SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported):
May 13, 1998
MEDITRUST CORPORATION
(Exact Name of Registrant as specified in its charter)
Delaware 0-9109 95-3520818
(State or other jurisdiction (Commission File (I.R.S. Employer
of incorporation) Number) Identification No.)
197 First Avenue, Suite 300, Needham, MA 02194
(Address of principal executive offices and zip code)
MEDITRUST OPERATING COMPANY
(Exact Name of Registrant as specified in its charter)
Delaware 0-9110 96-3419438
(State or other jurisdiction (Commission File (I.R.S. Employer
of incorporation) Number) Identification No.)
197 First Avenue, Suite 100, Needham, MA 02194
(Address of principal executive offices and zip code)
(781) 453-8062
(Registrant's telephone number, including area code)
<PAGE>
Item 5. Other Events
- --------------------
THE MEDITRUST COMPANIES
Introduction to Cobblestone's Financial Statements
On January 11, 1998, Cobblestone Holdings, Inc., parent of Cobblestone Golf
Group, Inc. ("Cobblestone"), Meditrust Corporation and Meditrust Operating
Company entered into an agreement and plan of merger pursuant to which
Cobblestone will merge with and into Meditrust Corporation, with Meditrust
Corporation being the surviving corporation.
Item 7. Financial Statements and Exhibits
- -----------------------------------------
(a) Financial Statements
None
(b) Pro Forma Financial Information
None
(c) Exhibits
23 Consent of Independent Auditors
99.1 Consolidated Financial Statements and Schedules of
Cobblestone Holdings, Inc.
Index to Consolidated Financial Statements and Schedules
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets of Cobblestone Holdings, Inc. at
September 30, 1997 and 1996.
Consolidated Statements of Operations of Cobblestone
Holdings, Inc. for the years ended September 30, 1997, 1996
and 1995.
Consolidated Statements of Stockholders' Equity (Net Capital
Deficiency) of Cobblestone Holdings, Inc. at September 30,
1997, 1996 and 1995, and October 1, 1994.
Consolidated Statements of Cash Flows of Cobblestone
Holdings, Inc. for years ended September 30, 1997, 1996 and
1995.
Notes to Consolidated Financial Statements of Cobblestone
Holdings, Inc.
Schedule I: Condensed Financial Information of Registrant
Schedule II: Valuation and Qualifying Accounts
99.2 Unaudited Consolidated Financial Statements of Cobblestone
Holdings, Inc. for the three and six month periods ended March
31, 1998 and 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned hereunto duly authorized.
MEDITRUST CORPORATION
Date May 13, 1998 By: /s/ David F. Benson
-------------------------------
Name: David F. Benson
Title: President
MEDITRUST OPERATING COMPANY
Date May 13, 1998 By: /s/ Abraham D. Gosman
-------------------------------
Name: Abraham D. Gosman
Title: Chairman of the Board,
Chief Executive Officer
and Treasurer
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the registration
statements of Meditrust Corporation and/or Meditrust Operating Company on Form
S-8 (File Nos. 333-39771, 333-39771-01, 333-36083, 333-36083-01, 33-51843 and
33-51843-01), Form S-3 (File Nos. 333-40055, 333-40055-01,333-41009,
333-41009-01, 333-01843, 33-59215, 33-56663, 33-50835, 33-45979, 333-48051 and
333-48051-0) and on Form S-4 (333-34831 and 333-34831-01) of our report dated
December 1, 1997 with respect to the consolidated financial statements and
schedules of Cobblestone Holdings, Inc. included in Meditrust Corporation and
Meditrust Operating Company's Form 8-K dated May 13, 1998, filed with the
Securities and Exchange Commission.
San Diego, California
May 13, 1998 /s/ Ernst & Young LLP
Exhibit 99.1
COBBLESTONE HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULES
<TABLE>
<CAPTION>
Page
------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors ..................................................................... __
Consolidated Balance Sheets--at September 30, 1997 and 1996 ........................................................... __
Consolidated Statements of Operations--for the years ended September 30, 1997, 1996 and 1995 .......................... __
Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)--at September 30, 1997, 1996
and 1995 ............................................................................................................ __
Consolidated Statements of Cash Flows--for the years ended September 30, 1997, 1996 and 1995 .......................... __
Notes to Consolidated Financial Statements--September 30, 1997 ........................................................ __
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENT SCHEDULE
- - ----------------------------
<S> <C>
Schedule I --Condensed Financial Information of Registrant .............................................................. __
Schedule II--Valuation and Qualifying Accounts .......................................................................... __
</TABLE>
All other Schedules for which provision is made in the applicable accepting
regulation of the Securities and Exchange Commission are omitted because such
schedules are not required under the related instructions, are inapplicable, or
the required information is given in the financial statements.
[The remainder of this page intentionally left blank]
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Cobblestone Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Cobblestone
Holdings, Inc. as of September 30, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended September 30, 1997. Our audits also included
the financial statement schedules listed in the Index at Item 14(a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cobblestone
Holdings, Inc. at September 30, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Diego, California
December 1, 1997
2
<PAGE>
COBBLESTONE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................................... $ 3,519,133 $ 6,578,946
Accounts receivable, net of allowance for doubtful accounts of $333,000 and
$175,000 at September 30, 1997 and 1996, respectively .............................. 3,067,347 2,868,190
Current portion of notes receivable, net ............................................ 2,108,796 1,729,875
Inventory ............................................................................ 2,450,328 2,202,481
Prepaid expenses and other current assets ........................................... 1,238,616 1,170,884
------------ ------------
Total current assets ............................................................. 12,384,220 14,550,376
Property, equipment and leasehold interests, net ..................................... 156,228,507 139,541,003
Notes receivable, net ................................................................ 3,964,691 3,889,857
Intangible assets, net of accumulated amortization of $1,489,000 and $1,202,000 at
September 30, 1997 and 1996, respectively ........................................... 3,611,199 3,898,185
Other assets, net .................................................................... 6,081,103 6,618,684
------------ ------------
$182,269,720 $168,498,105
============ ============
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Accounts payable .................................................................... $ 3,502,231 $ 4,101,736
Accrued payroll and related expenses ................................................ 2,522,130 2,091,719
Accrued interest expense ............................................................ 2,830,562 2,683,332
Accrued property taxes .............................................................. 1,576,078 1,364,891
Deferred revenue .................................................................... 1,666,970 1,460,028
Current portion of long-term debt and capital lease obligations ..................... 1,171,123 738,981
Current portion of deferred purchase price .......................................... 205,353 387,792
Income taxes payable ................................................................ 49,000 94,431
Other current liabilities ........................................................... 529,823 1,394,352
------------ ------------
Total current liabilities ........................................................ 14,053,270 14,317,262
Long-term debt and capital lease obligations ......................................... 128,162,096 108,494,952
Note payable to stockholder/officer .................................................. 232,467 224,787
Deferred purchase price .............................................................. 537,797 730,941
Long-term deferred revenue ........................................................... 2,128,480 2,423,707
Deferred income taxes ................................................................ 4,184,000 4,184,000
Minority interest .................................................................... 336,543 380,985
Commitments
Redeemable preferred stock, $.01 par value
Authorized shares--10,000,000
Issued and outstanding shares--5,220,376 at September 30, 1997 and 1996
Liquidation preference of $43,075,700 ............................................... 42,241,169 42,241,169
Net capital deficiency:
Common stock, $.01 par value:
Authorized shares--5,000,000
Issued and outstanding shares--1,722,449 at September 30, 1997 and 1996 ............. 17,224 17,224
Paid-in capital ..................................................................... 5,388,983 5,388,983
Accumulated deficit ................................................................. (15,012,309) (9,905,905)
------------ ------------
Net capital deficiency ............................................................... (9,606,102) (4,499,698)
------------ ------------
$182,269,720 $168,498,105
============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
COBBLESTONE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Operating revenues:
Golf revenues ................................................... $ 59,345,382 $ 45,155,674 $38,043,441
Food and beverage revenues ...................................... 13,083,253 9,664,103 7,034,407
Pro shop sales .................................................. 6,168,729 4,768,310 3,311,062
Other ........................................................... 3,343,445 2,534,833 1,473,869
------------ ------------ -----------
Total operating revenues ..................................... 81,940,809 62,122,920 49,862,779
Operating expenses:
Golf course operations .......................................... 49,928,332 36,925,453 29,591,886
Cost of food and beverage ....................................... 4,308,308 3,219,126 2,613,295
Cost of pro shop sales .......................................... 4,550,672 3,253,771 2,221,330
General and administrative ...................................... 4,028,725 3,449,686 2,517,423
Depreciation and amortization ................................... 8,909,134 7,534,068 6,144,430
------------ ------------ -----------
Total operating expenses ..................................... 71,725,171 54,382,104 43,088,364
------------ ------------ -----------
Income from operations ............................................ 10,215,638 7,740,816 6,774,415
Interest expense, net ............................................. (15,273,042) (11,691,072) (8,019,072)
Gain on insurance settlement ...................................... -- 738,456 746,845
------------ ------------ -----------
Loss before income taxes and extraordinary item ................... (5,057,404) (3,211,800) (497,812)
Provision for income taxes ........................................ 49,000 209,000 208,000
------------ ------------ -----------
Loss before extraordinary item .................................... (5,106,404) (3,420,800) (705,812)
Extraordinary item ................................................ -- (3,520,402) --
------------ ------------ -----------
Net loss .......................................................... $ (5,106,404) $ (6,941,202) $ (705,812)
============ ============ ===========
See accompanying notes.
</TABLE>
4
<PAGE>
COBBLESTONE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
COMMON STOCK EQUITY
------------------------ PAID-IN ACCUMULATED (NET CAPITAL
SHARES AMOUNT CAPITAL DEFICIT DEFICIENCY)
----------- ---------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1994 ............ 1,324,517 $13,245 $ 95,845 $ (2,258,891) $(2,149,801)
Issuance of common stock for cash .... 311,932 3,119 3,981,200 -- 3,984,319
Net loss ............................. -- -- -- (705,812) (705,812)
--------- ------- ---------- ------------ -----------
Balance at September 30, 1995 ......... 1,636,449 16,364 4,077,045 (2,964,703) 1,128,706
Issuance of common stock for cash .... 86,000 860 1,311,938 -- 1,312,798
Net loss ............................. -- -- -- (6,941,202) (6,941,202)
--------- ------- ---------- ------------ -----------
Balance at September 30, 1996 ......... 1,722,449 17,224 5,388,983 (9,905,905) (4,499,698)
Net loss ............................. -- -- -- (5,106,404) (5,106,404)
--------- ------- ---------- ------------ -----------
Balance at September 30, 1997 ......... 1,722,449 $17,224 $5,388,983 $(15,012,309) $(9,606,102)
========= ======= ========== ============ ===========
</TABLE>
See accompanying notes.
5
<PAGE>
COBBLESTONE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.......................................................................... $ (5,106,404) $ (6,941,202) $ (705,812)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.................................................... 9,680,763 8,619,316 6,728,092
Interest expense on zero-coupon notes............................................ 4,415,256 1,362,396 --
Gain on insurance settlement..................................................... -- (738,456) (746,845)
Loss on disposal of assets....................................................... -- -- 322,834
Loss on early extinguishment of debt............................................. -- 3,520,402 --
Provision for doubtful accounts.................................................. (506,476) (613,067) 2,125,458
Changes in assets and liabilities:
Notes and accounts receivable................................................... 331,540 (1,154,418) (7,321,947)
Inventory....................................................................... (123,328) (735,027) (229,801)
Prepaid expenses and other assets............................................... (225,465) (314,864) (57,476)
Accounts payable, accrued liabilities and deferred
revenue........................................................................ (1,576,254) 4,270,790 2,179,909
------------ ------------ ------------
Net cash provided by operating activities......................................... 6,889,632 7,275,870 2,294,412
INVESTING ACTIVITIES
Acquisitions...................................................................... (14,994,039) (6,437,796) (41,245,470)
Additions to property, equipment and leasehold interests.......................... (8,314,601) (8,179,620) (17,716,295)
Insurance proceeds................................................................ -- 1,189,692 1,941,917
------------ ------------ ------------
Net cash used in investing activities............................................. (23,308,640) (13,427,724) (57,019,848)
FINANCING ACTIVITIES
Proceeds from long-term debt...................................................... 20,726,000 107,262,650 37,560,573
Debt issuance costs and other debt-related costs.................................. -- (6,194,100) (2,118,618)
Principal payments on long-term debt and capital leases........................... (6,991,222) (90,039,889) (1,219,252)
Payments on deferred purchase price............................................... (375,583) (431,267) --
Proceeds from sale and leaseback.................................................. -- -- 7,410,527
Proceeds from issuance of redeemable preferred stock.............................. -- -- 8,629,824
Proceeds from issuance of common stock............................................ -- 1,312,798 3,984,319
------------ ------------ ------------
Net cash provided by financing activities......................................... 13,359,195 11,910,192 54,247,373
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents.............................. (3,059,813) 5,758,338 (478,063)
Cash and cash equivalents at beginning of year.................................... 6,578,946 820,608 1,298,671
------------ ------------ ------------
Cash and cash equivalents at end of year.......................................... $ 3,519,133 $ 6,578,946 $ 820,608
============= ============ ============
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest......................................................................... $ 9,915,994 $ 7,583,613 $ 6,464,811
============= ============ ===========
Income taxes..................................................................... $ 179,990 $ 1,235,810 $ 48,417
============= ============ ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital leases entered into....................................................... $ 1,928,108 $ 4,192,424 $ 2,395,859
============= ============ ===========
</TABLE>
See accompanying notes
6
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Cobblestone Holdings, Inc. (the "Company"), a Delaware corporation, was
incorporated on January 18, 1994. The Company, through its wholly-owned
subsidiary, Cobblestone Golf Group, Inc. (CGGI), owns and operates golf courses
in the United States, with a current portfolio of 24 golf properties including
private country clubs, semi-private clubs and public (or daily fee) courses. The
Company's courses are concentrated in clusters near metropolitan areas primarily
in the Sunbelt states (including Arizona, California, Georgia, Florida, Texas
and Virginia) which have large golfing populations and attractive climates.
The Company's business consists primarily of operating golf courses and
related facilities, with revenue generated from membership fees and dues at
private country clubs, greens fees, food and beverage services, golf cart
rentals, retail merchandise sales, driving range fees and lodging fees. The
Company owns eighteen courses, leases four courses (subject to long-term leases
in excess of twenty years, including extension options), leases one driving
range and pro shop facility and manages one additional course. The Company's
portfolio includes ten private country clubs, nine public facilities and five
semi-private facilities.
Principles of Consolidation
The Company has acquired certain golf facilities through its wholly-owned and
majority-owned subsidiaries. The consolidated financial statements include the
accounts of the Company and such subsidiaries. Intercompany balances and
transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and time deposits with original
maturities of less than 90 days.
Concentration of Credit Risk
Management places the Company's cash investments with what they consider to be
high credit-quality financial institutions and routinely assesses the financial
strength of these institutions. Management believes no significant concentration
of credit risk exists with respect to these cash investments.
7
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concentration of credit risk with respect to accounts receivable is limited
due to the geographic dispersion of golf courses and the large number of golf
course members and others from whom the receivables are to be collected.
Inventories
Inventories are carried at lower of cost (first-in, first-out) or market.
Property, Equipment and Leasehold Interests
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets
which are generally as follows:
Depreciable land improvements ...... 20 years
Buildings and improvements ......... 30 years
Equipment, furniture and fixtures.... 3 to 10 years
Leasehold improvements, equipment recorded under capital leases and property
and equipment related to leased facilities are depreciated and amortized using
the straight-line method over the shorter of the lease term or the estimated
useful lives of the related assets. Costs associated with the acquisition of
leasehold interests in golf facilities have been capitalized and are amortized
over the remaining life of the related lease (4 to 35 years).
Golf course facility construction in progress is carried at cost. All costs
associated with, or allocable to golf course facility construction in progress
are capitalized until construction is completed.
Intangible Assets
Costs in excess of net assets of businesses acquired are amortized over 20
years which is consistent with the depreciation of land improvements. Other
intangible assets are amortized over their estimated useful lives (5 to 14
years).
Debt Issuance Cost
Costs associated with the issuance of long-term debt are capitalized and
amortized over the term of the related debt using the interest method. Such
costs and related accumulated amortization included in other assets totaled
$6,627,881 and $1,069,071, respectively, at September 30, 1997 and $6,627,881
and $300,971, respectively, at September 30, 1996.
8
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Value of Financial Instruments
To meet the reporting requirements of Statement of Financial Accounting
Standards ("SFAS") No. 107, Disclosures about Fair Value of Financial
Instruments, the Company calculates the fair value of financial instruments and
includes this additional information in the notes to financial statements when
the fair value is different than the carrying value of those financial
instruments. When the fair value reasonably approximates the carrying value, no
additional disclosure is made. The Company uses quoted market prices and
management's estimates to calculate these fair values.
Revenue and Deferred Revenue
Operating revenue is recognized when received except for dues and fees paid in
advance which are recognized over the period which the dues and fees allow the
members access to the facilities. The Company recognizes revenue on initiation
fees for the amount of the deposit and the amount of the note receivable, less
the provision for doubtful accounts and imputed interest, at the time the
membership is sold.
Long-term deferred revenue relates to the Company's obligation to provide
memberships to residential developers of properties adjacent to the golf
facility and is recognized when individual homeowners apply for membership.
Seasonal weather conditions as well as the timing of new course purchases or
leases may cause the Company's results of operations to vary from quarter to
quarter. The second half (April through September) of the Company's fiscal year
tends to account for a greater portion of the Company's operating revenue and
operating income than does the first half.
Reliance on Estimates
The financial statements have been prepared in accordance with generally
accepted accounting principles and have required management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Impairment of Long-Lived Assets
Effective October 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
("SFAS 121"), which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. SFAS 121 also addresses the accounting for long-
lived assets that are expected to be disposed of. The adoption of SFAS 121 did
not have a material effect on the Company's financial position or results of
operations.
9
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
Effective October 1, 1996, the Company adopted SFAS No. 123, Accounting for
Stock Based Compensation ("SFAS 123"). SFAS 123 allows companies to either
account for stock-based compensation under the new provisions of SFAS 123 or
under the provisions of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25"), but requires pro forma disclosure in
the footnotes to the financial statements as if the measurement provisions of
SFAS 123 had been adopted. The Company has continued accounting for its stock-
based compensation in accordance with the provisions of APB 25.
2. ACQUISITIONS
Since inception, the Company has acquired the property and equipment or
leasehold interest in twenty-three golf course facilities in transactions that
have been recorded under the purchase method of accounting. Accordingly, the
acquired facilities have been reported in the consolidated financial statements
of the Company since the date of the respective acquisitions.
The 1997 acquisitions include: Eastlake Woodlands Country Club acquired in
February 1997, and The Champions Club of Gwinnett acquired in April 1997.
The 1996 acquisitions include: Eagle Crest Golf Club acquired in June, 1996,
and Sweetwater Country Club acquired in July 1996. In addition, the Company
entered into a management agreement for the Red Hawk Golf Club in October 1996.
The 1995 acquisitions include: The Ranch Country Club and Stonebridge Country
Club acquired in December 1994, Red Mountain Ranch Country Club acquired in
January 1995, and The Hills of Lakeway, Live Oak Golf Course, Yaupon Golf Course
and Brandermill Country Club acquired in March 1995.
In conjunction with the purchase of The Hills of Lakeway, the Company is
required to pay a deferred purchase price equal to the greater of $4,150 per
membership or 25% of Initiation Fees, as defined, collected for the first three
hundred memberships sold. The outstanding balance of the deferred purchase price
of $743,150 is scheduled to be paid in monthly installments through fiscal 2001.
A summary of the aggregate acquisition costs and allocation of the purchase
price to the assets and liabilities assumed is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Total acquisition costs:
Cash paid and acquisition related
costs................................. $14,994,039 $6,437,796 $41,245,470
Long-term debt and assumption of 758,511 342,755 7,379,667
liabilities........................... ----------- ---------- -----------
$15,752,550 $6,780,551 $48,625,137
=========== ========== ===========
Allocated to assets as follows:
Current assets ....................... $ 675,280 $ 29,182 $ 775,622
Property, equipment and leasehold
interests ........................... 15,077,270 6,751,369 47,849,515
----------- ---------- -----------
$15,752,550 $6,780,551 $48,625,137
=========== ========== ===========
</TABLE>
10
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following pro forma results for acquisitions consummated through September
30, 1997 assume the acquisitions occurred at the beginning of the fiscal year
prior to the year in which the facility was acquired. The unaudited pro forma
results have been prepared utilizing the historical financial statements of the
Company and the acquired business.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1997 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Operating revenues ................. $85,268,603 $78,874,940
Loss before extraordinary item ..... (5,414,816) (3,614,902)
Net loss ........................... (5,414,816) (7,135,304)
</TABLE>
This pro forma information is not necessarily indicative of the actual results
that would have been achieved had the acquisitions occurred at the beginning of
the fiscal year prior to the year in which the facility was acquired, nor is it
necessarily indicative of future results.
3. NOTES RECEIVABLE
Notes receivable consists of promissory notes made by golf club members for
the payment of initiation fees. The notes carry below market or no interest
rates, amortize monthly or annually and generally have a term of three to five
years. Management periodically analyzes the collectability of the notes
receivable and reserves for the portion that is doubtful of being collected. The
notes are secured by the underlying golf club membership and the Company has
full recourse against the member. The Company's notes receivable balance was
composed of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Gross receivables ...................... $7,804,836 $ 8,282,575
Less allowance for uncollectable
accounts................................ (781,823) (1,404,933)
Less valuation allowance for imputed
interest .............................. (949,526) (1,257,910)
---------- -----------
6,073,487 5,619,732
Current portion ........................ 2,108,796 1,729,875
---------- -----------
$3,964,691 $ 3,889,857
========== ===========
</TABLE>
11
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. PROPERTY, EQUIPMENT AND LEASEHOLD INTERESTS
Property, equipment and leasehold interests consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Land .............................................................................. $ 17,291,637 $ 15,161,226
Land improvements ................................................................. 97,476,310 85,110,308
Buildings and improvements ........................................................ 35,546,584 31,968,131
Equipment, furniture and fixtures ................................................. 23,353,353 18,724,101
Leasehold interests ............................................................... 3,230,266 3,230,266
Golf course facility construction in progress ..................................... 3,110,498 494,637
------------ ------------
180,008,648 154,688,669
Less accumulated depreciation and amortization .................................... (23,780,141) (15,147,666)
------------ ------------
Property, equipment and leasehold interests, net .................................. $156,228,507 $139,541,003
============ ============
</TABLE>
Land improvements include $27,134,837 and $24,095,050 at September 30, 1997
and 1996, respectively, of nondepreciable golf course improvements consisting of
tees, fairways, roughs, trees, greens, bunkers and sandtraps.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
8% note payable, due monthly through 2007 .............................................. $ 265,699 $ 282,594
Variable rate note payable, effective interest rate 10.509%, due
monthly, secured by the assets of The Vineyard at
Escondido ............................................................................. 5,675,100 5,780,976
10% imputed interest note payable January 2000 ......................................... 198,164 179,380
11 1/2% Series B Senior Notes due 2003................................................... 70,000,000 70,000,000
13 1/2% Series B Senior Zero-Coupon Notes ($86,000,000 principal balance) due 2004 ..... 34,740,302 30,325,046
Bank revolver .......................................................................... 14,726,000 --
Capital lease obligations, due at various dates through 2002 ........................... 3,727,954 2,665,937
------------ ------------
129,333,219 109,233,933
Less current portion ................................................................... 1,171,123 738,981
------------ ------------
$128,162,096 $108,494,952
============ ============
</TABLE>
12
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On June 4, 1996, the Company and CGGI completed two contemporaneous high yield
bond offerings (the "Offerings") totaling approximately $100 million. CGGI
offered $70 million aggregate principal amount 11 1/2% senior notes due 2003
(the "Senior Notes"). The Senior Notes are senior unsecured general obligations
of CGGI and rank pari passu in right of payment to all other senior indebtedness
of CGGI. The Company offered 86,000 Units (the "Unit Offering"), each consisting
of $1,000 principal amount at maturity of 13 1/2% senior zero-coupon notes due
2004 and one share of common stock, par $.01 per share, of the Company. The
Zero-Coupon Notes are senior unsecured general obligations of the Company and
rank pari passu in right of payment to all other senior indebtedness of the
Company. The net proceeds of the Unit Offering were $28.1 million and were
contributed as equity to CGGI.
Concurrent with the Offerings, the Company repaid a bank term loan and a bank
revolving credit agreement of $77.4 million and $4.6 million, respectively, and
repaid obligations under capital leases totaling $4.2 million. The Company also
paid a promissory note related to the acquisition of two adjacent golf course
facilities which had a balance of $2.8 million at June 4, 1996, which resulted
in a gain on early retirement of debt of $0.4 million. This gain and a $3.9
million write-off of unamortized loan fees related to the bank term loan and
bank revolving credit agreement have been recorded as extraordinary items in the
consolidated statement of operations.
In addition, on June 4, 1996, the Company and CGGI obtained a new $50 million
bank facility (the "New Credit Facility"), consisting of a $45 million bank
revolver for future acquisitions and capital projects and a six year $5 million
working capital facility to fund short term operating needs. At September 30,
1997, availability under the acquisition revolver and working capital facility
was $30,274,000 and $5,000,000, respectively. The New Credit Facility is secured
by substantially all of CGGI's assets, including the capital stock of CGGI and
its existing and future subsidiaries, and is guaranteed by the Company.
The New Credit Facility provides that borrowings bear interest, which is
payable quarterly, at the Eurodollar rate or a Floating Rate, as defined, plus a
fluctuating percentage based upon certain financial ratios (7.962% at September
30, 1997) and requires a non-use fee on the unused portion equal to 1/2% per
annum. The bank revolver provides that borrowings are payable based on certain
specified percentages in quarterly installments commencing September, 1998 and
ending March 2002. At the end of six years, the working capital facility expires
and any outstanding unpaid principal is payable in full.
The New Credit Facility requires mandatory reductions or prepayments of
principal as a result of certain events, provides for voluntary prepayments and
contains numerous covenants which, among other things, require the Company to
maintain defined leverage and interest coverage ratios, and limits the
incurrence of debt, capital expenditures and payment of dividends. At September
30, 1997, the Company was in compliance with such covenants.
Maturities of long-term debt (exclusive of capital lease obligations) for each
of the five years in the period ending September 30, 2002, are as follows: 1998-
- - -$146,807; 1999--$2,381,023; 2000--$3,581,115; 2001--$2,556,426; 2002--
$7,219,428; thereafter--$161,032,000.
13
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. REDEEMABLE PREFERRED STOCK
The preferred stock has priority upon liquidation over the Company's common
stock, and is also entitled to vote along with the common stock on the basis of
one vote per share of preferred stock. Shares of the preferred stock are
redeemable by the Company at any time, at the discretion of the Board of
Directors, for the purchase price of approximately $8 per share. Upon the sale,
consolidation or merger of the Company with or into another corporation, the
sale of all or substantially all of the Company's assets, or the sale or
exchange of stock representing at least 80% of the voting power of stock of the
Company, the Company must redeem all remaining outstanding shares of preferred
stock at the redemption price as defined above. During Fiscal 1995, the Company
issued 1,055,957 shares of preferred stock for proceeds totalling $8,629,824. As
of September 30, 1997, there have been no other issuances of preferred stock.
7. INCOME TAXES
Income taxes are provided for in accordance with the provisions of SFAS No.
109, Accounting for Income Taxes. Under this method, the Company recognizes
deferred tax assets and liabilities for the expected future tax effects of
temporary differences between the carrying amounts and the tax bases of assets
and liabilities, as well as operating loss carryforwards.
Significant components of the Company's deferred tax assets and liabilities
are shown below. A valuation allowance for $6,724,000, of which $2,742,000 is
related to 1997, has been recognized to offset the deferred tax assets as
realization of such assets is uncertain.
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Accounting basis in excess of tax
basis of golf properties............... $(4,184,000) $(4,184,000)
Depreciation .......................... (2,084,000) (1,165,000)
----------- -----------
Total deferred tax liabilities ......... (6,268,000) (5,349,000)
Deferred tax assets:
Net operating loss carryforwards ...... 6,149,000 2,826,000
Reserve for notes receivable .......... 711,000 1,093,000
Deferred gain on sale and leaseback ... 320,000 320,000
Accrued liabilities ................... 588,000 504,000
Capital loss carryforward ............. 783,000 --
Other, net.............................. 257,000 404,000
----------- -----------
Total deferred tax assets .............. 8,808,000 5,147,000
Valuation allowance for deferred tax
assets ................................ (6,724,000) (3,982,000)
----------- -----------
Net deferred tax assets ................ 2,084,000 1,165,000
----------- -----------
Net deferred tax liabilities ........... $(4,184,000) $(4,184,000)
=========== ===========
</TABLE>
At September 30, 1997, the Company has federal and state tax net operating
loss carryforwards of approximately $17,069,000 and $4,356,000, respectively.
The difference between the federal and state tax loss carryforwards is primarily
attributable to the fifty-percent limitation on California loss carryforwards.
The federal and state tax loss carryforwards will begin to expire in 2011 and
2001, respectively, unless previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the
Company's net operating loss and credit carryforwards may be limited if a
cumulative change in ownership of more than 50% occurs within any three year
period.
14
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Significant components of the provision for income taxes are as follows:
SEPTEMBER 30,
---------------------------------------------------
1997 1996 1995
---------------- ------------------- ----------
<S> <C> <C> <C>
Current:
Federal .............................................................. $ -- $(250,000) $ 307,000
State ................................................................ 49,000 152,000 208,000
------- --------- ---------
49,000 (98,000) 515,000
Deferred:
Federal .............................................................. -- 307,000 (307,000)
State ................................................................ -- -- --
------- --------- ---------
-- 307,000 (307,000)
------- --------- ---------
Total provision ......................................................... $49,000 $ 209,000 $ 208,000
======= ========= =========
</TABLE>
The following is a reconciliation of the actual tax provision to the expected
tax provision computed by applying the statutory federal income tax rate to
income before income taxes:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Income tax provision at statutory rate .................................. $(1,770,091) $(2,404,395) $(174,234)
State income tax provision .............................................. 31,900 98,800 135,200
Permanent differences ................................................... 28,787 87,736 177,938
Increase in valuation allowance and other ............................... 1,758,404 2,426,859 69,096
----------- ----------- ---------
Total provision for income taxes ........................................ $ 49,000 $ 209,000 $ 208,000
=========== =========== =========
</TABLE>
8. COMMITMENTS
In March 1995, the Company entered into a sale and leaseback transaction for
one of its golf course facilities. The Company received proceeds of
approximately $7.4 million and entered into a lease for fifteen years with two
five year renewal options. Minimum rent was $64,523 per month at September 30,
1997, and is subject to annual increases based upon changes in the Consumer
Price Index. The deferred gain on the sale and leaseback transaction of $499,000
is being amortized over the term of the lease.
The Company also leases four other golf facilities. The leases expire in the
years 1998 to 2029. The Company recorded an aggregate of approximately
$1,700,000, $1,346,000 and $639,000 in rent expense related to leased golf
course facilities for the years ended September 30, 1997, 1996 and 1995,
respectively.
The Company leases certain golf carts and maintenance equipment under capital
leases with terms of two to five years. Included in equipment, furniture and
fixtures in the accompanying consolidated balance sheets is equipment under
capital leases totaling $5,141,790 and $3,269,314 at September 30, 1997 and
1996, respectively. Accumulated amortization of equipment under capital leases
totaled $1,286,734 and $391,893 at September 30, 1997 and 1996, respectively.
15
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments at September 30, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDING SEPTEMBER 30, LEASES LEASES
-------------------------- ----------- -----------
<S> <C> <C>
1998 ........................................... $1,327,860 $ 2,442,366
1999 ........................................... 1,256,951 2,415,366
2000 ........................................... 1,105,210 2,415,366
2001 ........................................... 651,345 2,380,336
2002 ........................................... 61,291 2,310,276
Thereafter ..................................... -- 20,587,320
---------- -----------
Total minimum lease payments ................ 4,402,657 $32,551,030
===========
Amount representing interest ................... 674,703
----------
Present value of net minimum lease payments...... 3,727,954
Current portion ................................ 1,024,316
----------
$2,703,638
==========
</TABLE>
In accordance with certain purchase agreements, the Company is required to
maintain the respective golf courses in good condition and make various capital
improvements. As of September 30, 1997, the Company had a commitment to build an
additional nine holes at a facility with an estimated aggregate cost of
approximately $3.6 million.
9. RELATED PARTY TRANSACTIONS
In connection with the formation of the Company, an officer of the Company
contributed his interests in the leases of two golf course facilities in
exchange for 55,105 shares of preferred stock, $235,270 cash and a $250,000 note
due in 1999. The officer also contributed his options to acquire certain other
golf course facilities at no cost to the Company.
An affiliate of the majority stockholder of Holdings provides investment
banking and consulting services to the Company. The Company is obligated to pay
a service fee to the affiliate semi-annually in advance in an amount equal to 1%
per annum of the affiliate's debt and equity investment in the Company and to
reimburse the reasonable fees and costs incurred by the affiliate in providing
services to the Company. The Company paid $588,031, $436,741 and $1,076,416 in
fees to the affiliate pursuant to these obligations during the years ended
September 30, 1997, 1996 and 1995, respectively.
10. EMPLOYEE BENEFIT PLAN
The Company has an employee savings plan (the "Plan") that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Plan, which covers employees of the Company who have met certain
eligibility requirements, participating employees may defer up to 17% of their
pretax earnings, up to $9,500. The Company matches up to 20% of the employee's
contributions, up to a maximum of 4% of the employee's earnings. The Company's
matching contribution to the Plan, which vests equally over three years,
amounted to approximately $49,000, $35,000 and $8,000 for the years ended
September 30, 1997, 1996 and 1995, respectively.
16
<PAGE>
11. STOCK OPTION PLAN
The Company has a stock option plan whereby options to purchase 250,000 of the
Company's common stock may be granted. Options granted have a 5 year term and
generally vest over 2 to 5 years from the date of grant.
Pro forma information regarding net loss is required by SFAS 123, and has been
determined as if the Company had accounted for its employee stock options under
the fair value method of SFAS 123. The fair value of these options was
estimated at the date of grant using the Minimum Value Method option pricing
model with the following weighted-average assumptions for 1997 and 1996: risk-
free interest rate of 6.1%; dividend yield of 0%; and weighted-average life of
the options of 3.3 years.
The Minimum Value Method option valuation model was developed for use in
estimating the fair value of nonpublic entities. In addition, option valuation
models require the input of highly subjective assumptions. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in managements'
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's pro
forma net loss for the years ended September 30, 1997 and 1996 are $5,208,089
and $6,969,125, respectively.
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------
1997 1996
-------------------- --------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Outstanding - beginning of year ....... 57,261 $15.27 -- $15.27
Granted ............................... 66,239 $16.23 58,352 $15.27
Forfeited ............................. (5,817) $15.27 (1,091) $15.27
------- ------
Outstanding - end of year ............. 117,683 $15.81 57,261 $15.27
======= ======
Weighted-average fair value of options
granted during the year .............. $ 0.81 $ 1.67
</TABLE>
Exercise prices for options outstanding as of September 30, 1997 ranged from
$15.27 to $17.10. The weighted-average remaining contractual life of those
options is approximately 4 years. No options were exercisable at September 30,
1997 and 1996. At September 30, 1997, options for 125,409 shares were available
for future grant and have been reserved for issuance under the Company's stock
option plan.
12. SUBSEQUENT EVENT
In November, 1997, the Company purchased an 18-hole semi-private country
club located near Orlando, Florida for a total cash purchase price of
approximately $5.9 million.
17
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
COBBLESTONE HOLDINGS, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
----------------------------
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Debt issuance costs, net of accumulated amortization of $223,783 and
$52,769 at September 30, 1997 and 1996, respectively ..................... $ 1,938,239 $ 2,109,253
Investment in and net amounts due from wholly owned subsidiary.............. 65,437,130 65,957,264
------------ -----------
$ 67,375,369 $68,066,517
============ ===========
LIABILITIES AND NET CAPITAL DEFICIENCY
Long-term debt.............................................................. $ 34,740,302 $30,325,046
Redeemable preferred stock.................................................. 42,241,169 42,241,169
Net capital deficiency:
Common stock............................................................. 17,224 17,224
Paid-in capital.......................................................... 5,388,983 5,388,983
Accumulated deficit...................................................... (15,012,309) (9,905,905)
------------ -----------
Net capital deficiency...................................................... (9,606,102) (4,499,698)
------------ -----------
$ 67,375,369 $68,066,517
============ ===========
</TABLE>
See accompanying notes.
18
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
COBBLESTONE HOLDINGS, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------
1997 1996 1995
------------ ------------ ----------
<S> <C> <C> <C>
Interest expense ................................................ $(4,586,270) $(1,415,165) $ --
Equity in net loss of wholly owned subsidiary ................... (520,134) (5,526,037) (705,812)
----------- ----------- ---------
Net loss ........................................................ $(5,106,404) $(6,941,202) $(705,812)
=========== =========== =========
</TABLE>
See accompanying notes.
19
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
COBBLESTONE HOLDINGS, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ......................................................... $(5,106,404) $ (6,941,202) $ (705,812)
Deferred interest and amortization ............................... 4,586,270 1,415,165 --
Equity in net loss of wholly owned subsidiary .................... 520,134 5,526,037 705,812
----------- ------------ ------------
Net cash provided by operating activities ........................ -- -- --
INVESTING ACTIVITIES
Contribution to wholly owned subsidiary............................ -- (28,113,426) (12,614,143)
FINANCING ACTIVITIES
Proceeds from long-term debt ..................................... -- 28,962,650 --
Debt issuance costs .............................................. -- (2,162,022) --
Proceeds from issuance of redeemable preferred stock ............. -- -- 8,629,824
Proceeds from issuance of common stock ........................... -- 1,312,798 3,984,319
----------- ------------ ------------
Net cash provided by financing activities ........................ -- 28,113,426 12,614,143
----------- ------------ ------------
Net change in cash ............................................... $ -- $ -- $ --
=========== ============ ============
</TABLE>
See accompanying notes.
20
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
COBBLESTONE HOLDINGS, INC. (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1997
1. BASIS OF PRESENTATION
Cobblestone Holdings, Inc. (the "Company"), a Delaware corporation, was
incorporated on January 18, 1994 by shareholders of Cobblestone Golf Group, Inc.
("CGGI"). On January 31, 1994, the Company issued shares of its common and
preferred stock in exchange for all of the shares of CGGI. The transaction has
been accounted for at historical cost in a manner similar to a pooling of
interests and, accordingly, had no effect on the accompanying consolidated
financial statements.
The Company, through its wholly-owned subsidiary CGGI, owns and operates golf
courses in the United States, with a current portfolio of 24 golf properties
including private country clubs, semi-private clubs and public (or daily fee)
courses. The Company's courses are concentrated in clusters near metropolitan
areas in the Sunbelt states (including Arizona, California and Texas) which have
large golfing populations and attractive climates.
The Company's business consists primarily of operating golf courses and
related facilities, with revenue generated from membership fees and dues at
private country clubs, greens fees, food and beverage services, golf cart
rentals, retail merchandise sales, driving range fees and lodging fees. The
Company owns 18 courses, leases four courses (subject to long-term leases in
excess of 20 years, including extension options), leases one driving range and
pro shop facility and manages one additional course. The Company's portfolio
includes ten private country clubs, nine public facilities and five semi-private
facilities.
2. GUARANTEE
The wholly owned subsidiary of the Company, CGGI, has a credit facility with a
bank and has borrowings of $14,726,000 under the facility outstanding at
September 30, 1997. Under the terms of the credit facility agreement, the
Company has guaranteed the payment of all principal and interest.
21
<PAGE>
COBBLESTONE HOLDINGS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO CHARGES TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
YEAR EXPENSES ACCOUNTS ACQUISITIONS DEDUCTIONS YEAR
------------ ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1995
Deducted from asset accounts:
Allowance for doubtful
accounts receivable................. $ 67,000 $ 58,550 $ -- $ -- $ 49,550 $ 76,000
Allowance for uncollectable
notes receivable .................. -- -- 2,117,000 -- -- 2,117,000
Valuation allowance for
imputed interest .................. -- -- 1,242,867 -- -- 1,242,867
---------- -------- ---------- ------------ -------- ----------
Total................................... $ 67,000 $ 58,550 $3,359,867 $ -- $ 49,550 $3,435,867
========== ======== ========== ============ ======== ==========
YEAR ENDED SEPTEMBER 30, 1996
Deducted from asset accounts:
Allowance for doubtful
accounts receivable ............... $ 76,000 $151,000 $ -- $38,000 $ 90,000 $ 175,000
Allowance for uncollectable
notes receivable .................. 2,117,000 -- -- -- 712,067 1,404,933
Valuation allowance for
imputed interest .................. 1,242,867 -- 15,043 -- -- 1,257,910
---------- -------- ---------- ------------ -------- ----------
Total ................................. $3,435,867 $151,000 $ 15,043 $38,000 $802,067 $2,837,843
========== ======== ========== ============ ======== ==========
YEAR ENDED SEPTEMBER 30, 1997
Deducted from asset accounts:
Allowance for doubtful
accounts receivable ............... $ 175,000 $312,000 $ -- $41,000 $195,000 $ 333,000
Allowance for uncollectable
notes receivable .................. 1,404,933 -- -- -- 623,110 781,823
Valuation allowance for
imputed interest .................. 1,257,910 -- 308,384 -- -- 949,526
---------- -------- ---------- ------------ -------- ----------
Total ................................. $2,837,843 $312,000 $ 308,384 $41,000 $818,110 $2,064,349
========== ======== ========== ============ ======== ==========
</TABLE>
22
Exhibit 99.2
COBBLESTONE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
------------- --------------
(Unaudited) (Note)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ........................................................... $ 400,432 $ 3,519,133
Accounts receivable, net ............................................................ 3,554,935 3,067,347
Current portion of notes receivable, net ............................................ 2,420,749 2,108,796
Inventory ......................................................................... 3,215,730 2,450,328
Prepaid expenses and other current assets ........................................... 1,504,608 1,238,616
------------ ------------
Total current assets ............................................................. 11,096,454 12,384,220
Property, equipment and leasehold interests, net ..................................... 176,830,098 156,228,507
Notes receivable, net ................................................................ 3,738,380 3,964,691
Intangible assets, net ............................................................... 3,489,002 3,611,199
Other assets, net .................................................................... 6,332,264 6,081,103
------------ ------------
$201,486,198 $182,269,720
============ ============
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Accounts payable .................................................................... $ 1,587,368 $ 3,502,231
Accrued payroll and related expenses ................................................ 2,272,643 2,522,130
Accrued interest expense ............................................................ 3,275,881 2,830,562
Accrued property taxes .............................................................. 731,154 1,576,078
Deferred revenue .................................................................... 1,797,607 1,666,970
Current portion of long-term debt and capital lease obligations ..................... 997,034 1,171,123
Current portion of deferred purchase price .......................................... 205,353 205,353
Income taxes payable ................................................................ 49,000 49,000
Other current liabilities ........................................................... 722,440 529,823
------------ ------------
Total current liabilities ........................................................ 11,638,480 14,053,270
Long-term debt and capital lease obligations ......................................... 153,397,491 128,162,096
Note payable to stockholder/officer .................................................. 236,566 232,467
Deferred purchase price .............................................................. 435,120 537,797
Long-term deferred revenue ........................................................... 1,912,992 2,128,480
Deferred income taxes ................................................................ 4,184,000 4,184,000
Minority interest .................................................................... 336,543 336,543
Redeemable preferred stock, $.01 par value
Authorized shares--10,000,000
Issued and outstanding shares--5,220,376 at March 31, 1998
and September 30, 1997
Liquidation preference of $43,075,700 at March 31, 1998 and
September 30, 1997 ................................................................ 42,241,169 42,241,169
Net capital deficiency:
Common stock, $.01 par value:
Authorized shares--5,000,000
Issued and outstanding shares--1,722,449 at March 31, 1998 and
September 30, 1997 ............................................................... 17,224 17,224
Paid-in capital ..................................................................... 5,388,983 5,388,983
Accumulated deficit ................................................................. (18,302,370) (15,012,309)
------------ ------------
Net capital deficiency................................................................. (12,896,163) (9,606,102)
------------ ------------
$201,486,198 $182,269,720
============ ============
</TABLE>
Note: The balance sheet at September 30, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for financial
statements.
See accompanying notes.
<PAGE>
COBBLESTONE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------------- ----------------------------------
1998 1997 1998 1997
-------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Operating revenues:
Golf revenues ............................... $16,360,492 $13,944,044 $31,232,266 $25,759,281
Food and beverage revenues .................. 3,250,266 2,712,508 6,943,452 5,761,745
Pro shop sales .............................. 1,340,402 1,271,721 3,036,487 2,887,937
Other ....................................... 866,928 767,713 1,658,576 1,273,855
----------- ----------- ----------- -----------
Total operating revenues ................. 21,818,088 18,695,986 42,870,781 35,682,818
Operating expenses:
Golf course operations ...................... 12,727,833 11,112,728 25,464,313 22,322,110
Cost of food and beverage ................... 1,123,787 889,832 2,279,317 1,831,492
Cost of pro shop sales ...................... 833,841 852,718 1,882,858 1,858,916
General and administrative .................. 1,081,120 947,782 2,136,929 1,916,329
Depreciation and amortization ............... 2,706,088 2,247,888 5,127,719 4,456,527
----------- ----------- ----------- -----------
Total operating expenses ................. 18,472,669 16,050,948 36,891,136 32,385,374
----------- ----------- ----------- -----------
Income from operations ........................ 3,345,419 2,645,038 5,979,645 3,297,444
Interest expense, net ......................... (5,144,876) (3,771,750) (9,260,686) (7,375,271)
----------- ----------- ----------- -----------
Loss before income taxes ...................... (1,799,457) (1,126,712) (3,281,041) (4,077,827)
Provision for income taxes .................... -- 60,436 9,020 83,316
----------- ----------- ----------- -----------
Net loss ...................................... $(1,799,457) $(1,187,148) $(3,290,061) $(4,161,143)
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
2
<PAGE>
COBBLESTONE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
-------------------------------
1998 1997
-------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ........................................................................... $ (3,290,061) $ (4,161,143)
Adjustments to reconcile net loss to net cash provided by ( used in)
operating activities:
Depreciation and amortization ..................................................... 5,531,499 4,852,222
Interest on zero-coupon notes ..................................................... 2,433,582 2,135,554
Provision for doubtful accounts ................................................... (58,528) (228,999)
Changes in assets and liabilities:
Notes and accounts receivable ................................................... (322,046) (313,031)
Inventory ....................................................................... (488,363) (610,472)
Prepaid expenses and other assets ............................................... (850,417) (52,227)
Accounts payable, accrued liabilities and deferred revenue ...................... (2,886,231) (3,621,692)
------------ ------------
Net cash provided by (used in) operating activities ................................ 69,435 (1,999,788)
INVESTING ACTIVITIES
Acquisition-related costs .......................................................... (18,956,349) (9,139,627)
Additions to property, equipment and leasehold interests ........................... (5,801,110) (4,070,256)
------------ ------------
Net cash used in investing activities .............................................. (24,757,459) (13,209,883)
FINANCING ACTIVITIES
Proceeds from long-term debt ....................................................... 22,845,000 11,964,000
Principal payments on long-term debt and capital leases ............................ (1,173,000) (1,489,274)
Payments on deferred purchase price ................................................ (102,677) (272,906)
------------ ------------
Net cash provided by financing activities .......................................... 21,569,323 10,201,820
Net decrease in cash and cash equivalents .......................................... (3,118,701) (5,007,851)
Cash and cash equivalents at beginning of period ................................... 3,519,133 6,578,946
------------ ------------
Cash and cash equivalents at end of period ......................................... $ 400,432 $ 1,571,095
============ ============
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .......................................................................... $ 5,980,305 $ 4,697,002
============ ============
Income taxes, net ................................................................. $ 42,728 $ 100,863
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital leases entered into ........................................................ $ 945,607 $ 1,003,080
============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
Cobblestone Holdings, Inc. (the "Company"), a Delaware corporation, was
incorporated on January 18, 1994 by shareholders of Cobblestone Golf Group, Inc.
("CGGI"). On January 31, 1994, the Company issued shares of its common and
preferred stock in exchange for all of the shares of CGGI. The Company, through
its wholly-owned subsidiary CGGI, owns and operates golf courses in the United
States, with a current portfolio of 32 golf properties including private country
clubs, semi-private clubs and public (or daily fee) courses. The Company's
courses are concentrated in clusters near metropolitan areas primarily in the
Sunbelt states (including Arizona, California, Georgia, Florida, Texas and
Virginia) which have large golfing populations and attractive climates.
The Company's business consists primarily of operating golf courses and
related facilities, with revenue generated from membership fees and dues at
private country clubs, greens fees, food and beverage services, golf cart
rentals, retail merchandise sales, driving range fees and lodging fees. The
Company owns twenty-one courses, leases four courses (subject to long-term
leases in excess of 20 years, including extension options), leases one driving
range and pro shop facility and manages six additional courses. The Company's
portfolio includes twelve private country clubs, eleven public facilities and
nine semi-private facilities.
Seasonal weather conditions as well as the timing of new course purchases or
leases may cause the Company's results of operations to vary from quarter to
quarter.
The Company has acquired certain golf facilities through its wholly-owned and
majority-owned subsidiaries. The consolidated financial statements include the
accounts of the Company and such subsidiaries. Intercompany balances and
transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month period ended March
31, 1998 are not necessarily indicative of the results that may be expected for
the year ended September 30, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended September 30, 1997.
2. 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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
4
<PAGE>
COBBLESTONE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
3. MERGER AGREEMENT
In January, 1998, the Company announced that it had reached a definitive
merger agreement to be acquired by The Meditrust Companies ("Meditrust") for
Meditrust stock valued at approximately $241 million. In addition, under the
terms of the agreement, approximately $154 million of the Company's debt and
associated costs will be either refinanced or assumed as a condition of closing.
Meditrust is a paired share real estate investment trust and the nation's
largest heath care real estate investment trust.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Operating Revenue. Operating revenue increased to $21.8 million for the three
months ended March 31, 1998 from $18.7 million for the comparable prior year
period, an increase of $3.1 million or 16.6%. Of this increase, $2.7 million is
attributable to operating revenue for the five courses acquired by the Company
subsequent to December, 1996. The remaining $0.4 million is attributable to a
general increase in operating revenue from the Company's other facilities,
despite poor weather conditions.
Course-level Operating Expenses. Course-level operating expenses, which
include costs of golf course operations (e.g., salaries, taxes and utilities),
costs of food and beverage sales and costs of pro shop sales increased to $14.7
million for the three months ended March 31, 1998 from $12.9 million for the
comparable prior year period, an increase of $1.8 million or 14.0%. This
increase is primarily attributable to operating course-level operating expenses
for the five courses acquired by the Company subsequent to December, 1996.
General and Administrative Expenses. General and administrative expenses
primarily consist of corporate salaries and related expenses and legal and
accounting fees. General and administrative expenses increased to $1.1 million
for the three months ended March 31, 1998 from $0.9 million for the comparable
prior year period, an increase of $0.2 million or 22.2%. The increase is
attributable to additional overhead to support the Company's expanded operations
during the second quarter of fiscal 1998. General and administrative expenses as
a percentage of operating revenue was 5.0% for the three months ended March 31,
1998, a decrease from 5.1% for the comparable prior year period.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased to $2.7 million for the three months ended March 31, 1998 from $2.2
million for the comparable prior year period, an increase of $0.5 million or
22.7%. This increase is primarily attributable to depreciation and amortization
expense for the five courses acquired by the Company subsequent to December,
1996.
Income from Operations. Income from operations increased to $3.3 million for
the three months ended March 31, 1998 from $2.6 million for the comparable prior
year period, primarily due to the factors described above. Income from
operations as a percentage of operating revenue was 15.3% for the three month
period ended March 31, 1998, an increase from 14.1% for the comparable prior
year period.
Interest Expense, Net. Interest expense, net, increased to $5.1 million for
the three months ended March 31, 1998 from $3.8 million for the comparable prior
period, an increase of $1.3 million or 34.2%. The increase is primarily due to a
higher level of outstanding debt as a result of golf course facility
acquisitions.
Net loss. Net loss increased to $1.8 million for the three months ended March
31, 1998 from $1.2 million for the comparable prior year period, primarily due
to the factors described above.
SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH 31, 1997
Operating Revenue. Operating revenue increased to $42.9 million for the six
months ended March 31, 1998 from $35.7 million for the comparable prior year
period, an increase of $7.2 million or 20.2%. Of this increase, $4.8 million is
attributable to the operating revenue for the five courses acquired by the
Company subsequent to December 1996. The remaining $2.4 million is attributable
to increased revenue from the Company's other facilities as a result of
increased marketing efforts, price increases and utilizations.
6
<PAGE>
Course-level Operating Expenses. Course-level operating expenses, which
include costs of golf course operations (e.g., salaries, taxes and utilities),
costs of food and beverage sales and costs of pro shop sales increased to $29.6
million for the six months ended March 31, 1998 from $26.0 million for the
comparable prior year period, an increase of $3.6 million or 13.8%. This
increase is primarily attributable to course-level operating expenses for the
five courses acquired by the Company subsequent to December, 1996.
General and Administrative Expenses. General and administrative expenses
primarily consist of corporate salaries and related expenses and legal and
accounting fees. General and administrative expenses increased to $2.1 million
for the six months ended March 31, 1998 from $1.9 million for the comparable
prior year period, an increase of $0.2 million or 10.5%. The increase in expense
is related to non-recurring costs associated with the settlement of a law suit
and to additional overhead to support the Company's expanded operations during
the second quarter of fiscal 1998. General and administrative expenses as a
percentage of operating revenue was 5.0% for the six months ended March 31,
1998, a decrease from 5.4% for the comparable prior year period.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased to $5.1 million for the six months ended March 31, 1998 from $4.5
million for the comparable prior year period, an increase of $0.6 million or
13.3%. This increase is primarily attributable to the inclusion of the five
courses acquired subsequent to December, 1996.
Income from Operations. Income from operations increased to $6.0 million for
the six months ended March 31, 1998 from $3.3 million for the comparable prior
year period, primarily due to the factors described above. Income from
operations as a percentage of operating revenue was 13.9% for the six month
period ended March 31, 1998, an increase from 9.2% for the comparable prior year
period. The change is due to increased marketing efforts, pricing and
utilization of the Company's facilities.
Interest Expense, Net. Interest expense, net, increased to $9.3 million for
the six months ended March 31, 1998 from $7.4 million for the comparable prior
period, an increase of $1.9 million or 25.7%. The increase is primarily due to a
higher level of outstanding debt as a result of golf course facility
acquisitions.
Provision for Income Taxes. The Company recorded a $9,020 provision for income
taxes, which reflects the fact that certain subsidiaries generate taxable income
in individual states and localities notwithstanding the Company's consolidated
loss for financial reporting purposes.
Net loss. Net loss increased to $3.3 million for the six months ended March
31, 1998 from $4.2 million for the comparable prior year period, primarily due
to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary uses of cash are to fund debt service and maintenance
capital expenditures at its existing facilities (such as landscaping and
purchasing golf cart fleets). The Company also implements one-time upgrade and
renovation capital expenditures at its existing facilities in order to enhance
their appeal to customers and members and to generate additional revenues and
cash flow. Examples of these expenditures are the addition of courses (including
nine hole additions) to existing facilities to increase capacity and clubhouse
renovations to support increased dues and fees. These expenditures are generally
of a non-recurring nature. In addition, the Company implements strategic capital
expenditure programs which enable it to reduce course level operating costs and
improve the efficiency of operations, such as improving the irrigation system,
acquiring more efficient maintenance equipment and other programs which enhance
the marketability and/or reduce the operating expenses of existing facilities.
As part of its business strategy, the Company will require cash to continue to
acquire, lease or manage additional golf courses and the related facilities and
to complete any targeted renovations. The Company expended $19.0 million on
acquisition-related costs and $5.8 million on capital improvements during the
six months ended March 31, 1998. As of March 31, 1998, the Company had
approximately $3.6 million of long-term commitments for one-time capital
expenditures with respect to a golf facility which is currently under
development.
7
<PAGE>
Based upon the current level of operations and anticipated growth, the Company
believes that cash flow from operations, together with available borrowings
under the Company's credit facility and other sources of liquidity, will be
adequate to meet the Company's anticipated future requirements for working
capital, capital expenditures and scheduled payments of principal and interest
on its indebtedness. There can be no assurance, however, that the Company's
business will generate sufficient cash flow from operations or that future
working capital borrowings will be available in an amount sufficient to enable
the Company to service its indebtedness or make necessary capital expenditures.
The Company intends to fund these expenditures primarily with operating cash
flow and borrowings under its credit facility. The credit facility provides for
borrowings of up to $50.0 million, of which $45.0 million is available to fund
future acquisitions of golf courses and capital expenditures at such courses and
certain capital improvements at existing courses, and $5.0 million of which is
available for general working capital purposes. The total borrowing availability
under the $45.0 million portion of the credit facility will decrease over the
term of the facility beginning September 30, 1998. The credit facility provides
that the Company may not make any acquisitions or upgrade capital expenditures
when Funded Debt plus certain projected upgrade capital expenditures is greater
than 6.5x of Adjusted EBITDA (each as defined in the credit facility), with
certain adjustments for notes receivable, reducing over time. The maximum funded
debt to EBITDA Ratio was 5.25x at March 31, 1998. The credit facility also
imposes other limitations on the ability of the Company with respect to
borrowings. As on March 31, 1998, the Company had $37.1 million outstanding
under the credit facility. In addition, as of March 31, 1998, the Company had
$0.4 million of cash on hand to meet its working capital and other needs.
Historically, the Company has financed its operations through borrowings under
bank credit facilities and equity contributions by its stockholders. As of March
31, 1998, the Company's stockholders have invested a total of $47.6 million of
equity to fund the expansion of the Company and its golf course portfolio.
For the six month period ended March 31, 1998, net cash provided by operating
activities was $0.1 million versus a $2.0 million use of cash in the comparable
prior year period. The largest non-cash charges for the six month period ended
March 31, 1998 were depreciation and amortization and interest on zero-coupon
notes.
During the six month period ended March 31, 1998, net cash used in investing
activities was $24.8 million versus $13.2 million in the prior comparable
period. Expenditures for the six months ended March 31, 1998 consisted of $19.0
million in acquisition-related costs and $5.8 million in capital expenditures.
During the six month period ended March 31, 1998, net cash provided by
financing activities was $21.6 million versus $10.2 million in the prior
comparable period. During the six months ended March 31, 1998, the Company
borrowed $18.3 million under its acquisition facility and $4.5 under its working
capital revolver. During that same period, the Company paid $1.3 million in
principal of its bank facility and other obligations. At March 31, 1998,
borrowings under the $50 million credit facility totaled $37.1 million.
8
