)(D) 10
Depreciation............................................................... 137 (41)(E) 96
-------- ----------- --------
Total expenses........................................................... 1,777 1,294 3,071
-------- ----------- --------
Net income............................................................... $ 1,304 $(1,294) $ 10
-------- ----------- --------
-------- ----------- --------
Cash provided by (used in) operating activities (AA)....................... $ 1,591 $ 106
-------- --------
-------- --------
Cash provided by (used in) investing activities (AB)....................... $ (956) $ --
-------- --------
-------- --------
Cash provided by (used in) financing activities (AC)....................... $ (718) --
-------- --------
-------- --------
EBITDA (U)............................................................... $ 1,493 $ 116
-------- --------
-------- --------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-20
<PAGE>
SEASIDE RESORTS
COURSE: OYSTER BAY
PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
LESSEE
PRIOR PRO FORMA PRO
OWNER (B) ADJUSTMENTS FORMA
-------- ----------- --------
<S> <C> <C> <C>
Current assets........................ $ 424 $ (250)(Q) $ 174
Property and equipment................ 1,014 (867)(H) 147
Advances to affiliates................ 2,701 (2,701)(Q) --
-------- ----------- --------
Total assets........................ $ 4,139 $(3,818) $ 321
-------- ----------- --------
-------- ----------- --------
Current liabilities................... $ 344 $ -- $ 344
Current maturities of long-term
debt................................. 117 (39)(I) 78
Long-term debt........................ 948 (948)(I) --
Advances from affiliates.............. 1,256 (1,256)(Q) --
-------- ----------- --------
Total liabilities................... 2,665 (2,243) 422
Owners' equity...................... 1,474 (1,575)(Q) (101)
-------- ----------- --------
Total liabilities and owners
equity............................. $ 4,139 $(3,818) $ 321
-------- ----------- --------
-------- ----------- --------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-21
<PAGE>
LEGENDS OF VIRGINIA
COURSES: ROYAL NEW KENT, STONEHOUSE GOLF CLUB
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
LESSEE PRO
PRIOR PRO FORMA FORMA
OWNER (A) ADJUSTMENTS CONSOLIDATED
----------- ----------- -----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Revenue from golf operations.......... $ -- $ -- $ --
Other revenue......................... -- -- --
----------- ----- -----------
Total revenue......................... -- -- --
----------- ----- -----------
Participating Lease payments.......... -- -- (F) --
Operating expenses.................... 15 -- 15
Depreciation.......................... 29 (29)(E) --
----------- ----- -----------
Total expenses........................ 44 (29) 15
----------- ----- -----------
Net loss.............................. $ (44) $ 29 $ (15)
----------- ----- -----------
----------- ----- -----------
Cash used in operating activities
(AA)................................. $ (15) $ (15)
----------- -----------
----------- -----------
Cash used in investing activities
(AB)................................. $ (11,443) $ --
----------- -----------
----------- -----------
Cash used in financing activities
(AC)................................. $ 11,458 $ --
----------- -----------
----------- -----------
EBITDA (U)............................ $ (15) $ (15)
----------- -----------
----------- -----------
NINE MONTHS ENDED SEPTEMBER 30, 1996
Revenue from golf operations.......... $ 325 $ -- $ 325
Other revenue......................... 62 -- 62
----------- ----- -----------
Total revenue......................... 387 -- 387
----------- ----- -----------
Participating Lease payments.......... -- 933(F) 933
Operating expenses.................... 1,746 -- 1,746
Interest expense...................... 188 (188)(D) --
Depreciation.......................... 272 (272)(E) --
----------- ----- -----------
Total expenses........................ 2,206 473 2,679
----------- ----- -----------
Net loss.............................. $ (1,819) $ (473) $ (2,292)
----------- ----- -----------
----------- ----- -----------
Cash used in operating activities
(AA)................................. $ (1,054) $ (2,292)
----------- -----------
----------- -----------
Cash used in investing activities
(AB)................................. $ (36) $ --
----------- -----------
----------- -----------
Cash provided by financing activities
(AC)................................. $ 1,188 $ --
----------- -----------
----------- -----------
EBITDA (U)............................ $ (1,359) $ (2,292)
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-22
<PAGE>
LEGENDS OF VIRGINIA
COURSES: ROYAL NEW KENT, STONEHOUSE GOLF CLUB
PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
PRIOR PRO FORMA LESSEE PRO
OWNER (B) ADJUSTMENTS FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Current assets.......................... $ 138 $ (113)(T) $ 25
Property and equipment.................. 21,322 (21,322)(H) --
Advances to affiliates.................. 60 (60)(T) --
Other................................... 295 (295)(C,T) --
----------- ----------- -----------
Total assets........................ $ 21,815 $ (21,790) $ 25
----------- ----------- -----------
----------- ----------- -----------
Current liabilities..................... $ 852 $ -- $ 852
Current maturities of long-term debt.... 178 (178)(I) --
Long-term debt.......................... 12,468 (12,468)(I) --
Advances from affiliates................ 9,179 (9,179)(S) --
----------- ----------- -----------
Total liabilities....................... 22,677 (21,825) 852
Capital deficit......................... (862) 35(T) (827)
----------- ----------- -----------
Total liabilities and capital
deficit............................ $ 21,815 $ (21,790) $ 25
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-23
<PAGE>
NORTHGATE COUNTRY CLUB
COURSE: NORTHGATE COUNTRY CLUB
PRO FORMA CONDENSED CONSOLDIATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
PRIOR PRO FORMA LESSEE PRO
OWNER (A) ADJUSTMENTS FORMA
----------- ----------- -----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 20, 1995
Revenue from golf operations.......... $ 2,803 $ -- $ 2,803
Other revenue......................... 1,763 -- 1,763
----------- ----------- -----------
Total revenue......................... 4,566 -- 4,566
----------- ----------- -----------
Participating Lease payments.......... -- 1,407(F) 1,407
Operating expenses.................... 3,140 (41)(G) 3,099
Interest expense...................... 485 (485)(D) --
Depreciation.......................... 323 (298)(E) 25
----------- ----------- -----------
Total expenses........................ 3,948 583 4,531
----------- ----------- -----------
Net income............................ $ 618 (583) $ 35
----------- ----------- -----------
----------- ----------- -----------
Cash provided by operating activities
(AA)................................. $ 543 $ 60
----------- -----------
----------- -----------
Cash used in investing activities
(AB)................................. $ (347) $ --
----------- -----------
----------- -----------
Cash used in financing activities
(AC)................................. $ (273) $ --
----------- -----------
----------- -----------
EBITDA (U)............................ $ 1,426 $ 60
----------- -----------
----------- -----------
NINE MONTHS ENDED SEPTEMBER 20, 1996
Revenue from golf operations.......... $ 2,214 -- $ 2,214
Other revenue......................... 1,215 -- 1,215
----------- ----------- -----------
Total revenue......................... 3,429 -- 3,429
----------- ----------- -----------
Participating Lease payments.......... -- 1,055(F) 1,055
Operating expenses.................... 2,482 (31)(G) 2,451
Interest expense...................... 389 (389)(D) --
Depreciation.......................... 241 (223)(E) 18
----------- ----------- -----------
Total expenses........................ 3,112 412 3,524
----------- ----------- -----------
Net income............................ $ 317 $ (412) $ (95)
----------- ----------- -----------
----------- ----------- -----------
Cash provided by (used in) operating
activities (AA)...................... $ 573 $ (77)
----------- -----------
----------- -----------
Cash used in investing activities
(AB)................................. $ (155) $ --
----------- -----------
----------- -----------
Cash (used in) financing activities
(AC)................................. $ (423) $ --
----------- -----------
----------- -----------
EBITDA (U)............................ $ 947 $ (77)
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-24
<PAGE>
NORTHGATE COUNTRY CLUB
COURSE: NORTHGATE COUNTRY CLUB
PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 20, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
PRIOR PRO FORMA LESSEE
OWNER (B) ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Current assets.......................... $ 2,221 $ -- $ 2,221
Property and equipment, net............. 10,508 (10,450)(H) 58
----------- ----------- -----------
Total assets........................ $ 12,729 $ (10,450) $ 2,279
----------- ----------- -----------
----------- ----------- -----------
Current liabilities..................... $ 903 (28)(I) $ 875
Long-term debt.......................... 6,101 (6,101)(I) --
Membership deposits..................... 1,435 -- 1,435
----------- ----------- -----------
Total liabilities................... 8,439 (6,129) 2,310
Owners' equity.......................... 4,290 (4,321) (31)
----------- ----------- -----------
Total liabilities and owners'
equity............................. $ 12,729 $ (10,450) $ 2,279
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-25
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
COURSE: THE WOODLANDS
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
PRIOR PRO FORMA LESSEE PRO
OWNER (A) ADJUSTMENTS FORMA
----------- ----------- -----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Revenue from golf operations.......... $ 1,455 $ -- $ 1,455
Other revenue......................... 291 -- 291
----------- ----- -----------
Total revenue......................... 1,746 -- 1,746
----------- ----- -----------
Participating Lease payments.......... -- 679(F) 679
Operating expenses.................... 1,074 -- 1,074
Interest expense...................... 424 (424)(D) --
Depreciation.......................... 247 (247)(E) --
----------- ----- -----------
Total expenses........................ 1,745 8 1,753
----------- ----- -----------
Net income (loss)..................... $ 1 $ (8) $ (7)
----------- ----- -----------
----------- ----- -----------
Cash provided by (used in) operating
activities (AA)...................... $ 220 $ (7)
----------- -----------
----------- -----------
Cash used in investing activities
(AB)................................. $ (5) $ --
----------- -----------
----------- -----------
Cash used in financing activities
(AC)................................. $ (190) $ --
----------- -----------
----------- -----------
EBITDA (U)............................ $ 672 $ (7)
----------- -----------
----------- -----------
NINE MONTHS ENDED SEPTEMBER 30, 1996
Revenue from golf operations.......... $ 1,206 $ -- $ 1,206
Other revenue......................... 244 -- 244
----------- ----- -----------
Total revenue......................... 1,450 -- 1,450
----------- ----- -----------
Participating Lease payments.......... 509(F) 509
Operating expenses.................... 841 841
Interest expense...................... 274 (274)(D) --
Depreciation.......................... 186 (186)(E) --
----------- ----- -----------
Total expenses........................ 1,301 49 1,350
----------- ----- -----------
Net income............................ $ 149 $ (49) $ 100
----------- ----- -----------
----------- ----- -----------
Cash provided by operating activities
(AA)................................. $ 334 $ 100
----------- -----------
----------- -----------
Cash used in investing activities
(AB)................................. $ (29) $ --
----------- -----------
----------- -----------
Cash used in financing activities
(AC)................................. $ (301) $ --
----------- -----------
----------- -----------
EBITDA (U)............................ $ 609 $ 100
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-26
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
COURSE: THE WOODLANDS
PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
PRIOR PRO FORMA LESSEE PRO
OWNER (B) ADJUSTMENTS FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Current assets.......................... $ 281 $ -- $ 281
Other assets............................ 52 (50)(A) 2
Property and equipment, net............. 3,656 (3,656)(B) --
----------- ----------- ---
Total assets........................ $ 3,989 $ (3,706) $ 283
----------- ----------- ---
----------- ----------- ---
Current liabilities..................... $ 283 $ (234)(C) $ 49
Notes payable........................... 3,733 (3,733)(C) --
----------- ----------- ---
Total liabilities................... 4,016 (3,967) 49
Members' (deficit) equity............... (27) 261(D) 234
----------- ----------- ---
$ 3,989 $ (3,706) $ 283
----------- ----------- ---
----------- ----------- ---
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-27
<PAGE>
OLDE ATLANTA GOLF CLUB
COURSE: OLDE ATLANTA
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
PRIOR PRO FORMA LESSEE PRO
OWNER (A) ADJUSTMENTS FORMA
----------- -------------- -----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Revenue from golf operations............................................... $ 1,546 $ -- $ 1,546
Other revenue.............................................................. 466 -- 466
----------- ----- -----------
Total revenue.............................................................. 2,012 -- 2,012
----------- ----- -----------
Participating Lease payments............................................... -- 845(F) 845
Operating expenses......................................................... 1,434 8(J) 1,442
Interest expense........................................................... 202 (202)(D) --
Depreciation and amortization.............................................. 375 (277)(E) --
-- (98)(K) --
----------- ----- -----------
Total expenses............................................................. 2,011 276 2,287
----------- ----- -----------
Net income (loss).......................................................... $ 1 $ (276) $ (275)
----------- ----- -----------
----------- ----- -----------
Cash provided by (used in) operating activities (AA)....................... $ 375 $ (275)
----------- -----------
----------- -----------
Cash used in investing activities (AB)..................................... $ (53) $ --
----------- -----------
----------- -----------
Cash used in financing activities (AC)..................................... $ (391) $ --
----------- -----------
----------- -----------
EBITDA (U)................................................................. $ 578 $ (275)
----------- -----------
----------- -----------
NINE MONTHS ENDED SEPTEMBER 30, 1996
Revenue from golf operations............................................... $ 1,375 $ -- $ 1,375
Other revenue.............................................................. 402 -- 402
----------- ----- -----------
Total revenue.............................................................. 1,777 -- 1,777
----------- ----- -----------
Participating Lease payments............................................... -- 634(F) 634
Operating expenses......................................................... 1,282 (61)(J) 1,221
Interest expense........................................................... 167 (167)(D) --
Depreciation and amortization.............................................. 243 (169)(E) --
-- (74)(K) --
----------- ----- -----------
Total expenses............................................................. 1,692 163 1,855
----------- ----- -----------
Net income (loss).......................................................... $ 85 $ (163) $ (78)
----------- ----- -----------
----------- ----- -----------
Cash provided by (used in) operating activities (AA)....................... $ 252 $ (78)
----------- -----------
----------- -----------
Cash used in investing activities (AB)..................................... $ (19) $ --
----------- -----------
----------- -----------
Cash used in financing activities (AC)..................................... $ (200) $ --
----------- -----------
----------- -----------
EBITDA (U)................................................................. $ 495 $ (78)
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-28
<PAGE>
OLDE ATLANTA GOLF CLUB
COURSE: OLDE ATLANTA
PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
PRIOR PRO FORMA LESSEE
OWNER (B) ADJUSTMENTS PRO FORMA
--------- ----------- ---------
<S> <C> <C> <C>
Current assets.......................... $ 308 $ -- $308
Intangible assets....................... 219 (219)(M) --
Property and equipment, net............. 4,318 (4,318)(H) --
--------- ----------- ---
Total assets............................ $4,845 $(4,537) $308
--------- ----------- ---
--------- ----------- ---
Current liabilities..................... 407 (69)(I) 338
Notes payable........................... 2,541 (2,541)(I) --
--------- ----------- ---
Total liabilities....................... 2,948 (2,610) 338
Capital................................. 1,897 (1,927)(Y) (30)
--------- ----------- ---
Total liabilities and capital........... $4,845 $(4,537) $308
--------- ----------- ---
--------- ----------- ---
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-29
<PAGE>
GOLF COURSES AND LESSEES
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
(A) Reflects the Prior Owner's Historical Condensed Statements of Operations for
the year ended December 31, 1995, and the nine months ended September 30,
1996.
(B) Reflects the Prior Owner's Historical Condensed Balance Sheet at September
30, 1996.
(C) Decrease reflects the write-off of deferred financing costs related to debt
expected to be repaid with the proceeds of the Offering. These nonrecurring
costs are expected to be incurred in connection with the "Formation
Transactions" and the completion of the Offering and have not been included
in the unaudited Pro Forma Condensed Statements of Operations, but are
expected to be charged to operations when incurred.
(D) Decrease relates to a reduction in interest expense associated with debt
payoff from the Use of Proceeds.
(E) Decrease relates to a reduction in depreciation expense on the assets
contributed to the Operating Partnership.
(F) Represents 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, 1995 and the twelve months ended September 30, 1996 and $3,234
for the nine months ended September 30, 1996.
(G) Reflects a decrease in costs which would have been paid by the Operating
Partnership with funds accrued from capital expenditure reserves included in
the Participating Lease payments had the Formation Transactions been
consummated at the beginning of the period presented.
(H) Reflects transfers, as a part of the Formation Transactions, of property and
equipment and leasehold improvements expected to be contributed to the
Operating Partnership. Golf carts and certain vehicles are to be retained by
the Initial Lessee and have not been included in the amounts transferred.
(I) Reflects the transfer of certain bank debt, as part of the Formation
Transactions, expected to be retired with the proceeds of the Offering.
(J) Reflects a change in management fees and area manager compensation based on
the new management agreement as a result of the Formation Transactions.
(K) Represents the elimination of amortization expense of intangible assets
which are not being transferred to the Initial Lessee.
(L) Not used.
(M) Reflects the removal of intangible assets which are not being transferred to
the Initial Lessee as a result of the Formation Transactions.
(N) The leasehold improvements are encumbered by a conservatory easement entered
into prior to the Formation Transactions. Under the terms of the
conservatory easement, the land may be used only as a golf course.
F-30
<PAGE>
(O) Represents the elimination of the following expenses not expected to recur
as a result of the Formation Transactions:
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
YEAR ENDED SEPTEMBER
DECEMBER 31, 30,
1995 1996
------------ ----------
<S> <C> <C>
Land lease payment to the stockholder............. $534 $410
Allocable portion of executive vice president
compensation and related benefits eliminated as a
result of the elimination of the position........ 54 39
--- ---
$588 $449
--- ---
--- ---
</TABLE>
(P) Represents the elimination of the following expenses not expected to recur
as a result of the Formation Transactions:
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
YEAR ENDED SEPTEMBER
DECEMBER 31, 30,
1995 1996
------------ ----------
<S> <C> <C>
Land lease payment to the stockholder............. $200 $149
Allocable portion of executive vice president
compensation and related benefits eliminated as a
result of the elimination of the position........ 18 15
--- ---
$218 $164
--- ---
--- ---
</TABLE>
(Q) Certain assets, liabilities and equity have not been transferred to the
Initial Lessee as part of the Formation Transactions. These amounts remain
with the Prior Owner and are as follows:
<TABLE>
<S> <C>
Cash.............................................. $ 26
Accounts receivable............................... $ 224
Advances to affiliates............................ $ 2,701
Advances from affiliates.......................... $ 1,256
Equity............................................ $ (1,575)
</TABLE>
(R) 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.
(S) Includes $8,203 of advances from affiliates of Legends of Virginia for the
construction of the two Virginia golf courses. The advances will be repaid
with proceeds of the Offering as part of the Formation Transactions.
(T) Certain assets, liabilities and deficit have not been transferred to the
Initial Lessee as part of the Formation Transactions. These amounts remain
with the Prior Owner and are as follows:
<TABLE>
<S> <C>
Cash.............................................. $ 98
Accounts receivable............................... $ 16
Advances to affiliates............................ $ 60
Other (loan costs)................................ $ 295
Deficit........................................... $ 35
</TABLE>
(U) EBITDA represents earnings before interest, taxes, depreciation and
amortization.
F-31
<PAGE>
(V) Certain assets, liabilities and equity have not been transferred to the
Initial Lessee as part of the Formation Transactions. These amounts remain
with the Prior Owner and are as follows:
<TABLE>
<S> <C>
Cash.............................................. $ 62
Accounts receivable............................... $ 743
Advances to affiliates............................ $ 7,484
Other............................................. $ 4
Advances from affiliates.......................... $ 1,014
Equity............................................ $ (4,693)
</TABLE>
(W) Certain assets, liabilities and equity have not been transferred to the
Initial Lessee as part of the Formation Transactions. These amounts remain
with the Prior Owner and are as follows:
<TABLE>
<S> <C>
Cash.............................................. $ 39
Accounts receivable............................... $ 209
Prepaid assets.................................... $ 2
Advances to affiliates............................ $ 2,301
Advances from affiliates.......................... $ 595
Equity............................................ $ (2,993)
</TABLE>
(X) Transfer does not reflect the contribution of land by Mr. Young to Golf
Legends or Heritage Golf Club and the subsequent transfer to the Operating
Partnership as a result of the Formation Transactions. The land of Golf
Legends is covered under a conservatory easement which limits the use of the
land to a golf course.
(Y) Decrease reflects the transfer of assets to the Operating Partnership in
excess of liabilities transferred.
(Z) Increase reflects the transfer of liabilities to the Operating Partnership
in excess of assets transferred.
The aforementioned adjustments do not reflect any allocable share of the
income or distributions from the interest in the OP Units received 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.
(AA) 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. 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.
(AB) 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.
(AC) 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-32
<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 September 30, 1996, December 31, 1995 and 1994, and the
related combined statements of income, owners' equity, and cash flows for the
nine months ended September 30, 1996 and for each of the three years in the
period ended December 31, 1995. These combined financial statements are the
responsibility of Legends Golf's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free to material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully described in the notes to the combined financial statements,
Legends Golf has material transactions with its majority stockholder and
affiliates.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Legends Golf at
September 30, 1996, December 31, 1994 and 1995, and the results of its
operations and its cash flows for the nine months ended September 1996 and for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
BDO SEIDMAN, LLP
Charlotte, North Carolina
December 11, 1996
F-33
<PAGE>
LEGENDS GOLF
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
ASSETS (Note 6):
CURRENT:
Cash....................................................................... $ 505 $ 400 $ 225
Accounts receivable (Note 3):
Golf packages............................................................ 462 580 1,018
Related parties.......................................................... 30 45 139
Stockholder.............................................................. 886 -- --
Other.................................................................... 36 37 33
Inventories................................................................ 429 294 514
Prepaid assets............................................................. 16 2 141
--------- --------- -------------
Total current assets..................................................... 2,364 1,358 2,070
--------- --------- -------------
Property and equipment, less accumulated depreciation and amortization (Notes
4 and 6).................................................................... 19,301 33,099 34,989
--------- --------- -------------
Other assets:
Advances to affiliates (Note 3)............................................ 2,899 7,803 12,547
Other...................................................................... 85 40 299
--------- --------- -------------
Total other assets....................................................... 2,984 7,843 12,846
--------- --------- -------------
$ 24,649 $ 42,300 $ 49,905
--------- --------- -------------
--------- --------- -------------
LIABILITIES AND OWNERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable........................................................... $ 517 $ 430 $ 2,076
Accrued expenses:
Land lease (Note 7)...................................................... 1,318 -- 559
Retirement plan (Note 5)................................................. 74 71 80
Other.................................................................... 330 308 453
Current maturities of long-term debt (Note 6).............................. 1,076 1,710 813
--------- --------- -------------
Total current liabilities................................................ 3,315 2,519 3,981
Advances from affiliates (Note 3)............................................ 2,372 8,787 12,044
Advances from stockholder (Note 3)........................................... 525 -- --
Long-term debt, less current maturities (Note 6)............................. 14,665 24,666 26,386
--------- --------- -------------
Total liabilities........................................................ 20,877 35,972 42,411
--------- --------- -------------
Commitments and contingencies (Notes 5 and 7)
Owners' equity:
Common stock, $1 par -- shares authorized, 300,000; outstanding, 3,000..... 3 3 3
Members' contributions..................................................... 1 1 1
Additional paid-in capital................................................. 300 300 300
Members' equity (accumulated deficit)...................................... 1,000 956 (863)
Retained earnings (Note 6)................................................. 2,468 5,068 8,053
--------- --------- -------------
Total owners' equity..................................................... 3,772 6,328 7,494
--------- --------- -------------
$ 24,649 $ 42,300 $ 49,905
--------- --------- -------------
--------- --------- -------------
</TABLE>
See accompanying notes to Combined Financial Statements.
F-34
<PAGE>
LEGENDS GOLF
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Green fees.................................. $ 9,336 $ 9,931 $ 10,147 $ 7,801 $ 7,901
Cart rentals................................ 4,082 4,364 4,373 3,376 3,306
Membership dues............................. 37 76 99 99 147
Food and beverage sales..................... 1,546 1,652 1,708 1,310 1,555
Pro shop merchandise sales.................. 1,834 1,857 2,021 1,526 1,540
Other income (Note 8)....................... 58 1,216 94 45 --
--------- --------- --------- ----------- ---------
Total revenues............................ 16,893 19,096 18,442 14,157 14,449
--------- --------- --------- ----------- ---------
COSTS AND EXPENSES:
General and administrative (Note 3)......... 4,370 4,150 3,998 3,091 3,834
Repairs and maintenance..................... 2,138 2,319 2,386 1,788 2,593
Depreciation and amortization............... 1,564 1,830 1,791 1,303 1,579
Cost of merchandise sold.................... 812 911 983 768 820
Rents (Note 6).............................. 902 956 982 732 737
Pro shop operations......................... 767 765 857 637 770
Cost of food and beverage sold.............. 541 565 604 461 573
Food and beverage operations................ 352 417 512 364 473
--------- --------- --------- ----------- ---------
Total costs and expenses.................. 11,446 11,913 12,113 9,144 11,379
--------- --------- --------- ----------- ---------
Operating income.............................. 5,447 7,183 6,329 5,013 3,070
Interest expense.............................. 619 998 1,017 759 883
--------- --------- --------- ----------- ---------
Net income.................................... $ 4,828 $ 6,185 $ 5,312 $ 4,254 $ 2,187
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
See accompanying notes to Combined Financial Statements.
F-35
<PAGE>
LEGENDS GOLF
COMBINED STATEMENTS OF OWNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
MEMBERS' PAID-IN RETAINED ACCUMULATED
SHARES AMOUNT CONTRIBUTIONS CAPITAL EARNINGS DEFICIT
-------- -------- ------------- ------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993........... 3 $ 3 $ -- $300 $ 1,783 $ --
Net income......................... -- -- -- -- 4,828 --
Cash dividends..................... -- -- -- -- (4,651) --
-------- -------- ------------- ------- ------------- ----------------
Balance, December 31, 1993......... 3 3 -- 300 1,960 --
Net income......................... -- -- -- -- 5,185 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).................. -- -- -- -- 4,006 (1,819)
Cash dividends..................... -- -- -- -- (1,021) --
-------- -------- ------------- ------- ------------- ----------------
Balance, September 30, 1996........ 3 $ 3 $ 1 $300 $ 8,053 $ (863)
-------- -------- ------------- ------- ------------- ----------------
-------- -------- ------------- ------- ------------- ----------------
</TABLE>
See accompanying notes to Combined Financial Statements.
F-36
<PAGE>
LEGENDS GOLF
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $ 4,828 $ 6,185 $ 5,312 $ 4,254 $ 2,187
Contribution of land (Note 8)................ -- (1,000) -- -- --
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 1,564 1,830 1,791 1,280 1,579
Loss (gain) on sale of property and
equipment................................. (2) -- 5 -- 254
Decrease (increase) in:
Accounts receivable...................... (1,409) 374 (135) (670) (527)
Inventories.............................. (55) (98) 135 67 (221)
Prepaid expenses/other assets............ (137) (16) 7 (1) (458)
Increase (decrease) in:
Checks written against future deposits... (48) -- -- -- --
Accounts payable......................... (264) 293 (87) 305 1,645
Accrued expenses......................... (290) 777 (458) (1,194) 715
--------- --------- --------- ----------- ---------
Net cash provided by operating activities...... 4,187 8,345 6,570 4,041 5,174
--------- --------- --------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions............. (807) (1,049) (12,213) (514) (361)
Proceeds from sale of property and
equipment................................... 28 -- 124 54 --
Increase in advances to affiliates........... (116) (698) (4,843) (3,103) (4,744)
--------- --------- --------- ----------- ---------
Net cash used in investing activities.......... (895) (1,747) (16,932) (3,563) (5,105)
--------- --------- --------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of dividends........................ (1,128) (3,599) (2,757) (2,099) (1,020)
Proceeds from long-term debt................. 8,949 1,175 11,448 -- 1,188
Payments on long-term debt................... (8,943) (1,660) (812) (797) (365)
Increase (decrease) in advances from
affiliates.................................. (1,668) (2,526) 2,903 2,567 (47)
Decrease in advances from stockholder........ -- -- (525) (525) --
--------- --------- --------- ----------- ---------
Net cash provided by (used in) financing
activities.................................... (2,790) (6,610) 10,257 (854) (244)
--------- --------- --------- ----------- ---------
Net increase (decrease) in cash................ 502 (12) (105) (376) (175)
Cash, beginning of period...................... 15 517 505 505 400
--------- --------- --------- ----------- ---------
Cash, end of period............................ $ 517 $ 505 $ 400 $ 129 $ 225
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
See accompanying notes to Combined Financial Statements.
F-37
<PAGE>
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying combined financial statements include the accounts of three
subchapter S-Corporations (Seaside Resorts, Ltd. d/b/a Oyster Bay Golf Club;
Heritage Golf Club, Ltd.; and Golf Legends, Ltd.) and one limited liability
company (Legends of Virginia, LC). The entities, referred to collectively as
Legends Golf, are engaged in the operation of golf courses in North Carolina and
South Carolina, and Virginia.
The accompanying combined financial statements of Legends Golf have been
presented on a historical cost basis since the Legends Golf is to be the subject
of a business combination upon the contribution of real estate and other
properties in exchange for interest in a limited partnership to be formed by the
operating partnership for inclusion in a public offering (see Note 9). All
significant intercompany balances and transactions have been eliminated.
Additionally, certain classifications may vary from those of the individual
companies' financial statements.
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
due to all companies being under common control and 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are valued at the lower-of-cost (first-in, first-out) or market
and consist primarily of food, beverages, golf equipment, and clothing.
REVENUE RECOGNITION
Revenue from green fees, cart rentals, food and beverage sales, merchandise
sales, and range income are generally recognized at the time of sale.
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 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.
F-38
<PAGE>
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 September 30, 1996, the Company had
no significant concentration of credit risk.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" (Statement No. 121).
Statement No. 121 requires that long-lived assets and certain intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Legends Golf
periodically reevaluates the carrying amounts of its long-lived assets and the
related depreciation and amortization periods are discussed above, and Legends
Golf believes that the adoption of Statement No. 121 will not have a material
effect on its combined financial statements. This statement is effective for
fiscal years beginning after December 15, 1995.
ADVERTISING
Legends Golf expenses advertising costs as incurred. Advertising costs
included in general and administrative costs in the amounts of $446, $403, and
$418 for December 31, 1993, 1994, and 1995, respectively. Amounts expended for
the periods ended September 30, 1995 and 1996, were $312 and $576, respectively.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the nine months ended September 30,
1995 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-39
<PAGE>
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
3. 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.
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 Legends Golf for such services are as follows.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- ---------
<S> <C>
1993.................................... $ 1,485
1994.................................... $ 934
1995.................................... $ 1,065
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------
<S> <C>
1995.................................... $ 799
1996.................................... $ 919
</TABLE>
Advances to and from affiliated companies, stockholder receivable and
accrued land lease (Note 7), as shown on the balance sheets, have no fixed
payment/repayment provisions.
Interest income and expense on advances to and from affiliates is not
recorded for financial statement purposes.
Legends Golf paid an affiliate approximately $18,221 for construction of two
golf courses which represented cost plus seven percent.
F-40
<PAGE>
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
4. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
NINE MONTHS
DECEMBER 31, ENDED
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
Land (Note 8)........................... $ 1,000 $ 1,000 $ 1,000
Golf courses improvements............... 15,267 15,297 35,473
Buildings............................... 3,466 3,835 3,875
Machinery and equipment................. 2,800 3,549 2,612
Furniture............................... 716 727 813
Golf carts.............................. 1,439 1,439 1,448
Construction-in-progress,............... 2,467 16,821 282
--------- --------- -------------
27,155 42,668 45,503
Less accumulated depreciation........... 7,854 9,569 10,514
--------- --------- -------------
Net property and equipment.............. $ 19,301 $ 33,099 $ 34,989
--------- --------- -------------
--------- --------- -------------
</TABLE>
5. RETIREMENT PLAN
The Legends Group, Ltd. sponsors a defined-contribution retirement plan for
all eligible employees, of Legends Golf and other affiliated companies including
officers. The plan provides for contributions by Legends Golf equal to the level
funding amount as calculated and defined in the plan agreement for its eligible
employees. The actual benefit, at any point in time for each participant, is the
actual value of the participant's account based on the earnings or losses
experienced by the plan. Retirement plan expense was:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1993.................................... $ 64
1994.................................... $ 93
1995.................................... $ 71
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------
<S> <C>
1995.................................... $ 61
1996.................................... $ 80
</TABLE>
F-41
<PAGE>
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
6.25% note payable to bank collateralized by substantially all assets (1).... $ 14,667 $ 14,122 $ 14,110
Note payable to bank at prime (8.25% as of September 30, 1996) (2)........... -- 11,048 12,646
Notes payable to bank, due in monthly installments of principal plus interest
at prime to dates ranging from November 1996 to May 1998; collateralized by
golf carts having a net book value of $728 at September 30, 1996............ 1,049 687 416
Notes payable to financing corporation maturing February 1997 and April 2000
with monthly payments of principal plus interest at prime plus .9% to 1.15%
collateralized by equipment with a net book value of $27.................... -- 519 27
Repaid in 1995............................................................... 25 -- --
--------- --------- -------------
15,741 26,376 27,199
Less current maturities...................................................... 1,076 1,710 813
--------- --------- -------------
Total long-term debt......................................................... $ 14,665 $ 24,666 $ 26,386
--------- --------- -------------
--------- --------- -------------
</TABLE>
- ------------
(1) Legends Golf, along with certain affiliated companies (The Legends Group,
Ltd. and Marsh Harbour, Ltd.), participate in a debt agreement with a bank
consisting of two term notes totaling $17,790 as of September 30, 1996. The
aforementioned companies are jointly liable for the debt and the sole
stockholder has guaranteed the loans.
Effective October 26, 1996, the rate was adjusted to the bank's prime rate.
(2) On April 19, 1995, Legends of Virginia, LC obtained a loan with a bank
totaling $13,925. In addition, on this date, the affiliated entities amended
an existing loan agreement of which the Legends of Virginia, LC is jointly
liable. These loans are guaranteed by the majority member and collateralized
by the two new golf courses, New Kent and Stonehouse, and existing
affiliated courses and clubhouses and other assets of the majority member.
Payment terms on the above notes are from October 25, 1996, $150 monthly
plus interest; from October 25, 1997, $156 monthly plus interest; from
October 25, 1998, $163 monthly plus interest; total remaining due in balloon
payment on October 25, 1999.
The loan agreements provide among other covenants, restrictions on certain
financial ratios, a minimum aggregate cash balance of $250, payments to the
sole stockholder, capital expenditures, indebtedness, liens, changes in the
nature of the business and significant other limitations as to the use of
funds. Legends Golf had obtained a waiver of certain of the covenants not
met as of December 31, 1995 and September 30, 1996.
Legends Golf is jointly liable as a guarantor, with the sole stockholder,
and other affiliated entities for additional amounts totaling $3,850.
Total debt of all affiliated entities of which Legends Golf is jointly
liable is approximately $34,286, at September 30, 1995.
F-42
<PAGE>
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
6. LONG-TERM DEBT (CONTINUED)
The aggregate annual maturities for the above mortgage notes payable at
September 30, 1996, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, AMOUNT
- ---------------------------------------- ---------
<S> <C>
1996 (three months)..................... $ 813
1997.................................... 1,601
1998.................................... 1,721
1999.................................... 23,064
---------
Total................................... $ 27,199
---------
---------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
LEASES (Note 9)
Legends Golf leases the land for two of the entities included in the
combined financials from the sole stockholder. Legends Golf has four leases from
the sole stockholder one expiring in 2006, two expiring in 2009, and one in
2012. An additional lease from a third party expires in 2032. The leases require
rental payments of 10% of monthly green fees as defined in the lease agreements.
The leases do not contain an option to purchase the land. Total lease expense
approximates the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, STOCKHOLDER OTHER
- ---------------------------------------- ------------- -----------
<S> <C> <C>
1993.................................... $ 669 $ 233
1994.................................... $ 728 $ 228
1995.................................... $ 734 $ 248
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------
<S> <C> <C>
1995.................................... $ 563 $ 170
1996.................................... $ 559 $ 178
</TABLE>
Minimum lease commitments for noncancelable operating leases for various
equipment and golf carts in effect at September 30, 1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ----------------------------------------------------------------------------------------------- ---------
<S> <C>
1996 (three months)............................................................................ $ 186
1997........................................................................................... 531
1998........................................................................................... 531
1999........................................................................................... 494
2000........................................................................................... 86
---------
Total.......................................................................................... $ 1,828
---------
---------
</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 entities included in these combined
financials which totals $225. Cumulative amounts estimated to be payable by
Legends Golf with respect to pending and potential claims have been accrued as
liabilities.
F-43
<PAGE>
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENT
Legends Golf, along with other affiliated entities, have an employment
agreement with an officer that expires in 1998. The agreement provides basic
compensation in addition to other incentives and bonuses based upon certain
conditions as defined in the agreement.
8. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- ---------
<S> <C>
1993.................................... $ 607
1994.................................... $ 1,016
1995.................................... $ 1,574
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------
<S> <C>
1995.................................... $ 759
1996.................................... $ 883
</TABLE>
During 1993, equipment having a net book value of $334 and cash of $176 was
exchanged for similar new equipment having a value of $480.
During 1994, equipment having a net book value of $827 and cash of $333 was
exchanged for similar new equipment having a value of $1,159.
During 1994, $1,078 of receivables from the sole stockholder were settled
through the declaration of a dividend.
During 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.
9. PROPOSED CONTRIBUTION OF ASSETS
The Company is in negotiations to contribute the Company's interest in the
golf courses properties and related equipment along with related debt to a newly
formed partnership, Golf Trust of America, L.P. (GTA LP) in exchange for a
limited partnership interest in GTA LP. A newly formed affiliate would lease the
golf course properties and related equipment from GTA LP. GTA LP's general
partner, Golf Trust of America, Inc. intends to file a Form S-11 registration
statement with the Securities and Exchange Commission in connection with a
proposed offering of shares to the public.
F-44
<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
September 30, 1996 December 31, 1995 and 1994, and the related statements of
income and retained earnings, and cash flows for the nine months ended September
30, 1996 and for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully described in the notes to the financial statements, 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
September 30, 1996, December 31, 1995 and 1994, and the results of its
operations and its cash flows for the nine months ended September 30, 1996 and
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
BDO SEIDMAN, LLP
Charlotte, North Carolina
December 11, 1996
F-45
<PAGE>
GOLF LEGENDS, LTD.
BALANCE SHEETS
(IN THOUSANDS)
ASSETS (NOTE 5)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
CURRENT:
Cash....................................................................... $ 215 $ 216 $ 62
Accounts receivable (Notes 2 and 7)........................................ 1,188 356 743
Inventories................................................................ 181 98 234
Prepaid expenses........................................................... -- -- 89
--------- --------- -------------
Total current assets................................................... 1,584 670 1,128
--------- --------- -------------
Property and equipment (Notes 3 and 5), less accumulated depreciation........ 12,218 11,654 10,739
--------- --------- -------------
Other assets:
Advances to affiliates (Note 1)............................................ 2,191 4,924 7,484
Other...................................................................... 85 39 4
--------- --------- -------------
Total other assets..................................................... 2,276 4,963 7,488
--------- --------- -------------
$ 16,078 $ 17,287 $ 19,355
--------- --------- -------------
--------- --------- -------------
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable........................................................... $ 282 $ 257 $ 759
Accrued expenses:
Land lease (Notes 6 and 7)................................................. 898 -- 410
Retirement plan (Note 4)................................................... 41 36 26
Other...................................................................... 206 200 236
Current maturities of long-term debt (Note 5).............................. 867 882 429
--------- --------- -------------
Total current liabilities.............................................. 2,294 1,375 1,860
Advances from affiliates (Notes 1 and 5)..................................... 7 1,064 1,014
Advances from stockholder (Note 1)........................................... 525 -- --
Long-term debt, less current maturities (Note 5)............................. 12,739 12,061 12,244
--------- --------- -------------
Total liabilities...................................................... 15,565 14,500 15,118
--------- --------- -------------
Commitments and contingencies (Notes 4, 5 and 6)
Stockholder's equity:
Common stock, $1 par -- shares authorized, 100,000; outstanding, 1,000..... 1 1 1
Additional paid-in capital................................................. 300 300 300
Retained earnings (Note 5 and 7)........................................... 212 2,486 3,936
--------- --------- -------------
Total stockholder's equity............................................. 513 2,787 4,237
--------- --------- -------------
$ 16,078 $ 17,287 $ 19,355
--------- --------- -------------
--------- --------- -------------
</TABLE>
See accompanying summary of significant accounting polices
and notes to financial statements.
F-46
<PAGE>
GOLF LEGENDS, LTD.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES:
Green fees............................................................ $ 5,161 $ 5,582 $ 5,610 $ 4,290 $ 4,303
Cart rentals.......................................................... 2,289 2,452 2,393 1,838 1,823
Food and beverage sales............................................... 876 905 969 719 977
Pro shop merchandise sales............................................ 1,008 1,009 1,119 846 880
Other income.......................................................... 33 98 89 50 31
--------- --------- --------- --------- ---------
Total revenues........................................................ 9,367 10,046 10,180 7,743 8,014
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
General and administrative (Note 1)................................... 2,549 2,458 2,412 1,842 1,856
Repairs and maintenance............................................... 1,133 1,368 1,259 910 1,128
Depreciation and amortization......................................... 1,088 1,291 1,256 928 945
Cost of merchandise sold.............................................. 433 489 537 416 423
Rents (Note 6)........................................................ 494 531 534 408 410
Pro shop operations................................................... 347 331 357 261 323
Cost of food and beverage sold........................................ 300 311 361 272 374
Food and beverage operations.......................................... 193 219 279 194 291
--------- --------- --------- --------- ---------
Total costs and expenses............................................ 6,537 6,998 6,995 5,231 5,750
--------- --------- --------- --------- ---------
Operating income...................................................... 2,830 3,048 3,185 2,512 2,264
Interest expense...................................................... 562 857 877 654 602
--------- --------- --------- --------- ---------
Net income............................................................ 2,268 2,191 2,308 1,858 1,662
Retained earnings, beginning of period................................ 879 919 212 212 2,486
Dividends (Notes 5 and 7)............................................. 2,228 2,898 34 34 212
--------- --------- --------- --------- ---------
Retained earnings, end of period...................................... $ 919 $ 212 $ 2,486 $ 2,036 $ 3,936
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying summary of significant accounting policies
and notes to financial statements.
F-47
<PAGE>
GOLF LEGENDS, LTD.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 2,268 $ 2,191 $ 2,308 $ 1,858 $ 1,662
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 1,088 1,291 1,257 928 945
Loss (gain) on sale of property........................ (2) -- -- -- 186
Decrease (increase) in:
Accounts receivable................................ (1,321) 186 (54) (444) (386)
Inventories........................................ (38) (55) 83 58 (136)
Prepaid expenses/other assets...................... (140) -- (8) -- (89)
Increase (decrease) in:
Checks written against future deposits............... (8) -- -- -- --
Accounts payable..................................... (144) 148 (25) 158 502
Accrued expenses..................................... 94 551 (24) (848) 437
--------- --------- --------- ----------- ---------
Net cash provided by operating activities.................. 1,797 4,312 3,537 1,710 3,121
--------- --------- --------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions......................... (326) (747) (639) (515) (182)
Proceeds from sale of property and equipment............. 28 -- -- -- --
Increase in advances to affiliates....................... (574) (886) (2,733) (1,229) (2,560)
--------- --------- --------- ----------- ---------
Net cash used in investing activities...................... (872) (1,633) (3,372) (1,744) (2,742)
--------- --------- --------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends..................................... -- (2,370) (34) (34) (212)
Proceeds from long-term debt............................. 8,446 733 53 -- --
Payments on long-term debt............................... (8,429) (1,123) (715) (643) (271)
Increase (decrease) in advances from affiliates.......... (657) 7 1,057 1,067 (50)
Decrease in advances from stockholder.................... -- -- (525) (525) --
--------- --------- --------- ----------- ---------
Net cash provided by (used in) financing activities........ (640) (2,753) (164) (135) (533)
--------- --------- --------- ----------- ---------
Net increase (decrease) in cash............................ 285 (74) 1 (169) (154)
Cash, beginning of period.................................. 4 289 215 215 216
--------- --------- --------- ----------- ---------
Cash, end of period........................................ $ 289 $ 215 $ 216 $ 46 $ 62
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
See accompanying summary of significant accounting policies
and notes to financial statements.
F-48
<PAGE>
GOLF LEGENDS, LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
BUSINESS
Golf Legends, Ltd. (the Company) owns and operates three golf courses,
"Heathland Links," "Moorland Links," and "Parkland Links," located in Myrtle
Beach, South Carolina.
INVENTORIES
Inventories are valued at the lower-of-cost (first-in, first-out) or market
and consist primarily of food, beverages, golf equipment and clothing.
REVENUE RECOGNITION
Revenue from green fees, cart rentals, food and beverage sales, merchandise
sales, and range income are generally recognized at the time of sale.
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 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
The absence of a provision for income taxes is due to the election by the
Company, and consent by its stockholder, to include the taxable income or loss
of the Company in his individual tax returns. As a result, no federal or state
income taxes are imposed on the Company.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consist primarily of trade receivables.
F-49
<PAGE>
GOLF LEGENDS, LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
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 September 30, 1996, the Company had
no significant concentration of credit risk.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" (Statement No. 121).
Statement No. 121 requires that long-lived assets and certain intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company
periodically reevaluates the carrying amounts of its long-lived assets and the
related depreciation and amortization periods are discussed above, and the
Company believes that the adoption of Statement No. 121 will not have a material
effect on its financial statements. This statement is effective for fiscal years
beginning after December 15, 1995.
ADVERTISING
Golf Legends expenses advertising costs as incurred. Advertising costs
included in general and administrative costs in the amounts of $275, $234, and
$258 for December 31, 1993, 1994, and 1995, respectively. Amounts expended for
the periods ended September 30, 1995 and 1996, were $194 and $183, respectively.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the nine months ended September 30,
1995, 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-50
<PAGE>
GOLF LEGENDS, LTD.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR SEPTEMBER 30, 1995 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>
1993.................................. $ 891
1994.................................. $ 560
1995.................................. $ 639
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------
<S> <C>
1995.................................. $ 480
1996.................................. $ 480
</TABLE>
Advances to and from affiliated companies, stockholder receivable (Note 2)
and accrued land lease (Note 6), as shown on the balance sheets, have no fixed
payment/repayment provisions and are noninterest bearing.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- ---------------
<S> <C> <C> <C>
Golf packages........................... $ 272 $ 311 $ 604
Related parties......................... 30 45 139
Stockholder (Note 1).................... 886 -- --
--------- --- ---
$ 1,188 $ 356 $ 743
--------- --- ---
--------- --- ---
</TABLE>
F-51
<PAGE>
GOLF LEGENDS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
3. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
Golf course improvements................ $ 11,642 $ 11,642 $ 12,544
Buildings............................... 2,069 2,567 1,762
Machinery and equipment................. 1,441 1,648 1,342
Furniture............................... 248 256 267
Golf carts.............................. 877 877 887
Construction-in-progress................ 102 27 2
--------- --------- -------------
16,379 17,017 16,804
Less accumulated depreciation........... 4,161 5,363 6,065
--------- --------- -------------
Net property and equipment.............. $ 12,218 $ 11,654 $ 10,739
--------- --------- -------------
--------- --------- -------------
</TABLE>
4. RETIREMENT PLAN
Legends Group, Ltd. sponsors a defined-contribution retirement plan for all
eligible employees, of Golf Legends and other affiliated companies including
officers. The plan provides for contributions by the Company equal to the level
funding amount as calculated an defined in the plan agreement. The actual
benefit, at any point in time for each participant, is the actual value of the
participant's account based on the earnings or losses experienced by the plan.
Retirement plan expense was
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1993.................................... $ 35
1994.................................... 54
1995.................................... 36
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------
<S> <C>
1995.................................... 34
1996.................................... 27
</TABLE>
F-52
<PAGE>
GOLF LEGENDS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
6.25% note payable to bank, collateralized by substantially all assets (1)... $ 12,910 $ 12,455 $ 12,414
Notes payable to bank, due in monthly installments of $20,000, including
interest at prime (8.25% as of September 30, 1996) to dates ranging from
November 1996 to May 1998; collateralized by golf carts having a net book
value of $444 at September 30, 1996......................................... 670 435 259
Paid in 1996................................................................. -- 53 --
Paid in 1995................................................................. 26 -- --
--------- --------- -------------
13,606 12,943 12,673
Less current maturities...................................................... 867 882 429
--------- --------- -------------
Total long-term debt......................................................... $ 12,739 $ 12,061 $ 12,244
--------- --------- -------------
--------- --------- -------------
</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 $17,790 as of September 30, 1996. The aforementioned
companies are jointly liable for the debt and the sole stockholder as
guaranteed the loans.
Effective October 25, 1996, the rate on the notes was adjusted to the bank's
prime rate.
The outstanding balance at September 30, 1996, has been allocated to the
various entities based on the original use of the loan proceeds net of payments
to date as follows:
<TABLE>
<CAPTION>
AFFILIATE AMOUNT
- -------------------------------------------------- ---------
<S> <C>
Marsh Harbour, Ltd................................ $ 3,680
Seaside Resorts, Ltd.............................. 960
Golf Legends, Ltd................................. 12,414
Heritage Golf Club, Ltd........................... 736
---------
$ 17,790
---------
---------
</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 ($12,646 outstanding at September 30, 1996). These funds are to be used
for construction of golf courses by an affiliated entity, Legends of Virginia,
LC.
Payment terms on the above Notes are from October 25, 1996, $150 monthly
plus interest; from October 25, 1997, $156 monthly plus interest; from October
25, 1998, $163 monthly plus interest; total remaining due in balloon payment on
October 25, 1999.
F-53
<PAGE>
GOLF LEGENDS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
5. LONG-TERM DEBT (CONTINUED)
The loan agreements provide, among other covenants, restrictions on certain
financial ratios, a minimum aggregate cash balance of $250, payments to the sole
stockholder, capital expenditures, indebtedness, liens, changes in the nature of
the business and significant other limitations as to the use of funds. The
Company had obtained a waiver for those covenants not met at December 31, 1995
and September 30, 1996.
The Company is jointly liable as a guarantor, with the sole stockholder, and
other affiliated entities for additional amounts totaling $3,850.
Total debt of all affiliated entities of which the Company is jointly liable
is approximately $34,285 at September 30, 1996.
The aggregate annual maturities are as follows:
<TABLE>
<CAPTION>
AMOUNT
---------
<S> <C>
1996 (three months)...................................................... $ 429
1997..................................................................... 673
1998..................................................................... 714
1999..................................................................... 10,857
---------
Total.................................................................... $ 12,673
---------
---------
</TABLE>
6. COMMITMENTS
LEASES
The Company leases the land for the golf courses from the sole stockholder.
As of September 30, 1996, the Company has three leases for the golf courses, two
expiring in 2009 and one in 2012. The leases require rental payments of 10% of
monthly green fees as defined in the lease agreements. The total rental expense
approximated the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- --------------------------------------------------------------------------- -----------
<S> <C>
1993....................................................................... $ 494
1994....................................................................... 531
1995....................................................................... 534
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
- ---------------------------------------------------------------------------
<S> <C>
1995....................................................................... 408
1996....................................................................... 410
</TABLE>
Minimum lease commitments for noncancelable operating leases for various
equipment in effect at September 30, 1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- --------------------------------------------------------------------------- -----------
<S> <C>
1996 (three months)........................................................ $ 38
1997....................................................................... 113
1998....................................................................... 113
1999....................................................................... 103
---
Total.................................................................... $ 367
---
---
</TABLE>
F-54
<PAGE>
GOLF LEGENDS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
6. COMMITMENTS (CONTINUED)
SELF-INSURANCE
The Company and its affiliates maintain a self-insurance program for that
portion of health care costs not covered by insurance. The Company is liable for
claims up to $15 per employee annually with an annual aggregate maximum
liability under the program for all companies of $225. Cumulative amounts
estimated to be payable by the Company with respect to pending and potential
claims have been accrued as liabilities.
EMPLOYMENT AGREEMENT
The Company, along with other affiliated entities, has an employment
agreement with an officer that expires in 1998. The agreement provides basic
compensation in addition to other incentives and bonuses based upon certain
conditions as defined in the agreement.
7. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ------------------------------------------------------------------------------------- -----------
<S> <C>
1993............................................................................. $ 552
1994............................................................................. $ 873
1995............................................................................. $ 876
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
- -------------------------------------------------------------------------------------
<S> <C>
1995............................................................................. $ 654
1996............................................................................. $ 602
</TABLE>
During 1993, equipment having a net book value of $419 and cash of $227 was
exchanged for similar new equipment having a value of $645.
During 1993, $2,228 of receivables from the stockholder were settled through
the declaration of a dividend.
During 1994, $528 of receivables from the 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 payables to stockholder were netted against
receivables from stockholders.
8. PROPOSED CONTRIBUTION OF ASSETS
The Company is in negotiations to contribute the Company's interest in the
golf courses properties and related equipment along with related debt to a newly
formed partnership, Golf Trust of America, L.P. (GTA LP) in exchange for a
limited partnership interest in GTA LP. A newly formed affiliate would lease the
golf course properties and related equipment from GTA LP. GTA LP's general
partner, Golf Trust of America, Inc. intends to file a Form S-11 registration
statement with the Securities and Exchange Commission in connection with a
proposed offering of shares to the public.
F-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 September 30, 1996, December 31, 1995 and 1994, and the related statements
of income and retained earnings, and cash flows for the nine months ended
September 30, 1996 and for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully described in the notes to the financial statements, the
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
September 30, 1996, December 31, 1995 and 1994, and the results of its
operations and its cash flows for the nine months ended September 30, 1996 and
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
BDO SEIDMAN, LLP
Charlotte, North Carolina
December 11, 1996
F-56
<PAGE>
HERITAGE GOLF CLUB, LTD.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER
1994 1995 30, 1996
------ ------ -----------
ASSETS (NOTE 5)
<S> <C> <C> <C>
CURRENT:
Cash.................................................................................... $ 152 $ 75 $ 39
Accounts receivable (Notes 1 and 6)..................................................... 93 144 209
Inventories............................................................................. 98 76 87
Prepaid expenses........................................................................ 16 2 46
------ ------ -----------
Total current assets.................................................................. 359 297 381
------ ------ -----------
Property and equipment (Notes 2 and 4), less accumulated depreciation..................... 2,526 2,160 1,914
------ ------ -----------
Advances to affiliates, net (Note 1)...................................................... 1 956 2,301
------ ------ -----------
$2,886 $3,413 $4,596
------ ------ -----------
------ ------ -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................................ $ 138 $ 108 $ 284
Accrued expenses:
Land lease (Notes 5).................................................................. 420 -- 149
Retirement plan (Note 3).............................................................. 25 23 17
Other................................................................................. 86 85 91
Current maturities of long-term debt (Note 4)............................................. 99 89 89
------ ------ -----------
Total current liabilities........................................................... 768 305 630
Advances from affiliates (Notes 1)........................................................ -- 595 595
Long-term debt, less current maturities (Note 4).......................................... 853 773 726
------ ------ -----------
Total liabilities................................................................... 1,621 1,673 1,951
------ ------ -----------
Commitments (Notes 3 and 5)
Stockholder's equity:
Common stock, $1 par -- shares authorized, 100,000; outstanding, 1,000.................. 1 1 1
Retained earnings (Note 4 and 6)........................................................ 1,264 1,739 2,644
------ ------ -----------
Total stockholder's equity.......................................................... 1,265 1,740 2,645
------ ------ -----------
$2,886 $3,413 $4,596
------ ------ -----------
------ ------ -----------
</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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Green fees...................................... $ 1,836 $ 2,075 $ 2,108 $ 1,637 $ 1,568
Cart rentals.................................... 787 937 949 736 698
Membership dues................................. 37 76 99 99 147
Food and beverage sales......................... 355 419 405 316 300
Pro shop merchandise sales...................... 317 375 377 288 263
Other income (expense).......................... 7 53 -- (5) (8)
--------- --------- --------- ----------- ---------
Total revenues................................ 3,339 3,935 3,938 3,071 2,968
--------- --------- --------- ----------- ---------
COSTS AND EXPENSES:
General and administrative (Note 1)............. 1,050 985 895 693 677
Repairs and maintenance......................... 639 549 619 466 312
Depreciation and amortization................... 332 358 319 238 225
Cost of merchandise sold........................ 147 176 188 150 138
Rents (Note 5).................................. 175 197 200 154 149
Pro shop operations............................. 185 199 232 172 144
Cost of food and beverage sold.................. 154 167 149 114 117
Food and beverage operations.................... 101 138 159 117 125
--------- --------- --------- ----------- ---------
Total costs and expenses...................... 2,783 2,769 2,761 2,104 1,887
--------- --------- --------- ----------- ---------
Operating income.................................. 556 1,166 1,177 967 1,081
Interest expense.................................. 26 63 63 47 41
--------- --------- --------- ----------- ---------
Net income........................................ 530 1,103 1,114 920 1,040
Retained earnings, beginning of period............ 578 858 1,264 1,264 1,739
Dividends (Notes 4 and 6)......................... 250 697 639 403 134
--------- --------- --------- ----------- ---------
Retained earnings, end of period.................. $ 858 $ 1,264 $ 1,739 $ 1,781 $ 2,645
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 530 $ 1,103 $ 1,114 $ 920 $ 1,040
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss of sale of assets........................ -- -- 5 -- 46
Depreciation and amortization................. 332 358 319 238 225
(Increase) decrease) in:
Accounts receivable......................... (55) 112 (52) (109) (64)
Inventories................................. 5 (27) 22 15 (12)
Prepaid expenses/other assets............... 3 (16) 14 -- (44)
Increase (decrease) in:
Checks written against future deposits...... (13) -- -- -- --
Accounts payable............................ (24) 74 (30) 27 175
Accrued expenses............................ (310) 210 (423) (380) 150
--------- --------- --------- ----- ---------
Net cash provided by operating activities......... 468 1,814 969 711 1,516
--------- --------- --------- ----- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions................ (320) (91) (82) -- (25)
Proceeds from sale of assets.................... -- -- 124 47 --
Increase in advances to affiliates.............. -- (1) (955) (935) (1,346)
--------- --------- --------- ----- ---------
Net cash used in investing activities............. (320) (92) (913) (888) (1,371)
--------- --------- --------- ----- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends............................ -- (146) (639) (403) (134)
Proceeds from long-term debt.................... 253 222 -- -- --
Payments on long-term debt...................... (241) (266) (89) (74) (47)
Increase (decrease) in advances from
affiliates..................................... (48) (1,499) 595 562 --
--------- --------- --------- ----- ---------
Net cash used in financing activities............. (36) (1,689) (133) 85 (181)
--------- --------- --------- ----- ---------
Net increase (decrease) in cash................... 112 33 (77) (92) (36)
Cash, beginning of period......................... 7 119 152 152 75
--------- --------- --------- ----- ---------
Cash, end of period............................... $ 119 $ 152 $ 75 $ 60 $ 39
--------- --------- --------- ----- ---------
--------- --------- --------- ----- ---------
</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)
BUSINESS
Heritage Golf Club, Ltd. (the Company) owns and operates Heritage Golf Club,
located on Pawleys Island, South Carolina.
INVENTORIES
Inventories are valued at the lower-of-cost (first-in, first-out) or market
and consist primarily of food, beverages, golf equipment and clothing.
REVENUE RECOGNITION
Revenue from green fees, cart rentals, food and beverage sales, merchandise
sales, and range income are generally recognized at the time of sale.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, 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
The absence of a provision for income taxes is due to the election by the
Company, and consent by its stockholder, to include the taxable income or loss
of the Company in his individual tax returns. As a result, no federal or state
income taxes are imposed on the Company.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consist primarily of trade receivables.
F-60
<PAGE>
HERITAGE GOLF CLUB, LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
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 September 30, 1996, the Company had
no significant concentration of credit risk.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" (Statement No. 121).
Statement No. 121 requires that long-lived assets and certain intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company
periodically reevaluates the carrying amounts of its long-lived assets and the
related depreciation and amortization periods are discussed above, and the
Company believes that the adoption of Statement No. 121 will not have a material
effect on its financial statements. This statement is effective for fiscal years
beginning after December 15, 1995.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising costs
included in general and administrative costs in the amounts of $82, $76, and $81
for December 31, 1993, 1994, and 1995, respectively. Amounts expended for the
periods ended September 30, 1995 and 1996, were $59 and $74, respectively.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the nine months ended September 30,
1995, 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 SEPTEMBER 30, 1995 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1993.................................. $ 297
1994.................................. $ 187
1995.................................. $ 213
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1995.................................. $ 160
1996.................................. $ 160
</TABLE>
Advances to and from affiliated companies, stockholder receivable and
accrued land lease (Note 5), as shown on the balance sheets, have no fixed
payment/repayment provisions and are noninterest bearing.
2. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
Golf course improvements................ $ 2,490 $ 2,511 $ 2,511
Machinery and equipment................. 700 758 510
Furniture and fixtures.................. 363 366 380
Buildings............................... 1,161 1,032 1,032
Golf carts.............................. 296 296 296
--------- --------- ------
5,010 4,963 4,729
Less accumulated depreciation........... 2,484 2,803 2,815
--------- --------- ------
Net property and equipment.............. $ 2,526 $ 2,160 $ 1,914
--------- --------- ------
--------- --------- ------
</TABLE>
3. RETIREMENT PLAN
The Company and its affiliates sponsor a defined-contribution retirement
plan for all eligible employees, including officers. The plan provides for
contributions by the Company equal to the level funding amount as
F-62
<PAGE>
HERITAGE GOLF CLUB, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
3. RETIREMENT PLAN (CONTINUED)
calculated an defined in the plan agreement. The actual benefit, at any point in
time for each participant, is the actual value of the participant's account
based on the earnings or losses experienced by the plan. Retirement plan
expense:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1993.................................. $ 13
1994.................................. $ 26
1995.................................. $ 24
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------
<S> <C>
1995.................................. $ 17
1996.................................. $ 17
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- ---------------
<S> <C> <C> <C>
6.25% note payable to bank, collateralized by substantially all assets
(1)..................................................................... $ 762 $ 736 $ 736
Note payable to bank, due in monthly installments of $5, including
interest at prime (8.25% as of September 30, 1996) to February 1997;
collateralized by golf carts having a net book value of $142 at
September 30, 1996...................................................... 190 126 79
--- --- ---
952 862 815
Less current maturities.................................................. 99 89 89
--- --- ---
Total long-term debt..................................................... $ 853 $ 773 $ 726
--- --- ---
--- --- ---
</TABLE>
- ------------
(1) The Company, along with certain affiliated companies (The Legends Group,
Ltd.; Seaside Resorts, Ltd.; Golf Legends, Ltd.; and Marsh Harbour, Ltd.),
participates in a debt agreement with a bank consisting of two term notes
totaling $17,790 as of September 30, 1996. The aforementioned companies are
jointly liable for the debt and the sole stockholder as guaranteed the
loans.
The outstanding balance at September 30, 1996, has been allocated to the
various entities based on the original use of the loan proceeds net of payments
to date as follows:
<TABLE>
<CAPTION>
AFFILIATE AMOUNT
- ---------------------------------------- ---------
<S> <C>
Marsh Harbour, Ltd...................... $ 3,680
Seaside Resorts, Ltd.................... 960
Golf Legends, Ltd....................... 12,414
Heritage Golf Club, Ltd................. 736
---------
$ 17,790
---------
---------
</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 ($12,646 outstanding at September 30, 1996). These funds are to be used
for construction of golf courses by an affiliated entity, Legends of Virginia,
LC.
F-63
<PAGE>
HERITAGE GOLF CLUB, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
4. LONG-TERM DEBT (CONTINUED)
Payment terms on the above notes are from October 26, 1996, $150 monthly
plus interest; from October 25, 1997, $156 monthly plus interest; from October
25, 1998, $163 monthly plus interest; total remaining due in balloon payment on
October 25, 1999.
The loan agreement provides, among other covenants, restrictions on certain
financial ratios, a minimum aggregate cash balance of $250, payments to the sole
stockholder, capital expenditures, indebtedness, liens, changes in the nature of
the business and significant other limitations as to the use of funds. The
Company obtained a waiver for those covenants not met at December 31, 1995 and
September 30, 1996.
The Company is jointly liable as a guarantor, with the sole stockholder, and
other affiliated entities for additional amounts totaling $3,850.
Total debt of all affiliated entities of which the Company is jointly liable
is approximately $34,285 at September 30, 1996.
The aggregate annual maturities for the above mortgage notes payable at
September 30, 1996, are as follows:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
1996 (three months).................... $ 89
1997.................................. 26
1998.................................. 26
1999.................................. 674
---
Total............................... $ 815
---
---
</TABLE>
5. COMMITMENTS
LEASES
The Company leases the land for the golf course from the sole stockholder.
The lease expires in June 2006 and requires a rental payment of 10% of the
monthly green fees as defined in the lease agreements. The total rental expense
for the land approximates:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1993.................................. $ 175
1994.................................. $ 197
1995.................................. $ 200
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------
<S> <C>
1995.................................. $ 154
1996.................................. $ 149
</TABLE>
F-64
<PAGE>
HERITAGE GOLF CLUB, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
5. COMMITMENTS (CONTINUED)
Minimum lease commitments for noncancelable operating leases for various
equipment in effect at September 30, 1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------------------------------------------------------------------- -----------
<S> <C>
1996 (three months).................................................................. $ 15
1997................................................................................. 45
1998................................................................................. 45
1999................................................................................. 42
2000................................................................................. 2
---
Total.............................................................................. $ 149
---
---
</TABLE>
SELF-INSURANCE
The Company and its affiliates maintain a self-insurance program for that
portion of health care costs not covered by insurance. The Company is liable for
claims up to $15 per employee annually with an annual aggregate maximum
liability under the program for all companies of $225. Cumulative amounts
estimated to be payable by the Company with respect to pending and potential
claims have been accrued as liabilities.
EMPLOYMENT AGREEMENT
The Company, along with other affiliated entities, has an employment
agreement with an officer that expires in 1998. The agreement provides basic
compensation in addition to other incentives and bonuses based upon certain
conditions as defined in the agreement.
6. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1993.................................. $ 26
1994.................................. $ 64
1995.................................. $ 63
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------
<S> <C>
1996.................................. $ 47
1995.................................. $ 41
</TABLE>
During 1994, equipment having a net book value of $204 and cash of $53 was
exchanged for similar new equipment having a value of $257.
During 1994, $551 of receivables from the stockholder were settled through
the declaration of a dividend.
During 1993, equipment having a net book value of $167 and cash of $88 was
exchanged for similar new equipment having a value of $255.
7. PROPOSED CONTRIBUTION OF ASSETS
The Company is in negotiations to contribute the Company's interest in the
golf courses properties and related equipment along with related debt to a newly
formed partnership, Golf Trust of America, L.P. (GTA LP) in exchange for a
limited partnership interest in GTA LP. A newly formed affiliate would lease the
golf course properties and related equipment from GTA LP. GTA LP's general
partner, Golf Trust of America, Inc. intends to file a Form S-11 registration
statement with the Securities and Exchange Commission in connection with a
proposed offering of shares to the public.
F-65
<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 September 30, 1996, December 31, 1995 and 1994, and the related statements of
income and retained earnings, and cash flows for the nine months ended September
30, 1996 and for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully described in the notes to the financial statements, the
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
September 30, 1996, December 31, 1995 and 1994, and the results of its
operations and its cash flows for the nine months ended September 30, 1996 and
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
BDO SEIDMAN, LLP
Charlotte, North Carolina
December 11, 1996
F-66
<PAGE>
SEASIDE RESORTS, LTD.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
ASSETS (Note 5)
CURRENT:
Cash......................................................................... $ 138 $ 109 $ 26
Accounts receivable (Note 2)................................................. 133 162 224
Inventories.................................................................. 151 120 168
Prepaid expenses............................................................. -- -- 6
--------- --------- ------
Total current assets..................................................... 422 391 424
--------- --------- ------
Property and equipment (Notes 3 and 5), less accumulated depreciation.......... 1,192 1,055 1,014
--------- --------- ------
Advances to affiliates (Note 1)................................................ 706 1,863 2,701
--------- --------- ------
$ 2,320 $ 3,309 $ 4,139
--------- --------- ------
--------- --------- ------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................. $ 96 $ 65 $ 268
Accrued expenses:
Retirement plan (Note 4)................................................... 9 12 9
Other...................................................................... 38 23 67
Current maturities of long-term debt (Note 5).............................. 110 116 117
--------- --------- ------
Total current liabilities................................................ 253 216 461
Advances from affiliates (Note 1).............................................. -- 1,253 1,256
Long-term debt, less current maturities (Note 5)............................... 1,073 996 948
--------- --------- ------
Total liabilities........................................................ 1,326 2,465 2,665
--------- --------- ------
Commitments (Notes 4 and 6)
Shareholder's equity:
Common stock, $1 par -- shares authorized, 100,000; outstanding, 1,000....... 1 1 1
Retained earnings (Note 5)................................................... 993 843 1,473
--------- --------- ------
Total shareholder's equity............................................... 994 844 1,474
--------- --------- ------
$ 2,320 $ 3,309 $ 4,139
--------- --------- ------
--------- --------- ------
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements
F-67
<PAGE>
SEASIDE RESORTS, LTD.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Green fees.................................... $ 2,339 $ 2,274 $ 2,429 $ 1,875 $ 1,776
Cart rentals.................................. 1,006 975 1,030 801 714
Food and beverage sales....................... 316 329 334 272 255
Pro shop merchandise sales.................... 510 474 526 392 356
Other income.................................. 17 63 5 3 (20)
--------- --------- --------- ----------- ---------
Total revenues.............................. 4,188 4,115 4,324 3,343 3,081
--------- --------- --------- ----------- ---------
COST AND EXPENSES:
General and administrative (Note 1)........... 773 707 676 556 518
Repairs and maintenance....................... 366 403 508 412 406
Depreciation and amortization................. 144 181 187 137 137
Cost of merchandise sold...................... 232 247 259 202 173
Rents (Note 6)................................ 233 228 248 170 178
Pro shop operations........................... 234 234 267 204 188
Cost of food and beverage sold................ 87 87 94 75 75
Food and beverage operations.................. 58 59 74 53 50
--------- --------- --------- ----------- ---------
Total costs and expenses.................... 2,127 2,146 2,313 1,809 1,725
--------- --------- --------- ----------- ---------
Operating income................................ 2,061 1,969 2,011 1,534 1,356
Interest expense................................ 31 78 77 58 52
--------- --------- --------- ----------- ---------
Net income...................................... 2,030 1,891 1,934 1,476 1,304
Retained earnings, beginning of period.......... 327 184 993 993 843
Dividends (Notes 5 and 7)....................... 2,173 1,082 2,084 1,662 674
--------- --------- --------- ----------- ---------
Retained earnings, end of period................ $ 184 $ 993 $ 843 $ 807 $ 1,473
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-68
<PAGE>
SEASIDE RESORTS, LTD.
STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 2,030 $ 1,891 $ 1,934 $ 1,476 $ 1,304
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and Amortization............... 144 181 187 137 137
Gain (loss) on disposal of assets........... -- -- -- -- 22
(Increase) decrease in:
Accounts receivable....................... (32) 77 (29) (117) (62)
Inventories............................... (22) (16) 31 (8) (48)
Prepaid expenses.......................... -- -- -- -- (6)
Increase (decrease) in:
Checks written against future deposits.... (27) -- -- -- --
Accounts payable.......................... (97) 70 (32) 120 203
Accrued expenses.......................... (74) 15 (11) 21 41
--------- --------- --------- ----------- ---------
Net cash provided by operating activities....... 1,922 2,218 2,080 1,629 1,591
--------- --------- --------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions.............. (161) (209) (51) -- (118)
(Increase) decrease in advances to
affiliates................................... 458 189 (1,156) (939) (838)
--------- --------- --------- ----------- ---------
Net cash used in investing activities........... 297 (20) (1,207) (939) (956)
--------- --------- --------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends.......................... (1,128) (1,082) (2,084) (1,662) (674)
Proceeds from long-term debt.................. 249 220 26 -- --
Payments on long-term debt.................... (273) (272) (96) (81) (47)
Increase (decrease) in advances from
affiliates................................... (962) (1,035) 1,252 939 3
--------- --------- --------- ----------- ---------
Net cash used in financing activities........... (2,114) (2,169) (902) (804) (718)
--------- --------- --------- ----------- ---------
Net increase (decrease) in cash................. 105 29 (29) (114) (83)
Cash, beginning of period....................... 4 109 138 138 109
--------- --------- --------- ----------- ---------
Cash, end of period............................. $ 109 $ 138 $ 109 $ 24 $ 26
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements
F-69
<PAGE>
SEASIDE RESORTS, LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
BUSINESS
Seaside Resorts, Ltd. (the Company) owns and operates Oyster Bay Golf Links
located in Sunset Beach, North Carolina.
INVENTORIES
Inventories are valued at the lower-of-cost (first-in, first-out) or market
and consist primarily of food, beverages, golf equipment and clothing.
REVENUE RECOGNITION
Revenue from green fees, cart rentals, food and beverage sales, merchandise
sales, and range income are generally recognized at time of sale.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, 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>
INCOME TAXES
The absence of a provision for income taxes is due to the election by the
Company, and consent by its shareholder, to include the taxable income or loss
of the Company in his individual tax returns. As a result, no federal or state
income taxes are imposed on the Company.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consist primarily of trade receivables.
Concentration of credit risk with respect to trade receivables, which
consists primarily of golf packages from hotels and charges, is limited due to
the large number of hotels comprising the Company's customer base.
F-70
<PAGE>
SEASIDE RESORTS, LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
The trade receivables are billed and due monthly, and all probable bad debt
losses have been appropriately considered in establishing an allowance for
doubtful accounts. As of December 31, 1994, 1995, and September 30, 1996, the
Company had no significant concentration of credit risk.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" (Statement No. 121).
Statement No. 121 requires that long-lived assets and certain intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company
periodically reevaluates the carrying amounts of its long-lived assets and the
related depreciation and amortization periods are discussed above, and the
Company believes that the adoption of Statement No. 121 will not have a material
effect on its financial statements. This statement is effective for fiscal years
beginning after December 15, 1995.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising costs
included in general and administrative costs in the amounts of $89, $93, and $80
for December 31, 1993, 1994, and 1995, respectively. Amounts expended for the
periods ended September 30, 1995 and 1996, were $59 and $61, respectively.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the nine months ended September 30,
1995 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-71
<PAGE>
SEASIDE RESORTS, LTD.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR SEPTEMBER 30, 1995 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1993.................................... $ 297
1994.................................... $ 187
1995.................................... $ 213
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------
<S> <C>
1995.................................... $ 160
1996.................................... $ 160
</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,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- ---------------
<S> <C> <C> <C>
Golf packages receivables............... $ 97 $ 125 $ 191
Other................................... 36 37 33
--- --- ---
$ 133 $ 162 $ 224
--- --- ---
--- --- ---
</TABLE>
3. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
Golf course improvements................ $ 1,136 $ 1,144 $ 1,263
Buildings............................... 236 236 243
Machinery and equipment................. 659 679 495
Furniture and fixtures.................. 105 105 105
Golf carts.............................. 265 264 265
--------- --------- ------
2,401 2,428 2,371
Less accumulated depreciation........... 1,209 1,373 1,357
--------- --------- ------
Net property and equipment.............. $ 1,192 $ 1,055 $ 1,014
--------- --------- ------
--------- --------- ------
</TABLE>
F-72
<PAGE>
SEASIDE RESORTS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
4. RETIREMENT PLAN
The Company and its affiliates sponsor a defined-contribution retirement
plan for all eligible employees, including officers. The plan provides for
contributions by the Company, equal to the level funding amount as calculated an
defined in the plan agreement. The actual benefit, at any point in time for each
participant, is the actual value of the participant's account based on the
earnings or losses experienced by the plan. Retirement plan expense was:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1993.................................... $ 16
1994.................................... $ 12
1995.................................... $ 13
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------
<S> <C>
1995.................................... $ 9
1996.................................... $ 9
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
6.25% note payable to bank, collateralized by substantially
all assets(1)............................................. $ 994 $ 960 $ 960
Note payable to bank, due in monthly installments of $5
including interest at prime (8.25% as of September 30,
1996) to December 1997; collateralized by golf carts
having a net book value of $142 at September 30, 1996..... 189 126 79
Note payable to a finance company maturing April 2000 with
monthly payments of $1 plus interest at prime plus 1.15%;
collateralized by equipment with a net book value of
$27....................................................... -- 26 26
--------- --------- ------
1,183 1,112 1,065
Less current maturities.................................... 110 116 117
--------- --------- ------
Total long-term debt....................................... $ 1,073 $ 996 $ 948
--------- --------- ------
--------- --------- ------
</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 $17,790 as of September 30, 1996. The aforementioned
companies are jointly liable for the debt and the shareholder has guaranteed
the loans.
F-73
<PAGE>
SEASIDE RESORTS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
5. LONG-TERM DEBT (CONTINUED)
The outstanding balance at September 30, 1996, has been allocated to the
various entities based on the original use of the loan proceeds net of payments
to date as follows:
<TABLE>
<CAPTION>
AFFILIATE AMOUNT
- ---------------------------------------- ---------
<S> <C>
Marsh Harbour, Ltd...................... $ 3,680
Seaside Resorts, Ltd.................... 960
Golf Legends, Ltd....................... 12,414
Heritage Golf Club, Ltd................. 736
---------
$ 17,790
---------
---------
</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 ($12,646 outstanding at September 30, 1996.) These funds are to be used
for construction of golf courses by an affiliated entity, Legends of Virginia,
LC.
Payment terms on the above notes are from October 25, 1996, $150 monthly
plus interest; from October 25, 1997, $156 monthly plus interest; from October
25, 1998, $163 monthly plus interest; total remaining due in balloon payment on
October 25, 1999.
The loan agreement provides, among other covenants, restrictions on certain
financial ratios, a minimum aggregate cash balance of $250,000, payments to the
sole shareholder, capital expenditures, indebtedness, liens, changes in the
nature of the business and significant other limitations as to the use of funds.
The Company had obtained a waiver for those covenants not met at December 31,
1995 and September 30, 1996.
The Company is jointly liable as a guarantor, with the shareholder, and
other affiliated entities for additional amounts totaling $3,850.
Total debt of all affiliated entities of which the Company is jointly liable
is approximately $34,286 at September 30, 1996.
The aggregate annual maturities are as follows:
<TABLE>
<CAPTION>
AMOUNT
---------
<S> <C>
1996 (three months)..................... $ 117
1997.................................... 53
1998.................................... 56
1999.................................... 839
---------
Total................................... $ 1,065
---------
---------
</TABLE>
F-74
<PAGE>
SEASIDE RESORTS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
6. COMMITMENTS
LEASES
The Company leases land for the golf course. The lease has a term of fifty
years expiring in April 2032. The lease requires an annual rental payment of 10%
of the green fees, as defined in the lease agreement. The lease does not contain
an option to purchase the land. The total rental expense for the land
approximated.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1993.................................... $ 233
1994.................................... 228
1995.................................... 248
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------
<S> <C>
1995.................................... 170
1996.................................... 178
</TABLE>
SELF-INSURANCE
The Company and its affiliates maintain a self-insurance program for that
portion of health care costs not covered by insurance. The Company is liable for
claims up to $15 per employee annually with an annual aggregate maximum
liability under the program for all companies of $225. Cumulative amounts
estimated to be payable by the Company with respect to pending and potential
claims have been accrued as liabilities.
EMPLOYMENT AGREEMENT
The Company, along with other affiliated entities, has an employment
agreement with an officer that expires in 1998. The agreement provides basic
compensation in addition to other incentives and bonuses based upon certain
conditions as defined in the agreement.
7. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1993.................................... $ 30
1994.................................... 79
1995.................................... 77
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------
<S> <C>
1995.................................... 58
1996.................................... 52
</TABLE>
During 1993, equipment having a net book value of $167 and cash of $88 was
exchanged for similar new equipment having a value of $225.
During 1994, equipment having a net book value of $204 and cash of $53 was
exchanged for similar new equipment having a value of $257.
8. PROPOSED CONTRIBUTION OF ASSETS
The Company is in negotiations to contribute the Company's interest in the
golf courses properties and related equipment along with related debt to a newly
formed partnership, Golf Trust of America, L.P. (GTA LP) in exchange for a
limited partnership interest in GTA LP. A newly formed affiliate would lease the
golf course properties and related equipment from GTA LP. GTA LP's general
partner, Golf Trust of America, Inc. intends to file a Form S-11 registration
statement with the Securities and Exchange Commission in connection with a
proposed offering of shares to the public.
F-75
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Members
Legends of Virginia, LC
Myrtle Beach, South Carolina
We have audited the accompanying balance sheets of LEGENDS OF VIRGINIA, LC
as of September 30, 1996, December 31, 1995 and 1994 and the related statements
of income and retained earnings, and cash flows for the nine months ended
September 30, 1996 and for the two years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully described in the notes to the financial statements, LEGENDS OF
VIRGINIA, LC has material transactions with its majority member and affiliates.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LEGENDS OF VIRGINIA, LC at
September 30, 1996, December 31, 1995 and 1994, and the results of its
operations and its cash flows for the nine months ended September 30, 1996 and
for the two years in the period ended December 31, 1995 ended in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Charlotte, North Carolina
December 11, 1996
F-76
<PAGE>
LEGENDS OF VIRGINIA, LC
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
DECEMBER 31, ENDED
-------------------- SEPTEMBER
1994 1995 30, 1996
--------- --------- -----------
ASSETS (NOTE 5)
<S> <C> <C> <C>
CURRENT:
Cash......................................................... $ -- $ -- $ 98
Accounts receivable.......................................... -- -- 15
Inventories.................................................. -- -- 25
--------- --------- -----------
Total current assets..................................... -- -- 138
Advances to affiliates (Note 1)................................ -- 60 60
Other.......................................................... -- -- 295
Property and equipment (Notes 3 and 5), less accumulated
depreciation.................................................. -- 436 21,322
Construction in progress (Notes 1 & 6)......................... 3,365 17,795 --
--------- --------- -----------
$ 3,365 $ 18,291 $ 21,815
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................................... $ -- $ -- $ 765
Other liabilities.............................................. -- -- 87
Current maturities of long-term debt (Note 2).................. -- 622 178
--------- --------- -----------
Total current liabilities................................ -- 622 1,030
--------- --------- -----------
Advances from affiliates (Note 1).............................. 2,364 5,876 9,179
Long-term debt (Note 2)........................................ -- 10,836 12,468
--------- --------- -----------
Total liabilities........................................ 2,364 17,334 22,677
--------- --------- -----------
Commitments (Notes 3 and 4)
Members' equity (deficit):
Members' contributions....................................... 1 1 1
Members' accumulated equity (deficit)........................ 1,000 955 (863)
--------- --------- -----------
Total members' equity (deficit).......................... 1,001 956 (862)
--------- --------- -----------
$ 3,365 $ 18,291 $ 21,815
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-77
<PAGE>
LEGENDS OF VIRGINIA, LC
STATEMENTS OF LOSS AND MEMBERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
-------------------- ----------------------
1994 1995 1995 1996
--------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Green fees............................................... $ -- $ -- $ -- $ 255
Cart rentals............................................. -- -- -- 70
Food and beverage sales.................................. -- -- -- 24
Pro shop merchandise sales............................... -- -- -- 41
Other income (Note 6).................................... 1,000 -- -- (3)
--------- --------- ----------- ---------
Total revenues....................................... 1,000 -- -- 387
--------- --------- ----------- ---------
COSTS AND EXPENSES:
General and administrative (Note 1)...................... -- 15 -- 783
Repairs and maintenance.................................. -- -- -- 747
Depreciation and amortization............................ -- 29 -- 272
Cost of merchandise sold................................. -- -- -- 87
Pro shop operations...................................... -- -- -- 114
Cost of food and beverage sold........................... -- -- -- 8
Food and beverage operations............................. -- -- -- 7
--------- --------- ----------- ---------
Total costs and expenses............................. -- 44 -- 2,018
--------- --------- ----------- ---------
Operating income (loss).................................. 1,000 (44) -- (1,631)
Interest expense......................................... -- -- -- 188
--------- --------- ----------- ---------
Net income (loss)........................................ 1,000 (44) -- (1,819)
Members' accumulated equity (deficit), beginning of
period.................................................. -- 1,000 1,000 956
--------- --------- ----------- ---------
Members' accumulated equity (deficit), end of period..... $ 1,000 $ 956 $ 1,000 $ (863)
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-78
<PAGE>
LEGENDS OF VIRGINIA, LC
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
DECEMBER 31, -----------------------------
----------------- 1995
1994 1995 (UNAUDITED) 1996
------- -------- ----------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income (loss)............................... $ 1,000 $ (44) $ -- $ (1,819)
Adjustments to reconcile net income to net cash
provided by operating activities:
Contribution of land (Note 6)................. (1,000) -- -- --
Depreciation and amortization................. -- 29 -- 272
(Increase) decrease in:
Accounts receivable......................... -- -- -- ) (15
Inventories................................. -- -- -- ) (25
Prepaid expenses/other assets............... -- -- -- )(319
Increase (decrease) in:
Accounts payable............................ -- -- -- 765
Accrued expenses............................ -- 87
------- -------- ----------- ------
Net cash (used in) operating activities........... -- (15) -- (1,054)
------- -------- ----------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions................ -- (11,443) -- ) (36
------- -------- ----------- ------
Net cash used in investing activities............. -- (11,443) -- ) (36
------- -------- ----------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.................... -- 11,458 -- 1,188
Increase (decrease) in advances from
affiliates..................................... -- -- -- --
------- -------- ----------- ------
Net cash provided by financing activities......... -- 11,458 -- 1,188
------- -------- ----------- ------
Net decrease in cash.............................. -- -- -- 98
Cash, beginning of period......................... -- -- -- --
------- -------- ----------- ------
Cash, end of period............................... $ -- $ -- $ -- $ 98
------- -------- ----------- ------
------- -------- ----------- ------
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-79
<PAGE>
LEGENDS OF VIRGINIA, LC
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
BUSINESS
Legends of Virginia, LC (the Company) is in the business of developing and
operating two golf courses near Williamsburg, Virginia, Stonehouse Golf Club and
Royal New Kent which opened in June and August 1996, respectively.
REVENUE RECOGNITION
Revenue from green fees, cart rentals, food and beverage sales, merchandise
sales, and range income are generally recognized at the time of sale.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt investments with a maturity of three months or less to be
cash equivalents.
CONSTRUCTION-IN-PROGRESS
Construction-in-progress is stated at cost.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets using straight-line methods for financial
reporting and accelerated methods for income tax purposes.
Estimated useful lives for major asset categories approximate:
<TABLE>
<CAPTION>
DESCRIPTION YEARS
- ---------------------------------------- -----
<S> <C>
Golf course improvements................ 15
Buildings............................... 40
Machinery and equipment................. 3-8
Furniture............................... 8
Golf carts.............................. 5
</TABLE>
Major renewals and betterment's are capitalized. Maintenance, repairs and
minor renewals are expensed as incurred. When properties are retired or
otherwise disposed of, related cost and accumulated depreciation are removed
from the accounts.
INCOME TAXES
No provision has been made for income taxes or related credits, as under the
Internal Revenue Code a limited liability company is treated as a partnership
for income tax purposes. Therefore, the results of operations are includable in
the income tax returns of the members.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consist primarily of trade receivables.
F-80
<PAGE>
LEGENDS OF VIRGINIA, LC
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
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 September 30, 1996, the Company had
no significant concentration of credit risk.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" (Statement No. 121).
Statement No. 121 requires that long-lived assets and certain intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company
periodically reevaluates the carrying amounts of its long-lived assets and the
related depreciation and amortization periods are discussed above, and the
Company believes that the adoption of Statement No. 121 will not have a material
effect on its financial statements. This statement is effective for fiscal years
beginning after December 15, 1995.
ADVERTISING
The Company expenses advertising costs as incurred. The Company incurred no
advertising costs in 1994 and 1995. Amounts expended for the nine month periods
ended September 30, 1995 and 1996, were $0 and $251, respectively.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the nine months ended September 30,
1995, 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-81
<PAGE>
LEGENDS OF VIRGINIA, LC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR SEPTEMBER 30, 1995 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1994.................................. $ --
1995.................................. $ --
<CAPTION>
NINE MONTH ENDED SEPTEMBER 30, AMOUNT
- ---------------------------------------- -----------
<S> <C>
1996.................................. $ 60
</TABLE>
2. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
Land (Note 6)....................................................... $ 1,000 $ 1,000 $ 1,000
Golf course improvements............................................ -- -- 19,155
Buildings........................................................... -- -- 836
Machinery and equipment............................................. -- 465 252
Furniture........................................................... -- -- 76
Construction-in-progress............................................ 2,365 16,795 280
--------- --------- -------------
3,365 18,260 21,599
Less accumulated depreciation and amortization...................... -- 29 277
--------- --------- -------------
Net property and equipment.......................................... $ 3,365 $ 18,231 $ 21,322
--------- --------- -------------
--------- --------- -------------
</TABLE>
F-82
<PAGE>
LEGENDS OF VIRGINIA, LC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
Note payable to bank at prime (8.25% at September 30, 1996) (1)....... $ -- $ 11,048 $ 12,646
Paid in 1996.......................................................... -- 410 --
--- --------- -------------
-- 11,458 12,646
Less current maturities............................................... -- 622 178
--- --------- -------------
Total long-term debt.................................................. -- $ 10,836 $ 12,468
--- --------- -------------
--- --------- -------------
</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 Harbor, Ltd.)
participate in a debt agreement with a bank consisting of two term notes
totaling $17,804 as of September 30, 1996. The aforementioned companies are
jointly liable for the debt and the majority member has guaranteed the loans.
Payment terms on the above note are from October 25, 1996, $69 monthly plus
interest; from October 25, 1997, $75 monthly plus interest; from October 25,
1998, $82 monthly plus interest; total remaining due in balloon payment on
October 25, 1999.
The loan agreement provides, among other covenants, restrictions on certain
financial ratios, a minimum aggregate cash balance of $250, payments to the
majority member, capital expenditures, indebtedness, liens, changes in the
nature of the business and significant other limitations as to the use of funds.
The Company had obtained a waiver of certain of the covenants not met as of
December 31, 1995 and September 30, 1996.
The Company is jointly liable as a guarantor, with the majority member, and
other affiliated entities for additional amounts totaling $3,850.
Total debt of all affiliated entities of which the Company is jointly liable
is approximately $34,285 at September 30, 1996.
The aggregate annual maturities are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
- ---------------------------------------- ---------
<S> <C>
1996 (three months)..................... $ 178
1997.................................... $ 848
1998.................................... $ 925
1999.................................... $ 10,695
---------
Total................................. $ 12,646
---------
---------
</TABLE>
F-83
<PAGE>
LEGENDS OF VIRGINIA, LC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
4. COMMITMENT
EMPLOYMENT AGREEMENT
The Company, along with other affiliated entities, has an employment
agreement with an officer that expires in 1998. The agreement provides basic
compensation in addition to other incentives and bonus based upon certain
conditions as defined in the agreement.
SELF-INSURANCE
The Company and its affiliates maintain a self-insurance program for that
portion of health care costs not covered by insurance. The Company is liable for
claims up to $15 per employee annually with an annual aggregate maximum
liability under the program for all companies of $225. Cumulative amounts
estimated to be payable by the Company with respect to pending and potential
claims have been accrued as liabilities.
LEASES
Minimum lease commitments for noncancelable operating leases for various
equipment and golf carts in effect at September 30, 1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------------------------------------------------------------------- ---------
<S> <C>
1996 (three months).................................................................. $ 132
1997................................................................................. 373
1998................................................................................. 373
1999................................................................................. 349
2000................................................................................. 84
---------
Total.............................................................................. $ 1,311
---------
---------
</TABLE>
5. RETIREMENT PLAN
The Legends Group, Ltd. sponsors a defined-contribution retirement plan for
all eligible employees of Golf Legends and other affiliated companies including
officers. The plan provides for contributions by the Company equal to the level
funding amount as calculated and defined in the plan agreement. The actual
benefits, 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................................................................................. $ --
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
- -------------------------------------------------------------------------------------
<S> <C>
1995................................................................................. $ --
1996................................................................................. $ --
</TABLE>
6. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
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 1994, the Company acquired $2,365 of construction costs through
advances from an affiliated company.
F-84
<PAGE>
LEGENDS OF VIRGINIA, LC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1995 IS UNAUDITED)
(IN THOUSANDS)
6. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (CONTINUED)
During 1995, the Company acquired $14,894 of property and equipment through
advances from an affiliated company.
7. PROPOSED CONTRIBUTION OF ASSETS
The Company is in negotiations to contribute the Company's interest in the
golf courses properties and related equipment along with related debt to a newly
formed partnership, Golf Trust of America, L.P. (GTA LP) in exchange for a
limited partnership interest in GTA LP. A newly formed affiliate would lease the
golf course properties and related equipment from GTA LP. GTA LP's general
partner, Golf Trust of America, Inc. intends to file a form S-11 registration
statement with the Securities and Exchange Commission in connection with a
proposed offering of shares to the public.
F-85
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Northgate Country Club
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and partners' equity and of cash flows
present fairly, in all material respects, the financial position of Northgate
Country Club (the "Club") at September 20, 1996 and December 20, 1995 and 1994,
and the results of its operations and its cash flows for the nine months ended
September 20, 1996 and each of the three years in the period ended December 20,
1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Club's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Costa Mesa, CA
December 13, 1996
F-86
<PAGE>
NORTHGATE COUNTRY CLUB
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 20,
-------------------- SEPTEMBER 20,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 97 $ 20 $ 15
Accounts receivable, net of allowance for doubtful accounts of $-0-, $12
and $18, respectively..................................................... 515 539 496
Receivable from affiliate.................................................. 70 1,953 1,467
Inventories................................................................ 99 99 129
Prepaid expenses........................................................... 42 176 114
--------- --------- -------------
Total current assets..................................................... 823 2,787 2,221
Property and equipment, net.................................................. 10,567 10,594 10,508
--------- --------- -------------
Total assets............................................................. $ 11,390 $ 13,381 $ 12,729
--------- --------- -------------
--------- --------- -------------
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................... $ 214 $ 262 $ 256
Notes payable -- current portion........................................... 88 31 28
Accrued liabilities........................................................ 166 32 68
Deferred revenue........................................................... 229 249 231
Other liabilities.......................................................... 352 345 320
--------- --------- -------------
Total current liabilities................................................ 1,049 919 903
Membership deposits.......................................................... 1,649 1,482 1,435
Notes payable................................................................ 4,839 6,719 6,101
--------- --------- -------------
Total liabilities........................................................ 7,537 9,120 8,439
--------- --------- -------------
Contingencies (Note 6)
Partners' equity............................................................. 3,853 4,261 4,290
--------- --------- -------------
Total liabilities and partners' equity................................... $ 11,390 $ 13,381 $ 12,729
--------- --------- -------------
--------- --------- -------------
</TABLE>
The accompanying notes to are an integral part to these financial statements.
F-87
<PAGE>
NORTHGATE COUNTRY CLUB
CONSOLIDATED STATEMENTS OF OPERATIONS
AND PARTNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE-MONTH
PERIOD
YEAR ENDED DECEMBER 20, ENDED
SEPTEMBER 20,
------------------------ --------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Revenue from golf operations.................. $2,461 $2,594 $2,768 $2,060 $2,190
Food and beverage sales....................... 1,181 1,170 1,370 910 982
Pro shop merchandise sales.................... 337 363 393 259 233
Revenue from other services................... 33 35 35 24 24
------ ------ ------ ------ ------
Total revenues................................ 4,012 4,162 4,566 3,253 3,429
------ ------ ------ ------ ------
OPERATING COSTS AND EXPENSES
Operating expenses.............................. 1,107 1,194 1,149 950 984
Costs of goods sold............................. 589 594 731 449 469
General and administrative...................... 580 580 517 401 408
Repairs and maintenance......................... 743 746 743 560 621
Depreciation and amortization................... 360 401 323 245 241
------ ------ ------ ------ ------
Total operating costs and expenses.......... 3,379 3,515 3,463 2,605 2,723
------ ------ ------ ------ ------
Operating income................................ 633 647 1,103 648 706
------ ------ ------ ------ ------
OTHER EXPENSES
Interest expense................................ 914 475 485 356 389
------ ------ ------ ------ ------
Net (loss) income............................... (281) 172 618 292 317
------
------
Capital contributions........................... 2,055 201 577 112
Capital distributions........................... (733) (522) (787) (400)
Partners' equity beginning of period............ 2,961 4,002 3,853 4,261
------ ------ ------ ------
Partners' equity end of period.................. $4,002 $3,853 $4,261 $4,290
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
The accompanying notes to are an integral part to these financial statements.
F-88
<PAGE>
NORTHGATE COUNTRY CLUB
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
YEAR ENDED DECEMBER 20, ENDED SEPTEMBER 20,
------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.................................. $ (281) $ 172 $ 618 $ 292 $ 317
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation..................................... 360 401 323 245 241
Decrease (increase) in accounts receivable....... 236 (17) (24) (44) 43
Decrease (increase) in inventories............... (15) 7 -- (9) (30)
Decrease (increase) in prepaid expenses.......... 382 (2) (134) (88) 62
Decrease (increase) in accounts payable.......... (4) 127 48 106 (6)
(Decrease) increase in accrued liabilities....... 19 8 (134) (139) 36
(Decrease) increase in deferred revenue.......... 86 7 20 30 (18)
(Decrease) increase in other liabilities......... 82 (42) (7) (25) (25)
(Decrease) increase in membership deposits....... (25) (77) (167) (157) (47)
--------- --------- --------- ----------- ---------
Net cash provided by (used in) operating
activities...................................... 840 584 543 211 573
--------- --------- --------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment................. (37) (81) (347) (129) (155)
--------- --------- --------- ----------- ---------
Net cash provided by (used in) investing
activities...................................... (37) (81) (347) (129) (155)
--------- --------- --------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt....... 63 -- 7,000 7,000 --
Principal payments on notes payable................ (501) (115) (5,180) (5,100) (621)
Decrease (increase) in receivables from affiliates -- (70) (1,883) (1,812) 486
Contributions...................................... 375 201 577 426 112
Distributions...................................... (733) (522) (787) (692) (400)
--------- --------- --------- ----------- ---------
Net cash used by financial activities............ (796) (506) (273) (178) (423)
--------- --------- --------- ----------- ---------
Net increase (decrease) in cash and cash
equivalents....................................... 7 (3) (77) (96) (5)
Cash and cash equivalents at beginning of year..... 93 100 97 97 20
--------- --------- --------- ----------- ---------
Cash and cash equivalents at end of year........... $ 100 $ 97 $ 20 $ 1 $ 15
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
The accompanying notes to are an intergral part to these financial statements.
F-89
<PAGE>
NORTHGATE COUNTRY CLUB
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
(IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Northgate, a
Texas general partnership, and Northgate Country Club Beverage, Inc., a Texas
corporation (collectively, the "Partnership"). Northgate was formed in 1982 for
the purpose of constructing and operating a country club facility consisting of
a golf course, clubhouse, pro shop, tennis courts and dining facilities. Jack A.
Thoner owns an 89% general partner interest in Northgate and is the sole
shareholder of Northgate Country Club Beverage, Inc.
The term "affiliate," as used in these financial statements, refers to any
entity which Jack A. Thoner has a controlling interest.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
All material intercompany transactions and balances have been eliminated.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, all cash and certificates of
deposit purchased with a maturity of three months or less are considered to be
cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market value. Inventories consist primarily of food, beverage, golf
and tennis equipment, clothing and accessories.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost which is less than fair value as
measured in accordance with Statement of Financial Accounting Standards No. 121
"Accounting for the Improvement of Long-Lived Assets and for Long-Lived Assets
to be Disposed of." Depreciation is computed using the straight-line basis over
the estimated useful lives as follows:
<TABLE>
<S> <C>
Buildings............................... 30 years
Land improvements....................... 20 years
Equipment............................... 3 to 10 years
</TABLE>
Significant expenditures which extend the useful lives of existing assets
are capitalized. All other maintenance and repair costs are charged to current
operations.
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 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.
F-90
<PAGE>
NORTHGATE COUNTRY CLUB
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (CONTINUED)
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Partnership's customer base. The trade
receivables are billed and due monthly, and all probable bad debt losses have
been appropriately considered in establishing an allowance for doubtful
accounts. As of September 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 $100,000 per institution.
At various times throughout the year, the Partnership may have cash in financial
institutions which exceed the FDIC insurance limits.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The cost basis of the Partnership's note payable approximates fair value
based on comparison with current market rates for loans of similar risks and
maturities.
INCOME TAXES
No provision has been made in the accompanying consolidated financial
statements for federal or state income taxes because, as a partnership, the
results of operations are included in the tax returns of the respective
partners.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the nine months ended September 20,
1995, 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-91
<PAGE>
NORTHGATE COUNTRY CLUB
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (CONTINUED)
(IN THOUSANDS)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 20,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
Land.................................... $ 7,144 $ 7,144 $ 7,147
Golf course improvements................ 2,592 2,640 2,663
Buildings............................... 2,788 3,018 3,037
Furniture, fixtures, machinery and
equipment.............................. 1,539 1,579 1,689
--------- --------- -------------
14,063 14,381 14,536
Less accumulated depreciation........... (3,496) (3,787) (4,028)
--------- --------- -------------
$ 10,567 $ 10,594 $ 10,508
--------- --------- -------------
--------- --------- -------------
</TABLE>
4. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 20,
-------------------- SEPTEMBER 20,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
Notes payable to purchase equipment.................................. $ 46 $ 49 $ 37
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 6,092
Note payable to Textron Financial Corporation. The note is due in
1998 and accrues interest at an annual rate equal to the greater of
prime plus 2.5% or 9%. The note was repaid in 1995 from funds
obtained from Greyrock Capital Group, Inc........................... 4,881 -- --
--------- --------- ------
$ 4,927 $ 6,750 $ 6,129
--------- --------- ------
--------- --------- ------
</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.
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.
F-92
<PAGE>
NORTHGATE COUNTRY CLUB
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (CONTINUED)
(IN THOUSANDS)
4. NOTES PAYABLE (CONTINUED)
The following is a schedule of maturities on notes payables for the next
five years ending September 20, 1997 through 2001, and in total thereafter:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---------------------------------------- ---------
<S> <C>
1997.................................... $ 103
1998.................................... 105
1999.................................... 108
2000.................................... 113
2001.................................... 125
Thereafter.............................. 5,575
---------
$ 6,129
---------
---------
</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
Subsequent to September 20, 1996, the Partnership began negotiating
agreements to transfer the golf course and related improvements and equipment to
Golf Trust of America, Inc.
F-93
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members
Bright's Creek Development, LLC
We have audited the accompanying balance sheets of Bright's Creek
Development, LLC, as of September 30, 1996 and December 31, 1995 and 1994, and
the related statements of operations and cash flows for the nine months ended
September 30, 1996, the year ended December 31, 1995, and the period from
inception (May 17, 1994) through December 31, 1994 and the statement of members'
deficit for the nine months ended September 30, 1996, the year ended December
31, 1995, and the period from inception (May 17, 1994) through December 31,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bright's Creek Development,
LLC, as of September 30, 1996 and December 31, 1995 and 1994, and the results of
its operations and its cash flows for the nine months ended September 30, 1996
and the year ended December 31, 1995, and the period from inception (May 17,
1994) through December 31, 1994, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
December 6, 1996
F-94
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
BALANCE SHEETS
(IN THOUSANDS)
(DECEMBER 31, 1994 AND 1995 AND SEPTEMBER 30, 1996)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and equivalents......................................................... $ 26 $ 51 $ 55
Accounts receivable.......................................................... 12 10 30
Notes receivable............................................................. 183 155 155
Inventory.................................................................... 23 43 38
Other........................................................................ 1 3 3
--------- --------- ------
Total current assets..................................................... 245 262 281
--------- --------- ------
LAND, BUILDINGS, AND EQUIPMENT:
Land......................................................................... 1,001 1,001 1,001
Golf course improvements..................................................... 2,596 2,596 2,625
Buildings.................................................................... 312 312 312
Furniture and equipment...................................................... 194 230 207
Automobiles.................................................................. 45 37 36
--------- --------- ------
4,148 4,176 4,181
Less accumulated depreciation.................................................. (104) (350) (525)
--------- --------- ------
4,044 3,826 3,656
--------- --------- ------
OTHER ASSETS:
Deposits..................................................................... 1 1 1
Loan costs, net.............................................................. 52 52 51
--------- --------- ------
53 53 52
--------- --------- ------
Total assets............................................................. $ 4,342 $ 4,141 $ 3,989
--------- --------- ------
--------- --------- ------
<CAPTION>
LIABILITIES AND MEMBERS' DEFICIT
<S> <C> <C> <C>
Accounts payable and accrued expenses.......................................... $ 44 $ 35 $ 49
Current maturities of long-term debt........................................... -- 413 234
--------- --------- ------
Total current liabilities................................................ 44 448 283
Long-term debt................................................................. 4,433 3,855 3,733
--------- --------- ------
Total liabilities........................................................ 4,477 4,303 4,016
Members' deficit............................................................... (135) (162) (27)
--------- --------- ------
Total liabilities and members' deficit................................... $ 4,342 $ 4,141 $ 3,989
--------- --------- ------
--------- --------- ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-95
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(FOR THE PERIOD FROM INCEPTION (MAY 17, 1994) THROUGH DECEMBER 31, 1994 AND THE
YEAR ENDED DECEMBER 31, 1995 AND THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995
AND 1996)
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS
INCEPTION ENDED
(MAY 17, 1994) SEPTEMBER
THROUGH YEAR ENDED 30,
DECEMBER 31, DECEMBER 31, ------------
1994 1995 1995 1996
-------------- ------------ ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Golf revenues................................... $ 376 $1,429 $1,193 $1,183
Food and beverage............................... 56 169 142 130
Pro shop........................................ 23 116 93 103
Other income.................................... 8 26 22 23
------ ------ ----- -----
Total revenues.............................. 463 1,740 1,450 1,439
------ ------ ----- -----
OPERATING COSTS AND EXPENSES:
Golf course maintenance......................... 122 302 224 259
Pro shop costs and expenses..................... 85 335 249 281
Food and beverage costs and expenses............ 43 124 102 100
General and administrative expenses............. 113 313 220 201
Depreciation and amortization................... 104 247 184 186
------ ------ ----- -----
Total operating costs and expenses.......... 467 1,321 979 1,027
------ ------ ----- -----
Operating (loss) income..................... (4) 419 471 412
Interest expense.................................. (134) (424) (320 ) (274)
Other income...................................... 1 6 1 11
------ ------ ----- -----
Net (loss) income........................... $(137) $ 1 $152 $ 149
------ ------ ----- -----
------ ------ ----- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-96
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
STATEMENTS OF MEMBERS' DEFICIT
(IN THOUSANDS)
(FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996, THE YEAR ENDED DECEMBER 31, 1995
AND THE PERIOD FROM INCEPTION (MAY 17, 1994) THROUGH DECEMBER 31, 1994)
<TABLE>
<S> <C>
Initial contribution from members, May 17, 1994...................................... $ 1
Net loss............................................................................. (137)
Other contributions.................................................................. 1
---------
Balance, December 31, 1994........................................................... (135)
Net income........................................................................... 1
Distributions to members............................................................. (31)
Contributions from members........................................................... 3
---------
Balance, December 31, 1995........................................................... (162)
Net income........................................................................... 149
Distributions to members............................................................. (14)
---------
Balance, September 30, 1996.......................................................... $ (27)
---------
---------
</TABLE>
F-97
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996, THE YEAR ENDED DECEMBER 31, 1995
AND THE PERIOD FROM INCEPTION (MAY 17, 1994) THROUGH DECEMBER 31, 1994)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MAY 17,
1994) NINE MONTHS ENDED
THROUGH YEAR ENDED SEPTEMBER 30,
DECEMBER DECEMBER 31, ----------------------
31, 1994 1995 1995 1996
----------- ------------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................... $ (137) $ 1 $ 152 $ 149
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization................. 104 247 184 186
Changes in current assets and liabilities:
Accounts receivable......................... (12) 2 (8) (20)
Inventory................................... (23) (20) (11) 5
Other assets................................ (1) (2) 1
Deposits.................................... (1) (1)
Accounts payable and accrued expenses....... 44 (8) 48 14
----------- ------ ----------- ---------
Net cash provided by (used in) operating
activities............................... (26) 220 365 334
----------- ------ ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of golf course...................... (3,416)
Capital expenditures............................ (731) (33) (33) (29)
Notes receivable issued by related parties...... (183)
Payments received from related parties.......... 28 30
----------- ------ ----------- ---------
Net cash used in investing activities......... (4,330) (5) (3) (29)
----------- ------ ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common units.......... 1
Distributions to members........................ (25) (5)
Principal reductions of debt.................... (13) (109)
Net change in revolving credit balances......... 30 (30)
Proceeds from bankborrowings.................... 4,000
Proceeds from related party borrowings.......... 433
Payments made to related parties................ (182) (209) (162)
Payment of loan financing costs................. (52)
----------- ------ ----------- ---------
Net cash provided by (used in) financing
activities................................. 4,382 (190) (214) (301)
----------- ------ ----------- ---------
Increase (decrease) in cash and cash
equivalents................................ 26 25 148 4
Cash and equivalents, beginning of period......... 26 26 51
----------- ------ ----------- ---------
Cash and equivalents, end of period............... $ 26 $ 51 $ 174 $ 55
----------- ------ ----------- ---------
----------- ------ ----------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.......... $ 118 $ 437 $ 290 $ 274
----------- ------ ----------- ---------
----------- ------ ----------- ---------
</TABLE>
F-98
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
1. FORMATION AND PRESENTATION
Bright's Creek Development, LLC (the Company) is a limited liability
corporation which owns and operates The Woodlands Golf Course in Gulf Shores,
Alabama. Under the operating agreement of the limited liability corporation, the
members may be held liable only to the extent of each member's respective
investment in the Company. The Company was formed on May 17, 1994 and,
subsequently, purchased The Woodlands Golf Course for a purchase price of
$3,416. After completion of the golf course, operations began in August 1994.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORY -- Inventory is valued at the lower of cost (specific
identification method) or market.
LAND, BUILDINGS, AND EQUIPMENT -- Land, buildings, and equipment is stated
at the lower of cost, less accumulated depreciation, or net realizable value.
Maintenance and repairs are charged to expense as incurred. Replacements and
improvements are capitalized and depreciated over the estimated remaining useful
lives of the assets. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets.
LOAN COSTS -- Amortization of loan costs is recorded using the straight-line
method, which approximates the effective interest method, over the life of the
related note.
REVENUE RECOGNITION -- Golf course related income is recognized as services
are provided.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses. Actual results could differ from those
estimates.
INCOME TAXES -- Federal and state income taxes are not incurred by the
Company. Members are taxed individually on their share of earnings. Accordingly,
no provision for federal or state income taxes has been provided in these
financial statements.
CASH AND EQUIVALENTS -- The Company considers all highly liquid marketable
securities and debt instruments purchased with a maturity of three months or
less in cash equivalents.
RECENTLY ISSUED ACCOUNTING STANDARDS -- Statement of Financial Accounting
Standards No. 121 (SFAS 121), ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS, establishes guidance beginning in 1996 for recognizing and measuring
impairment losses which require that the carrying amounts of impaired assets be
reduced to fair value. Management does not believe that the adoption of SFAS 121
will have a material effect on the financial statements of the Company.
PRO SHOP COSTS AND EXPENSES -- Included in pro shop costs and expenses are
certain costs which are incurred for the benefit of the entire golf course and
not solely for the benefit of the pro shop. These expenses include, but are not
limited to, golf professionals' salaries and wages and certain overhead costs.
F-99
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
3. NOTES PAYABLE
Notes payable at September 30, 1996 and December 31, 1994 and 1995 were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Note payable to Colonial Bank, dated December 1, 1995;
payable in monthly installments beginning December 31,
1995 of $41, including interest at .5% over the Colonial
Bank base rate (9.25% at December 31, 1995); final payment
due at maturity on November 30, 2000; collateralized by
real estate, guaranteed by Robert S. Craft and Craft Turf
Farms..................................................... $ $ 3,987 $ 3,878
Note payable to Colonial Bank, dated May 17, 1994 in the
amounts of $3,000 and $1,000 payable in monthly
installments of interest only beginning June 16, 1994;
interest accrues at 1% over the Colonial Bank base rate;
final payment of principal balance due at maturity on
November 16, 1995; collateralized by real estate,
guaranteed by Robert S. Craft and Craft Turf Farms........ 4,000 -- --
Note payable to Craft Development Corporation (related
party). This note is dated May 17, 1994; payable on
demand; bears interest at 7.16% annually; unsecured....... 433 251 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 August 14, 1996; unsecured............ -- 30 --
------ ------ ------
$ 4,433 $ 4,268 $ 3,967
------ ------ ------
------ ------ ------
</TABLE>
The aggregate maturities of notes payable at December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996........................................................................ $ 413
1997........................................................................ 147
1998........................................................................ 162
1999........................................................................ 177
2000........................................................................ 3,369
---------
$ 4,268
---------
---------
</TABLE>
4. LEASES
The Company rents certain machinery, equipment, and buildings under
operating leases in the normal course of business.
F-100
<PAGE>
BRIGHT'S CREEK DEVELOPMENT, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
4. LEASES (CONTINUED)
Total rent expense for the year ended December 31, 1995 amounted to
approximately $102. Minimum commitments under noncancelable operating leases as
of December 31, 1995 are payable as follows:
<TABLE>
<S> <C>
1996......................................................................... $ 101
1997......................................................................... 65
---
$ 166
---
---
</TABLE>
5. RELATED PARTY TRANSACTIONS
The Company has a note receivable, which bears interest at 7.63% and is due
on demand, from Pinehurst Development Partnership in the amounts of $58, $58 and
$86 at September 30, 1996, December 31, 1995, and December 31, 1994,
respectively. The Company also has a note receivable, which bears interest at
7.63% and is due on demand, from Craft Land Company in the amount of $97 at
September 30, 1996, December 31, 1995, and December 31, 1994. Both Pinehurst
Development Partnership and Craft Land Company are related parties.
The Company has a note payable to Craft Development Corporation which is due
on demand (SEE NOTE 3).
Robert S. Craft serves as a member on the board of directors of Colonial
BancGroup, the Company's primary lender.
6. EMPLOYEE BENEFIT PLAN
The Company has a profit sharing plan for all employees who have worked
1,000 hours and have been employed at least two years. Funding is discretionary
by the members of the Company.
7. LITIGATION
The Company is engaged in various legal actions in the ordinary course of
business. Management does not believe the ultimate outcome of these actions will
have a material adverse affect on the financial position, results of operations,
or cash flows of the Company.
F-101
<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 September 30, 1996 and December 31, 1995 and 1994, and
the related statements of income, changes in partners' capital and cash flows
for the nine-month period ended September 30, 1996 and the years ended December
31, 1995 and 1994. 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 September 30, 1996 and December 31, 1995 and 1994, and the
results of its operations and its cash flows for each of the periods then ended
in conformity with generally accepted accounting principles.
CROWE, CHIZEK AND COMPANY LLP
Oak Brook, Illinois
November 13, 1996
F-102
<PAGE>
OLDE ATLANTA GOLF CLUB LIMITED PARTNERSHIP
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash......................................................................... $ 135 $ 66 $ 99
Accounts receivable.......................................................... 56 43 83
Inventories.................................................................. 57 64 81
Other current assets......................................................... 18 20 45
--------- --------- ------
Total current assets....................................................... 266 193 308
Property and equipment
Land......................................................................... 2,229 2,229 2,229
Land improvements............................................................ 1,159 1,167 1,167
Buildings and equipment...................................................... 1,671 1,696 1,715
--------- --------- ------
5,059 5,092 5,111
Accumulated depreciation..................................................... 366 625 793
--------- --------- ------
Total property and equipment............................................... 4,693 4,467 4,318
Intangible assets.............................................................. 369 293 219
--------- --------- ------
$ 5,328 $ 4,953 $ 4,845
--------- --------- ------
--------- --------- ------
LIABILITIES AND CAPITAL
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 2)................................ $ 42 $ 65 $ 69
Accounts payable............................................................. 7 7 54
Deferred revenue............................................................. 210 232 219
Accrued property taxes....................................................... 42 53 40
Other current liabilities.................................................... 79 39 25
--------- --------- ------
Total current liabilities.................................................. 380 396 407
Long-term debt (Note 2)........................................................ 1,766 2,591 2,541
Capital
General partners............................................................. 32 20 19
Limited partners............................................................. 3,150 1,946 1,878
--------- --------- ------
Total capital.............................................................. 3,182 1,966 1,897
--------- --------- ------
$ 5,328 $ 4,953 $ 4,845
--------- --------- ------
--------- --------- ------
</TABLE>
See accompanying notes to financial statements.
F-103
<PAGE>
OLDE ATLANTA GOLF CLUB LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE-MONTH PERIOD
DECEMBER 31, ENDED SEPTEMBER 30,
-------------------- ----------------------
1994 1995 1995 1996
--------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
SALES
Green fees, cart fees, driving range fees, membership
dues and initiation fees amortization.................. $ 1,413 $ 1,546 $ 1,272 $ 1,375
Golf shop sales......................................... 186 200 144 160
Restaurant sales........................................ 246 261 202 234
Other sales............................................. 10 5 5 8
--------- --------- ----------- ---------
Total sales........................................... 1,855 2,012 1,623 1,777
--------- --------- ----------- ---------
COSTS AND EXPENSES
Cost of sales -- golf shop................................ 166 158 121 129
Cost of sales -- restaurant............................... 70 94 60 83
Operating expenses........................................ 1,605 1,557 1,138 1,313
--------- --------- ----------- ---------
1,841 1,809 1,319 1,525
--------- --------- ----------- ---------
Income from operations.................................... 14 203 304 252
Interest expense.......................................... 143 202 145 167
--------- --------- ----------- ---------
Net income (loss)......................................... $ (129) $ 1 $ 159 $ 85
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
See accompanying notes to the financial statements.
F-104
<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 84 85
--- --------- ---------
Partners' capital at September 30, 1996............................................. $ 19 $ 1,878 $ 1,897
--- --------- ---------
--- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-105
<PAGE>
OLDE ATLANTA GOLF CLUB LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
YEAR ENDED
DECEMBER 31, ENDED SEPTEMBER 30,
-------------------- ----------------------
1994 1995 1995 1996
--------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ (129) $ 1 $ 159 $ 85
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.......................................... 352 277 210 169
Amortization.......................................... 91 98 74 74
Initiation fees amortization.......................... (23) (30) (21) (22)
Change in assets and liabilities:
Accounts receivable................................. (49) 13 (3) (40)
Inventory........................................... (30) (7) (19) (19)
Other current assets................................ (11) (2) (7) (25)
Accounts payable.................................... (79) -- 10 48
Other current liabilities........................... 198 25 (2) (18)
--------- --------- ----------- ---------
Net cash provided by operating activities............... 320 375 401 252
--------- --------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...................... (196) (69) (64) (19)
Proceeds from sale of equipment......................... -- 16 -- --
--------- --------- ----------- ---------
Net cash used in investing activities................... (196) (53) (64) (19)
--------- --------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of limited partnership interest................ -- (21) (21) --
Payments of financing fees.............................. (41) (22) (22) --
Proceeds from long-term debt............................ 1,835 900 900 --
Payments on long-term debt.............................. (1,702) (52) (37) (46)
Partner distributions................................... (164) (1,196) (1,138) (154)
--------- --------- ----------- ---------
Net cash used in financing activities................... (72) (391) (318) (200)
--------- --------- ----------- ---------
Net increase (decrease) in cash........................... 52 (69) 19 33
Cash at beginning of period............................... 83 135 135 66
--------- --------- ----------- ---------
Cash at end of period..................................... $ 135 $ 66 $ 154 $ 99
--------- --------- ----------- ---------
--------- --------- ----------- ---------
Supplemental disclosure of cash flow information
Cash paid during the period for interest................ $ 143 $ 202 $ 145 $ 167
</TABLE>
See accompanying notes to financial statements.
F-106
<PAGE>
OLDE ATLANTA GOLF CLUB LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994 AND SEPTEMBER 30, 1996
(IN THOUSANDS)
1. NATURE OF BUSINESS AND OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS
Olde Atlanta Golf Club Limited Partnership (the Partnership) owns and
operates a golf course, Olde Atlanta Country Club, in Atlanta, Georgia. The
Partnership was organized as a limited partnership on August 21, 1992 under the
laws of the State of Illinois.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
Management must make estimates and assumptions in preparing financial
statements that affect the amounts reported therein and the disclosures
provided. These estimates and assumptions may change in the future and future
results could differ.
INVENTORY
Inventory is stated at the lower of cost or market, cost determined on the
first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Improvements and betterments
are capitalized; maintenance and repairs are charged to operations as incurred.
Depreciation is provided for financial reporting and income tax purposes using
both accelerated and straight-line methods over lives from 5 to 31 years.
INTANGIBLE ASSETS
Intangible assets consist of financing fees, start-up costs, and
organization costs. Financing fees are being amortized on the straight-line
method over the period of the underlying loans. Start-up and organization costs
are being amortized on the straight-line method over 60 months. Accumulated
amortization at December 31, 1994 and 1995 and September 30, 1996 was $98, $195
and $270, 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 nine months ended September 30,
1995 are unaudited, however, in the opinion of management, the interim financial
statments 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.
F-107
<PAGE>
OLDE ATLANTA GOLF CLUB LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
2. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1994 and 1995 and
September 30, 1996:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<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.............................................................. $ 1,808 $ 1,767 $ 1,735
Loan with Peoples Bank of Forsyth County, dated April 15, 1995, due in
monthly payments of $8 including interest, with a balloon payment due
April 15, 1999; interest at 9.25%, secured by the golf course, including
all improvements. An unused line of credit for $100 to acquire equipment
is available.............................................................. -- 889 875
--------- --------- ---------
1,808 2,656 2,610
Current maturities of long-term debt....................................... 42 65 69
--------- --------- ---------
Total long-term debt....................................................... $ 1,766 $ 2,591 $ 2,541
--------- --------- ---------
--------- --------- ---------
</TABLE>
Maturities of long-term debt as of September 30, 1996 are as follows:
<TABLE>
<S> <C>
1997........................................................................ $ 69
1998........................................................................ 75
1999........................................................................ 2,466
</TABLE>
Based on the borrowing rates currently available to the Partnership for
loans with similar terms and maturities, the fair value of long-term debt
approximates the carrying amount.
3. COMMITMENTS
The Partnership leases golf carts under an operating lease which expires in
November 1997. Minimum future rentals under this lease as of September 30, 1996
are as follows:
<TABLE>
<S> <C>
1997........................................................................ $ 46
1998........................................................................ 8
---------
$ 54
---------
---------
</TABLE>
Total rent expense for the nine months ended September 30, 1996 and for the
years ended December 31, 1995 and 1994 was $47, $55 and $51, respectively.
The Partnership terminated its agreement with HMS Golf Management, Inc. to
manage the golf club effective November 30, 1994. The termination agreement
included a termination fee of $102 to be paid by the Partnership. Total expense
plus the termination fee incurred in 1994 amounted to $161.
The Partnership pays a management fee to the general partner for
administrative and management services. The management fee is based on gross
revenues and amounted to $92, $78 and $54 for the nine months ended September
30, 1996 and the years ended December 31, 1995 and 1994, respectively.
4. SUBSEQUENT EVENT
Subsequent to September 30, 1996, the Partnership began negotiating
agreements to transfer the golf course and related improvements and equipment to
Golf Trust of America.
F-108
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, payable by the
Company in connection with the sale of Common Stock being registered. All
amounts are estimates except the SEC registration fee, the NASD filing fee and
the American Stock Exchange listing fees.
<TABLE>
<CAPTION>
AMOUNT TO BE
PAID
------------
<S> <C>
SEC Registration fee............................................................ $ 20,967
NASD filing fee................................................................. 7,419
American Stock Exchange listing fees............................................ 22,500
Printing and engraving.......................................................... 279,550
Legal fees and expenses of the Company..........................................
Accounting fees and expenses.................................................... 500,000
Transfer Agent and Registrar fees............................................... 2,500
Miscellaneous...................................................................
------------
Total.......................................................................
------------
------------
</TABLE>
ITEM 31. SALES TO SPECIAL PARTIES.
See Item 32 below.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
On November 11, 1996, 1 share of Common Stock was issued by the Company to
C.A. Hooks, Jr. This issuance of Common Stock was effected in reliance upon an
exemption from registration under Section 4(2) of the Securities Act as a
transaction not involving a public offering. On November 11, 1996 (i) 12,500 OP
Units were issued by the Operating Partnership to W. Bradley Blair, II, (ii)
12,500 OP Units were issued to David J. Dick and (iii) 3,750 OP Units were
issued to James Hoppenrath. These issuances were effected in reliance upon an
exemption from registration under Section 4(2) of the Securities Act as a
transaction not involving a public offering.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 2-418 of the Maryland General Corporation Law (the "MGCL") empowers
the Company to indemnify, subject to the standards set forth therein, any person
who is a party in any action in connection with any action, suit or proceeding
brought or threatened by reason of the fact that the person was a director,
officer, employee or agent of such company, or is or was serving as such with
respect to another entity at the request of such company. The MGCL also provides
that the Company may purchase insurance on behalf of any such director, officer,
employee or agent.
The Company's Charter provides for indemnification of the officers and
directors of the Company substantially identical in scope to that permitted
under Section 2-418 of the MGCL. The Bylaws of the Company also provide that the
expenses of officers and directors incurred in defending any action, suit or
proceeding, whether civil, criminal, administrative or investigative, must be
paid by the Company as they are incurred and in advance of the final disposition
of the action, suit or proceeding, upon receipt of an undertaking by or on
behalf of the director or officer to repay all amounts so advanced if it is
ultimately determined by a court of competent jurisdiction that the officer or
director is not entitled to be indemnified by the Company.
Prior to the completion of the Offering, the Company anticipates entering
into indemnification agreements with certain of its directors and officers that
require the Company to indemnify such directors and officers to the 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.
II-1
<PAGE>
Pursuant to the Underwriting Agreement, the Registrant has agreed to
indemnify the Underwriters against certain liabilities which may be incurred in
connection with the Offering made by this Prospectus forming a part of this
Registration Statement, including liabilities under the Securities Act, and the
Underwriters have agreed to indemnify the Company and its officers and directors
against certain similar liabilities.
The Company's Charter limits the liability of the Company's directors and
officers for money damages to the Company and its shareholders to the fullest
extent permitted from time to time by Maryland law. Maryland law presently
permits the liability of directors and officers to a corporation or its
shareholders for money damages to be limited, except (i) to the extent that it
is proved that the director or officer actually received an improper benefit or
profit or (ii) if a judgment or other final adjudication is entered in a
proceeding based on a finding that the director's or officer's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. This provision
does not limit the ability of the Company or its shareholders to obtain other
relief, such as an injunction or rescission.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements.
Index included at page F-1 to F-4
(b) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO.
- ---------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1* Charter of the Company, as filed with the State Department of
Assessments and Taxation of Maryland on November 8, 1996.
3.1A Articles of Amendment and Restatement of the Company, as filed with
the State Department of Assessments and Taxation of Maryland on or
around January 30, 1997.
3.2* Bylaws of the Company, as currently in effect.
5.1* Opinion of Ballard Spahr Andrews & Ingersoll as to legality of the
shares being registered.
8.1 Opinion of O'Melveny & Myers LLP as to tax matters.
10.1* Form of First Amended and Restated Agreement of Limited Partnership
of the Operating Partnership.
10.2* Form of Participating Lease.
10.3 Form of Right of Option to Purchase and Right of First Refusal
Agreement.
10.4* Form of Contribution and Leaseback Agreement.
10.6* Form of Golf Trust of America, Inc. Stock Incentive Plan.
10.7* Form of Golf Trust of America, Inc. Non-Employee Directors'
Incentive Plan.
10.8* Form of Employment Agreement between the Company and W. Bradley
Blair, II.
10.9* Form of Employment Agreement between the Company and David J. Dick.
10.10* Form of Employment Agreement between the Company and Scott D.
Peters.
22.1* List of subsidiaries of the Company.
23.1* Consents of Price Waterhouse LLP, Coopers & Lybrand L.L.P., BDO
Seidman, LLP and Crowe, Chizek and Company LLP.
23.2* Consent of Ballard Spahr Andrews & Ingersoll (included within the
opinion filed as Exhibit 5.1).
23.3 Consent of O'Melveny & Myers LLP (included within the opinion filed
as Exhibit 8.1).
24.1* Powers of Attorney.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
- ---------
<C> <S>
99.1* Consent of Fred W. Reams, proposed director.
99.2* Consent of Roy C. Chapman, proposed director.
99.3* Consent of Edward L. Wax, proposed director.
99.4* Consent of Raymond V. Jones, proposed director.
</TABLE>
- ------------
* Previously filed.
** To be filed by amendment.
ITEM 36. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 33 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933, as amended, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus as
filed as part of the registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to Rule
424(b(1) or (4) or 497(h) under the Securities Act of 1933, as amended,
shall be deemed to be part of the registration statement as of the time it
was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each posteffective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement on Form S-11 to
be signed on its behalf by the undersigned, thereunto duly authorized, in Myrtle
Beach, State of South Carolina, on January 28, 1997.
GOLF TRUST OF AMERICA, INC.
By: /s/ W. BRADLEY BLAIR, II
-----------------------------------
W. Bradley Blair, II
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-11 has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------------- ----------------------------------------- ------------------
<C> <S> <C>
/s/ W. BRADLEY BLAIR, II
---------------------------------------- Chairman of the Board of Directors/ Chief January 28, 1997
W. Bradley Blair, II Executive Officer/President
/s/ DAVID J. DICK
---------------------------------------- Executive Vice President/Director January 28, 1997
David J. Dick
/s/ *
---------------------------------------- Senior Vice President/Chief Financial January 28, 1997
Scott D. Peters Officer
/s/ *
---------------------------------------- Director January 28, 1997
Larry D. Young
*Power of Attorney By:
/s/ W. BRADLEY BLAIR, II
----------------------------------------
W. Bradley Blair, II
CHAIRMAN OF THE BOARD/
CHIEF EXECUTIVE OFFICER
</TABLE>
II-4
<PAGE>
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
GOLF TRUST OF AMERICA, INC.
Golf Trust of America, Inc., a Maryland corporation, having a
principal office in Baltimore, Maryland (the "Corporation"), hereby certifies
to the State Department of Assessments and Taxation of Maryland that:
FIRST: The Charter of the Corporation is hereby amended and
restated as follows:
ARTICLE I
The undersigned, David J. Dick, whose post office address is c/o
Inland Group, Inc., South Tower, Suite 606, 3501 Jamboree Road, Newport
Beach, California 92660, being at least 18 years of age and the sole
incorporator of Golf Trust of America, Inc., does, pursuant to the Maryland
General Corporation Law, form Golf Trust of America, Inc. under the general
laws of the State of Maryland.
ARTICLE II
NAME
The name of the corporation (which is hereinafter called the
"Corporation") is:
Golf Trust of America, Inc.
ARTICLE III
PURPOSES
The purpose for which the Corporation is formed is to engage in any
lawful act or activity for which corporations may be organized under the
General Laws of the State of Maryland now or hereafter in force. Subject to,
and not in limitation of the authority of the preceding sentence, upon
completion of its Initial Public Offering, the Corporation shall engage in
business as a real estate investment trust (a "REIT") qualifying as such
under Sections 856 through 860 of the Code, as defined below, unless and
until the Board of Directors shall have determined that it is no longer in
the best interests of the Corporation to engage in such business, and shall
have taken the action contemplated in such event by Section 3(b) of Article
IX hereof.
The foregoing enumerated purposes and objects shall be in no way
limited or restricted by reference to, or inference from, the terms of the
any other clause of this or any other Article of the Articles of Amendment
and Restatement of the Corporation, and each shall be regarded as
independent; and they are intended to be and shall be construed as powers as
well as purposes and objects of the Corporation and shall be in addition to
and not in limitation of the general powers of corporations under the General
Laws of the State of Maryland.
<PAGE>
ARTICLE IV
PRINCIPAL OFFICE IN MARYLAND
AND RESIDENT AGENT
The post office address of the principal office of the Corporation
in the State of Maryland is PARASEC c/o Federal Research Corporation, 928
North Charles Street, Unit B2, Baltimore, Maryland 21201. The name of the
resident agent of the Corporation in the State of Maryland is Federal
Research Corporation, 928 North Charles Street, Unit B2, Baltimore, Maryland
21201. Said resident agent is a resident of the State of Maryland.
ARTICLE V
SHARES OF CAPITAL STOCK
SECTION 1. AUTHORIZED SHARES OF CAPITAL STOCK.
(a) AUTHORIZED SHARES. The total number of shares of capital stock
of all classes that the Corporation has authority to issue is one hundred
million (100,000,000) shares of capital stock (par value one cent ($.01) per
share), consisting of: (i) ninety million (90,000,000) shares of Common
Stock, par value one cent ($.01) per share (the "Common Shares"); and (ii)
ten million (10,000,000) shares of Preferred Stock, par value one cent ($.01)
per share (the "Preferred Shares") which may be issued in one or more classes
as described in Section 5 of Article V. The Common Shares and each class of
the Preferred Shares shall each constitute a separate class of capital stock
of the Corporation.
The Board of Directors may classify and reclassify any unissued
shares of capital stock in accordance with Section 6 of Article V hereof.
(b) TERMINOLOGY AND AGGREGATE PAR VALUE. The Common Shares and
Preferred Shares are collectively referred to herein as the "Equity Shares."
The aggregate par value of all the Corporation's authorized Equity Shares
having par value is $1,000,000.
SECTION 2. REIT-RELATED RESTRICTIONS AND LIMITATIONS ON THE EQUITY
SHARES OF THE CORPORATION.
Subsequent to the date of the Initial Public Offering, as defined
below, and until the "Restriction Termination Date," as defined below, all
Equity Shares of the Corporation shall be subject to the following
restrictions and limitations intended to preserve the Corporation's status as
a REIT:
(a) DEFINITIONS. The following terms shall have the following
meanings:
"Acquire" shall mean the acquisition of Beneficial or Constructive
Ownership of Equity Shares, whether by a Transfer, Non-Transfer Event of by
any other means, including, without limitation, acquisition pursuant to the
exercise of the Acquisition Rights or any other option, warrant, pledge or
other security interest or similar right to acquire shares, but shall not
include the acquisition of any such rights unless, as a result, the acquiror
would be considered a Beneficial Owner, as defined below.
"Acquisition Rights" shall mean rights to Acquire Equity Shares
pursuant to: (i) the exercise of any option issued by the Corporation and
outstanding at the opening of business on the first business day following
the closing of the Initial Public Offering (whether exercisable on that day
or not); (ii) any right to exchange Units held on the first business day
following the closing of the Initial Public Offering or any right to exchange
Units that may be Acquired pursuant to an agreement described in the
following clause; (iii) any pledge of Equity Shares or Units made pursuant to
an agreement executed on or before the opening of business
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<PAGE>
on the first business day following the closing of the Initial Public
Offering (or the exchange of Units subject to such an agreement).
"Beneficial Ownership" shall mean ownership of Equity Shares by a
Person who would be treated as an owner of Equity Shares either directly or
indirectly under Section 542(a)(2) of the Code, taking into account, for this
purpose, constructive ownership determined under Section 514 of the Code, as
modified by Section 856(h)(1)(B) of the Code (except where expressly provided
otherwise). The terms "Beneficial Owner," "Beneficially Owns" and
"Beneficially Owned" shall have the correlative meanings.
"Beneficiary" shall mean, with respect to any Share Trust, one or
more organizations described in each of Section 170(b)(1)(A) (other than
clauses (vii) or (viii) thereof) and Section 170(c)(2) of the Code that are
named by the Share Trustee as the beneficiary or beneficiaries of such Share
Trust, in accordance with the provisions of Section 4(a) of this Article V.
"Code" shall mean the Internal Revenue Code of 1986, as amended and
in effect from time to time, or any successor statute thereto, as interpreted
by the applicable regulations thereunder. Any reference herein to a specific
section or sections of the Code shall be deemed to include a reference to any
corresponding provision of future law.
"Constructive Ownership" shall mean ownership of Equity Shares by a
Person who would be treated as an owner of such Equity Shares either directly
or constructively through the application of Section 318 of the Code, as
modified by Section 856(d)(5) of the Code. The terms "Constructively Own,"
"Constructively Owned" and "Constructive Owner" shall have the correlative
meanings.
"Initial Public Offering" shall mean the closing of the first sale
of Common Shares by the Corporation in an underwritten public offering
pursuant to an effective registration statement for such Common Shares filed
under the Securities Act of 1933, as amended.
"Market Price" on any date shall mean the average of the Closing
Price for the five consecutive Trading Days ending on such date. The
"Closing Price" on any day shall mean the last reported sale price, regular
way, or, in case no such sale takes place on such day, the average of the
closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange, of
the class of Equity Shares of the Corporation, or, if not reported in the
consolidated transaction reporting system with respect to securities listed
on the principal national securities exchange on which such Equity Shares are
listed or admitted to trading or, if such Equity Shares are not then listed
or admitted to trading on any national securities exchange, the last quoted
price, or if not so quoted, the average of the high bid and low asked prices
in the over-the-counter market, as reported by the National Association of
Securities Dealers, Inc. Automated Quotation System or, if such system is no
longer in use, the principal other automated quotations system that may then
be in use or, if such Equity Shares are not quoted by any such market maker
making a market in such Equity Shares as selected in good faith by the Board
of Directors of the Corporation. "Trading Day" shall mean a day on which the
principal national securities exchange on which such Equity Shares are listed
or admitted to trading is open for the transaction of business or, if such
Equity Shares are not listed or admitted to trading on any national
securities exchange, shall mean any day other than a Saturday, a Sunday or a
day on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Non-Transfer Event" shall mean an event other than a purported
Transfer that would cause any Person to Beneficially Own or Constructively
Own Equity Shares in excess of the Ownership Limit (or would cause the
Corporation to fail to qualify as a REIT), including, without limitation, a
change in the capital structure of the Corporation.
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<PAGE>
"Ownership Limit" shall initially mean, (i) with respect to the
Common Shares, 9.8% of the lesser of (a) the total number, or (b) the value
of the total number, of outstanding Common Shares or (ii) with respect to the
Preferred Shares, 9.8% of the lesser of (a) the total number, or (b) the
value of the total number, of outstanding Preferred Shares (or such other
number or value of Preferred Shares as the Board of Directors may determine
in fixing the terms of the Preferred Shares).
"Partnership" shall mean Golf Trust of America, L.P., a Delaware
limited partnership formed pursuant to the Partnership Agreement and any
successor thereto.
"Partnership Agreement" shall mean the agreement of limited
partnership establishing the Partnership, as the same may be amended,
supplemented or restated from time to time.
"Permitted Transferee" shall mean any Person designated as a
Permitted Transferee in accordance with the provisions of Section 4(e) of
this Article V.
"Person" shall mean an individual, corporation, partnership, limited
liability company or partnership, estate, trust (including a trust qualified
under Section 401(a) or 501(c)(17) of the Code), a portion of a trust
permanently set aside for or to be used exclusively for the purposes
described in Section 642(c) of the Code, association, private foundation
within the meaning of Section 509(a) of the Code, joint stock company or
other entity and also includes a group as that term is used for purposes of
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended but does
not include (i) an underwriter who participates in the Initial Public
Offering or (ii) an underwriter who participates in any public offering of
the common Shares and/or Preferred Shares and/or securities convertible into
or exchangeable for Common Shares and/or Preferred Shares subsequent to the
Initial Public Offering (a "Secondary Offering") for a period of sixty (60)
days following the purchase by such underwriter of the Common Shares and/or
Preferred Shares and/or securities convertible into or exchangeable for
Common Shares and/or Preferred Shares in such Secondary Offering.
"Purported Beneficial Transferee" shall mean, with respect to any
purported Transfer that results in Shares-in-Trust as defined below in
Section 4 of this Article V, the purported beneficial transferee for whom the
Purported Record Transferee would have Acquired Equity Shares of the
Corporation if such Transfer had been valid under Section 2(b) of this
Article V.
"Purported Record Transferee" shall mean, with respect to any
purported Transfer which results in Shares-in-Trust, the Person who would
have been the record holder of the Equity Shares of the Corporation if such
Transfer had been valid under Section 2(b) of this Article V.
"REIT" shall mean a real estate investment trust under Section 856
et seq. of the Code.
"Restriction Termination Date" shall mean the first day after the
date of the Initial Public Offering on which the Corporation determines
pursuant to Section 3(b) of Article IX and Section 2(i) of this Article V
that it is no longer in the best interests of the Corporation to attempt to,
or continue to, qualify as a REIT.
"Share Trust" shall mean any separate trust created pursuant to
Section 4(a) of this Article V and administered in accordance with the terms
of Section 4 of this Article V, for the exclusive benefit of any Beneficiary.
"Shares-in-Trust" shall mean any Equity Shares designated
Shares-in-Trust pursuant to Section 4(a) of this Article V.
"Share Trustee" shall mean the trustee of the Share Trust, which is
selected by the Corporation but not affiliated with the Corporation, the
Partnership or the Beneficiary, and any successor trustee appointed by the
Corporation.
4
<PAGE>
"Transfer" (as a noun) shall mean any sale, transfer, gift,
assignment, devise or other disposition of Equity Shares or the right to vote
or receive dividends on Equity Shares (including without limitation (i) the
granting of any option or entering into any agreement for the sale, transfer
or other disposition of Equity Shares or the right to vote or receive
dividends on Equity Shares or (ii) the sale, transfer, assignment or other
disposition or grant of any Acquisition Rights or other securities or rights
convertible into or exchangeable for Equity Shares, or the right to vote or
receive dividends on Equity Shares), whether voluntary or involuntary,
whether of record or beneficially and whether by operation of law or
otherwise. "Transfer" (as a verb) shall have a correlative meaning.
"Units" shall mean Partnership Units as that term is defined in the
Partnership Agreement, as effective on the date of the Initial Public
Offering.
(b) OWNERSHIP LIMITATION AND TRANSFER RESTRICTIONS.
(i) Except as provided in Section 2(f) of this Article V, from
and after the date of the Initial Public Offering and prior to the
Restriction Termination Date: (w) no Person shall Beneficially Own or
Constructively Own Equity Shares in excess of the Ownership Limit; (x) no
Person shall Acquire Equity Shares, if, as a result of such action, the
Equity Shares would be beneficially owned by fewer than 100 Persons
(determined without reference to any rules of attribution under the Code);
(y) no Person shall Acquire Equity Shares or any interest therein if, as a
result of such acquisition, the Corporation would be "closely held" within
the meaning of Section 856(h) of the Code or would otherwise fail to qualify
as a REIT, as the case may be; and (z) no Person shall Acquire Equity Shares
or any interest therein if, as a result of such acquisition, the Corporation
would Constructively Own 10% or more of the ownership interests in a tenant
of the Corporation's or the Partnership's real property, within the meaning
of Section 856(d)(2)(B) of the Code, or would otherwise fail to qualify as a
REIT, as the case may be.
(ii) Any Transfer that would result in a violation of the
restrictions in Section (b)(i) above, shall be void AB INITIO as to the
purported Transfer of such number of Equity Shares that would cause the
violation of the applicable restriction in Section (b)(i), and the Purported
Record Transferee (and the Purported Beneficial Transferee, if different)
shall acquire no rights in such Equity Shares.
(c) AUTOMATIC TRANSFER TO SHARE TRUST.
(i) If, notwithstanding the other provisions contained in this
Article V, at any time from and after the date of the Initial Public Offering
and prior to the Restriction Termination Date, there is a purported Transfer
or Non-Transfer Event such that any Person would either Beneficially Own or
Constructively Own Equity Shares in excess of the Ownership Limit, then,
except as otherwise provided in Section 2(f) of this Article V, (x) the
Purported Record Transferee (and the Purported Beneficial Transferee, if
different) shall acquire no right or interest (or, in the case of a
Non-Transfer Event, the person holding record title to the Equity Shares
Beneficially Owned or Constructively Owned by such Beneficial Owner or
Constructive Owner, shall cease to own any right or interest) in such number
of Equity Shares which would cause such Purported Record Transferee (and
Purported Beneficial Transferee, if different) to Beneficially Own or
Constructively Own Equity Shares in excess of the Ownership Limit (rounded up
to the nearest whole share), (y) such number of Equity Shares in excess of
the Ownership Limit (rounded up to the nearest whole share) shall be
designated Shares-in-Trust and, in accordance with the provisions of Section
4(a) of this Article V, transferred automatically and by operation of law to
the Share Trust to be held in accordance with Section 4 of this Article V and
(z) such Purported Record Transferee (and the Purported Beneficial
Transferee, if different) shall submit such number of Equity Shares to the
Share Trust for registration in the name of the Share Trustee. Any Purported
Record Transferee (and Purported Beneficial Transferee, if different) shall
acquire no right or interest (or, in the case of a Non-Transfer Event, the
person holding title to the Shares Beneficially Owned or Constructively Owned
by such Beneficial Owner or Constructive Owner, shall cease to own any right
or interest) in such number of Shares which would cause such person to own
Shares in excess of the Ownership Limit. Such transfer to a Share Trust and
the designation of shares as Shares-in-Trust shall be effective as of
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<PAGE>
the close of business on the business day prior to the date of the Transfer
or Non-Transfer Event, as the case may be.
(ii) If, notwithstanding the other provisions contained in this
Article V, at any time from and after the date of the Initial Public Offering
and prior to the Restriction Termination Date, there is a purported Transfer
of Non-Transfer Event that, if effective, would (i) result in the Equity
Shares being beneficially owned by fewer than 100 persons (determined without
reference to any rules of attribution), (ii) result in the Corporation being
"closely held" within the meaning of Section 856(h) of the Code, (iii) cause
the Corporation or the Partnership to Constructively Own 10% or more of the
ownership interests in a tenant of the Corporation's real property, within
the meaning of Section 856(d)(2)(B) of the Code, or (iv) cause the
Corporation to otherwise fail to qualify as a REIT, as the case may be, then
(x) the Purported Record Transferee (and the Purported Beneficial Transferee,
if different) shall acquire no right or interest (or, in the case of a
Non-Transfer Event, the person holding record title to the Equity Shares with
respect to which such Non-Transfer Event occurred, shall cease to own any
right or interest) in such number of Equity Shares, the ownership of which by
such Purported Record Transfer (and Purported Beneficial Transferee, if
different) would (A) result in the Equity Shares being beneficially owned by
fewer than 100 Persons (determined without reference to any rules of
attribution), (B) result in the Corporation being "closely held" within the
meaning of Section 856(h) of the Code, (C) cause the Corporation or the
Partnership to Constructively Own 10% or more of the ownership interests in a
tenant of the Corporation's property, within the meaning of Section
856(d)(2)(B) of the Code, or (D) would otherwise cause the Corporation to
fail to qualify as a REIT, as the case may be, (y) such number of Equity
Shares (rounded up to the nearest whole share) shall be designated
Shares-in-Trust and , in accordance with the provisions of Section 4(a) of
this Article V, transferred automatically and by operation of law to the
Share Trust to be held in accordance with Section 4 of this Article V and (z)
the Purported Record Transferee (and the Purported Beneficial Transferee, if
different) shall submit such number of Equity Shares to the Share Trust for
registration in the name of the Share Trustee.
(d) REMEDIES FOR BREACH. If the Board of Directors or the
Corporation or its designee shall at any time determine in good faith that a
purported Transfer of Equity Shares has taken place in violation of Section
2(b) of this Article V or that a Person intends to acquire or has attempted
to acquire beneficial ownership (determined without reference to any rules of
attribution). Beneficial Ownership or Constructive Ownership of any Equity
Shares of the Corporation in violation of Section 2(b) of this Article V, the
Board of Directors or the Corporation or its designee shall take such action
as it deems advisable to refuse to give effect to or to prevent such Transfer
or acquisition, including, but not limited to, refusing to give effect to
such Transfer or acquisition on the books of the Corporation or instituting
proceedings to enjoin such Transfer or acquisition; PROVIDED, HOWEVER, that
any Transfer, attempted Transfer, acquisition or attempted acquisition in
violation of Section 2(b)(i) of this Article V shall automatically result in
the transfer described in Section 2(c) of this Article V, irrespective of any
action (or non-action) by the Board of Directors, except as provided in
Section 2(f) of this Article V.
(e) NOTICE OF RESTRICTED TRANSFER.
(i) Any Person who acquires or attempts to acquire Equity
Shares in violation of Section 2(b) of this Article V, and any Person who is
a Purported Record Transferee or a Purported Beneficial Transferee of Equity
Shares that are transferred to a Share Trust under Section 2(c) of this
Article V, shall immediately give written notice to the Corporation of such
event, shall submit to the Corporation such number of Equity Shares to be
transferred to the Share Trust and shall provide to the Corporation such
other information as the Corporation may request in order to determine the
effect, if any, of such Transfer or attempted Transfer or such Non-Transfer
Event on the Corporation's status as a REIT.
(ii) From and after the date of the Initial Public Offering and
prior to the Restriction Termination Date every Beneficial Owner or
Constructive Owner of more than 5% (or such other percentage, as provided in
the pertinent income tax regulations promulgated under the Code) of the
number or value of the outstanding Equity Shares of the Corporation shall,
within 30 days after January 1 of each year,
6
<PAGE>
give written notice to the Corporation stating the name and address of such
Beneficial Owner or Constructive Owner, the number of Equity Shares
Beneficially or Constructively Owned, and a description of how such shares
are held. Each such Beneficial Owner or Constructive Owner shall provide to
the Corporation such additional information that the Corporation may
reasonably request in order to determine the effect, if any, of such
Beneficial or Constructive Ownership on the Corporation's status as a REIT
and to ensure compliance with the Ownership Limit; and
(iii) From and after the date of the Initial Public
Offering and prior to the Restriction Termination Date, each Person who is a
Beneficial Owner or Constructive Owner of Equity Shares of the Corporation
and each Person (including the stockholder of record) who is holding Equity
Shares of the Corporation for a Beneficial Owner or Constrictive Owner shall
provide to the Corporation such information as the Corporation may reasonably
request in order to determine the Corporation's status as a REIT, to comply
with the requirements of any taxing authority or governmental agency or to
determine any such compliance and to ensure compliance with the Ownership
Limit.
(f) EXCEPTION. The Board of Directors may, upon receipt of either
a certified copy of a ruling from the Internal Revenue Service or an opinion
of counsel satisfactory to the Board of Directors, but shall in no case be
required to, exempt a Person (the "Exempted Holder") from the Ownership
Limit, if the ruling or opinion concludes that no Person who is an individual
as defined in Section 542(a)(2) of the Code will, as the result of the
ownership of Equity Shares by the Exempted Holder, be considered to have
Beneficial Ownership or Constructive Ownership of an amount of Equity Shares
that will violate the restrictions contained in Sections 2(b)(i)(x),
2(b)(i)(y) and 2(b)(i)(z) of this Article V; provided, that (i) the Board of
Directors obtains such representations and undertakings from such Person as
are reasonably necessary to ascertain that no individual's Beneficial
Ownership of Equity Shares will violate the Ownership Limit, and (ii) such
Person agrees that any violation or attempted violation will result in such
transfer to the Share Trust of Equity Shares pursuant to Section 2(c) of this
Article V.
(g) LEGEND. Each certificate for shares of Equity Shares shall
bear substantially the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO RESTRICTIONS ON OWNERSHIP AND TRANSFER FOR THE PURPOSE OF
THE CORPORATION'S MAINTENANCE OF ITS STATUS AS A REAL ESTATE
INVESTMENT TRUST UNDER THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED (THE 'CODE'). EXCEPT AS OTHERWISE PROVIDED PURSUANT
TO THE CHARTER OF THE CORPORATION, NO PERSON MAY
BENEFICIALLY OWN OR CONSTRUCTIVELY OWN (1) COMMON SHARES OF
THE CORPORATION IN EXCESS OF 9.8% OF THE LESSER OF THE TOTAL
NUMBER OR VALUE OF THE OUTSTANDING COMMON SHARES OF THE
CORPORATION, (2) PREFERRED SHARES OF THE CORPORATION IN
EXCESS OF 9.8% OF THE LESSER OF THE TOTAL NUMBER OF VALUE OF
THE OUTSTANDING PREFERRED SHARES OF THE CORPORATION, (3)
EQUITY SHARES THAT WOULD RESULT IN THE TRUST BEING "CLOSELY
HELD" UNDER SECTION 856(h) OF THE CODE, (4) EQUITY SHARES
THAT WOULD RESULT IN THE EQUITY SHARES BEING BENEFICIALLY
OWNED BY FEWER THAN 100 PERSONS (DETERMINED WITHOUT
REFERENCE TO ANY RULES OF ATTRIBUTION) OR (5) EQUITY SHARES
THAT WOULD CAUSE THE CORPORATION OR GOLF TRUST OF AMERICA,
L.P., A DELAWARE LIMITED PARTNERSHIP, TO CONSTRUCTIVELY OWN
10% OR MORE OF THE OWNERSHIP INTERESTS IN A TENANT OF THE
REAL PROPERTY OF THE
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CORPORATION OR GOLF TRUST OF AMERICA, L.P., WITHIN THE
MEANING OF SECTION 856(d)(2)(B) OF THE CODE, WITH FURTHER
RESTRICTIONS AND EXCEPTIONS SET FORTH IN THE CORPORATION'S
CHARTER. ANY PERSON WHO ATTEMPTS OR PROPOSES TO
BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES OF
EQUITY SHARES IN EXCESS OF THE ABOVE LIMITATIONS MUST
IMMEDIATELY NOTIFY THE CORPORATION IN WRITING. IF AN
ATTEMPT IS MADE TO VIOLATE OR THERE IS A VIOLATION OF THESE
RESTRICTIONS (I) ANY PURPORTED TRANSFER WILL BE VOID AB
INITIO AND WILL NOT BE RECOGNIZED BY THE CORPORATION, (II)
THE EQUITY SHARES IN VIOLATION OF THESE RESTRICTIONS,
WHETHER AS A RESULT OF A TRANSFER OR NON-TRANSFER EVENT,
WILL BE TRANSFERRED AUTOMATICALLY AND BY OPERATION OF LAW TO
A SHARE TRUST AND SHALL BE DESIGNATED SHARES-IN-TRUST. ALL
TERMS USED IN THIS LEGEND AND DEFINED IN THE CORPORATION'S
CHARTER HAVE THE MEANINGS DEFINED IN THE CORPORATION'S
CHARTER, AS THE SAME MAY BE AMENDED FROM TIME TO TIME, A
COPY OF WHICH, INCLUDING THE RESTRICTIONS ON OWNERSHIP AND
TRANSFER, WILL BE SENT WITHOUT CHARGE TO EACH STOCKHOLDER
WHO SO REQUESTS."
(h) REIT QUALIFICATION. From and after the date of the Initial
Public Offering, the Board of Directors shall use its reasonable best efforts
to cause the Corporation and its stockholders to qualify for United States
federal income tax treatment as a REIT in accordance with the provisions of
the Code applicable to a REIT and shall not take any action which could
adversely affect the ability of the Corporation to qualify as a REIT. In
furtherance of the foregoing, the Board of Directors shall use its reasonable
best efforts to take such actions as are necessary, and may take such actions
as in its sole judgment and discretion are desirable, to preserve the status
of the Corporation as a REIT; PROVIDED, HOWEVER that if it is determined that
it is no longer in the best interests of the Corporation to continue to have
the Corporation qualify as a REIT, the actions required by Article IX Section
3(b) may be taken to terminate the Corporation's REIT election.
(i) REMEDIES NOT LIMITED. Subject to Section 7 of this Article V,
nothing contained in this Article shall limit the authority of the Board of
Directors to take such other action as it deems necessary or advisable to
protect the Corporation and the interests of its stockholders in preserving
the Corporation's status as a REIT.
(j) AMBIGUITY. In the case of an ambiguity in the application of
any of the provisions of this Article V, including any definition contained
in Section 2(a), the Board of Directors shall have the power to determine the
application of the provisions of this Article V with respect to any situation
based on the facts known to it.
(k) SEVERABILITY. If any provision of this Article V or any
application of any such provision is determined to be invalid by a federal or
state court having jurisdiction over the issue, the validity of the remaining
provisions shall not be affected and other applications of such provision
shall be affected only to the extent necessary to comply with the
determination of such court.
SECTION 3. COMMON SHARES.
Subject to the provisions of Sections 2, 4 and 5 of this Article V,
the Common Shares shall have the following preferences, conversion and other
rights, voting powers, restrictions, limitations as to
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dividends, qualifications and terms and conditions of redemption and such
other rights as may be afforded by law.
(a) VOTING RIGHTS. Except as may otherwise be required by law,
each holder of Common Shares shall have one vote in respect of each Common
Share on all actions to be taken by the stockholders of the Corporation, and,
except as otherwise provided in respect of any class of stock, hereafter
classified or reclassified, the exclusive voting power for all purposes shall
be vested in the holders of the Common Shares.
(b) DIVIDEND RIGHTS. Subject to the provisions of law and any
preferences of any class of stock hereafter classified or reclassified,
dividends, including dividends payable in shares of another class of the
Corporation's stock, may be paid on the Common Shares of the Corporation at
such time and in such amounts as the Board of Directors may deem advisable
and the holders of the Common Shares shall share ratably in any such
dividends, in proportion to the number of Common Shares held by them
respectively, on a share for share basis.
(c) LIQUIDATION RIGHTS. In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary of
involuntary, the holders of the Common Shares shall be entitled, after
payment or provision for payment of the debts and other liabilities of the
Corporation and the amount to which the holders of any class of capital stock
hereafter classified or reclassified having a preference on distributions in
the liquidation, dissolution or winding up on the Corporation are entitled,
together with the holders of any other class of capital stock hereafter
classified or reclassified not having a preference on distributions in the
liquidation, dissolution or winding up of the Corporation, to share ratably
in the remaining net assets of the Corporation.
(d) STOCK EXCHANGE TRANSACTIONS. Notwithstanding any provisions
contained herein to the contrary, nothing in these Articles of Amendment and
Restatement shall preclude the settlement of any transaction entered into
through the facilities of the New York Stock Exchange or the American Stock
Exchange.
SECTION 4. SHARES-IN-TRUST.
(a) SHARE TRUST. Any Equity Shares transferred to a Share Trust
and designated Shares-in-Trust pursuant to Section 2(c) hereof shall be held
for the exclusive benefit of the Beneficiary. The Corporation shall name a
beneficiary and trustee of each Share Trust within five days after discovery
of the existence thereof. Any transfer to a Share Trust, and subsequent
designation of Equity Shares as Shares-in-Trust, pursuant to Section 2(c)
hereof shall be effective as of the close of business on the business day
prior to the date of the Transfer or Non-Transfer Event that results in the
transfer to the Share Trust. Shares-in-Trust shall remain issued and
outstanding Equity Shares of the Corporation and shall be entitled to the
same rights and privileges on identical terms and conditions as are all other
issued and outstanding Equity Shares of the same class and series. When
transferred to the Permitted Transferee in accordance with the provisions of
Section 4(c) hereof, such Shares-in-Trust shall cease to be designated as
Shares-in-Trust.
(b) DIVIDEND RIGHTS. The Trustee, as record holder of
Shares-in-Trust, shall be entitled to receive all dividends and distributions
as may be declared by the Board of Directors on such Equity Shares and shall
hold such dividends or distributions in trust for the benefit of the
Beneficiary. The Purported Record Transferee (or Purported Beneficial
Transferee, if applicable) with respect to Shares-in-Trust shall repay to the
Share Trustee the amount of any dividends or distributions received by it
that (i) are attributable to any Equity Shares designated as Shares-in-Trust
and (ii) the record date of which was on or after the date that such shares
became Shares-in-Trust. The Corporation shall take all measures that it
determines reasonably necessary to recover the amount of any such dividend or
distribution paid to the Purported Record Transferee (or Purported Beneficial
Transferee, if applicable), including, if necessary, withholding any portion
of future dividends or distributions payable on Equity Shares Beneficially
Owned or Constructively Owned by the Person who, but for
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the provisions of Section 2(c) hereof, would Constructively Own or
Beneficially Own the Shares-in-Trust; and, as soon as reasonably practicable
following the Corporation's receipt or withholding thereof, shall pay over to
the Share Trustee for the benefit of the Beneficiary the dividends so
received or withheld, as the case may be.
(c) RIGHTS UPON LIQUIDATION. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of, or any distribution of
the assets of (other than a dividend), the Corporation, each Trustee of
Shares-in-Trust shall be entitled to receive, ratably with each other holder
of Equity Shares of the same class or series, that portion of the assets of
the Corporation which is available for distribution to the holders of such
class and series of Equity Shares. The Trustee shall distribute to the
Purported Record Transferee the amounts received upon such liquidation,
dissolution, or winding up, or distribution, PROVIDED, HOWEVER, that the
Purported Record Transferee shall not be entitled to receive amounts pursuant
to this Section 4(c) in excess of, in the case of a purported Transfer in
which the Purported Record Transferee gave value for Equity Shares and which
Transfer resulted in the transfer of the shares to the Share Trust, the price
per share, if any, such Purported Record Transferee paid for the Equity
Shares and, in the case of a Non-Transfer Event or Transfer in which the
Purported Record Transferee did not give value for such shares (e.g., if the
shares were received through a gift or devise) and which Non-Transfer Event
or Transfer, as the case may be, resulted in the transfer of shares to the
Share Trust, the price per share equal to the Market Price on the date of
such Non-Transfer Event or Transfer. Any remaining amount in such Share
Trust shall be distributed to the Beneficiary.
(d) VOTING RIGHTS. The Share Trustee shall be entitled to vote all
Shares-in-Trust. Any vote by a Purported Record Transferee as a holder of
Equity Shares prior to the discovery by the Corporation that the Equity
Shares are Shares-in-Trust shall, subject to applicable law, be rescinded and
shall be void AB INITIO with respect to such Shares-in-Trust and the
Purported Record Transferee shall be deemed to have given, as of the close of
business on the business day prior to the date of the purported Transfer or
Non-Transfer Event that results in the transfer to the Share Trust of Equity
Shares under Section 2(c) hereof, an irrevocable proxy to the Share Trustee
to vote the Shares-in-Trust in the manner in which the Share Trustee, in its
sole and absolute discretion, desires.
(e) DESIGNATION OF PERMITTED TRANSFEREE. The Share Trustee shall
have the exclusive and absolute right to designate a Permitted Transferee of
any and all Shares-in-Trust. In an orderly fashion so as not to materially
adversely affect the Market Price of the Shares-in-Trust, the Share Trustee
shall designate any Person as Permitted Transferee, PROVIDED, HOWEVER, that
(i) the Permitted Transferee so designated purchases for valuable
consideration (whether in a public or private sale), at a price as set forth
in Section 4(g) hereof, the Shares-in-Trust and (ii) the Permitted Transferee
so designated may acquire such Shares-in-Trust without such acquisition
resulting in a transfer to a Share Trust and the redesignation of such Equity
Shares so acquired as Shares-in-Trust under Section 2(c) hereof. Upon the
designation by the Share Trustee of a Permitted Transferee in accordance with
the provisions of this Section 4(e), the Share Trustee of a Share Trust shall
(i) cause to be transferred to the Permitted Transferee that number of
Shares-in-Trust acquired by the Permitted Transferee, (ii) cause to be
recorded on the books of the Corporation that the Permitted Transferee is the
holder of record of such number of Equity Shares, (iii) cause the
Shares-in-Trust to be cancelled, and (iv) distribute to the Beneficiary any
and all amounts held with respect to the Shares-in-Trust after making that
payment to the Purported Record Transferee pursuant to Section 4(f) hereof.
(f) COMPENSATION TO RECORD HOLDER OF EQUITY SHARES THAT BECOME
SHARES-IN-TRUST. Any Purported Record Transferee shall be entitled
(following discovery of the Shares-in-Trust and subsequent designation of the
Permitted Transferee in accordance with Section 4(c) hereof) to receive from
the Share Trustee upon the sale or other disposition of such Shares-in-Trust
the lesser of (i) in the case of (a) a purported Transfer in which the
Purported Record Transferee (or Purported Beneficial Transferee, if
applicable) gave value for Equity Shares and which Transfer resulted in the
transfer of the shares to the Share Trust, the price per share, if any, such
Purported Record Transferee (or Purported Beneficial Transferee, if
applicable) paid for the Equity Shares, or (b) a Non-Transfer Event or
Transfer in which the Purported Record Transferee (or Purported Beneficial
Transferee, if applicable) did not give value for such shares (e.g., if the
shares were received through a gift or devise) and which Non-Transfer Event
or Transfer, as the case may be, resulted in
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the transfer of shares to the Share Trust, the price per share equal to the
Market Price on the date of such Non-Transfer Event or Transfer, and (ii) the
price per share received by the Share Trustee of the Share Trust from the
sale or other disposition of such Shares in Trust in accordance with Section
4(e) or (g) hereof. Any amounts received by the Share Trustee in respect of
such Shares-in-Trust and in excess of such amounts to be paid the Purported
Record Transferee pursuant to this Section 4(f) shall be distributed to the
Beneficiary in accordance with the provisions of Section 4(e) hereof. Each
Beneficiary and Purported Record Transferee (and Purported Beneficial
Transferee, if different) waives any and all claims that each may have
against the Share Trustee and the Share Trust arising out of the disposition
of the Shares-in-Trust, except for claims arising out of the gross negligence
or willful misconduct of, or any failure to make payments in accordance with
this Section 4 by, such Share Trustee or the Corporation.
(g) PURCHASE RIGHTS IN SHARES-IN-TRUST. Shares-in-Trust shall be
deemed to have been offered for sale to the Corporation, or its designee, at
a price per share equal to the lesser of (i) the price per share in the
transaction that created such Shares-in-Trust (or, in the case of devise,
gift or Non-Transfer Event, the Market Price at the time of such devise, gift
or Non-Transfer Event) and (ii) the Market Price on the date the Corporation,
or its designee, accepts such offer. The Corporation shall have the right to
accept such offer for a period of ninety days after the later of (i) the date
of the Non-Transfer Event or purported Transfer which resulted in such
Shares-in-Trust and (ii) the date the Corporation determines in good faith
that a Transfer or Non-Transfer Event resulting in Shares-in-Trust has
occurred, if the Corporation does not receive a notice of such Transfer or
Non-Transfer Event pursuant to Section 2(e) hereof.
SECTION 5. PREFERRED SHARES.
The Preferred Shares may be issued from time to time in one or more
classes. The Board of Directors is expressly authorized, in the resolution
or resolutions providing for the issuance of any wholly unissued class of
Preferred Shares, to fix, state and express the powers, rights, designations,
preferences, qualifications, limitations and restrictions thereof, including
without limitation: the rate of dividends upon which and the times at which
dividends on shares of such class shall be payable and the preference, if
any, which such dividends shall have relative to dividends on shares of any
other class or classes of stock of the Corporation; whether such dividends
shall be cumulative or noncumulative, and if cumulative, the date or dates
from which dividends on shares of such class shall be cumulative; the voting
rights, if any, to be provided for shares of such class; the rights, if any,
which the holders of shares of such class shall have in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Corporation; the rights, if any, which the holders of shares
of such class shall have to convert such shares into or exchange such shares
for shares of stock of the Corporation, and the terms and conditions,
including price and rate of exchange of such conversion or exchange; and the
redemption rights (including sinking fund provisions), if any, for shares of
such class; and such other powers, rights, designations, preferences,
qualifications, limitations and restrictions as the Board of Directors may
desire to so fix. The Board of Directors is also expressly authorized to fix
the number of shares constituting such class and to increase or decrease the
number of shares of any class prior to the issuance of shares of that class
and to increase or decrease the number of shares of any class subsequent to
the issuance of shares of that class, but not to decrease such number below
the number of shares of such class then outstanding. In case the number of
shares of any class shall be so decreased, the shares constituting such
decrease shall resume the status which they had prior to the adoption of the
resolution originally fixing the number of shares of such class.
SECTION 6. CLASSIFICATION AND RECLASSIFICATION OF CAPITAL STOCK.
(a) Subject to the foregoing provisions of Article V of the
Charter, the power of the Board of Directors to classify and reclassify any
of the unissued shares of capital stock shall include, without limitation,
subject to the provisions of the Charter, authority to classify or reclassify
any unissued shares of such stock into a class or classes of preferred stock,
preference stock, special stock or other stock, by determining, fixing, or
altering one or more of the following:
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(i) The distinctive designation of such class and the number
of shares to constitute such class, provided that, unless otherwise
prohibited by the terms of such or any other class, the number of shares of
any class may be decreased by the Board of Directors in connection with any
classification or reclassification of unissued shares and the number of
shares of such class may be increased by the Board of Directors in connection
with any such classification or reclassification, and any shares of any class
which have been redeemed, purchased, otherwise acquired or converted into
Common Shares or any other class shall become part of the authorized capital
stock and be subject to classification and reclassification as provided in
this Section.
(ii) Whether or not and, if so, the rates, amounts and times at
which, and the conditions under which, dividends shall be payable on shares
of such class, whether any such dividends shall rank senior or junior to or
on a parity with the dividends payable on any other class of stock, and the
status of any such dividends as cumulative, cumulative to a limited extent or
non-cumulative and as participating or non-participating.
(iii) Whether or not shares of such class shall have voting
rights, in addition to any voting rights provided by law and, if so, the
terms of such voting rights.
(iv) Whether or not shares of such class shall have conversion
or exchange privileges and, if so, the terms and conditions thereof,
including provision for adjustment of the conversion or exchange rate in such
events or at such times as the Board of Directors shall determine.
(v) Whether or not shares of such class shall be subject to
redemption and, if so, the terms and conditions of such redemption, including
the date or dates upon or after which they shall be redeemable and the amount
per share payable in case of redemption, which amount may vary under
different conditions and at different redemption dates; and whether or not
there shall be any sinking fund or purchase account in respect thereof, and
if so, the terms thereof.
(vi) The rights of the holders of shares of such class upon the
liquidation, dissolution or winding up of the affairs of, or upon any
distribution of the assets of, the Corporation, which rights may vary
depending upon whether such liquidation, dissolution or winding up is
voluntary or involuntary and, if voluntary, may vary at different dates, and
whether such rights shall rank senior or junior to or on a parity with such
rights of any other class of stock.
(vii) Whether or not there shall be any limitations
applicable, while shares of such class are outstanding, upon the payment of
dividends or making of distributions on, or the acquisition of, or the use of
moneys for purchase or redemption of, any stock of the Corporation, or upon
any other action of the Corporation, including action under this Section,
and, if so, the terms and conditions thereof.
(viii) Any other preferences, rights, restrictions,
including restrictions on transferability, and qualifications of shares of
such class, not inconsistent with law and the Charter of the Corporation.
(b) For the purposes hereof and of any articles supplementary to
the Charter providing for the classification or reclassification of any
shares of capital stock or of any other charter document of the Corporation
(unless otherwise provided in any such articles or document), any class of
stock of the Corporation shall be deemed to rank:
(i) prior to another class either as to dividends or upon
liquidation, if the holders of such class shall be entitled to the receipt of
dividends or of amounts distributable on liquidation, dissolution or winding
up, as the case may be, in preference or priority to holders of such other
class;
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(ii) on a parity with another class either as to dividends or
upon liquidation, whether or not the dividend rates, dividend payment dates
or redemption or liquidation price per share thereof be different from those
of such others, if the holders of such class of stock shall be entitled to
receipt of dividends or amounts distributable upon liquidation, dissolution
or winding up, as the case may be, in proportion to their respective dividend
rates or redemption or liquidation prices, without preference or priority
over the holders of such other class; and
(iii) junior to another class either as to dividends or
upon liquidation, if the rights of the holders of such class shall be subject
or subordinate to the rights of the holders of such other class in respect of
the receipt of dividends or the amounts distributable upon liquidation,
dissolution or winding up, as the case may be.
SECTION 7. SETTLEMENT.
Nothing in this Article V shall be interpreted to preclude the
settlement of any transaction entered into through the facilities of the New
York Stock Exchange, the American Stock Exchange, any other national
securities exchange or The Nasdaq National Market system, but the Equity
Shares which are the subject of such transaction shall continue to be subject
to the terms of this Article V subsequent to such settlement.
ARTICLE VI
THE BOARD OF DIRECTORS
SECTION 1. NUMBER AND QUALIFICATION OF DIRECTORS.
(a) AUTHORIZED NUMBER. The business and affairs of the Corporation
shall be managed by a Board of Directors which may exercise all of the powers
of the Corporation except those conferred on, or reserved to, the
stockholders hereunder, under the Bylaws or by law. The number of directors
of the Corporation initially shall be three (3) which number may be increased
or decreased pursuant to the Bylaws of the Corporation but in no event shall
be less than the minimum number required by the general laws of the State of
Maryland. A director need not be a shareholder of the Corporation.
(b) INITIAL DIRECTORS. The names of the directors who will serve
until the first annual meeting (or until such directors' class, determined in
accordance with Section 2 of this Article VI, expires) and until their
successors are elected and qualify are as follows:
DAVID J. DICK
W. BRADLEY BLAIR, II
LARRY D. YOUNG
SECTION 2. CLASSIFIED BOARD.
At all times subsequent to the closing of the Initial Public
Offering the directors (except for those elected solely by a class of Equity
Shares other than Common Shares) of the Corporation shall be divided into
three Classes, designated "Class I," "Class II" and "Class III,"
respectively. The number of directors in each Class shall be as nearly equal
in number as possible. Each director shall serve for a term ending on the
date of the third annual meeting of stockholders following the annual meeting
at which such director was elected; PROVIDED, HOWEVER, that the directors in
office at the time of the closing of the Initial Public Offering shall be
divided into classes by the Board of Directors and once classified, each such
director in Class I shall serve for a term ending on the date of the annual
meeting held in 2000; each such director in Class II shall serve for a term
ending on the date of the annual meeting held in 1999; and each such director
in Class III shall serve for a term ending on the date of the annual meeting
held in 1998.
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SECTION 3. REMOVAL OF DIRECTORS.
Any director may be removed with or without cause by the affirmative
vote of stockholders holding not less than 66-2/3% of all votes entitled to
be cast for the election of directors, subject to any rights granted to any
class of Preferred Shares.
SECTION 4. FILLING VACANCIES.
Except in the case of a vacancy on the Board of Directors among the
directors elected by a class of Equity Shares other than Common Shares, any
vacancy on the Board of Directors may be filled by the affirmative vote of
the remaining directors (except that a vacancy which results from an increase
in the number of directors may be filled by a majority of the entire Board of
Directors), and, in the case of a vacancy resulting from the removal of a
director, by the stockholders by the vote of a majority of the votes entitled
to be cast in the election of directors, subject to any rights granted to any
class of Preferred Shares.
SECTION 5. NO CUMULATIVE VOTING.
Stockholders shall not be entitled to cumulative voting rights with
respect to the election of directors.
SECTION 6. RESERVED POWERS OF THE BOARD OF DIRECTORS.
The enumeration and definition of particular powers of the Board of
Directors included in the foregoing provisions of Article VI or the
provisions of Article VII of the Charter shall in no way be limited or
restricted by reference to or inference from the terms of any other clause of
this or any other Article of the Charter of the Corporation, or construed as
or deemed by inference or otherwise in any manner to exclude or limit any
powers conferred upon the Board of Directors under the General Laws of the
State of Maryland now or hereafter in force.
SECTION 7. INDEPENDENT DIRECTORS.
At all times (except (i) during a period not to exceed sixty (60)
days following the death, resignation, incapacity or removal from office of a
Director prior to the expiration of the Director's term of office or (ii)
prior to the closing date of the Initial Public Offering (as hereinafter
defined) and the consummation of all transactions related thereto), a
majority of the Directors shall be Independent Directors.
An Independent Director shall be a person who is not: (i) an officer
or employee of the Corporation; or (ii) an Affiliate of (w) any advisor to
the Corporation under an advisory agreement; (x) any lessee or management
company operating any property of the Corporation; (y) any subsidiary of the
Corporation; (z) or any partnership which is an Affiliate of the Corporation.
For purposes of this Section 6 of Article VII of the Charter, an
"Affiliate" of a person or entity shall mean (i) any person that, directly or
indirectly, controls or is controlled by or is under common control with such
person, (ii) any other person that owns, beneficially, directly or
indirectly, five percent (5%) or more of the outstanding capital shares,
shares or equity interests of such person, or (iii) any officer, director,
employee, partner or trustee of such person or any person controlling,
controlled by or under common control with such person (excluding trustees
and persons serving in similar capacities who are not otherwise an Affiliate
of such person). The term "person" means and includes individuals,
corporations, general and limited partnerships, stock companies or
associations, joint ventures, associations companies, trusts, banks, trust
companies, last trusts, business trusts, or other entities and governments
and agencies and political subdivisions thereof. For the purposes of this
definition, "control" (including the correlative meanings of the terms
"controlled by" and "under common control with", as used with respect to any
person, shall mean the
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possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such person, through the
ownership of voting securities, partnership interests or other equity
interests.
Notwithstanding the foregoing requirement that a majority of the
directors be Independent Directors, no action otherwise validly taken by the
Board of Directors during a period in which a majority of its members are not
Independent Directors shall be invalidated or otherwise affected by such
circumstance, nor shall such circumstance subject the directors taking any
such action to a higher standard of care or to liability other than that
which would have applied to such action had a majority of the members of the
Board of Directors been independent Directors at the time such action was
taken.
ARTICLE VII
PROVISIONS FOR DEFINING, LIMITING AND REGULATING
CERTAIN POWERS OF THE CORPORATION AND OF THE
STOCKHOLDERS AND DIRECTORS
The following provisions are hereby adopted for the purpose of
defining, limiting, and regulating the powers of the Corporation and of the
directors and stockholders:
SECTION 1. BOARD AUTHORIZATION OF SHARE ISSUANCES.
The Board of Directors is hereby empowered to authorize the issuance
from time to time of shares of any class of Equity Shares, whether now or
hereafter authorized, or securities convertible into any class of Equity
Shares, whether now or hereafter authorized, for such consideration as may be
deemed advisable by the Board of Directors and without any action by the
stockholders.
SECTION 2. NO PREEMPTIVE RIGHTS.
Except as provided by the Board of Directors in authorizing the
issuance of Preferred Shares pursuant to Section 5 of Article V, no holder of
any stock or any other securities of the Corporation, whether now or
hereafter authorized, shall have any preemptive right to subscribe to or
purchase (i) any shares of capital stock of the Corporation, (ii) any
warrants, rights, or options to purchase any such shares, or (ii) any other
securities of the Corporation or obligations convertible into any shares of
capital stock of the Corporation or such other securities or into warrants,
rights or options to purchase any such shares or other securities.
SECTION 3. POWERS OF THE BOARD OF DIRECTORS.
The Board of Directors of the Corporation shall, consistent with
applicable law, have the power in its sole discretion to determine from time
to time in accordance with sound accounting practice or other reasonable
valuation methods what constitutes annual or other net profits, earnings,
surplus, or net assets in excess of capital; to fix and vary from time to
time the amount to be reserved as working capital, or determine that retained
earnings or surplus shall remain in the hands of the Corporation; to set
apart out of any funds of the Corporation such reserve or reserves in such
amount or amounts and for such proper purpose or purposes as it shall
determine and to abolish any such reserve or any part thereof; to distribute
and pay distributions or dividends in stock, cash or other securities or
property, out of surplus or any other funds or amounts legally available
therefor, at such times and to the stockholders of record on such dates as it
may, from time to time, determine; and to determine whether and to what
extent and at what times and places and under what conditions and regulations
the books, accounts and documents of the Corporation, or any of them, shall
be open to the inspection of stockholders, except as otherwise provided by
statute or by the Bylaws of the Corporation, and, except as so provided, no
stockholder shall have any right to inspect any book, account or document of
the Corporation unless authorized so to do by resolution of the Board of
Directors.
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SECTION 4. RELATED PARTY TRANSACTIONS.
Without limiting any other procedures available by law or otherwise
to the Corporation, the Board of Directors may authorize any agreement or
transaction with any Person, corporation, association, company, trust,
partnership (limited or general) or other organization, although one or more
of the directors or officers of the Corporation may be a party to any such
agreement or an officer, director, stockholder or member of such other party
(an "Interested Officer/Director"), and no such agreement or transaction
shall be invalidated or rendered void or voidable solely by reason of the
existence of any such relationship if: (i) the existence is disclosed or
known to the Board of Directors, and the contract or transaction is
authorized, approved or ratified by the affirmative vote of a majority of the
directors, excluding the Interested Officers/Directors; or (ii) the existence
is disclosed to the stockholders entitled to vote, and the contract or
transaction is authorized, approved or ratified by a majority of the votes
entitled to be cast by the stockholders, other than the votes of the shares
held of record by the Interested Officers/Directors; or (iii) the contract or
transaction of fair and reasonable to the Corporation. Any Interested
Officer/Director of the Corporation or the stock owned by them or by a
corporation, association, company, trust, partnership (limited or general) or
other organization in which an Interested Officer/Director may have an
interest, may be counted in determining the presence of a quorum at a meeting
of the Board of Directors or a committee of the Board of Directors or at a
meeting of the stockholders, as the case may be, at which the contract or
transaction is authorized, approved or ratified.
ARTICLE VIII
INDEMNIFICATION
AND LIMITATION OF LIABILITY
SECTION 1. INDEMNIFICATION.
(a) INDEMNIFICATION OF AGENTS. The Corporation shall indemnify, in
the manner and to the fullest extent permitted by law, any person (or the
estate of any person) who is or was a party to, or is threatened to be made a
party to, any threatened, pending or completed action, suit or proceeding,
whether or not by or in the right of the Corporation, and whether civil,
criminal, administrative, investigative or otherwise, by reason of the fact
that such person is or was a director or officer of the Corporation, or such
director or officer is or was serving at the request of the Corporation as a
director, officer, agent, trustee, partner or employee of another
corporation, partnership, joint venture, limited liability company, trust,
real estate investment trust, employee benefit plan or other enterprise. To
the fullest extent permitted by law, the indemnification provided herein
shall include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement and any such expenses may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding. The Corporation shall indemnify other employees and agents to
such extent as shall be authorized by the Board of Directors or the
Corporation's Bylaws and be permitted by law. Any repeal or modification of
this Section 1(a) by the stockholders of the Corporation shall be prospective
only, and shall not adversely affect any right to indemnification or
advancement of expenses hereunder existing at the time of such repeal or
modification.
(b) INSURANCE. The Corporation may, to the fullest extent
permitted by law, purchase and maintain insurance on behalf of any such
person against any liability which may be asserted against such person.
(c) INDEMNIFICATION NON-EXCLUSIVE. The indemnification provided
herein shall not be deemed to limit the right of the Corporation to indemnify
any other person for any such expenses to the fullest extent permitted by
law, nor shall it be deemed exclusive of any other rights to which any person
seeking indemnification from the Corporation may be entitled under any
agreement, vote of stockholders or disinterested directors, or otherwise,
both as to action in such person's official capacity and as to action in
another capacity while holding such office.
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SECTION 2. LIMITATION OF LIABILITY.
To the fullest extent permitted by Maryland statutory or decisional
law, as amended or interpreted from time to time, no director or officer of
this Corporation shall be personally liable to the Corporation or its
stockholders, or any of them, for money damages. No amendment of the Charter
of the Corporation or repeal of any of its provisions shall limit or
eliminate the benefits provided to directors and officers under this
provision with respect to any act or omission which occurred prior to such
amendment or repeal.
ARTICLE IX
AMENDMENTS
SECTION 1. RIGHT TO AMEND CHARTER.
The Corporation reserves the right form time to time to make any
amendments to the Charter which may now or hereafter be authorized by law,
including any amendments changing the terms or contract rights, as expressly
set forth in the Charter, of any of its outstanding stock by classification,
reclassification or otherwise.
SECTION 2. AMENDMENT TO THE CHARTER OF THE CORPORATION.
Notwithstanding any provision of law to the contrary, except as
otherwise specifically provided in Section 3 of this Article IX, the
affirmative vote of a majority of all votes entitled to be cast by the
stockholders of the Corporation shall be sufficient, valid and effective,
after due authorization, approval or advice by the Board of Directors, to
approve and authorize any amendment to the Charter of the Corporation.
SECTION 3. CERTAIN AMENDMENTS REQUIRING SPECIAL STOCKHOLDER VOTE.
(a) Notwithstanding any other provisions of the Charter or Bylaws
of the Corporation (and in addition to any other vote, approval,
authorization or advice (including that of the Board of Directors) that may
be required by law, the Charter or the Bylaws of the Corporation), the
affirmative vote of stockholders holding at least two-thirds (66-2/3%) of all
of the votes entitled to be cast thereon shall be required to amend, alter,
change, repeal, or adopt any provisions inconsistent with, the provisions of
this Article IX, Section 2 (classified Board) and Section 3 (removal of
directors) of Article VI, Section 5 (no cumulative voting) of Article VI,
Section 6 (Independent Directors) of Article VII, Article VIII
(indemnification of directors, officers, employees and agents and limitation
of liability of officers and directors) and Section 2 (preemptive rights) of
Article VII. In addition, no term or provisions of the Charter may be added,
amended or repealed in any respect that would, in the determination of the
Board of Directors, cause the Corporation not to qualify as a REIT under the
Code unless, in each such case, such action is approved (in addition to any
other vote, approval, authorization or advice (including that of the Board of
Directors) that may otherwise be required) by the affirmative vote of the
holders of not less than two-thirds (66-2/3%) of all the votes entitled to be
cast on the matter.
(b) The Board of Directors SHALL take no action to terminate the
Corporation's status as a REIT or to amend the provisions of Article V until
such time as (i) the Board of Directors adopts a resolution recommending that
the Corporation terminate its status as a REIT or amend Article V, as the
case may be, (ii) the Board of Directors presents the resolution at an annual
or special meeting of the stockholders and (iii) such resolution is approved
by at least two-thirds (66-2/3%) of all of the votes entitled to be cast on
the matter.
17
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ARTICLE X
DURATION OF CORPORATION
The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Incorporation and acknowledges the same to be his act, and further
acknowledges, under the penalties of perjury, that, to the best of his
knowledge, information and belief, the matters and facts contained herein are
true in all material respects on this 7th day of November, 1996
By: /s/ DAVID J. DICK
_______________________________________
David J. Dick
Sole Incorporator
WITNESS:
_____________________________
SECOND: The amendment to and restatement of the Charter of the
Corporation as hereinabove set forth has been duly advised by the Board of
Directors and approved by the sole holder of stock entitled to be voted on
the matter at the time of approval.
THIRD: The amendment and restatement of the Charter of the
Corporation does not increase the authorized stock of the Corporation.
FOURTH: The undersigned President acknowledges that these Articles
of Amendment and Restatement to be the corporate act of the Corporation and
as to all matters or facts required to be verified under oath, the
undersigned President acknowledges that to the best of his knowledge,
information, and belief, these matters and facts are true in all material
respects and that this statement is made under the penalties for perjury.
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<PAGE>
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment and Restatement to be signed in its name and on its behalf by its
President and attested by its Secretary as of the 29th day of January, 1997.
By:______________________________________
W. Bradley Blair, II
President
By:______________________________________
David J. Dick
Secretary
<PAGE>
[O'MELVENY & MYERS LLP LETTERHEAD]
January 29, 1997
Golf Trust of America, Inc.
190 King Street
Charleston, South Carolina 29401
GOLF TRUST OF AMERICA, INC.
QUALIFICATION AS
REAL ESTATE INVESTMENT TRUST
Ladies and Gentlemen:
We have acted as counsel to Golf Trust of America, Inc., a Maryland
Corporation (the "Company"), in connection with the preparation of a Form
S-11 registration statement (the "Registration Statement") filed with the
Securities and Exchange Commission ("SEC") on November 12, 1996 (No.
333-15965), as amended through the date hereof, with respect to the offering
and sale (the "Offering") of up to 3,294,750 shares of common stock, par
value $.01 per share, of the Company (the "Common Stock"), the Company's
contribution of the net proceeds of the Offering to its wholly-owned
subsidiaries, GTA GP, Inc. and GTA LP, Inc., and the contribution of such net
proceeds by those wholly-owned subsidiaries to Golf Trust of America, L.P.
(the "Operating Partnership") in exchange for general and limited partnership
interests in the Operating Partnership. You have requested our opinion
regarding certain U.S. federal income tax matters in connection with the
Offering.
The Operating Partnership has contracted to acquire ten golf courses
and associated personal property (the "Golf Courses"). Each Golf Course will
then be leased by the Operating Partnership to a lessee (each, a "Lessee",
and collectively, the "Lessees") on the terms described in the Registration
Statement.
<PAGE>
Golf Trust of America, Inc.
January 29, 1997
Page 2
In giving the opinions set forth herein, we have examined the
following:
1. the Company's Articles of Incorporation and Articles of
Amendment and Restatement and By-laws;
2. The Articles of Incorporation and By-Laws of GTA GP, Inc. and
GTA LP, Inc.;
3. the prospectus contained as part of the Registration Statement
(the "Prospectus");
4. the First Amended and Restated Agreement of Limited Partnership
of the Operating Partnership, among GTA GP, Inc., as general partner, and
several limited partners (the "Operating Partnership Agreement");
5. the leases between the Operating Partnership and the lessees;
and
6. such other documents as we have deemed necessary or appropriate
for purposes of this opinion.
In connection with the opinions rendered below, we have assumed,
with your consent, that:
1. each of the documents referred to above has been duly
authorized, executed, and delivered; is authentic, if an original, or is
accurate, if a copy; and has not been amended;
2. during its short taxable year ending December 31, 1997 and
subsequent taxable years, the Company will operate in such a manner that will
make the representations contained in a certificate, dated the date hereof
and executed by a duly appointed officer of the Company (the "Officer's
Certificate"), true for such years;
3. the Company will not make any amendments to its organizational
documents or the Operating Partnership Agreement after the date of this
opinion that would affect its qualification as a real estate investment trust
(a "REIT") for any taxable year;
4. each partner (each, a "Partner") of the Operating Partnership
that is a corporation or other entity has a valid legal existence;
2
<PAGE>
Golf Trust of America, Inc.
January 29, 1997
Page 3
5. each Partner has full power, authority, and legal right to
enter into and to perform the terms of the Operating Partnership Agreement
and the transactions contemplated thereby; and
6. no action will be taken by the Company, the Operating
Partnership or the Partners after the date hereof that would have the effect
of altering the facts upon which the opinions set forth below are based.
In connection with the opinions rendered below, we also have relied
upon the correctness of the representations contained in the Officer's
Certificate and we have no reason to believe such reliance is not reasonable.
For purposes of our opinions, we made no independent investigation of the
facts contained in the documents and assumptions set forth above, the
representations set forth in the Officer's Certificate, or the Prospectus.
Consequently, we have relied on the Company's representations that the
information presented in such documents, or otherwise furnished to us,
accurately and completely describes all material facts relevant to our
opinions. No facts have come to our attention, however, that would cause us
to question the accuracy and completeness of such facts or documents in a
material way.
Based on the documents and assumptions set forth above, the
representations set forth in the Officer's Certificate, and the discussion in
the Prospectus under the caption "Federal Income Tax Considerations" (which
is incorporated herein by reference), we are of the opinion that:
(a) the Company's organization and proposed method of operation
will enable it to qualify to be taxed as a REIT pursuant to Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code")
for its taxable year ending December 31, 1997, and in the future;
(b) the descriptions of the law and the legal conclusions contained
in the Prospectus under the caption "Federal Income Tax Considerations"
are correct in all material respects, and the discussion thereunder
fairly summarizes the federal income tax considerations that are likely
to be material to a holder of the Common Stock; and
(c)the Operating Partnership will be treated for federal income tax
purposes as a partnership and not as a corporation or association taxable
as a corporation or as a publicly traded partnership.
<PAGE>
Golf Trust of America, Inc.
January 29, 1997
Page 4
We will not review on a continuing basis the Company's compliance
with the documents or assumptions set forth above, or the representations set
forth in the Officer's Certificate. Accordingly, no assurance can be given
that the actual results of the Company's operations for its 1997 and
subsequent taxable years will satisfy the requirements for qualification and
taxation as a REIT.
The foregoing opinions are based on current provisions of the Code
and the Treasury regulations thereunder (the "Regulations"), published
administrative interpretations thereof, and published court decisions. The
Internal Revenue Service has not issued Regulations or administrative
interpretations with respect to various provisions of the Code relating to
REIT qualification. No assurance can be given that the law will not change
in a way that will prevent the Company from qualifying as a REIT.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to O'Melveny &
Myers under the caption "Federal Income Tax Considerations" in the
Prospectus. In giving this consent, we do not admit that we are in the
category of persons whose consent is required by Section 7 of the 1933 Act or
the rules and regulations promulgated thereunder by the SEC.
The foregoing opinions are limited to the U.S. federal income tax
matters addressed herein, and no other opinions are rendered with respect to
other federal tax matters or to any issues arising under the tax laws of any
other country, or any state or locality. We undertake no obligation to
update the opinions expressed herein after the date of this letter. This
opinion letter is solely for the information and use of the addressees and
their respective counsel, and it may not be distributed, relied upon for any
purpose by any other person, quoted in whole or in part or otherwise
reproduced in any document, or filed with any governmental agency without our
express written consent.
Very truly yours,
O'MELVENY & MYERS LLP
4
<PAGE>
OPTION TO PURCHASE AND RIGHT OF FIRST REFUSAL AGREEMENT
(GOLF TRUST OF AMERICA)
THIS OPTION TO PURCHASE AND RIGHT OF FIRST REFUSAL AGREEMENT (this
"Agreement") is entered as of the _______ day of ____________, 1997 (the
"Effective Date") by and between (i) Golf Trust of America, L.P., a Delaware
limited partnership (the "Partnership") and Golf Trust of America, Inc., a
Maryland corporation (the "REIT"), (collectively, the "Company") on the one
hand, and (ii) Mr. Larry D. Young (together with his Affiliates (as
hereinafter defined), "The Legends Group").
THE PARTIES ENTER THIS AGREEMENT on the basis of the following
facts, understandings and intentions:
A. Mr. Young is actively engaged in various aspects of golf course and
real estate acquisition, development, management and operation, both
personally and for companies and joint ventures he controls
B. The Company has undertaken, or will concurrently with the public
offering of shares in the Company (the "Offering") undertake, a series of
transactions involving the Company and golf courses currently owned and/or
managed by, among others, The Legends Group (the "Formation Transactions").
C. Pursuant to the Formation Transactions the Partnership will acquire
ten (10) golf courses, including all of the golf courses in which Mr. Young
or The Legends Companies or their respective Affiliates own an interest, with
the exception of Marsh Harbor, an 18-hole golf course facility (the "Marsh
Harbor" course). The Marsh Harbor course is subject to a ground lease with a
short remaining term.
D. In the future, The Legends Companies may develop one or more
additional golf courses and/or may acquire one or more established, operating
golf courses, or with respect to the Marsh Harbor course, enter into a lease
amendment to extend the term of the lease or acquire the fee interest in such
course.
E. The Company's primary objective is to maximize cash available for
distribution and to enhance shareholder value through its partnership
interest in the Partnership by acquiring golf courses that meet the Company's
investment criteria and leasing such courses to third party operators.
F. The Legends Group and the Company have determined that, in
connection with the Formation Transactions and the Offering and as benefit to
the shareholders of the Company, it is desirable to set forth the terms and
conditions pursuant to which the Company will have an Option, as hereinafter
defined, and the Right of First Refusal, as hereinafter defined, with respect
to the Marsh Harbor course and any Future Courses, as hereinafter defined.
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants and
promises of the parties, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. DEFINITIONS. The following terms as used in this Agreement
shall have the following meanings (applicable to both the singular and plural
forms of the terms defined):
a. "ACQUISITION AGREEMENT" shall mean a Contribution and
Leaseback Agreement substantially in the form of Exhibit 10.4 to the
Registration Statement, incorporating the terms and conditions of the Option
Notice, or the Option Notice, as applicable, and which shall include, without
limitation, a thirty (30)-day condition precedent or free-look provision.
b. "AFFILIATE" means (i) any other person or entity directly
or indirectly controlling, controlled by, or under common control with the
person or entity to which such term applies; and (ii) as to any natural
person, such person's spouse, or child, as well as the then-existing spouse
of any of the foregoing. In addition, as to any corporation or partnership,
any person with any of the foregoing relationships to any person in control
of such partnership as a general partner or otherwise or in control of such
corporation shall be deemed to be an Affiliate of such partnership or
corporation. For purposes of this Agreement, "CONTROL" as applied to any
person or entity means the possession, either directly or indirectly, of the
power to direct or cause the direction of the management, policies and
decision-making of such person or entity, whether through the ownership of
voting interests, by contract or otherwise. "Control" shall also include,
without limitation, the possession of direct or indirect equity or beneficial
interests in at least seventy-five percent (75%) of the profits or voting
control of any entity.
c. "BASIC BUSINESS TERMS" shall mean, at a minimum, the
following terms: (i) the sales price, (ii) the amount and terms of any seller
financing, (iii) the amount and terms of any assumable third party financing,
(iv) the state of title to be transferred, (v) the date for close of escrow,
(vi) the proration of closing costs and the allocation between buyer and
seller of any brokerage commissions, and (vii) all other material business
terms and conditions.
d. "CHANGE IN CONTROL" means a change in ownership or control
of the Company effected through either of the following transactions:
(1) the direct or indirect acquisition by any person or
related group of persons (other than the Company or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Company) of beneficial ownership (within the meaning of
Rule 13d-3 of the Securities Exchange Act of 1934) of securities
possessing more than twenty-five percent
2
<PAGE>
(25%) of the total combined voting power of the REIT's outstanding
securities pursuant to a tender or exchange offer made directly to the
REIT's stockholders which the REIT's Board of Directors (the "Board")
does not recommend such stockholders to accept; or
(2) a change in the composition of the Board over a
period of twenty-four (24) consecutive months or less such that a
majority of the Board members (rounded up to the next whole number)
ceases, by reason of one or more contested elections for Board
membership, to be comprised of individuals who either (A) have been Board
members continuously since the beginning of such period or (B) have been
elected or nominated for election as Board members during such period by
at least two-thirds (2/3) of the Board members described in clause (A)
who were still in office at the time such election or nomination was
approved by the Board.
e. "COMPANY AFFILIATE" means any Affiliate of the Company.
f. "FUTURE COURSE" shall mean any golf course acquired,
developed or otherwise owned or controlled by The Legends Group other than
Marsh Harbor and other than any golf course subject to a Contribution and
Leaseback Agreement with the Partnership as of the Effective Date. If The
Legends Group acquires the fee interest in the Marsh Harbor course or if the
term of the existing Marsh Harbor lease, together with any applicable
extension options, is extended to a period in excess of 20 years, then at
such time the Marsh Harbor course shall be considered a "Future Course."
g. "INDEPENDENT DIRECTOR" shall mean a member of the Board of
Directors of the REIT who is defined as an "Independent Director" in the
charter documents of the REIT.
h. "NEGOTIATED PURCHASE PRICE FORMULA" shall mean the formula
described in EXHIBIT A hereto.
i. "OFFER NOTICE" shall mean a term sheet prepared by The
Legends Group and delivered to the Company indicating with respect to any
Future Course the terms and conditions upon which The Legends Group intends
to offer to Transfer the applicable Future Course.
j. "REGISTRATION STATEMENT" shall mean the Form S-11
Registration Statement under the Securities Act of 1933, Registration No.
333-15965, as the same may be amended or supplemented from time to time.
k. "TRANSFER" means the sale, long-term ground lease,
transfer of control or conveyance, by deed, assignment, quitclaim or
otherwise, whereby The Legends Group transfers its interest in the subject
property.
3
<PAGE>
2. GRANT OF OPTION TO PURCHASE. The Legends Group hereby grants
to the Company separate rights to elect to acquire one or more of the Future
Courses, separately or together, from time to time or at any time during the
Option Term, by giving written notice (the "Option Notice") to The Legends
Group at any time on or after the Option Term Commencement (as hereinafter
defined) with respect to each property, on all of the following terms and
conditions (the "Option"):
a. OPTION TERM. The term of the Option with respect to each
property (the "Option Term") shall be determined as follows.
(1) COMMENCEMENT. The Option Term shall commence on the
Option Term Commencement determined as follows:
(i) with respect to each Future Course developed by
Mr. Young and/or the Legends Group, the Option Term Commencement shall be the
fourth (4th) anniversary of the public opening of the subject course; and
(ii) with respect to each Future Course acquired as
an operating course by Mr. Young and/or the Legends Group, the Option Term
Commencement shall be the second (2nd) anniversary of the date of such
acquisition.
(2) TERMINATION. The Option Term with respect to each
property shall terminate on the earlier of (i) the tenth (10th) anniversary
of the Effective Date, or (ii) the conveyance of the subject property to a
third party in accordance with and subject to the terms and conditions hereof.
b. CONDITIONS. Exercise of the Option by the Company is
conditioned upon the Company not having received an Offer Notice prior to
delivery of the Option Notice to The Legends Group; PROVIDED, HOWEVER, that
if The Legends Group for any reason fails to Transfer the subject property to
a third party within the 9-Month Transfer Period (as hereinafter defined),
then Company's receipt of said Offer Notice shall not prevent the exercise of
this option.
c. PURCHASE. Subject to Paragraph 2.d below, upon delivery
of an Option Notice, the Company shall prepare and the parties shall execute
an Acquisition Agreement within thirty (30) business days. The purchase
price with respect to each property for which the Company gives an Option
Notice to The Legends Group shall be determined according to the Negotiated
Purchase Price Formula for the subject property.
d. FAILED NEGOTIATIONS. Notwithstanding Paragraph 2.c above,
if the parties negotiating in good faith are unable to reach a mutually
agreeable Negotiated Purchase Price Formula for the property referred to in
the Option Notice before the deadline referred to in Paragraph 2.c above,
then The Legends Group shall not be obligated to convey the subject property
to the Company pursuant to said Option Notice and the Company shall not
deliver any other Option Notice regarding such property to
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<PAGE>
Owner for a period of 12 months following delivery of the former Option
Notice. Nothing in this Paragraph 2.d shall be construed to terminate the
Option Term.
3. GRANT OF RIGHT OF FIRST REFUSAL. The Legends Group hereby
grants to the Company separate rights of first refusal (each a "Right of
First Refusal") to purchase each of the Future Courses at the same price and
upon the same terms as are contained in the Offer Notice with respect to each
property.
a. TERM. The rights granted to the Company under this
Section 3 shall commence as of the Effective Date and shall terminate ten
(10) years thereafter, provided this Agreement shall automatically terminate
upon a Change in Control.
b. OFFER REQUIREMENTS. If, from time to time and at any
time, The Legends Group desires to make a Transfer of one or more of the
Future Courses to a third party unaffiliated with The Legends Group and
excepting transfers by will or transfers to any lineal descendent of Mr.
Young, The Legends Group shall first prepare and deliver an Offer Notice and
shall offer to the Company or a Company Affiliate, at the election of the
Company, the opportunity to purchase such property (the "Offered Property")
on the same terms and conditions as are contained in the Offer Notice. The
Company shall have thirty (30) days after receipt of the Offer Notice to
deliver to The Legends Group a written acceptance agreeing to purchase the
Offered Property on the terms and conditions set forth in the Offer Notice,
and otherwise in accordance with the terms and conditions set forth in the
Acquisition Agreement. Upon delivery of such acceptance, the parties shall
execute an Acquisition Agreement with respect to the Offered Property within
ten (10) business days.
c. SALES TO THIRD PARTIES. If the Company fails to elect to
purchase the Offered Property on the terms and conditions described herein,
then, during the nine (9) month period immediately following the expiration
of the thirty (30) day period provided in the immediately preceding Paragraph
(the "9-Month Transfer Period"), The Legends Group may make a Transfer of the
Offered Property to any third party on terms no more than five percent (5%)
more favorable to the third party than the terms and conditions contained in
the most recently delivered Offer Notice. The Legends Group shall not make
any Transfer of any Future Course to any third party unless such Transfer is
preceded by an Offer Notice as provided herein.
d. SUBSEQUENT OFFERS. If, upon the expiration of the 9-Month
Transfer Period, The Legends Group has not entered into a fully-executed
purchase agreement with a third party on terms permitted by Paragraph 3.c
above and recorded a grant deed to the Offered Property in favor of such
third party within thirty (30) days after the expiration of the 9-Month
Transfer Period, then prior to making a Transfer of all or any portion of the
Offered Property to a third party, The Legends Group must first deliver to
the Company another Offer Notice in accordance with Paragraph 3.b above. The
Company shall then have fifteen (15) days after receipt of such new Offer
Notice to accept the terms and conditions contained in the Offer Notice and
otherwise in
5
<PAGE>
accordance with the terms and conditions set forth in the Acquisition
Agreement. Upon acceptance of a Offer Notice by the Company, the parties
shall execute an Acquisition Agreement with respect to the Offered Property
within ten (10) business days.
e. TERMINATION OF RIGHT OF FIRST OFFER. If The Legends Group
makes a Transfer of the Offered Property to a third party pursuant to
Paragraph 3.c above, such third party shall take title to the Offered
Property free and clear of any right of the Company to purchase the Offered
Property, and this Agreement shall terminate and be of no further force or
effect as to that (and only that) Offered Property.
4. MISCELLANEOUS.
a. COMPLETE AGREEMENT; CONSTRUCTION. This Agreement, and the
other agreements and documents referred to herein, shall constitute the
entire agreement between the parties with respect to the subject matter
thereof and shall supersede all previous negotiations, commitments and
writings with respect to such subject matter.
b. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the jurisdiction of the State of
South Carolina without regard to the principles of conflicts of laws thereof
and venue respecting any dispute under this Agreement shall be the proper
court located in the State of South Carolina.
c. NOTICES. All notices and other communications required or
permitted hereunder shall be in writing, shall be deemed duly given upon
actual receipt, and shall be delivered (i) in person, (ii) by registered or
certified mail (air mail if addressed to an address outside of the country in
which mailed), postage prepaid, return receipt requested, or (iii) by
facsimile or other generally accepted means of electronic transmission
(provided that a copy of any notice delivered pursuant to this clause (iii)
shall also be sent pursuant to clause (ii)), addressed as follows (or to such
other addresses as may be specified by like notice to the other parties):
If to The Legends Group: Mr. Larry D. Young
1500 Legends Drive
Myrtle Beach, South Carolina 29578
If to the Company: Golf Trust of America, Inc.
190 King Street
Charleston, South Carolina 29401
d. AMENDMENTS. No amendment, modification or supplement to
this Agreement shall be binding on any of the parties hereto unless it is in
writing and signed by
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<PAGE>
the parties in interest at the time of the modification, and further provided
any such modification is approved by a majority of the Independent Directors.
e. SUCCESSORS AND ASSIGNS. Neither this Agreement nor any
rights or obligations hereunder shall be assignable by a party to this
Agreement without the prior, express written consent of the other party.
This Agreement and all of the provisions hereof shall be binding upon and
inure to the benefit of the parties to this Agreement and their respective
successors and permitted assigns.
f. NO THIRD-PARTY BENEFICIARIES. This Agreement is solely
for the benefit of the parties to this Agreement and should not be deemed to
confer upon third parties any remedy, claim, liability, reimbursement, claims
or action or other right in excess of those existing without reference to
this Agreement.
g. TITLES AND HEADINGS. Titles and headings to sections and
paragraphs in this Agreement are inserted for the convenience of reference
only and are not intended to be a part of or to affect the meaning or
interpretation of this Agreement.
h. MAXIMUM LEGAL ENFORCEABILITY; TIME OF ESSENCE. Any
provision of this Agreement which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof. Any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction. Without prejudice to any rights or remedies
otherwise available to any party to this Agreement, each party hereto
acknowledges that damages would not be an adequate remedy for any breach of
the provisions of this Agreement and agrees that the obligations of the
parties hereunder shall be specifically enforceable. Time shall be of the
essence as to each and every provision of this Agreement. The parties
understand and agree that the determination of the purchase price under the
option granted hereunder is subject to the parties agreement on the extent
and nature of the adjustments to both expenses and revenue and each party
agrees that given the subjective nature of such adjustments is not capable of
being determined by a third party and therefore the parties agree that a suit
for specific performance or damages is not appropriate if the parties
negotiating faith are unable to agree on such adjustments.
i. FURTHER ASSURANCES. The parties to this Agreement will
execute and deliver or cause the execution and delivery of such further
instruments and documents and will take such other actions as any other party
to the Agreement may reasonably request in order to effectuate the purpose of
this Agreement and to carry out the terms hereof.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first written above.
"The Legends Group"
__________________________________
LARRY D. YOUNG
"Company" GOLF TRUST OF AMERICA, L.P.
By GTA GP
General Partner
By: _______________________________
Name:
Title:
GOLF TRUST OF AMERICA, INC.
By _______________________________
Name:
Title:
8
<PAGE>
EXHIBIT A
NEGOTIATED PURCHASE PRICE FORMULA
A. NEGOTIATED PURCHASE PRICE FORMULA. The Negotiated Purchase Price shall
equal the Adjusted Net Operating Income divided by the Capitalization Rate.
B. DEFINITIONS. For purposes of this EXHIBIT A, the following terms shall
have the following meanings:
(1) "ADJUSTED NET OPERATING INCOME" means the Net Operating Income
divided by 1.135.
(2) "APPLICABLE TWELVE (12) MONTH PERIOD" means the twelve (12) month
period ending the calendar quarter immediately preceding the date the Option
Notice is given.
(3) "CAPITALIZATION RATE" shall mean the Company's First Call FFO plus
200 basis points.
(4) "COMPANY" means Golf Trust of America, Inc.
(5) "COMPANY'S FIRST CALL FFO" means the consensus FFO per share
estimate for the Company for the calendar year which includes the date the
Option Notice is given, subtracting the Company's capital expenditure reserve
per share as estimated for that year as such estimate is reported by First
Call (or, if First Call is no longer in general use within the securities
industry, by such other reporting service as is then in general use within
the securities industry) divided by the average of the Company's closing
share price for the thirty (30) trading days immediately preceding the date
the Option Notice is given.
(6) "GROSS OPERATING EXPENSES" means the gross operating expenses of the
Property for the Applicable Twelve (12) Month Period, calculated in
accordance with generally accepted accounting principles consistently
applied. For purposes of calculating Gross Operating Expenses, the Company
and The Legends Group shall negotiate in good faith to make such
discretionary adjustments on a line item basis to reflect stabilized Gross
Operating Expenses, which may include the following adjustments:
(a) annual capital replacement reserves shall be included;
(b) annual cash expenditures (including depreciation) for golf
carts shall be included;
(c) extraordinary expenditures (such as to repair storm damage)
which are not anticipated to recur in the ordinary course shall be
excluded;
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(d) other adjustments to reflect stabilized Gross Operating
Expenses;
(e) depreciation, amortization and debt service shall be excluded.
(7) "GROSS OPERATING REVENUE" means the gross operating revenue of the
Property, including revenue related to the golf course operations, food and
beverage operations and sale of merchandise, for the Applicable Twelve (12)
Month Period, calculated in accordance with generally accepted accounting
principles consistently applied. Gross Operating Revenue shall also be
subject to the Company and The Legends Group negotiating in good faith to
make such discretionary adjustments on a line item basis to reflect
stabilized Gross Operating Revenue.
(8) "NET OPERATING INCOME" means the Gross Operating Revenue of the
Property for the Applicable Twelve (12) Month Period LESS the Gross Operating
Expenses for the same period.
(9) "PROPERTY" means the property which is the subject of the Option
Notice.
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