SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDED CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 26, 1997
GOLF VENTURES, INC.
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Exact name of registrant as specified in its charter
Utah 0-21337 87-0403864
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State or other jurisdiction Commission File No. IRS Employer ID #
of incorporation
255 South Orange Avenue, Suite 1515, Orlando, Florida 32801
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Address and zip code of principal executive offices
407-245-7557
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Registrant's telephone number
On February 23, 1998 Registrant filed a report on Form 8-K disclosing
financial information about the reverse acquisition transaction with U.S. Golf
Communities, Inc. as required by the Instructions to this Form and other
applicable Commission Rules. Additional disclosures were made under several
other items in the February 23, 1998 Report with information that was deemed
important and useful to increase the information mix about the Registrant
available in the public markets.
Some corrections need to be made to the financial statements filed with the
February 23, 1998 Report, and these are reflected in this Amended Report.
Certain other information of current importance is also included in this Amended
Report. Nothing material has been deleted from the February 23, 1998 Report
through this Amended Report.
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Item 1. Changes in Control of Registrant
By an earlier filing on Form 8-K filed on or about November 26, 1997, the
Company reported that it had closed on its reverse acquisition transaction with
U.S. Golf Communities, Inc. The result of this transaction was that the
shareholders of U.S. Golf Communities, Inc. received shares of the Company's new
Series D Convertible Preferred Stock constituting approximately 81% of total
common share votes of the Company and constituting approximately 81% of the
total equity shares of the Company. U.S. Golf Communities, Inc. became a wholly
owned subsidiary of the Company, and thereby the Company gained ownership of the
assets and liabilities of U.S. Golf Communities, Inc.
As provided in the Notes to this Form 8-K, audited financial information
about U.S. Golf Communities, Inc. and pro forma combined financial information
about the Company after the U.S. Golf Communities transaction were to be filed
with the Commission within 75 days of the closing on November 26, 1997. This
Form is filed to fulfill that requirement. (See Exhibits)
In this regard, the current Directors and management of the Company are
relying on financial records compiled and kept by the former Directors and
management of the Company in presenting financial information for periods prior
to November 26, 1997.
Item 2. Acquisition or Disposition of Assets
On December 4, 1997, the Company executed and delivered a series of
agreements that resulted in the Company acquiring 81% of the issued and
outstanding stock of Pelican Strand Development Corporation ("Development") from
Maricopa Hardy Development Group, Inc. in return for the issuance of 3,432,713
new restricted shares of authorized Company common stock. Development is the
general partner of a Florida limited partnership which owns and operates the
Pelican Strand golf and country club in Naples, Florida, the value of which the
Company believed justified the purchase price. For the year ended December 31,
1997, the Company's share of Development's net operating loss would have been
$(150,000) if the acquisition of the Company's interest had taken place on or
before January 1, 1997.
Shortly after this closing, the Commission's lawsuit against the Company was
filed without prior notice to the Company. The pendency of the Commission's
lawsuit resulted in the Company receiving notices from legal counsel for
Maricopa Hardy Development Group of a desire to rescind the transaction. The
Company is working to resolve the issues raised by Maricopa Hardy and its legal
counsel. This acquisition will be accounted for under the purchase method of
accounting. The Company's financial statements filed in its Annual Report on
Form 10-KSB will reflect the Pelican Strand acquisition and results.
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Item 3. Bankruptcy or Receivership
Not Applicable.
Item 4. Changes in Registrant's Certifying Accountant
On March 13, 1998, the Company formally terminated its independent auditor
relationship with Jones Jensen & Co. (A response letter from Jones Jensen & Co.
is attached to this filing as an exhibit.)
Each of Jones, Jensen's reports on the financial statements of the Company
for the fiscal years ended March 31, 1997 and 1996 were qualified as to
uncertainty with respect to the Company's ability to continue as a going
concern.
The decision to change accountants was approved by the Company's Board of
Directors.
During the fiscal years ended March 31, 1997 and 1996, and during the period
April 1, 1997 through March 13, 1998, there were no disagreements with Jones,
Jensen on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedures or any reportable event.
On March 19, 1998, the Company formally engaged BDO Seidman LLP ("BDO") as
its independent auditors who will audit and report on the financial statements
of the Company for the fiscal year ended December 31, 1997. (A copy of the BDO
engagement letter tin attached to this filing as an exhibit.)
Prior to engaging BDO, neither the Company nor anyone acting on its behalf
consulted with BDO regarding the application of accounting principles to any
specified transaction or the type of audit opinion that might be rendered on the
Company's financial statements. In addition, during the Company's fiscal years
ended March 31, 1997 and 1996, and the interim period from April 1, 1997 to
March 13, 1998, neither the Company nor anyone acting on its behalf consulted
with BDO with respect to any matters that were the subject of a disagreement (as
defined in Item 304(a)(1)(iv) of Regulation S-K) or a reportable event (as
described in Item 304(a)(1)(v) of Regulation S-K).
Item 5. Other Events
In connection with the disclosures made herein concerning the Company's
reverse acquisition transaction with US Golf, the Company makes the following
clarifying disclosures of historical information which are designed to bring the
information about the Company in the public markets to a state of currency and
completeness as the Company prepares to file its first Annual Report on Form
10-KSB as a new combined entity with US Golf.
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The Company's Historical Connection with George Badger
The Company was organized in 1983, primarily under the auspices of George
Badger, and continued, under Mr. Badger's practical control, without significant
operations until 1993.
In 1990, Mr. Badger caused his affiliate, American Resource and Development
Corporation ("ARDCO") (formerly known as Leasing Technology, Inc.) to acquire a
large tract of land in Washington City, Utah and a large residential development
in St. George, Utah. Duane Marchant, an experienced real estate professional who
was involved with the St. George residential property acquired by ARDCO, was
employed by ARDCO to develop all of these Southern Utah properties. In 1992,
ARDCO concluded that the Company was the appropriate vehicle to hold and develop
these Southern Utah properties, and ARDCO sold the Washington City project, and
the St. George residential developments, then named Cotton Manor and Cotton
Acres, to the Company in exchange for 654,746 new shares of the Company's common
stock, which represented at that time approximately 86% of the Company's total
outstanding shares. Thus ARDCO become the majority shareholder of the Company at
this time. The Company also assumed $4,338,319 of debt to third parties in
connection with the acquired properties. Mr. Marchant became the President of
the Company, and continued in that capacity until the U.S. Golf transaction
closed in November, 1997.
Between its activation as an operating company in 1993 and the Summer of
1997, Mr. Badger continued to exercise control over the financial operations of
the Company, including matters involving the issuance of securities and
disclosures to the public. Mr. Badger and his affiliates have had no control
over the business or affairs of the Company in a legal or practical sense since
late Summer, 1997, although Mr. Badger or members of his family, and ARDCO,
continue to be shareholders of the Company.
On October 10, 1996, a criminal complaint was filed in the Southern District
of New York against Mr. Badger charging him with a number of violations of law
related to alleged unlawful and undisclosed compensation to securities brokers
and promoters to induce them to cause customers to purchase securities issued by
ARDCO and the Company. (The Company has learned that Mr. Badger has pleaded
guilty to counts of: (i) conspiracy to commit securities fraud; (ii) securities
fraud; (iii) criminal contempt; and (iv) perjury.)
Upon learning of the criminal charges filed against Mr. Badger, the Company
retained legal counsel, who conducted interviews of Company management. This
legal counsel drafted a press release issued by the Company (dated October 18,
1996) stating that the Company was undertaking an investigation of Mr. Badger's
activities involving the Company and its securities. Any impression of that
press release of a far ranging and comprehensive independent investigation was
corrected in a later press release (dated August 12, 1997), and the Company
never completed or published a report on any such investigation.
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On advice of new legal counsel, the Company began to separate itself from
ARDCO and Mr. Badger, through increasing physical separation and the continuing
retention of independent counsel. Such separation was not completed until late
in the Summer of 1997. By September 1997, the Company was able to relocate its
executive offices to St. George, Utah, in one of the Company's model homes in
the Cotton Manor development, and away from the office sharing arrangement with
ARDCO that had been in place for the prior approximately ten years. All of these
steps were taken by the Company in an effort to achieve practical and actual
distance from ARDCO and Mr. Badger.
In early 1997, U.S. Golf Communities, Inc. ("US Golf") retained Oppenheimer &
Co., investment bankers, to locate a suitable public company merger partner.
Later in 1997, Oppenheimer introduced US Golf to George Badger, Duane Marchant
and the Company. An agreement in principle was reached in mid-1997 for the
Company to acquire US Golf in a transaction that would give the shareholders of
US Golf voting control of the Company. In August, 1997, a definitive agreement
was signed with US Golf for the reverse acquisition. With the closing of the US
Golf transaction on November 26, 1997, voting and financial control of the
Company passed from ARDCO and its affiliates to the shareholders of US Golf,
subject to ratification by the Company's shareholders at the next annual
meeting.
In late Summer, 1997, ARDCO made claims against the Company for
reimbursements and other amounts arising in connection with the Company's early
years and the introduction of US Golf to the Company. Mr. Badger caused
approximately 860,000 shares to be issued to ARDCO in satisfaction of these
claims. When the President of the Company learned of this stock issuance, he
consulted with legal counsel and took action to cancel the shares, although the
Company had already reported the issuance of these shares in its 10-Q report for
the quarter ended June 30, 1997 with respect to a settlement in principle
believed to have been reached with ARDCO. Thereafter, arm's length negotiations,
through counsel, ensued between the Company and ARDCO, and have continued in an
effort to explore and resolve this claim without litigation, and in an effort to
create a complete legal and practical separation from ARDCO. During the Fall of
1997, the Company believed on several occasions that it understood the nature of
the ARDCO claims and that a settlement in principle had been reached. The
Company attempted in its filings with the Commission to disclose the agreements
in principle it thought it had reached. Each time, however, the parties failed
to consumate any agreement. For example, shortly before the closing of the U.S.
Golf transaction, the Company believed that it had reached an agreement with
ARDCO on this issue, and the then-President of the Company actually signed a
written release agreement, subject to board approval. The Company reported the
pending issuance of shares of common stock to ARDCO in filings with the
Commission during October-December 1997. Subsequent to those filings, problems
and issues arose causing the Company's Board of Directors to question the
validity of the claims and to disapprove the signed settlement proposal.
Recently ARDCO has indicated that its claims are for "services rendered" rather
than based on past advances or reimbursement claims. Prior reports by the
Company on this matter, which have characterized the ARDCO claim to be for past
advances or reimbursements, may have been in error, but were based on what the
Company was hearing from ARDCO at the time. Based on upon uncertainties inherent
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in the ARDCO claims, including the pending Commission action against the
Company, ARDCO's management, and Mr. Badger, there is no assurance that the
ARDCO claims can be resolved without litigation in the near future or at all.
Between October 1996 and August 1997, the Company received and responded to
two subpoenas from the Commission concerning Mr. Badger's relationships with the
Company, and Messrs. Marchant and Spencer, the President and Secretary of the
Company, respectively, gave sworn testimony to the Commission with respect to
Mr. Badger's role in the Company.
On December 18, 1997, the Commission filed a civil complaint against Mr.
Badger alleging facts substantially similar to those alleged in Mr. Badger's
criminal charges, discussed above, in Federal District Court in Salt Lake City.
In the same complaint, the Company and certain former officers were alleged to
have caused deficiencies in historical disclosure filings by the Company during
the period of Mr. Badger's involvement with managing the Company, with regard to
the Corporation's investigation of allegations against Mr. Badger, and with
regard to the status of the Company's Red Hawk development in St. George, Utah.
The Company has not yet been required to answer this Complaint. The Company is
attempting to resolve the Commission's concerns with respect to the Company, as
expressed in this Complaint.
The Company's Southern Utah Properties
RED HAWK
In 1994, the Company named its 616 acre parcel of undeveloped land in
Washington, Utah the Red Hawk(TM) International Golf & Country Club ("Red
Hawk(TM)"), and on June 1, 1994, the Company acquired an additional 54 acres of
adjacent land, thus increasing the Red Hawk(TM) project to 670 acres. Red
Hawk(TM) is a master-planned residential golfing and recreational community
that, when completed, will include more than 945 building lots, a 27 hole golf
course, tennis courts, swimming pools, and other recreational amenities. Phase I
was designed to include the first 18 holes on the golf course, five corporate
villa lots, seven cottage lots, and one hundred-two estate lots. The remaining 9
holes on the golf course, the Club House and amenities, and the bulk of the
residential and commercial land developments are planned for subsequent phases,
and have not yet been started, except in the overall project design and surveys.
In 1996, Washington City completed construction of a storage tank for
culinary (drinking) water in close proximity to Red Hawk(TM), together with a
water pumping station and delivery lines which run through Red Hawk(TM), thus
assuring Red Hawk(TM) will have an adequate supply of culinary water available.
(The Company paid part of this water line) In addition, there are ten (10)
separate wells on the Red Hawk property, and these wells will not only provide
the lakes included in the design of the project, but could also be developed
into sources of culinary and irrigation water.
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Since 1992, the Company has expended a total of $2,972,985 on the planning,
development and construction of Red Hawk(TM), most of which was spent on the
construction of Phase I. This amount was funded in part by equity capital
provided by the Company's shareholders, but mostly was debt financed.
Significant cost and effort have been expended in gaining initial government
approvals and permits. The final plat for Red Hawk(TM) will be recorded upon
installation of all Phase I improvements and/or bonding for the same. The
Company believes that no other permits or authorization are required until after
filing of the final plat for Phase I, at which time building permits for homes
at the project can be obtained from Washington City. During 1996, the Company
was optimistic that Phase I could be finished before year-end and that sales of
residential lots could begin in earnest in early 1997. Indeed, substantially all
of the first 18 holes have been roughed in, most of the lakes have been dug out,
and the sewer utilities have been installed in the roughed in residential
portion of Phase I. However, construction was halted in late 1996 before Phase I
could be completed, because of increasing costs and a lack of money. Although
hopeful of rejuvenating the project through new capital, the Company proved
unable to raise any further funds for the project. There is a risk that the
current cessation of work on the project, if continuing, may result in the need
to redo some or all existing local and other governmental approvals obtained to
date.
The Company estimates that approximately 40% of the needed work on Phase I
has been accomplished to date, and that an additional approximately $6,400,000
in investment capital and a solid nine months of construction activity will
bring Phase I of Red Hawk(TM) to a point where golf can take place on the course
and fully developed residential lots can be sold for home construction. If the
Company were to undertake the construction of "spec" homes, or otherwise reserve
to itself the development of the residential units at the project, the capital
required for Phase I would be substantially higher than the $6,400,000 estimate,
and it could take two to three years or more to fully build out the residential
lots in Phase I.
The Company estimates that it could take up to ten years to fully develop all
phases of Red Hawk(TM), and that between $15,000,000 and $60,000,000 of
additional investment capital will be needed to reach the full development
stage, again depending on whether the Company involves itself in the
construction of residential properties or simply sells developed lots.
COTTON MANOR AND COTTON ACRES
Cotton Manor, a 20-acre development approved and platted for a total of 130
units. Of the 36 total approved units in Phases I and II, 28 condominium units
are complete (one two-story building with 16 units and three one-story
four-plexes). Eight units remain to be built. Recreational facilities including
a swimming pool, tennis courts, and a putting green were constructed in Phase I.
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The Company has amended the plat for Cotton manor to accommodate 94
additional units as single detached units. These are referred to as "cottages"
or "townhomes". In Phase III, two cottages were built. One Phase III cottage has
been sold to a third person, while the other is being used by the Company as a
model, sales office and, executive office. Development of the 19 lots in Phase
IV has been completed at a cost of approximately $11,700 per lot. Three of the
Phase IV lots have been sold. One lot was purchased by Bruce Frodsham, a former
Company Vice President, at the Company's offer price of $15,000. Mr. Frodsham
has built a home on the lot at his cost. In early 1997, a second Phase IV lot
was transferred to Mr. George Badger to enable Mr. Badger to get a loan to
finance construction of a home on the site for entry by the Company in a home
show. The Company's entry won the "best of the show" award. Currently, Mr.
Badger is paying the indebtedness on the property and lives there from time to
time. A third lot was recently sold to an unaffiliated third party builder.
Building permits will be obtained from the City of St. George as needed.
Following the sale of the 19 units in Phase IV, the Company intends to commence
developing and marketing additional Phases.
While the Company is still marketing Cotton Manor cottage sites, without
further investment the Company cannot build the remaining 17 cottages in Phase
IV or engage in further development of the project.
Cotton Manor residents belong to the Condominium Association or the Planned
Unit Development Association, and pay a monthly fee to support the common area
maintenance. To date, fees collected have not been sufficient to cover costs,
and the Company has subsidized the project from inception. The Company retains
control over the two homeowners associations at Cotton Manor. The Company
maintains property and liability insurance on the Cotton Manor project at a cost
of approximately $6,000 per year.
Cotton Acres is a 60-acre development approved and platted for 238 single
family detached home lots. 182 lots in Phases I-IX have been sold and dwelling
units on these lots have been completed, mostly by the lot buyers instead of the
Company. Development of Phase X, consisting of 19 new lots, has been completed
at a cost of approximately $165,000. All Phase X lots have been sold or pre-sold
with a deposit and are expected to close during the first six months of 1998.
Phase XI has been platted and approved for a final 37 lots. At the current time,
pre-sale reservations have been received by the Company for 10 of the Phase XI
lots. Management anticipates that the development and sale of the lots from all
of the remaining potential phases of Cotton Acres could be completed within two
years, provided that sufficient development funding becomes available for this
purpose. There is also no assurance that market conditions will allow for this
schedule, even if sufficient funding were available.
Item 6. Resignation of Registrant's Directors
On December 18, 1997, as previously announced, Duane Marchant, the former
President of the Company, resigned as an officer and director of the Company in
the wake of his being named in the Commission's civil complaint, discussed in
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Item 5, above. Mr. Marchant had previously agreed with the Company that he would
resign if he was named as a defendant in a Commission action.
Item 7. Financial Statement, Pro Forma Financial Information and Exhibits
Attached as Amended Exhibit 99.1 are the audited balance sheet of U.S. Golf
Communities, Inc. at December 31, 1996 and the audited income statements and
statements of cash flows for the years ended December 31, 1996 and 1995.
Attached as Amended Exhibit 99.2 are the unaudited balance sheets and income
statements as of September 30, 1997 and 1996 for U.S. Golf Communities.
Attached as Amended Exhibit 99.3 are pro forma financial statements combining
financial information for U.S. Golf Communities at December 31, 1996 and
financial information for the Company at March 31, 1997.
Item 8. Changes in Fiscal Year
As a result of the reverse acquisition transaction with U.S. Golf
Communities, Inc., and pursuant to Commission accounting rules, the Company has
changed its fiscal year from March 31 to December 31. The Company will file its
first audited financial statement with its new fiscal year end for the year
ended December 31, 1997 in connection with its Annual Report on Form 10-KSB due
on or before March 31, 1998.
Item 9. Sales of equity securities pursuant to Regulation S
Not Applicable.
The following exhibits are filed with the Report.
Exhibit No. Description
10.1 Letter from Jones, Jensen & Co. recognizing the cessation
of the independent auditor relationship.
10.2 Letter from BDO Seidman LLP accepting independent auditor
relationship with the Company.
Amended 99.1 Audited Financial Statements for U.S. Golf Communities,
Inc. as of December 31, 1996.
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Amended 99.2 Unaudited Financial Statements for U.S. Golf Communities,
Inc. as of September 30, 1996 and 1995.
Amended 99.3 Pro Forma Combined Financial Information for Golf
Ventures, Inc. (as of March 31, 1997) and U.S. Golf
Communities, Inc. (as of December 31, 1996)
GOLF VENTURES, INC.
/s/ Warren Stanchina
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Warren Stanchina, President
DATED: May 5, 1998
10
March 26, 1998
Eric LaGrange
Executive Vice President
255 South Orange Avenue, Suite 1515
Orlando, Florida 32801
Dear Mr. LaGrange:
This is to confirm that the client-auditor relationship between Golf Ventures,
Inc. (Commission file Number 0-22775) and Jones, Jensen & Company has ceased.
Sincerely,
Jones, Jensen & Company
cc: Office of the Chief Accountant
SECPS Letter File
Securities and Exchange Commission
Mail Stop 9-5
450 Fifth Street, N.W.
Washington, D.C. 20549
March 23, 1998
Mr. Warren J. Stanchina
Chairman and Chief Executive Officer
Golf Ventures, Inc.
255 S. Orange Avenue, Suite 1515
Orlando. FL 32801
Dear Mr. Stanchina:
Agreement To Provide Services
This agreement is intended to describe the nature and scope of our services.
Audit
As agreed, we will audit the consolidated balance sheet of Golf Ventures, Inc.
and subsidiaries as of December 31, 1997 and the related statements of income,
stockholders' equity, and cash flows for the period then ending in accordance
with generally accepted auditing standards. The financial records and financial
statements are the responsibility of your Company's management.
Our responsibility is to express an opinion on the financial statements based on
our audit At the conclusion of our audit, we will submit to you a report
containing our opinion as to whether the financial statements, taken as a whole,
are fairly presented based on generally accepted accounting principles. If
during the course of our work it appears for any reason that we will not be in a
position to render an unqualified opinion on the financial statements, or that
our report will require an explanatory paragraph, we will discuss this with you.
We will design our audit to provide reasonable assurance of detecting errors or
fraud that would have a material effect on the financial statements. Our work
will be based primarily upon selected tests of evidence supporting the amounts
and disclosures in the financial statements and therefore, will not include a
detailed check of your Company' s transactions for the period. Accordingly, an
audit performed in accordance with generally accepted auditing standards is not
a guarantee of the accuracy of the financial statements, and there is a risk
that material errors or fraud may exist and not be detected by us. However, we
will inform you of any material errors or fraud that come to our attention.
If Golf Ventures, Inc. plans any reproduction or publication of our report, or
any portion of it, copies of masters' or printers' proofs of the entire document
should be submitted to us in sufficient time for our review.
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Mr. Warren J. Stanchina
March 26, 1998
Page 15
In addition, the audited financial statements and our report thereon should not
be provided or otherwise made available to the recipients of any document to be
used in connection with the sale of securities without first submitting copies
of the document to us in sufficient time for our review.
As required by generally accepted auditing standards, we will request certain
written representations from management at the close of our audit to confirm
oral representations given to us and to indicate and document the continuing
appropriateness of such representations and reduce the possibility of
misunderstanding concerning matters that are the subject of the representations.
You agree that all records, documentation, and information we request in
connection with our audit will be made available to us, that all material
information will be disclosed to us, and that we will have full cooperation of
your personnel.
We also ask that your personnel, to the extent possible, prepare various
schedules and analyses for our staff. This assistance by your personnel will
serve to facilitate the progress of our work and minimize costs to you.
Other Services
We-are always available to meet with you and/or other executives at various
times throughout the year to discuss current business, operational, accounting,
and auditing matters affecting your Company. Whenever you feel such meetings are
desirable, please let us know. We are also prepared to provide services to
assist you in any of these areas. We will also be pleased, at your request, to
attend your directors' and stockholders' meetings.
Fees
We have determined a fee arrangement separately for the audits of U. S. Golf
Communities, Inc (Delaware) and subsidiaries; Golf Ventures, Inc.; and Pelican
Strand Development Corporation Our charges for U. S. Golf Communities, Inc.
(Delaware) and subsidiaries are expected to be $60,000 plus out-of-pocket
expenses. Our charges for Golf Ventures, Inc. and Pelican Strand Development
Corporation, in addition to our SEC department review of SEC filings, will be
based on hours incurred at the hourly rates listed below:
Hourly
Personnel Rates
Partners(1) $170
Senior associates 115
Associates 85
Paraprofessionals 50
Administrative staff 25
(1) Exclusive of national SEC specialists who have hourly rates
ranging from $200 - $300. We would anticipate the use of these
specialists in providing professional services to Golf
Venture, Inc. relating to the review of SEC filings such as
the December 31, 1997 lOK.
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Mr. Warren J. Stanchina
March 26, 1998
Page 16
Our charges for professional services plus out-of-pocket and travel expenses
will be billed semimonthly with one-half of the total unpaid billings to be paid
by April 30, 1998 and the remainder to be paid by May 15, 1998. We require a
$10,000 advance payment upon the execution of this agreement.
The fee is based on the following assumptions: your personnel will prepare
certain schedules and analyses for us and make available to us documents for our
examination as and when requested; there will be no significant changes in the
internal accounting controls, accounting systems, key personnel, or structure of
the organization; there will be no significant acquisitions or disposals of
businesses; and there will not be any unanticipated increases in current
operations requiring significant additional audit time. Should we encounter any
unforeseen problems which will warrant additional time or expense, you will be
notified of the situation and, if possible, the added cost.
Our charges for other services will be agreed to separately.
Dispute Resolution Procedure
If any dispute, controversy or claim arises in connection with the performance
or breach of this agreement, either party may, upon written notice to the other
party, request facilitated negotiations. Such negotiations shall be assisted by
a neutral facilitator acceptable to both parties and shall require the best
efforts of the parties to discuss with each other in good faith their respective
positions and, respecting their different interests, to finally resolve such
dispute.
Each party may disclose any facts to the other party or to the facilitator which
it, in good faith, considers necessary to resolve the dispute. However, all such
disclosures will be deemed in furtherance of settlement efforts and will not be
admissible in any subsequent litigation against the disclosing party. Except as
agreed by both parties, the facilitator shall keep confidential all information
disclosed during negotiations. The facilitator shall not act as a witness for
either party in any subsequent arbitration between the parties.
Such facilitated negotiations shall conclude within sixty days from receipt of
the written notice unless extended by mutual consent. The parties may also agree
at any time to terminate or waive facilitated negotiations. The costs incurred
by each party in such negotiations will be borne by it; the fees and expenses of
the facilitator, if any, shall be borne equally by the parties.
If any dispute, controversy or claim arises in connection with the performance
or breach of this agreement and cannot be resolved by facilitated negotiations
(or the parties agree to waive that process), then such dispute, controversy or
claim shall be settled by arbitration in accordance with the laws of the State
of New York and the then current Arbitration Rules for Professional Accounting
and Related Disputes of the American Arbitration Association, except that no
pre-hearing discovery shall be permitted unless specifically authorized by the
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Mr. Warren J. Stanchina
March 26, 1998
Page 17
arbitration panel and shall take place in the city in which the BDO Seidman, LLP
office providing the relevant services exists, unless the parties agree to a
different locale.
Such arbitration shall be conducted before a panel of three persons, one chosen
by each party and the third selected by the two party-selected arbitrators. The
arbitration panel shall have no authority to award non-monetary or equitable
relief, and any monetary award shall not include punitive damages. The
confidentiality provisions applicable to facilitated negotiation shall also
apply to arbitration.
The award issued by the arbitration panel may be confirmed in a judgment by any
federal or state court of competent jurisdiction. All reasonable costs of both
parties, as determined by the arbitrators, including but not limited to (I) the
costs, including reasonable attorneys' fees, of the arbitration; (2) the fees
and expenses of the AAA and the arbitrators and (3) the costs, including
reasonable attorneys' fees, necessary to confirm the award in court shall be
borne entirely by the non-prevailing party (to be designated by the arbitration
panel in the award) and may not be allocated between the parties by the
arbitration panel.
* * * *
We believe the foregoing correctly sets forth our understanding, but if you have
questions, please let us know. If you find the arrangements acceptable, please
acknowledge your agreement to the understanding by signing and returning to us
the copy enclosed.
It is a pleasure for us to be of services to you. We look forward to many years
of pleasant association with you and your Golf Ventures, Inc.
Very truly yours,
BDO Seidman, LLP
Acknowledged:
By:_____________________
Title:___________________
Date:___________________
U.S. Golf Communities, Inc.
Audited Financial Statements
Years Ended December 31, 1996 and 1995
<PAGE>
U.S. Golf Communities, Inc.
Contents
Independent auditors' report 3
Combined financial statements
Combined balance sheet 4 - 5
Combined statements of operations 6
Combined statements of capital deficit 7
Combined statements of cash flows 8
Summary of accounting policies 9 - 13
Notes to combined financial statements 14 - 27
2
<PAGE>
Independent Auditors' Report
To the Board of Directors
U.S. Golf Communities, Inc.
We have audited the accompanying combined balance sheet of U.S. Golf
Communities, Inc. and affiliates as of December 31 1996, and the related
statements of operations, capital deficit, and cash flows for each of the two
years ended December 31, 1996. These financial statements are the responsibility
of the Companies' 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 combined financial position of U.S. Golf Communities,
Inc. and affiliates as of December 31, 1996, and the results of their operations
and their cash flows for each of the two years ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
Certified Public Accountants
Orlando, Florida
January 24, 1998
3
<PAGE>
<TABLE>
<CAPTION>
U.S. Golf Communities, Inc.
Combined Balance Sheet
December 31,
1996
------------
Assets
<S> <C>
Cash and cash equivalents $ 378,669
Accounts receivable:
Trade 386,191
Related parties (Note 1) 83,856
Other 123,235
Inventories 154,959
Prepaid expenses 83,751
Property and equipment, at cost,
net of accumulated depreciation (Note 2) 8,225,690
Land and development costs 25,406,847
Deferred loan costs 875,623
Goodwill, net of accumulated amortization of $298,037 (Note 3) 3,675,790
Other assets 347,585
-----------
Total assets $39,742,196
===========
</TABLE>
See accompanying summary of significant accounting policies and
notes to combined financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
U.S. Golf Communities, Inc.
Combined Balance Sheet
December 31,
1996
----
<S> <C>
Liabilities and Capital Deficit
Liabilities:
Accounts payable:
Trade 1,430,799
Related parties (Note 1) 1,710,201
Accrued expenses 782,900
Accrued interest payable:
Related parties 2,334,710
Other 2,641,712
Loan costs payable 1,410,658
Notes payable (Note 4) 24,632,309
Related party notes payable (Note 5) 17,563,632
----------
Total liabilities 52,506,921
----------
Commitments and Contingencies (Note 6) -
Capital deficit:
Partners' deficit:
General partners (1,023,276)
Limited partners (11,341,079)
Stockholders' deficit:
Common stock, $1 par value, shares authorized 10,000,
issued and outstanding 500 500
Accumulated deficit (400,870)
-----------
Total capital deficit (12,764,725)
-----------
$39,742,196
===========
</TABLE>
See accompanying summary of significant accounting policies and
notes to combined financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
U.S. Golf Communities, Inc.
Combined Statements of Operations
Year ended December 31,
1996 1995
---- ----
Operating revenue:
<S> <C> <C>
Dues and initiation fees $ 2,586,233 $ 1,963,136
Golf cart rentals 1,890,024 1,001,608
Food, beverage and pro shop sales 1,379,745 1,167,609
Lot sales 2,296,707 4,602,281
Other 18,261 12,693
----------- -----------
Total operating revenue 8,170,970 8,747,327
----------- -----------
Costs and expenses:
Cost of merchandise and lots sold 1,816,100 2,924,851
General and administrative expenses 9,542,050 7,758,337
----------- -----------
Total costs and expenses 11,358,150 10,683,188
----------- -----------
Loss from operations (3,187,180) (1,935,861)
----------- -----------
Other income (expense):
Interest income 17,796 32,035
Interest expense (4,182,476) (3,472,136)
Provision for loss on property and equipment (221,127) -
Loss on equity method investment (180,047) (375,696)
Other (110,254) (16,118)
----------- -----------
Total other income (expense), net (4,676,108) (3,831,915)
----------- -----------
Loss before minority interest (7,863,288) (5,767,776)
Minority interest in net loss of consolidated subsidiary (Note 3) 68,111 538,674
----------- -----------
Net loss $(7,795,177) $(5,229,102)
=========== ===========
</TABLE>
See accompanying summary of significant accounting policies and
notes to combined financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
U.S. Golf Communities, Inc.
Combined Statements of Capital Deficit
General Limited Total
Partners' Partners' Common Accumulated Capital
Deficit Deficit Stock Deficit Deficit
------- ------- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ (654,459) $ (18,491) $500 $ (16,191) $ (688,641)
Distribution of capital - (20,000) - - (20,000)
Contribution of capital - 423,559 - - 423,559
Net loss (129,910) (4,908,936) - (190,256) (5,229,102)
----------- ------------- ---- --------- ------------
Balance, December 31, 1995 (784,369) (4,523,868) 500 (206,447) (5,514,184)
Contribution of capital - 44,636 - - 44,636
Conversion of related party notes
payable into partners' capital - 500,000 - - 500,000
Net loss (238,907) (7,361,847) - (194,423) (7,795,177)
----------- ------------- ---- --------- ------------
Balance, December 31, 1996 $(1,023,276) $ (11,341,079) $500 $(400,870) $(12,764,725)
=========== ============= ==== ========= ============
</TABLE>
See accompanying summary of significant accounting policies
and notes to combined financial statements
7
<PAGE>
<TABLE>
<CAPTION>
U.S. Golf Communities, Inc.
Combined Statements of Cash Flows
Year ended December 31,
1996 1995
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net loss $(7,795,177) $(5,229,102)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation 402,974 428,763
Amortization 566,371 177,062
Loss on equity method investment 180,047 375,696
Provision for loss on property and equipment 221,127 -
Minority interest in net loss of consolidated subsidiary (68,111) (538,674)
Gain recognized under installment sales - (137,692)
Cash provided by (used for):
Accounts receivable (80,991) (125,361)
Inventories 48,248 (95,630)
Prepaid expenses (49,500) 63,410
Land and development costs 663,290 807,282
Accounts payable 1,425,004 862,722
Accrued expenses (30,768) 407,859
Accrued interest payable 2,245,637 1,766,062
----------- -----------
Net cash used for operating activities (2,271,849) (1,237,603)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (152,660) (233,228)
Investment in equity method investment (56,503) (289,248)
Payment of option payable - (950,000)
Payments received on notes receivable - 395,001
Increase (decrease) in other assets (32,557) (75,452)
----------- -----------
Net cash used for investing activities (241,720) (1,152,927)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 4,987,113 2,177,866
Repayments of notes payable (3,302,157) (4,027,744)
Proceeds from related party notes payable 1,658,921 4,294,970
Repayment of related party notes payable (1,108,611) (337,619)
Distributions of capital - (20,000)
Contributions of capital 44,636 423,559
Deferred loan costs (40,496) -
----------- -----------
Net cash provided by financing activities 2,239,406 2,511,032
----------- -----------
Net increase (decrease) in cash and cash equivalents (274,163) 120,502
Cash and cash equivalents, beginning of year 652,832 532,330
----------- -----------
Cash and cash equivalents, end of year $ 378,669 $ 652,832
=========== ===========
</TABLE>
See accompanying summary of significant accounting policies
and notes to combined financial statements
8
<PAGE>
U.S. Golf Communities, Inc.
Summary of Significant Accounting Policies
Principles of U.S. Golf Communities, Inc. and affiliates, hereinafter
Combination referred to collectively as the Company, are engaged in the
ownership, management, development and operation of golf
courses and the acquisition, development and sale of
residential lots. The accompanying combined financial
statements include the following affiliated entities based
upon common ownership and control:
All significant intercompany transactions and balances have
been eliminated in the combination. Subsequent to December
31, 1996, the entities entered into an agreement and plan of
reorganization (see Note 9).
Name of Entity Principal Business Activity
-------------- ---------------------------
U.S. Golf Communities, Inc. Management Company
Golf Communities of America, Ltd. Ownership of U.S. Golf
Pinehurst Plantation, Ltd.
U.S. Golf Pinehurst Golf course and development
Plantation, Ltd. and sale of residential
lots Pinehurst,
North Carolina
U.S. Golf (Plantation), Inc. 1% general partner of U.S.
Golf Pinehurst,
Plantation, Ltd.
Wedgefield Limited Partnership Golf course Orlando,
Florida
U.S. Golf (Wedgefield), Inc. 1% general partner of
Wedgefield Limited
Partnership
FSD Golf Club, Ltd. Golf course Orange City,
Florida
U.S. Golf (FSD), Inc. 25% general partner of FSD
Golf Club, Ltd.
Cutter Sound Development, Ltd. Golf course and development
and sale of residential
lots Stuart, Florida
U.S. Golf (Cutter Sound), Inc. 1% general partner of
Cutter Sound
Development, Ltd.
Northshore Golf Partners, Ltd. Golf course
` Portland, Texas
Northshore Development, Ltd. Development and sale of
residential lots near
Portland, Texas
9
<PAGE>
U.S. Golf Communities, Inc.
Summary of Significant Accounting Policies
Northshore U.S. Golf, Inc. 1% general partner of
Northshore Golf Partners,
Ltd. and Northshore
Development, Ltd.
Montverde Properties, Ltd. Proposed golf course and
residential lots
U.S. Golf (Montverde), Inc. 1% general partner of
Montverde Properties, Ltd.
Montverde Investment Group, Ltd. 99% owner of Montverde
Properties, Ltd.
U.S. Golf Leasing Co., Inc. Leasing of management
employees to the companies
above
U.S. Golf Services &
Development, Inc. No business activity
Operations The Company owns and operates daily fee (public)
golf courses and develops and sells residential lots in
Central Florida, Southeast Texas and Pinehurst, North
Carolina. In addition, the Company owns partially developed
real estate in Florida which has been partially developed as
a future golf course and residential housing site. Golf
Communities of America, Ltd.; U.S. Golf Pinehurst Plantation,
Ltd.; Wedgefield Limited Partnership; FSD Golf Club, Ltd.;
Cutter Sound Development, Ltd.; Northshore Golf Partners,
Ltd.; Northshore Development, Ltd.; Montverde Properties,
Ltd.; and Montverde Investment Group, Ltd. are limited
partnerships with defined lives. The partnerships are
scheduled to dissolve, unless terminated sooner, at various
dates beginning December 31, 2020 through December 31, 2042.
Cash and All highly liquid cash investments with a maturity of three Cash
Equivalents months or less from the date of purchase are considered cash
equivalents.
Inventories Inventories are stated at the lower of cost or market and
consist primarily of golf equipment and clothing, golf course
maintenance supplies, and food and beverages. Costs are
determined by the first-in, first-out (FIFO) method.
10
<PAGE>
U.S. Golf Communities, Inc.
Summary of Significant Accounting Policies
Land and Land acquired for development and development costs are
Development Costs lower stated at the of cost, including development costs,
or estimated net realizable value. Land and development
costs include all significant acquisition, carrying and
development costs, including interest and real estate taxes
until the point of substantial completion. Costs after such
point are expensed as incurred.
Land and development costs are allocated to individual lots
based on the lot's relative sales value.
The Company monitors the valuation of its land and
development costs on a continueous basis with a detailed
review each year in conjunction with the completion of the
following year's business plan.
Revenue The Company recognizes revenue on lot sales when
Recognition substantially all construction is complete and the sale has
been closed. The related cost of the lots is accumulated
during construction and is charged to cost of sales at the
time revenue is recognized.
Revenue from dues, initiation fees, cart rentals, food and
beverage sales and clothing is recognized at the time of
sale.
Partners' Equity The financial statements do not reflect assets the
partners may have outside their interests in the
partnership, nor any personal obligations, including income
taxes, of the individual partners.
Depreciation Property and equipment are depreciated using straight-line
and and accelerated methods over the estimate depreciable lives
Amortization of the assets.
Deferred loan costs are amortized using the straight-line
method over the terms of the related notes payable.
Goodwill Goodwill represents the excess of cost over the fair value
of net assets acquired and is being amortized on a
straight-line method over ten years. The realizability of
goodwill is evaluated periodically as events or
circumstances indicate a possible inability to recover the
carrying amount.
11
<PAGE>
U.S. Golf Communities, Inc.
Summary of Significant Accounting Policies
Income Taxes Golf Communities of America, Ltd.; U.S. Golf Pinehurst
Plantation, Ltd.; Wedgefield Limited Partnership; FSD Golf
Club, Ltd.; Cutter Sound Development, Ltd.; Northshore Golf
Partners, Ltd.; Northshore Development, Ltd.;
Montverde Properties, Ltd.; and Montverde Investment Group,
Ltd. are organized as limited partnerships. Accordingly, all
tax effects of these entities' income or loss are passed
through to the stockholders and partners. U.S. Golf
Communities, Inc.; U.S. Golf (Plantation), Inc.; U.S. Golf
(Wedgefield), Inc.; U.S. Golf (FSD), Inc.; U.S. Golf (Cutter
Sound), Inc.; Northshore U.S. Golf, Inc.; U.S. Golf
(Montverde), Inc.; U.S. Golf Leasing Co., Inc.; and U.S.
Golf Services & Development, Inc. are taxed as a regular C
Corporations. Accordingly, deferred income taxes are
recognized for temporary differences between the bases of
the assets and liabilities for financial statement and
income tax purposes. Because income taxes for the C
Corporations are not significant, they have not been
included in the accompanying combined financial statements.
Fair Value of Statement of Financial Accounting Standards No. 107,
Financial "Disclosures about Fair Value of Financial Instruments,"
Instruments requires disclosure of fair value information about
financial instruments. Fair value estimates discussed herein
are based upon certain market assumptions and pertinent
information available to management as of December 31, 1996.
The respective carrying value of certain on-balance-sheet
financial instruments approximated their fair values. These
financial instruments include cash and equivalents, trade
receivables, accounts payable and accrued expenses. Fair
values were assumed to approximate carrying values for these
financial instruments since they are short term in nature
and their carrying amounts approximate fair values or they
are receivable or payable on demand. The fair value of the
Company's notes payable is estimated based upon the quoted
market prices for the same or similar issues or on the
current rates offered to the Company for debt of the same
remaining maturities. The carrying value approximates the
fair value of the notes payable.
12
<PAGE>
U.S. Golf Communities, Inc.
Summary of Significant Accounting Policies
Use of The preparation of financial statements in conformity with
Estimates generally accepted accounting principles requires 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.
Recent In June 1997, the Financial Accounting Standards Board
Accounting issued Statement of Financial Accounting Standards No. 130,
Pronouncements "Reporting Comprehensive Income." (FAS 130), and No. 131,
"Disclosure about Segments of an Enterprise and Related
Information" (FAS 131). FAS 130 establishes standards for
reporting and displaying comprehensive income, its
components and accumulated balances. FAS 131 establishes
standards for the way that public companies report
information about operation segments in annual financial
statements in interim financial statement issued to the
public. Both FAS 130 and FAS 131 are effective periods
beginning after December 15, 1997. The Company has not
determined the impact that the adoption of these new
accounting standards will have on its future financial
statements and disclosures.
13
<PAGE>
U.S. Golf Communities, Inc.
Notes to Combined Financial Statements
1. Related Party The Company is affiliated with various other companies
Transactions through common control and stock ownership which are not
included in the accompanying combined financial statements.
Material related party transactions between the Company and
the affiliated companies consisted of the following:
Accounts Receivable Related Parties
Amounts due from related parties are comprised of amounts
advanced to certain limited partners and to entities related
by common management which are not included in the
accompanying combined financial statements.
The advances are noninterest bearing with no stipulated
terms for repayment.
Management Fees
U.S. Golf Communities, Inc., FSD Golf Club, Ltd.; Northshore
Golf Partners, Ltd.; Northshore Development, Ltd.; and
Wedgefield Limited Partnership have management agreements
with shareholders and a limited partner as follows:
U.S. Golf Communities, Inc. has entered into a
management agreement with Cutter Sound
Development, Ltd. and U.S. Golf Pinehurst
Plantation Ltd. Management fees under these
agreements are based on the greater of monthly
minimums of $16,000 or 6%, 3% and 5% of golf
operations, revenues, real estate sales and design
and construction costs, respectively. In addition,
the agreements provide for the payment of
acquisition and development fees, as defined. U.S.
Golf Communities, Inc. is obligated to pay 95% of
the fees earned as a management fee to its
shareholders. Management fees earned for the years
ended December 31, 1996 and 1995 were
approximately $365,000 and $425,000, respectively.
FSD Golf Club, Ltd. is obligated under a 10-year
management agreement effect April 25, 1991 with a
company owned by one of its limited partners. Annual
management fees are the greater of 5% of annual gross
revenues, as defined, or $60,000.
14
<PAGE>
U.S. Golf Communities, Inc.
Notes to Combined Financial Statements
After the initial minimum term, the agreement shall
continue in effect until canceled by either party upon
90 days written notice.
Northshore Golf Partners, Ltd. and Northshore
Development, Ltd. are obligate under management
agreements effective June 15, 1992 with a company
owned by one of their limited partners. Annual
management fees under the agreements are $120,000.
The agreements will remain in effect as long as
the partnerships retain ownership or control of
their respective projects.
Wedgefield Limited Partnership is obligated under a
10-year management agreement effective May 1, 1995 with
a company owned by one of its limited partners. Annual
management fees are the greater of 10% of annual gross
revenues, as defined, or $120,000. After the initial
minimum term, the agreement shall continue in effect
until canceled by either party upon 90 days written
notice.
Management fees for the years ended December 31, 1996 and
1995 were approximately $665,000 and $725,000, respectively,
and are included in administrative and general in the
accompanying combined financial statements. At December 31,
1996, the amount owed under these agreements was
approximately $1,700,000 and is included in accounts payable
related parties in the accompanying combined financial
statements.
15
<PAGE>
U.S. Golf Communities, Inc.
Notes to Combined Financial Statements
2. Property and Property and equipment consist of the following:
Equipment
Estimated
December 31, Useful Lives 1996
------------ ------------- ----
Land and golf courses $3,630,453
Improvements of land and
golf courses 10 - 20 years 1,754,377
Buildings and improvements 5 - 40 years 2,770,937
Furniture 3 - 10 years 76,635
Equipment 5 - 15 years 1,259,918
Vehicles 5 years 7,202
------------- ----------
9,499,522
Less accumulated depreciation 1,273,832
----------
Net property and equipment $8,225,690
==========
See Note 7 regarding the basis of the assets of Wedgefield
Limited Partnership and Northshore Golf Partners, Ltd.
16
<PAGE>
U.S. Golf Communities, Inc.
Notes to Combined Financial Statements
3. Purchase of Golf Communities of America, Ltd. owned approximately 60% of
Minority US Golf Pinehurst Plantation, Ltd. ("Plantation") and Interest
approximately 60% of another limited partnership, US Golf and Goodwill
Pinehurst National, Ltd. ("National"), through March 1996.
The remaining 40% of both Plantation and National was owned
by an unrelated third party. During March 1996, Golf
Communities of America, Ltd. exchanged its 60% ownership of
National, paid $2,300,000 and issued a $1,200,000 note
payable to acquire the remaining 40% ownership interest in
Plantation from the unrelated third party. The balance of
the Plantation minority interest at the date of the
acquisition was $798,447. Golf Communities of America, Ltd.
accounted for its investment in National under the equity
method of accounting. The balance of Golf Communities of
America's investment in National at the date of acquisition
was $1,272,274. The acquisition of the 40% interest was
accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the net
assets acquired based upon their estimated fair market
values. The excess of the purchase price over the estimated
fair value of net assets acquired amounted to approximately
$3,974,000, which has been accounted for as goodwill and is
being amortized over its estimated useful life of ten years.
The operating results of Plantation are included in the
Company's combined results of operations from the April 1994
inception of the partnership. Minority interest is recorded
in the statements of operations for the 40% third-party
ownership of Plantation through March 1996.
17
<PAGE>
<TABLE>
U.S. Golf Communities, Inc.
Notes to Combined Financial Statements
4. Notes Payable
Notes payable consist of the following:
December 31,
1996
----
<S> <C>
Second mortgage note payable. This note is non-interest bearing through
November 1996 and bears interest at prime plus 2% (10.3% at December 31, 1996)
interest thereafter. Principal and interest are payable based on lot sale
release prices until maturity in September, 1999. Collateralized by principally
all Cutter Sound Development, Ltd. assets (see Note 10). $ 5,593,591
Mortgage note payable with principal and interest payable based on lot sale
release prices until maturity in March 1999. Interest of 13%, 17% and 21% per
annum from March 22, 1996 to March 22, 1997; March 23, 1997 to March 22, 1998;
and March 23, 1998 to maturity at March 22, 1999, respectively, is payable
monthly. Additional interest of 8% and 4% for March 31, 1996 to March 31, 1997
and March 23, 1997 to March 22, 1998, respectively, is payable at maturity.
Collateralized by certain land of US Golf Pinehurst Plantation, Ltd. ($1,313,373
converted to equity subsequent to year end). 4,300,000
Prime plus 1%(9.3% at December 31, 1996) mortgage note payable to a bank with
principal and interest payable based on lot sale release prices until maturity
in March 1997. Collateralized by certain land and the golf course of U.S. Golf
Pinehurst Plantation, Ltd. 4,165,593
Unsecured notes payable bearing interest ranging from 10% to 12.5% payable
annually and principal due in February 1997. 1,695,000
Various unsecured notes payable bearing interest ranging from 10% to 12.5% with
principal and accrued interest payable on demand after December 31, 1998.
($637,821 converted to equity subsequent to year end). 1,328,364
Prime plus 1% (9.3% at December 31, 1996) note payable with principal and
accrued interest due March 1997. 1,200,000
9% mortgage note payable to a bank with principal and interest due in monthly
installments of $9,447 through maturity in October 2001. Collateralized by
principally all the assets of Wedgefield Limited Partnership. 1,047,109
Various unsecured notes payable with interest ranging from 8% to 18%, due
currently. 1,025,718
7.12% unsecured note payable to an international bank with principal and accrued
interest due February 1997. Personally guaranteed by the Company President and
other related parties. 1,000,000
Prime (8.3% at December 31, 1996) note payable with interest payable monthly and
principal due at maturity in February 1997. Collaterlized by assets of
Wedgefield Limited Partnership. 1,000,000
10% mortgage note payable with principal and accrued interest due in April 1998.
Collateralized by land of Montverde Properties, Ltd. (converted to equity
subsequent to year end). 1,000,000
10% mortgage note payable with accrued interest and principal past due.
Collateralized by land of Montverde Properties, Ltd. This note is currently in
litigation (see Note 6). 916,824
10% note payable with principal and accrued interest due in May 1997.
Collateralized by 20 saleable memberships in the U.S. Golf Pinehurst Plantation,
Ltd. golf course. (converted to equity subsequent to year end) 300,000
Other notes payable 60,110
----------
24,632,309
==========
</TABLE>
Certain of the above notes and mortgage notes payable were past due as of
December 31, 1996. The Company is currently in the process of negotiating and
extension or modification of the terms of the debt.
18
<PAGE>
U.S. Golf Communities, Inc.
Notes to Combined Financial Statements
The aggregate amount of notes payable maturing in future
years is as follows as of December 31, 1996:
Year ending December 31,
1997 $11,043,204
1998 6,955,423
1999 5,652,244
2000 26,120
2001 26,120
Thereafter 929,198
-----------
Total $24,632,309
===========
Interest capitalized as land and development costs as
construction period interest was $127,706 and $182,292 for
the years ended December 31, 1996 and 1995, respectively.
19
<PAGE>
<TABLE>
<CAPTION>
U.S. Golf Communities, Inc.
Notes to Combined Financial Statements
5. Notes Payable Notes payable to related parties consist of the following:
to Related December 31,
Parties 1996
----
<S> <C>
Various unsecured note payable to limited partners and other related
parties bearing interest ranging from 7.13% to 12% with principal and
accrued interest due on demand after December 31, 1998. ($2,066,918
converted to equity subsequent to year end). $ 5,247,402
Unsecured notes payable to a limited partner and another related party
bearing interest ranging from 7.13% to 8.25% with principal and accrued
interest due December 31, 1998. ($2,425,718 converted to equity
subsequent to year end). 4,075,411
7.5 % mortgage note payable to a related party with principal and
interest payable based on lot sale release prices until maturity
in November 1998. Collateralized by principally all Cutter
Sound Development, Ltd. assets. The Company has guaranteed
an interest rate equal to a rate based on the euro dollar market
rate plus 1.5% through April 1997 and plus 5% thereafter until
maturity. ($1,083,143 converted to equity subsequent to year end). 3,355,572
8.68% mortgage note payable to a partner with principal
and accrued interest due December 31, 1998. Collateralized by
principally all assets of FSD Golf Club, Ltd. ($900,000 converted
to equity subsequent to year end). 1,872,660
Various unsecured notes payable to a limited partner and other
related parties bearing interest ranging from 1.3% to 9% with
principal and accrued interest due on demand. ($649,882 converted
to equity subsequent to year end). 1,249,882
8% unsecured note payable to a related party with principal
and accrued interest due March 1997. 600,000
8.25% mortgage note payable to a related party with principal
and accrued interest due anytime after December 31, 1998.
Collateralized by land of Northshore Development, Ltd. 569,202
10% mortgage note payable to a trust owned by certain limited
partners with principal and accrued interest past due.
Collateralized by land owned by Montverde Properties, Ltd. 523,503
Other related party notes payable. 70,000
-----------
$17,563,632
===========
</TABLE>
20
<PAGE>
U.S. Golf Communities, Inc.
Notes to Combined Financial Statements
The aggregate amount of related party notes payable maturing
in future years is as follows as of December 31, 1996:
Year ending December 31,
1997 $ 2,443,384
1998 8,000,185
1999 7,120,063
---- -----------
Total $17,563,632
===========
Interest expense on notes payable to related parties was
$1,085,246 and $1,642,651 for the years ended December 31,
1996 and 1995, respectively.
Subsequent to December 31, 1996, certain of the above notes
payable to related parties were converted to partner capital
and additional paid-in capital of the Company. (see Note 9).
21
<PAGE>
U.S. Golf Communities, Inc.
Notes to Combined Financial Statements
6. Commitments Leases
and
Contingencies The Company conducts certain operations from leased
facilities including office space in Orlando, Florida. The
Company also leases certain office, maintenance and golf
course equipment. These leases are classified as operating
leases and expire on various dates from 1997 through 2000.
Certain leases provide for renewal options and payment of
occupancy costs and taxes.
As of December 31, 1996, future minimum rental payments
required under operating leases that have initial or
remaining noncancelable lease terms in excess of one year
are as follows:
1997 $355,640
1998 240,368
1999 187,939
2000 96,473
2001 -
Thereafter -
---- --------
Total minimum lease payments $880,420
========
Rental expense under all operating leases was approximately
$503,616 and $228,222 for the years ended December 31, 1996
and 1995, respectively.
Litigation
As discussed in Note 9, the Company completed a reverse
acquisition with Golf Ventures, Inc. On December 8, 1997,
the U.S. Securities and Exchange Commission filed a
complaint against Golf Ventures, Inc. and certain of its
former officers and directors, as well as other defendants.
The SEC has alleged, with respect to the Company and its
former officers and directors, violations of certain
sections of the Securities and Exchange Act of 1934 and
various rules in connection with reporting and disclosure
requirements. At this time, management is unable to predict
the outcome of the complaint. However, the Company believes
that since such acts occurred under prior management, the
ultimate impact on the Company will not have a significant
impact on future operations.
22
<PAGE>
U.S. Golf Communities, Inc.
Notes to Combined Financial Statements
U.S. Golf Pinehurst Plantation, Ltd. is a defendant in a
lawsuit alleging trademark infringement arising out of the
use of the term "Pinehurst Plantation" in connection with
its golf course operations and residential lot development.
The claim for monetary damages is over $1,000,000. While
any litigation or investigation has an element of
uncertainty, in the opinion of management and legal counsel,
there is no reasonable probability at present of any
substantial liabilities arising out of this matter.
The Company is involved in various other lawsuits and
litigations matters on an ongoing basis as a result of its
day-to-day operations. However, the Company does not believe
that any of these other or any threatened lawsuits and
litigation matters will have a material adverse effect on
the Company's financial position or results of operations.
Loan Costs
In connection with the issuance of certain notes payable
described in Notes 4 and 5, the Company has agreed to pay
loan cost in the form of cash and transfer title to
specified lots of the Company's residential developments.
The following is a summary of the loan cost obligations
outstanding as of December 31, 1996:
Description
============================================================
Cash commitments $1,090,000
Residential development lots 320,658
------------------------------------------------------------
$1,410,658
============================================================
The Company has valued the residential development lot
commitment based on the recorded cost of the specified lots
on the Company's balance sheet at the date of the
commitment.
23
<PAGE>
U.S. Golf Communities, Inc.
Notes to Combined Financial Statements
7. Disposition and In April 1994, the Wedgefield Limited Partnership sold
Reconveyance substantially all of its assets, and Northshore Golf
of Assets of Partners, Ltd. sold its golf course operation to a
Wedgefield third-party corporation (the "buyer"). The assets sold
Limited consisted almost entirely of real estate. As part of the
Partnership and same transaction, an affiliated entity which owned and
Northshore Golf operated a golf course in Florida sold substantially all
Partners, Ltd. of its assets to the buyer. The consideration received by
the Company and the affiliated entity included a $400,000
promissory note and a $5,500,000 subordinated convertible
note. The entire $400,000 promissory note and $3,200,000 of
the subordinated convertible note were included in the
consideration received by the Company for the assets of the
Partnerships. Additional consideration received for the
assets of the Partnerships included cash and other items
totaling approximately $1,393,000 and the assumption of
first mortgages securing the assets totaling approximately
$4,407,000. As a condition of the sale, certain partners of
Northshore Golf Partners. Ltd. guaranteed payment of the
$2,428,360 first mortgage secured by the assets of
Northshore Golf Partners, Ltd. and assumed by the buyer in
connection with the transactions. During 1994 and 1995, the
buyer paid the $400,000 promissory note in full and in 1995
defaulted on the $3,200,000 subordinated convertible note.
In May 1995, in exchange for a dismissal of the foreclosure
suits, the buyer reconveyed the assets to the Partnerships
and the affiliated entity. In addition, the Partnerships
assumed the first mortgages assumed by the buyer in the
original transaction as well as accrued interest related to
the mortgages.
Because the buyer's initial investment was small, the sale
of the assets by the Company was accounted for on the
installment basis. The sale involved a total potential gain
of approximately $4,870,000, of which approximately $138,000
and $848,000 were recognized during 1995 and 1994,
respectively, Upon reacquiring the assets in May 1995, the
Company recorded its investment in the assets at the amount
of its net receivable (no interest was accrued), plus the
debt assumed, determined as follows:
24
<PAGE>
U.S. Golf Communities, Inc.
Notes to Combined Financial Statements
Note receivable $ 3,200,000
Deferred gross profit (3,884,000)
-----------
Net receivable (deferred gross profit in
excess of installment note receivable (684,000)
Plus: debt and accrued interest assumed 3,953,000
-----------
Total carrying value at reacquisition $ 3,269,000
===========
The fair market value of the property and equipment
reacquired exceeded the carrying values assigned to it on
the date of reacquisition.
<TABLE>
<CAPTION>
8. Supplemental Year ended December 31, 1996 1995
Cash Flow ------------------------------- ---- ----
Information <S> <C> <C>
Cash paid for income taxes $ - $ -
Refinancing of note payable with
related parry note payable 3,355,572 -
Purchase of minority interest through
issuance of related party notes payable
(see Note 3) 2,300,000 -
Purchase of minority interest through
conveyance of equity method investment
(see Note 3) 2,472,274 -
Conversion of related party notes payable
into partners' capital (see Note 5) 500,000 -
Deferred loan costs accrued 920,658 -
Net increase in assets (see Note 7) and
liabilities as a result of reconveyance - 3,268,636
========== ==========
</TABLE>
25
<PAGE>
U.S. Golf Communities, Inc.
Notes to Combined Financial Statements
9. Subsequent In September 1997, certain debt holders converted notes of Events
$10,376,855 and accrued interest of $2,089,493 into partner
capital and additional paid-in capital of U.S. Golf
Communities, Inc. and related companies at conversion prices
equal to $1 of capital for each $1 of debt and interest
converted.
Subsequent to September 30, 1997, the partners and
stockholders of U.S. Golf Communities, Inc. and related
companies exchanged their partnership interests and common
stock ownership interests for shares of common stock in a
newly formed Delaware corporation, U.S. Golf Communities,
Inc. Since these entities were under common ownership and
control, this transaction will be accounted for in a manner
similar to a pooling of interests.
U.S. Golf Communities, Inc. (Delaware) has previously entered
into an Agreement and Plan of Reorganization with Golf
Ventures, Inc. whereby Golf Ventures, Inc. would acquire U.S.
Golf Communities, Inc. through an exchange of Series D
Convertible Stock for all outstanding common stock of U.S.
Golf Communities, Inc. This transaction was closed on
November 26, 1997. Based on the controlling interest in Golf
Ventures, Inc. obtained by U.S. Golf Communities, Inc. as a
result of this transaction, the transaction will be accounted
for as an acquisition of Golf Ventures, Inc. by U.S. Golf
Communities, Inc. (a reverse acquisition in which U.S. Golf
Communities, Inc. is considered the acquirer for accounting
purposes).
26
<PAGE>
U.S. Golf Communities, Inc.
Notes to Combined Financial Statements
10. Cutter Sound In 1994, Cutter Sound Development, Ltd. ("Cutter") entered
Development, into an option to purchase (the "Agreement") a golf course Ltd.
Option and residential lots for $15,500,000. The term of this Agreement
option is five years unless sooner terminated as defined in
the Agreement. Under the Agreement, Cutter paid $3,000,000
in cash and agreed to extinguish an existing $5,500,000
first mortgage obligation of the seller. The balance of the
purchase price of $7,000,000 shall be payable to the seller
upon satisfaction of the first mortgage. When Cutter closes
on the sale of a lot, the net cash, as defined, shall first
be applied to the payment of the first mortgage until fully
paid. Upon satisfaction of the first mortgage, the net cash
will be applied to the $7,000,000 balance owned the seller
until satisfied. During November 1996, the outstanding
balance of approximately $3,356,000 on the first mortgage
note was refinanced by the seller.
The option agreement was accounted for as a purchase of the
golf course and residential lots and assumption of the
related liabilities. Accordingly, the total purchase price,
including the cash payment, was allocated to the net assets
acquired based upon their estimated fair market values. The
$7,000,000 note payable to the seller was non-interest
bearing until November 1996, at which time the note began
accuring interest at prime plus 2%. Interest was imputed on
the note during the period of November 1994 to November 1996
at a rate of 10.5%, resulting in a net present value of
$5,593,591 at the date of the transaction.
27
U.S. Golf Communities, Inc.
Unaudited Interim Financial Statements
Periods Ended September 30, 1997 and December 31, 1996
<PAGE>
<TABLE>
<CAPTION>
U.S. GOLF COMMUNITIES, INC.
Combined Balance Sheet
September December
1997 1996
---- ----
(unaudited)
Assets
<S> <C> <C>
Cash and Cash equivalents $ 436,045 $ 378,669
Accounts receivable:
Trade, net 457,202 386,191
Related parties 167,334 83,856
Other 125,821 123,235
Inventories 127,683 154,959
Prepaid expenses 80,637 83,751
Property and equipment, net of
accumulated depreciation 8,069,303 8,225,690
Land under development and related costs 24,025,179 25,406,847
Deferred loan costs 59,964 875,623
Goodwill, net 3,377,755 3,675,790
Other assets 258,212 347,585
------------ ------------
Total assets $ 37,185,135 $ 39,742,196
============= ============
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
U.S. GOLF COMMUNITIES, INC.
Combined Balance Sheet
September December
1997 1996
---- ----
(unaudited)
Liabilities and Capital Deficit
Liabilities:
Accounts payable
<S> <C> <C>
Trade $ 1,465,711 $ 1,430,799
Related parties 1,544,710 1,710,201
Accrued expenses 1,170,890 782,900
Accrued interest payable:
Related parties 2,203,907 2,334,710
Other 2,954,313 2,641,712
Loan costs payable 1,410,658 1,410,658
Notes payable 21,038,072 24,632,309
Related party notes payable 11,480,871 17,563,632
------------- ------------
Total liabilities 43,269,132 52,506,921
------------- ------------
Commitments and contingencies - -
Capital deficit:
Partners' deficit:
General partners (1,177,340) (1,023,276)
Limited partners (6,371,930) (11,341,079)
Stockholders' deficit:
Common stock, $1 per value, shares authorized
10,000, issued and outstanding 500 500 500
Additional paid in capital 1,650,000 -
Accumulated deficit (185,227) (400,870)
------------ -------------
Total capital deficit (6,083,997) (12,764,725)
------------ -------------
$ 37,185,135 $ 39,742,196
============ ============
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
U.S. GOLF COMMUNITIES, INC.
Combined Statements of Operations
Year ended
Nine months ended September December 31,
--------------------------- ------------
1997 1996 1996
---- ---- ----
(unaudited) (unaudited)
Operating revenue:
<S> <C> <C> <C>
Dues and initiation fees $ 1,770,663 $ 1,983,641 $ 2,586,233
Golf cart rentals 1,692,745 1,423,626 1,890,024
Food, beverage and pro shop sales 935,539 1,074,358 1,379,745
Lot sales 3,204,983 1,845,047 2,296,707
Other 15,806 - 18,261
-------------- -------------- ---------------
Total operating revenue 7,619,736 6,326,672 8,170,970
-------------- -------------- ---------------
Costs and expenses:
Cost of merchandise and lots sold 2,165,015 1,509,500 1,816,100
General and administrative expenses 7,341,269 8,533,325 9,542,050
-------------- -------------- ---------------
Total costs and expenses 9,506,284 10,042,825 11,358,150
-------------- -------------- ---------------
Loss from operations (1,886,548) (3,716,153) (3,187,180
-------------- -------------- ---------------
Other income (expense):
Interest income 40,452 120,616 17,796
Interest expense (3,956,115) (2,399,554) (4,182,476)
Gain (loss) on sale of property and equipment (18) 22,393 (221,127)
Lose on equity method investment - (180,047) (180,047)
Other (21,166) (337,899) (110,254)
-------------- -------------- ---------------
Total other income (expense), net (3,936,847) (2,774,491) (4,676,108)
-------------- -------------- ---------------
Loss before minority interest (5,823,395) (6,490,644) (7,863,288)
Minority interest in net loss of
consolidated subsidiary - 68,111 68,111
-------------- -------------- ---------------
Net loss $ (5,823,395) $ (6,422,533) $ (7,795,177)
============== ============== ===============
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
U.S. GOLF COMMUNITIES, INC.
Combined Statements of Capital Deficit
General Limited Additional Total
Partners' Partners' Common Paid-in Accumulated Capital
Deficit Deficit Stock Capital Deficit Deficit
------- ------- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ (784,369) $ (4,523,868) $ 500 $ - $ (206,447) $ (5,514,184)
Contribution of capital 32,515 32,515
Conversion of related party notes
payable into partners' capital 500,000 500,000
Net loss (195,804) (6,064,991) (161,738) (6,422,533)
----------- ------------ ------- --------- ----------- ------------
Balance, September 30, 1996 (980,173) (10,056,344) 500 - (368,185) (11,404,202)
Contribution of capital 12,121 12,121
Net loss (43,103) (1,296,856) (32,685) (1,372,644)
----------- ------------ ------- --------- ----------- ------------
Balance, December 31, 1996 (1,023,276) (11,341,079) 500 - (400,870) (12,764,725)
Contribution of capital 37,778 37,778
Conversion of notes payable and
accrued interest into partners'
capital 5,333,021 5,333,021
Conversion of related party notes
payable and accrued into
partners' capital and additional
paid-in capital 5,483,324 1,650,000 7,133,324
Net loss (154,064) (5,884,974) 215,643 (5,823,395)
----------- ------------ ------- --------- ----------- ------------
Balance, September 30, 1997 $(1,177,340) $ (6,371,930) $ 500 $1,650,000 $ (185,227) $ (6,083,997)
=========== ============ ======= ========== =========== ============
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
U. S. Golf Communities, Inc.
Combined Statements of Cash Flows
Nine months ended September 30,
------------------------------
1997 1996
---- ----
(unaudited) (unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (5,823,395) $ (6,422,533)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation 302,230 326,979
Amortization 1,113,694 464,533
Loss on equity method investment - 180,047
Provision for loss on property and equipment - 221,127
Minority interest in net loss of consolidated subsidiary - (68,111)
Cash provided (used for):
Accounts receivable (157,075) (125,124)
Inventories 27,276 33,991
Prepaid expenses 3,114 (35,865)
Land and development costs 1,381,668 768,569
Accounts payable (130,579) 715,801
Accrued expenses 387,990 5,788
Accrued interest payable 2,271,289 1,785,544
------------- -------------
Net cash used for operating activities (623,788) (2,149,254)
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (145,843) (73,304)
Proceeds from property sold 225,000 -
Investment in equity method investment - (56,503)
Increase (decrease) in other assets (135,627) (62,836)
------------- -------------
Net cash used for investing activities (56,470) (192,643)
------------- -------------
Cash flows from financing activities:
Proceeds from notes payable 761,530 3,676,504
Repayments of notes payable (178,855) (2,605,858)
Proceeds from related party notes payable 1,282,572 1,164,276
Repayment of related party notes payable (1,165,391) (58,167)
Contributions of capital 37,778 32,515
------------- -------------
Net cash provided from financing activities 737,634 2,209,270
------------- -------------
Net increase (decrease) in cash and cash equivalents 57,376 (132,627)
Cash and cash equivalents, beginning of period 378,669 652,832
------------- -------------
Cash and cash equivalents, end of period $ 436,045 $ 520,205
============= =============
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
U. S. Golf Communities, Inc.
Combined Statements of Cash Flows
Nine months ended September 30,
------------------------------
1997 1996
---- ----
(unaudited) (unaudited)
Supplemental Cash Flow Information
<S> <C> <C>
Purchase of minority interest through issuance of related party
notes payable - 2,300,000
Purchase of minority interest through conveyance of equity
method investment - 2,472,274
Conversion of related party notes payable into partners' capital 12,466,345 500,000
Deferred loan cost accrued - 920,658
</TABLE>
6
<PAGE>
U.S. Golf Communities, Inc.
Notes to Unaudited Financial Statements
Subsequent Subsequent to September 30, 1997, the partners and
Events stockholders of U.S. Golf Communities, Inc. and related
companies exchanged their partnership interests and common
stock ownership interests for shares of common stock in a
newly formed Delaware corporation, U.S. Golf Communities,
Inc. Since these entities were under common ownership and
control, this transaction will be accounted for in a manner
similar to a pooling of interests.
U.S. Golf Communities, Inc. (Delaware) has previously entered
into an Agreement and Plan of Reorganization with Golf
Ventures, Inc. whereby Golf Ventures, Inc. would acquire U.S.
Golf Communities, Inc. through an exchange of Series D
Convertible Stock for all outstanding common stock of U.S.
Golf Communities, Inc. This transaction was closed on
November 26, 1997. Based on the controlling interest in Golf
Ventures, Inc. obtained by U.S. Golf Communities, Inc. as a
result of this transaction, the transaction will be accounted
for as an acquisition of Golf Ventures, Inc. by U.S. Golf
Communities, Inc. (a reverse acquisition in which U.S. Golf
Communities, Inc. is considered the acquirer for accounting
purposes).
Conversion of Certain debt holders exchanged their notes and accrued
Notes Payable interest totaling approximately $12,466,000 into partner
and Accrued capital and additional paid-in capital as of September 30,
Interest to 1997.
Capital
Golf Ventures, Inc. has a fiscal year end of March 31. The
statement of operations for the nine months ended September
30, 1997 and 1996 were derived from the unaudited quarterly
financial statements of Golf Ventures, Inc. as reported in
previous 10Q filings.
7
Golf Ventures, Inc.
Pro Forma Consolidated Financial Information
Explanatory Headnote (Unaudited)
Introduction
On August 25, 1997, Golf Ventures, Inc. (the "Company") entered into an
Agreement and Plan of Reorganization (the "Agreement") with U.S. Golf
Communities, Inc. ("U.S. Golf"). The closing of the transaction between the
Company and U.S. Golf occurred on November 26, 1997. Under the terms of the
agreement, the Company issued 6,672,578 shares of the Company's new Series D
Convertible Preferred Stock in exchange for all of the common stock of U.S. Golf
Communities, Inc. Each share of Series D Preferred Stock is convertible into
four (4) shares of Common Stock of Golf Ventures, Inc. Prior to conversion, each
share of Series D Preferred Stock has four (4) votes in any vote of common
stockholders of the Company.
U.S. Golf Communities, Inc. is a recently formed company that immediately prior
to its acquisition by Golf Ventures, Inc. issued its capital stock in exchange
for the outstanding common stock and partnership interests in the following
entities:
U.S. Golf Communities, Inc. U.S. Golf (Cutter Sound), Inc.
Golf Communities of America, Ltd. Northshore Golf Partners, Ltd.
U.S. Golf Pinehurst Plantation, Ltd. Northshore Development, Ltd.
U.S. Golf (Plantation), Inc. Northshore U.S. Golf, Inc.
Wedgefield Limited Partnership Montverde Properties, Ltd.
U.S. Golf (Wedgefield), Inc. U.S. Golf (Montverde), Inc.
FSD Golf Club, Ltd. Montverde Investment Group, Ltd.
U.S. Golf (FSD), Inc. U.S. Golf Leasing Co., Inc.
Cutter Sound Development, Ltd. U.S. Golf Services & Development, Inc.
In September 1997, certain debt holders exchanged their notes and accrued
interest totaling approximately $12,466,000 for equity in U.S. Golf Communities,
Inc. and related companies.
Since these entities were under common ownership and control, the acquisitions
were accounted for in a manner similar to a pooling of interests, and their
financial information is presented as if they were a single entity since
inception.
Based on the controlling interest in Golf Ventures, Inc. obtained by U.S. Golf
shareholders as a result of this transaction, the transaction will be accounted
for as an acquisition of Golf Ventures, Inc. by U.S. Golf Communities, Inc. (a
reverse acquisition in which U.S. Golf is considered the acquirer for accounting
purposes).
The pro forma condensed consolidated balance sheets as of September 30, 1997
assume the transaction was consummated as of September 30, 1997, and the pro
forma condensed consolidated statements of operations for the year ended
December 31, 1996 and the nine months ended September 30, 1997 and 1996 assume
the transaction was consummated as of January 1, 1996.
The pro forma condensed consolidated financial statements may not be indicative
of the actual results of the transactions. In particular, the pro forma
condensed consolidated financial statements are based on management's current
estimate of the allocation of the purchase price, the actual allocation of which
may differ. In the opinion of management, all adjustments have been made that
are necessary to present fairly the pro form data.
<PAGE>
<TABLE>
<CAPTION>
Golf Ventures, Inc.
Pro Forma Consolidated Balance Sheets
September 30, 1997
(Unaudited)
U.S. Golf U.S. Golf Golf
Communities, Pro Forma Ventures, Eliminating Consolidated
Inc. Adjustments Inc. Entries Pro Forma
---- ----------- ---- ------- ---------
Assets:
<S> <C> <C> <C> <C> <C>
Cash $ 436,045 $ $ 14,921 $ $ 450,966
Notes and accounts receivable 750,357 57,948 808,305
Inventories 127,683 127,683
Prepaid expenses 80,637 80,637
Property and equipment, net 8,069,303 145,809 8,215,112
Land under development 24,025,179 12,592,408 1,448,326 38,065,913
Deferred loan costs 59,964 59,964
Goodwill 3,377,755 3,377,755
Other assets 258,212 258,212
Investment in subsidiary 5,191,605 (3) (5,191,605) -
-------------- ---------- ------------- ----------- -------------
$ 37,185,135 $5,191,605 $ 12,811,086 $(3,743,279) $ 51,444,547
============== ========== ============= =========== =============
See accompanying headnote and notes to pro forma consolidated financial statements (unaudited).
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Golf Ventures, Inc.
Pro Forma Consolidated Balance Sheets
September 30, 1997
(Unaudited)
U.S. Golf U.S. Golf Golf
Communities, Pro Forma Ventures, Eliminating Consolidated
Inc. Adjustments Inc. Entries Pro Forma
---- ----------- ---- ------- ---------
Liabilities and Stockholders' Equity:
<S> <C> <C> <C> <C> <C>
Accounts payable $ 3,010,421 $ $ 893,265 $ $ 3,903,686
Accrued expenses 6,329,110 707,474 7,036,584
Loan costs payable 1,410,658 1,410,658
Notes payable 32,518,943 7,467,068 39,986,011
------------ ----------- ----------- ----------- ------------
Total liabilities 43,269,132 9,067,807 52,336,939
------------ ----------- ----------- ----------- ------------
Partners' deficit:
General partners (1,081,510) 1,081,510 (2) - - -
Limited partners (4,602,117) 4,602,117 (2) - - -
Stockholders' equity (deficit):
Preferred stock - Class A
cumulative convertible - - 29 - 29
Preferred stock - Class B
cumulative convertible - - 313 - 313
Preferred stock - Class D
convertible 66,726 (3) - - 66,726
Common stock 500 12,210 (2) 2,247 (12,710) 2,247
Additional paid-in capital - 5,124,879 (3) 8,796,828 (8,786,707) 18,183,759
13,048,759 (2)
Accumulated deficit (400,870) (18,744,596)(2) (5,056,138) 5,056,138 (19,145,466)
------------ ----------- ----------- ----------- ------------
Total partners' and
stockholders' equity (deficit) (6,083,997) 5,191,605 3,743,279 (3,743,279) (892,392)
------------ ----------- ----------- ----------- ------------
$ 37,185,135 $ 5,191,605 $12,811,086 $(3,743,279) $ 51,444,547
============ =========== =========== =========== ============
See accompanying headnote and notes to pro forma consolidated financial statements (unaudited).
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Golf Ventures, Inc
Pro Forma Consolidated Statement of Operations (Unaudited)
Year Ended December 31, 1996
U.S. Golf Golf
Communities, Ventures, Pro Forma Consolidated
Inc. Inc. Adjustments Pro Forma
---- ---- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $ 8,170,970 $ 274,000 $ $ 8,444,970
Costs and expenses:
Cost of sales 1,816,100 158,066 1,974,166
Operating expenses 9,542,050 860,289 10,402,339
----------- ---------- ---------- ------------
11,358,150 1,018,355 12,376,505
----------- ---------- ---------- ------------
Loss from operations (3,187,180) (744,355) (3,931,535)
Other income (expense):
Interest expense (4,182,476) (10,142) 785,715(5) (3,406,903)
Other (493,632) 68,580 (425,052)
----------- ---------- ---------- ------------
(4,676,108) 58,438 785,715 (3,831,955)
----------- ---------- ---------- ------------
Loss before minority interest (7,863,288) (685,917) 785,715 (7,763,490)
Minority interest in loss of subsidiary 68,111 - 68,111
----------- ---------- ---------- ------------
Net loss $(7,795,177) $ (685,917) $ 785,715 $ (7,695,379)
=========== ========== ========== ============
Loss per share $ (.27)
============
Weighted average number of common shares outstanding 28,489,495
============
See accompanying headnote and notes to pro forma consolidated financial statements (unaudited).
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Golf Ventures, Inc.
Pro Forma Consolidated Statement of Operations (Unaudited)
Nine Months Ended September 30, 1997
U.S. Golf Golf
Communities, Ventures, Pro Forma Consolidated
Inc. Inc. Adjustments Pro Forma
---- ---- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $ 7,619,736 $ 316,546 $ $ 7,936,282
Costs and expenses:
Cost of sales 2,165,015 176,952 2,341,967
Operating expenses 7,341,269 924,150 8,265,419
----------- ---------- --------- -----------
9,506,284 1,101,102 10,607,386
----------- ---------- --------- -----------
Loss from operations (1,886,548) (784,556) (2,671,104)
Other income (expense):
Interest expense (3,956,115) (14,447) 766,286(5) (3,204,276)
Other 19,268 33,963 53,231
----------- ---------- --------- -----------
(3,936,847) 19,516 766,286 (3,151,045)
----------- ---------- --------- -----------
Net loss $(5,823,395) $ (765,040) $ 766,286 $(5,822,149)
=========== ========== ========= ===========
Loss per share $ (.20)
===========
Weighted average number of common shares outstanding 28,937,760
===========
See accompanying headnote and notes to pro forma consolidated financial statements (unaudited).
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Golf Ventures, Inc.
Pro Forma Consolidated Statement of Operations (Unaudited)
Nine Months Ended September 30, 1996
U.S. Golf Golf
Communities, Ventures, Pro Forma Consolidated
Inc. Inc. Adjustments Pro Forma
---- ---- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $ 6,326,672 $ 242,768 $ $ 6,569,440
Costs and expenses:
Cost of sales 1,509,500 174,758 1,684,258
Operating expenses 8,533,325 3,990,527 12,523,852
------------ ----------- --------- -----------
10,042,825 4,165,285 14,208,110
------------ ----------- --------- -----------
Loss from operations (3,716,153) (3,922,517) (7,638,670)
Other income (expense):
Interest expense (2,399,554) 549,921(5) (1,849,633)
Other (374,937) 120,501 (254,436)
------------ ----------- --------- -----------
(2,774,491) 120,501 549,921 (2,104,069)
------------ ----------- --------- -----------
Loss before minority interest (6,490,644) (3,802,016) 549,921 (9,742,739)
Minority interest in loss of subsidiary 68,111 68,111
------------ ----------- --------- -----------
Net loss $ (6,422,533) $(3,802,016) $ 549,921 $(9,674,628)
============ =========== ========= ===========
Loss per share $ (.34)
===========
Weighted average number of common shares outstanding 28,439,612
===========
Set accompanying headnote and notes to pro forma consolidated financial statements (unaudited).
</TABLE>
6
<PAGE>
Golf Ventures, Inc.
Notes to Pro Forma Consolidated Financial Information
(Unaudited)
1. Pro Forma Adjustments
The pro forma condensed consolidated balance sheet as of September 30, 1997
assumes the transaction was consummated as of September 30, 1997, and the pro
forma condensed consolidated statements of operations for the year ended
December 31, 1996 and the nine months ended September 30, 1997 and 1996 assume
the transaction was consummated as of January 1, 1996.
2. Reorganization of U.S. Golf communities, Inc.
U.S. Golf Communities, Inc. ("USGCI") is a company formed in April 1996 that
immediately prior to its acquisition by Golf Ventures, Inc. ("GVI") issued its
capital stock in exchange for 100% of the outstanding common stock and
partnership interests in the following entities:
U.S. Golf Management, Inc. (formerly U.S. Golf (Cutter Sound), Inc.
U.S. Golf Communities, Inc. Northshore Golf Partners, Ltd.
Golf Communities of America, Ltd. Northshore Development, Ltd.
U.S. Golf Pinehurst Plantation, Ltd. Northshore U.S. Golf, Inc.
U.S. Golf (Plantation), Inc. Montverde Properties, Ltd.
Wedgefield Limited Partnership U.S. Golf (Montverde), Inc.
U.S. Golf (Wedgefield), Inc. Montverde Investment Group, Ltd.
FSD Golf Club, Ltd. U.S. Golf Leasing Co., Inc.
U.S. Golf (FSD), Inc. U.S. Golf Services & Development, Inc.
Cutter Sound Development, Ltd.
Since these entities were under common ownership and control, the acquisitions
were accounted for in a manner similar to a pooling of interests, and their
financial information is presented as if they were a single entity since
inception.
3. Acquisition of Golf Ventures, Inc.
Effective November 24, 1997, GVI acquired the stock of USGCI in a reverse
acquisition in which USGCI's stockholders acquired voting control of GVI. The
acquisition was accomplished through an exchange of stock in which GVI exchanged
6,672,578 shares of Class D convertible preferred stock ("Class D Stock") for
100% of the outstanding stock of USGCI. The Class D stock will automatically
convert into shares of the Company's common stock at a conversion rate of four
shares of common stock for each share of Class D Stock upon the approval of an
increase of the Company's authorized common stock to 100,000,000 shares expected
to be completed at the first meeting of the Company's board of directors
subsequent to the acquisition. Upon completing the transaction, the stockholders
of USGCI controlled 81% of the voting rights of the combined Company.
For financial reporting purposed, USGCI is deemed to be the acquiring entity.
The acquisition has been reflected in the accompanying consolidated financial
statements as (a) a recapitalization of USGCI (whereby the issued and
outstanding stock of USGCI was converted into 29,084 shares of Class a
cumulative convertible preferred stock, 313,404 shares of Class B cumulative
preferred stock and 6,672,578 shares of Class D convertible preferred stock and
(b) the issuance of the securities discussed in the following paragraph by USGCI
in exchange for all of the outstanding equity securities of GVI.
7
<PAGE>
Golf Ventures, Inc.
Notes to Pro Forma Consolidated Financial Information
(Unaudited)
The acquisition of USGCI is deemed to have issued 2,247,448 shares of common
stock. The purchase price of GVI is computed by valuing the outstanding shares
of common stock of GVI (2,247,448 shares) at $2.31 or $5,191,605.
The purchase price for Golf Ventures, Inc. is anticipated to be allocated as
follows:
Carrying value of assets acquired $12,811,086
Excess of cost over net assets acquired applied
to land under development* 1,448,326
-----------
Fair value of liabilities assumed 14,259,412
9,067,807
-----------
Total purchase price $ 5,191,605
===========
* The fair market value of Golf Ventures, Inc.'s land under development
is in excess of its carrying value. The excess cost over net assets
acquired has been applied to increase the carrying value of the land
under development accordingly.
4. conversion of Notes Payable and Related Party Notes Payable into Capital
During September 1997, $5,333,024 of notes payable and accrued interest and
$7,133,327 of related party notes payable and accrued interest, respectively,
were converted into Company capital at conversion prices equal to $1 of capital
for each $1 of debt converted.
5. Interest Expense
To remove interest expense on debt that was converted to equity. The interest
expanse removed is equal to the amount of debt converted multiplied by their
related interest rates for the year ended December 31, 1996 and the nine months
ended September 30, 1997 and 1996.
6. agreement and Plan of Reorganization
The Agreement and Plan of Reorganization between Golf Ventures, Inc. and U.S.
Golf Communities, Inc. required that U.S. Golf Communities, Inc. have a minimum
of $12,000,000 in total stockholders' equity immediately prior to the
transaction. On November 24, 1997, by unanimous written consent, the board of
Directors of Golf Ventures, Inc. waived the $12,000,000 requirement in
consideration of a minimum of $12,000,000 of U.S. Golf Communities, Inc.'s debt
being converted to stockholders' equity (see Note 4).
8
