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As Filed with the Securities and Exchange Commission on July 2, 1998.
Registration No. 333-_________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
---------------
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
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DIVOT GOLF CORPORATION
(Name of small business issuer in its Charter)
DELAWARE 7997 56-1781650
-------- ---- ----------
(state or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
No.)
JOSEPH R. CELLURA
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
201 N. FRANKLIN STREET, SUITE 200 201 N. FRANKLIN STREET, SUITE 200
TAMPA, FLORIDA 33602 TAMPA, FLORIDA 33602
(813) 222-0611 (813) 222-0611
-------------- --------------
(Address, and telephone number (Name, address and telephone
of principal executive offices and number of agent for service)
principal place of business)
With Copies to:
BRAD S. MARKOFF
ALSTON & BIRD, LLP
3605 GLENWOOD AVENUE, SUITE 310
RALEIGH, NORTH CAROLINA 27612
(919) 420-2210
Approximate date of proposed sale to the public: As soon as
practicable following the date on which the Registration Statement becomes
effective.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number
of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities To Be Registered Offering Price Per Aggregate Offering Registration
Registered Share Price Fee(1)
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Common Stock 3,471,135 $1.9375 $6,725,324 $1,983
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(1) The registration fee was calculated in accordance with Rule 457 (c)
and is based on the average of the high and low prices of Registrant's
Common Stock, as reported on the NASDAQ SmallCap Market on June 30,
1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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DIVOT GOLF CORPORATION
Cross Reference Sheet
PART I
INFORMATION REQUIRED IN THE PROSPECTUS
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Item
Number Form SB-2 Item Number Caption or Location in Prospectus
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1. Front of the Registration Statement and Outside Front of Registration Statement and Outside
Front Cover of Prospectus Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages
Prospectus of Prospectus
3. Summary Information and Risk Factors Prospectus Summary and Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Selling Stockholders
8. Plan of Distribution Plan of Distribution
9. Legal Proceedings Legal Proceedings
10. Directors, Executive Officers, Promoters Directors and Executive Officers
and Control Persons
11. Security Ownership of Certain Beneficial Owners Security Ownership of Certain Persons
and Management
12 Description of Securities Front of Registration Statement, Outside
Front Cover of Prospectus and Description
of Securities
13. Interests of Named Experts and Counsel Not Applicable
14. Disclosure of Commission Position on Description of Securities
Indemnification for Securities Act Liabilities
15. Organization Within Last Five Years Not Applicable
16. Description of Business Business of the Company
17. Management's Discussion and Analysis Management's Discussion and Analysis of
or Plan of Operation Financial Condition and Results of Operations
18. Description of Property Business of the Company
19. Certain Relationships and Related Transactions Certain Relationships and Related Transactions
20. Market for Common Equity and Related Market Prices of Common Equity, Dividend
Stockholder Matters Policy and Related Stockholder Matters
21. Executive Compensation Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Accountants Not Applicable
on Accounting and Financial Disclosure
</TABLE>
ii
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
SUBJECT TO COMPLETION, DATED JULY 2, 1998
PROSPECTUS
DIVOT GOLF CORPORATION
(formerly known as Brassie Golf Corporation)
3,471,135 SHARES
COMMON STOCK
This Prospectus relates to (i) the offer and sale of up to 1,537,685
shares (the "Warrant Shares") of common stock, par value $.001 per share (the
"Common Stock"), of Divot Golf Corporation, formerly known as Brassie Golf
Corporation (the "Company"), by the holders thereof, which Warrant Shares have
been issued or may be issued upon the exercise of certain warrants to purchase
Common Stock, (ii) the offer and sale of up to 1,538,246 shares (the
"Preferred Resale Shares") of Common Stock, by the holders thereof, which
Preferred Resale Shares have been or may be issued upon the conversion of 5,895
shares of 1997 Convertible Preferred Stock, (iii) the offer and sale of up to
281,871 shares (the "Debt Resale Shares"), which Debt Resale Shares have been
or may be issued upon the conversion of $2,448,994 (plus accrued interest
thereon) of Convertible Notes due December 31, 1998, of which a balance of
$199,180 plus accrued interest remains outstanding at June 30, 1998, and (iv)
the offer and sale of up to 113,333 shares (the "Acquisition Resale Shares,"
and together with the Debt Resale Shares, the Warrant Shares, and the Preferred
Resale Shares, the "Resale Shares") of Common Stock issued in connection with
certain asset and stock acquisitions by the Company, by the holders thereof.
The Resale Shares have been, or will be, issued pursuant to an exemption from
registration under applicable Federal and state securities laws. The holders
of the Resale Shares are referred to herein as the "Selling Stockholders." See
"Selling Stockholders."
SEE "RISK FACTORS" AT PAGE 6 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
The Company has agreed to bear certain expenses of the registration of
the offer and sale of the Resale Shares under the Federal and state securities
laws. The Company will not receive any of the proceeds from the sale of the
Resale Shares offered hereby. Trading of the Common Stock is quoted on the
National Association of Securities Dealers, Inc. ("NASDAQ") SmallCap Market
under the symbol "PUTT."
The Selling Stockholders and any agents or broker-dealers that
participate with the Selling Stockholders in the distribution of the Resale
Shares may be deemed to be "underwriters" within the meaning of the Securities
Act of 1933, as amended (the "Securities Act"), and any commission received by
them and any profit on the resale of the Resale Shares may be deemed to be
underwriting commissions or discounts under the Securities Act. Upon being
advised of any underwriting arrangements that may be entered into by a Selling
Stockholder after the date of this Prospectus, the Company will prepare a
supplement to this Prospectus to disclose such arrangements.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1998.
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TABLE OF CONTENTS
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Significant Operating Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Variability of Operating Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Dependence on Key Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
No Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
No Assurance of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Limited Financial Resources; Need for Additional Financing . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Risks Associated with Management of Growth, Implementation of Growth Strategy, and Potential Inability to
Successfully Integrate Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Management Changes and New Business Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Limited Scope of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Consumer Preferences and Industry Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Susceptibility to General Economic Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Uncertainty of Proprietary Rights; Expense of Intellectual Property Litigation . . . . . . . . . . . . . . . . 8
Possible Delisting of Securities from NASDAQ System; Risks Relating to Low-Priced Stocks . . . . . . . . . . . 9
Impact on Stock Price of This or Future Offerings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Limitations on Acquisition and Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Staggered Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Anti-Takeover Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Limitation on Liability of Directors And Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Possible Environmental Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
MARKET PRICES OF COMMON EQUITY, DIVIDEND POLICY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . 13
Overview and Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
New Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Liquidity And Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Warrant Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Proceeds from Developer's Resident Lot Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Impact of Year 2000 Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Disclosure Regarding Forward-looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
BUSINESS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
DIRECTORS AND EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECURITY OWNERSHIP OF CERTAIN PERSONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
</TABLE>
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SELLING STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
DESCRIPTION OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Transfer Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Reports to Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Limitation on Liability of Directors And Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Commission Position on Indemnification for Securities Act Liabilities . . . . . . . . . . . . . . . . . . . 40
Anti-takeover Provisions of Delaware Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2-F-39
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and in accordance with the
Exchange Act files periodic reports and other information with the Securities
and Exchange Commission (the "Commission"). Such reports, proxy and information
statements and other information filed by the Company with the Commission can be
inspected and copied (at prescribed rates) at the Commission's Public Reference
Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Regional Offices of the Commission located at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511 and 7 World Trade Center, Suite 1300, New York, New York 10048. The
commission maintains a Web site that contains reports, proxy and information
statements and other information regarding the Company. The address of such site
is http://www.sec.gov. In addition, the Company's securities are listed on the
NASDAQ SmallCap Market, and reports, proxy statements and other information
concerning the Company can be inspected and copied at the office of the National
Association of Securities Dealers, Inc. 9513 Key West Avenue, Rockville,
Maryland 20850-3389.
The Company has filed with the Commission a registration statement on
Form SB-2 (the "Registration Statement") under the Securities Act of 1933 (the
"Securities Act") with respect to the securities offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto, certain items of which are omitted in accordance with the
rules and regulations of the Commission. For further information with respect to
the Company and the securities offered hereby, reference is hereby made to the
Registration Statement and such exhibits and schedules.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Except with respect to historical financial
statements and unless the context indicates otherwise, all information in this
Prospectus, including per share data and information relating to the number of
shares outstanding (i) has been adjusted to give retroactive effect to the 1:15
reverse stock split effected by the Company on June 16, 1998 and (ii) reflects
the change of the Company's name from "Brassie Golf Corporation" to "Divot Golf
Corporation" on June 2, 1998.
Certain matters discussed in this Prospectus, including, without
limitation, strategic initiatives, may constitute forward-looking statements for
purposes of the Securities Act of 1933, as amended (the "Securities Act"), and
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as
such may involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company to be
materially different from future results, performance or achievements expressed
or implied by such forward-looking statements. Important factors that could
cause the actual results, performance or achievements of the Company to differ
materially from the Company's expectations are disclosed in this Prospectus
("Cautionary Statements"), including, without limitation, those statements made
in conjunction with the forward-looking statements included herein. All
forward-looking statements attributable to the Company are expressly qualified
in their entirety by the Cautionary Statements.
THE COMPANY
Prior to July 1, 1997, the Company was primarily engaged in the design,
ownership and management of golf courses. In order to capitalize on the growth
in the golf products and accessories industry and the experience of its new
management, on July 1, 1997, the Company commenced a corporate restructuring
plan that included disposing of its golf course ownership and design businesses
and acquiring businesses engaged in the development, licensing, and marketing of
golf-related products and services. All golf course properties have been
disposed of as of April 2, 1998, and this disposition has resulted in the
recognition of losses totaling approximately $1.6 million. Since November 1997,
the Company has entered into agreements to acquire, and has subsequently
consummated the acquisitions of, Divot Golf Corporation, a designer and supplier
of golf products; Miller Golf, Inc., a supplier of high-quality golf accessory
products; and Talisman Tools Incorporated, a manufacturer of high-quality greens
repair tools. The Company acquired Divot Golf Corporation from the Company's
Chairman and Chief Executive Officer. See "Certain Relationships and
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Related Transactions." In addition, the Company has acquired two parcels of
land located within the World Golf Village, a destination golf resort currently
under development by third parties, south of Jacksonville, Florida. See
"Business of the Company -- World Golf Village."
The Company was incorporated in Delaware on November 12, 1991 under
the name "Longview Golf Corporation." On September 18, 1992, the Company
changed its name to "Brassie Golf Holdings, Ltd." On March 29, 1993, the
Company changed its name to "Brassie Golf Corporation." On June 2, 1998, the
Company changed its name to "Divot Golf Corporation." The Company's executive
offices are located at 201 N. Franklin Street, Suite 200, Tampa, Florida 33602,
and its telephone number is (813) 222-0611.
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THE OFFERING
Common Stock Offered by the Selling Stockholders . . . . . . . . . . . . . 3,471,135 shares
Common Stock to be outstanding after the Offering . . . . . . . . . . . . 6,644,110 shares
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Company will not receive any of
the proceeds from the sale of the Resale
Shares offered hereby.
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INVESTMENT IN THE COMPANY'S
COMMON STOCK IS HIGHLY SPECULATIVE, AND
PROSPECTIVE INVESTORS SHOULD READ AND
CONSIDER THE SECTION ENTITLED "RISK FACTORS"
BEGINNING ON PAGE 6 OF THE PROSPECTUS AS
WELL AS ALL OTHER CAUTIONARY STATEMENTS THAT
MAY BE FOUND THROUGHOUT THE DOCUMENT.
NASDAQ SmallCap Symbol . . . . . . . . . . . . . . . . . . . . . . . . . . PUTT
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The Company has agreed to bear certain expenses of registration of
these Resale Shares under the Federal and state securities laws.
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Some of the information in this Prospectus may contain forward-looking
statements. Such statements can be identified by the use of forward-looking
terminology, such as "may," "will," "expect," "anticipate," "estimate,"
"continue" or other similar words. These statements discuss future
expectations, contain projections of results of operations or of financial
condition, or state other "forward-looking" information. When considering such
forward-looking statements, the risk factors and other cautionary statements in
this Prospectus should be kept in mind. The risk factors noted in this section
and other factors noted throughout this Prospectus, including certain risks and
uncertainties, could cause the Company's actual results to differ materially
from those contained in any forward-looking statement.
WHEN READING THIS PROSPECTUS, IT IS IMPORTANT TO NOTE THAT THE COMPANY EFFECTED
A 1:15 REVERSE STOCK SPLIT ON JUNE 16, 1998. ALL SHARE AND PER SHARE
INFORMATION, UNLESS OTHERWISE NOTED, HAS BEEN RESTATED TO REFLECT THIS REVERSE
STOCK SPLIT.
RISK FACTORS
An investment in the Company's Common Stock is highly speculative and
involves a high degree of risk. The Common Stock should be purchased only by
persons who are sophisticated in financial matters and business investments.
The following factors, in addition to those discussed elsewhere in this
Prospectus, should be considered carefully before purchasing Common Stock of
the Company.
SIGNIFICANT OPERATING LOSSES
The Company was incorporated in November 1991, and it has incurred
significant losses in all of its operating periods. The Company's results of
operations for the fiscal year ended December 31, 1997 reflected a net loss of
$5,987,034 or $3.36 net loss per share. In addition, the Company has continued
to experience significant losses through the date of this Prospectus. There
can be no assurance that the Company will be profitable in the future.
VARIABILITY OF OPERATING RESULTS
The Company has experienced significant fluctuations in its operating
results and anticipates that these fluctuations will continue. Operating
results may fluctuate due to factors such as the demand for the Company's
products, the timing of the introduction of new products, price reductions by
the Company and its competitors, delay, cancellation or rescheduling of orders,
purchasing patterns in the distribution channel, performance of third-party
manufacturers, inventory levels, availability of key components for the
Company's products, the Company's ability to develop and market new products,
the timing and amount of sales and marketing expenditures, and general economic
conditions. In addition, the Company anticipates that its business will be
affected by seasonal purchasing patterns because of the impact winter weather
has on playing golf in many areas of the country.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the management and leadership skills of
the members of its senior management team. The loss of key personnel or the
inability to attract, retain, and motivate key personnel could adversely affect
the Company's business. There can be no assurance that the Company will be
able to retain its existing senior management personnel or attract additional
qualified personnel.
NO DIVIDENDS
To date, the Company has not paid any dividends on its Common Stock
and does not intend to declare any dividends in the foreseeable future. The
Company intends to retain earnings, if any, for the future operation and
development of its business.
NO ASSURANCE OF PROCEEDS
A potential source of capital to the Company is the proceeds from the
exercise of certain of the Warrants. The Company, however, has received no
firm commitment for the exercise of the Warrants. Thus, there can be no
assurances that the Company will realize material proceeds, if any, from the
exercise of such Warrants.
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LIMITED FINANCIAL RESOURCES; NEED FOR ADDITIONAL FINANCING
The Company's ability to execute its business strategy depends to a
significant degree on its ability to obtain substantial capital to finance its
growth. The Company does not expect cash flows from operations to be
sufficient to sustain operations or to finance any acquisitions. Consequently,
the Company must seek equity or debt financing from outside sources. There can
be no assurance that the Company will be able to obtain such financing.
Furthermore, the Company's Common Stock faces possible delisting from the
NASDAQ SmallCap market (See "-- Possible Delisting of Securities from NASDAQ
system; Risks Relating to Low-Priced Stocks"). In such event, the Company, if
it is able to obtain additional financing at all, may only be able to obtain
financing on less advantageous terms than have been historically available.
In addition, the Company's history of operating losses and stock
depreciation make obtaining such financing at prevailing market terms less
likely. New investors and lenders may make and obtain substantially better
terms than were granted to the Company's present investors, and the issuance of
equity securities in the future at such favorable terms may result in further
dilution to the existing stockholders.
COMPETITION
The markets for the Company's golf products and accessories are highly
competitive and contain limited barriers to entry. The Company attempts to
compete primarily on the basis of providing higher quality products at its
products' price points. Many of the Company's competitors are well established
companies with broad consumer recognition and greater financial, marketing,
distribution, personnel, and other resources than the Company. There can be no
assurance that the Company will be able to compete successfully.
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH, IMPLEMENTATION OF GROWTH STRATEGY,
AND POTENTIAL INABILITY TO SUCCESSFULLY INTEGRATE ACQUISITIONS
The successful implementation of the Company's expansion strategy will
be dependent on, among other things, consumer acceptance of the Company's new
lines of golf products; the reduction of Company costs; the Company's ability
to develop and introduce new products to consumers and the marketplace; the
Company's ability to identify potential acquisition prospects; the
establishment of additional distribution arrangements; the hiring and retaining
of additional marketing, creative and other personnel; and the successful
management of such growth (including monitoring operations, controlling costs,
and maintaining effective quality, inventory and service controls). As the
Company continues to grow, there will be additional demands on the Company's
financial, technical and administrative resources. The failure to maintain and
improve such resources, or the occurrence of unexpected difficulties relating
to the Company's expansion strategy, could have a material adverse effect on
the Company's business, prospects, results of operations, or financial
condition. There can be no assurance that the Company will be able to
implement successfully its business strategy or otherwise expand its
operations. The complete integration and consolidation into the Company of the
product lines acquired upon the acquisition of Talisman Tools Incorporated,
Miller Golf, Inc., and Divot Golf Corporation, as well as any future corporate
acquisitions and new product licensing arrangements will require substantial
management, financial, and other resources, and could impose significant
pressure on the financial condition and operating results of the Company.
There can be no assurance that the Company's resources will be sufficient to
accomplish such integration or that the Company will not experience
difficulties with customers, personnel, suppliers, or others. In addition,
although the Company believes that its acquisition and licensing arrangements
will enhance its competitive position and business prospects, there can be no
assurance that such benefits will be realized or that the combination of the
Company with other companies will be successful.
MANAGEMENT CHANGES AND NEW BUSINESS STRATEGY
The Company's success will depend in large part on the ability of the
Company's new senior management team, all of whom have been with the Company
for less than 9 months, to implement a successful turnaround strategy.
The Company has historically been primarily engaged in the design,
ownership and management of golf courses. The Company has now disposed of all
golf course assets and is engaged in the development, licensing, and marketing
of golf-related products and services. See "Management's Discussion and
Analysis of Financial Condition
7
<PAGE> 10
and Results of Operations -- Recent Developments." See also "Business of
the Company." The Company has no historical experience in its new lines of
business, and it must rely on the experience of its new management team.
The implementation of this new strategy involves substantial risks,
and there can be no assurance that the Company's new management will be
successful in implementing this new strategy. In addition, even if such
strategy is effectively implemented, there can be no assurance that such
strategy will be successful, and therefore, this strategic change may result in
losses that have a material adverse effect on the Company's operating results
and financial condition.
LIMITED SCOPE OF OPERATIONS
The Company has recently changed its line of business and strategy
from golf course ownership and operation to the development, licensing and
marketing of golf-related products and services. However, at present the
Company is only receiving revenues from the sale of golf accessories, such as
golf bags, bag tags, towels, and greens repair tools. There can be no
assurance that the Company will be able to develop its other products and
services in a commercially viable and marketable manner. The failure of the
Company to expand and grow current business lines and to move into new business
lines may retard growth prospects and have a material adverse effect on the
price of the Company's Common Stock.
In addition, the Company's exposure to industry-specific risk is
increased when the Company is only engaged in one or a few lines of business.
Consequently, a downturn in the golf products and accessories industry could
have material adverse effect on the Company's financial condition.
CONSUMER PREFERENCES AND INDUSTRY TRENDS
The golf industry is characterized by the frequent introduction of new
products and services and is subject to changing consumer preferences and
industry trends, which may adversely affect the Company's ability to plan for
future design, development, and marketing of its products and services. The
Company's success will depend on the Company's ability to anticipate and
respond to these and other factors affecting the industry. Moreover, if a
downturn occurs in the economy, the leisure industry, including the golf
industry, may be particularly vulnerable. There can be no assurance that the
Company will be able to anticipate and respond quickly and effectively to
changing consumer preferences and industry trends or that competitors will not
develop and commercialize new products and services that render the Company's
products and services obsolete or less marketable.
SUSCEPTIBILITY TO GENERAL ECONOMIC CONDITIONS
Sales of golf products have historically been dependent on
discretionary consumer spending. As a result, the Company's revenues will be
subject to fluctuations based upon general economic conditions in markets where
the Company sells its products. If there is a general economic downturn or
recession, general consumer spending on golf products could be expected to
decline, which would have a material adverse effect on the Company's business,
operating results, and financial condition.
UNCERTAINTY OF PROPRIETARY RIGHTS; EXPENSE OF INTELLECTUAL PROPERTY LITIGATION
The Company relies on a combination of patents and trade secret
protection to establish and protect the proprietary rights it has in its
products. The ability of the Company's competitors to acquire technologies or
other proprietary rights equivalent or superior to those of the Company or the
inability of the Company to enforce its proprietary rights would have a
material adverse effect on the Company's operating results and financial
condition. There can be no assurance that the Company's competitors will not
independently develop or acquire patented or other proprietary technologies
that are substantially equivalent or superior to those of the Company. There
also can be no assurance that the measures adopted by the Company to protect
its proprietary rights will be adequate to do so or that the Company's products
do not infringe on third party intellectual property rights, including patents.
Intellectual property matters are frequently litigated on allegations that
third-party proprietary rights have been infringed. The Company may have to
defend against such lawsuits, which could be expensive and time-consuming.
Additionally, the Company's limited resources may not enable it to effectively
defend such lawsuits. Furthermore, the Company's
8
<PAGE> 11
limited resources may prevent it from effectively protecting its proprietary
rights by prosecuting claims against third parties that the Company believes
have infringed on its proprietary rights.
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SYSTEM; RISKS RELATING TO
LOW-PRICED STOCKS
The Company is currently listed on the NASDAQ SmallCap Market. In
order to continue to be listed on NASDAQ, however, the Company must maintain $2
million in net tangible assets (total assets, other than goodwill, less total
liabilities) and a $1 million public float. In addition, continued inclusion
requires two market-makers, a minimum bid price of $1.00 per share and
adherence to certain corporate governance provisions.
On June 11, 1998, the Company was notified by the NASDAQ Stock Market,
Inc. that it was not in compliance with the established listing requirements
and would be delisted on June 18, 1998. The Company has requested an appeal
for which NASDAQ has granted an August 6, 1998 hearing. This request stays the
delisting until the appeal is heard. The Company's Management believes that as
of July 1, 1998 the Company is in compliance with the NASDAQ SmallCap Market's
listing requirements and anticipates that its strategic plan will enable it to
continue to meet those requirements in the long-term. However, there can be
no assurance that the Company will avoid delisting or, if it avoids delisting
currently, that the Company will not be delisted in the future.
The failure to meet the above-noted maintenance criteria would result
in the delisting of the Common Stock from NASDAQ, and trading, if any, in the
Common Stock would thereafter be conducted in the non-NASDAQ over-the-counter
market. As a result of such delisting, an investor could find it substantially
more difficult to dispose of, or to obtain accurate quotations as to the market
value of, the Common Stock. Additionally, the Company could have difficulty
raising capital in the future due to the loss of liquidity and probable loss of
value of the Common Stock.
Furthermore, if the Common Stock were to become delisted from trading
on NASDAQ and the trading price of the Common Stock were to remain below $5.00
per share, trading in the Common stock would also be subject to the
requirements of certain rules promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any non-NASDAQ equity security that has a market price
of less than $5.00 per share, subject to certain exceptions). Such rules
require the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith
and impose various sales practice requirements on broker-dealers who sell
penny stocks to persons other than established customers and accredited
investors (generally defined as an investor with a net worth in excess of
$1,000,000 or annual income exceeding $200,000 individually or $300,000
together with a spouse). For these types of transactions, the broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior to the sale.
The broker-dealer also must disclose the commission payable to the
broker-dealer, current bid and offer quotations for the penny stock and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Such
information must be provided to the customer orally or in writing before or
with the written confirmation of trade sent to the customer. Monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks. The
additional burdens imposed upon broker-dealers by such requirements could, in
the event the Common Stock were deemed to be a penny stock, discourage
broker-dealers from effecting transactions in the Common Stock, which could
severely limit the market liquidity of the Common Stock and the ability of
purchasers in this offering to sell the Common Stock in the secondary market.
IMPACT ON STOCK PRICE OF THIS OR FUTURE OFFERINGS
A substantial portion of the Common Stock being registered under this
registration statement underlies certain convertible preferred stock,
convertible debentures, and warrants. The conversion or exercise price of
these securities may be significantly less than the current market price of the
underlying Common Stock. See "Market Prices of Common Equity, Dividend Policy
and Related Stockholder Matters," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Working Capital," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Warrant Exercises." The
exercise or conversion of these securities into Common Stock at below market
price may have an adverse effect on the market price of the Common Stock, erode
stockholder value, and have a dilutive effect on existing stockholders.
9
<PAGE> 12
In addition, the Company may issue Common Stock or financing
instruments convertible into or exercisable for shares of Common Stock in the
future, and the Company may do so at terms substantially more favorable to
investors in those securities than those previously granted. The exercise or
conversion of such instruments in the future may result in further dilution to
stockholders, and have further adverse impact upon the market price of the
Common Stock.
LIMITATIONS ON ACQUISITION AND CHANGE IN CONTROL
Staggered Board. The board of directors of the Company has three
classes of directors, the terms of which will expire in 1999, 2000 and 2001.
Directors of each class are chosen for a three year term. The staggered terms
of directors may affect the stockholders' ability to change control of the
Company even if a change in control were in the stockholders' interest.
Anti-Takeover Statutes. Delaware has enacted legislation that
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an "interested
stockholder," unless the business combination is approved in a prescribed
manner. Subject to certain exceptions, an "interested stockholder" is a person
who, together with affiliates and associates, owns (or in the prior three years
did own) 15% or more of a corporation's voting stock. A "business combination"
includes mergers, asset sales, and other transactions that result in a
financial benefit to the "interested stockholder." See "Description of
Securities -- Anti-Takeover Provisions of Delaware Law." These provisions of
Delaware law may have the effect of preventing or delaying a change-in-control
or merger even if such an event would be in the best interest of the Company's
stockholders.
LIMITATION ON LIABILITY OF DIRECTORS AND OFFICERS
The General Corporation Law of Delaware provides that in certain
circumstances a corporation shall have the power to indemnify directors,
officers, employees, and agents for expenses incurred by them in legal
proceedings. The Certificate of Incorporation of the Company provides that (i)
the Company will indemnify any director, officer, employee or agent of the
Company with respect to actions, suits or proceedings relating to the Company
if he acted in good faith and in a manner reasonably believed to be in, or not
opposed to, the Company's best interests, (ii) that any such person subject to
an action or suit that is by or in the right of the Corporation shall be
indemnified except that no indemnification shall be made if such person shall
have been adjudged to be liable for misconduct or negligence in the performance
of his duties to the Company, unless judicially determined otherwise, and (iii)
the personal liability of directors is eliminated to the fullest extent
permitted by Delaware law. These provisions may discourage stockholders from
bringing suit against a director for breach of fiduciary duty and may reduce
the likelihood of derivative litigation brought by stockholders on behalf of
the Company against a director, even if such litigation would be in the best
interest of the Company's stockholders. See "Description of Securities --
Limitation on Liability of Directors and Officers."
Additionally, the executive officers of the Company have executed
Indemnification Agreements which obligate the Company to contribute to the
officer its proportionate share of any amounts paid with respect to a legal
proceeding in which the Company is jointly liable. The contribution amount
shall be the equivalent of that proportion of the relative benefit received and
the relative fault of the respective parties.
RISK OF CONCENTRATION OF FINANCING
Certain security holders have provided substantial financing to the
Company in exchange for certain securities convertible into the Company's
Common Stock and certain warrants. The Company may be dependent on these
security holders for additional financing in the future due to possible
difficulties in obtaining alternate financing as discussed elsewhere in this
section. The Company expects to issue additional convertible securities and
warrants to these certain security holders in exchange for such financing.
Concentrated ownership of these convertible securities and warrants may give
certain security holders disproportionate influence and control over the
Company, and may lead to actions and activities by the Company that are not in
the best interest of the Company's stockholders in general.
10
<PAGE> 13
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various Federal, state and local laws, ordinances and
regulations, such as the Comprehensive Environmental Response Compensation and
Liability Act or "CERCLA," and common law, an owner or operator of real estate
is liable for the costs of investigation, removal or remediation of certain
hazardous or toxic chemicals or substances on or in or migrating from such
property as well as certain other costs, including governmental fines and
injuries to persons and property. Such laws often impose such liability
without regard to whether the owner or operator knew of, or was responsible
for, the presence of such hazardous or toxic chemicals or substances. Persons
who arrange for the disposal or treatment or transportation of hazardous or
toxic chemicals or substances may also be liable for the same types of costs
at a disposal, treatment or storage facility, whether or not such facility is
owned or operated by such person. In addition, it is not unusual for property
owners to encounter on-site contamination caused by off-site sources, and the
presence of hazardous or toxic chemical or substances at a site in the vicinity
of a property could require the property owner or a previous property owner to
participate in remediation activities in certain cases or could have an adverse
effect on the value of such property.
As of the date hereof, all of the properties currently owned and leased
by the Company have been subjected to a Phase I environmental assessment within
the past two to five years. These assessments have not revealed, nor is
management of the Company aware of, any environmental liability that it believes
would have a material adverse effect on the Company's financial position,
operations, or liquidity taken as a whole. This belief, however, could prove to
be incorrect depending on certain factors. For example, the Company's
assessments may not reveal all environmental liabilities, or may underestimate
the scope and severity of environmental conditions observed, with the result
that there may be material environmental liabilities of which the Company is
unaware, or material environmental liabilities may have arisen after the
assessments were performed of which the Company is unaware. In addition,
assumptions regarding environmental conditions, including groundwater flow and
the existence and source of contamination, are based on observation and readily
available information and sampling data, and there are no assurances that the
data are reliable in all cases. Moreover, there can be no assurance that (i)
future laws, ordinances, or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
properties will not be affected by current operations, by the conditions of land
or operations in the vicinity of the properties, or by third parties unrelated
to the Company.
The Company has had ownership interests in and operated a number of
golf courses, although none are currently owned and operated. Operations at
these golf courses involved the use and storage of various hazardous or toxic
chemicals or substances, such as herbicides, pesticides, fertilizers, motor
oil, and gasoline. In the past, the Company was required to undertake clean-up
activities with respect to certain of its golf course properties. All required
clean-up activities have been completed, and the Company believes it otherwise
operated in compliance with all Federal, state, and local environmental laws.
There can be no assurance, however, that substantial liability will not be
imposed upon the Company as a previous property owner. Previous property
owners generally are responsible for all environmental conditions present on
such property and for any discharge of hazardous or toxic chemicals or
substances thereon through the time of sale, regardless of knowledge or
responsibility therefor.
DUE DILIGENCE AND PRE-DEVELOPMENT COSTS
As part of the Company's revised strategic business plan, the Company
may incur substantial costs for due diligence relating to proposed acquisitions
or for pre-development costs relating to other ventures. Some of these costs
may be capitalized under applicable accounting principles. In 1998 alone, the
Company has expended and written off approximately $200,000. This amount
relates to projects that the Company ultimately has decided not to pursue
further. No assurance can be given that the Company will not continue to make
large expenditures for potential acquisitions or ventures that are ultimately
not consummated or developed into commercially viable ventures.
USE OF PROCEEDS
The Company has agreed to bear certain expenses of registration of the
offer and sale of the Resale Shares under the Federal and state securities
laws. The Company will not receive any of the proceeds from the sale of the
Resale Shares offered hereby.
11
<PAGE> 14
MARKET PRICES OF COMMON EQUITY, DIVIDEND POLICY AND
RELATED STOCKHOLDER MATTERS
On April 3, 1998, the Company had approximately 3,300 stockholders of
record of its Common Stock. No dividend has been declared or paid on the
Company's Common Stock by the Company since its inception. The Company does
not anticipate that any dividends will be declared or paid in the foreseeable
future on the Company's Common Stock.
From August 6, 1993 through July 17, 1996, the Company's Common Stock
traded on the Toronto Stock Exchange (the "TSE") under the trading symbol
"TEE." The Company voluntarily delisted from TSE.
The following table sets forth the high and low closing prices on the
TSE for each quarter from January 1, 1996 through the Company's voluntary
request to delist from the TSE on July 17, 1996 (all such prices are in
Canadian dollars):
<TABLE>
<CAPTION>
Closing Prices
Period Ended High Low
- ------------ ---- ---
<S> <C> <C>
March 30, 1996 $54.00 $31.50
June 30, 1996 33.75 15.75
July 17, 1996 18.75 10.20
</TABLE>
Since November 22, 1994, trading of the Company's Common Stock has
been quoted on the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") SmallCap Market. The following table sets forth, for the
periods indicated, the quarterly range of the high and low bid prices of the
Common Stock as reported by the NASDAQ SmallCap Market (all such prices are in
U.S. dollars):
Bid Prices
<TABLE>
<CAPTION>
Period Ended High Low
------------ ---- ---
<S> <C> <C>
March 31, 1996 $40.31 $22.50
June 30, 1996 25.31 13.13
September 30, 1996 15.00 3.75
December 31, 1996 7.50 3.75
March 31, 1997 10.31 3.75
June 30, 1997 6.56 3.75
September 30, 1997 5.63 2.81
December 31, 1997 9.38 1.88
March 31, 1998 9.38 5.63
June 30, 1998 6.56 1.84
</TABLE>
A 1:15 reverse stock split was effectuated on June 16, 1998 to raise
the per share price and increase the shares of Common Stock available for
issuance. All dollar amounts in the above table have been revised to reflect
the reverse stock split.
On June 30, 1998, the closing bid price for the Company's Common
Stock on the NASDAQ SmallCap Market was $1.94 per share.
As of June 30, 1998, the Company had sold 5,895 shares of its 1997
Convertible Preferred Stock ("1997 Preferred"), of which 5,730 remain
outstanding. The 1997 Preferred was sold solely to accredited investors
pursuant to a private placement offering in reliance upon Section 4(2) of the
Securities Act of 1933, as amended. Proceeds from the private placement of the
1997 Preferred equaled approximately $5.8 million, less fees of approximately
$600,000. The 1997 Preferred was offered in units of 15 preferred shares, with
each such share having a liquidation value of
12
<PAGE> 15
$1,000 plus 667 warrants (exercisable at $15.00 per share for a period of three
years) for a price of $15,000 per unit. The holders of the 1997 Preferred are
entitled to 7% cumulative dividends payable quarterly, which percentage
increases in certain events. The Company does not anticipate paying any
dividends in the foreseeable future. Since the 1997 Preferred carries rights to
cumulative 7% dividends, dividends that are not paid accrue. These accrued
dividends must be paid by the Company before any dividends are allowed to be
paid on the Common Stock. Consequently, should the Company at some time have
the resources and authorize dividends, the accrued and current cumulative 7%
dividends on the 1997 Preferred must be paid first, thus acting as a restriction
on the ability of holders of Common Stock to receive dividends. The Company's
current Certificate of Designation for the 1997 Preferred allows the holders of
the 1997 Preferred to convert their shares of 1997 Preferred into shares of the
Company's Common Stock by dividing $1,000 per 1997 Preferred share by the
"conversion price." The "conversion price" is a formula based on the lesser of
$10.50 or 75% of the average closing price during the 10 trading-day period
prior to conversion. The Company intends to amend its Certificate of
Designation for the 1997 Preferred so that each unit of 15 shares of 1997
Preferred will be convertible into number of shares based on a $1,000 value for
each share of Preferred divided by 75% of the closing price of the Company's
Common Stock on the date of funding of the Preferred. For each unit of 15
shares of 1997 Preferred, this equates to between 2,133 shares and 9,412 shares
of the Company's Common Stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW AND BACKGROUND
The Company was incorporated in Delaware on November 12, 1991 under
the name "Longview Golf Corporation." On September 18, 1992, the Company
changed its name to "Brassie Golf Holdings, Ltd." On March 29, 1993, the
Company changed its name to "Brassie Golf Corporation." On June 2, 1998, the
Company changed its name to "Divot Golf Corporation." The Company's executive
offices are located at 201 N. Franklin Street, Suite 200, Tampa, Florida 33602,
and its telephone number is (813) 222-0611.
Prior to July 1, 1997, the Company was primarily engaged in the
design, ownership and management of golf courses. In order to capitalize on
the growth in the golf products and accessories industry and the experience of
its new management, on July 1, 1997, the Company commenced a corporate
restructuring plan that included selling its golf course ownership and design
businesses and acquiring businesses engaged in the development, licensing, and
marketing of golf-related products and services. Since November 1997, the
Company has acquired Divot Golf Corporation, a designer and supplier of golf
products; Miller Golf, Inc., a supplier of high-quality golf accessory
products; and Talisman Tools Incorporated, a manufacturer of high-quality
greens repair tools. The Company has also acquired two parcels of land located
within the World Golf Village, a destination golf resort currently under
construction by third parties, south of Jacksonville, Florida. See "Business of
the Company -- World Golf Village."
NEW MANAGEMENT
The Company's senior management has been completely replaced within
the last 9 months. See "Directors and Executive Officers." The Company's new
senior management recognizes the Company's history of operating losses and
stock depreciation and can give no assurance that the Company will not continue
to suffer losses and stock depreciation. See "Risk Factors." However, the
Company has commenced the above-referenced restructuring plan, and management
believes that the Company may be able to achieve profitability over time.
13
<PAGE> 16
RESULTS OF OPERATIONS
Comparison of Quarter Ended March 31, 1998 Compared to Quarter Ended March 31,
1997.
The period-to-period decrease in each of the revenue categories
follows:
<TABLE>
<CAPTION>
QUARTER QUARTER
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1997 (DECREASE)
<S> <C> <C> <C>
Golf Revenues $101,457 $ 443,492 $(342,035)
Management and Design Fees 6,938 379,504 (372,566)
Resident Membership Fees, Membership Sales and
Annual Dues 5,783 121,227 (115,444)
Food & Beverage Revenues 13,751 97,412 (83,661)
Pro Shop Revenues 9,539 53,367 (43,828)
Other Income 0 5,259 (5,259)
-------- ---------- ---------
Totals $137,468 $1,100,261 $(962,793)
-------- ---------- ---------
</TABLE>
In the aggregate, the Company generated $137,468 in revenues during the
quarter ended March 31, 1998 compared to $1,100,261 during the quarter ended
March 31, 1997. This decrease of $962,793, or 88%, is primarily due to the
disposition of the Gauntlet at St. James golf course in November, 1997 and the
sale of the management division in July, 1997. Until the Company can more fully
implement its business strategies (discussed more fully under "Business of the
Company -- Principal Investment Objective," "-- Corporate Acquisition Strategy,"
and "-- World Golf Village"), no assurance can be given that the Company's
revenues will increase.
Despite the 88% decrease in revenues, the Company's total operating
expenses only decreased $16,325, or 1%, to $1,445,179 during the three-month
period ended March 31, 1998. The decrease is due to a combination of a $373,226
decrease attributed to design expense, a $288,053 decrease in marketing and golf
course activities, and a $109,185 decrease in depreciation and amortization,
which resulted primarily from the sale of the design division and the golf
course operations. These decreases were offset by an increase of $564,294 in
general and administrative expenses directly related to the hiring of key
employees necessary to facilitate the execution of ongoing business activities
and an increase of $192,627 of professional fees, which were primarily legal and
accounting fees incurred in connection with the Company's efforts towards
complying with the Securities and Exchange Commission and NASDAQ and other costs
incurred to pursue acquisitions and financing alternatives, some of which were
unsuccessful. No assurance can be given that future efforts to acquire other
businesses or properties or to raise additional capital will be successful.
As noted under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent Developments -- Sale of Curtis
Park," the Company disposed of its remaining interest in golf courses on April
2, 1998. At that time, the Company recorded a gain of approximately $524,000,
which is not reflected in the financial statements for the quarter ended March
31, 1998. Golf course operations included in the historical financial statements
included the compensation and benefits costs of course personnel and related
payroll taxes, golf cart leases, equipment rental and maintenance, clubhouse
repairs and upkeep, insurance, utilities, chemicals, seed and fertilizers,
water, supplies and other miscellaneous costs incurred in the operation of the
golf course. The Company evaluated the cost of operations at its facility and
established budgeted amounts for each significant category of expense in the
areas of pro shop, food and beverage, golf course maintenance, and general,
selling and administrative expenses. Monthly, the Company analyzed its actual
versus budgeted results.
General and administrative expenses include management and
administrative compensation, related payroll taxes and benefits, professional
fees, including legal and accounting and other consultants, telephone,
utilities, insurance, other taxes, travel, meals and entertainment and office
expenses, including rents.
14
<PAGE> 17
Interest expense increased by 15% from $178,472 during the three-month
period ended March 31, 1997 to $206,131 during the three-month period ended
March 31, 1998. The increase of $27,659 is primarily due to an increase in
borrowings, which the Company required to acquire a parcel of land, as more
fully described under "-- Recent Developments."
During the quarter ended March 31, 1998, the Company charged to
amortization expense $260,783 of debt discount because the holders exercised
approximately 135,000 warrants that were issued in conjunction with certain debt
instruments.
During the quarter ended March 31, 1998, the Company forfeited a
$100,000 deposit on an unsuccessful acquisition and incurred another $60,000 in
related costs that the Company has written off. See "Risk Factors -- Due
Diligence and Pre-development Costs."
Interest increased from $22,236 during the three-month period ended
March 31, 1997 to $22,637 during the three-month period ended March 31, 1998.
For the quarter ended March 31, 1998, the Company had net loss of
$1,851,988, an increase of $1,354,399 from the net loss of $497,589 for the
three-month period ended March 31, 1997. The increase is attributable to the
reasons stated above, namely, a substantial decrease in revenues resulting from
the disposition of operating assets and an increase, due to the restructuring,
in general and administrative expenses that offset the decrease in operating
expenses related to the disposed properties.
Inflation did not have a material effect on the Company's operations
during the three-month periods ended March 31, 1998 or March 31, 1997.
Comparison of 1997 to 1996.
The period-to-period decrease in each of the revenue categories
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER DECEMBER
31, 1997 31, 1996 (DECREASE)
<S> <C> <C> <C>
Golf Revenues $1,833,010 $1,878,273 $ (45,263)
Management and Design Fees 809,660 1,785,818 (976,158)
Resident Membership Fees, Membership Sales and Annual Dues 699,733 774,594 (74,861)
Food & Beverage Revenues 485,737 508,911 (23,174)
Pro Shop Revenues 259,099 277,188 (18,089)
Other Income 6,360 7,118 (758)
---------- ---------- -----------
Totals $4,093,599 $5,231,902 $(1,138,303)
</TABLE>
In the aggregate, the Company generated $4,093,599 in revenues during
the year ended December 31, 1997, compared to $5,231,902 in the year ended
December 31, 1996, a decrease of $1,138,303, or 22%. The decrease primarily
consists of a $692,866 decrease in management revenues related to the sale of
the management division in July, 1997, a $157,226 decrease in design revenues
related to the sale of the design division in August, 1997, and a $141,000
decrease related to the construction management division which had no operations
in 1997. In addition, as a result of the sale of St. James in November, 1997,
corresponding decreases of $228,457, $50,249, $59,916, and $44,134 occurred for
golf revenue; resident membership fees, membership sales, and annual dues; food
and beverage revenues; and pro shop revenues, respectively. These decreases were
offset in part by an increase of $221,156 in total revenues for Curtis Park,
which the Company has subsequently disposed of in April, 1998.
15
<PAGE> 18
The Company's total operating expenses decreased from $11,056,005
during the year ended December 31, 1996 to $6,660,207 during the year ended
December 31, 1997, a decrease of $4,395,798, or 40%. However, the majority of
this decrease was largely attributable to the 1996 writedown of goodwill by
$4,050,000. Absent this expense in 1996, the Company's operating expenses
would have decreased by only $346,000, or 3%, despite the 22% decline in gross
revenues. Other operating expenses decreased in 1997 compared to 1996 as
follows:
o reduced expenses of $763,568 resulting from the sale of the management
division in July, 1997,
o reduced expenses of $424,062 resulting from the sale of the design
division in August, 1997,
o reduced expenses of $171,412 relating to the construction management
division, which had no operations in 1997,
o reduced expenses of $153,450 resulting from the sale of St. James in
November, 1997 and
o reduced expenses of $171,669 resulting from the decrease in
amortization and depreciation expense relating to the sale of St.
James.
These items were offset in part by the following:
o Bad debt expense increased by $307,161, and other general and
administrative costs increased by $708,421. These increased costs
were recorded in conjunction with writing off the uncollectible
receivables of the Company, other legal and accounting fees, and costs
and other professional fees associated with preparing the new business
plan of the Company.
o Marketing costs increased by $135,329 in 1997 in an effort to enhance
investor relations and to more effectively market the business of the
Company.
o Finally, expenses associated with the operations of the golf course at
Curtis Park were $146,734 higher than in the previous year.
The Company incurred a write down of goodwill of $-0- and $4,050,000
related to the Summit merger as of December 31, 1997 and 1996. The write down
in 1996 was a result of management's evaluation of the future value of goodwill
on the Company's financial statements at year end.
Golf course operations include the compensation and benefits costs of
course personnel and related payroll taxes, golf cart leases, equipment rental
and maintenance, clubhouse repairs and upkeep, insurance, utilities, chemicals,
seed and fertilizers, water, supplies and other miscellaneous costs typically
incurred in the operation of a golf course.
General and administrative expenses include management and
administrative compensation, related payroll taxes and benefits, professional
fees, including legal and accounting and other consultants, telephone,
utilities, insurance, other taxes, allowance for doubtful accounts receivable,
fixed asset valuation adjustments, travel, meals and entertainment and office
expenses, including rent.
Interest expense decreased to $683,755 during the year ended December
31, 1997 from $2,316,301 during the year ended December 31, 1996. This 70%
decrease of $1,632,546 was primarily due to a one-time charge to interest
expense in 1996 of $1,400,000 related to the discount on convertible
debentures. In addition, the contractual interest expense on the debentures
and lower principal balances on certain debt, partially related to the payoff
of loans due to the sale of the St. James property in November, 1997, resulted
in an additional decrease of $146,896. The prime rate increased from 8.25% at
December 31, 1996 to 8.50% at December 31, 1997. At December 31, 1997,
substantially all of the Company's debt was fixed-rate debt and had an average
effective interest rate of 8.38%.
As a result of the 2,005,485 warrants and approximately 111,475 shares
of common stock issued in connection with the issuance of new debentures in
November of 1997, the Company recorded $1,513,065 of debt discount on the
convertible debentures as additional paid-in capital. As a result of
conversions of some of the convertible debentures in December of 1997, the
Company charged $892,709 of this amount to amortization expense in 1997.
The loss on equity investment in subsidiaries decreased from $966,579
during the year ended December 31, 1996 to $116,318 during the year ended
December 31, 1997. This $850,261 decrease results primarily from a substantial
writedown of $505,691 related to the Company's investment in Gauntlet at Laurel
Valley and the Gauntlet at Myrtle West subsidiaries in 1996 due to a
redetermination of the net realizable value of the Company's ownership
16
<PAGE> 19
interests in these entities at that time. Due to the recurring losses and
working capital deficiencies of the entities, the Company in 1997 again
redetermined the net realizable value of the Company's investment in the
entities, which the company found to be zero, and wrote down the investment
value by $116,318 to reflect that redetermination as of December 31, 1997. The
Company's interests in the Gauntlet at Laurel Valley and the Gauntlet at Myrtle
West were conveyed to EPI Pension in April, 1998 pursuant to a court order. See
"Legal Proceedings."
For the year ended December 31, 1997, the Company recorded a loss on
sale of subsidiaries of $1,826,164. The Company recorded a $1,931,875 loss on
the sale of the golf course at St. James and a $19,289 loss on the sale of Hale
Irwin Golf Services, which were offset by a $125,000 gain on the sale of
Brassie Golf Management Services, Inc. and Summit Golf Corporation. No gains
or losses on the sale of subsidiaries were recorded in 1996 because no
subsidiaries were sold during the year.
For the year ended December 31, 1996, the Company recorded a $510,000
gain related to proceeds received in 1996. This gain is attributed to a
settlement of claims in connection with a disposition of securities held by the
Company's foreign subsidiary, previously recorded as a bad debt expense in
prior years.
Interest income decreased to $98,520 during the year ended December
31, 1997 from $149,266 during the year ended December 31, 1996.
The provision for income taxes of $110,000 in 1996 was a result of
foreign income taxes due as a result of the $510,000 gain from the former
disposition of securities mentioned above. No provision for income taxes was
necessary in 1997 due to the losses the Company incurred.
For the year ended December 31, 1997, the Company had a net loss of
$5,987,034, compared to the net loss of $8,625,732 for the year ended December
31, 1996. This $2,638,698 decrease in loss from the prior year is the net
result of the items explained above.
Inflation has not had a material effect on the Company's operations
during the years ended December 31, 1997 and 1996.
Comparison of 1996 to 1995.
The period-to-period increase (decrease) in each of the revenue
categories is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED INCREASE
DECEMBER DECEMBER (DECREASE)
31, 1996 31, 1995
<S> <C> <C> <C>
Golf Revenues $1,878,273 $2,555,799 $ (677,526)
Management and Design Fees 1,785,818 1,211,240 574,578
Resident Membership Fees, Membership Sales and Annual Dues 774,594 1,223,464 (448,870)
Food & Beverage Revenues 508,911 743,835 (234,924)
Pro shop Revenues 277,188 356,016 (78,828)
Other Income 7,118 15,484 (8,366)
---------- ---------- -----------
Totals $5,231,902 $6,105,838 $ (873,936)
---------- ---------- -----------
</TABLE>
In the aggregate, the Company generated $5,231,902 in revenues during the year
ended December 31, 1996 compared to $6,105,838 in the year ended December 31,
1995, a decrease of $873,936, or 14%. The decrease primarily consists of:
o $1,698,196 of decreased revenue related to the operations of
previously owned courses that were disposed of in May, 1995.
17
<PAGE> 20
o $210,000 of decreased lot release fees paid related to the Gauntlet
at St. James (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Proceeds from
Developer's Resident Lot Sales"). Fewer lots were sold during 1996
than in 1995.
o $101,878 of decreased golf course design fee revenue because of
fewer design contracts.
These decreases in revenues were offset by $676,456 of additional revenues
attributable to the golf course management division and $438,944 of additional
revenues attributable to the Gauntlet at Curtis Park. Both of these revenues
increased because 1996 saw a full year's revenues and 1995 saw only a partial
year's revenues.
The Company's total operating expenses increased from $10,935,785
during the year ended December 31, 1995 to $11,056,005 during the year ended
December 31, 1996 an increase of $120,220, or 1%. This increase is largely
attributable to additional costs of $457,740 associated with a full year of
operations for the golf course at Curtis Park, a $427,093 increase in costs
related to the golf course management division, $372,198 in increased costs for
the golf course design division, a $250,000 reserve for potential uncollectible
receivables, a $50,000 increase in the write-down to goodwill, and a $150,442
increase in other general and administrative costs, offset by a reduction of
$1,587,253 of costs that were attributable to the previously owned courses,
which costs were included only through the date of disposition in May 1995.
The Company incurred write downs of goodwill of $4,050,000 and
$4,000,000 related to the Summit merger at December 31, 1996 and 1995. These
write downs were a result of management's evaluation of the future value of
goodwill on the Company's financial statements at year end. See note 1 on
"Goodwill," in the accompanying Consolidated Financial Statements, for
additional disclosure of the goodwill write-downs.
Golf course operations include the compensation and benefits costs of
course personnel and related payroll taxes, golf cart leases, equipment rental
and maintenance, clubhouse repairs and upkeep, insurance, utilities, chemicals,
seed and fertilizers, water, supplies and other miscellaneous costs incurred in
the operation of a golf course.
General and administrative expenses include management and
administrative compensation, related payroll taxes and benefits, professional
fees, including legal and accounting and other consultants, telephone
utilities, insurance, other taxes, allowance for doubtful accounts receivable,
fixed asset valuation adjustments, travel, meals and entertainment and office
expenses, including rents.
Interest expense increased from $656,248 during the year ended
December 31, 1995 to $2,316,301 during the year ended December 31, 1996. This
$1,660,053 increase was primarily due to $1,400,000 of interest expense related
to the discount on convertible debentures, which the Company recorded to
reflect the value of the conversion feature on the convertible debt. Other
factors causing interest expense to increase included $202,845 related to the
6% contractual interest on the debentures, $180,249 related to both a one-time
interest adjustment in 1995 and a loan refinancing in 1995 for the St. James
property, and $93,857 related to Curtis Park being open for a full year in
1996, offset by $158,155 from the reduction in debt from the disposition of
previously owned courses. In addition, the prime rate decreased to 8.25% at
December 31, 1996 versus 8.65% at December 31, 1995. At December 31, 1996,
substantially all of the Company's debt was fixed-rate debt and had an average
effective interest rate of 8.38%.
The loss on equity investment in subsidiaries increased from $637,074
during the year ended December 31, 1995 to $966,579 during the year ended
December 31, 1996. This $329,505 increase results primarily from a write-down
of the Company's investment in the Gauntlet at Laurel Valley and the Gauntlet
at Myrtle West subsidiaries due to a redetermination of the net realizable
value of the Company's ownership interests in those properties including a
$150,000 reserve affiliated with ongoing litigation regarding the Gauntlet at
Myrtle West stock guarantee. The Company also recorded an additional $50,000
reserve in the first quarter of 1998. See "Legal Proceedings."
For the year ended December 31, 1996, the Company recorded a $510,000
gain related to proceeds received in 1996. This gain is attributed to a
settlement of claims in connection with a disposition of securities held by the
Company's foreign subsidiary, previously recorded as a bad debt expense in
prior years.
Interest income increased from $3,403 during the year ended December
31, 1995 to $149,266 during the year ended December 31, 1996.
18
<PAGE> 21
The provision for income taxes of $110,000 is a result of foreign
income taxes due as a result of the $510,000 gain from the former disposition
of securities mentioned above.
During the year ended December 31, 1995, the Company incurred an
extraordinary loss of $4,130,000 in connection with the disposition of three
previously owned golf courses. No extraordinary gains or losses were incurred
in 1996.
For the year ended December 31, 1996, the company had a net loss of
$8,625,732, including the write down of goodwill as detailed above, compared to
the net loss of $10,293,535 at December 31, 1995. This $1,667,803 decrease is
the result of the items explained above.
Inflation has not had a material effect on the Company's operations
during the years ended December 31, 1996 and 1995.
LIQUIDITY AND CAPITAL RESOURCES
Historically, golf revenues, resident membership fees, membership
sales and annual dues, pro shop revenue, food and beverage revenue and
management and design fees have been the principal source of funds to pay the
operating expenses of the Company. As of April, 1998, the Company had disposed
of all of its interests in golf courses. This effectively eliminated the
primary source of the Company's revenues. As noted in more detail under
"Business of the Company - Background of the Company - Restructuring," the
Company has reorganized and refocused its operations. Currently, however, the
Company does not have sufficient operations to fund its activities or its
strategic plan. In the short-term, therefore, the Company will be dependent on
additional infusions of capital or debt to fund its operations. And in the
foreseeable future, the Company will continue to rely on long-term borrowing
and equity financing to fund acquisitions and capital improvements. The
Company cannot predict at what point in time it will be able to fund its
working capital needs out of funds generated from current operations.
Working Capital
As noted above, the Company is not generating sufficient revenues from
its operations to fund its activities and therefore is dependent on additional
financing from external sources. This fact raises substantial doubt about the
Company's ability to continue as a going concern. The Company expects to raise
additional amounts from private placements or registered public offerings of
its securities in 1998. If the Company is successful in raising additional
capital in 1998, management believes that the Company will have adequate
resources to continue to meet its working capital requirements to pay its
current debt obligations, fund capital improvements and expand and develop
businesses. There is no assurance that such additional funding will be
completed. The inability to obtain such financing would have a material
adverse effect on the Company.
The Company had a working capital deficiency of $2,424,446 as of March
31, 1998, as compared to a working capital deficiency of $98,529 as of December
31, 1997. The reduction in working capital of $2,325,917 from December 31,
1997 to March 31, 1998 relates primarily to the net loss for the three-month
period ended March 31, 1998 and short-term borrowings related to the purchase
of the Parcel 11-A land at the World Golf Village. See "-- Recent Developments
- -- World Golf Village Developments."
On April 2, 1998, the Company used approximately $4,800,000 of the
proceeds from the sale of its leasehold interest in the golf course assets at
the Gauntlet at Curtis Park to reduce its debt, which resulted in a decrease in
its working capital deficit of approximately $1,000,000. See "- Recent
Developments - Sale of Curtis Park."
On May 8, 1998, the Company secured a working capital loan of
$1,100,000, due May 10, 1999 with interest at 10.6% per annum, secured by
Parcel 11-A land at the World Golf Village, which reduced bank lines of credit
by approximately $675,000.
The total borrowings for the Company were $5,825,709 as of March 31,
1998 compared to $4,234,279 as of December 31, 1997. The net increase in
borrowings of $1,591,430 from December 31, 1997 to March 31, 1998 consists
primarily of a $1,500,000 short-term note payable to purchase the Parcel 11-A
land at the World Golf Village. As part
19
<PAGE> 22
of the financing, the Company paid $150,000 in loan and associated costs and
issued 50,000 shares of restricted Common Stock to the Mortgagors in
connection with the loan.
The Company commenced a private placement offering in December 1997 of
the 1997 Preferred for $1.92 million, less associated costs of $165,000 to
secure such funding. The 1997 Preferred was offered for a price of $15,000 per
unit. One hundred twenty-eight units (128) were sold, which equates to 1,920
shares of 1997 Preferred. Each unit consisted of 15 Preferred Shares and 667
warrants to purchase common shares. Each preferred share has a liquidation
value of $1,000 and each warrant is exercisable immediately for a period of 3
years to purchase one share of common stock for $15.00 each.
Through June 30, 1998, an additional 265 units, or 3,975 shares of
1997 Preferred and 176,755 warrants to purchase Common Stock at $15.00 per
share, were issued for approximately $3.9 million, less fees of approximately
$400,000. Of the 265 units, 200 units were issued in exchange for $3.0 million
of convertible debentures. See "-- Recent Developments -- Miller Golf
Acquisition". The terms of the 1997 Preferred are discussed under "Market
Prices of Common Equity, Dividend Policy and Related Stockholder Matters."
Through June 26, 1998, holders of 165 shares of the 1997 Preferred converted
their 1997 Preferred into 46,429 shares of the Company's Common Stock.
During March 1996, the Company issued $5.5 million in six percent
convertible debentures to finance the Company's operations. During 1996, the
holders of the debentures converted $2,034,262 of the debt into 423,371 shares
which equated to $2,496,785 in equity, net of financing fees. The higher
equity figure is a result of the conversion feature being at a discount to
market value. Through March 1, 1997, these debentures were convertible into
shares of common stock at discounts ranging from 15%-35% of its current market
value. The Company recorded $1.4 million in interest expense during 1996 to
reflect the discounts upon conversion of the Company's common stock. As of
December 31, 1996, $3,465,738 of convertible debentures were outstanding.
From January through October 1997, the holders of the debentures
converted $1,195,743 of the debt into 331,474 common shares which equated to
$1,573,308 in equity, net of financing fees. During November 1997, the
remaining $2,269,995 of outstanding 1996 debentures plus accrued interest were
transferred to new debenture holders in a third party transaction.
Simultaneously, the Company retired the 1996 debenture agreements and replaced
them with new debenture agreements containing new terms, including different
conversion features, the issuance of restricted stock, and the issuance of
warrants.
The new debentures are payable on December 31, 1998. Through December
31, 1998, the holders of the debentures are entitled to convert the debentures
into common stock of the Company at a conversion price equal to the lesser of
(1) $2.55 per share or (2) 70% of the average closing bid of the common stock
during the last five trading days prior to conversion.
From November through December 1997, $1,259,346 of the debentures'
principal had been converted into 564,059 shares of common stock, which equated
to $1,863,442 in equity, net of financing fees. As of December 31, 1997,
$1,010,649 of convertible debentures were outstanding. During 1998, an
additional $811,469 of the debentures' principal had been converted into
419,723 shares of common stock, which equates to $1,309,567 in equity, net of
financing fees. As of June 30, 1998, $199,180 of the debentures' principal and
$57,503 of accrued interest remained outstanding.
In connection with the sale of the debenture agreements issued in
November 1997, the Company issued (1) warrants to purchase 1,002,742 shares of
common stock of the Company at the lesser of $2.55 per share or 70% of the
average closing bid price of common stock during the last five trading days
prior to exercise, (2) warrants to purchase 1,002,742 shares of common stock of
the Company at the lesser of $5.10 per share or 70% of the average closing bid
price of the common stock during the last five trading days prior to exercise
and (3) 111,475 shares of restricted common stock. The warrants are
exercisable for a period of three years from the date of issuance and may be
exercised without having to pay cash by multiplying the number of warrants
exercised by the excess of the market price over the exercise price. The
resulting product would then be divided by the market price on the date of
exercise to determine the number of shares of Common Stock to be issued.
Through June 30, 1998, holders of these warrants exercised 134,751 warrants in
a cashless exercise and received 94,304 shares of Common Stock. The Company is
currently negotiating with the holders of the remainder of these warrants to
substitute approximately 667,000 warrants with an exercise price of $2.00 per
share for the remaining warrants.
20
<PAGE> 23
For other sources of liquidity, see "Business of the Company --
Financing Strategy."
Use of Funds
From the proceeds obtained through the private placement of preferred
stock, the sale of businesses, and the sale of interests in its golf course
assets, the Company is attempting to position itself to execute its new
business plan.
The Company has used these proceeds in a variety of acquisitions
designed to capitalize on the growth in the golf products and accessories
industry and the experience of its new management. See " -- Recent
Developments."
Stockholders' Equity
During the year ended December 31, 1997, the Company's stockholders'
equity increased from $1,843,291 to $2,590,885. This $747,594 increase was
primarily a result of the issuance of securities offset by the Company's net
loss. The Company issued 1,005,675 common shares and 2,005,485 warrants in
connection with the convertible debentures for $4,949,815 and received proceeds
from the private placement of preferred stock of $1,920,000 less fees of
$165,000. The net loss for the year was $5,987,034.
During the quarter ended March 31, 1998, the Company's stockholders'
equity decreased from $2,590,885 to $2,122,633. This $468,252 decrease was
primarily a result of the issuance of securities offset by the Company's net
loss. The Company issued 380,735 shares of Common stock and 120 shares of
1997 Preferred. The Company received $120,000 in the private placement of the
1997 Preferred. The Company also retired approximately $1.1 million of debt
through the issuance of its Common Stock. Finally, the Company issued $200,000
of the $300,000 of stock issued in the acquisition of Miller Golf, Inc. in the
first quarter. The net loss for the quarter was approximately $1.9 million.
WARRANT EXERCISES
As of June 30, 1998, warrants to purchase 1,537,684 shares of the
Company's Common Stock were outstanding as follows:
<TABLE>
<CAPTION>
# WARRANTS ISSUED EXPIRATION DATE EXERCISE PRICE
----------------- ------------------ --------------
<S> <C> <C>
6,667 September 28, 1998 $36.00
15,867 November 17, 1998 $36.00
3,333 December 5, 1998 $15.00
10,000 June 30, 1999 $30.00
66,667 January 20, 2000 $11.25-22.50
60,000 June 30, 2000 $36.00
16,667 September 28, 2000 $36.00
666,667 November 18, 2000 $ 2.00
230,000 December 3, 2000 $15.00
56,666 January 28, 2001 $ 3.00
181,818 April 2, 2002 $ 6.00
133,333 January 28, 2003 $ 2.81
90,000 January 28, 2003 $ 3.00
1,537,685
</TABLE>
21
<PAGE> 24
PROCEEDS FROM DEVELOPER'S RESIDENT LOT SALES
By agreement with the developer of the residential real estate
development contiguous to the Gauntlet at St. James golf course constructed by
the Company, initial membership fees are paid to the Company by the developer on
behalf of the purchasing resident upon the closing of each lot sale pursuant to
negotiated or assumed agreements. During the years ended December 31, 1997 and
1996, 66 and 96 lots were sold, respectively, by the developer at St. James, the
proceeds of which increased cash by $327,500 and $480,000 in 1997 and 1996,
respectively. As a result of the sale of the St. James golf course in November
1997, the Company expects to receive no further proceeds from the sale of
residential lots.
RECENT DEVELOPMENTS
World Golf Village Developments
The World Golf Village, a golf resort currently under development by
third parties south of Jacksonville, Florida, is expected to open in phases,
with the first phase having opened in May, 1998. In December 1996, the Company
acquired Parcel 2 for approximately $475,000 and on January 16, 1998 acquired
Parcel 11-A at the World Golf Village. The 11-A parcel was acquired for total
consideration of approximately $1,850,000. The Company plans to develop the
World Golf Village Spa (the "Spa") and the Bungalows at World Golf Village (the
"Bungalows") on parcel 11-A. See "Business of the Company -- World Golf
Village."
Sale of Curtis Park
In a closing on April 2, 1998, the Company sold its leasehold interest
in the Gauntlet at Curtis Park golf course to KSL Fairways, Inc. This was the
only remaining golf course interest held by the Company, and this sale concluded
the Company's previous strategy of golf course ownership. The interest was sold
for $5,400,000.
Miller Golf Acquisition
On April 8, 1998, the Company completed its $4.3 million stock
acquisition of Miller Golf, Inc. ("Miller"), a Massachusetts corporation (the
"Miller Golf Transaction"). Miller is a supplier of high-quality golf
accessories such as bag tags, divot repair tools and towels. The Miller stock
was acquired from its stockholders, Robert Marchetti, Louis Katon, and John
Carroll, for a combination of $3.0 million in cash, $1.0 million in notes
payable to the sellers and $300,000 of the Company's common stock (53,333 shares
valued at the fair market value of the common stock at the date of closing). The
notes payable to the sellers are due on September 30, 1998, accrue interest at
8% per annum, and are secured by a pledge of the common stock of Miller.
To obtain the funds necessary to complete this transaction, the Company
issued $3.0 million of convertible notes. These convertible notes were secured
by a subordinated pledge of the common stock of Miller, which matured on
December 31, 1999, and accrued interest at 7% per annum, payable quarterly
beginning on July 1, 1998. The notes were convertible into shares of the
Company's common stock at the lessor of $7.50 per share or 75% of the average
closing bid price of the common stock during the last five trading days prior to
conversion. The convertible note holders also received warrants to purchase
98,182 shares of common stock at $7.50 per share. On May 31 and June 9, 1998,
the holders of these convertible debentures and warrants exchanged the debt and
warrants for 3,000 shares of the 1997 Preferred and warrants to purchase
approximately 133,000 shares of the Company's Common Stock at $15.00 per share,
exercisable for three years from the date of issuance.
Divot Acquisition
On April 15, 1998, the Company completed its $500,000 stock acquisition
of Divot Golf Corporation ("Divot"),
22
<PAGE> 25
a Florida corporation from its sole stockholder, Joseph R. Cellura, the
Chairman and Chief Executive Officer of the Company. See "Certain Relationships
and Related Transactions."
Talisman Tools Acquisition
On April 20, 1998, the Company completed its $101,875 stock acquisition
of Talisman Tools Incorporated ("Talisman"), a Rhode Island corporation. The
Talisman stock was acquired from its stockholders, Daniel S. Shedd and Dixon
Newbold, for a combination of (i) two short-term, non-interest bearing
promissory notes in the aggregate amount of $55,000 payable on May 20, 1998 and
(ii) $46,875 of the Company's common stock (10,000 shares valued at the fair
market value of the common stock on the date of closing). Additionally, the
Company issued a $35,000 short-term promissory note to Taylor Box Company in
payment of certain company payables of Talisman Tools. To date each of these
notes remains unpaid. Talisman is a manufacturer of high-quality greens repair
tools. The assets of Talisman include a pending patent on the specialized divot
repair tool and the proprietary process of producing the divot repair tool.
Acquisition Plan
As noted in more detail under "Business of the Company -- Acquisition
Strategy," the Company intends to grow principally through acquisitions of other
companies that provide golf products or services. The Company intends to
complete the majority of these acquisitions for a combination of stock and cash.
See "Business of the Company -- Financing Strategy."
IMPACT OF YEAR 2000 ISSUES
The "Year 2000" issue is a general term used to describe the various
problems that may result from the improper processing of dates and calculations
involving years by many computers throughout the world as the Year 2000 is
approached and reached. The Company has reviewed the impact of Year 2000 issues
and does not expect any remedial actions taken with respect thereto to
materially adversely affect its business, operations or financial condition.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement. The
Company has identified several important factors that could cause the Company's
actual financial results to differ materially from those projected by the
Company in forward-looking statements and has discussed those factors under the
heading "Risk Factors" and throughout this Prospectus.
BUSINESS OF THE COMPANY
GENERAL
The Company was incorporated in Delaware on November 12, 1991 under the
name "Longview Golf Corporation." On September 18, 1992, the Company changed
its name to "Brassie Golf Holdings, Ltd." On March 29, 1993, the Company
changed its name to "Brassie Golf Corporation." On June 2, 1998, the Company
changed its name to "Divot Golf Corporation." The Company's executive offices
are located at 201 N. Franklin Street, Suite 200, Tampa, Florida 33602, and its
telephone number is (813) 222-0611.
BACKGROUND OF THE COMPANY
Ownership of Golf Courses
During the period from August 1988 until April 1998, the Company,
together with its predecessors and
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subsidiaries, engaged in the acquisition, design, construction, operation and
management of private, semi-private and daily-fee (i.e., "public") golf courses
in the United States. In 1991, under the name "Longview Golf Corporation," the
Company acquired two golf courses, The Gauntlet at St. James in Southport, North
Carolina and The Gauntlet at Laurel Valley in Tigerville, South Carolina. Later,
the Company also acquired two additional golf courses, The Gauntlet at Curtis
Park in Stafford County, Virginia and The Gauntlet at Myrtle West in North
Myrtle Beach, South Carolina. The ownership and operation of these golf courses
was part of the Company's business plan to expand, by acquisition and
development, its portfolio of golf courses primarily by capitalizing on the
present and projected need for quality golf courses in markets where management
believed (i) demand exceeded supply and (ii) buying power, integrated operating
systems and national account management could generate significant economies of
scale. By November 1997, the Company determined that the ownership and operation
of these golf courses no longer fit with the Company's strategic plan to develop
and market golf-related products, and, accordingly, between November 1997 and
April 1998, the Company disposed of all of its remaining golf courses.
Golf Course Design Services
In May 1994, the Company entered into the golf course design,
development and management business by acquiring Hale Irwin Golf Services, Inc.
("HIGSI"), an international golf company based in St. Louis, Missouri. Hale
Irwin, an internationally known professional golfer, served as president of
HIGSI until August 1996, at which time he tendered his resignation from the
Company. In August 1997, the Company completed the sale of HIGSI to Mr. Irwin
for a portion of the earnings to be received on design contracts the Company was
then currently negotiating with clients, as well as a percentage of revenues on
future design contracts procured by the Company.
Golf Course Management Services
From June 1995 until July 1997, the Company also engaged in the
day-to-day management of 39 private, semi-private and daily-fee golf courses in
14 states throughout the U.S. and five courses in Mexico. In July 1997, the
Company sold the division responsible for managing these third party-owned golf
courses.
Restructuring
Due to the poor operating results of the above activities, the Company,
on July 1, 1997, commenced a corporate restructuring plan that included selling
its golf course ownership and design businesses. A new management team was also
put in place through the last half of 1997. The Company's current strategy
includes plans to acquire businesses engaged in the development, licensing and
marketing of golf-related products and services. Management selected this
strategy to capitalize on the growth in the golf products and accessories
industry and the experience of its new management.
To effectuate its strategy, the Company has acquired, since December
1997, Divot Golf Corporation, a designer and supplier of golf accessories;
Miller Golf, Inc., a supplier of high-quality golf accessory products; and
Talisman Tools Incorporated, a manufacturer of high-quality greens repair tools.
The Company has also completed its divestiture of its interests in golf courses.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments." In addition, the Company has acquired two
parcels of land located within the World Golf Village, a destination golf resort
currently under construction by third parties, south of Jacksonville, Florida.
See " -- World Golf Village."
PRINCIPAL INVESTMENT OBJECTIVE
The Company's principal investment objective is to provide its
stockholders with long-term appreciation of their investment in the Company's
shares of common stock. To accomplish this goal, the Company has developed a
two-pronged strategy. First, the Company plans to acquire consumer product and
service companies that compete in the golf industry. Second, the Company plans
to acquire and develop properties located in the World Golf Village.
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CORPORATE ACQUISITION STRATEGY
The Company intends to develop a premium collection of golf-related
companies. The Company believes that the assimilation of such companies into a
public vehicle will allow the acquired companies to compound their individual
success, eliminate redundancy, and enjoy economies of scale, particularly in
the marketing and distribution areas.
Management Focus
The Company intends to maximize the various strengths of the acquired
companies by integrating them into one cohesive entity. The Company will
provide resources not previously available to the acquired companies including
additional financial support, collective cross marketing and merchandising
strategies, experienced management, and information technologies.
The Company will target strategic acquisitions of companies that offer
the highest quality golf related consumer products and services and a potential
for above average growth. The Company is generally looking for those companies
with sales of $5.0 million and higher that have an upward trend in market share
and net profits, although the Company will consider acquisition targets with
lower sales figures if the Company believes the target will complement the
Company's other products and services. Each target company must possess an
ingredient that allows them to be complementary to, and to be complemented by,
the other companies under the Company's umbrella. A coordinated, synergistic
union of these acquired companies is the ultimate goal of the Company's
management.
Each potential opportunity is different and complex in nature. The
Company approaches its negotiations with financial partners and potential
subsidiaries with flexibility. The Company believes, through a coordinated
series of strategic acquisitions, in niche market segments, that the Company
can offer the necessary vehicle to result in a focused, profitable enterprise.
Consumer Market Focus
Golf continues to provide great enjoyment for generation after
generation to perpetuate the growth of the golf industry. In recent years,
golf has enjoyed an enormous resurgence in popularity as shown by total dollars
spent on golf related fees and accessories. Research shows senior golfers
(age 50 and above) account for close to 50% of all rounds played and 53% of all
spending on golf. Even more encouraging is the number of junior golfers which
has increased by 14% from a year ago, and women golfers have increased by an
estimated 10%. This wave of Americans now playing golf include pre-senior and
senior retirees ages 50 plus. Unlike past generations this new crop of
enthusiasts are more affluent with a higher degree of disposable income. It is
this new breed of golf enthusiast that will contribute to a progressive future
of the Company.
In 1994 an estimated 700 companies exhibited at golf industry trade
shows, and today the number of exhibitors exceeds 1,500. Estimated total
revenues from golf fees and equipment sales has grown 27% from 1994 to 1997.
This translates into an estimated gross revenue for the golf industry of $22
billion in 1997. Equipment and golf related consumer goods followed this
industry trend averaging over a 40% increase during that same time period with
sales topping $6.3 billion.
Over the past three years (1994 to 1997) the golf industry has seen
increasing gross revenues at an average of 10% per year. This consistent,
stable growth pattern indicates the golf industry to be a prime example of a
mature industry with years of steady growth ahead. It is these indicators that
have shown the consumer products arena to be an open window for Divot Golf
Corporation.
Products and Services
The 1998 calendar year will be a developmental period for the Company
in order to prepare for an aggressive launch of the new product and marketing
strategy in January of 1999 at the PGA of America Merchandise Show in Orlando,
Florida, the largest golf trade show in the world.
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The acquisition of Divot Golf Corporation gave the Company several
other assets, including the rights to the "Divot Golf" name, a patent on a
uniquely designed golf ball, and a patented divot repair tool that contains a
built-in ball marker and club head face cleaner.
The Company's Miller Golf, Inc. subsidiary offers a wide range of
logoed golf products. Such items include bag tags, tees, ball markers, divot
tools, score cards, towels, rainwear, umbrellas, hats, head covers, tournament
prizes and awards. Currently, the largest selling product is injection molded
plastic bagtags. The majority of these are produced from molds owned by Miller
Golf which are located at two Boston area molding facilities who deliver them
to the warehouse where Miller Golf employees imprint the logos on each tag.
Wooden tees, painted in various colors, are purchased ready for imprinting at
the Miller Golf facility in boxes of 20,000 each. These tees are made by two
manufacturers, one in Vermont and one in New Hampshire. Tournament awards and
prizes are purchased from numerous manufacturers that store inventory readily
accessible by Miller Golf.
The Company believes a great number of opportunities currently exist
to increase sales and control costs to significantly improve profitability of
Miller Golf. The current Miller Golf new product development efforts have been
lacking for the last few years. The Company has already targeted a selection
of new products to broaden the product line for tournament prizes and awards,
umbrellas, towels, head covers, rainwear and bags, including expanding to new
price points. The Company plans a new product campaign specifically targeted
to public golf courses and corporate sales.
Talisman Tools Incorporated, another of the Company's subsidiaries,
produces an upscale, divot repair tool with a magnetized ball marker included
(on which a patent is pending). The repair tool is made of one of four metals,
brushed stainless steel, copper, titanium, or beryllium. Although the Company
plans to maintain Talisman as a separate subsidiary, the marketing,
distribution, and manufacturing of this tool will be transferred to the Miller
Golf subsidiary.
Distribution Methods
The Company's Miller Golf subsidiary currently distributes its
products through golf professionals, country clubs and resorts, as well as
through numerous golf associations throughout the world. The products are sold
through independent representatives, supported by an in-house customer service
department, to accounts throughout the United States and Puerto Rico.
Miller Golf has basically adhered to a "pro shop" only distribution
policy dating back to the 1950's. Designed to protect the "carriage trade",
virtually all golf manufacturers and distributors have abandoned this strategy
as golf specialty stores (i.e., Nevada Bob's, Edwin Watts, etc.), and sporting
goods/mass merchandiser channels continue to proliferate and show sustained
growth. The Company intends to strategically amend the existing distribution
policy at Miller Golf and sell selective products to these growing and emerging
channels without jeopardizing existing sales.
The Company is also developing a virtual golf pro shop website
(www.divot.com). The Company intends to merchandise its proprietary products
via the virtual golf pro shop on the Internet. By utilizing new technology and
the Internet, the Company expects to provide Miller Golf's existing account
base of 5,000 golf country clubs and resorts more efficient order processing
and enhanced support for its existing sales representatives. The website will
offer Miller Golf's existing customers, individuals, and businesses an
interactive experience and one-stop approach to previewing and purchasing a
wide range of golf products and services.
Implementation of the virtual golf pro shop is currently being
developed by Raremedium Inc. The Company expects that the virtual golf pro
shop will facilitate the Company's expansion into several new markets
worldwide.
Marketing
An internal survey of Miller Golf's customers revealed the key to
Miller Golf's unique marketing position and reputation is based upon its
unparalleled customer service and prompt accurate product delivery. Further,
the Company believes Miller Golf's weaknesses include a lack of new products,
and limited resources to aggressively grow the business.
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Miller Golf supplies accessories to over 90% of all golf resorts, 70%
of all private clubs and 10% of all public courses in the United States.
However, of the estimated total 16,000 courses in U.S., more than 50% are public
daily fee facilities. The Company feels this is one of many areas that
represent a substantial sales growth potential for Miller Golf in the future.
The Company intends on initiating a new corporate sales division and
plans to build national and direct account sales volume to 25% of gross
revenues over three years. It is believed the Company can capitalize on
established hotel contacts and tie into hotel and resort amenities packages;
new construction projects; convention center promotional opportunities; special
events; and the ever growing licensing market. In addition, the Company feels
cruise lines, airlines, QVC/Home Shopping Networks and major travel/tour
package companies, as well as professional sports teams, also offer great
potential for sales.
Geographically, Miller Golf has minimal sales outside the U.S. The
golf market is now worldwide in scope and has experienced explosive global
growth in the last ten years. Immediate opportunities exist in Canada, Great
Britain, Europe and in the Far East. Europe is following the U.S. lead in the
evolution of golf shop merchandising which will yield new opportunities in this
embryonic market. It is estimated that the total golf market outside of the
United States has approximately the same number of golf courses with
approximately the same volume potential in accessory needs and sales.
At the appropriate time, the Company will launch a coordinated
marketing campaign designed to solidify the corporate image of its
subsidiaries. This form of coordinated marketing effort can better leverage
the collective advertising and marketing strengths to help corporate dollars go
further.
As part of the Company's strategic plan, the Company will coordinate
cross marketing to combine the strengths of each individual subsidiary for the
benefit of the Company. This element includes product design, sourcing,
distribution, advertising and retailer relations.
The Company will broaden its sales efforts into the corporate arena
which will include a heavy emphasis on the expansion of their catalog and
Internet presence.
Suppliers
Miller Golf is not dependent on any one supplier for a significant
portion of its product line. The Company has long standing relationships with
the majority of its suppliers insuring reliable delivery.
Competition
As the popularity of golf continues to flourish, so has the recent
introduction of new ideas, products and services in the golf industry. This
unprecedented growth of the golf industry, typical of most rapidly growing
industries, continues to be fragmented and void of a definitive focus. Many
ideas and new emerging companies are trying to claim their share of this
booming industry.
The $1 billion golf accessory market is divided among a large number
of companies that distribute one or more items with a variety of quality and
pricing as well as non-golfing companies whose varied manufactured product
lines offer something for the golf trade. The golf accessory portion of the
golf industry is very fragmented with no one company having significant share
of the $1 billion in annual sales. Most of these companies in this market
segment gross between $500,000 and $5,000,000 in annual sales volume.
Information Management Systems
Control and reporting are among the most critical elements of quality
corporate management. The Company, at the appropriate time, anticipates
installing an Information Management System to be integrated into each of the
subsidiaries in order to receive and send accurate information on a timely
basis. Such measures allow for close control
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of the subsidiaries and will assist in cash management, inventory control,
sales force automation, accounts receivable, news releases and general
intra-corporate communications.
WORLD GOLF VILLAGE
The World Golf Village Resort ("WGV") is currently under development by
third parties south of Jacksonville, Florida. Management considers WGV to be the
most ambitious golf project ever attempted, and it is anticipated to be a major
destination golf resort. It is believed to be the largest single golf-related
project in the world today. The centerpiece of the WGV will be a 75,000
square-foot "World Golf Hall of Fame" and IMAX theater. Plans also include three
18-hole golf courses, including one championship course, and complete amenities
for those visiting on vacation or on business. Golf legend Sam Snead is the
design consultant for the championship course, and Bobby Weed is the course
architect. The WGV will also include the new headquarters for PGA TOUR
Productions; the 300-room 80,000 square foot World Golf Village Resort Hotel and
the St. Johns County Convention Center operated by John Q. Hammons Hotels, Inc.;
the Vistana World Golf Village Resort, complex of upscale vacation ownership
villas developed by Vistana, Inc.; The Residences, a 31-acre luxury condominium
village developed by EcoGroup, Inc.; a Mayo Clinic family care facility; The
Slammer and The Squire, an 18-hole championship course and clubhouse named for
Hall of Famers Sam Snead and Gene Sarazen and managed by Scratch Golf Company;
and the Shops at World Golf Village, an upscale shopping and dining marketplace
managed by W.C. Bradley Co. and Cousins Properties. Plans call for the WGV to
open in phases, with the first phase having opened in May 1998.
The Company's first project to open at WGV is expected to be a Sam
Snead's Tavern at World Golf Village. Construction of the restaurant is slated
to begin by the owner of the property in July and is expected to open late fall
1998. The 390 seat restaurant, which will be leased and operated by Tour Tavern
Corporation, a wholly owned subsidiary of the Company, will be located on the
Walk of Champions, a 26-foot wide, one-half mile long walkway where the
signatures of all inductees into the World Golf Hall of Fame are being engraved
in granite. The plans for the restaurant contain three areas -- the main
restaurant with an exhibition kitchen behind glass, a private dining and banquet
room, and a comfortable bar and lounge area. The decor will feature dark woods,
deep colors, vintage chandeliers, golf memorabilia and museum quality artwork
pertaining to the history of golf. Sam Snead establishments are currently in
operation in Myrtle Beach, South Carolina; Alpharetta, Georgia; at Metro West in
Orlando, Florida; at The Homestead in Hot Springs, Virginia; and at The
Greenbrier in White Sulphur Springs, West Virginia.
On December 11, 1996, the Company acquired Parcel 2 at the WGV, a 4.29
acre parcel of land zoned for industrial use. The Company has a license from
World Golf Village, Inc., for which it paid $150,000 in December 1996, to
construct a laundry dry cleaner, golf ball and tool manufacturing facility, and
a transportation center. The Company is holding it for future development.
Parcel 2 was acquired for approximately $475,000, not including the $150,000
license fee. The Company's current plans, subject to change, include developing
a 30,000 square-foot laundry facility for the use by WGV hotels, guests and
residents. To date, however, the Company has incurred only minimal
pre-development costs.
As noted under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent Developments," the Company
recently acquired Parcel 11-A at the WGV. The Company plans to develop the World
Golf Village Spa (the "Spa") and the Bungalows at World Golf Village (the
"Bungalows") on the parcel for which the Company has a license from World Golf
Village, Inc. The Company paid $100,000 in December of 1996 for the license. The
Spa is planned to offer 40,000 square feet of luxury spa and retail space. It is
also planned to include a high-end spa and fitness center, clubhouse,
restaurant, and a retail boutique. The Spa is in the design and initial
development stage now. Canyon Ranch Management, LLC is expected to design,
manage, and operate the Spa. Canyon Ranch has been involved in the design and
operations of award-winning health resorts in Tucson, Arizona and the Berkshires
in Lenox, Massachusetts. The Company expects to begin construction of the Spa in
early 1999 with a projected completion date of February 2000. The Bungalows will
offer 32 rentable bungalow structures. The Company expects to begin development
and construction on the first 16 Bungalows in the fall of 1998, with a targeted
completion date of the first quarter of 1999. The remaining Bungalows are
expected to be built throughout 1999.
The Company's operations at the WGV will face competition from other
golf-focused resorts, as well as other resorts that offer spa and golf packages.
To date, although the Company has expended approximately $193,000 for
pre-development costs relating to parcel 11-A and $22,000 on the Sam Snead's
Tavern at World Golf Village, the Company has not commenced active operations
at WGV.
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PROPERTIES
The Company's headquarters are located in Tampa, Florida, and occupy
approximately 8,900 square feet of administrative space pursuant to a lease
agreement which expires in December 2004 and provides for an initial annual
base rental of approximately $134,000 and escalates to approximately $170,000
in the fifth year of the lease.
Although nothing in the Company's governing documents prohibits the Company
from investing in 1) investments in real estate or interests in real estate; 2)
investments in real estate mortgages; 3) securities of or interests in persons
primarily engaged in real estate activities, the Company has no plans to make
any such investments.
Miller Golf's office and warehouse facilities are located in Rockland,
Massachusetts, 20 miles south of Boston, in an industrial office park. The
property is separately owned by Mr. Robert Marchetti in the name of Rockland
Hills Realty Trust, and covers five acres with 56,000 square feet under roof.
Miller Golf currently occupies 34,200 square feet. The additional 21,800
square feet is rented to an unrelated tenant whose lease expires in December,
1999. Of Miller Golf's space, 20,000 square feet is devoted to production and
warehouse and 14,200 square feet to office space. The rent has been
pre-negotiated and will remain fixed for the next 5 years.
The only asset accounting for more than 10% of the Company's total
assets is parcel 11-A at the World Golf Village. See " -- World Golf Village"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments -- World Golf Village Acquisitions."
EMPLOYEES
At June 30, 1998, the Company has 74 full time employees, including 14
executive administrative personnel at the Company's headquarters in Tampa,
Florida and 60 people employed by the Company's Miller Golf subsidiary. Of the
60 people employed by Miller Golf, 22 are in general administration, customer
services, and finance and 38 are in factory operations. All of the factory
personnel are members of the International Union of Electronic, Electrical,
Salaried, Machine and Furniture Workers, AFL, CIO Local 259. The average
employee's tenure is 11 years, and the Company has stable union relations.
TRADE NAMES AND OTHER INTELLECTUAL PROPERTY
Trade Names
Through the Company's acquisitions of Miller Golf, Inc., Divot Golf
Corporation, and Talisman Tools Incorporated (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent
Developments"), the Company has acquired the rights to use those companies'
trade names. On June 2, 1998, after obtaining stockholder approval, the
Company changed its name to "Divot Golf Corporation."
Intellectual Property and Proprietary Rights
As noted above, the Company has various license rights obtained from
World Golf Village, Inc., to operate various facilities at the World Golf
Village.
Through the Company's acquisitions, the Company has also obtained
patent rights to a uniquely dimpled golf ball, a specialized divot repair tool
with a built in ball marker and built in club head face cleaner, and rights to
a pending patent for a high-end divot repair tool with a magnetized ball
marker, which can be produced from brushed stainless steel, copper, beryllium,
or titanium.
FINANCING STRATEGY
Miller Golf currently has a secured revolving line of credit with a
lender with a maximum of $2.0 million or as available based on 50% inventory
and 80% accounts receivable under 60 days. Miller Golf also has an available
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long-term credit line for equipment purchases totaling $250,000, due March 30,
2000. No outstanding balance currently exists on this line. Under the terms
of this line of credit, Miller Golf cannot make any inter-company advances or
pay any dividends to its parent, the Company, of more than $100,000.
The lender has indicated that it may be interested in financing other
acquisitions by the Company on an asset-based financing basis. In addition,
the Company is pursuing a corporate line of credit from this lender. No
assurance can be provided, that such agreements will be reached.
The Company anticipates a private equity placement of preferred stock,
warrants, or debt within the next thirty days in an amount that approximates
$500,000. No assurance can be provided, however, that such a private placement
will be consummated.
As noted above, the Company has expended approximately $193,000 on
pre-development costs relating to the development of the Spa and Bungalows on
Parcel 11-A at the World Golf Village. The Company anticipates entering into a
joint venture or partnership relationship with one or more other parties to
help finance and construct the Spa and Bungalows. The Company currently
estimates that, at the conclusion of the construction of the Spa and Bungalows,
it will hold a one-third to one-half interest in the Spa and Bungalows. No
assurance can be given, however, that such joint venture or partnership
relationships will be established or that the Company will be able to obtain
other sources of financing allowing it to construct and operate the Spa and
Bungalows.
As the Company identifies future acquisition targets, it will seek
additional capital through private offerings or through private placements or
public offerings of debt of equity securities. No assurance can be provided,
however, that the Company will be able to obtain the necessary financing to
acquire suitable acquisition candidates.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the current
directors and executive officers of the Company, the principal offices and
positions with the Company held by each person and the date such person
became a director or executive officer of the Company.
<TABLE>
<CAPTION>
Name of Director or Executive Director Principal Occupation
Officer and Position, in the Company Since Age During the last Five Years
- ------------------------------------ ------- --- --------------------------
<S> <C> <C> <C>
Clifford F. Bagnall 1997 43 Clifford F. Bagnall was elected as a director of the
Company in September, 1997 and re-elected in June
1998. Prior to that time, since 1992, Mr. Bagnall
owned and operated a consulting company, Foxhole
Consulting, Inc., serving primarily an international
clientele in the areas of real estate development,
construction, and financing transactions. From
September, 1988 through December, 1991, Mr. Bagnall
served as Vice President - Chief Financial Officer of
Trammell Crow Residential in Tampa, Florida. Mr.
Bagnall also has experience with other real estate
development companies, including Jack Nicklaus
Development from March, 1984 through May, 1987 where
he served as Vice President - Finance. Mr. Bagnall
presently serves as Chief Financial Officer and Chief
Operating Officer of the Company.
Joseph R. Cellura 1997 43 Joseph R. Cellura was elected Chairman of the Board of
Directors and Chief Executive Officer of the Company in
June, 1997 and re-elected in June 1998. Mr. Cellura has
controlled and served as a director and in executive
capacities of several privately held corporations,
including most significantly Divot Corporation (since
1989) and Divot Development Corporation (since 1994).
Divot Corporation has owned exclusive licensing,
marketing and development rights at the World Golf
Village, Inc. and the PGA TOUR Golf Course Properties,
Inc. In addition, Divot Corporation has owned the
patent rights to a specialized divot repair tool. These
rights, among others, have been transferred to the
Company. See "Certain Relationships and Related
Transactions." At this time, Mr. Cellura is neither
employed by nor actively involved in any entity other
than the Company.
Preston H. Cottrell 1998 48 Preston H. Cottrell was elected as a director at the
Company's 1998 Annual Shareholders' Meeting.
Mr. Cottrell founded, and has been since 1983 Chief
Executive Officer, of Cottrell Communication
Corporation, which designs, installs and maintains
business telephone systems, data wiring, voice mail and
computer-telephone integration. Mr. Cottrell has also
served as President and Chief Executive Officer of CFC
Leasing Company since 1992, which leases telephone
equipment. Mr. Cottrell is a Director of Branch Banking
& Trust Company of Virginia.
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Jeremiah M. Daly 1997 44 Jeremiah M. Daly was elected as a director in
December, 1997 and re-elected in June 1998. Prior to
this, Mr. Daly had served as Vice President and
General Manager of the Rockport Golf Division of The
Rockport Company, a shoe manufacturing company, since
1994. From 1989 through 1993, Mr. Daly served as Vice
President of Operations, Golf Division, for Etonic,
Inc. While in that position, Mr. Daly also served as
Vice President Sales and Marketing for the Golf
Division. Mr. Daly presently serves as President of
the Company. At this time, Mr. Daly is neither
employed by nor actively involved in any entity other
than the Company.
Gordon D. Ewart 1991 55 Gordon D. Ewart, a director of the Company since
November, 1991, is a co-founder of the Company. He
was President of the Company from November 12,
1991 to October 16, 1992, at which time he became
Chairman of the Board and its Chief Executive Officer,
which latter position he held until July 11, 1995. Mr.
Ewart resigned as Chairman of the Board in May 1997.
Since 1987, and prior to joining the Company, Mr. Ewart
was co-founder of three merchant banks based in
Toronto, Canada and Bermuda: Resources Capital
International Ltd., Paramount Funding Corp. and Grafco
Ltd., which firms were utilized as investment vehicles
to finance Canadian industrial and natural resource
companies. Mr. Ewart is also a director of Global
(GMPC) Holdings, Inc. (Formerly New Total Group, Inc.),
a Canadian public company.
</TABLE>
The directorship terms of office of Clifford F. Bagnall and Joseph R.
Cellura will expire at the annual meeting of stockholders in 2001. The
directorship terms of Preston H. Cottrell and Jeremiah M. Daly will expire at
the annual meeting of stockholders in 2000, and the directorship term of Gordon
D. Ewart will expire at the annual meeting of stockholders in 1999.
Each executive officer will hold office until his successor duly is
appointed and qualified, until his resignation or death or until he is removed
in the manner provided by the Company's Bylaws.
There are no other arrangements or understandings between any executive
officer and any director or other person pursuant to which any person was
selected as a director or an executive officer.
EXECUTIVE COMPENSATION
The Company's directors have heretofore served without compensation for
their services as directors, but have been reimbursed for expenses incurred in
connection with their duties. It is anticipated that directors will continue to
serve without compensation (other than reimbursement of expenses).
Other than the employment contracts described below, the Company had no
standard arrangements or policies for compensation of its executives. The Board
of Directors will, from time to time, determine the compensation of its senior
management in accordance with the prevailing financial condition of the Company
as the Board shall determine and provide other incentives to promote successful
management of the Company's business. There were no bonus, stock option or other
incentive plans in effect for any level of management as of the end of the last
fiscal year except for the Company's 1994 Stock Option Plan and certain
performance bonuses included in the employment agreements of Messrs. Cellura,
Daly, and Bagnall as more fully described below. At the Company's 1998
stockholder meeting, the Company's stockholders approved the Company's 1998
Stock Option Plan.
The following table sets forth information with respect to compensation
paid by the Company and its subsidiaries to both Chief Executive Officers in the
last fiscal year. No other executive of the Company received compensation in
excess of $100,000 for the last fiscal year.
31
<PAGE> 34
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
-------------------------------
Securities
Annual Compensation Underlying
------------------- Other Restricted Options LTIP All Other
Name and Salary Bonus Annual Stock SARs Payouts Compensation
Principal Position Year ($) ($) Compensation Awards ($) ($) ($)
- ------------------ ---- ------ ------ ------------ ---------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William E. Horne 1997 $118,209(1)
Former President 1996 $240,610
and Chief Executive 1995 $156,689(2)
Officer
Joseph R. Cellura 1997 $ 45,406(3)
Chairman and Chief 1996 $ -0-
Executive Officer 1995 $ -0-
</TABLE>
- ---------------------
(1) Mr. Horne stepped down as President and Chief Executive Officer in May 1997
and as Director of the Company in November 1997.
(2) Represents the period beginning June 30, 1995 through December 31, 1995.
(3) Represents the period beginning June 2, 1997 through December 31, 1997.
No options, stock appreciation rights, or long-term incentive plan
awards were granted by the Company to the Company's executives during the last
fiscal year. No options or stock appreciation rights were exercised by the
Company's executives during the last fiscal year, and at the end of fiscal 1997,
there were no unexercised options or stock appreciation rights held by the
Company's executives which were outstanding.
EMPLOYMENT CONTRACTS
On September 3, 1997, the Company entered into a seven-year Employment
Contract with Joseph R. Cellura. Mr. Cellura is entitled to an annual salary of
$225,000. The contract, unless terminated by agreement or in accordance with the
termination provisions therein, automatically renews for annual periods unless
at least sixty (60) days notice is given by either party. During 1998,
management of the Company determined that Mr. Cellura may also be issued 333,333
shares of Common Stock of the Company as part of the consideration for Mr.
Cellura's employment. In the second quarter of 1998, in satisfaction of this
obligation, the Company issued 333,333 options exercisable at $2.8125 per share,
which represents the fair value of the Common Stock on the date of grant. The
options vested immediately and expire in five years. In the event Mr. Cellura is
terminated for cause, any unexercised options will be subject to immediate
forfeiture. If Mr. Cellura's employment terminates without cause, the options
will expire three months from the date of termination. However, if the reason
for termination is death or disability, the options will not expire until one
year from the date of termination. The Employment Contract includes an incentive
bonus which will pay Mr. Cellura the following percentages depending upon the
Company's earnings before interest and taxes: $1,000,000 or less, 5% of base
salary; $1,000,001 - $300,000,000, 15% of base salary; $3,000,001 - $5,000,000,
30% of base salary; and greater than $5,000,000, 50% of base salary. The
Employment Contract will also provide Mr. Cellura with benefits commensurate
with other executives of the Company. Additionally, Mr. Cellura will be entitled
to maintain an office in New York, New York, with the Company being responsible
for any expenses related thereto (currently $8,000 per month). In the event Mr.
Cellura is terminated without cause, unless such termination is at the election
of Mr. Cellura or upon the scheduled termination date pursuant to the terms of
the Employment Contract, the Company will be responsible for paying Mr. Cellura
severance compensation in the amount of $500,000 which shall be payable within
sixty (60) days of termination. The Employment Contact provides for covenants
against competition and solicitation of employees of the Company for a one-year
period after termination for cause or termination by Mr. Cellura. As of December
31, 1997, the Company accrued, but did not pay, an amount of $30,000 (which was
due as salary under the Employment Contract), and an additional amount of
$35,000, representing an employee bonus. These amounts due Mr. Cellura have been
offset against amounts owed to the Company from Mr. Cellura and affiliates. See
"Certain Relationships and Related Transactions" set forth below.
The Company signed an Employment Contract with Jeremiah M. Daly
effective December 1, 1997. The Employment Contract provides that Mr. Daly shall
serve as President of the Company for a five-year term, and unless terminated by
agreement or in accordance with the termination provisions therein, will be
automatically renewed for an additional five-year period unless either party
provides thirty days notice. The Company will pay Mr. Daly a salary of $250,000
per annum and he will be entitled to a one-time payment for relocation costs of
up to $30,000. In the second quarter of 1998, the Company issued to Mr. Daly
options to purchase 200,000 shares of Common Stock
32
<PAGE> 35
exercisable at $2.8125 per share, which represents the fair value of the Common
Stock on the date of grant. The options vested immediately and expire in five
years. In the event Mr. Daly is terminated for cause, any unexercised options
will be subject to immediate forfeiture. If Mr. Daly's employment terminates
without cause, the options will expire three months from the date of
termination. However, if the reason for termination is death or disability, the
options will not expire until one year from the date of termination. Mr. Daly
shall also receive a performance bonus based upon the Company's earnings before
interest and taxes which shall be calculated as follows: $1,000,000 or less, 5%
of base salary; $1,000,001 - $3,000,000, 15% of base salary; $3,000,001 -
$5,000,000, 30% of base salary; and greater than $5,000,000, 50% of base salary.
The Employment Contract also provides for benefits commensurate with other
executives of the Company. In the event Mr. Daly is terminated without cause,
unless such termination is at the election of Mr. Daly or upon the scheduled
termination date pursuant to the terms of the Employment Contract, the Company
will be responsible for paying Mr. Daly severance compensation in the amount of
$500,000 which shall be payable within sixty (60) days of termination. The
Employment Contract provides for covenants against competition and solicitation
of employees of the Company for a one-year period after termination for cause or
termination by Mr. Daly.
On September 2, 1997, the Company entered into a three-year Employment
Contract with Clifford F. Bagnall, engaging Mr. Bagnall to serve in the capacity
of Chief Operating Officer of the Company and interim Chief Financial Officer
until the Company hired another executive. Mr. Bagnall is entitled to a salary
of $175,000 per year and the contract, unless terminated by agreement or in
accordance with the termination provisions therein, automatically renews for
annual periods unless terminated by thirty (30) days notice from either party.
In the second quarter of 1998, the Company issued options to purchase 200,000
options to purchase shares of Common Stock exercisable at 2.8125 per share,
which represents the fair value of the Common Stock on the date of grant. The
options vested immediately and expire in five years. In the event Mr. Bagnall is
terminated for cause, any unexercised options will be subject to immediate
forfeiture. If Mr. Bagnall's employment terminates without cause, the options
will expire three months from the date of termination. However, if the reason
for termination is death or disability, the options will expire one year from
the date of termination. Mr. Bagnall shall also be entitled to a performance
bonus based upon the Company's earnings before interest and taxes which shall be
calculated as follows: $1,000,000 or less, 5% of base salary; $1,000,001 -
$3,000,000, 15% of base salary; $3,000,001 - $5,000,000, 30% of base salary; and
greater than $5,000,000, 50% of base salary. Mr. Bagnall shall additionally
receive benefits commensurate with other executives of the Company. In the event
Mr. Bagnall is terminated without cause, unless such termination is at the
election of Mr. Bagnall or upon the scheduled termination date pursuant to the
terms of the Employment Contract, the Company will be responsible for paying Mr.
Bagnall severance compensation in the amount of $240,000 which shall be payable
within sixty (60) days of termination. The Employment contract provides for
restrictive covenants of competition and solicitation of employees of the
Company for a one-year period after termination for cause or termination by Mr.
Bagnall. During 1997, the Company accrued, but did not pay, an amount of $16,667
(which was due under the Employment Contract). As of June 30 1998, the Company
has not paid this amount.
SECURITY OWNERSHIP OF CERTAIN PERSONS
The following table sets forth certain information regarding the
beneficial ownership of the Company's capital stock as of June 30, 1998 (except
as noted) by each person known to the Company to own beneficially more than five
percent of the Company's capital stock, each director, each executive officer,
and all executive officers and directors as a group. The information reported
herein is based on a review of the records of the Company's Registrar and
Transfer Agent, the most recently filed reports of beneficial ownership
("Section 16 Reports"), and information supplied by the named individuals.
Certain discrepancies may exist among such information which are noted in the
footnotes to this table. Relationships between the Company and certain members
of its former management are hostile. No assurance can be given that the
information reported is accurate.
As noted under "Market Prices of Common Equity, Dividend Policy and
Related Policy and Related Stockholder Matters," the Company is negotiating to
amend its 1997 Preferred Certificate of Designation to provide for a fixed
conversion based on the market price at the date the 1997 Preferred was
purchased by the holder thereof. As noted under "Managements Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Working Capital," the Company is negotiating with the
holders of the warrants issued in connection with the November 1997 issuance of
convertible debentures to exchange certain of those outstanding warrants for
other warrants with an exercise price of $2.00 per share. The following table
assumes these negotiations are successful.
33
<PAGE> 36
<TABLE>
<CAPTION>
Common Stock
-----------------------
Amount Percent
Beneficially of
Name of Beneficial Owner (1) Owned (1) Class
---------------------------- ------------ -------
<S> <C> <C>
Clifford F. Bagnall (2) . . . . . . . . . . . . . . . 207,778 5.9%
Joseph R. Cellura (3) . . . . . . . . . . . . . . . . 333,333 9.1%
Preston H. Cottrell (4) . . . . . . . . . . . . . . . 16,518 *
Jeremiah M. Daly (5). . . . . . . . . . . . . . . . . 200,000 5.7%
Gordon D. Ewart (6) . . . . . . . . . . . . . . . . . 176,815 5.1%
Divot Spa WGV, Inc. (7) . . . . . . . . . . . . . . . 200,000 6.0%
All directors and executive officers as a group (7
persons). . . . . . . . . . . . . . . . . . . . . . . 934,444 22.2%
</TABLE>
- --------------
* Less than one percent.
(1) The named stockholders have sole voting and dispositive power with
respect to all shares shown as being beneficially owned by them, except
as otherwise indicated.
(2) Includes 200,000 options exercisable immediately at $2.8125 per share
for a period of five years; 15 shares of 1997 Preferred convertible
immediately into 7,111 shares of the Company's Common Stock; and
warrants to purchase 667 shares of the Company's Common Stock
exercisable immediately at $15 per share for a period of three years.
Mr. Bagnall serves as Chief Financial Officer and Chief Operating
Officer of the Company. He was elected to the Board in September 1997.
Mr. Bagnall's address is One Tampa City Center, 201 North Franklin
Street, Suite 200, Tampa, Florida 33602. As noted under "Market Prices
of Common Equity, Dividend Policy and Related Stockholder Matters" the
Company anticipates amending its Certificate of Designation for the
1997 Preferred to reflect a conversion price based upon 75% of the
closing market price of the Company's Common Stock on the date of
funding for the purchase of the 1997 Preferred. The above conversion
assumes this amendment.
(3) Includes 333,333 options exercisable immediately at $2.8125 per share
for a period of five years. Mr. Cellura serves a Chairman of the Board
and Chief Executive Officer of the Company. Mr. Cellura was elected to
the Board in June 1997. Mr. Cellura's address is One Tampa City Center,
201 North Franklin Street, Suite 200, Tampa, Florida 33602.
(4) Includes 75 shares of 1997 Preferred convertible immediately into
11,852 shares of the Company's Common Stock; and warrants to purchase
3,335 shares of the Company's Common Stock exercisable immediately at
$15 per share for a period of three years. Mr. Cottrell was elected to
the Board in June 1998. Mr. Cottrell's address is 7300 Impala Drive,
Richmond, Virginia 23228. As noted under "Market Prices of Common
Equity, Dividend Policy and Related Stockholder Matters" the Company
anticipates amending its Certificate of Designation for the 1997
Preferred to reflect a conversion price based upon 75% of the closing
market price of the Company's Common Stock on the date of funding for
the purchase of the 1997 Preferred. The above conversion assumes this
amendment.
(5) Includes 200,000 options exercisable immediately at $2.8125 per share
for a period of five years. Mr. Daly serves as President of the
Company. He was elected to the Board in December, 1997. Mr. Daly's
address is 17 Olde Meadow Road, Marion, Massachusetts 02738.
34
<PAGE> 37
(6) Includes 510 shares of 1997 Preferred convertible immediately into
80,593 shares of the Company's Common Stock; 40,223 shares of Common
Stock; warrants to purchase 22,678 shares of the Company's Common Stock
exercisable immediately at $15 per share for a period of three years
that are owned by corporations controlled by Mr. Ewart; and warrants to
purchase 33,333 shares of the Company's Common Stock exercisable
immediately at $3.00 per share that are owned by Bradstone Equity
Partners, of which Mr. Ewart is a director. Mr. Ewart, who served as
Chairman of the Board of the Company until May 1997, and is currently a
director. Mr. Ewart's address is 163 Ontario Street, Cobourg, Ontario
K9A 3N6, Canada. As noted under "Market Prices of Common Equity,
Dividend Policy and Related Stockholder Matters" the Company
anticipates amending its Certificate of Designation for the 1997
Preferred to reflect a conversion price based upon 75% of the closing
market price of the Company's Common Stock on the date of funding for
the purchase of the 1997 Preferred. The above conversion assumes this
amendment.
(7) Divot Spa WGV, Inc. is a Florida corporation which was formed and
organized in 1996 by Mr. Cellura. Mr. Cellura transferred his interest
in the corporation to Robert Gewant in October 1997. Mr. Gewant
subsequently conveyed 90% of the stock of the corporation to Ellee M.
Knight. Ms. Knight and Mr. Cellura reside at the same address. Mr.
Bagnall serves as Vice President and Secretary of Divot Spa WGV, Inc.,
but has no ownership interest therein. Both Mr. Cellura and Mr. Bagnall
disclaim any beneficial ownership regarding any Company stock owned by
Divot Spa WGV, Inc.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 1997, the Company entered into a Stock Purchase Agreement
with William E. Horne and certain family members. Pursuant to this Agreement,
the Company redeemed shares of its preferred stock which were owned by Mr. Horne
and his family. The shares of preferred stock were redeemed for $0.75 per share
(for a total purchase price of $210,937). In connection with the redemption of
these shares, Mr. Horne resigned as a director and officer of the Company and
all affiliated companies and executed a general release in favor of the Company.
The Company also entered into an Indemnification Agreement with Mr. Horne to
indemnify him in connection with any liability that arose as a result of his
service as an officer and director of the Company.
In November 1997, the Company entered into a Cross Creek/Brassie Stock
Agreement with Lance McNeill. Pursuant to this Agreement, Mr. McNeill guaranteed
that the Company would receive $35,000 in repayment of certain amounts which had
been expended by the Company at the Cross Creek Golf Course Development Project.
Mr. McNeill pledged 100,000 shares of his Common Stock of the Company to secure
his guaranty. The Company also agreed to assist Mr. McNeill in having the Rule
144 restrictions on his shares of Common Stock removed. Mr. McNeill executed a
General Release in favor of the Company and resigned as an officer and director
of the Company and its affiliates. The Company entered into an Indemnification
Agreement with Mr. McNeill to indemnify him in connection with any liabilities
that arose as a result of his service as an officer and director of the Company.
A & E Capital loaned the Company $469,000, which was secured by a
second mortgage on the Company's Curtis Park property. Interest on the loan
accrued at a rate of nine and one-half percent (9.5%). The Company repaid this
loan and all unpaid and accrued interest on or about December 5, 1997. A & E
Capital is owned by Robert G. Atkinson, a former director of the Company, and
Gordon D. Ewart, who is presently a director of the Company. The Company
believes that the terms of this loan were comparable to what it could have
negotiated with a commercial lender.
On April 15, 1998, the Company completed its acquisition of the issued
and outstanding capital stock of Divot Golf Corporation, a Florida corporation,
which was wholly-owned by Mr. Cellura. Mr. Cellura serves as director, Chairman
of the Board, and Chief Executive Officer of the Company. The purchase price was
$500,000, payable $300,000 in cash and the remainder in a promissory note. The
Company previously delivered to the seller a good-faith, non-refundable deposit
of $300,000 in November 1997 which was applied toward the purchase price. The
note is at an interest rate of 6% and provides for quarterly payments of
interest only, with the first payment of interest due on June 30, 1998. The note
is to be repaid in full on or before October 15, 1998. To date, the Company has
paid $170,000 towards the principal on this note. The assets of Divot Golf
include its name, certain patent and licensing rights, and molds for producing a
divot repair tool.
35
<PAGE> 38
On January 7, 1998, the Company loaned to Mr. Cellura $65,388. This
loan is evidenced by a promissory note which bears interest at the rate of 6%
and is unsecured. The terms of the loan require that it be repaid on or before
June 30, 1998. Mr. Cellura did not participate in the Board's decision to
approve this loan. The Company believes that the terms of this loan are
commercially reasonable. The Company has also made advances to Divot
Development Corporation, a Florida corporation, which is wholly-owned by Mr.
Cellura in the total aggregate amount of $31,500. Effective March 31, 1998,
these advances have been offset against certain accruals and payables to Mr.
Cellura aggregating $97,000. See "Employment Contracts" set forth above. After
such offset, the Company still owed certain minimal amounts to Mr. Cellura,
which the Company intends to discharge on or before June 30, 1998.
Mr. Ewart and Mr. Cottrell purchased $510,000 and $75,000 of 1997
Preferred, respectively, pursuant to a private placement offering by the
Company in December 1997. The terms of the 1997 Preferred are discussed under
"Market Price of Common Equity, Dividend Policy and Related Stockholder
Matters." Messrs. Ewart and Cottrell were among a number of investors in the
private placement offering and did not receive any terms different from other
investors. As noted under "Market Prices of Common Equity, Dividend Policy and
Related Stockholder Matters," the Company is currently negotiating to amend the
1997 Preferred Certificate of Designation, which would result in Mr. Ewart's
1997 Preferred being convertible into 80,593 shares of the Company's Common
Stock and Mr. Cottrell's shares of 1997 Preferred being convertible into 11,852
shares of the Company's Common Stock.
In January 1998, for $85,000, Bradstone Equity Partners purchased
33,333 warrants. Mr. Ewart is a director in Bradstone Equity Partners. The
warrants are exercisable at a price of $3.00 per share and expire in January
2003.
LEGAL PROCEEDINGS
On August 10, 1995, the Company and its subsidiary, The Gauntlet at
Myrtle West, Inc. ("GMW"), received from North Myrtle Beach Golf Club, Inc.
("MW Seller") a "Notice of Default Under Indemnity Agreement and Guaranty"
dated December 28, 1993 in connection with MW Seller's alleged inability to
realize $350,000 or any proceeds through its attempts at a public sale of its
6,801 shares of the Company's Common Stock. The stock was issued to MW Seller
and the Indemnity Agreement and Guaranty (the "Guaranty") was entered into by
the Company and GMW as part consideration for the December 28, 1993 sale to GMW
of certain of MW Seller's assets, inclusive of certain golf course lands and
improvements in Myrtle Beach, S.C. The obligations under the Guaranty are
secured by a third mortgage and security agreement over the golf course. The
Company has disputed the claim that its shares held by MW Seller have no value
and on February 12, 1996 filed an Answer to the December 11, 1995 Complaint and
Third Mortgage Foreclosure proceedings filed by MW Seller under Civil Action
No. 5-CR26-3462 in The Court of Common Pleas, County of Horry, State of South
Carolina. The Company denies liability and states that MW Seller's failure to
sell the stock as required by the Guaranty discharges the Company's and GMW's
obligations. Discovery has proceeded. The parties have had mediation and
attempted settlement. The real property is no longer owned by the Company.
Trial in the matter should occur Fall 1998 if the matter is not settled. The
Company believes its maximum liability exposure will be the shortfall, if any,
from $350,000 and the sale proceeds at the time MW Seller's 6,801 Company
shares are sold or should have been sold. The Company has recorded in its
Consolidated Financial Statements a reserve for its estimated maximum liability
for this case.
In connection with the Company's February 21, 1996 Agreement in
Principle ("AIP") with its three Pension Fund Partners, definitive agreements
were reached during the second quarter of 1996 with regards to two of the
Company's four golf courses. However, the Company's efforts to interpret the
AIP and negotiate with EPI Pension Fund regarding the two other courses were
unsuccessful. On May 31, 1996, EPI Pension Fund commenced an action claiming
breach of contract, specific performance, a constructive trust and temporary
and permanent injunctive relief. At a hearing conducted on July 12, 1996 in
the Circuit Court in and for Hillsborough County, Florida, the court issued a
preliminary injunction which required the Company to transfer to EPI Pension
Fund 45% of the outstanding equity in the Company's GLV and GMW subsidiaries
whereby the Company now holds 30% of the outstanding equity in each of these
two subsidiaries and EPI Pension Fund holds 70%. The Company filed an appeal
brief to this preliminary injunction on August 14, 1996 in the 2nd District
Court of Appeals for the 13th Judicial District in Hillsborough County,
Florida. The District Court denied this appeal on February 11, 1997. The
Company entered into a settlement agreement with the EPI Pension Fund on
October 15, 1997, which purported to resolve all outstanding issues between the
36
<PAGE> 39
Company and the EPI Pension Fund. The Company failed to perform fully all of its
obligations under the Settlement Agreement prior to February 24, 1998. At a
hearing on March 26, 1998 the Company offered partial performance under the
Settlement Agreement, and on April 16, 1998, the Company delivered the remaining
30% minority ownership interest in two golf courses in South Carolina, The
Gauntlet at Myrtle West and The Gauntlet at Laurel Valley, to the EPI Pension
Fund under the March 26, 1998 court ordered hearing. The Company also recorded,
in operations for the period ended March 31, 1998, the amount of the anticipated
settlement of the litigation with EPI Pension Fund.
EXPERTS
The consolidated financial statements of the Company at December 31,
1997, and for each of the two years in the period ended December 31, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
(which contains an explanatory paragraph describing conditions that raise
substantial doubt about the Company's ability to continue as a going concern as
described in Note 1 to the consolidated financial statements) appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such experts in accounting and auditing.
The financial statements of Miller Golf, Inc. at March 31, 1998,
September 30, 1997, and September 30, 1996, and for the six-month period ended
March 31, 1998 and for each of the two years in the period ended December 31,
1997, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the shares
of Common Stock beneficially owned as of June 30, 1998, by each Selling
Stockholder. This table indicates any position, office or other material
relationship with the Company that the Selling Stockholder had within the past
three years, the number of shares of Common Stock owned by such Selling
Stockholder prior to the offering, the maximum number of shares of Common Stock
to be offered for such Selling Stockholder's account and the amount and
percentage (if one percent or more) of the shares of Common Stock to be owned by
the Selling Stockholder after completion of the offering (assuming the Selling
Stockholder sold the maximum number of shares of Common Stock). The Selling
Stockholders are not required, and may choose not, to sell any of their shares
of Common Stock. Further, certain of the Selling Stockholders may have already
sold their shares of Common Stock prior to the date hereof.
As noted under "Market Prices of Common Equity, Dividend Policy and
Related Policy and Related Stockholder Matters," the Company is negotiating to
amend its 1997 Preferred Certificate of Designation to provide for a fixed
conversion based on the market price at the date the 1997 Preferred was
purchased by the holder thereof. As noted under "Managements Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Working Capital," the Company is negotiating with the
holders of the warrants issued in connection with the November 1997 issuance of
convertible debentures to exchange certain of those outstanding warrants for
other warrants with an exercise price of $2.00 per share. The following table
assumes these negotiations are successful.
<TABLE>
<CAPTION>
Number of Shares
Name Offered Hereby
- ---- -----------------
<S> <C>
Bodner/Huberfeld Partnership 822,881
Chesterfield Capital Resources Limited 313,725
Viva Corporation 281,482
SIRHC Holdings, Ltd 246,666
Mueller & Co. 181,818
Naftali Menela 157,407
</TABLE>
37
<PAGE> 40
<TABLE>
<S> <C>
Charles Kushner 140,741
Forehand 140,741
Jeffrey Rubin 138,039
Congregation Ahavas Tzdokoh v' Chesed 108,626
Gordon D. Ewart 103,259
Murray Kushner 84,444
Jules Nordlicht 81,926
Kirk A. Scoggins 72,074
Infinity Investors Limited 66,668
Richard Stadtmauer 56,296
Brenner Securities Corporation 48,000
Bradstone Equity Partners 33,333
Robert D. Marchetti 33,333
Asean Sales Inc. 32,533
Irwin Growth 30,370
Abraham Ziskind 21,259
Chesed Auraham 21,259
The Jerusalem Fund, Inc. 21,259
Wolowitz Partners Pension Plan 21,259
Rita Folger 17,032
Louis R. Katon 16,667
Robert Cohen 15,590
Preston H. Cottrell 15,185
Harlan R. Logan, Jr. 14,762
Prudential Securities 12,148
Dewey Tomko 11,111
Gary Nacht 10,000
Shirley Huchinson Creative Works, Inc. 9,867
Wayne & Linda Saker 9,111
Gabriel & Naomi Bodenheimer 8,400
Clifford F. Bagnall 7,778
Local 628 6,667
Robert Kouwe 6,074
Douglas St. Clair 6,074
The Ezra Charitable Trust, Ezra Birnbaum Trustee 6,074
Holdridge Investment Corporation 6,000
JDM Capital, Ltd. 6,000
Karen Mordechai Yaakov 5,600
Stephanie Rubin 5,227
Daniel S. Shedd 5,000
Dixon Newbold 5,000
John T. Carroll 3,333
Clifton Management & Trading, Inc. 3,037
---------
3,471,135
</TABLE>
38
<PAGE> 41
DESCRIPTION OF SECURITIES
The Company is authorized to issue 200,000,000 shares of $.001 par
value Common Stock and 1,000,000 shares of $.001 par value preferred stock. As
of June 30, 1998, there were 3,315,708 shares of Common Stock outstanding. An
additional 3,471,135 shares of Common Stock are reserved for issuance upon
exercise of outstanding warrants, conversion of convertible debentures, and
convertible preferred stock.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share
on all matters submitted to a vote of the stockholders of the Company. Except
as may be required by applicable law, holders of shares of Common Stock and the
5,730 outstanding shares of 1997 Preferred will not vote separately as a class,
but will vote together with the holders of outstanding shares of other classes
of capital stock that have voting rights, including Preferred Stock. There is
no right to cumulate votes in the election of directors or for any other
purpose. Shares representing 33-1/3% of the issued and outstanding voting
stock constitutes a quorum at any meeting of stockholders for conducting
business. In the absence of a quorum, the stockholders present in person or by
proxy, by majority vote and without further notice, may adjourn the meeting
from time to time until a quorum is attained. At any reconvened meeting
following such adjournment at which a quorum shall be present, any business may
be transacted which might have been transacted at the meeting as originally
notified.
Holders of shares of Common Stock are entitled to receive dividends,
if, as and when declared by the Board of Directors out of funds legally
available therefor, after payment of dividends required to be paid on
outstanding shares of preferred stock. Upon liquidation of the Company,
holders of shares of Common Stock are entitled to share ratably in all assets
of the Company remaining after payment of liabilities, subject to the
liquidation preference rights of any outstanding shares of preferred stock.
Holders of shares of Common Stock have no conversion, redemption or preemptive
rights. The rights of the holders of Common Stock will be subject to, and may
be adversely affected by, the rights of the holders of any outstanding
preferred stock. The outstanding shares of Common Stock are, and all shares of
Common Stock issued upon conversion of debentures and preferred stock and
exercise of warrants described in this Prospectus and payment therefor will be,
validly issued, fully paid and nonassessable.
TRANSFER AGENT
The transfer agent for the Common Stock is American Stock Transfer &
Trust Company. Through June 15, 1998, the transfer agent of the Company was
Montreal Trust Company of Canada.
REPORTS TO STOCKHOLDERS
The Company has registered its Common Stock under the provisions of
Section 12(g) of the Exchange Act. Such registration will require the Company
to comply with periodic reporting, proxy solicitation and certain other
requirements of the Exchange Act. The Company intends to furnish its
stockholders with annual reports containing audited financial statements and
such other periodic reports as the Company may deem to be appropriate or as may
be required by law, and to make available copies of quarterly reports for the
first three quarters of each fiscal year containing unaudited interim financial
information.
LIMITATION ON LIABILITY OF DIRECTORS AND OFFICERS
The General Corporation Law of Delaware provides that in certain
circumstances a corporation shall have the power to indemnify directors,
officers, employees, and agents for expenses incurred by them in legal
proceedings. Article 9 of the Certificate of Incorporation of the Company
provides that (i) the Company will indemnify any director, officer, employee or
agent of the Company with respect to actions, suits or proceedings relating to
the Company if he
39
<PAGE> 42
acted in good faith and in a manner reasonably believed to be in, or not
opposed to, the Company's best interests, (ii) that any such person subject to
an action or suit that is by or in the right of the Corporation shall be
indemnified except that no indemnification shall be made if such person shall
have been adjudged to be liable for misconduct or negligence in the performance
of his duties to the Company, unless judicially determined otherwise and (iii)
that indemnification shall not be deemed exclusive of any other rights to which
a person may be entitled under any by-law, agreement, or otherwise. This
indemnification includes the right to advancement of expenses when allowed
pursuant to applicable law. The Company, pursuant to the direction of the Board
of Directors, may purchase and maintain insurance, in amounts as the Board of
Directors deem appropriate on behalf of those subject to indemnification
regardless of whether or not the Company has the power to indemnify the person.
Article Ten states that the personal liability of directors is eliminated to the
fullest extent permitted by Delaware law. These provisions may discourage
stockholders from bringing suit against a director for breach of fiduciary duty
and may reduce the likelihood of derivative litigation brought by stockholders
on behalf of the Company against a director.
Additionally, the executive officers of the Company have executed
Indemnification Agreements which obligate the Company to contribute to the
amount expended or incurred by the executive in legal proceedings for which
indemnification is not available or permitted. The contribution shall be in a
proportionate amount as is appropriate to reflect the relative benefits received
by the parties and their relative fault which resulted in the legal proceeding.
However, no contribution by the Company is required if the executive's conduct
is held to be unlawful by a court having jurisdiction.
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. That section provides, with certain exceptions, that a
Delaware corporation may not engage in any of a broad range of business
combinations with a person or affiliate, or associate of such person, who is an
"interested stockholder" for a period of three years from the date that such
person became an interested stockholder unless: (i) the transaction resulting in
a person becoming an interested stockholder, or the business combination, is
approved by the board of directors of the corporation before the person becomes
an interested stockholder; (ii) the interested stockholder acquires 85% or more
of the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder (excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An "interested
stockholder" is defined as any person that is (a) the owner of 15% or more of
the outstanding voting stock of the corporation or (b) an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year period immediately
prior to the date on which it is sought to be determined whether such person is
an interested stockholder.
PLAN OF DISTRIBUTION
The Selling Stockholders intend to sell their shares of Common Stock
directly, through agents, dealers, or underwriters, in the over-the-counter
market, or otherwise, on terms and conditions determined at the time of sale by
the Selling Stockholders or as a result of private negotiations between buyer
and seller. No underwriting arrangements exist as of the date of this Prospectus
for the Selling Stockholders to sell their shares. Upon being advised of any
underwriting arrangements that may be entered into by a Selling Stockholders
after the date of this Prospectus, the Company will prepare a supplement to this
Prospectus to disclose such arrangements. It is anticipated that the per share
selling price for the shares will be at or between the "bid" and "asked" prices
of the Company's
40
<PAGE> 43
Common Stock as quoted on the NASDAQ SmallCap market immediately preceding
the sale. Expenses of any such sale will be borne by the parties as they may
agree.
LEGAL MATTERS
The legality of the shares of Common Stock being offered hereby have
been passed upon for the Company by Alston & Bird LLP, Raleigh, North Carolina.
41
<PAGE> 44
INDEX TO FINANCIAL STATEMENTS
DIVOT GOLF CORPORATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and
March 31, 1998 (unaudited).................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997 and December 31, 1996 and for the three
month period ended March 31, 1998 and 1997 (unaudited)........ F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997 and December 31, 1996 and
for the three month period ended March 31, 1998 (unaudited)... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996 and for the three month
period ended March 31, 1998 and 1997 (unaudited).............. F-6
Notes to Consolidated Financial Statements...................... F-7
</TABLE>
MILLER GOLF, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-20
Balance Sheets as of March 31, 1998, September 30, 1997,
and September 30, 1996 ................................... F-21
Statements of Operations for the six month period ended
March 31, 1998, and for the years ended September 30,
1997 and September 30, 1996 .............................. F-23
Statements of Shareholders' Equity for the six month
period ended March 31, 1998, and for the years ended
September 30, 1997 and September 30, 1996................. F-24
Statements of Cash Flows for the six month period ended
March 31, 1998 and for the years ended September 30,
1997 and September 30, 1996............................... F-25
Notes to Financial Statements............................... F-26
</TABLE>
DIVOT GOLF CORPORATION UNAUDITED PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Pro Forma Financial Data.................................... F-35
Unaudited Pro Forma Combined Condensed Balance Sheet
as of March 31, 1998 ..................................... F-36
Unaudited Pro Forma Combined Condensed Statement of
Operations for the three month period ended
March 31, 1998............................................ F-37
Unaudited Pro Forma Combined Condensed Statement of
Operations for the year ended December 31, 1997........... F-38
Notes to Unaudited Pro Forma Combined Condensed
Financial Statements...................................... F-39
</TABLE>
F-1
<PAGE> 45
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Divot Golf Corporation (formerly "Brassie Golf Corporation")
We have audited the accompanying consolidated balance sheet of Divot Golf
Corporation and subsidiaries as of December 31, 1997 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended December 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 10 to the consolidated financial statements, the
Company changed its method of accounting for two previously majority-owned
subsidiaries.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Divot Golf Corporation and subsidiaries at December 31, 1997 and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1997 and 1996 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As more fully
described in Note 1, the Company has incurred recurring operating losses and has
a working capital deficiency. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/s/ ERNST & YOUNG LLP
Raleigh, North Carolina
January 12, 1998
F-2
<PAGE> 46
DIVOT GOLF CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash (bank overdraft)..................................... $ 53,266 $ (148,362)
Cash -- restricted........................................ 135,019 126,012
Trade accounts receivable, net of allowance for doubtful
accounts of $150,800 at December 31, 1997 and
$128,400 at March 31, 1998............................. 352,018 279,577
Accounts receivable from related parties.................. 160,543 175,358
Inventories............................................... 31,611 26,902
Prepaid expenses and other current assets................. 1,038,588 865,592
----------- -----------
Total current assets.............................. 1,771,045 1,325,079
Property and equipment at cost:
Land and land improvements................................ 2,789,069 4,665,780
Depreciable golf course improvements...................... 828,681 828,681
Buildings................................................. 1,426,369 1,433,487
Furniture, machinery and equipment........................ 986,642 1,065,266
----------- -----------
6,030,761 7,993,214
Less accumulated depreciation and amortization.............. 742,956 823,356
----------- -----------
5,287,805 7,169,858
Intangible assets, net of accumulated amortization of
$270,000 at December 31, 1997 and $352,000 at
March 31, 1998............................................ 583,400 651,627
Goodwill.................................................... 331,250 325,729
----------- -----------
Total assets...................................... $ 7,973,500 $ 9,472,293
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 772,460 $ 1,159,892
Accrued interest payable.................................. 32,751 76,818
Income tax payable........................................ 181,793 181,793
Unearned income........................................... -- 1,000
Short-term notes.......................................... -- 1,500,000
Current portion of long-term debt......................... 757,023 757,023
Current maturities of capital lease obligations........... 21,510 21,510
Accrued discount on convertible debentures................ 104,037 51,489
----------- -----------
Total current liabilities......................... 1,869,574 3,749,525
Long-term debt, less current portion........................ 3,477,256 3,568,686
Long-term capital lease obligations, less current portion... 35,785 31,449
Commitments and Contingencies
Shareholders' equity:
Convertible Preferred Stock, $.001 par value; 1,000,000
shares authorized; 283,170 shares issued and
outstanding (aggregate liquidation
preference of $1,920,000).............................. 283 283
Common Stock, $.001 par value; 200,000,000 shares
authorized; 2,842,167 and 3,222,902 shares issued
and outstanding at December 31, 1997 and
March 31, 1998, respectively........................... 2,842 3,223
Additional paid-in capital................................ 32,083,757 32,907,112
Accumulated deficit....................................... (29,176,276) (30,468,264)
Less cost of Convertible Preferred Stock held in treasury,
281,250 shares......................................... (210,937) (210,937)
Foreign currency translation adjustment................... (108,784) (108,784)
----------- -----------
Total shareholders' equity........................ 2,590,885 2,122,633
----------- -----------
Total liabilities and shareholders' equity........ $ 7,973,500 $ 9,472,293
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 47
DIVOT GOLF CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 THREE MONTHS ENDED MARCH 31
-------------------------- ---------------------------
1997 1996 1998 1997
----------- ------------ ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating revenues:
Golf revenues............................................. $ 1,833,010 $ 1,878,273 $ 101,457 $ 443,492
Food and beverage revenues................................ 485,737 508,911 13,751 97,412
Proshop revenues.......................................... 259,099 277,188 9,539 53,367
Membership sales and dues................................. 372,233 294,594 5,783 91,227
Resident membership fees.................................. 327,500 480,000 -- 30,000
Management and design fees................................ 809,660 1,785,818 6,938 379,504
Other..................................................... 6,360 7,118 -- 5,259
----------- ------------ ------------ -----------
Total operating revenues.......................... 4,093,599 5,231,902 137,468 1,100,261
Operating expenses:
Golf course operations.................................... 1,293,975 1,328,564 70,367 306,762
Cost of food and beverage sales........................... 195,869 203,660 22,968 41,056
Cost of proshop sales..................................... 193,886 173,812 51,607 36,301
Advertising expense....................................... 313,351 216,254 16,172 67,830
Management and design expenses............................ 701,191 1,553,821 -- 373,226
General and administrative expenses....................... 3,090,713 2,487,003 1,198,743 441,822
Depreciation and amortization expense..................... 871,222 1,042,891 85,322 194,507
Write down of goodwill.................................... -- 4,050,000 -- --
----------- ------------ ------------ -----------
Total operating expenses.......................... 6,660,207 11,056,005 1,445,179 1,461,504
----------- ------------ ------------ -----------
Operating loss.............................................. (2,566,608) (5,824,103) (1,307,711) (361,243)
Other income (expense):
Interest expense -- contractual........................... (683,755) (916,301) (206,131) (178,472)
Interest expense -- discount on convertible debentures.... -- (1,400,000) -- --
Amortization of debt discount on convertible debentures... (892,709) -- (260,783) --
(Loss on) income from equity investment in subsidiaries... (116,318) (966,579) -- 19,890
Loss on sale of subsidiaries.............................. (1,826,164) -- -- --
Bad debt recoveries....................................... -- 510,000 -- --
Write-off of deposit...................................... -- -- (100,000) --
Interest income........................................... 98,520 149,266 22,637 22,236
----------- ------------ ------------ ------------
Loss before minority interest............................. (5,987,034) (8,447,717) (1,851,988) (497,589)
Minority interest expense................................. -- (68,015) -- --
----------- ------------ ------------ ------------
Loss before income taxes.................................. (5,987,034) (8,515,732) (1,851,988) (497,589)
Provision for income taxes................................ -- (110,000) -- --
----------- ------------ ------------ ------------
Net loss.................................................... $(5,987,034) $ (8,625,732) $ (1,851,988) $ (497,589)
=========== ============ ============ ============
Basic and diluted loss per common share..................... $ (3.36) $ (6.47) $ (.59) $ (.27)
=========== ============ ============ ============
Weighted average number of common shares outstanding........ 1,981,607 1,333,727 3,117,080 1,829,860
=========== ============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 48
DIVOT GOLF CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
CONVERTIBLE PREFERRED
COMMON STOCK PREFERRED STOCK ADDITIONAL TREASURY STOCK
-------------------- ----------------- PAID-IN ACCUMULATED ------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT
---------- ------- -------- ------ ----------- -------------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995....... 1,178,538 $ 1,179 375,000 $375 $21,873,955 $(13,893,582) -- $ --
Net loss........................... -- -- -- -- -- (8,625,732) -- --
Issuance of Common Stock in
connection with conversion of
convertible debentures............ 423,371 423 -- -- 2,496,362 -- -- --
Issuance of Common Stock in lieu of
compensation...................... 3,333 3 -- -- 58,592 -- -- --
Unrealized gain on investments..... -- -- -- -- -- -- -- --
Translation of foreign currency
financial statements.............. -- -- -- -- -- -- -- --
---------- ------- -------- ---- ----------- ------------ -------- ---------
Balance at December 31, 1996....... 1,605,242 $ 1,605 375,000 $375 $24,428,909 $(22,519,314) -- $ --
========== ======= ======== ==== =========== ============ ======== =========
Net loss........................... -- -- -- -- -- (5,987,034) -- --
Conversion of Preferred Stock
to Common Stock................... 31,250 31 (93,750) (94) 63 -- -- --
Repurchase of Preferred Stock...... -- -- -- -- -- -- (281,250) (210,937)
Issuance of Preferred Shares in
connection with a private
placement......................... -- -- 1,920 2 1,754,998 -- -- --
Preferred Stock Dividend
-- conversion discount............ -- -- -- -- 669,928 (669,928) -- --
Issuance of Common Stock
in connection with conversion
of convertible debentures......... 895,533 896 -- -- 3,435,854 -- -- --
Issuance of 2,005,485 warrants
in connection with convertible
debentures........................ -- -- -- -- 1,203,291 -- -- --
Issuance of Common Stock
in connection with the convertible
debenture agreement............... 110,142 110 -- -- 309,664 -- -- --
Issuance of Common Stock
in connection with the purchase of
Divot Spa WGV, Inc................ 200,000 200 -- -- 281,050 -- -- --
Unrealized gain on investments..... -- -- -- -- -- -- -- --
Translation of foreign currency
financial statements.............. -- -- -- -- -- -- -- --
---------- ------- -------- ---- ----------- ------------ -------- ---------
Balance at December 31, 1997....... 2,842,167 $ 2,842 283,170 $283 $32,083,757 $(29,176,276) (281,250) $(210,937)
========== ======= ======== ==== =========== ============ ======== =========
Net loss.......................... -- -- -- -- -- (1,851,988) -- --
Issuance of Warrants in
connection with issuance of
other notes payable............. -- -- -- -- -- 560,000 -- --
Issuance of Common Stock in
connection with a private
placement....................... 50,000 50 -- -- 700 -- -- --
Issuance of Preferred Stock in
connection with a private
placement....................... -- -- 120 -- 120,000 -- -- --
Issuance of Common Stock in
connection with Warrant
exercise........................ 94,304 94 -- -- (94) -- -- --
Issuance of Common Stock in
connection with convertible
debenture....................... 200,875 201 -- -- 502,785 -- -- --
Issuance of Common Stock in
connection with a deposit on the
acquisition of Miller Golf, Inc. 35,556 36 -- -- 199,964 -- -- --
Translation of foreign currency
financial statements............ -- -- -- -- -- -- -- --
---------- ------- ------- ---- ----------- ------------ -------- ---------
Balance at March 31, 1998
(unaudited)..................... 3,222,902 $ 3,223 283,290 $283 $32,907,112 $(30,468,264) (281,250) $(210,937)
========== ======= ======= ==== =========== ============ ======== =========
<CAPTION>
FOREIGN UNREALIZED
CURRENCY GAIN (LOSS)
TRANSLATION ON
ADJUSTMENT INVESTMENTS TOTAL
----------- ----------- ----------
<S> <C> <C> <C>
Balance at December 31, 1995....... $(259,664) $(593) $7,721,670
Net loss........................... -- -- (8,625,732)
Issuance of Common Stock in
connection with conversion of
convertible debentures............ -- -- 2,496,785
Issuance of Common Stock in lieu of
compensation...................... -- -- 58,595
Unrealized gain on investments..... -- 356 356
Translation of foreign currency
financial statements.............. 191,617 -- 191,617
--------- ----- ----------
Balance at December 31, 1996....... $ (68,047) $(237) $1,843,291
========= ===== ==========
Net loss........................... -- -- (5,987,034)
Conversion of Preferred Stock
to Common Stock................... -- -- --
Repurchase of Preferred Stock...... -- -- (210,937)
Issuance of Preferred Shares in
connection with a private
placement......................... -- -- 1,755,000
Preferred Stock Dividend
-- conversion discount............ -- -- --
Issuance of Common Stock
in connection with conversion
of convertible debentures......... -- -- 3,436,750
Issuance of 30,082,268 warrants
in connection with convertible
debentures........................ -- -- 1,203,291
Issuance of Common Stock
in connection with the convertible
debenture agreement............... -- -- 309,774
Issuance of Common Stock
in connection with the purchase of
Divot Spa WGV, Inc................ -- -- 281,250
Unrealized gain on investments..... -- 237 237
Translation of foreign currency
financial statements.............. (40,737) -- (40,737)
--------- ----- ----------
Balance at December 31, 1997....... $(108,784) $ -- $2,590,885
========= ===== ==========
Net Loss.......................... -- -- (1,851,988)
Issuance of Warrants in
connection with issuance of
other notes payable............. -- -- 560,000
Issuance of Common Stock in
connection with a private
placement....................... -- -- 750
Issuance of Preferred Stock in
connection with a private
placement....................... -- -- 120,000
Issuance of Common Stock in
connection with Warrant
exercise........................ -- -- 0
Issuance of Common Stock in
connection with convertible
debenture....................... -- -- 502,986
Issuance of Common Stock in
connection with deposit on
the acquisition of Miller
Golf, Inc....................... -- -- 200,000
Translation of foreign currency
financial statements............ -- -- --
-------- ----- ----------
Balance at March 31, 1998
(unaudited)..................... $(108,784) -- $2,122,633
======== ===== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 49
DIVOT GOLF CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 THREE MONTHS ENDED MARCH 31
--------------------------- ---------------------------
1997 1996 1998 1997
------------ ------------ ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $ (5,987,034) $ (8,625,732) $(1,851,988) $ (497,589)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on sales of subsidiaries............................. 1,826,164 -- -- --
Amortization of debt discount............................. 892,709 -- 260,783 --
Loss on (income from) equity investments in subsidiaries.. 116,318 966,579 -- (19,890)
Depreciation.............................................. 520,959 535,293 80,400 80,466
Amortization.............................................. 350,263 507,598 87,294 114,040
Writedown of goodwill..................................... -- 4,050,000 -- --
Bad debt expense.......................................... 372,161 65,000 -- --
Loss on sale of marketable equity securities.............. 21,404 182 -- --
Trade accounts receivable................................. (197,388) 66,826 (77,559) (183,389)
Accounts receivable from related parties.................. (10,543) 107,258 135,185 --
Inventories and other current assets...................... (953,044) (55,202) 377,705 51,601
Accounts payable and accrued expenses..................... 280,744 (368,480) 388,432 (90,602)
Accrued interest payable.................................. 103,774 1,024,133 44,067 (44,713)
Income tax payable........................................ (15,919) 197,712 -- (8,000)
------------ ------------ ----------- ------------
Net cash used in operating activities....................... (2,679,432) (1,528,833) (555,681) (598,076)
INVESTING ACTIVITIES
Payments for intangible assets.............................. (260,006) (571,293) (150,000) (30,312)
(Purchases of) Proceeds from the sale of property and
equipment, net............................................ (366,612) (698,630) (1,962,453) 27,827
Change in restricted cash................................... (135,019) -- 9,007 --
Additional investments in subsidiaries...................... 33,682 (486,770) -- 2,761
Proceeds from sale of marketable equity securities.......... 18,271 -- -- --
Proceeds from sale of subsidiaries.......................... 3,550,000 -- -- --
------------ ------------ ----------- ------------
Net cash provided by (used in) investing activities......... 2,840,316 (1,756,693) (2,103,446) 276
FINANCING ACTIVITIES
Additions to short-term borrowings.......................... -- -- 1,500,000 --
Additions to long-term borrowings........................... 3,417,480 5,480,388 1,025,976 --
Payments on long-term borrowings and capital leases......... (4,540,608) (4,836,509) (189,227) (1,167,217)
Issuance of common stock.................................... -- 2,555,380 750 1,370,230
Payments on loans from officers and shareholders............ (1,293,895) 648,121 -- --
Proceeds from sales of convertible preferred stock.......... 1,920,000 -- 120,000 --
Payment for stock issuance costs............................ (165,000) -- -- --
Payments made to retire preferred stock..................... (210,937) -- -- --
Increase in convertible debt discount....................... -- -- -- (272,595)
------------ ------------ ----------- ------------
Net cash (used in) provided by financing activities......... (872,960) 3,847,380 2,457,499 (69,582)
Effect of foreign currency exchange rate changes on cash.... (40,737) 191,617 -- (11,024)
------------ ------------ ----------- ------------
(Decrease) Increase in cash................................. (752,813) 753,471 (201,628) (678,406)
Cash at beginning of year................................... 806,079 52,608 53,266 806,079
------------ ------------ ----------- ------------
Cash (book overdraft) at end of year........................ $ 53,266 $ 806,079 $ (148,362) $ 127,673
------------ ------------ ----------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest.................... $ 580,581 $ 938,071 $ 85,213 $ 102,891
============ ============ =========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 50
DIVOT GOLF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BUSINESS OF THE COMPANY, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES
Effective June 2, 1998, Brassie Golf Corporation (the "Company") changed its
name to Divot Golf Corporation (the "Company").
The Company owns and operates golf courses and is engaged in the
development, licensing and marketing of golf-related businesses. The Company
also holds certain exclusive licensing rights in the United States and
internationally.
As of December 31, 1997, the Company has a net working capital deficiency
of $98,529. The Company is not generating sufficient revenues from its
operations to fund its activities and therefore is dependent on additional
financing from external sources. Such factors raise substantial doubt about the
Company's ability to continue as a going concern. The Company secured $1.9
million of funding in a private placement transaction in December 1997. The
Company expects to raise additional amounts from private placements in 1998. If
the Company is successful in raising additional equity capital in 1998,
management believes that the Company will have adequate resources to continue to
meet its current debt obligation, fund capital improvements and expand and
develop its businesses. There is no assurance that such additional funding will
be completed and the inability to obtain such financing would have a material
adverse effect on the Company.
Unaudited Interim Financial Statements
The unaudited interim financial statements include all adjustments
(consisting of normal recurring adjustments) that are, in the opinion of
management, necessary for a fair presentation of the financial position of the
Company as of March 31, 1998 and the results of operations and cash flows for
the three month periods ended March 31, 1998 and 1997. Operating results for
the three months ended March 31, 1998 are not necessarily indicative of the
results to be expected for future interim periods for the entire year. All
interim financial data presented is unaudited.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all wholly and majority-owned subsidiaries. All material intercompany
accounts and transactions are eliminated in consolidation. The subsidiaries and
related percentage of ownership by the Company at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
OWNERSHIP PERCENTAGE
AT
DECEMBER 31,
---------------------
COMPANY NAME ABBREVIATION 1997 1996
- ------------ ------------ --------- ---------
<S> <C> <C> <C>
The Gauntlet at St. James, Inc.
(inactive as of December 31, 1997)............... St. James 100% 80%
The Gauntlet at Curtis Park, Inc. ................. Curtis Park 100 100
Brassie Golf Management Services, Inc. ............ BGMS -- 100
Summit Golf Corporation............................ Summit -- 100
Hale Irwin Golf Services, Inc. .................... HIGSI -- 100
Brassie Construction Management Services, Inc. .... BCMS 100 100
Amalgamated Equity Golf (a British Columbia
Corporation) (inactive as of December 31, 1997).. Amalgamated 100 100
Divot Properties WGV, Inc. ........................ Properties 100 100
</TABLE>
Minority interest expense in 1996 represents the 20% interest in the St.
James golf course owned by a related entity. The Company received the remaining
20% Minority interest in St. James as part of the sale of the golf course in
1997 (see Note 9, "Disposition of Assets").
The Company's 30% investments in The Gauntlet at Laurel Valley, Inc., a
golf course located in Greenville, S.C., and The Gauntlet at Myrtle West, Inc.,
a golf course located in Myrtle Beach, S.C., are accounted for using the equity
method (See Note 10 "Change in Reporting Entity").
Property and Equipment
Property and equipment is recorded at cost. Costs relating to the
acquisition and development of golf courses, including the cost of real estate,
related legal fees, construction costs, interest, and other direct costs
associated with the development of the golf courses are capitalized as part of
the cost of the course. Depreciable golf course improvements are comprised
primarily of irrigation
F-7
<PAGE> 51
DIVOT GOLF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
systems, cart paths, bridges, and other land improvements. Depreciation on
property and equipment begins when the assets are placed into service and is
charged to operations over the estimated useful lives of the assets (5 to 20
years), utilizing the straight-line method for financial reporting purposes and
accelerated methods for tax purposes. All other costs are charged to expense as
incurred.
Intangible Assets
Intangible assets consist primarily of financing costs and licensing fees.
Costs incurred in obtaining long-term debt obligations are capitalized at cost
and amortized over the lives of the respective loans. Significant additions to
financing costs during 1997 resulted primarily from costs incurred to obtain
financing on more favorable terms.
Goodwill
The Company initially records goodwill at its cost and amortizes the cost
over the estimated useful life of the asset. At the end of each accounting
period, the Company reviews the carrying value of the goodwill for possible
impairment. The Company's policy for the valuation of goodwill is to calculate
the undiscounted projected future cash flows expected to be generated over the
life of the goodwill. This amount is then compared to the carrying value of the
goodwill to determine if the asset is impaired.
The Company has classified, as goodwill, the cost in excess of the fair
value of the net assets of SPA, which was acquired through a purchase
transaction during 1997 (see Note 8, "Acquisitions", for further discussion).
Goodwill is being amortized on a straight-line basis over 15 years. Amortization
charged to continuing operations amounted to $18,092 and $255,226 in 1997 and
1996, respectively.
During 1996, the Company recorded a goodwill writedown of $4,050,000 on
Summit, leaving a remaining balance of $626,245, net of accumulated
amortization, at December 31, 1996 which reflects estimated future discounted
cash flows. The writedown is included in the accompanying statement of
operations for the year ended December 31, 1996.
In July 1997, the Company sold its golf course management division,
consisting of Brassie Golf Management Services. Inc. and Summit. The Company's
remaining goodwill associated with the Summit was written off in connection with
the sale (See Note 9, "Disposition of Assets").
Restricted Cash
Restricted cash represents escrow accounts of Curtis Park and Saint James
on behalf of certain lending institutions pursuant to loan and sale agreements,
respectively. Such amounts are to be recorded as expense when earned over the
terms of the agreements and are recoverable by the Company upon occurrence of
certain events specified in the respective escrow agreements.
Cash and Cash Equivalents
The Company considers highly liquid, short-term investments with a maturity
of three months or less when purchased to be cash equivalents.
Marketable Equity Securities
The Company's marketable equity securities are classified as
available-for-sale and carried at fair value. The ending balance of
shareholders' equity has been adjusted to reflect the net unrealized holding
gain or loss on securities classified as available-for-sale.
F-8
<PAGE> 52
DIVOT GOLF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1997, the Company sold all of its marketable equity securities. Net
realized gains, determined by specific identification, were not material.
The Company maintains cash and short-term investments with various
financial institutions. These financial institutions are located in different
areas of the U.S. and Canada, and Company policy is designed to limit exposure
to any one institution. The Company performs periodic evaluations of the
relative credit standing of those financial institutions utilized in the
Company's investment strategy.
Inventories
Inventories are stated at the lower of cost or market as determined using
the specific identification method.
Inventory at December 31, 1997 consists of:
<TABLE>
<S> <C>
Proshop merchandise......................................... $ 27,415
Food and beverage inventory................................. 4,196
--------
$ 31,611
========
</TABLE>
Revenues
Revenues of the Company include daily golf fees, proshop merchandise sales
and food and beverage sales. Golf fees include revenue generated from green
fees, cart fees and range fees. Revenues also include sales of memberships and
annual dues charged to members and golf course management and design fees.
Golf fees, proshop merchandise sales and food and beverage sales are
recognized when received. Annual membership dues are recognized and earned
ratably over a twelve-month period. Membership dues collected in advance are
deferred as "unearned income" and recognized over the period of prepayment.
Membership fees that are non-refundable are recognized by the Company when
received. Golf course management and design fees are recognized as services are
performed.
As part of an agreement with the developer of the residential lots, the
Company receives $5,000 in membership fees for each residential lot sold in the
immediate area of the St. James golf course through November 23, 1997 (See Note
9, "Disposition of Assets").
Stock Based Compensation
On January 1, 1996, the company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which
requires companies to recognize as expense the fair value of all stock-based
awards on the date of grant, or continue to apply the provisions of Accounting
Principles Board Opinion No. 25 ("APB 25") and provide pro forma net income and
pro forma earnings per share disclosures for employee stock option grants as if
the fair-value-based method defined in SFAS 123 had been applied. The Company
has elected to continue to apply the provisions of APB 25 and provide the pro
forma disclosure provisions of SFAS 123 (See Note 7, "Stock Options").
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred
$313,000 and $216,000 in advertising costs during the years ended December 31,
1997 and 1996, respectively.
F-9
<PAGE> 53
DIVOT GOLF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company's primary financial instrument subject to potential
concentration of credit risk is trade accounts receivable which are unsecured.
The Company provides an allowance for doubtful accounts based on its analysis of
potentially uncollectible accounts. The Company's trade receivables arise
principally from its golf course management operations. As of December 31, 1997,
the Company had no significant concentrations of credit risk with any individual
customers.
Foreign and Domestic Operations
Net (loss) income from the Company's foreign subsidiary (Amalgamated) was
approximately $(201,000) and $339,000 for the years ended December 31, 1997 and
1996, respectively. Net loss from domestic operations was approximately
$5,786,000 and $8,965,000, respectively, for the same periods.
Translation of Foreign Currencies
Foreign currency transactions and financial statements of Amalgamated are
translated from the local currency, Canadian dollars, into U.S. dollars at the
current exchange rates except for revenues, costs and expenses which are
translated at average exchange rates. Adjustments resulting from translations of
financial statements are reflected as a separate component of shareholders'
equity.
Net Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the Statement 128 requirements. Stock
options, warrants and the five percent convertible debentures are considered
anti-dilutive and therefore have not been included in the computation.
Reverse Stock Split
All common shares and per share amounts have been adjusted to give
retroactive effect to a reverse stock split of approximately 15 to 1 on June 16,
1998 to holders of record on June 16, 1998.
Long Lived Assets
In 1996, the Company adopted FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
Under the provisions of the Statement, impairment losses are recognized when
expected future cash flows are less than the assets' carrying value.
Accordingly, when indicators of impairment are present, the Company evaluates
the carrying value of property and equipment and intangibles in relation to the
operating performance and future undiscounted cash flows of the underlying
business. The Company adjusts the net book value of the underlying assets if the
sum of expected future cash flows is less than book value. Based on the
application of the Statement, goodwill was adjusted to its estimated fair value
which resulted in a write-down of $4,050,000 in 1996.
F-10
<PAGE> 54
DIVOT GOLF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Debt
The Company estimates that the fair value of notes payable approximates the
carrying value based upon its effective current borrowing rate for debt with
similar terms and remaining maturities. Disclosure about fair value of financial
instruments is based upon information available to management as of December 31,
1997. Although management is not aware of any factors that would significantly
affect the fair value of amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date.
Impact of Recently Issued Accounting Standards
In 1997, the FASB issued Statements No. 130, "Reporting Comprehensive
Income" ("SFAS 130") and No. 131, "Disclosures About Segments of an Enterprise
and Related Information" ("SFAS 131"), which are both effective for fiscal years
beginning after December 15, 1997. SFAS 130 addresses reporting amounts of other
comprehensive income and SFAS 131 addresses reporting segment information. The
Company does not believe that the adoption of these new standards will have a
material impact on its financial statements.
2. LONG-TERM DEBT
Long-term debt with financial institutions and other third parties at
December 31, 1997 consists of the following:
<TABLE>
<S> <C>
Loan to Curtis Park from bank, payable in monthly payments
of $26,124, which includes principal and interest
beginning December 1, 1997 with remaining principal and
interest due October 1, 2007; collateralized by leasehold
interest in land and land improvements. Interest is
payable monthly at 8.37% per annum........................ $3,276,753
Unsecured convertible 5% debentures due December 31, 1998,
unless converted into common stock, interest payable
quarterly and incrementally based upon conversions with
the balance due, if any, at maturity, net of unamortized
discount of $620,356...................................... 390,293
Unsecured operating term loan from bank, with interest at
10.75%, payable in monthly installments of $16,723, which
includes principal and interest, through January 1999..... 220,366
Other notes payable......................................... 346,867
----------
4,234,279
Less current portion........................................ 757,023
----------
$3,477,256
==========
</TABLE>
Principal maturities of all the indebtedness detailed above during each of
the following five years and thereafter are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 757,023
1999........................................................ 77,455
2000........................................................ 242,850
2001........................................................ 47,422
2002........................................................ 51,607
Thereafter.................................................. 3,057,922
----------
$4,234,279
==========
</TABLE>
F-11
<PAGE> 55
DIVOT GOLF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONVERTIBLE DEBENTURE EXCHANGE
During March 1996, the Company issued $5.5 million in six percent
convertible debentures to finance the operations of the Company. During 1996,
the holders of the debentures converted $2,034,262 of the debt into 423,371
shares which equated to $2,496,785 in equity, net of financing fees. Through
March 1, 1998, the six percent debentures were convertible into shares of common
stock at discounts ranging from 15%-35% of its current market value. The Company
recorded $1.4 million in interest expense during 1996 to reflect the discounts
upon conversion of the Company's common stock. As of December 31, 1996,
$3,465,738 of convertible debentures were outstanding.
From January through October 1997, the holders of the debentures converted
$1,195,743 of the debt into 331,474 shares which equated to $1,573,308 in
equity, net of financing fees. During November 1997, the remaining $2,269,995 of
outstanding debentures were transferred to new debenture holders in a third
party transaction. Simultaneously, the Company retired the 1996 debenture
agreements and replaced them with new debenture agreements containing new terms.
The new debentures are payable on December 31, 1998. Through December 31,
1998, the holders of the debentures are entitled to convert the debentures into
common stock of the Company at a conversion price equal to the lesser of (1)
$2.55 per share or (2) 70% of the average closing bid of the common stock during
the last five trading days prior to conversion. The debentures accrue interest,
payable quarterly commencing March 1, 1998, at a rate of 5% per annum. If the
Company does not file a Registration Statement with the SEC to register
securities in a public offering within 120 days from November 18, 1997, the
interest rate shall increase to 18% per annum. If the Effective Date of the
Registration Statement has not occurred by the 180th day after November 18,
1997, then the interest rate shall further increase to 24% per annum until the
Effective Date. The accrued interest is convertible into common stock of the
Company at the same conversion price as the debenture principal. In any event,
each holder cannot as a result of such conversions beneficially own more than
4.99% of the then outstanding common stock. In the event that the debenture
holder proposes to convert all or any portion of the principal and interest at a
conversion price of less than $0.75, the Company shall have the option to redeem
all or any part of the amount proposed to be converted at a redemption price of
125% of the amount of the principal and interest proposed to be converted. In
conjunction with these debenture agreements, the Company incurred issuance costs
totaling $27,000. These issuance costs are being amortized as a component of
interest expense over the term of the debentures.
From November through December 1997, $1,259,346 of the debentures'
principal had been converted into 564,059 shares of common stock, which
equated to $1,863,442 in equity, net of financing fees. As of December 31, 1997,
$1,010,649 of convertible debentures were outstanding.
In connection with the sale of the debenture agreements, the Company issued
(1) warrants to purchase 1,002,742 shares of common stock of the Company at the
lesser of $2.55 per share of 70% of the average closing bid price of the common
stock during the last five trading days prior to exercise, (2) warrants to
purchase 1,002,742 shares of common stock of the Company at the lesser of
$5.10 per share of 70% of the average closing bid price of the common stock
during the last five trading days prior to exercise and (3) 111,475 shares of
common stock. The warrants are exercisable for a period of three years from the
date of issuance. The estimated value of these warrants and common stock,
$1,513,065, has been recorded as additional paid-in capital.
F-12
<PAGE> 56
DIVOT GOLF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LEASES
The Company leases certain equipment used in the daily operations of the
Company under capital leases which are included in furniture, machinery and
equipment. Leased equipment under capital leases included in furniture,
machinery and equipment at December 31, 1997 consists of the following:
<TABLE>
<S> <C>
Equipment................................................... $69,683
Less accumulated amortization............................... 5,203
-------
$64,480
=======
</TABLE>
The accumulated amortization with respect to these capitalized leases is
included in "accumulated depreciation and amortization" in the accompanying
balance sheet. Amortization expense is included in depreciation and amortization
expense in the accompanying statement of operations.
Future minimum lease payments, by year and in the aggregate, under capital
leases, consist of the following at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................ $ 28,228
1999........................................................ 25,236
2000........................................................ 16,148
--------
Total minimum lease payments................................ 69,612
Amounts representing interest............................... (12,317)
--------
57,295
Less current portion........................................ (21,510)
--------
$ 35,785
========
</TABLE>
The Company also rents certain facilities, land and equipment under
operating leases which expire at various times through 2027. Total rent expense
for the Company was approximately $283,200 and $207,500, for the years ended
December 31, 1997 and 1996, respectively.
Future minimum lease payments, by year and in the aggregate, under
operating leases consist of the following at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................ $ 272,200
1999........................................................ 284,674
2000........................................................ 242,428
2001........................................................ 187,356
2002........................................................ 180,566
Thereafter.................................................. 600,000
----------
$1,767,224
==========
</TABLE>
4. RELATED PARTY TRANSACTIONS
The Company funded expenses on behalf of certain entities affiliated
through common ownership. Accounts receivable from related parties were $160,543
at December 31, 1997. The Company expects payment of the amount outstanding at
December 31, 1997 within the next twelve months; accordingly, the amounts are
classified as short-term assets.
The Company provided management services to related parties resulting in
approximately $77,000 and $190,000 in management fee revenue for the years ended
December 31, 1997 and 1996, respectively.
F-13
<PAGE> 57
DIVOT GOLF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
Under Financial Accounting Standards Board Statement No. 109, "Accounting
for Income Taxes," the liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets at December 31, 1997 are as
follows:
<TABLE>
<S> <C>
Deferred tax liabilities:
Tax over book depreciation and amortization............... $ --
-----------
$ --
===========
Deferred tax assets:
Book over tax depreciation and amortization............... $ 130,000
Net operating loss carryforwards.......................... 4,400,000
Bad debt allowance........................................ 60,000
Other..................................................... 4,700
-----------
Total deferred tax assets................................... 4,594,700
Valuation allowance for deferred tax assets................. (4,594,700)
-----------
Net deferred tax assets..................................... --
===========
Net deferred taxes.......................................... $ --
===========
</TABLE>
At December 31, 1997 the Company has a net operating loss carryforward of
$11,000,000 which will begin to expire in the year 2007. The tax benefits of
these items are reflected in the above table of deferred tax assets and
liabilities. U.S. tax rules impose limitations on the use of net operating
losses following certain changes in ownership. If a change were to occur, the
limitation could reduce the amount of these benefits that would be available to
offset future taxable income each year, starting with the year of ownership
change.
F-14
<PAGE> 58
DIVOT GOLF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Income tax benefit at U.S. statutory rate.............. $(2,040,000) $(2,895,000)
Amortization and write-off of goodwill................. -- 1,722,000
State tax benefit, net................................. (360,000) (492,000)
Equity income.......................................... 47,000 326,000
Interest expense for which no tax benefit was
provided............................................. 357,000 648,000
Impact of foreign losses for which a current tax
benefit is not available............................. 80,000 --
Impact of sale of stock in subsidiaries................ 460,000 --
Other items............................................ 141,000 438,300
Change in valuation allowance.......................... 1,315,000 252,700
Foreign tax............................................ -- 110,000
----------- -----------
Tax expense............................................ $ -- $ 110,000
=========== ===========
</TABLE>
6. SHAREHOLDERS' EQUITY
During 1996, the Company issued 3,333 shares of common stock with a value
of $58,595 in lieu of compensation for consulting services performed. The value
of the issued stock was based on the fair market value of the Company's common
stock on the date that the consulting services were performed and reflects the
value of services received. The Company recognized $58,595 in compensation
expense related to the transaction.
During December 1997, the Company closed on a private placement offering of
7% Cumulative Convertible Preferred Stock ("Preferred Stock") for $1.92 million.
The Preferred Stock was offered in units of 15 Preferred Shares, with each such
share having a liquidation value of $1,000, and 667 warrants, for a price of
$15,000 per unit.
The holders of the Preferred Stock are entitled to a cash dividend equal to
$70 per share payable quarterly commencing April 1, 1998, although the Company
has the option to utilize shares of its common stock, under certain conditions,
to satisfy the dividend requirement. If the Company has not filed a Registration
Statement with the SEC to register securities in a public offering within 180
days of issuance, the Preferred Stock shall accrue dividends at an annual rate
of $180 per share. The purchaser has the right to convert the Preferred Stock
immediately into a number of shares of the Company's common stock equal to
$1,000 per share converted divided by the Conversion Price. The Conversion Price
means the lesser of (1) $10.50 or (2) 75% of the average of the closing bid
price of a share of the Company's common stock during the ten trading days prior
to such conversion provided that the holder can not as a result of such
conversion beneficially own more than 4.99% of the then outstanding common
stock. In the event the Conversion Price falls below $7.50, the Company may
redeem, at $1,250 per share plus any accrued but unpaid dividends, all (but not
any part) of shares proposed to be converted. In conjunction with the discount
allowed on the conversion of the Preferred Stock into common stock, the Company
has recorded dividends of $669,928. The Preferred Stock does not carry any
voting rights. As of December 31, 1997, 128 units of Preferred Stock had been
sold while no conversions of shares of the Company's common stock had taken
place.
In connection with the sale and issuance of the Preferred Stock, the
Company issued warrants, exercisable immediately, to purchase 85,333 shares
of common stock of the Company at
F-15
<PAGE> 59
DIVOT GOLF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$15.00 per share for a period of three years from the date of issuance. The
Company incurred approximately $165,000 in additional costs related to the
issuance of the Preferred Stock, which are offset against additional paid-in
capital in the consolidated statements of shareholders' equity.
As of December 31, 1997, warrants to purchase 2,236,685 shares of the
Company's common stock were outstanding. These warrants have exercise prices
ranging from $2.55 to $48.75 per share; 6,667 warrants expire September 28,
1998 (exercise price equals $36.00 per share); 15,867 warrants expire November
17, 1998 (exercise price equals $36.00 per share); 3,333 warrants expire
December 5, 1998; (exercise price equals $15.00 per share); 10,000 warrants
expire June 30, 1999 (exercise price equals $30.00 per share); 93,333 warrants
expire June 30, 2000 (exercise prices range from $36.00 to $48.75 per share),
16,667 warrants expire September 28, 2000 (exercise price equals $36.00 per
share); 1,002,742 warrants expire November 18, 2000 (exercise price equals the
lesser of $2.55 per share or 70% of the average closing bid of the common stock
during the last five trading days prior to conversion); 1,002,742 warrants
expire November 18, 2000 (exercise price equals the lesser of $5.10 per share or
70% of the average closing bid of the common stock during the last five trading
days prior to conversion); and 85,333 warrants expire December 3, 2000 (exercise
price equals $15.00 per share).
Loss per Share
The following table sets forth the computation of basic and diluted
earnings per share in accordance with Statement No. 128, Earnings per Share:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Numerator:
Net loss............................................. $(5,987,034) $(8,625,732)
Preferred stock dividends -- conversion discount..... (669,928) --
----------- -----------
Numerator for basic and dilutive earnings per share--
income available to common stockholders........... $(6,656,962) $(8,625,732)
Denominator:
Denominator for basic and diluted earnings per
share -- weighted-average shares.................. 1,981,607 1,333,727
----------- -----------
Basic and diluted loss per share..................... $ (3.36) $ (6.47)
=========== ===========
</TABLE>
The following number of potentially convertible shares of common stock
related to convertible preferred stock, convertible debentures, warrants, and
stock options are as follows at December 31, 1997:
<TABLE>
<S> <C>
For conversion of convertible preferred stock.......... 324,873
For conversion of convertible debentures............... 396,333
Outstanding warrants................................... 2,236,685
Outstanding stock options.............................. 39,617
Possible future issuance under stock option plan....... 60,383
---------
Total shares potentially convertible................. 3,057,891
=========
</TABLE>
As of December 31, 1997, the Company had only 491,166 common shares
available to be issued.
F-16
<PAGE> 60
DIVOT GOLF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCK OPTIONS
On June 3, 1994, the Board of Directors and the stockholders of the Company
adopted the Brassie Golf Corporation 1994 Stock Option and Restricted Stock
Purchase Plan (the "Stock Option Plan") as an incentive for key employees. The
purchase price for any Stock Awards and the exercise price for any Options may
not be less than the fair market value for the common stock on the date of
grant. Unless otherwise agreed between the grantee and the Company, the Stock
Awards and Options expire 90 days after termination of the grantee's
relationship with the Company. Because no options were issued during the years
ended December 31, 1997 and 1996, no pro forma disclosures are required under
SFAS 123.
Options Outstanding, Common Stock
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES --------------------------
AVAILABLE NUMBER PRICE
FOR GRANT OF SHARES PER SHARE
--------- --------- --------------
<S> <C> <C> <C>
Balances at December 31, 1995......................... 14,498 85,502 $30.00 to $57.00
Options granted..................................... -- -- --
Options canceled.................................... 3,133 (3,133) --
Options exercised................................... -- -- --
--------- --------- ----------------
Balances at December 31, 1996......................... 17,631 82,369 $30.00 to $57.00
--------- --------- ----------------
Options granted..................................... -- -- --
Options canceled.................................... 42,751 (42,751) --
Options exercised................................... -- -- --
--------- --------- ----------------
Balances at December 31, 1997......................... 60,382 39,618 $30.00 to $57.00
========= ========= ================
</TABLE>
8. ACQUISITIONS
On December 26, 1997, the Company acquired from a related party certain
licensing and development rights on Parcel 11-A of the World Golf Village, the
Spa Tournament Championship development program, and the Spa Products and
Catalog from Divot Spa WGV, Inc., for approximately $356,000. The purchase price
of which approximately $331,000 and $25,000 has been allocated to goodwill and
licensing fees, respectively, consisted of 200,000 shares of the Company's
common stock and cash of $75,000. No expense was recorded during 1997 in
connection with this goodwill. The goodwill will be amortized using the straight
line method over a period of 15 years.
On December 28, 1997, the Company executed a letter of intent with Lady
Fairway Golf to purchase 100% of the outstanding stock of Lady Fairway Golf. In
connection with this agreement, the Company paid a nonrefundable deposit of
$100,000 which is included in the other assets of the Company's consolidated
balance sheet at December 31, 1997. The Company contemplates closing this
transaction in the first quarter 1998.
F-17
<PAGE> 61
DIVOT GOLF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. DISPOSITION OF ASSETS
During the year ended December 31, 1997, the Company disposed of three
subsidiaries and substantially all of the assets of St. James in three separate
transactions for an aggregate amount of approximately $3,800,000 ($3,550,000 in
cash and $250,000 in accounts receivable). In addition, the Company is entitled
to receive a certain percentage of future contract revenue of Hale Irwin Golf
Services, Inc. The Company recognized a loss of $1,826,164 in connection with
the disposition of these subsidiaries. This loss is reflected in the statement
of operations. The operating results of the subsidiaries were included in the
consolidated statements of operations of the Company from the dates of
acquisition through the dates of disposition. The proceeds from the sale and
related gain (loss) are recorded as follows:
<TABLE>
<CAPTION>
PROCEEDS
FROM SALE GAIN/(LOSS)
---------- -----------
<S> <C> <C>
Brassie Golf Management Services, Inc. and Summit Golf
Corporation............................................... $ 850,000 $ 125,000
The Gauntlet at St. James................................... 2,950,000 (1,931,875)
Hale Irwin Golf Services, Inc............................... -- (19,289)
---------- -----------
$3,800,000 $(1,826,164)
========== ===========
</TABLE>
10. CHANGE IN REPORTING ENTITY
In 1995, the Company consolidated two 75% owned subsidiaries, The Gauntlet
at Laurel Valley and The Gauntlet at Myrtle West in accordance with Financial
Accounting Standards Board Statement 94. In 1996, the Company transferred 45% of
the ownership interest in the subsidiaries to the minority shareholder to comply
with a mandatory injunction issued by the 13th Circuit Court of Hillsborough
County of Florida. Accordingly, the financial statements for 1996 have been
restated to reflect the Company's ownership in the subsidiaries under the equity
method of accounting. In 1996, the Company recognized a loss of $310,888 on the
transference of the interest in the subsidiaries. The Company's interest in the
net losses of these entities is recorded at 75% up until the date of
transference and at 30% thereafter.
Due to the recurring operating losses and working capital deficiencies of
the entities, the Company assessed the net realizable value of these investments
at December 31, 1996 to be -0-. Therefore, on the Company's assessment, a
write-down of $116,318 and $505,691 was recorded in 1997 and 1996, respectively
to reflect the net realizable value of these investments. The write-down is
included in the loss on equity investment in subsidiaries line item on the
Company's 1997 and 1996 statement of operations.
The components of the line item, Loss on equity investment in subsidiaries,
as reported in the consolidated statements of operations are as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Pro rata share of net loss.................................. $310,888 $ --
Write-down to carrying value................................ 505,691 116,318
Reserve for ongoing litigation.............................. 150,000 --
-------- --------
Loss on equity investment in subsidiaries................... $966,579 $116,318
======== ========
</TABLE>
F-18
<PAGE> 62
DIVOT GOLF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with its executive officers, the
terms of which expire at various times through September 3, 2004. Such
agreements provide for minimum salary levels, as well as for incentive bonuses
which are payable if specified management goals are attained. Minimum
commitments for future salaries, excluding bonuses, by year and in the aggregate
consist of the following at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................ $ 650,000
1999........................................................ 650,000
2000........................................................ 591,667
2001........................................................ 475,000
2002........................................................ 454,167
Thereafter.................................................. 375,000
----------
$3,195,834
==========
</TABLE>
The Company, in the ordinary course of business, is the subject of, or
party to, various pending or threatened claims and litigation. In the opinion
of management, settlement of such claims and litigation will not have a
material effect on the Company's operations or financial position.
12. SUBSEQUENT EVENTS (Unaudited)
Reverse Stock Split
Effective June 16, 1998, the Board of Directors declared a reverse stock
split of 15 to 1 shares of the Company's common stock to holders of record on
June 16, 1998. Common stock issued and additional paid-in capital as of December
31, 1996 and 1997 and March 31, 1998 have been restated to reflect this split.
All share and per share data, including stock option plan and warrant
information, is stated to reflect the split.
Common Shares Authorized
Effective April 1998, the Company increased the number of common shares
authorized from 50 million to 200 million.
Disposition of Gauntlet at Curtis Park
On April 2, 1998, the Company sold its leasehold interest in the golf
course assets at The Gauntlet at Curtis Park for $5,400,000. The net realized
gain on the sale of the golf course assets was approximately $524,000.
Acquisitions
Miller Golf, Inc.--On April 8, 1998, the Company purchased all of the
outstanding stock of Miller Golf, Inc. ("Miller"), a supplier of high-quality
golf accessories, for a total purchase price of $4.3 million. The purchase price
consisted of $3,000,000 in cash, $1,000,000 in short-term notes payable to the
sellers, and $300,000 of the Company's common stock (53,333 shares valued at the
fair market value of the common stock at the date of closing). The acquisition
was accounted for under the purchase method of accounting.
To finance the Miller purchase, the Company issued $3.0 million of
convertible secured notes in April 1998. During May and June 1998, the holders
of these convertible notes exchanged such notes for 200 units of the Company's
private placement dated December 3, 1997. Each unit consists of 15 shares of the
Company's 1997 Convertible Preferred Stock, and warrants to purchase 667 shares
of the Company's common stock at $15.00 per share.
Divot Golf Corporation--On April 15, 1998, the Company purchased all of the
outstanding stock of Divot Golf Corporation from a related party for a total
purchase price of $500,000. The purchase price consisted of $300,000 in cash and
a $200,000 short-term promissory note payable to the seller. The acquisition was
accounted for under the purchase method of accounting.
Talisman Tools Incorporated--On April 20, 1998, the Company purchased all
of the outstanding stock of Talisman Tools Incorporated for a total purchase
price of $101,875. The purchase price consisted of two short-term notes payable
to the sellers in the aggregate amount of $55,000 and $46,875 of the Company's
common stock (10,000 shares valued at the fair market value of the common stock
at the date of closing). The acquisition was accounted for under the purchase
method of accounting.
Land Purchase--On January 16, 1998, the Company closed its acquisition of
Parcel 11-A at the World Golf Village for a purchase price of approximately
$1,850,000 in cash. The Company financed a portion of the purchase price through
the issuance of short-term notes payable to individuals in the aggregate amount
of $1,500,000 and the issuance of 50,000 shares of common stock to the
mortgagors.
Stock Option Plan
During April 1998, the Board of Directors and shareholders approved the
formation of the Brassie Golf Corporation 1998 Stock Option Plan (the "1998
Plan") for the purpose of attracting and retaining certain key employees of the
Company. The 1998 Plan provides that an aggregate of 1,500,000 of the Company's
authorized shares be reserved for future issuance. In the case of initial
grants, the exercise price will be fixed by the Board of Directors on the date
of grant.
On June 15, 1998, the Company issued a total of 733,333 options to certain
officers and key employees of the Company under the 1998 Plan These options
have a exercise price of $2.8125 per share, which equals the fair value of the
stock price on the date of grant.
During the first quarter of 1998, the Company ceased negotiations to
purchase 100% of the outstanding stock of Lady Fairway Golf. As a result, the
Company wrote off a nonrefundable deposit of $100,000 during the three months
ended March 31, 1998 which was included in the other assets of the Company's
consolidated balance sheet at December 31, 1997.
F-19
<PAGE> 63
Report of Independent Auditors
Board of Directors and Shareholders
Miller Golf, Inc.
We have audited the accompanying balance sheets of Miller Golf, Inc. as of March
31, 1998, September 30, 1997, and September 30, 1996, and the related statements
of operations, shareholders' equity and cash flows for the six-month period
ended March 31, 1998 and for each of the two years in the period ended September
30, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Miller Golf, Inc. at March 31,
1998, September 30, 1997, and September 30, 1996 and the results of its
operations and its cash flows for the six-month period ended March 31, 1998 and
for each of the two years in the period ended September 30, 1997 in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Raleigh, North Carolina
May 1, 1998
F-20
<PAGE> 64
Miller Golf, Inc.
Balance Sheets
<TABLE>
<CAPTION>
March 31 September 30
1998 1997 1996
--------------------------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash $ 156,311 $ 84,809 $ 47,668
Accounts receivable, less allowance for doubtful accounts
of $30,600 at March 31, 1998, $26,600 at September 30,
1997, and $28,900 at September 30, 1996
1,348,808 1,279,483 1,417,706
Other receivables 59,041 94,258 12,906
Inventory 1,259,960 1,142,040 1,124,442
Prepaid expenses and deposits 283,743 132,304 132,421
Deferred tax asset 82,800 79,200 31,200
--------------------------------------------------------
Total current assets 3,190,663 2,812,094 2,766,343
Property and equipment:
Machinery and leasehold improvements 725,352 725,352 721,962
Furniture and fixtures 286,426 285,709 285,709
Equipment 596,824 589,606 551,665
--------------------------------------------------------
1,608,602 1,600,667 1,559,336
Accumulated depreciation (1,441,722) (1,410,500) (1,332,767)
--------------------------------------------------------
166,880 190,167 226,569
Deferred tax asset 96,200 96,200 164,500
Other assets 112,394 117,033 107,416
--------------------------------------------------------
Total assets $ 3,566,137 $ 3,215,494 $ 3,264,828
========================================================
</TABLE>
F-21
<PAGE> 65
<TABLE>
<CAPTION>
March 31 September 30
1998 1997 1996
--------------------------------------------------------
<S> <C> <C> <C>
Liabilities and shareholders' equity Current liabilities:
Accounts payable $ 250,651 $ 275,489 $ 277,101
Accrued expenses 314,794 348,329 301,579
Income taxes payable - 97,246 309,097
Line of credit 1,242,977 683,913 754,001
Current portion of long-term debt - 12,666 50,000
Notes payable - related party 104,698 103,847 44,015
--------------------------------------------------------
Total current liabilities 1,913,120 1,521,490 1,735,793
Long-term debt, less current portion - - 12,667
Notes payable - related party, less current portion 10,653 20,851 39,962
Deferred taxes 23,300 23,300 21,200
Commitments and contingencies (Notes 11 and 12)
Shareholders' equity:
Common Stock, $1 par value, 250,000 shares
authorized, 114,000 shares issued and outstanding
114,000 114,000 114,000
Additional paid-in capital 386,000 386,000 386,000
Retained earnings 3,514,278 3,545,067 3,350,420
Less cost of Common Stock held in treasury, 82,000
shares (2,202,160) (2,202,160) (2,202,160)
Notes receivable from shareholders (193,054) (193,054) (193,054)
--------------------------------------------------------
Total shareholders' equity 1,619,064 1,649,853 1,455,206
--------------------------------------------------------
Total liabilities and shareholders' equity $ 3,566,137 $ 3,215,494 $ 3,264,828
========================================================
</TABLE>
See accompanying notes.
F-22
<PAGE> 66
Miller Golf, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Six-month period
ended March 31 Year ended September 30
1998 1997 1996
--------------------------------------------------------
<S> <C> <C> <C>
Sales $ 3,419,782 $ 8,983,132 $ 9,918,366
Cost of sales 2,231,733 5,535,424 6,316,556
--------------------------------------------------------
Gross profit 1,188,049 3,447,708 3,601,810
Selling, general and administrative expenses 1,283,592 2,973,095 3,021,277
--------------------------------------------------------
(Loss) income from operations (95,543) 474,613 580,533
Other income (expense):
Life insurance proceeds - - 1,750,680
Interest expense (46,700) (121,248) (201,694)
Interest income 7,754 14,417 69,028
Other income (expense) 100,000 (2,835) 9,434
--------------------------------------------------------
61,054 (109,666) 1,627,448
(Loss) income before taxes (34,489) 364,947 2,207,981
Provision for income taxes (3,700) 170,300 196,500
========================================================
Net (loss) income $ (30,789) $ 194,647 $ 2,011,481
========================================================
</TABLE>
See accompanying notes.
F-23
<PAGE> 67
Miller Golf, Inc.
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Additional Retained Notes Receivable
Stock Paid-In Capital Earnings Treasury Stock from Shareholders Total
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 $ 114,000 $ 386,000 $ 1,338,939 $ (52,160) $ (202,500) $ 1,584,279
Purchases of treasury stock - - - (2,150,000) - (2,150,000)
Repayments of principal - - - - 9,446 9,446
Net income - - 2,011,481 - - 2,011,481
-------------------------------------------------------------------------------------------------
Balance at September 30, 1996 114,000 386,000 3,350,420 (2,202,160) (193,054) 1,455,206
Net income - - 194,647 - - 194,647
-------------------------------------------------------------------------------------------------
Balance at September 30, 1997 114,000 386,000 3,545,067 (2,202,160) (193,054) 1,649,853
Net loss - - (30,789) - - (30,789)
=================================================================================================
Balance at March 31, 1998 $ 114,000 $ 386,000 $ 3,514,278 $ (2,202,160) $ (193,054) $ 1,619,064
=================================================================================================
</TABLE>
See accompanying notes.
F-24
<PAGE> 68
Miller Golf, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six-month period Year ended
ended September 30
March 31, 1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net (loss) income $ (30,789) $ 194,647 $ 2,011,481
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation 31,222 77,733 102,356
Deferred taxes (3,600) 22,400 (178,560)
Changes in operating assets and liabilities:
Accounts receivable and other receivables (34,108) 56,871 137,070
Inventory (117,920) (17,598) 80,275
Prepaid expenses and deposits (151,439) 117 115,591
Other assets 4,639 (9,617) 252,700
Accounts payable (24,838) (1,612) (283,669)
Accrued expenses (33,535) 46,750 20,850
Income taxes payable (97,246) (211,851) 288,988
----------------------------------------------------
Net cash (used in) provided by operating activities (457,614) 157,840 2,547,082
Investing activities
Purchases of property and equipment (7,935) (41,331) (26,054)
----------------------------------------------------
Net cash used in investing activities (7,935) (41,331) (26,054)
Financing activities
Proceeds from line of credit 4,134,301 9,655,113 10,135,898
Principal payments on line of credit (3,575,237 (9,725,201) (10,456,991)
Net (payments) proceeds from notes payable - related party (9,347) 40,721 -
Payments on long-term debt (12,666) (50,001) (45,000)
Repayments on notes receivable from shareholders - - 9,446
Purchase of treasury stock - - (2,150,000)
----------------------------------------------------
Net cash provided by (used in) financing activities 537,051 (79,368) (2,506,647)
Net increase in cash 71,502 37,141 14,381
Cash at beginning of year 84,809 47,668 33,287
----------------------------------------------------
Cash at end of year $ 156,311 $ 84,809 $ 47,668
====================================================
Supplemental disclosures of cash flow information
Cash paid for interest $ 42,095 $ 103,764 $ 183,895
====================================================
Cash paid for income taxes $ 208,992 $ 359,651 $ 78,012
====================================================
</TABLE>
See accompanying notes.
F-25
<PAGE> 69
Miller Golf, Inc.
Notes to Financial Statements
March 31, 1998
1. Business of the Company
Miller Golf, Inc. (the "Company") is engaged in the manufacturing and
distribution of golf accessories, specialties and promotional items, which are
sold principally to golf courses, pro shops, recreational facilities, and event
sponsoring organizations in the United States and Puerto Rico.
2. Summary of Significant Accounting Policies
Revenue Recognition
Revenues, net of allowance for estimated future returns, are recognized at the
time merchandise is shipped to the customer.
Concentration of Credit Risk
The Company's primary financial instrument subject to potential concentration of
credit risk is accounts receivable which are unsecured. The Company provides an
allowance for doubtful accounts based on its analysis of potentially
uncollectible accounts. As of March 31, 1998, the Company had no significant
concentrations of credit risk with any individual customers.
Inventory
Inventory is stated at cost (using the first-in, first-out cost flow assumption)
and has been adjusted for slow-moving or obsolete items.
Inventory consists of the following:
<TABLE>
<CAPTION>
March 31 September 30
1998 1997 1996
--------------------- ------------------ -------------------
<S> <C> <C> <C>
Raw materials $ 321,874 $ 310,949 $ 293,935
Work in process 55,303 47,460 51,876
Finished goods 896,783 785,631 780,631
--------------------- ------------------ -------------------
Total 1,273,960 1,144,040 1,126,442
Less inventory reserves 14,000 2,000 2,000
===================== ================== ===================
$ 1,259,960 $ 1,142,040 $ 1,124,442
===================== ================== ===================
</TABLE>
F-26
<PAGE> 70
Miller Golf, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment accounts are stated at cost. Depreciation for both
financial reporting and income tax purposes is computed using accelerated
methods.
Expenditures for major renewals and betterments that extend the useful lives of
the property and equipment are capitalized. Expenditures for maintenance and
repairs are charged to expense as incurred.
The estimated lives are as follows:
<TABLE>
<S> <C>
Machinery and leasehold improvements 7 - 31.5 years
Furniture and fixtures 7 years
Equipment 5 - 7 years
</TABLE>
Long-Lived Assets
Upon indication of impairment, the Company's policy for assessing impairment of
long-lived assets is to calculate the undiscounted projected future cash flows
of the asset expected to be generated over the remaining useful life of the
asset. This amount is compared to the carrying value of the asset to determine
if the asset is impaired. The Company adjusts the net book value of the
underlying assets if the sum of expected future cash flows is less than book
value. Based on the application of this policy, no impairments have been
recognized.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-27
<PAGE> 71
Miller Golf, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Advertising Costs
The Company expenses advertising costs as incurred, except for direct response
advertising, which is capitalized as prepaid advertising and amortized over its
expected period of future benefits. Total advertising expense was $113,779,
$241,353 and $258,882 for the six-month period ended March 31, 1998 and the
years ended September 30, 1997 and 1996, respectively.
Impact of Recently Issued Accounting Standard
In 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income"
("SFAS 130") and Statement No. 131, "Disclosures About Segments of an Enterprise
and Related Information" ("SFAS 131"), which are both effective for fiscal years
beginning after December 15, 1997. SFAS 130 addresses reporting amounts of other
comprehensive income and SFAS 131 addresses reporting segment information. The
Company does not believe that the adoption of these new standards will have a
material impact on its financial statements.
3. Prepaid Expenses and Deposits
Prepaid expenses and deposits consist of the following:
<TABLE>
<CAPTION>
March 31 September 30
1998 1997 1996
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Prepaid advertising $ 38,221 $ 43,148 $ 42,995
Prepaid insurance 66,065 39,334 41,583
Other prepaid expenses 62,576 33,347 34,043
Prepaid income taxes 107,181 - -
Deposits and advances 9,700 16,475 13,800
==================== ==================== ====================
$ 283,743 $ 132,304 $ 132,421
==================== ==================== ====================
</TABLE>
F-28
<PAGE> 72
Miller Golf, Inc.
Notes to Financial Statements (continued)
4. Notes Receivable from Shareholders
During 1995, two employees of the Company purchased 9,000 shares of the
Company's common stock in exchange for promissory notes. If the employees
receive an annual bonus, then they are subject to payments on the note equal to
one-third of the bonus which will first reduce accrued interest and then the
outstanding principal balance. Interest accrues on the unpaid balance at a rate
of 7% per annum. The unpaid principal balance and accrued interest are due and
payable on July 14, 2000. The notes are secured by a security interest in 9,000
shares of the Company's common stock.
5. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
March 31 September 30
1998 1997 1996
---------------- -------------------- ------------------
<S> <C> <C> <C>
Accrued and withheld payroll taxes $ 20,950 $ 9,410 $ 10,276
Accrued payroll and payroll related expenses 131,755 173,266 121,710
Accrued commissions 79,282 66,495 77,016
Accrued pension 27,807 39,973 49,976
Accrued professional fees 55,000 59,185 42,601
---------------- -------------------- ------------------
$ 314,794 $ 348,329 $ 301,579
================ ==================== ==================
</TABLE>
6. Debt
The Company has a short-term line of credit of $2,000,000 which is secured by
inventory, accounts receivable, fixtures, machinery and equipment. Interest is
paid by the Company at a rate of 1% per annum over the bank's prime rate through
February 18, 1997, after which time interest is paid at a rate of .75% per annum
over the bank's prime rate (8.5% at March 31, 1998). The line of credit, which
expires March 31, 2000, requires the Company to maintain certain financial
covenants principally relating to cash flow. The outstanding balance at May
1998, September 30, 1997, and September 30, 1996 was $1,242,977, $683,913 and
$754,001, respectively.
The Company also has a $100,000 line of credit for the purpose of equipment
acquisitions. The outstanding balance accrues interest at 1% over the bank's
prime rate (8.5% at March 31, 1998) and is cross-collateralized with the
short-term line of credit. Based on the line of credit agreement, the
outstanding balance under this line of credit will be converted to a five-year
term note at the end of each fiscal year. As of March 31, 1998, there was no
outstanding balance on this line of credit.
F-29
<PAGE> 73
Miller Golf, Inc.
Notes to Financial Statements (continued)
7. Notes Payable - Related Party
Periodically, the President and majority shareholder have advanced the Company
funds for cash shortfalls. There is no set repayment schedule and accordingly,
the amounts have been included as current liabilities. Interest accrues at prime
(8.5% at March 31, 1998) plus .75% adjusted periodically by executive management
as they deem necessary. Amounts outstanding at March 31, 1998, September 30,
1997, and September 30, 1996 were $84,736, $84,736 and $26,500, respectively.
The Company has an unsecured note payable from a shareholder payable in fixed
monthly installments of $1,821 including interest at 8.75%. Amounts outstanding
at March 31, 1998, September 30, 1997, and September 30, 1996 were $30,615,
$39,962 and $57,477, respectively.
8. Employee Retirement Plan
The Company has a noncontributory defined contribution pension plan that covers
all salaried employees employed for at least six months and 1,000 hours of
service within the year. Factory employees are covered by a noncontributory
union pension plan. Pension expenses charged to operations are as follows:
<TABLE>
<CAPTION>
Six-month
period ended
March 31 Year ended September 30
1998 1997 1996
---------------- -------------------- ------------------
<S> <C> <C> <C>
Salaried employees $ 24,375 $ 47,543 $ 53,804
Hourly and factory employees 17,425 37,142 40,717
================ ==================== ==================
Total $ 41,800 $ 84,685 $ 94,521
================ ==================== ==================
</TABLE>
The Company has a voluntary cash or deferred salary arrangement qualified under
Section 401(k) of the Internal Revenue Code which became effective July 1, 1983.
All salaried employees, and effective October 1, 1993, all union employees are
eligible to participate and elections may be made to contribute from 1% to 15%
of salary, to a statutory maximum. The Company has a matching program of up to a
maximum 6% of covered compensation for salaried employees and 4% of covered
compensation for union employees. Contributions made were $41,387, $84,220 and
$74,331 for the six-month period ended March 31, 1998 and for the years ended
September 30, 1997 and 1996, respectively.
F-30
<PAGE> 74
Miller Golf, Inc.
Notes to Financial Statements (continued)
9. Income Taxes
Federal and state income taxes are computed on net income of the Company
adjusted for permanent differences between income for financial reporting and
income for tax purposes. The resulting tax is computed using the statutory rates
of respective governing agencies.
Deferred income taxes result primarily from timing differences between financial
and tax income and are accounted for as required by Statement No. 109 of the
Financial Accounting Standards Board.
The tax effects of temporary differences at March 31, 1998, September 30, 1997,
and September 30, 1996 that give rise to significant portions of deferred tax
assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
March 31 September 30
1998 1997 1996
------------------ ----------------- ------------------
<S> <C> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $ 13,800 $ 13,800 $ 11,700
Other, net 9,500 9,500 9,500
------------------ ----------------- ------------------
Total deferred tax liabilities 23,300 23,300 21,200
Deferred tax assets:
Inventory 53,200 47,100 19,500
Insurance 9,100 21,400 -
Alternative minimum tax credit carryforward
96,200 96,200 164,500
Bad debts 12,300 10,700 11,700
Net operating loss 8,200 - -
------------------ ----------------- ------------------
Total deferred tax assets 179,000 175,400 195,700
================== ================= ==================
Net deferred tax asset $ 155,700 $ 152,100 $ 174,500
================== ================= ==================
</TABLE>
For the period ended March 31, 1998, the Company incurred a federal net
operating loss of approximately $24,000 that expires during the year 2018. An
alternative minimum tax credit of approximately $164,500 arose in the year ended
September 30, 1996. Approximately $68,300 of the credit was used in the year
ended September 30, 1997. The remaining credit has an indefinite carryforward
period.
F-31
<PAGE> 75
Miller Golf, Inc.
Notes to Financial Statements (continued)
9. Income Taxes (continued)
The provision for income taxes for the six-month period ended March 31, 1998 and
for the years ended September 30, 1997 and 1996, respectively, consists of the
following:
<TABLE>
<CAPTION>
March 31 September 30
1998 1997 1996
------------------ ----------------- ------------------
<S> <C> <C> <C>
Current expense:
Federal $ - $ 96,800 $ 319,100
State - 51,000 47,900
------------------ ----------------- ------------------
- 147,800 367,000
Deferred expense (benefit):
Federal (4,400) 29,600 (172,100)
State 700 (7,100) 1,600
================== ================= ==================
(3,700) 22,500 (170,500)
================== ================= ==================
$ (3,700) $ 170,300 $ 196,500
================== ================= ==================
</TABLE>
A reconciliation of the provision for income taxes to income tax expense,
computed by applying the statutory federal income tax rate to pre-tax earnings
at March 31, 1998, September 30, 1997, and September 30, 1996 is as follows:
<TABLE>
<CAPTION>
March 31 September 30
1998 1997 1996
------------------ ----------------- ------------------
<S> <C> <C> <C>
Income tax expense at statutory federal rate $ (10,000) $ 124,100 $ 750,700
Income tax expense at statutory state rate (1,800) 22,900 138,400
Increase (decrease) resulting from:
Life insurance proceeds - - (705,000)
Non-deductible expenses 6,700 23,300 9,200
Other 1,400 - 3,200
================== ================= ==================
$ (3,700) $ 170,300 $ 196,500
================== ================= ==================
</TABLE>
F-32
<PAGE> 76
Miller Golf, Inc.
Notes to Financial Statements (continued)
10. Treasury Stock
The Company has periodically repurchased shares of common stock from its
shareholders. Treasury stock consists of the following at March 31, 1998,
September 30, 1997, and September 30, 1996:
<TABLE>
<CAPTION>
Fiscal Year End of Number of Shares
Common Stock Repurchase Repurchased Cost
- ------------------------------------------------------------------------- ------------------ -----------------
<S> <C> <C>
September 30, 1994 4,000 $ 52,160
September 30, 1996 78,000 2,150,000
================= =================
82,000 $ 2,202,160
================= =================
</TABLE>
11. Leases
The Company leases certain automobiles and office space under operating leases
which expire at various times through 2005. Total rent expense for the Company
was approximately $145,000, $291,000 and $291,000 for the six-month period ended
March 31, 1998 and the years ended September 30, 1997 and 1996, respectively.
Future minimum lease payments, by year and in the aggregate, under operating
leases during the next five years and thereafter are as follows:
<TABLE>
<S> <C>
1998 (nine months) $ 231,125
1999 304,350
2000 302,998
2001 326,862
2002 and thereafter 1,272,525
=====================
$ 2,437,860
=====================
</TABLE>
The Company leases its corporate office and warehouse space from the President
and majority shareholder of the Company. The lease is for a period of ten years
expiring in December 2005.
Terms of the lease required the Company to pay real estate taxes, repairs,
maintenance and insurance on the leased premises. The rent during the option
period is adjusted to reflect increases, but not decreases, in cost of living
based on the consumer price index for urban consumers.
Annual rent expense paid to the shareholder for the six-month period ended March
31, 1998 and the years ended September 30, 1997 and 1996 was $145,350, $290,700
and $285,000, respectively.
F-33
<PAGE> 77
Miller Golf, Inc.
Notes to Financial Statements (continued)
12. Commitments and Contingencies
Letters of credit may be issued up to a maximum of the available balance under
the Company's short-term line of credit to vendors for overseas inventory
purchases (see Note 6). Interest accrues annually at prime (8.5% at March 31,
1998) plus 1%. Letters of credit outstanding at March 31, 1998, September 30,
1997 and September 30, 1996 were $29,634, $148,862 and $36,950, respectively.
13. Subsequent Events
On April 3, 1998, the shareholders' of Miller Golf, Inc. entered into a Stock
Purchase Agreement with Brassie Golf Corporation ("Brassie"), whereby Brassie
will purchase one hundred percent of the outstanding shares of Miller Golf, Inc.
for a total purchase price of $4,300,000, consisting of $3,000,000 in cash,
800,000 shares of Brassie's common stock (valued at $300,000 on the date of
closing), and a $1,000,000 note payable with principal and accrued interest due
on September 30, 1998.
F-34
<PAGE> 78
DIVOT GOLF CORPORATION
PRO FORMA FINANCIAL DATA
(Unaudited)
The following unaudited pro forma combined condensed financial statements
include the historical and pro forma effects of the April 8, 1998 acquisition of
Miller Golf, Inc. ("Miller Golf "). These pro forma financial statements also
include (i) the historical and pro forma effects of the issuance of $3.0 million
of convertible secured notes in April 1998 and the subsequent exchange of such
notes for shares of the Company's 1997 Convertible Preferred Stock, and (ii) the
sale of the Company's leasehold interest in the golf course assets at the
Gauntlet at Curtis Park ("Curtis Park").
The following unaudited pro forma combined condensed financial statements have
been prepared by the management of Divot Golf Corporation, Inc. formerly known
as Brassie Golf Corporation, Inc. (the "Company") from its historical
consolidated financial statements and the historical financial statements of
Miller Golf which are included in this Current Report on Form SB-2. The
unaudited pro forma combined condensed statements of operations reflect
adjustments as if the transactions had occurred on January 1, 1997. The
unaudited pro forma combined condensed balance sheet reflects adjustments as if
the transactions had occurred on March 31, 1998. See "Note 1 - Basis of
Presentation." The pro forma adjustments described in the accompanying notes are
based upon preliminary estimates and certain assumptions that management of the
Company believes are reasonable in the circumstances.
The unaudited pro forma combined condensed financial statements are not
necessarily indicative of what the financial position or results of operations
actually would have been if the transaction had occurred on the applicable dates
indicated. Moreover, they are not intended to be indicative of future results of
operations or financial position. The unaudited pro forma combined condensed
financial statements should be read in conjunction with the historical
consolidated financial statements of the Company and related notes thereto which
are included in the Company's Quarterly Report on Form 10-QSB for the quarter
ended March 31, 1998, which was filed with the Securities and Exchange
Commission (the "Commission") on May 15, 1998, and in the Company's Annual
Report on Form 10-KSB filed with the Commission on March 31, 1998. The unaudited
pro forma combined condensed financial statements should be read in conjunction
with the historical financial statements of Miller Golf which are included in
this Current Report on Form SB-2.
F-35
<PAGE> 79
DIVOT GOLF CORPORATION
PRO FORMA COMBINED CONDENSED BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Convertible Divot Golf
Divot Golf Sale of Secured Note Pro Forma Combined
Historical Miller Golf Curtis Park(d) Financing Adjustments Pro Forma
------------- -------------- -------------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash (deficit) $ (148,362) $ 156,311 $ 263,434 $3,000,000(c) $(3,000,000)(a) $ 271,383
Cash restricted 126,012 (126,012)
Accounts and notes receivable 429,577 1,407,849 (63) 1,837,363
Accounts receivable from related
parties 25,358 25,358
Inventories and other current assets 892,494 1,626,503 (170,494) 100,000 (a) 2,448,503
----------- -------------- -------------- ---------- ------------- --------------
Total current assets 1,325,079 3,190,663 (33,135) 3,000,000 (2,900,000) 4,582,607
Property and equipment, net 7,169,858 166,880 (4,416,950) 461,266(b) 3,381,054
Goodwill, net 325,729 2,119,670(b) 2,445,399
Intangible assets, net 651,627 (177,590) 474,037
Other Assets 208,594 208,594
----------- -------------- -------------- ----------- -------------- --------------
Total assets $ 9,472,293 $ 3,566,137 $(4,627,675) $ 3,000,000 $ (319,064) $11,091,691
=========== ============== ============== =========== ============== ==============
<CAPTION>
CONVERTIBLE DIVOT GOLF
Divot Golf Sale of Secured Note Pro Forma Combined
Historical Miller Golf Curtis Park(d) Financing Adjustments Pro Forma
----------- ------------- --------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Liabilities And Shareholders Equity:
Accounts payable and accrued
expenses $ 1,160,892 $ 565,445 $ (323,556) $ $ $ 1,402,781
Accrued interest payable 76,818 (61,025) 15,793
Income tax payable 181,793 181,793
Long-term debt and capital
lease obligations 5,878,668 (4,766,894) 3,000,000(c) 1,000,000(a) 2,111,774
(3,000,000)(c)
Notes payable - related Party 115,351 115,351
Line of Credit 1,242,977 1,242,977
Accrued discount on convertible
debentures 51,489 51,489
Deferred taxes 23,300 23,300
Shareholders' Equity:
Preferred Stock 283 3(c) 286
Common Stock 48,344 114,000 (114,000) 49,144
800(a)
Additional paid-in capital 33,421,991 386,000 2,999,997(c) 299,200(a) 37,450,188
729,000(e) (386,000)
Accumulated deficit (31,028,264) 3,514,278 523,800 (729,000)(e) (3,514,278) (31,233,464)
Less cost of Common stock
held in treasury (2,202,160) 2,202,160
Less cost of Convertible
Preferred Stock held in
Treasury, 281,250 shares (210,937) (210,937)
Notes Receivable from shareholders (193,054) 193,054
Foreign currency translation
adjustment (108,784) (108,784)
------------ ------------- ---------------- ---------- -------------- ---------------
Total shareholders' equity 2,122,633 1,619,064 523,800 $3,000,000 (1,319,064) 5,946,433
------------ ------------- ---------------- ---------- -------------- ---------------
Total liabilities and shareholders' $ 9,472,293 $ 3,566,137 $ (4,627,675) $3,000,000 $ (319,064) $11,091,691
equity ============ ============= ================ ========== ============== ===============
</TABLE>
F-36
<PAGE> 80
DIVOT GOLF CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Divot Golf
Divot Golf Sale of Pro Forma Combined
Historical Miller Golf Curtis Park (h) Adjustments Pro Forma
------------------ ------------------ ----------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 137,468 $ 1,493,917 $ (130,530) $ $ 1,500,855
Operating Expenses (1,359,857) (1,606,374) 247,018 (2,719,213)
Depreciation & Amortization (85,322) (11,920) 72,421 (26,496)(g) (67,791)
(16,474)(f)
------------------ ------------------ ----------------- --------------- ------------
Operating Loss (1,307,711) (124,377) 188,909 (42,970) (1,286,149)
Interest Expense (206,131) (28,125) 73,542 (160,714)
Other Expense, net (338,146) 523,800(i) 185,654
------------------ ------------------ ----------------- --------------- ------------
Net Loss Before Extraordinary Items $ (1,851,988) $ (152,502) $ 786,251 $ (42,970) $(1,261,209)
================== ================== ================= =============== ============
Net Loss Per Share Before
Extraordinary Item $ (.59) $ (.40)
================== ============
Weighted Average Shares Outstanding 3,117,080 3,117,080
================== ============
</TABLE>
F-37
<PAGE> 81
BRASSIE GOLF CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Divot Golf
Divot Golf Sale of Pro Forma Combined
Historical Miller Golf Curtis Park (j) Adjustments Pro Forma
------------------ ----------------- ------------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 4,093,599 $ 8,983,132 $ (1,566,144) $ $ 11,510,587
Operating Expenses (5,788,985) (8,430,786) 1,071,830 (13,147,941)
Depreciation & Amortization (871,222) (77,733) 463,305 (105,984)(g) (657,529)
(65,895)(f)
------------------ ----------------- ------------------- ------------ --------------
Operating Profit (Loss) (2,566,608) 474,613 (31,009) (171,879) (2,294,883)
Interest Expense (683,755) (121,248) 282,674 (522,329)
Loss on sale of subsidiaries (1,826,164) (1,826,164)
Other Expense, net (910,507) (158,718) 523,800(i) (545,425)
----------------- ----------------- ----------------- ------------ -------------
Net Loss Before Extraordinary Item $ (5,987,034) $ 194,647 $ 775,465 $ (171,879) $ (5,188,801)
================= ================= ================= ============ =============
Net Loss Per Share Before
Extraordinary Item $ (3.36) $ (2.62)
================= =============
Weighted Average Shares Outstanding 1,981,607 1,981,607
================= =============
</TABLE>
F-38
<PAGE> 82
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma combined condensed statements of
operations present the historical results of operations of the Company and
Miller Golf for the three months ended March 31, 1998 and for the year
ended December 31, 1997 with pro forma adjustments as if the transaction
had taken place on January 1, 1997. The unaudited pro forma combined
condensed statement of operations for the year ended December 31, 1997, is
presented using the combined historical results of the Company for the year
then ended, and those of Miller Golf for its most recent fiscal year ended
September 30, 1997. The unaudited pro forma combined condensed statement of
operations for the three month period ended March 31, 1998, is presented
using the combined historical results of the Company and those of Miller
Golf for the three months ended March 31, 1998. The unaudited pro forma
combined condensed balance sheet presents the historical balance sheets of
the Company and Miller Golf as of March 31, 1998, with pro forma
adjustments as if the transaction had been consumated as of March 31, 1998
in a transaction accounted for as a purchase in accordance with generally
accepted accounting principles.
Certain reclassifications have been made to the historical financial
statements of the Company and Miller Golf to conform to the pro forma
combined condensed financial statement presentation.
2. PRO FORMA ADJUSTMENTS
The following adjustments give pro forma effect to the transaction:
(a) To record purchase price consideration:
Cash deposit paid on February 2, 1998 $ 100,000
Cash paid at closing financed by
$3.0 million convertible debentures,
subsequently converted to convertible
preferred stock, 2,900,000
Short term debt issued to Miller Golf's
former shareholders 1,000,000
Common Stock issued as deposit 200,000
Common Stock issued at closing 100,000
-----------
$ 4,300,000
===========
(b) To adjust the acquired assets to their estimated fair values,
including the recording of the cost in excess of net assets acquired
of approximately $2.1 million.
(c) To reflect adjustments representing $3.0 million of convertible
secured notes issued to finance Miller acquisition and subsequent
exchange of such notes for 3,000 shares of the Company's 1997
Convertible Preferred Stock.
(d) Represents the historical balance sheet of Curtis Park as of March 31,
1998, as adjusted for the Company's gain on the sale of assets.
(e) To record adjustment to reflect discount feature of Convertible
Preferred Stock. Convertible Preferred Stock is convertible at the
lessor of (i) $.70 or (ii) 75% of the average of the closing bid price
of a share of common stock of the Company during the ten trading days
prior to such conversion.
(f) To record adjustments for depreciation expense for estimated fair
value adjustment of certain fixed assets over estimated lives of three
to seven years. Such depreciation expense is subject to possible
adjustment resulting from completion of the valuation analysis.
(g) To record amortization of the cost in excess of acquired net assets
over an estimate life of 20 years. Such amortization expense is
subject to possible adjustment resulting from the completion of
valuation analysis and final post-closing adjustments.
(h) Reflects the historical statement of operations of Curtis Park for the
three months ended March 31, 1998.
(i) Reflects the Company's gain on the sale of Curtis Park.
(j) Reflects the historical statement of operations of Curtis Park for the
year ended December 31, 1997.
F-39
<PAGE> 83
<TABLE>
<S> <C>
====================================================== ==============================================
Until ___________, all dealers effecting transactions
in the registered securities, whether or not 3,471,135 SHARES
participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the
obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their DIVOT GOLF
unsold allotments of subscriptions. CORPORATION
__________________________________________
AVAILABLE INFORMATION . . . . . . . . . . . . . 5
PROSPECTUS SUMMARY . . . . . . . . . . . . . . 5 COMMON STOCK
RISK FACTORS . . . . . . . . . . . . . . . . . 7
USE OF PROCEEDS . . . . . . . . . . . . . . . . 12
MARKET PRICES OF COMMON EQUITY,
DIVIDEND POLICY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . 12 ------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL PROSPECTUS
CONDITION AND RESULTS OF OPERATIONS . . 13 ------------------------
BUSINESS OF THE COMPANY . . . . . . . . . . . . 23
DIRECTORS AND EXECUTIVE OFFICERS . . . . . . . 24
EXECUTIVE COMPENSATION . . . . . . . . . . . . 25 , 1998
SECURITY OWNERSHIP OF CERTAIN PERSONS . . . . . 28 --------------
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 29
LEGAL PROCEEDINGS . . . . . . . . . . . . . . . 30
EXPERTS . . . . . . . . . . . . . . . . . . . . 31
SELLING STOCKHOLDERS . . . . . . . . . . . . . 31
DESCRIPTION OF SECURITIES . . . . . . . . . . . 32
PLAN OF DISTRIBUTION . . . . . . . . . . . . . 34
LEGAL MATTERS . . . . . . . . . . . . . . . . . 34
===================================================== ==============================================
</TABLE>
<PAGE> 84
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The General Corporation Law of Delaware provides that in certain
circumstances a corporation shall have the power to indemnify directors,
officers, employees, and agents for expenses incurred by them in legal
proceedings. Article 9 of the Certificate of Incorporation of the Company
provides that (i) the Company will indemnify any director, officer, employee or
agent of the Company with respect to actions, suits or proceedings relating to
the Company if he acted in good faith and in a manner reasonably believed to be
in, or not opposed to, the Company's best interests, (ii) that any such person
subject to an action or suit that is by or in the right of the Corporation shall
be indemnified except that no indemnification shall be made if such person shall
have been adjusted to be liable for misconduct or negligence in the performance
of his duties to the Company, unless judicially determined otherwise and (iii)
that indemnification shall not be deemed exclusive of any other rights to which
a person may be entitled under any by-law, agreement, or otherwise. This
indemnification includes the right to advancement of expenses when allowed
pursuant to applicable law. The Company, pursuant to the direction of the Board
of Directors, may purchase and maintain insurance, in amounts as the Board of
Directors deem appropriate on behalf of those subject to indemnification
regardless of whether or not the Company has the power to indemnify the person.
Article Ten states that the personal liability of directors is eliminated to the
fullest extent permitted by Delaware law. These provisions may discourage
stockholders from bringing suit against a director for breach of fiduciary duty
and may reduce the likelihood of derivative litigation brought by stockholders
on behalf of the Company against a director.
Additionally, the executive officers of the Company have executed
Indemnification Agreements which obligate the Company to contribute to the
amount expended or incurred by the executive in legal proceedings for which
indemnification is not available or permitted. The contribution shall be in a
proportionate amount as is appropriate to reflect the relative benefits received
by the parties and their relative fault which resulted in the legal proceeding.
However, no contribution by the Company is required if the executive's conduct
is held to be unlawful by a court having jurisdiction.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
Expenses payable by the Company in connection with the issuance and
distribution of the securities being registered hereby are as follows:
<TABLE>
<S> <C>
SEC Registration Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,983
NASDAQ Listing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500
Accounting Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 *
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000 *
Blue Sky Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 *
Printing, Freight and Engraving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 *
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 *
--------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $165,483
</TABLE>
*Estimated.
II-1
<PAGE> 85
Item 26. Recent Sales of Unregistered Securities
The following sets forth all sales of unregistered securities within
the past three years by the Company:
<TABLE>
<CAPTION>
Brief description of the
Date Number and Class purchaser and the consideration therefor
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
September 29, 1995 13,333 shares of Common Stock and Issued to Plumbers and
6,667 warrants exercisable at Pipefitters Union Local 628
$36.00 until September 28, 1998. Pension Trust in consideration of
the retirement of the Company's
indebtedness.
September 29, 1995 8,333 shares of Common Stock. Issued to Thexton Capital
Corporation for consideration of
$282,500.
September 29, 1995 33,333 shares of Common Stock Issued to Asean Sales, Inc. for
and 16,667 warrants exercisable aggregate consideration of
until September 28, 2000 at $1,000,000.
$36.00.
November 17, 1995 31,733 shares of Common Stock Issued to Asean Sales, Inc. for
and 15,867 warrants exercisable aggregate consideration of
at $36.00 until November 17, $952,000.
1998.
February 21, 1996 1,667 shares of Common Stock. Issued to Kent Smith as
consideration for the settlement
of a dispute regarding
compensation for past services.
March 19, 1996 Two year 6% Convertible Debenture Issued for aggregate
with principle convertible into consideration of $5,500,000 to
Common Stock of the Company at a Conservative Growth Advisors
discount from market upon Limited, Flurina Development
conversion with interest due and S.A., Lake Management LDC and
payable upon conversion with Infinity Investors, Ltd.
stock at fair market value.
December 31, 1996 3,333 shares of Common Stock Issuance of common stock in lieu
of compensation
June 5, 1997 31,250 shares of Common Stock Conversion of Preferred Stock
from Summit merger
November 3, 1997 110,142 shares of Common Stock Issuance of common stock for
convertible debentures
November 25 - December 31, 1997 895,533 shares of Common Stock Issuance of common stock for
conversions of convertible
debentures
December 31, 1997 200,000 shares of Common Stock Acquisition of Divot Spa assets
December 3, 1997-June 15, 1998 5,895 share of Preferred Stock Issuance of 1997 Convertible
Preferred
January 1, 1998-June 15, 1998 310,275 shares of Common Stock Issuance of Common Stock for
conversions of convertible
debentures
May 19, 1998 4,762 shares of Common Stock Conversion of 1997 Convertible
Preferred
May 4, 1998 1,933 shares of Common Stock Issuance of stock for right of
first refusal on possible land
acquisition
</TABLE>
II-2
<PAGE> 86
<TABLE>
<S> <C> <C>
April 29, 1998 16,667 shares of Common Stock Conversion of 1997 Convertible
Preferred
April 17, 1998 16,667 shares of Common Stock Conversion of 1997 Convertible
Preferred
April 14, 1998 8,333 shares of Common Stock Conversion of 1997 Convertible
Preferred
April 3, 1998 53,333 shares of Common Stock Issuance of common stock for
acquisition of Miller Golf, Inc.
acquisition
April 20, 1998 10,000 shares of Common Stock Issuance of common stock for
acquisition of Talisman Tools,
Incorporated
January 16, 1998 50,000 shares of Common Stock Issuance of common stock for
funding related to acquisition of
Parcel 11-A at World Golf Village
February 19, 1998 94,304 shares of Common Stock Issuance of common stock for
exercise of warrants under
convertible debentures
</TABLE>
Item 27. Exhibits and Financial Statement Schedules.
The following is a list of all exhibits filed as part of this
Registration Statement or, as noted, incorporated by reference to this
Registration Statement:
<TABLE>
<CAPTION>
Ex. FN Description and Method of Filing
- ---- -- --------------------------------
<S> <C> <C>
2.1 (2) Agreement of Purchase and Sale, dated as of December 23, 1993, by and between North Myrtle
Beach Golf Club, Inc. ("MW Seller"), the Company and The Gauntlet at Myrtle West, Inc.
("GMW"), and the material Exhibits thereto.
2.2 (9) Stock Purchase Agreement effective as of April 20, 1998 by and among (i) the Company; (ii)
Talisman Tools Incorporated, a Rhode Island corporation; and (iii) Daniel S. Shedd and Dixon
Newbold.
2.3 (10) Stock Purchase Agreement effective as of April 15, 1998 by and among (i) the Company; (ii)
Divot Golf Corporation, a Florida corporation; and (iii) Joseph R. Cellura
2.4 (11) Stock Purchase Agreement effective as of January 29, 1998 by and among the Company, Miller
Golf, Inc., and Robert Marchetti, Louis Katon, and John Carroll
3.1 (1) Certificate of Incorporation of the Company, as amended.
3.2 (1) By-laws of the Company.
3.3 (2) Amendment to the Certificate of Incorporation of the Company filed July 18, 1994.
4.1 (1) Escrow Agreement dated as of July 23, 1993 between The Toronto Stock Exchange, the Company,
Montreal Trust Company of Canada and the individuals listed on Schedule A thereto.
</TABLE>
II-3
<PAGE> 87
<TABLE>
<S> <C> <C>
4.2 (8) Certificate of Designations, Preferences and Rights of 1997 Convertible Preferred
Stock of the Company dated December 29, 1997.
4.3 (8) Certificate of Designations, Preferences and Rights of 10,500 Shares of 1997 Convertible
Preferred Stock of the Company dated January 13, 1998.
5.1 Form of Opinion of Alston & Bird LLP
10.1 (1) Stockholders Agreement between Eliga, Edmonton Pipe Industry Pension Trust Fund (the "EPI
Pension Fund"), EPI and Laurel Valley Golf (1) Corporation ("GLV") dated as of October 30, 1991.
10.2 (1) Loan Agreement between GLV and EPI Pension Fund dated as of October 30, 1991; Promissory Note
made by GLV to EPI Pension Fund; and second mortgage and Security Agreement between GLV and EPI
Pension Fund dated as of October 30, 1991.
10.3 (2) Stockholders' Agreement, dated February 25, 1994, between the Company, Edmonton Pipe Industry
Pension Trust Fund ("EPI Pension Fund") and GMW.
10.4 (2) Mortgage Purchase and Subscription Agreement, effective as of February 28, 1994, between the
Company, EPI Pension Fund and GMW.
10.5 (2) Warrant Agreement, dated March 15, 1994, between the Company and The Travers Financial
Corporation; Warrant Agreement, dated March 15, 1994, between the Company and Theo Kraumanis.
10.6 (1) Form of Warrant Agreement between the Company and the signatories thereto
Dated July 28, 1993.
10.7 (1) Form of Warrant Agreement between the Company and the signatories thereto
dated March 29, 1993.
10.8 (3) Form of Warrant Issued to the Summit Stockholders dated June 30, 1995.
10.9 (3) Form of Warrant and Registration Rights Agreement Issued to Financial Advisor
dated June 30, 1995.
10.10 (3) Office Lease between Breckenridge VIII Investment Corporation, Lessor, and
Brassie Golf Corporation, Lessee, dated June 22, 1995.
10.11 (3) Consulting Agreement between the Company and Fantor Consulting Ltd. (Allen Jefferson) dated
January 1, 1996.
10.12 (4) Agreement in Principle dated February 21, 1996 between the Company, Gordon
Ewart, the Company's four golf course subsidiaries and the Company's three
pension fund partners.
10.13 (7) Sale of Certain Note Secured by Junior Security dated November 14, 1996 between UA Pension
Fund, A & E Capital Funding, Inc., GCP, and the Company selling and assigning the second
mortgage loan on The Gauntlet at Curtis Park from UA Pension Fund to A & E Capital.
10.14 (7) Agreement for Sale and Purchase dated June 25, 1996 between Divot Development Corporation and
SJH Partnership, Ltd. concerning Southeast Parcel 2 of the St. Johns Development.
</TABLE>
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<TABLE>
<S> <C> <C>
10.15 (7) Amendment to Agreement for Sale and Purchase dated December 11, 1996 between SJH Partnership,
Ltd. and Divot Properties, WGV, Inc. concerning Southeast Parcel 2 of the St. Johns
Development.
10.16 (7) Assignment and Assumption of Purchase Agreement dated December 11, 1996 between Divot
Development Corporation and Divot Properties WGV, Inc. concerning Southeast Parcel 2 of
the St. Johns Development.
10.17 (8) Sublease Agreement dated as of January 1, 1998 between Churchill Capital Corporation and the
Company, and Consent of Landlord.
10.18 (8) Amended and Restated Employment Agreement dated September 3, 1997 between the Company and
Joseph R. Cellura.
10.19 (8) Employment Agreement dated September 2, 1997 between the Company and Clifford F. Bagnall.
10.20 (8) Purchase and Sale Agreement dated October of 1997 by and among the Company, Divot Spa WGV,
Inc. and Robert N. Gewant.
10.21 (8) Cross Creek/Brassie Stock Agreement dated November 13, 1997 between the Company and Lance
McNeill; General Release by Lance McNeill; Resignation of Lance McNeill; and indemnification
Agreement between the Company and Lance McNeill.
10.22 (8) Form of Convertible Debenture Agreement dated November 18, 1997 between the Company and the
signatories thereto, Convertible Note and Warrant.
10.23 (8) Employment Agreement dated December 1, 1997 between the Company and Jeremiah M. Daly.
10.24 (8) Form of Private Placement Purchase Agreement dated December 3, 1997 between the Company and the
signatories thereto, with form of Warrant to purchase shares of the Company's Common Stock.
10.25 (8) Letter Agreement dated December 5, 1997 between the Company and Mr. and Mrs. William E.
Horne, et. al., and Stock Purchase Agreement; Resignation of William E. Horne; General Release
by William E. Horne; and Indemnification Agreement between the Company and William E. Horne.
10.26 (8) Agreement of Lease dated December 16, 1997 between Tampa City Center Associates and the
Company.
10.27 (8) Form of Mortgage and Security Agreement dated January of 1998 given by Divot Properties WGV,
Inc.; Promissory Note in the principal amount of $1,500,000 given by Divot Properties WGV,
Inc.; Assignment of Net Sales Proceeds; and Continuing Guaranty.
10.28 (8) Form of Private Placement Purchase Agreement dated January of 1998 between the Company and the
signatories thereto.
10.29 (9) Stock Purchase Agreement effective April 20, 1998 between the Company, Talisman Tools, Inc.,
Daniel S. Shedd and Dixon Newbold.
10.30 (10) Stock Purchase Agreement effective April 15, 1998 between the Company, Divot Golf corporation
and Joseph R. Cellura.
</TABLE>
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<TABLE>
<S> <C> <C>
10.31 (11) Stock Purchase Agreement effective as of January 29, 1998 between the Company, Miller
Golf, Inc., Robert Marchetti, Louis Katon and John Carroll.
10.32 (11) Form of Private Placement Purchase Agreement dated April 3, 1998 between the Company and the
signatories thereto, with form of convertible note and warrants.
21.1 * Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Alston & Bird LLP (included in exhibit 5.1).
24.1 Powers of Attorney (included in signature page of Registration Statement).
(1) Incorporated by reference from the Company's Form 10 filed on December 13, 1993.
(2) Incorporated by reference from the Company's Form 10 filed on September 15, 1994.
(3) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
(4) Incorporated by reference from the Company's Current Report on Form 8-K dated August 30, 1996.
(5) Incorporated by reference from the Company's Quarterly Report on Form 10-QSB for the quarter
ended March 31, 1996.
(6) Incorporated by reference from the Company's Quarterly Report on Form 10-QSB, for the quarter
ended September 30, 1996.
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-QSB for the quarter
ended March 31, 1997.
(8) Incorporated by reference from the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997.
(9) Incorporated by reference from the Company's Current Report on Form 8-K dated April 20, 1998
(10) Incorporated by reference from the Company's Current Report on Form 8-K dated April 15, 1998.
(11) Incorporated by reference from the Company's Current Report on Form 8-K dated April 8, 1998.
* To be filed by amendment.
</TABLE>
Item 28. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling
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<PAGE> 90
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
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<PAGE> 91
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Tampa,
State of Florida on July 1, 1998.
DIVOT GOLF CORPORATION
By: /s/ Joseph R. Cellura
-------------------------------
Joseph R. Cellura
Chief Executive Officer
By: /s/ Clifford F. Bagnall
--------------------------------
Clifford F. Bagnall,
Chief Financial Officer
(Principal Accounting Officer),
Chief Operating Officer
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
directors of Divot Golf Corporation hereby severally constitute Joseph R.
Cellura, Clifford F. Bagnall and Jeremiah M. Daly and each of them singly, our
true and lawful attorneys with full power to them, and each of them singly, to
sign for us and in our names in the capacities indicated below, the
Registration Statement filed herewith and any and all amendments to said
Registration Statement, and generally to do all such things in our names and in
our capacities as officers and directors to enable Divot Golf Corporation to
comply with the provisions of the Securities Act of 1933, and all requirements
of the Securities and Exchange Commission, hereby ratifying and confirming our
signature as they may be signed by our said attorneys, or any of them, to said
Registration Statement and any and all amendments thereto.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Joseph R. Cellura Chairman of the Board, July 1, 1998
- ---------------------------- Chief Executive Officer
Joseph R. Cellura
/s/ Gordon D. Ewart Director July 1, 1998
- ----------------------------------------
Gordon D. Ewart
/s/ Clifford F. Bagnall Director July 1, 1998
- ---------------------------- Chief Financial Officer
Clifford F. Bagnall Chief Operating Officer
/s/ Jeremiah M. Daly Director July 1, 1998
- --------------------------- President
Jeremiah M. Daly
</TABLE>
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EXHIBIT 5.1
Form Opinion and Consent of Alston & Bird LLP
__________, 1998
Divot Golf Corporation
201 N. Franklin Street, Suite 200
Tampa, Florida 33602
Gentlemen:
The undersigned has acted as counsel for Divot Golf Corporation (the
"Company") in connection with a registration statement on Form SB-2 of the
Company (the "Registration Statement"), filed with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Act of 1933, as
amended (the "Securities Act"), pertaining to the registration of the resale of
shares of common stock, par value $0.001 per share, of the Company (the "Resale
Shares"), which are underlying convertible debentures, warrants, and
convertible preferred stock, as described in the Registration Statement.
In connection with this opinion, we have considered such questions of law
as we deemed necessary as a basis for the opinions set forth below, and have
examined or otherwise are familiar with originals or copies, certified or
otherwise identified to our satisfaction, of the following: (i) the
Registration Statement; (ii) the Articles of Incorporation and Bylaws, as
amended, of the Company, as currently in effect; (iii) certain resolutions of
the Board of Directors of the Company relating to the issuance of the shares
and other transactions contemplated by the Registration Statement; and (iv)
such other documents as we have deemed necessary or appropriate as a basis for
the opinions set forth below. In our examination, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents
submitted to us as certified or photostatic copies and the authenticity of the
originals of such copies. As to any facts material to this opinion that we did
not independently establish or verify, we have relied upon statements and
representations of officers and other representatives of the Company and
others.
Based upon the foregoing, we are of the opinion that the Resale Shares to
be issued by the Company have been duly authorized for issuance and that when
issued and delivered in the manner contemplated by the Registration Statement,
the Resale Shares will be validly issued, fully paid and nonassessable.
The law covered by this opinion is limited to the law of the State of
Delaware, without regard to the principles of conflicts of laws thereof, and
based upon and limited to the laws and regulations in effect as of the date
hereof. The undersigned assumes no obligation to update the opinions set forth
herein.
We hereby consent to the filing of this opinion with the Commission as
Exhibit 5 to the Registration Statement. In giving this consent, we do not
thereby admit that we are within the category of persons whose consent is
required under Section 7 of the Securities Act, or the Rules and Regulations of
the Commission thereunder.
Very truly yours,
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated January 12, 1998 (Divot Golf Corporation) and May
1, 1998 (Miller Golf, Inc.) in the Registration Statement (Form SB-2
No.--__________) and related Prospectus of Divot Golf Corporation dated July 1,
1998.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Raleigh, North Carolina
June 30, 1998