ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Golf Trust of America, Inc. (collectively with its subsidiaries, the "Company") was incorporated in Maryland on November 8, 1996. The Company is a self-administered real estate investment trust ("REIT") formed to capitalize upon consolidation opportunities in the ownership of golf courses in the United States. The principal business strategy of the Company is to acquire high quality golf courses and to lease the golf courses to qualified third party operators, including affiliates of the sellers. Title to the acquired courses is held by Golf Trust of America, L.P., a Delaware limited partnership (the "Operating Partnership"), in which the Company is the sole general partner. The Company has the ability to issue units of limited partnership interest ("OP Units") in the Operating Partnership. OP Units are redeemable by their holder for cash or, at the election of the Company, for shares of the Company's common stock ("Common Stock") on a one-for-one basis (the "Redemption Rights"). When the Company acquires a golf course in exchange for OP Units, the seller of the course does not recognize taxable income until it exercises the OP Units' Redemption Rights. OP Units can thus provide an attractive tax-deferred sale structure for golf course sellers. The Company believes its ability to issue OP Units and its utilization of the multiple independent lessee structure, together with the substantial industry knowledge, experience and relationships within the golf community of Company management and the golf course lessees provide it with a distinct competitive advantage in the acquisition of high quality golf courses, including those which might not otherwise be available for purchase.
INITIAL PUBLIC OFFERING AND FORMATION TRANSACTIONS
In February 1997, the Company raised net proceeds of approximately $73 million in its initial public offering (the "IPO") and consummated the transactions described below (collectively the "Formation Transactions"). In the IPO the Company sold 3,910,000 shares of Common Stock at $21.00 per share (including 510,000 shares sold pursuant to the underwriters' over-allotment option, which was exercised in full). The Company contributed the net proceeds of the IPO to the Operating Partnership in exchange for a 48.6% interest in the Operating Partnership. Concurrently with the closing of the IPO, the Operating Partnership acquired ten golf courses (the "Initial Courses") from their prior owners (the "Prior Owners").
The ten Initial Courses are located in South Carolina (4), Virginia (2), Alabama, Georgia, North Carolina and Texas. See "Item 2
ITEM 2. PROPERTIES
The Initial Courses consist of 10 nationally or regionally recognized high quality courses located in the mid-Atlantic, southeastern and southwestern United States. Four of the Initial Courses were ranked among the Top Ten New Courses by either GOLF DIGEST or GOLF MAGAZINE in each course's opening year, including the recently opened Stonehouse Golf Club, which in November 1996 was named the Best New Upscale Course by GOLF DIGEST for 1996. Two of the established courses (Oyster Bay and Heritage Club) have been ranked in the Top 50 Public Initial Courses by GOLF DIGEST.
The Initial Courses include nine high quality Daily Fee courses (including six Resort Courses) and one private country club. "Daily Fee" courses are open to the public and generate revenues principally through green fees, golf cart rentals, food and beverage operations, merchandise sales and driving range charges. "Resort Courses" are Daily Fee golf courses that attract a significant percentage of players from outside the immediate area in which the golf course is located and generate a significant amount of revenue through golf vacation packages. The Company considers the Daily Fee and Resort Courses to be high-end golf courses because of the quality and maintenance of each golf course and the average green fees, which are significantly above the averages for golf courses in their
respective geographic markets. Private country clubs are generally closed to the public and derive revenues principally from membership dues, initiation fees, transfer fees, golf cart rentals, guest fees, food and beverage operations and merchandise sales.
The Company believes that the overall quality of the Initial Courses is reflected in the average green fees charged at each Initial Course, which significantly exceed national averages. The Company believes its focus on high quality Daily Fee golf courses and private country clubs, which attract golfers with attractive demographic and economic profiles, will result in stronger and less cyclical revenue growth in comparison to lower-end golf courses.
Five of the Initial Courses are located in the Myrtle Beach, South Carolina vicinity, a popular year-round golf destination area. Myrtle Beach is considered one of the nation's premier golf resort locations with nearly 100 golf courses and more than 3.9 million rounds played in 1995, according to the MYRTLE BEACH GOLF HOLIDAY TM. In addition to golf courses, Myrtle Beach offers a mix of entertainment, shopping and dining, as well as proximity to beaches. All of the Initial Courses located in the Myrtle Beach vicinity were developed by The Legends Group.
Two of the Initial Courses are located in the Williamsburg, Virginia area and were opened in June and August, 1996. Williamsburg is a leading tourist destination and an emerging golf destination area, with a population of approximately 2.6 million people within a 60 mile radius, providing the area with an opportunity to attract both resort and local golfers. Since 1995 five new courses have been opened in the Williamsburg vicinity, including two of the Initial Courses. In addition to golf course opportunities, Williamsburg and the surrounding area offer shopping, dining, entertainment and historical sites. Both of the Initial Courses located in Williamsburg were developed and are currently owned and operated by The Legends Group.
One of the Initial Courses is located in Gulf Shores, Alabama, a popular golf and vacation destination located near the Florida panhandle. In addition to golf, Gulf Shores offers 32 miles of sandy beaches. The other Initial Courses are located in Houston, Texas and Atlanta, Georgia, two major metropolitan areas.
The Company acquired a 100% interest in each of the Initial Courses in February, 1997. Certain information respecting each of the Initial Courses is set forth below:
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(1) Yardage is calculated from the championship tees. (2) "Revenue Per Player" is calculated by dividing Gross Golf Revenue at the applicable Initial Course by the number of rounds played at the applicable Initial Course. For Heathland, Moorland and Parkland, which share common facilities and have the same green fees, Revenue Per Player is equally allocated. (3) Gross Golf Revenue is defined as all revenues from a golf course, including green fees, golf cart rentals, range fees, membership dues, member initiation fees and transfer fees, but excluding food and beverage and merchandise revenue. (4) Amounts for Northgate Country Club are for its fiscal year ended December 20, 1996. (5) Participating Rent is calculated based on increases in the Gross Golf Revenue from a base year of 1996, as adjusted. Consequently, no Participating Rent is payable on a pro forma basis for 1996. (6) The Heathland, Moorland and Parkland Initial Courses are subject to a single Participating Lease and the Base Rent is equally allocated among these Initial Courses. (7) The Company acquired the fee simple interest in each of the Golf Courses except Oyster Bay, which is subject to a long-term ground lease with a lessor not affiliated with the Prior Owner thereof. (8) Opened in August 1994. (9) Opened in August of 1996. (10) Opened in June of 1996. (11) The Company expects to acquire, upon completion, an additional nine holes at this Golf Course.
DESCRIPTIONS OF THE INITIAL COURSES
Set forth below are brief descriptions of each of the Initial Courses. Unless otherwise noted, the Company owns fee title to the Initial Courses, free and clear of any material liens.
RESORT COURSES
Resort Courses are Daily Fee golf courses that draw a high percentage of players from outside the immediate area in which the course is located and generate a significant amount of revenue through golf vacation packages. Some Resort Courses are semi-private, meaning they offer membership packages that allow members special privileges at the golf course, but also allow public play.
HEATHLAND -- MYRTLE BEACH, SOUTH CAROLINA. Heathland, a Resort Course developed by The Legends Group, opened in 1990 and was named by GOLF MAGAZINE as one of the United States' Top 10 New Courses in 1990. The Heathland course has been molded in the image of the British Isles links courses and most of its holes are without trees or vegetation, providing a spectacular visual presentation. Along with the Moorland and Parkland courses described below, Heathland is part of the Legends Resort that consists of a 42,000 square foot clubhouse on a 1,300 acre development. This Scottish style resort includes various amenities such as a pub adorned with Scottish memorabilia and the sounds of Scottish bagpipes at sunset.
MOORLAND -- MYRTLE BEACH, SOUTH CAROLINA. Moorland, a Resort Course developed by The Legends Group, opened in 1990 and was named by GOLF DIGEST as one of the United States' Top 5 New Courses in 1990. Moorland is part of the Legends Resort and was designed by P.B. Dye. Moorland consists of large expanses of natural growth, sand and water that combine with undulations and bulkheaded areas to present a challenging "target style" course.
PARKLAND -- MYRTLE BEACH, SOUTH CAROLINA. Parkland, a Resort Course developed by The Legends Group, opened in 1992 and is the last golf course that was opened at the Legends Resort. Parkland demonstrates the diversity and beauty of the local natural terrain by its combination of tree-lined fairways, vast natural areas, deep-faced bunkers and massive multi-level greens.
HERITAGE CLUB -- PAWLEYS ISLAND, SOUTH CAROLINA. Heritage Club was developed by The Legends Group and opened in 1986. Heritage Club was named to GOLF DIGEST'S Top 50 Public Courses in the United States in 1992. Heritage Club is a semi-private resort consisting of over 600 acres of giant magnolias and oaks, fresh water lakes and marshes. Heritage Club is built on the site of two plantations and retains an historic atmosphere with facilities designed in a traditional plantation architectural style, including the southern style Colonial Clubhouse.
OYSTER BAY -- SUNSET BEACH, NORTH CAROLINA. Oyster Bay, developed by The Legends Group, opened in 1983 and was named by GOLF DIGEST as its Best New Resort Course in the United States in 1983 and was named to GOLF DIGEST'S Top 50 Public Courses in the United States in 1992. Oyster Bay is operated pursuant to a ground lease with a remaining term of 35 years. The ground lessor is not affiliated with either the Company or the course's Initial Lessee. Oyster Bay consists of several marsh-oriented holes, two island greens and strategic fresh water lakes. Over half of the holes are situated so that water hazards add an additional challenge.
THE WOODLANDS -- GULF SHORES, ALABAMA. The Woodlands is a 6,600-yard par 72 course which opened in 1994. The course, featuring lakes, marshes and tree-lined fairways, was designed by Larry Nelson, former United States Open champion and two-time PGA Championship winner. Gulf Shores, Alabama, located near the Florida panhandle, is an emerging golf course destination area that includes 10 golf courses in the immediate area. Gulf Shores includes over 30 miles of white sand beaches and the historical Civil War outposts of Fort Morgan and Fort Gaines.
Subject to certain conditions, the Company has agreed to acquire a clubhouse to be constructed at the course by the Initial Lessee of The Woodlands. The Company believes that the construction of the clubhouse will permit the Initial Lessee to attract more group and tournament play and also permit an increase in green fees.
The Company has agreed to reconvey to the Prior Owner of The Woodlands the land on which a portion of certain of the existing holes are located at such time as the Prior
Owner is prepared to contribute comparable golf holes to the Company. All costs associated with such exchange shall be paid for by the Prior Owner.
HIGH-END DAILY FEE COURSES
The Company considers its Daily Fee courses to be high-end courses, reflected in the quality and maintenance standards of the golf courses, and the green fees, which are generally higher than other golf courses in their market.
STONEHOUSE GOLF CLUB -- WILLIAMSBURG, VIRGINIA. Stonehouse Golf Club, located within a 10,000 acre master planned community, was developed by The Legends Group. Stonehouse Golf Club opened in June 1996 and was named by GOLF DIGEST as the Best New Upscale Course for 1996. Stonehouse Golf Club was designed by Mike Strantz (formerly an understudy of Tom Fazio) and constructed in a densely forested area that includes tall hardwood trees and deep ravines. One of the holes at Stonehouse Golf Club features a spring-fed waterfall behind the green while another requires players to hit over a wide, plunging ravine to a green on a cliff-like setting. Stonehouse Golf Club features large greens and wide fairways despite the nearby trees. The Initial Lessee of this golf course is obligated to complete construction of a clubhouse at the course by December 31, 1997.
ROYAL NEW KENT -- PROVIDENCE FORGE, VIRGINIA. Located within a third-party-owned master-planned community just outside Williamsburg, Virginia, Royal New Kent was developed by The Legends Group. It opened in August, 1996. Royal New Kent is located adjacent to Colonial Downs, which is scheduled to open in 1997 and will be the only pari-mutual horse racing facility in Virginia. Royal New Kent also was designed by Mike Strantz and includes five sets of tees, including the "Invicta" (which is Latin for "unconquerable") to accommodate the nearly 7,300 yards of the course. Royal New Kent was fashioned after traditional links-style Irish courses. The Initial Lessee of this golf course is obligated to complete construction of a clubhouse at the course by December 31, 1997.
OLDE ATLANTA GOLF CLUB -- ATLANTA, GEORGIA. Olde Atlanta Golf Club ("Olde Atlanta") is open for public play as well as for member play. Olde Atlanta was designed by Arthur Hills and is located in Suwanee, Georgia (a northeast Atlanta suburb), in the foothills of north Georgia within a 594 acre master-planned community consisting of 645 homesites. This geographic setting allows for multiple changes in terrain and elevation throughout the course. Olde Atlanta's course layout includes three lakes, clustered mounds, grass and sand bunkers and grassy hollows. Olde Atlanta's facilities include a 6,000 square foot clubhouse, which includes a pro shop and a dining room that can seat up to 100 persons.
PRIVATE COUNTRY CLUB COURSES
Private country clubs are generally closed to the public and generate revenue principally through initiation fees and membership dues, golf cart rentals and guest green fees. Initiation fees and membership dues are determined according to the particular market segment in which the club operates.
Revenue and cash flows of private country clubs are generally more stable and predictable than those of public courses because the receipt of membership dues is independent of the level of course utilization.
NORTHGATE COUNTRY CLUB -- HOUSTON, TEXAS. Northgate Country Club ("Northgate") is a full service upscale country club with a championship golf course designed by Robert von Haggie and Bruce Devlin, which opened in 1984. An additional nine holes are expected to open at the course in 1998. The Company has agreed to acquire such additional holes, subject to certain conditions. This Initial Course is located in a forested area north of Houston within a 440 acre high-end master-planned community.
Northgate recently completed the construction of a tennis center building and a restaurant cafe. These improvements provide Northgate greater utilization of its facilities, which the Company believes has produced a sustainable increase in new membership sales. The adjacent country club community of Northgate Forest presently comprises 177 developed homesites with completed homes situated on 83 of these homesites. It is anticipated that 128 more homesites will be developed with approximately 80% of these new homesites to be situated on the additional nine hole expansion referred to above, which is expected to provide Northgate with a sustainable source of future members.
The following tables set forth certain information regarding the Initial Courses.
THE INITIAL COURSES -- RESORT COURSES
- ----------------------------- (1) The Woodlands has a temporary clubhouse which the Company expects will be replaced with a permanent facility.
THE INITIAL COURSES -- HIGH-END DAILY FEE COURSES
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(1) These courses each have a temporary clubhouse which the prior owner is obligated to replace with a permanent facility by December, 1997. The construction of the permanent facilities will be at the election of the applicable Initial Lessee, and at the sole cost and expense of the applicable Initial Lessee.
THE INITIAL COURSES -- PRIVATE COUNTRY CLUB COURSE
- --------- (1) Nine additional holes are expected to open in 1998. The Company has agreed to acquire such additional holes subject to certain conditions.
THE PARTICIPATING LEASES
THE FOLLOWING SUMMARY OF THE PARTICIPATING LEASES BETWEEN THE COMPANY AND THE INITIAL LESSEES (THE "PARTICIPATING LEASES") IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PARTICIPATING LEASES, A FORM OF WHICH HAS BEEN FILED AS AN EXHIBIT. THE FOLLOWING DESCRIPTION OF THE PARTICIPATING LEASES DOES NOT PURPORT TO BE COMPLETE BUT CONTAINS A SUMMARY OF THE MATERIAL PROVISIONS THEREOF.
LEASE TERM. The Participating Leases, all of which contain the same basic provisions described below, were entered into upon the conveyance to the Company of the Initial Courses. The Company's interest in each Initial Course includes the land, buildings and improvements, related easements and rights, and fixtures (collectively, the "Leased Property"). Each Initial Course is leased to the respective Initial Lessee under a Participating Lease which has a primary term of 10 years ending on December 31, 2006 (the "Fixed Term"). In addition, each Initial Lessee has options to extend the term of each Participating Lease (the "Extended Terms") for six terms of five years each, subject to earlier termination upon the occurrence of certain contingencies described in the Participating Lease. (The term of the Participating Lease for Oyster Bay, which is leased pursuant to a ground lease with 35 years remaining, has four extension terms of five years each.) Any additional properties acquired will be leased pursuant to such terms and conditions as may be agreed upon between the lessee and the Company at the time of such acquisitions, and such terms and conditions may vary from the terms and conditions described herein with respect to the Participating Leases. The Company anticipates that any new leases will be with either existing Initial Lessees, affiliates of sellers of courses or unaffiliated third parties experienced in the operation of similar courses.
In addition, at the expiration of the Fixed Term and the Extended Terms, the Initial Lessee will have a right of first offer to continue to lease the Initial Course on the terms and conditions pursuant to which the Company intends to lease the Initial Course to a third party.
USE OF THE INITIAL COURSES. Each Participating Lease permits the Initial Lessee to operate the Leased Property as a golf course, along with a clubhouse and other activities customarily associated with or incidental to the operation of a golf course and other facilities located at the golf course, including, where applicable, swim and tennis operations. Operations may include sale or rental of golf-related merchandise, sale of memberships, furnishing of lessons, operation of a driving range, and sales of food and beverages, including liquor sales.
BASE RENT; PARTICIPATING RENT.
Certain information respecting each of the Initial Courses is set forth below:
INITIAL NAME LOCATION BASE RENT(1) - -------------------------------------- ------------------ ------------- Heritage Club. . . . . . . . . . . . . Pawleys Island, SC $1,824,980 Heathland. . . . . . . . . . . . . . . Myrtle Beach, SC $1,556,635(2) Moorland . . . . . . . . . . . . . . . Myrtle Beach, SC $1,556,635(2) Parkland . . . . . . . . . . . . . . . Myrtle Beach, SC $1,556,635(2) Oyster Bay . . . . . . . . . . . . . . Sunset Beach, NC $1,855,974 The Woodlands. . . . . . . . . . . . . Gulf Shores, AL $679,029 Royal New Kent . . . . . . . . . . . . Providence Forge, VA $1,816,501 Stonehouse Golf Club . . . . . . . . . Williamsburg, VA $1,889,835 Olde Atlanta . . . . . . . . . . . . . Atlanta, GA $845,058 Northgate Country Club . . . . . . . . Houston, TX $1,406,843 --------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . $14,988,131
- --------- (1) In addition to Base Rent, beginning in 1997 Participating Rent may be payable by the Initial Lessees. Participating Rent is calculated based on increases in the Gross Golf revenue from a base year of 1996 as adjusted. Consequently, no calculation of Participating Rent is included above.
(2) The Heathland, Moorland and Parkland courses are subject to a single Participating Lease providing for gross Base Rent of $4,669,905, and the Base Rent is allocated equally among these three courses.
The Participating Leases provide for the Company to receive, with respect to each Initial Lessee, the greater of Base Rent or an amount equal to Participating Rent plus the Initial Base Rent payable under each Participating Lease. Participating Rent is equal to 33 1/3% of any increase in Gross Golf Revenue over Gross Golf Revenue for the 1996 base year, as adjusted in determining the initial Base Rent, which base year will be reset to the year immediately preceding the date on which the Prior Owner exercises the Lessee performance Option, if applicable. Base Rent will increase annually by the Base Rent Escalator (i.e. the lesser of (i) 3% or (ii) 200% of the change in CPI for the prior year) during the first five years of each Participating Lease term and, if the Lessee Performance Option is exercised, an additional five years thereafter from the date of exercise. Annual increases in Lease Payments are limited to 5% during the first five years of the initial lease terms. "Gross Golf Revenue" is generally defined as all revenues from a Golf Course including green fees, golf cart rentals, range fees, membership dues, membership initiation fees and transfer fees, excluding, however, food and beverage and merchandise revenue.
For the recently opened Golf Courses, the base year Gross Golf Revenue is based on an estimate by the Company and the Initial Lessee of such courses, which estimate was also the basis for the valuation of those Golf Courses. Increases in the Lease Payments under the participating Leases are limited to 5% during the first five years. Base Rent is required to be paid monthly in arrears on the first day of each calendar month and Participating Rent is payable quarterly in arrears. The Company believes that Gross Golf Revenue, and hence the amount of any Participating Rent, will be favorably impacted by any significant capital improvements undertaken by an Initial Lessee, such as the planned clubhouses at The Woodlands, Stonehouse Golf Club and Royal New Kent.
TRIPLE NET LEASES. The Participating Leases are structured as triple net leases under which each Initial Lessee is be required to pay all real estate and personal property taxes, insurance, utilities and services and other operating expenses. Out of the payment of Base Rent, the Company will reserve with respect to each Initial Course a capital replacement reserve (the "Capital Replacement Fund") of between 2% and 3% of the annual Gross Golf Revenue generated by such Initial Course (depending primarily on the condition of the structures and the age and condition of the Initial Course), which the Initial Lessee of such course may use for capital improvements or replacements pursuant to a capital replacement budget approved by the Company. The Company will not be required to make or pay for any capital improvements with respect to any Initial Course, except to the extent of such Capital Replacement Fund.
SECURITY DEPOSIT. As security for an Initial Lessee's obligations under the Participating Leases, the seller of each Initial Course has pledged, on behalf of the affiliated Initial Lessee, OP Units (or cash or other collateral acceptable to the Company) with a value initially equal to 15% of the purchase price for the applicable Initial Course, which approximates 16 months of the initial Base Rent (at the IPO Price). The OP Units will not be released for two years. Beginning in the third year and any time thereafter, one-third of the pledged OP Units will be released when the net operating income to lease payment coverage ratio (the "Coverage Ratio") from the applicable Initial Course for the two prior fiscal years equals or exceeds 120%, 130% and 140%, respectively. If the Coverage Ratio falls below 120% at any time following the release of pledged collateral, then the Initial Lessee shall be required to retain and not distribute profits until such time as six months of Base Rent at current levels has been retained. In addition, the Participating Leases with the Legends Lessees are cross-collateralized and cross-defaulted.
The security deposit will be increased following the exercise of any Lessee Performance Option to equal approximately 15% of the sum of the initial purchase price of such Initial Course and the value of any additional OP Units issued in connection with the exercise of the Lessee Performance Option. If the Company acquires any Expansion Facility, the security deposit also will be increased by an amount equal to approximately 15% of the purchase price of the Expansion Facility.
ADVISORY ASSOCIATION. Each Initial Lessee will be a member of the Advisory Association, which will participate in cross-marketing of the Initial Courses and will identify each Initial Course as owned by the Company, thereby increasing the golfing consumer's
brand name awareness of the Company. Membership in the Advisory Association also is designed to provide the Initial Lessees as a group greater purchasing power with vendors than as individuals. Additionally, the Advisory Association is expected to provide a means of ensuring a consistent, high-quality product at each of the Initial Courses. In conjunction with management of the Company, the Advisory Association will review and analyze any disputes between the Company and an Initial Lessee concerning annual capital and operating budgets and will also, in conjunction with the Company, confirm each Initial Lessee's compliance with its repair and maintenance obligations under each Participating Lease.
MAINTENANCE AND MODIFICATIONS. Each Initial Lessee will, at its sole cost and expense, maintain and operate its respective Leased Property in good order, repair and appearance and will make structural and non-structural, interior and exterior foreseen and unforeseen, and ordinary and extraordinary repairs which may be necessary and appropriate to keep such Leased Property in good order, repair and appearance. Each Initial Lessee will also maintain each Initial Course it leases in accordance with the condition of the Initial Course at the commencement of the Participating Lease and otherwise in a condition comparable to other comparable golf courses in the vicinity of that Initial Course. If the Company, in consultation with the Advisory Association, determines that an Initial Lessee has failed to comply with its maintenance and operation obligations, then the Company shall provide a written list to the Initial Lessee setting forth the remedial work and/or steps to be performed. If the Initial Lessee disputes the Company's assertions, then the matter shall be handled by a committee composed of members of the Advisory Association and representatives of the Company. The Company will not be required to build or rebuild any improvements on any Leased Property, or to make any repairs, replacements, alterations, restorations or renewals of any nature or description to any Leased Property, whether ordinary or extraordinary, structural or non-structural, foreseen or unforeseen, or to make any expenditure whatsoever with respect thereto, in connection with any Participating Lease, or to maintain any Leased Property in any way. In the event that the Company elects to make capital improvements on a Initial Course, the Company will generally condition such election on an increase in minimum rent under the Participating Lease with respect to such Initial Course to reflect such expenditures.
The Company will maintain with respect to each Initial Course a Capital Replacement Fund in an amount equal to between 2% and 3% of Gross Golf Revenues at such Initial Course, depending on certain factors, including the condition of the structures and the age and condition of the Initial Course. The Company and each Initial Lessee will agree on the use of funds in these reserves and the Company has the right to approve each Initial Lessee's annual and long-term capital expenditure budgets. Funds in the Capital Replacement Fund shall be paid to an Initial Lessee to reimburse such Initial Lessee for expenditures made in connection with capital replacements. Amounts in the Capital Replacement Fund will be deemed to accrue interest at a money market rate of interest. Any amounts in the Capital Replacement Fund at the expiration of the applicable Participating Lease will be retained by the Company.
During the Fixed Term and each Extended Term, each Initial Lessee, at its sole cost and expense, may make alterations, additions, changes and/or improvements ("Initial Lessee Improvements") to each Leased Property, without the Company's prior written consent, provided such alterations do not diminish the value or appearance of the Initial Course. All such Initial Lessee Improvements will be subject to all the terms and provisions of each applicable Lease and will become the property of the Company upon termination of such Lease.
At the end of the Participating Lease, all remaining personal property on the Leased Property will become the property of the Company.
INSURANCE. Each Initial Lessee maintains insurance on each Leased Property it leases under insurance policies providing for all-risk, liability, flood (if carried by comparable golf course facilities in the area and otherwise available at commercially reasonable rates) and worker's compensation, of the type usual and commonly obtained in connection with the properties similar in building size and use to the Leased Property and located in the geographic area where the Leased Property is located. Each insurance policy names the Company as an additional insured or loss payee, as applicable.
ENVIRONMENTAL MATTERS. Each Initial Lessee has made various representations and warranties relating to environmental matters in respect of the applicable Leased Property in each Participating Lease.
ASSIGNMENT AND SUBLETTING. An Initial Lessee may not, without the prior written consent of the Company (which consent may be withheld by the Company in its sole discretion, except in limited instances), assign, mortgage, pledge, hypothecate, encumber or otherwise transfer any Participating Lease or any interest therein, all or any part of the Leased Property or suffer or permit any lease or the leasehold estate created thereby or any other rights arising under any Participating Lease to be assigned, transferred, mortgaged, pledged, hypothecated or encumbered, in whole or in part, whether voluntarily, involuntarily or by operation of law. An assignment of a Participating Lease will be deemed to include any change of control of such Initial Lessee, as if such change of control were an assignment of the Participating Lease. Each Initial Lessee shall have the right to assign its Participating Lease to its affiliates.
Each Prior Owner shall retain the right to use the existing portion of any club house or other improvements on a Initial Course for its continued corporate operations not associated with the Initial Course.
Each Initial Lessee may, with the Company's prior approval, which approval the Company may withhold in its discretion, be permitted to sublease portions of any Leased Property to sublessees who will operate portions (but not the entirety) of the operations customarily associated with or incidental to the operation of a golf course (e.g, driving range, restaurant, etc.).
COMPANY'S RIGHT OF FIRST OFFER. In the event the Initial Lessee desires to sell its interest in its Participating Lease to an unaffiliated third party, it must first offer the Company or its designee the right to purchase such interest. The Initial Lessee must give the Company written notice of its intent to sell, which shall indicate the terms and conditions upon which such Initial Lessee intends to sell its interest in the Participating Lease. The Company or its designee shall thereafter have a period of 60 days to elect to purchase the leasehold interest on the terms and conditions at which such Initial Lessee proposes to sell its interest. If the Company or its designee elects not to purchase the interest of the Initial Lessee, then such Initial Lessee shall be free to sell its interest to a third party, subject to the Company's approval as described below. However, if the terms on which the Initial Lessee intends to sell its interest are reduced by 5% or more then such Initial Lessee shall again offer the Company the right to acquire its interest, provided the Company shall have only 15 days to accept such offer.
INITIAL LESSEE'S RIGHT OF FIRST OFFER. The Company may sell an Initial Course, but must first offer the Initial Lessee of such course the right to purchase the Initial Course. The Company must give the relevant Initial Lessee written notice of its intent to sell, which shall indicate the terms and conditions upon which the Company intends to sell such Initial Course. Such Initial Lessee shall thereafter have a period of 60 days to elect to purchase the Initial Course on the terms and conditions at which the Company proposes to sell the Initial Course. If such Initial Lessee elects not to purchase the Initial Course, then the Company shall be free to sell the Initial Course to a third party. However, if the terms on which the Company intends to sell the Initial Course are reduced by 5% or more, then the Company shall again offer such Initial Lessee the right to acquire the Initial Course upon the same terms and conditions, provided that such Initial Lessee shall have only 15 days to accept such offer.
DAMAGE TO, OR CONDEMNATION OF, A LEASED PROPERTY. In the event of damage to or destruction of any Leased Property which is caused by an insured risk, the Initial Lessee will be obligated diligently to restore the Leased Property to substantially the same condition as existed immediately prior to such damage or destruction and, to the extent the insurance proceeds and the Capital Replacement Fund are insufficient to do so, such Initial Lessee will be obligated to contribute the excess funds needed to restore the Leased Property. Any excess insurance proceeds will be paid to the Company. Notwithstanding the foregoing, in the event the damage or destruction of the Leased Property renders the Leased Property unsuitable for use as a golf course for a period of 12 months or more, the Initial Lessee may terminate the Participating Lease.
INDEMNIFICATION GENERALLY. Under each Participating Lease, the applicable Initial Lessee will agree to indemnify, and is obligated to hold harmless, the Company from and against all liabilities, obligations, claims, actual or consequential damages, penalties, causes of action, costs and expenses (including reasonable attorneys' fees and expenses) imposed upon or asserted against the Company as owner of the applicable Leased Property on account of, among other things, (i) any accident, injury to or death of a person or loss of or damage to property on or about the Leased Property, (ii) any use, non-use, condition, maintenance or repair misuse, by such Initial Lessee of the Leased Property, (iii) any
impositions (which are the obligations of the relevant Initial Lessee to pay pursuant to the applicable provisions of such Participating Lease) or the operations thereon, (iv) any failure on the part of such Initial Lessee to perform or comply with any of the terms of the Participating Lease or any sublease, (v) any taxes levied against such Leased Property, and (vi) any liability the Company may incur or suffer as a result of any permitted contest by such Initial Lessee under any Participating Lease.
EVENTS OF DEFAULT. Events of Default are defined in each Participating Lease to include, among others, the following:
(i) if an Initial Lessee fails to make a rent payment when such payment becomes due and payable and such failure is not cured by such Initial Lessee within a period of 10 days after receipt of written notice thereof from the Company;
(ii) if an Initial Lessee fails to observe or perform any material term, covenant or condition of a Participating Lease and such failure is not cured by such Initial Lessee within a period of 30 days after receipt by such Initial Lessee of written notice thereof from the Company, unless such failure cannot with due diligence be cured within a period of 30 days, in which case such failure will not constitute an Event of Default if such Initial Lessee proceeds promptly and with due diligence to cure the failure and diligently completes the curing thereof, within 120 days;
(iii) if an Initial Lessee: (a) admits in writing its inability to pay its debts generally as they become due, (b) files a petition in bankruptcy or a petition to take advantage of any insolvency act, (c) makes an assignment for the benefit of its creditors, (d) is unable to pay its debts as they mature, (e) consents to the appointment of a receive of itself or of the whole or any substantial part of its property, or (f) files a petition or answer seeking reorganization or arrangement under the federal bankruptcy laws or any other applicable law or statute of the United States of America or any state thereof;
(iv) if such Initial Lessee is liquidated or dissolved;
(v) if such Initial Lessee voluntarily ceases operations on the Leased Property, except as a result of damage, destruction or a partial or complete condemnation or other unavoidable delays; or
(vi) if such Initial Lessee or an affiliate thereof is in default under any other Participating Lease with the Company.
If an Event of Default occurs and is continuing under a Participating Lease, then the Company may terminate the Participating Lease by giving such Initial Lessee not less than 10 days notice (only if required by the Participating Lease) of such termination and upon the expiration of such time, the Fixed or Extended Term, as the case may be, will terminate and all rights of such Initial Lessee under such Participating Lease shall cease.
GOVERNING LAW. The Participating Leases will be governed by and construed in accordance with the law of the state where the Initial Course is located. Because the Initial Courses are located in various states, the Participating Leases may be subject to restrictions imposed by applicable local law.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Owners and operators of golf courses are subject to a variety of legal proceedings arising in the ordinary course of operating a golf course, including proceedings relating to personal injury and property damage. Such proceedings are generally brought against the operator of a golf course, but may also be brought against the owner. Each of the Prior Owners represented to the Company that at the time of the IPO, no Initial Course contributed by it was subject to any material legal proceedings. Since the IPO, no material legal proceedings have been commenced or threatened against the Company, the Operating Partnership, or, to the Company's knowledge, any Initial Lessee. The Participating Leases provide that each Initial Lessee is responsible for claims based on personal injury and property damage occurring at the Initial Courses leased by such Initial Lessee and require each Initial Lessee to maintain insurance for such purposes.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 5, 1996, the Company's sole shareholder approved the Company's election of Subchapter S status under the tax code. (Such election was subsequently revoked immediately prior to the completion of the Company's IPO.)
No other matters were submitted to a vote of the security holders of the Company during the year ended December 31, 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's sole class of common stock is traded on the American Stock Exchange (the "AMEX"). Trading of the Company's stock commenced on the AMEX on February 7, 1997. Since then, and through March 24, 1997, the highest reported sale price was $26.125 on March 14, 1997 and the lowest reported sale price was $22.750 on February 7, 1997.
SHAREHOLDER INFORMATION
As of March 24, 1997, the number of holders of record of Common Stock of the Company was approximately 31 and there were 3,910,000 shares outstanding. On that date a total of 8,045,356 units of limited partnership interest in the Operating Partnership ("OP Units") were held by twelve entities, including the Company's two subsidiaries.
DIVIDENDS
The Company intends to make regular quarterly distributions to its stockholders. The Board of Directors, in its sole discretion, will determine the actual distribution rate based on the Company's actual results of operations, economic conditions, tax considerations (including those related to REITs) and other factors. The Company's first distribution, for the period from the completion of the IPO to March 31, 1997, is expected to equal a pro rata share of the estimated initial quarterly distribution of $0.40625 per share of Common Stock, which, on an annualized basis, will represent a distribution rate of $1.625 per share, or 7.74% of the IPO Price. On a pro forma basis for the twelve months ended December 31, 1996, the estimated initial distribution represents 105.57% of estimated Cash Available for Distribution. Holders of OP Units will receive distributions on a per unit basis equal to the per share distributions to owners of Common Stock.
The Company expects to maintain its initial distribution rate unless actual results of operations, economic conditions or other factors differ from the pro forma results for the twelve months ended December 31, 1996. The Company's actual Cash Available for Distribution will be affected by a number of factors, including Gross Golf Revenues generated at the Initial Courses. The Company anticipates that Cash Available for Distribution will exceed earnings and profits due to non-cash expenses, primarily depreciation and amortization, to be incurred by the Company. Distributions by the Company to the extent of its current or accumulated earnings and profits for federal income tax purposes, other than capital gain dividends, will be taxable to stockholders as ordinary dividend income. Any dividends designated by the Company as capital gain dividends generally will give rise to capital gain for stockholders. Distributions in excess of the Company's current or accumulated earnings and profits generally will be treated as a non-taxable reduction of a stockholder's basis in the Common Stock to the extent thereof, and thereafter as capital gain. Distributions treated as non-taxable reduction in basis will have the effect of deferring taxation until the sale of a stockholder's Common Stock or future distributions in excess of the stockholder's basis in the Common Stock. Based upon the total estimated Cash Available for Distribution, the Company estimates that none of the Company's expected annual distribution would represent a return of capital for federal income tax purposes. If actual Cash Available for Distribution or taxable income vary from these amounts, or if the Company is not treated as the owner of one or more of the Initial Courses, the percentage of distributions which represents a return of capital may be materially different.
In order to maintain its qualification as a REIT, the Company must make annual distributions to its stockholders of at least 95% of its taxable income (excluding net capital
gains). Based on the Company's pro forma results of operations for the twelve months ended September 30, 1996, the Company would have been required to distribute approximately $4.5 million, or approximately $1.32 per share, in order to maintain its status as a REIT. Under certain circumstances, the Company may be required to make distributions in excess of Cash Available for Distribution in order to meet such distribution requirements. In such event, the Company would seek to borrow the amount of the deficiency or sell assets to obtain the cash necessary to make distributions to retain its qualification as a REIT for federal income tax purposes.
The Board of Directors, in its sole discretion, will determine the actual distribution rate based on a number of factors, including the amount of Cash Available for Distribution, the Company's financial condition, capital expenditure requirements for the Company's properties, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Directors deems relevant.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth (i) unaudited selected consolidated pro forma financial information for the Company and (ii) selected historical financial information for Legends Golf. The pro forma operating information is presented as if the Formation Transactions had occurred as of January 1, 1995 and therefore incorporates certain assumptions that are included in the Notes to Unaudited Pro Forma Condensed Statements of Operations (see). The pro forma balance sheet information is presented as if the Formation Transactions had occurred on December 31, 1996. The pro forma information does not purport to represent what the Company's or the Initial Lessees' financial position or results of operations actually would have been had the Formation Transactions, in fact, occurred on such date or at the beginning of the period indicated, or to project the Company's or the Initial Lessees' financial position or results of operations at any future date or any future period.
GOLF TRUST OF AMERICA, INC. UNAUDITED SUMMARY CONSOLIDATED PRO FORMA FINANCIAL DATA (in thousands, except per share and footnote data)
YEAR ENDED DECEMBER 31, ----------------------- 1995 1996 ------- ------- OPERATING DATA: Participating lease revenue (1) $11,282 $13,142 ------- ------- Depreciation and amortization (1) 2,536 3,080 General and administrative (2) 1,639 1,639 Interest expense 366 366 ------- ------- Total expenses 4,541 5,085 ------- ------- Income before minority interest 6,741 8,057 Minority interest (3) 3,202 3,988 ------- ------- Net income applicable to common shareholders (1) $ 3,539 $ 4,069 ------- ------- ------- ------- Net income per share of Common Stock $ 0.91 $ 1.04 Shares of Common Stock outstanding 3,910 3,910
CASH FLOW DATA: Cash flows from operating activities (4) $ 9,277 $11,137 Cash flows used in investing activities (5) 479 544 Cash flows used in financing activities (6) 8,821 13,074
OTHER DATA: Cash Available for Distribution (7) $12,374 $12,384 Common Stock and OP Units outstanding 8,045 8,045
DECEMBER 31, ------------ BALANCE SHEET DATA: Investment in Initial Courses $ 62,876 Mortgages and notes payable $ 4,325 Minority interest in Operating Partnership $ 42,333 Total stockholders' equity $ 40,026
ITEM 6
LEGENDS GOLF SUMMARY COMBINED HISTORICAL FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31, ------------------------------------------- 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- FINANCIAL DATA: Revenue from golf course operations. . . . . . . . . . . $11,724 $13,455 $14,371 $14,619 $15,199 Other revenue. . . . . . . . . . 2,931 3,438 4,725 3,823 4,214 ------- ------- ------- ------- ------- Total revenue. . . . . . . . . . 14,655 16,893 19,096 18,442 19,413 Operating expenses . . . . . . . 8,895 9,882 10,083 10,322 13,556 Depreciation and amortization. . 1,406 1,564 1,830 1,791 2,400 Interest expense . . . . . . . . 648 619 998 1,017 1,589 ------- ------- ------- ------- ------- Net income . . . . . . . . . . . $ 3,706 $ 4,828 $ 6,185 $ 5,312 $ 1,868 ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
BALANCE SHEET DATA: Investment in golf courses and related equipment . . . . . $17,425 $16,663 $19,301 $33,099 $35,060 Total assets . . . . . . . . . . 20,484 22,719 24,649 $42,300 49,804 Mortgages, notes payable, and advances from affiliates and stockholders . . 16,293 19,285 18,638 35,163 40,480 Capital lease obligations. . . . 332 - - - - Total owners' equity . . . . . . 2,086 2,263 3,772 6,328 7,174
(1) Represents payments of Base Rent from the Initial Lessees to the Company calculated on a pro forma basis as if the beginning of the period presented was the beginning of a lease year, except for Legends of Virginia, the Initial Lessee of Stonehouse Golf Club and Royal New Kent, which courses opened in June 1996 and August 1996, respectively. Pro forma Participating Lease revenue payable by Legends of Virginia reflects only the periods during which such Golf Courses were actually operating.
If Stonehouse and Royal New Kent had been operating during the entire period presented, (i) Participating Lease revenue would have been $3,706 and $1,846 higher for the years ended December 31, 1995 and 1996, respectively, for a total of $14,988, (ii) depreciation and amortization would have been $1,180 and $580 higher for the years ended December 31, 1995 and 1996, respectively, for a total of $3,716 and $3,660, respectively, and (iii) net income would have been $2,526 and $1,266 higher, respectively, for a total of $9,267 and $9,323, respectively.
(2) Represents legal, audit, office, franchise taxes, salaries and other general and administrative expenses to be paid by the Company.
(3) Calculated as approximately 47.5% and 49.5% of the Operating Partnership's net income for the years ended December 31, 1995 and 1996, respectively, based on the weighted average OP Units outstanding.
(4) Represents the Company's income before minority interest adjusted for non-cash depreciation and amortization. Estimated pro forma cash flows from operating activities excludes cash provided by (used in) operating activities due to changes in working capital resulting from changes in current assets and current liabilities. The Company does not believe these excluded items are material to cash flows from operating activities.
(5) Represents the amount of the reserve which the Company will be required to make available annually under the Participating Leases to fund capital expenditures, calculated as 2.0% to 3.0% of Gross Golf Revenue of the Initial Courses. In addition to increases resulting from the Base Rent Escalator and payments of Participating Rent, the Initial Lessees are generally obligated to increase their lease payments each year in an amount equal to the increase in the capital expenditure reserve from the prior year.
If Stonehouse and Royal New Kent were operating during the entire period, cash flows used in investing activities would have been $130 and $65 higher for the years ended December 31, 1995 and 1996, respectively.
(6) Represents estimated initial distributions to be paid based on the anticipated initial annual dividend rate of $1.625 per share of Common Stock and OP Unit and an aggregate of 8,045,356 shares of Common Stock and OP Units outstanding and initial debt of $4,253,000, net of loan costs.
(7) Estimated Cash Available for Distribution is calculated as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1995 1996 ------- ------- Pro forma income before minority interest . . $ 6,741 $ 8,057 Pro forma depreciation. . . . . . . . . . . . 2,536 3,080 ------- ------- Pro forma funds from operations . . . . . . . 9,277 11,137 Adjustments: Additional base rent for courses not operational during entire period . . . 3,706 1,856 Estimated capital expenditures . . . . . . . (609) (609) ------- ------- Cash available for distribution. . . . . . . . $12,374 $12,384 ------- ------- ------- -------
In accordance with the resolution adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, Inc. ("NAREIT"), Funds From Operations represents net income (loss) (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring or sales of property, plus depreciation of real property, and after adjustments for unconsolidated partnerships and joint ventures. Funds From Operations should not be considered as an alternative to net income or other measurements under generally accepted accounting principles as an indicator of operating performance or to cash flows from operating, investing or financial activities as a measure of liquidity. Funds From Operations does not reflect working capital changes, cash expenditures for capital improvements or principal payments on indebtedness. The Company believes that Funds From Operations is helpful to investors as a measure of the performance of an equity REIT, because, along with cash flows from operating activities, financing activities and investing activities, it provides investors with an understanding of the ability of the Company to incur and service debt and make capital expenditures. Compliance with the NAREIT definition of Funds From Operations is voluntary. Accordingly, the Company's calculation of Funds From Operations in accordance with the NAREIT definition may be different than similarly titled measures used by other REITs.
Pro forma income before minority interest for the years ended December 31, 1996 reflects base rent from Legends of Virginia for the period during which the Golf Courses it is contributing to the Company, Stonehouse Golf Club and Royal New Kent, were actually operating (Stonehouse opened in June 1996 and Royal New Kent opened in August 1996). The adjustment reflects additional Base Rent which will be payable during the Golf Courses' initial year of operations (i.e., to reflect a full year's Base Rent) and is provided to arrive at estimated Cash Available for Distribution.
The Participating Leases require the Company to reserve annually between 2% and 3% of the Gross Golf Revenues of the Golf Courses to fund capital expenditures. Any capital expenditures in excess of such amounts will be funded by the Initial Lessees.
(8) Represents the Initial Lessees' pro forma income adjusted for noncash depreciation and amortization. Estimated pro forma cash flows from operating activities excludes cash provided by (used in) operating activities due to changes in working capital resulting from changes in current assets and current liabilities. The Initial Lessees are newly formed entities, and the Company does not believe these excluded items are material to cash flows from operational activities.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Concurrently with the Company's successful initial public offering in February 1997, the Operating Partnership acquired the ten Initial Courses, and the Company, through its wholly-owned subsidiaries, GTA GP and GTA LP, acquired an approximate 48.6% interest in the Operating Partnership. GTA GP is the sole general partner of the Operating Partnership. The Company's primary source of revenue is the Lease Payments under the Participating Leases. Each Initial Lessee has only nominal capitalization and an Initial Lessee's ability to make the Lease Payments to the Company under its Participating Lease is dependent upon the Initial Lessee's ability to generate sufficient cash flow from the operation of the Initial Course(s) leased by it. Each Initial Course is leased by a separate Initial Lessee except for the Heathland, Moorland and Parkland courses (collectively, the "Legends Resort Courses"), which share a common clubhouse, driving range, golf carts and other facilities, and Royal New Kent and Stonehouse Golf Club, both of which were recently opened and are located in close proximity to each other. The Legends Resort Courses are leased to a Legends Lessee under a single Participating Lease. A separate Legends Lessee leases both Royal New Kent and Stonehouse Golf Club under separate Participating Leases. The Participating Leases provide for the Company to receive the greater of Base Rent or an amount equal to Participating Rent plus the initial Base Rent payable under each Participating Lease. Participating Rent is equal to 33 1/3% of the increase in Gross Golf Revenues over the Gross Golf Revenues for the Initial Course for the year ended December 31, 1996, as adjusted by the Company in determining the initial Base Rent. Base Rent will increase each year by the Base Rent Escalator during the first five years of the lease term (and for an additional five years thereafter following an exercise of the Lessee Performance Option). The Base
Rent Escalator for a given year equals the lesser of (i) 3% or (ii) 200% of the change in the CPI over the prior year. Annual increases in Lease Payments are limited to a maximum of 5% for the first five years of the lease terms.
The Company expects the Initial Lessees' results of operations to differ significantly from the historical results of the Prior Owners at each course. During the acquisition of the Initial Courses (concurrent with the closing of the IPO), substantially all of the indebtedness of the Prior Owners related to the Initial Courses was repaid by the Company. The Initial Courses were contributed to the Company and the Company entered into Participating Leases with the Initial Lessees providing for Lease Payments to the Company. Going forward, depreciation of the Initial Courses will be reflected in the results of operations of the Company. In addition to the repayment of debt, the Initial Lessees are expected to benefit from economies of scale resulting from their affiliation with the Company and their participation in the Advisory Association.
Management believes the principal source of growth in Gross Golf Revenues at the Initial Courses will be increased green fees, cart fees and other related fees (revenues per player). In order to achieve higher revenues per player, management believes the Initial Lessees will need to continue to offer golfers a high quality golf experience regarding the pace of play, condition of the Initial Course and overall quality of the facilities.
The Company intends to acquire additional golf courses that meet one or more of its investment criteria. The Company believes its multiple independent lessee structure, together with the industry knowledge, experience and relationships of management of the Company and the Initial Lessees will permit the Company to acquire high quality golf courses. The Company expects to have access to a variety of debt and equity financing sources to fund acquisitions, including the Line of Credit and the ability to issue OP Units. OP Units represent limited partnership interests in the Operating Partnership. When a golf course owner contributes a golf course in exchange for OP Units, the owner does not recognize ordinary income or capital gain (or loss) for federal income tax purposes until the exercise of the OP Units' Redemption Rights. The Company believes its ability to issue OP Units will facilitate the acquisition of quality golf courses that might not otherwise be available for purchase.
The following discussion and analysis of financial condition and pro forma results of operations of the Company, and certain Prior Owners and Initial Lessees is based upon the Company's financial statements as of December 31, 1996, the pro forma consolidated balance sheet and income statement of the Company and the Legends Lessees, and the historical combined financial statements of The Legends Group, the accounting acquiror, with respect to seven of the Initial Courses. In establishing the amount of Base Rent for the Initial Courses, the Company and the Initial Lessees considered, in addition to actual historical results of operations, a number of other factors which under the accounting rules of the Securities and Exchange Commission cannot be reflected in the pro forma financial information for the Initial Lessees. Such factors include (i) declines in revenues at certain of the Initial Courses as a result of unusually severe weather conditions (affecting Olde Atlanta and The Woodlands), (ii) cost savings expected to be achieved by the Initial
Lessees as a result of operational changes following completion of the Formation Transactions (affecting The Legends Group courses and Olde Atlanta), (iii) revenue enhancing programs which certain Initial Lessees intend to implement following completion of the Formation Transactions (affecting Legends Resort Courses, Oyster Bay and Heritage Golf Club), and (iv) estimated revenues and expenses at the two recently opened Initial Courses (Royal New Kent and Stonehouse Golf Club). The pro forma financial information for the Company and the Initial Lessees reflects initial Base Rent and no Participating Rent. PRO FORMA RESULTS OF OPERATIONS OF THE COMPANY
On a pro forma basis for the years ended December 31, 1995, and December 31, 1996, the Company would have received $11,282,000 and $13,142,000, respectively, in revenue from the Participating Leases for the Initial Courses. This amount does not include $3,706,000 and $1,846,000 in rent from Legends of Virginia LC for the years ended December 31, 1995 and December 31, 1996, respectively, related to its two courses, Stonehouse Golf Club and Royal New Kent, because such courses opened in July 1996 and August 1996 respectively. As these golf courses are now fully operational, the Company is contractually entitled to receive rent of approximately $14,988,000 in its first full year of operation.
Total pro forma expenses before minority interest, totaling $4,541,000 and $5,085,000 for the years ended December 31, 1995 and December 31, 1996, respectively, reflect depreciation and amortization, general and administrative expenses and interest expense. Depreciation expense is based on the Company's cost of acquiring the Initial Courses, except for the seven Initial Courses acquired by the Company from The Legends Group. The contribution of these seven Initial Courses is treated for accounting purposes as a reorganization of the interests of The Legends Group in the contributed courses as has been accounted for at historical cost. Pro forma expenses for the years ended December 31, 1995 and December 31, 1996 do not include depreciation related to the Legends of Virginia Golf Courses totaling $1,180,000 and $580,000, respectively, related to periods these courses were not operational in 1995 and 1996. If these courses had been operational in 1995 and all of 1996, total pro forma expenses for the years ended December 31, 1995 and December 31, 1996 would have been $5,721,000 and $5,665,000, respectively.
Minority interest, totaling $3,202,000 for the year ended December 31, 1995 ($4,402,000 if the Legends of Virginia Initial Courses had been fully operational) and $3,988,000 for the year ended December 31, 1996 ($4,615,000 if the Legends of Virginia Initial Courses had been fully operational) reflects the 47.5% and 49.5% weighted average outstanding interest, respectively, of the Prior Owners and management in the pro forma net income of the Operating Partnership.
Pro forma net income for the year ended December 31, 1995 is $3,540,000 ($4,504,000 if the Legends of Virginia Initial Courses had been fully operational). Pro forma net income for the year ended December 31, 1996 is $4,069,000 ($4,531,000 if the Legends of Virginia Initial Courses had been fully operational).
PRO FORMA LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
On a pro forma basis, cash flow from operating activities for the years ended December 31, 1995 and 1996, excluding changes in working capital, would have been $9,277,000 and $11,137,000 ($12,983,000 and $12,993,000 if the Legends of Virginia Initial Courses had been fully operational). This reflects net income before minority interest, plus non-cash charges to income for depreciation and loan fee amortization. Cash flows used in investing activities reflects capital expenditures of $479,000 and $544,000, calculated based upon the Company's capital expenditure reserves required by the terms of the Participating Leases. Cash flows used in financing activities, totaling $8,821,000 and $13,074,000, represents distributions (based upon an initial estimated per share and OP Unit distribution rate of $1.625) to holders of the Common Stock and OP Units and the amount of the initial borrowing of $4,325,000 in 1995.
The Company's principal source of cash to meet its cash requirements, including distributions to its stockholders, is its share of the Operating Partnership's cash flow. The Operating Partnership's sole source of revenue is Lease Payments under the Participating Leases. The Initial Lessees have nominal capitalization and the ability of the Initial Lessees to make Lease Payments to the Operating Partnership and, therefore, the Company's liquidity, including the ability to make distributions to its stockholders, will depend upon the Initial Lessees' ability to generate sufficient cash flow from their operations at their respective Initial Courses.
Concurrent with the closing of the IPO, the Company borrowed approximately $4,325,000 which, together with the net proceeds of the IPO, was used to retire mortgage indebtedness and other debt of the Prior Owners, to fund the cash portion of the purchase of the Initial Courses and to provide approximately $24,119,700 in initial working capital. The Company has agreed to maintain approximately $4,325,000 of indebtedness for up to 10 years to accommodate a Prior Owner's efforts to seek to minimize certain adverse tax consequences from its contribution of one of the Initial Courses to the Company. Additionally, the Company has signed a term sheet and is finalizing the documentation for a Line of Credit to be used primarily for the acquisition of additional golf courses, but a portion of which may also be used for acquisition of the Expansion Facilities, for capital expenditures or for general working capital purposes. The Company has not, however, finalized the Line of Credit and there can be no assurance that the Company will have access to sufficient debt and equity financing to pursue its acquisition strategy. The Company anticipates that the Line of Credit lender, NationsBank, N.A., will impose certain conditions on the Company's ability to draw on the Line of Credit. If the Company is not able successfully to finalize the Line of Credit, the Company anticipates that future acquisitions would be funded with debt financing to be secured by the particular acquisition property or with proceeds of additional equity offerings. In the future, the Company may negotiate additional credit facilities or issue corporate debt instruments. Any debt issued or incurred by the Company may be secured or unsecured, long-term or short-term, fixed or
variable interest rate and may be subject to such other terms as the Board of Directors deems prudent.
The Company believes its acquisition capabilities are enhanced by its initial capital structure. The Company intends to maintain a capital structure with consolidated indebtedness representing no more than 50% of its total market capitalization.
The Company intends to invest in additional golf courses as suitable opportunities arise, but the Company will not undertake investments unless adequate sources of financing are available. Future acquisitions of golf courses will be financed, in whole or in part, with proceeds from the Line of Credit, additional issuances of OP Units or shares of Common Stock, borrowings under financing arrangements or other securities issuances. The Company currently has no agreement to acquire any additional golf courses, and there can be no assurance that the Company will acquire any more golf courses.
Pursuant to the Participating Leases, the Company is obligated to reserve annually from rental payments an amount equal to between 2% and 3% of Gross Golf Revenue at each Initial Course to fund capital expenditures approved by the Company, including the periodic replacement or refurbishment of improvements and equipment. Capital expenditures in excess of that reserve will be funded by the Initial Lessees. The Company anticipates entering into similar arrangements with respect to golf courses it acquires in the future.
THE LEGENDS GROUP PRIOR OWNERS
As part of the Formation Transactions, the Company acquired the following seven Initial Courses from The Legends Group: Heritage Golf Club, Heathland, Moorland, Parkland, Oyster Bay, Royal New Kent and Stonehouse Golf Club. These seven Initial Courses are operated by four Legends Lessees. The Legends Resort Courses -- Heathland, Moorland and Parkland -- share a common clubhouse, driving range, golf carts and other facilities and are leased by a single Legends Lessee pursuant to a single Participating Lease. The newly-opened Initial Courses -- Royal New Kent and Stonehouse Golf Club -- are in similar stages of operation and are leased by a single Legends Lessee pursuant to separate Participating Leases. Each of the other two Legends Initial Courses are leased by separate Legends Lessees. Aggregate Base Rent under the Participating Leases with the Legends Lessees represents approximately 80.4% of the Company's pro forma revenue under the Participating Leases for the year ended December 31, 1996. The Legends Group Prior Owners received OP Units representing an approximate 46.5% interest in the Operating Partnership upon completion of the Formation Transactions.
The following discussion and analysis addresses the combined historical results of operations of the Initial Courses contributed by The Legends Group. However, the results
of operations of such courses do not purport to represent the pro forma results of operations of the Legends Lessees or the Company and should not be used to assess the operating performance of the Legends Lessees or the Company. Two of the Initial Courses contributed by The Legends Group, Stonehouse Golf Club and Royal New Kent, opened in June and August 1996, respectively.
The Legends Group markets its courses through media advertising (primarily in golf publications) and various other promotional arrangements (generally discounted green fees) provided to guests of local hotels in the markets where its golf courses are located. In addition, in 1995, affiliated entities began constructing, selling and renting golf villas as part of a resort/residential development at the Legends Resort, site of the three Legends Resort Coures, Heathland, Moorland and Parkland. This development eventually is expected to include 204 golf villas with over 800 beds. The Company believes that this resort/residential development helped contribute to the number of rounds played at the Legends Resort Courses in 1995 and 1996 and is expected to continue to be an increasing source of rounds played as the development is completed.
For purposes of financial presentations, the term "Legends Golf" refers to the combined operations of all seven Initial Courses contributed by The Legends Group, and the term "Golf Legends" refers to operations of the three Initial Courses located at the Legends Resort.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 AND 1995
Revenue from golf operations increased 4.0% from $14,619,000 to $15,199,000 as well as the revenue per player (principally as a result of increased green fees and golf cart rentals) from $55.65 to $56.21, while the total rounds played increased 2.9% from 262,700 to 270,400. The increase in total number of rounds is primarily due to the opening of the two Legends of Virginia courses in mid-1996. The increase in total revenues in 1996 due to the two new courses approximated $690,000. In January and February 1996, management reduced available tee times and increased green and cart fees over the prior period's winter rates in an effort to enhance the quality of the golf experience during the slower time of the year. The Company believes that the late, harsh winter of 1996 in the midwest and northeastern United States reduced vacation golfers' travel from these areas and contributed to the decrease in the number of rounds played. Rounds played were also adversely affected by two hurricanes during the summer of 1996 that resulted in minimal damage to the Golf Courses but reduced vacation golf travel to the area.
Other revenue sources, including food and beverage and merchandise sales are significantly influenced by the number of rounds played. While the number of rounds increased 2.9%, other revenue increased 10.2% to $4,214,000 from $3,823,000 principally due to a 22.6% increase in food and beverage sales resulting from additional demand created by occupants of the newly constructed golf villas at the Legends Resort. The rental units recently opened and additional units are being developed. Management is unable to estimate the future impact on food and beverage sales. However, food and
beverage revenues are not included in the calculation of Gross Golf Revenue and therefore do not affect Participating Rent payments.
Operating expenses increased 31.7% to $15,956,000 from $12,113,000. Principal components of the $3,843,000 increase were (i) initial operating costs of approximately $3,178,000 associated with the two Legends of Virginia courses opened in mid-1996, (ii) a one time increase in chemicals and fertilizer expense of approximately $90,000, (iii) periodic resurfacing of cart paths totaling $50,000, (iv) food and beverage operations of approximately $352,000 attributed to an increase in revenues and (v) an increase in repairs and maintenance expense.
Interest expense increased 56.2% to $1,589,000 from $1,017,000 as a result of higher borrowings incurred in connection with the completion and pre-opening costs of the two recently opened Initial Courses.
Net income decreased 64.8% from $5,312,000 to $1,868,000 primarily as a result of additional $3,178,000 of expenses associated with the two recently opened Initial Courses.
YEAR ENDED DECEMBER 31, 1995 AND 1994
Revenue from golf operations increased 1.7% to $14,619,000 from $14,371,000. The increase resulted primarily from a 9.5% increase in revenues per player (principally as a result of increased green fees and golf cart rentals) from $50.82 to $55.65. During this same period rounds played decreased 7.1% from 282,800 to 262,700 as a result of the Company's focus on increasing green fees.
Other revenue decreased 19.1% from $4,725,000 to $3,823,000 principally due to a contribution of land in 1994 totaling $1,000,000 which was partially offset by increased food and beverage and merchandise sales as a result of improved merchandising efforts in the pro shop.
Operating expenses increased 1.7% to $12,113,000 from $11,913,000, primarily as a result of normal wage and other operating cost increases.
Interest expense increased 1.9% to $1,017,000 from $998,000 primarily due to financing costs incurred in connection with the purchase of maintenance equipment.
Net income decreased 14.1% to $5,312,000 from $6,185,000.
LEGENDS LESSEES
On a pro forma basis, assuming the Formation Transactions had occurred as of the beginning of the respective periods, the pro forma results of operations of the Legends Lessees for the years ended December 31, 1995 and December 31, 1996 were as follows:
YEAR ENDED YEAR ENDED DECEMBER 31, 1995 DECEMBER 31, 1996 ----------------- -----------------
LEGENDS GOLF (1) Total revenue. . . . . . . . . . . . . . . $18,442 $19,413 Participating Lease payment. . . . . . . . 8,351 10,210 Net income (loss). . . . . . . . . . . . . 231 (3,966) Cash flows from operating activities (2) . 514 (3,618) Cash flows from investing activities (3) . -- -- Cash flows from financing activities (4) . -- -- EBITDA (5) 595 (3,568)
- -------------
(1) Reflects seven months of operations for the Stonehouse Golf Club and five months of operations for Royal New Kent for the year ended December 31, 1996. Stonehouse and Royal New Kent Golf Club opened in June and August 1996, respectively.
(2) Represents the applicable Initial Lessee's pro forma income adjusted for non-cash depreciation and amortization. Estimated pro forma cash flows from operating activities excludes cash provided by (used in) operating activities due to changes in working capital resulting from changes in current assets liabilities. The Initial Lessees are newly formed entities, and the Company does not believe these excluded items are material to cash flows from operating activities.
(3) Cash flows from investing activities would consist principally of capital improvements to the Golf Courses. As such improvements are expected to be funded through a capital expenditure reserve funded by the Company, cash flows from investing activities funded by the Initial Lessees are not expected to be material.
(4) Cash flows from financing activities would primarily included transactions with the Initial Lessees' owners and borrowings and repayments on loans. Such cash flows have been excluded in the determination of cash flows from financing activities as the Company does not believe these excluded items are material to cash flows from financing activities.
(5) EBITDA is defined as operating income before interest, income taxes, depreciation and amortization. Management considers EBITDA to be an important measure of the cash flows from operations of the Initial Lessees (before payment of debt service obligations and non-cash depreciation charges). EBITDA does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not to be considered as an alternative to net income as an indication of financial performance or to cash flows from operating activities as a measure of liquidity.
INFLATION
All of the Participating Leases provide for initial terms of 10 years with Base Rent and Participating Rent features. Base Rent will increase by the Base Rent Escalator for each year during the first five years of the term of each Participating Lease (and for an
additional five years if the Lessee Performance Option is exercised). All of such leases are triple net leases requiring the Initial Lessees to pay for all maintenance and repair, insurance, utilities and services, thereby minimizing the effect of inflation on the Company.
SEASONALITY
The golf industry is seasonal in nature based on weather conditions and fewer available tee times in the rainy season and the winter months. Each of the Initial Lessees operating a Daily Fee course may vary green fees based on changes in demand.
FORWARD-LOOKING STATEMENTS
The preceding sections "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of this Annual Report contain various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations or beliefs concerning future events, including, without limitation, statements containing the words "believes," "anticipates," "expects" and words of similar import; and also including, without limitation, the following: statements regarding the Company's continuing ability to target and acquire high quality golf courses; the expected availability of the Line of Credit and other debt and equity financing; the sufficiency of the Company's working capital, cash flow and financing to support the Company's future operating and capital requirements; the Initial Lessees' future cash flows, results of operations and overall financial performance; the Company's planned strategic alliance with Troon Golf; the planned acquisition and/or financing of certain golf courses; the expected completion and acquisition of the Expansion Facilities; the expected dividend distribution rate; the intended limit on the Company's level of consolidated indebtedness; the expected tax treatment of the Company's operations; the Company's beliefs about continued growth in the golf industry; statements regarding the possible redemption of OP Units and exercise of the Lessee Performance Options; and the expected completion of real estate developments near the Initial Courses. Such forward-looking statements relate to future events and the future financial performance of the Company and the industry and involve known and unknown risks, uncertainties and other important factors which could cause actual results, performance or achievements of the Company or industry to differ materially from the future results, performance or achievements expressed or implied by such forward-looking statements.
Investors should carefully consider the various factors identified under the headings "Business," "Properties" and "Management's Discussion and Analysis of Financial Condition and Results of Operation" and elsewhere in this Annual Report that could cause actual results to differ materially from the results predicted in the forward-looking statements. Further, the Company specifically cautions investors to consider the following important factors in conjunction with the forward-looking statements: the possible decline in the Company's ability to locate and acquire quality golf courses and to negotiate acceptable lease terms; the possibility that negotiations regarding the Line of Credit and the alliance with Troon Golf will fail; the possibility that Company management lacks the skill to manage the Company's
planned process of acquisitions and expansions; the possible adverse effect of changing economic conditions, including interest rate movements and changes in the real estate market both locally and nationally; the effect of severe weather or natural disasters; and the effect of competitive pressures from other golf course acquirors and other golf course lessors. Because of the foregoing factors, the actual results achieved by the Company in the future may differ materially from the expected results described in the forward-looking statements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Regulation S-X are included in this Annual Report on Form 10-K commencing on page.
ITEM 9.
ITEM 9. CHANGES IN THE COMPANY'S CERTIFYING ACCOUNTANT
(a) On February 26, 1997, the Company dismissed Price Waterhouse LLP as independent accountants. Effective February 26, 1997, the Company engaged BDO Seidman, LLP as principal accountants. The decision to change accountants was approved by the Audit Committee and ratified by the Board of Directors of the Company.
(b) The Company was formed on November 8, 1996. Its balance sheet as of November 8, 1996 was audited by Price Waterhouse LLP. The balance sheet and the report of Price Waterhouse LLP thereon were included in the Company's Registration Statement on Form S-11 which was declared effective on February 6, 1997. In connection with its audit of the November 8, 1996 balance sheet and through February 26, 1997, there were no disagreements with Price Waterhouse LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Price Waterhouse LLP would have cause them to make reference thereto in their report on the November 8, 1996 balance sheet and there were no reportable events (as defined in Regulation S-K Item 304(a)(1)(v)).
(c) The report of Price Waterhouse LLP on the Registrant's November 8, 1996 balance sheet did not contain an adverse opinion or a disclaimer of opinion and the report was not qualified or modified as to uncertainty, audit scope or accounting principles.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Board of Directors consists of seven members. The directors include W. Bradley Blair II, Chairman, Chief Executive Officer and President of the Company, David J. Dick, the Company's Executive Vice President and Larry D. Young, founder of The Legends Group, the Prior Owner of seven of the Initial Courses. The remaining directors are Independent Directors (the "Independent Directors"). Subject to rights pursuant to any employment agreements, officers of the Company serve at the pleasure of the Board of Directors.
Set forth below is information with respect to the directors and executive officers of the Company as of March 24, 1997.
NAME AGE POSITION -------------------- ---- ------------------------------------------------ W. Bradley Blair, II 53 Chairman of the Board of Directors, Chief Executive Officer and President of the Company David J. Dick 37 Executive Vice President, Director Scott D. Peters 39 Senior Vice President and Chief Financial Officer Larry D. Young 55 Director Roy C. Chapman 56 Director Raymond V. Jones 49 Director Fred W. Reams 54 Director Edward L. Wax 60 Director
W. Bradley Blair, II is the Chairman of the Board, Chief Executive Officer and President of the Company. From 1993 until the completion of the IPO Mr. Blair served as Executive Vice President, Chief Operating Officer and General Counsel for The Legends Group. As an officer of Legends Group Ltd., Mr. Blair was responsible for all aspects of operations, including acquisitions, development and marketing. From 1978 to 1993, Mr. Blair was the managing partner and currently is of counsel at Blair, Conaway Bograd & Martin, P.A., a law firm, specializing in real estate, finance, taxation and acquisitions. Several clients of Blair, Conaway Bograd & Martin are golf course owners, operators and developers as well as companies involved in golf course financing. Mr. Blair received a Bachelor of Science Degree in Business from Indiana University and a Juris Doctorate from University of North Carolina at Chapel Hill Law School.
David J. Dick is Executive Vice President of the Company. Since 1993 Mr. Dick has worked with the Inland Group, Inc. as a consultant specializing in real estate investment banking and golf course finance. From 1983 to 1992 Mr. Dick served as Vice President of Development and Asset/Portfolio Management for Thoner & Birmingham Development Corporation, a golf and country club community developer that is affiliated with the owner of Northgate Country Club. While with Thoner & Birmingham Development Corporation, Mr. Dick's responsibilities included many aspects of golf course and country club development, finance operations and management. Mr. Dick received a Bachelor of Science in Business Administration from Central Missouri State University. Mr. Dick is a Certified Commercial Investment Member.
Scott D. Peters is Senior Vice President and Chief Financial Officer of the Company. From 1992 to 1996, Mr. Peters served as Senior Vice President and Chief Financial Officer of the Pacific Holding Company in Los Angeles, where he participated in the management of a 4,000 acre real estate portfolio consisting of residential, commercial and country club properties focusing on master-planned golf communities. From 1988 to 1992, Mr. Peters served as Senior Vice President and Chief Financial Officer of Castle Cooke Homes, Inc; and during 1990 and 1991 lectured on Real Estate Finance and Asset Management at California State University at Bakersfield. Mr. Peters is a certified public accountant and worked with Arthur Andersen & Co. and Laventhol & Horwath from 1981 to 1985. From
1986 to 1988, Mr. Peters worked with a general partnership that managed the construction of the Scotsdale Princess Resort. He received a Bachelor of Arts degree in Accounting and Finance with honors from Kent State University and a Masters Degree in Taxation from the University of Akron, Ohio.
Larry D. Young is a director of the Company and is the founder of The Legends Group. Mr. Young has been involved in the golf business for 25 years, and for 21 of those years in Myrtle Beach. In 1975 he moved to Myrtle Beach, South Carolina, where he started what became The Legends Group, a leading golf course owner, developer and operator in the southeast and Mid-Atlantic regions of the United States. Mr. Young has developed ten courses during that time, three of which were rated the best new course in their respective category in the year developed by GOLF DIGEST. Mr. Young has served in numerous capacities in golf industry related non-profit organizations.
Roy C. Chapman is a director of the Company. He is the Chairman, Chief Executive Officer and principal shareholder of Human Capital Resources, Inc., which was formed to assist students to finance higher education. From 1987 until his retirement in February of 1993, he was Chairman and Chief Executive Officer of Cache, Inc., the owner and operator of a nationwide chain of upscale women's apparel stores. He has served as the Chief Financial and Administrative Officer of Brooks Fashion Stores and was a partner in the international accounting and consulting firm of Coopers & Lybrand LLP. Mr. Chapman has also served as a member of the staff of the Division of Market Regulation of the Securities and Exchange Commission and acted as a consultant to the Special Task Force to Overhaul the Securities Investors Protection Act.
Raymond V. Jones is a director of the Company. Mr. Jones is the Executive Vice President of Summit Properties Inc., where he has been employed since 1984. Summit Properties Inc. is a publicly traded REIT listed on the New York Stock Exchange and is one of the largest developers and operators of luxury garden multifamily apartment communities in the southeastern United States. While at Summit Properties Inc., Mr. Jones has overseen the development of twenty-six communities comprising nearly 6,500 apartment homes in Georgia, North Carolina, South Carolina and Ohio. Prior to 1984, Mr. Jones served as General Operations Manager for both the Charlotte and Houston divisions of Ryan Homes, Inc. Mr. Jones earned a B.A. in Political Science from George Washington University.
Fred W. Reams is a director of the Company. Since 1981 he has served as the President of Reams Asset Management Company, LLC ("Reams Management"), an independent private investment firm which he co-founded. Reams Management employs a staff of 20 persons and manages approximately $2.5 billion in assets. In addition, Mr. Reams has served as President of the Board of Directors of the Otter Creek Initial Course since 1981. Otter Creek, located in Indiana and rated in the top 25 public courses by GOLF DIGEST in 1990, recently expanded to 27 holes and has hosted several noteworthy tournaments including multiple U.S. Open and U.S. Senior Open qualifiers and four American Junior Golf Association Championships.
Edward L. Wax is a director of the Company. Since 1992 he has served as Chairman and Chief Executive Officer of Saatchi & Saatchi Advertising Worldwide. There, Mr. Wax is responsible for the operations of 143 offices, in 87 countries. Mr. Wax has been employed by Saatchi & Saatchi since 1982. Mr. Wax was formerly Chairman of The American Association of Advertising Agencies as well as a director of both the Ad Council and the Advertising Educational Foundation. Mr. Wax holds an M.B.A. from the Wharton Graduate School of Business and an undergraduate degree from Northeastern University.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The Form 3 initial report under Section 16(a) of the Securities Exchange Act of 1934 ("Section 16(a)") was submitted on behalf of Larry D. Young, a director of the Company, on February 12, 1997, six days after it was due. Form 4 reports of changes in beneficial ownership of the Company's securities under Section 16(a) were submitted on behalf of W. Bradley Blair, II, Roy C. Chapman, Edward L. Wax, Raymond V. Jones and David J. Dick, on or around April 1, 1997, one month after they were due. There were no other late reports, reportable transactions, or failures to file a required form to the Company's knowledge.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the estimated 1997 compensation, on an annualized basis, expected to be paid to the most highly compensated executive officers of the Company whose cash compensation from the Company in 1997 on an annualized basis is expected to exceed $100,000. The Company paid no compensation to its executives in fiscal year 1996.
NAME AND PRINCIPAL POSITION ANNUAL COMPENSATION - ------------------------------------------------------- ------------------- YEAR SALARY (1) ---- ---------- W. Bradley Blair, II 1997 $250,000 Chairman of the Board of Directors/Chief Executive Officer/President David J. Dick 1997 $150,000 Executive Vice President Scott D. Peters 1997 $125,000 Senior Vice President/Chief Financial Officer
- ----------------- (1) Amounts given are annualized projections for the year ending December 31, 1997.
OPTION/SAR GRANTS
During fiscal year 1996, no stock options or stock appreciation rights ("SARs") were granted by the Company. Upon completion of the IPO, the Company granted options to Messrs. Blair, Dick and Peters to purchase up to 150,000, 125,000 and 40,000 shares of Common Stock, respectively. These options will become exercisable in three equal installments, commencing upon the first anniversary of the date of grant and each of the two years thereafter. The options will be exercisable for 10 years from the date of grant at the IPO price.
COMPENSATION OF DIRECTORS
The Company intends to pay its Independent Directors fees for their services as directors. Directors will receive annual compensation of $10,000 plus a fee of $1,000 for attendance at each meeting of the Board of Directors, but not for committee meetings. Directors who are not Independent Directors will not be paid any director fees. The Company will reimburse directors for their out-of-pocket travel expenses. Upon completion of the IPO, the four Independent Directors were each awarded options to purchase 5,000 shares of Common Stock. The Company's Directors' Plan provides that any newly-elected directors will also be awarded options to purchase 5,000 shares of Common Stock. See "Directors' Plan."
DIRECTORS AND OFFICERS INSURANCE
The Company maintains directors and officers liability insurance. Directors and officers liability insurance insures (i) the officers and directors of the Company from any claim arising out of an alleged wrongful act by such persons while acting as directors and officers of the Company, and (ii) the Company to the extent that it has indemnified the directors and officers for such loss.
INDEMNIFICATION
The Charter provides for the indemnification of the Company's officers and directors against certain liabilities to the fullest extent permitted under applicable law. The Charter also provides that the directors and officers of the Company be exculpated from monetary damages to the fullest extent permitted under applicable law. In addition, in connection with the IPO the officers, directors and controlling persons of the Company are indemnified against certain liabilities by the Underwriters, and the Underwriters are indemnified against certain liabilities by the Company.
STOCK INCENTIVE PLAN
The Company has established a stock incentive plan (the "Plan") to enable executive officers and other key employees of the Company to participate in the ownership of the
Company. The Plan is designed to attract and retain executive officers and other key employees of the Company and to provide incentive to such persons to maximize the Company's cash flow available for distribution. The Plan provides for the award to executive officers and other key employees of the Company of a broad variety of stock-based compensation alternatives such as nonqualified stock options, incentive stock options, restricted stock and performance awards.
The Plan will be administered by the Compensation Committee, which is authorized to select from among the eligible employees of the Company the individuals to whom options, restricted stock purchase rights and performance awards are to be granted and to determine the number of shares to be subject thereto and the terms and conditions thereof. The Compensation Committee will select the individuals to whom nonqualified stock options are to be granted and will determine the number of shares to be subject thereto and the terms and conditions thereof. The Compensation Committee is also authorized to adopt, amend and rescind rules relating to the administration of the Plan. No member of the Compensation Committee is eligible to participate in the Plan.
AWARDS UNDER THE PLAN
NONQUALIFIED STOCK OPTIONS provide for the right to purchase Common Stock at a specified price which may be less than fair market value on the date of grant (but not less than par value), and usually become exercisable in installments after the grant date. Nonqualified stock options may be granted for any reasonable term.
INCENTIVE STOCK OPTIONS are designed to comply with the provisions of the Code and will be subject to restrictions contained in the Code, including exercise prices equal to at least 100% of fair market value of the Common Stock on the grant date and a ten year restriction on their term, but may be subsequently modified to disqualify them from treatment as an incentive stock option.
RESTRICTED STOCK may be sold to participants at various prices (but not below par value) and made subject to such restrictions as may be determined by the Compensation Committee. Restricted stock, typically, may be repurchased by the Company at the original purchase price if the conditions or restrictions are not met. In general, restricted stock may not be sold, or otherwise transferred or hypothecated, until restrictions are removed or expire. Purchasers of restricted stock, unlike recipients of options, have voting rights and receive dividends prior to the time when the restrictions lapse.
PERFORMANCE AWARDS may be granted by the Compensation Committee on an individual or group basis. Generally, these awards are based upon specific agreements and may be paid in cash or in Common Stock or in a combination of cash and Common Stock. Performance awards may include "phantom" stock awards that provide for payments based upon increases in the price of the Company's Common Stock over a predetermined period. Performance awards may also include bonuses which may be granted by the Compensation Committee on an individual or group basis and which may be payable in cash or in Common Stock or in a combination of cash and Common Stock.
DIRECTORS' PLAN
SHARE AUTHORIZATION. A maximum of 100,000 shares of Common Stock may be issued under the Company's Non-Employee Directors' Plan (the "Directors' Plan"). The share limitation and terms of outstanding awards shall be adjusted, as the Compensation Committee deems appropriate, in the event of a stock dividend, stock split, combination, reclassification, recapitalization or other similar event.
ELIGIBILITY. The Directors' Plan provides for the grant of options to purchase Common Stock to each eligible director of the Company. No director who is an employee of the Company or a Prior Owner is eligible to participate in the Directors' Plan.
OPTIONS. Pursuant to the Directors' Plan, each eligible director who was a member of the Board of Directors as of the date that the registration statement relating to the IPO was declared effective by the SEC was awarded nonqualified options to purchase 5,000 shares of Common Stock on that date (each such director, a "Founding Director"). Each eligible director who is not a Founding Director (a "Non-Founding Director") will receive nonqualified options to purchase 5,000 shares of Common Stock on the date of the meeting of the Company's stockholders at which the Non-Founding Director is first elected to the Board of Directors. The options granted to Founding Directors upon effectiveness of the registration statement relating to the IPO have an exercise price equal to the initial public offering price and vest on the date of grant. The exercise price of options under future grants will be 100% of the fair market value of the Common Stock on the date of grant and will vest in the same manner. The exercise price may be paid in cash, cash equivalents, Common Stock or a combination thereof acceptable to the Compensation Committee. Options granted under the Directors' Plan are exercisable for 10 years from the date of grant.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES RELATING TO OPTIONS. Generally, an eligible director does not recognize any taxable income, and the Company is not entitled to a deduction upon the grant of an option. Upon the exercise of an option the eligible director recognizes ordinary income equal to the excess of the fair market value of the shares acquired over the option exercise price, if any. Special rules may apply as a result of Section 16 of the Exchange Act. The Company is generally entitled to a deduction equal to the compensation taxable to the eligible director as ordinary income. Eligible directors may be subject to backup withholding requirements for federal income tax.
AMENDMENT AND TERMINATION. The Directors' Plan provides that the Board may amend or terminate the Plan, but the terms of the Plan relating to the amount, price and timing of awards under the Plan may not be amended more than once every six months other than to comport with changes in the Code, or the rules and regulations thereunder. An amendment will not become effective without stockholder approval if the amendment materially (i) increases the number of shares that may be issued under the Directors' Plan, (ii) changes the eligibility requirements, or (iii) increases the benefits that may be provided under the Directors' Plan. No options may be granted under the Directors' Plan after December 31, 2006.
DEFERRED COMPENSATION PLAN
The Company intends to establish a deferred compensation plan under which executive officers of the Company may elect to defer receiving a portion of their cash compensation otherwise payable in one tax year until a later tax year and thereby postpone payment of tax on the deferred amount. Prior to the beginning of any taxable year, such executive officers may elect to defer receipt of such amount of cash compensation until a future date or until an event selected by such persons pursuant to the terms of the plan. Deferred compensation will be invested in a separate trust account.
EMPLOYMENT AGREEMENTS
The Company has entered into written employment agreements with W. Bradley Blair, II, David J. Dick and Scott D. Peters. The employment agreement for Mr. Blair has a term of four years, the employment agreement for Mr. Dick has a term of three years and the employment agreement with Mr. Peters has a term of one year. The employment agreements provides for an annual salary of $250,000, $150,000 and $125,000 for Messrs. Blair, Dick and Peters, respectively, with annual performance bonuses determined by the Compensation Committee in connection with the achievement of performance criteria to be determined by the Compensation Committee. In addition, each of Messrs. Blair, Dick and Peters have received options to purchase shares of Common Stock as described above under the heading "Stock Incentive Plan." Each of Messrs. Blair, Dick and Peters shall receive severance payments upon the death, disability, termination or resignation of such executive, unless such executive resigns without "good cause" or unless the Company terminates such executive with "good reason," i.e. as a result of gross negligence, willful misconduct, fraud or a material breach of the employment agreement. Each such executive will have "good cause" to terminate his employment with the Company in the event of any reduction in his compensation or benefits, material breach or material default by the Company under his employment agreement or following a merger or change in control of the Company. The severance payments of Messrs. Blair and Dick would be equal to base compensation plus bonus at the most recent annual amount for the longer of the balance of the employment term or two years. The severance payments of Mr. Peters would be equal to base compensation for a period which varies from four months to one year depending upon the time and cause of termination.
The Compensation Committee may establish additional incentive compensation arrangements for the executive officers and certain key employees.
COVENANTS NOT TO COMPETE. Messrs. Blair, Dick and Peters have agreed to devote substantially full time to the business of the Company and not to engage in any competitive business. Messrs. Blair, Dick and Peters have agreed not to compete directly with the Company in a business similar to that of the Company for a period of one year following any termination of employment. Mr. Blair may continue to invest with Mr. Young and his affiliates in certain residential real estate developments and resort operations.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Since the first Board meeting following the IPO, the Compensation Committee has been comprised exclusively of Independent Directors. Prior to the IPO, decisions regarding executive officer compensation were made by the three-member Board of Directors. Consequently, Messrs. Blair and Dick participated in the Board's deliberations concerning executive compensation prior to the IPO.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS OF THE COMPANY AND PRINCIPAL PARTNERS IN THE OPERATING PARTNERSHIP
The following table sets forth certain information regarding the beneficial ownership of Common Stock and OP Units by each director, by each named executive officer of the Company, by all directors and officers of the Company as a group and by each person known to the Company to be the beneficial owner of 5% or more of the outstanding Common Stock as of March 24, 1997. Each person named in the table has sole voting and investment power with respect to all of the shares of Common Stock or OP Units shown as beneficially owned by such person, except as otherwise set forth in the notes to the table.
- ---------------- * Less than 1%.
(1) Address is c/o The Legends Group, 1500 Legends Drive, Myrtle Beach, South Carolina 29577.
(2) The Operating Partnership has 8,045,356 OP Units outstanding as of March 24, 1997, of which 3,910,000 are owned by the Company. The numbers and percentages set forth in this table assumed that all outstanding OP Units are redeemed for shares of Common Stock. The OP Units (other than those owned by the Company) may be redeemed as follows: 50% after the first anniversary of the completion of the IPO and 50% after the second anniversary of the completion of the IPO.
(3) Mr. Blair is a co-trustee of, but has no equity in, the managing member of Legends of Virginia, L.C., which holds 598,187 OP Units. Mr. Blair disclaims any beneficial interest in such OP Units. These OP Units are included in the OP Units of which Mr. Young has beneficial ownership.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIPS AMONG OFFICERS AND DIRECTORS
Larry Young is a director of the Company and the majority owner of The Legends Group and the Legends Lessees. Prior to the completion of the IPO, Mr. Blair was the Executive Vice President and Chief Operating Officer of Legends Group, Ltd. Upon completion of the IPO, Mr. Blair resigned from Legends Group, Ltd. and no longer holds any interest in the golf operations of The Legends Group.
ACQUISITION OF INTERESTS IN CERTAIN OF THE INITIAL COURSES
Mr. Young and his affiliates received 3,738,556 OP Units in exchange for their interests in seven of the Initial Courses. Upon exercise of their right to redeem such OP Units (which rights are not exercisable until beginning one year after the completion of the IPO), such persons and entities may receive an aggregate of 3,738,556 shares of Common Stock or, at the Company's option, cash.
REPAYMENT OF INDEBTEDNESS
In connection with the acquisition of the Initial courses, the Company repaid approximately $26.3 million of indebtedness guaranteed by Mr. Young. The Company also paid Mr. Young's affiliates approximately $8.4 million in repayment of a loan made to The Legends Group in connection with the development of the two recently opened Initial Courses. Additionally, the Company reimbursed Mr. Dick $62,000 for direct out-of-pocket expenses incurred in connection with the Formation Transactions.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with W. Bradley Blair, II, David J. Dick and Scott D. Peters, pursuant to which Mr. Blair will serve as Chairman of the Board, Chief Executive Officer and President, Mr. Dick will serve as Executive Vice President and Mr. Peters will serve as Senior Vice President and Chief Financial Officer of the Company for a term of four years, three years and one years, respectively, at an initial annual base compensation of $250,000, $150,000 and $125,000, respectively, subject to any increases in base compensation approved by the Compensation Committee. Upon termination of the employments other than for cause, Messrs. Blair, Dick and Peters will be entitled to receive severance benefits. See "Item 11 -- Executive Compensation -- Employment Agreements."
OPTION TO PURCHASE AND RIGHT OF FIRST REFUSAL
The Legends Group currently owns a golf course that is not being contributed to the Company because it is subject to a ground lease with a short remaining term and The Legends Group may acquire or develop additional golf courses in the future. The Company
has an option and right of first refusal to acquire all such golf courses, pursuant to the Option to Purchase and Right of First Refusal Agreement (the "Option Agreement"). Commencing four years after the public opening of a golf course developed by The Legends Group, or 24 months after the acquisition of an established operating golf course, the Company may purchase the applicable golf course under the Option Agreement for a purchase price based on the net operating income of the golf course, subject to adjustments agreed upon by the parties, divided by a capitalization rate equal to the Company's cost of equity capital plus 200 basis points. For purpose of this calculation, the Company's cost of equity capital is deemed to equal the Company's Funds From Operations yield for the then current fiscal year as published by First Call, less reserves for capital expenditures. In the event The Legends Group receives a bona fide third party offer to acquire a developed golf course, the option will not be effective pending the acquisition by the third party, in which case the Company shall have the right to purchase the developed golf course pursuant to the right of first refusal described below. The Company anticipates that any such developed golf course will have achieved stabilized operating revenues before the Company would consider purchasing such developed golf course from The Legends Group or any affiliate of The Legends Group.
If the Company does not elect to exercise its option to acquire a golf course owned, acquired or developed by The Legends Group, or if the parties are unable to agree on the adjustments to net operating income for purposes of the pricing formula, then the Company will have a right of first refusal under the Option Agreement with respect to such golf course. The right of first refusal will obligate The Legends Group to offer the Company the right to buy any such golf course on the same terms and conditions as The Legends Group intends to offer to any third party. If the Company does not exercise its right to acquire such golf course, The Legends Group will be free to sell to a third party, provided if The Legends Group either opts not to sell the golf course within nine months or reduces the purchase price by 5% or more, The Legends Group must again offer the golf course to the Company. The Option Agreement shall generally run for a period of 10 years after the IPO.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The financial statements and schedules filed as part of this Annual Report on form 10-K are listed on page.
REPORTS ON FORM 8-K
A Current Report on Form 8-K dated February 26, 1997, was filed on March 4, 1997 and amended on March 17, 1997. It contained disclosure under Items 4 and 7 regarding the Company's change in its certifying accountant (see Item 9 of this Annual Report).
EXHIBITS
The following exhibits are part of this Annual Report on Form 10-K for fiscal year 1996 (and are numbered in accordance with Item 601 of Regulation S-K). Items marked with an asterisk (*) are filed herewith.
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------- 3.1 Articles of Amendment and Restatement of the Company, as filed with the State Department of Assessments and Taxation of Maryland on January 31, 1997, (previously filed as Exhibit 3.1A to the Company's Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 2 (filed January 30, 1997) and incorporated herein by reference).
3.2 Bylaws of the Company as currently in effect (previously filed as Exhibit 3.2 to the Company's Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 1 (filed January 15, 1997) and incorporated herein by reference).
10.1* First Amended and Restated Agreement of Limited Partnership of the Operating Partnership (including Exhibit A (schedule of partners and partnership interests) as of March 24, 1997).
10.2.0 Form of Participating Lease between the Operating Partnership and the Initial Lessees relating to the Initial Courses (previously filed as Exhibit 10.2 to the Company's Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 1 (filed January 15, 1997) and incorporated herein by reference).
10.2.1* Schedule of material differences among the Participating Leases for the Initial Courses (included in lieu of the full text of each lease pursuant to Instruction 2 to Item 601 of Regulation S-K).
10.3 Option to Purchase and Right of First Refusal Agreement between (i) the Company and the Operating Partnership and (ii) Larry D. Young dated as of February 6, 1997 (previously filed as Exhibit 10.3 to the Company's Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 2 (filed January 30, 1997) and incorporated herein by reference).
10.4.0 Form of Contribution and Leaseback Agreement between the Operating Partnership and the Prior Owners relating to the Initial Courses (previously filed as Exhibit 10.4 to the Company's Registration Statement on Form S-11 (Commission File No. 333-15965) (filed November 12, 1996) and incorporated herein by reference).
10.4.1* Schedule of material differences among the Contribution and Leaseback Agreements relating to the Initial Courses (included in lieu of the full text of each agreement pursuant to Instruction 2 to Item 601 of Regulation S-K).
10.5 1997 Stock Incentive Plan of the Company (previously filed as Exhibit 10.6 to the Company's Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 1 (filed January 15, 1997) and incorporated herein by reference).
10.6 1997 Non-Employee Directors' Plan (previously filed as Exhibit 10.7 to the Company's Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 1 (filed January 15, 1997) and incorporated herein by reference).
10.7* Employment Agreement between the Company and W. Bradley Blair, II dated February 7, 1997.
10.8* Employment Agreement between the Company and David J. Dick dated February 7, 1997.
10.9* Employment Agreement between the Company and Scott D. Peters dated February 7, 1997.
16.1 Letter of Price Waterhouse LLP, former independent accountants of the Company (previously filed as Exhibit 16.1 to the Company's amended Current Report on Form 8-K dated February 26, 1997 (filed March 17, 1997) and incorporated herein by reference).
21.1 List of Subsidiaries of the Company (previously filed as Exhibit 22.1 to the Company's Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 1 (filed January 15, 1997) and incorporated herein by reference).
24.1 Powers of Attorney. See the "Signatures" section of this Annual Report.
27.1 Financial Data Schedule.
_________________________
* Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Charleston, South Carolina, on March 31, 1997.
GOLF TRUST OF AMERICA, INC.
By: /s/ W. Bradley Blair II ----------------------------- W. Bradley Blair, II PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF DIRECTORS
POWER OF ATTORNEY
We, the undersigned officers and directors of Golf Trust of America, Inc., do hereby constitute and appoint W. Bradley Blair, II and David J. Dick, and each of them, our true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby, ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
/s/ W. Bradley Blair II March 31, 1997 ________________________ President, Chief Executive _________________ W. Bradley Blair, II Officer and Chairman of the Board of Directors /s/ David J. Dick March 31, 1997 ________________________ Executive Vice President and _________________ David J. Dick Director /s/ Scott D. Peters March 31, 1997 ________________________ Senior Vice President and _________________ Scott D. Peters Chief Financial Officer /s/ Larry D. Young March 31, 1997 ________________________ Director _________________ Larry D. Young
________________________ Director _________________ Roy C. Chapman /s/ Raymond V. Jones March 31, 1997 ________________________ Director _________________ Raymond V. Jones
________________________ Director _________________ Fred W. Reams
________________________ Director _________________ Edward L. Wax
GOLF TRUST OF AMERICA, INC.
GOLF TRUST OF AMERICA, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company's unaudited Pro Forma Condensed Consolidated Statements of Operations for the years ended December 31, 1995 and 1996 are presented as if the completion of the Formation Transactions had occurred as of January 1, 1995, and carried forward through each period presented. The Company was formed in November 1996 and has no operating history. In management's opinion, all adjustments necessary to reflect the effects of the Formation Transactions have been made.
The following unaudited Pro Forma Condensed Consolidated Statements of Operations are not necessarily indicative of what actual results of operations of the Company would have been assuming such Formation Transactions had been completed as of the beginning of the periods presented, nor do they purport to represent the results of operations for future periods.
GOLF TRUST OF AMERICA, INC. NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS)
(A) Represents payments of Base Rent from the Initial Lessees to the Company calculated on a pro forma basis as if the beginning of the period presented was the beginning of a lease year, except for Legends of Virginia, the Initial Lessee of Stonehouse Golf Club and Royal New Kent, which courses opened in June 1996 and August 1996, respectively. Pro forma Participating Lease revenue payable by Legends of Virginia reflects only the periods during which such Golf Courses were actually operating. If Stonehouse and Royal New Kent had been operating during the entire year presented, Participating Lease revenue would have been $3,706 and $1,846 higher for the years ended December 31, 1995 and 1996, for a total of $14,988.
(B) Represents depreciation on buildings, improvements, and furniture and equipment and amortization. Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 30 years for buildings, 15 years for improvements and 3 to 10 years for furniture and equipment. If Stonehouse and Royal New Kent had been operating during the entire period presented, depreciation expense would have been $1,180 and $580 higher for the years ended December 31, 1995 and 1996, respectively, for a total of $3,716 and $3,660, respectively.
(C) Represents legal, audit, office costs, salaries and other general and administrative expenses to be paid by the Company as follows:
Salaries and benefits for executive officers are based upon agreements with the respective officers. Other amounts are based upon management's estimates of expenses to be incurred given the Company's estimated level of operations and related administrative requirements.
(D) Reflects interest expense at 7.5% per annum to be paid on the initial borrowing of $4,325 and loan costs amortized as interest expense. Loan costs, aggregating $72, include estimated fees and legal costs of obtaining the Company's initial borrowing and are amortized over the expected two year term of the initial borrowing.
(E) Calculated as approximately 47.5% and 49.5% of the Operating Partnership's net income for the years ended December 31, 1995 and 1996, respectively, based on the weighted average of OP Units outstanding.
(F) The Company, as sole general partner of the Operating Partnership, will have, subject to certain protective rights of the Limited Partners, full, exclusive and complete responsibility and discretion in the management and unilateral control of the Operating Partnership. Such responsibilities permit the Company to enter into certain major transactions including acquisitions, dispositions, refinancings and selection of golf course operators and to cause changes in the Operating Partnership's line of business and distribution policies. Further, the Company may not be replaced as general partner by the Limited Partners, except in certain limited circumstances. Accordingly, for accounting purposes, the Company is considered to control the Operating Partnership and the accompanying unaudited Pro Forma Condensed Consolidated Statement of Operations consolidates the accounts of the Company and the Operating Partnership.
GOLF TRUST OF AMERICA, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) (IN THOUSANDS)
The unaudited Pro Forma Condensed Consolidated Balance Sheet is presented as if the completion of the Formation Transactions and the application of the net proceeds of the Offering had occurred on December 31, 1996. The contribution of the interest in the Golf Courses to the Operating Partnership by The Legends Group represents a reorganization of the interests of The Legends Group in the contributed Golf Courses and has been accounted for at historical cost as a transfer between parties under common control in accordance with APB No. 16, the contribution of the Golf Courses by the other Prior Owners to the Operating Partnership (Other Acquired Golf Courses) has been accounted for using the purchase method. In management's opinion, all adjustments necessary to reflect the effects of the Formation Transactions have been made.
This unaudited Pro Forma Condensed Consolidated Balance Sheet is not necessarily indicative of what the Company's actual financial position would have been assuming formation such transactions had been completed as of December 31, 1996, nor does it purport to represent the future financial position of the Company.
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
GOLF TRUST OF AMERICA, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED) (UNAUDITED)
(IN THOUSANDS)
(A) The Legends Group Prior Owners are contributing the following Golf Courses and related facilities and equipment (except golf carts) to the Operating Partnership: Parkland, Heathland and Moorland (Golf Legends), Oyster Bay (Seaside Resorts), Heritage Golf Club, and Stonehouse Golf Club and Royal New Kent (Legends of Virginia LC). The contribution of Stonehouse and Royal New Kent includes land owned by Legends of Virginia on which the two Golf Courses are situated. An affiliate of the Prior Owners of Golf Legends and Heritage is separately contributing to the Operating Partnership the land on which these Golf Courses are situated. The land on which Oyster Bay is situated is subject to a ground lease for which the Oyster Bay Initial Lessee will have the payment obligation.
(B) Reflects the acquisition of property and equipment from Northgate Country Club, Bright's Creek Development and Olde Atlanta Golf Club which includes, but is not limited to, the Golf Courses and related land, buildings, improvements, fixed assets and equipment (except golf carts) as follows:
Cash . . . . . . . . . . . . . . . . . . . . $ 6,252 Assumption of debt . . . . . . . . . . . . . 12,596 Issuance of 368,050 OP Units . . . . . . . . 7,361 ------- Consideration paid for acquired Golf Courses and land . $26,209 ------- -------
GOLF TRUST OF AMERICA, INC. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED) (UNAUDITED) (IN THOUSANDS)
The increase in basis has been allocated to the assets of the Other Acquired Golf Courses as summarized below. The allocation is preliminary and is based upon management's best estimate of the fair value of the assets acquired. The contribution of the Golf Courses by The Legends Group is reflected at the net book value of the assets plus $3,532 of land contributed to Legends Golf, by the prior owner concurrent with the Formation Transactions.
Other Acquired Legends Golf Courses Pro Forma -------- -------------- --------- Land $ 4,532 $10,374 $14,906 Golf course improvements 26,429 8,290 34,719 Buildings 3,219 5,908 9,127 Furniture and equipment 2,487 1,637 4,124 ------- ------- ------- Total properties $36,667 $26,209 $62,876 ------- ------- ------- ------- ------- -------
(C) Reflects initial borrowing obtained by the Company and related loan costs ($72). (D) Reflects the following proposed transaction
Gross proceeds from sale of 3,910,000 shares of common stock net of underwriting discount . . . . . . . $76,362 Expenses of the offering . . . . . . . . . . . . . . . . (3,145) ------- $73,217 ------- -------
(E) Reflects the following:
(F) The Company, as sole general partner of the Operating Partnership, will have, subject to certain protective rights of the Limited Partners, full, exclusive and complete responsibility and discretion in the management and unilateral control of the Operating Partnership. Such responsibilities permit the Company to enter into certain major transactions including acquisitions, dispositions, refinancings and selection of golf course operators and to cause changes in the Operating Partnership's line of business and distribution policies. Further, the Company may not be replaced by as general partner by the Limited Partners, except in certain limited circumstances.
REPORT OF INDEPENDENT CERTIFIED ACCOUNTANTS
To the Board of Directors and Shareholders of Golf Trust of America, Inc.
We have audited the accompanying balance sheet of GOLF TRUST AMERICA, INC. as of December 31, 1996. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of GOLF TRUST AMERICA, INC. at December 31, 1996, in conformity with generally accepted accounting principles.
BDO Seidman, LLP Charlotte, North Carolina
March 26, 1997
GOLF TRUST OF AMERICA, INC. BALANCE SHEET DECEMBER 31, 1996
ASSETS Cash ................................................................. $100 ---- ---- STOCKHOLDERS' EQUITY Preferred stock, $.01 par value, 10,000,000 shares authorized, no shares issued .................................................... $ - Common stock, $.01 par value, 90,000,000 shares authorized, 1 share issued and outstanding ...................................... - Additional paid-in capital ........................................... 100 ---- Total stockholders' equity ............................................ $100 ---- ----
NOTES TO BALANCE SHEET
1. ORGANIZATION
Golf Trust of America, Inc. (the "Company") was incorporated in Maryland on November 8, 1996. The authorized capital stock of the Company consists of 90,000,000 shares of Common Stock having a par value of $.01 per share and 10,000,000 shares of Preferred Stock having a par value of $.0l per share.
The Company is a self-administered real estate investment trust ("REIT") formed to capitalize upon consolidation opportunities in the ownership of golf courses in the United States. The principal business strategy of the Company is to acquire high quality golf courses and to lease the golf courses to qualified third party operators, including affiliates of the sellers. Title to the acquired courses is held by Golf Trust of America, L.P., a Delaware limited partnership (the "Operating Partnership"), in which the Company is the sole general partner.
Golf Trust of America, Inc., through its wholly owned subsidiaries GTA GP, Inc. ("GTA GP") and GTA LP, Inc. ("GTA LP"), holds a 48.6% interest in the Operating Partnership. GTA GP is the sole general partner of the Operating Partnership and owns a 0.2% interest therein. GTA LP is a limited partner in the Operating Partnership and owns a 48.4% interest therein.
In February 1997, the Company raised net proceeds of approximately $73 million in its initial public offering ("the IPO"). In the IPO the Company sold 3,910,000 shares of common stock at $21.00 per share (including 510,000 shares sold pursuant to the underwriters' over-allotment option, which was exercised in full). The Company contributed the net proceeds of the IPO to the Operating Partnership in exchange for 48.6% interest in the Operating Partnership. Concurrently with the closing of the IPO, the Operating Partnership acquired ten golf courses (the "Initial Courses") from their prior owners ( the "Prior Owners").
The Prior Owners were paid an aggregate of approximately $6.2 million in cash and approximately $43.1 million in repayment of mortgage and other indebtedness and were issued approximately 4.1 million OP units which represents a 51% limited partnership interest in the Operating Partnership. Control of the Operating Partnership remains in the Company as the sole general partner.
The Company as sole general partner of the Operating Partnership has, subject to certain protective rights of the Limited Partner, full, exclusive and complete responsibility and discretion in the management and unilateral control of the Operating Partnership. Such responsibilities permit the Company to enter into certain major transactions including acquisitions, dispositions, refinancings and selection of golf course operators and to cause changes in the Operating Partnership's line of business and distribution policies'. Further, the Company may not be replaced as general partner by the Limited Partners, except in certain limited circumstances. Accordingly, the Company is considered to control the Operating Partnership and intends to present its accounts on a consolidated basis with the Operating Partnership.
Holders of limited partnership interests in the Operating Partnership ("OP Units") will have the opportunity after one year following the receipt of such OP Units, subject to certain restrictions, to have their OP Units exchanged for cash in an amount equal to the fair market value of an equivalent number of shares of Common Stock or, at the election of the Company, for Common Stock on a one-for-one basis. The Company currently expects that it will elect to issue Common Stock in connection with such exchange, unless it is prohibited from doing so because of the ownership restrictions in its Charter.
2. INCOME TAXES
Commencing with the year beginning January 1, 1997, the Company intends to make an election to be taxed as a real estate investment trust ("REIT") under Sections 856 through 860 of the Code. As a REIT, the Company generally will not be subject to federal income tax if it distributes at least 95% of its REIT taxable income to its stockholders. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to state and local taxes on its income and property and to federal income and excise taxes on its undistributed income.
3. INCENTIVE PLANS AND EMPLOYMENT AGREEMENTS
The Company has established a stock incentive plan (the "Plan") to enable executive officers and other key employees of the Company to participate in the ownership of the Company. The Plan is designed to attract and retain executive officers and other key employees of the Company and to provide incentive to such persons to maximize the Company's cash flow available for distribution. The Plan provides for the award to executive officers and other key employees of the Company of a broad variety of stock-based compensation alternatives such as nonqualified stock options, incentive stock options, restricted stock, and performance awards.
AWARDS UNDER THE PLAN
NONQUALIFIED STOCK OPTIONS provide for the right to purchase common stock at a specified price which may be less than the fair market value on the date of grant (but not less than par value) and usually become exercisable in installments after the grant date. Nonqualified stock options may be granted for any reasonable term.
INCENTIVE STOCK OPTIONS are designed to comply with the provisions of the Code and will be subject to restrictions contained in the Code, including exercise prices equal to at least 100% of fair market value of the common stock on the grant date and a ten year restriction on their term, but may be subsequently modified to disqualify them from treatment as an incentive stock option.
RESTRICTED STOCK may be sold to participants at various prices but not below par value and made subject to such restrictions as may be determined by the Compensation Committee. Restricted stock, typically, may be repurchased by the Company at the original purchase price if the conditions or restrictions are not met. In general, restricted stock may not be sold, or otherwise transferred or hypothecated, until restrictions are removed or expire. Purchasers of restricted stock, unlike recipients of options, have voting rights and receive dividends prior to the time when the restrictions lapse.
PERFORMANCE AWARDS may be granted by the Compensation Committee on an individual or group basis. Generally, these awards are based upon specific agreements and may be paid in cash or in common stock or in a combination of cash and common stock. Performance awards may include "phantom" stock awards that provide for payments based upon increases in the price of the Company's common stock over a predetermined period. Performance awards may include bonuses which may be granted by the Compensation Committee on an individual or group basis and which may be payable in cash or in common stock or in a combination of cash and common stock.
In addition, a maximum of 100,000 shares of Common Stock may be issued under the Company's Non-Employee Directors' Plan.
In accordance with Statement of Financial Accounting Standards No. 123, the Company intends to adopt the intrinsic value based approach to accounting for stock-based compensation, supplemented by footnote disclosure of pro forma net income and earnings per share using a fair value based method of accounting for stock-based compensation.
The Company has entered into employment agreements with the officers concurrent with the formation transactions that expire through 2001. The agreements provide basic compensation in addition to other incentives and bonuses upon certain conditions as defined in the agreements.
4. COMMITMENT
The Company and NationsBank, N.A. have signed a term sheet relating to a $75 million line of credit (the "Line of Credit") which will be used primarily for acquisitions. Definitive documentation on the Line of Credit is currently being finalized. The Company expects the Line of Credit facility to be available in the second quarter of 1997. However, the Company has not consummated the Line of Credit and there can be no assurance that such credit will be extended to the Company.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of Legends Golf Myrtle Beach, South Carolina
We have audited the accompanying combined balance sheets of LEGENDS GOLF (as defined in Note 1) as of December 31, 1996 and 1995, and the related combined statements of income, owners' equity, and cash flows for each of the three years in the period ended December 31, 1996. These combined financial statements are the responsibility of LEGENDS GOLF'S management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As more fully described in the notes to the combined financial statements, LEGENDS GOLF has material transactions with its majority stockholder and affiliates.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of LEGENDS GOLF at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
March 21, 1997
LEGENDS GOLF COMBINED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ---------------------- 1995 1996 ASSETS (Note 6) ------- ------- CURRENT: Cash. . . . . . . . . . . . . . . . . . . . . . . $ 400 $ 841 Accounts receivable (Note 3): Golf packages. . . . . . . . . . . . . . . . . . 580 984 Related parties. . . . . . . . . . . . . . . . . 45 246 Stockholder. . . . . . . . . . . . . . . . . . . - 1 Other. . . . . . . . . . . . . . . . . . . . . . 37 59 Inventories . . . . . . . . . . . . . . . . . . . 294 498 Prepaid assets. . . . . . . . . . . . . . . . . . 2 4 ------- ------- Total current assets. . . . . . . . . . . . . 1,358 2,633 ------- ------- Property and equipment, less accumulated depreciation and amortization (Notes 4 and 6). . . 33,099 35,060 ------- ------- Other assets: Advances to affiliates (Note 3) . . . . . . . . . 7,803 11,673 Other . . . . . . . . . . . . . . . . . . . . . . 40 438 ------- ------- Total other assets. . . . . . . . . . . . . . 7,843 12,111 ------- ------- $42,300 $49,804 ------- ------- ------- ------- LIABILITIES AND OWNERS' EQUITY: CURRENT LIABILITIES: Accounts payable. . . . . . . . . . . . . . . . . $ 430 $ 1,417 Accrued expenses: Land lease (Note 7). . . . . . . . . . . . . . . - 5 Retirement plan (Note 5 ). . . . . . . . . . . . 71 95 Other. . . . . . . . . . . . . . . . . . . . . . 308 633 Current maturities of long-term debt (Note 6) . . 1,710 26,697 ------- ------- Total current liabilities . . . . . . . . . . 2,519 28,847
Advances from affiliates (Note 3) . . . . . . . . . 8,787 13,167 Long-term debt, less current maturities (Note 6). . 24,666 616 ------- ------- Total liabilities . . . . . . . . . . . . . . 35,972 42,630 ------- ------- Commitments and contingencies (Notes 5 and 7)
Owners' equity: Common stock, $1 par--shares authorized, 300,000; outstanding, 1,000 . . . . . . . . . . 3 3 Members' contributions . . . . . . . . . . . . . 1 1 Additional paid-in capital . . . . . . . . . . . 300 300 Members' accumulated deficit . . . . . . . . . . 956 (1,970) Retained earnings (Note 6) . . . . . . . . . . . 5,068 8,840 ------- ------- Total owners' equity . . . . . . . . . . . . 6,328 7,174 ------- ------- $42,300 $49,804 ------- ------- ------- -------
See accompanying notes to combined financial statements.
LEGENDS GOLF COMBINED STATEMENTS OF INCOME (IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------- 1994 1995 1996 ------- ------- ------- REVENUES: Green fees. . . . . . . . . . . . . . . . . . . $ 9,931 $10,147 $10,476 Cart rentals. . . . . . . . . . . . . . . . . . 4,364 4,373 4,564 Membership dues . . . . . . . . . . . . . . . . 76 99 159 Food and beverage sales . . . . . . . . . . . . 1,652 1,708 2,095 Pro shop merchandise sales. . . . . . . . . . . 1,857 2,021 2,089 Other income (Note 8) . . . . . . . . . . . . . 1,216 94 30 ------- ------- ------- Total revenues . . . . . . . . . . . . . . 19,096 18,442 19,413 ------- ------- ------- COSTS AND EXPENSES: General and administrative (Note 3) . . . . . . 4,150 3,998 5,171 Repairs and maintenance . . . . . . . . . . . . 2,319 2,386 3,642 Depreciation and amortization . . . . . . . . . 1,830 1,791 2,400 Cost of merchandise sold. . . . . . . . . . . . 911 983 1,053 Rents (Note 6). . . . . . . . . . . . . . . . . 956 982 1,098 Pro shop operations . . . . . . . . . . . . . . 765 857 1,107 Cost of food and beverage sold. . . . . . . . . 565 604 817 Food and beverage operations. . . . . . . . . . 417 512 668 ------- ------- ------- Total costs and expenses. . . . . . . . . . 11,913 12,113 15,956 ------- ------- ------- Operating income. . . . . . . . . . . . . . . . . 7,183 6,329 3,457 Interest expense. . . . . . . . . . . . . . . . . 998 1,017 1,589 ------- ------- ------- Net income. . . . . . . . . . . . . . . . . . . . $ 6,185 $ 5,312 $ 1,868 ------- ------- ------- ------- ------- -------
See accompanying notes to combined financial statements.
LEGENDS GOLF COMBINED STATEMENTS OF OWNERS' EQUITY (IN THOUSANDS)
See accompanying notes to combined financial statements.
LEGENDS GOLF COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying notes to combined financial statements.
LEGENDS GOLF NOTES TO COMBINED FINANCIAL STATEMENTS (IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying combined financial statements include the accounts of three S-Corporations (Seaside Resorts, Ltd. d/b/a Oyster Bay Golf Club; Heritage Golf Club, Ltd.; and Golf Legends, Ltd.) and one limited liability company (Legends of Virginia, LC). The entities, referred to collectively as Legends Golf, are engaged in the operation of golf courses in North Carolina, South Carolina, and Virginia.
The accompanying combined financial statements of Legends Golf have been presented on a historical cost basis since the Legends Golf is to be the subject of a business combination upon the contribution of real estate and other properties in exchange for interest in a limited partnership to be formed by the operating partnership for inclusion in a public offering (see Note 9). All significant intercompany balances and transactions have been eliminated. Additionally, certain classifications may vary from those of the individual companies' financial statements.
Minority interest attributed to the minority shareholder of Legends of Virginia, LC is not reflected as the company is in a capital deficit position. Therefore, the total deficit is attributed to the majority owner.
The Companies financial statements are being presented on a combined basis as under the terms of the operating leases to be implemented under the Formation Transactions, the lease obligations are cross-collateralized among all four Legends lessees. This presentation better presents the ability of the lessees to service the leases.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are valued at the lower-of-cost (first-in, first-out) or market and consist primarily of food, beverages, golf equipment, and clothing.
REVENUE RECOGNITION
Revenue from green fees, cart rentals, food and beverage sales, merchandise sales, and range income are generally recognized at the time of sale.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with a maturity of three months or less to be cash equivalents.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed over the estimated useful lives of the assets using straight-line methods for financial reporting and accelerated methods for income tax purposes.
Estimated useful lives for major asset categories approximate:
DESCRIPTION YEARS ----------- ----- Golf course improvements. . . . . . . . 15 Buildings . . . . . . . . . . . . . . . 40 Machinery and equipment . . . . . . . . 3-8 Furniture . . . . . . . . . . . . . . . 8 Golf carts. . . . . . . . . . . . . . . 5
Major renewals and betterments are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. When properties are retired or otherwise disposed of, related cost and accumulated depreciation are removed from the accounts.
INCOME TAXES
For the S-Corporations, the absence of a provision for income taxes is due to the election by the companies, and consent by their sole stockholder, to include the taxable income or loss of the companies in his individual tax returns. As a result, no federal or state income taxes are imposed on the companies. For the limited liability company, no provision has been made for income taxes or related credits as under the Internal Revenue Code as a limited liability company is treated as a partnership for income tax purposes. Therefore, the results of operations are includable in the income tax returns of the members.
USE OF ESTIMATES
The preparation of combined financial statements in conformity with generally accepted accounting principles required management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the combined financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject Legends Golf to concentration of credit risk consist primarily of trade receivables.
Concentration of credit risk with respect to trade receivables, which consists primarily of golf packages from hotels and charges, is limited due to the large number of hotels comprising Legends Golf's customer base. The trade receivables are billed and due monthly, and all probable bad debt losses have been appropriately considered in establishing an allowance for doubtful accounts. As of December 31, 1994, 1995, and 1996, Legends Golf had no significant concentration of credit risk.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" (Statement No. 121). Statement No. 121 requires that long-lived assets and certain intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Legends Golf periodically reevaluates the carrying amounts of its long-lived assets and the related depreciation and amortization periods, and that the adoption of Statement No. 121 did not have a material effect on its combined financial statements. This statement is effective for fiscal years beginning after December 15, 1995.
ADVERTISING
Legends Golf expenses advertising costs as incurred. Advertising costs included in general and administrative costs in the amounts of $446, $403, and $672 for December 31, 1994, 1995, and 1996, respectively.
3. RELATED PARTY TRANSACTIONS
The Legends' Golf sole stockholder (majority member) also owns and operates Marsh Harbour, Ltd.; Heritage Plantation, Ltd.; Legends Golf Development, Ltd.; The Legends Group, Ltd.; Legends Scottish Village, LLC; Legends Properties, LLC; Legends Golf Resorts, LLC; and other related businesses.
The Legends Group, Ltd. provides various management and administrative services including reservations, advertising, accounting, payroll and related benefits, and telephone for all affiliated companies. These expenses are allocated to the businesses using procedures deemed appropriate to the nature of the expenses involved. The procedures utilize various allocation bases such as relative investment and number of employees and direct effort expended. Interest on allocated external debt is charged as incurred. Legends Golf's management believes the allocations are reasonable, but they are not necessarily indicative of the costs that would have been incurred if the businesses had operated as separate companies. Administrative fees paid by the Legends Golf for such services are as follows.
YEAR ENDED DECEMBER 31, AMOUNT ---------------------- ------ 1994. . . . . . . . . . . . . $ 934 1995. . . . . . . . . . . . . $1,065 1996. . . . . . . . . . . . . $1,185
Advances to and from affiliated companies, stockholder receivable and accrued land lease (Note 7), as shown on the combined balance sheets, have no fixed payment/repayment provisions.
Interest income and expense on advances to and from affiliates is not recorded for financial statement purposes.
Legends Golf paid an affiliate approximately $18,221 for construction of two golf courses which represented cost plus 7 percent.
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
4. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
DECEMBER 31, ----------------- 1995 1996 ------- ------- Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,000 $ 1,000 Golf course improvements. . . . . . . . . . . . . . . . . . 15,297 36,005 Buildings . . . . . . . . . . . . . . . . . . . . . . . . . 3,835 4,789 Machinery and equipment . . . . . . . . . . . . . . . . . . 3,549 2,830 Furniture . . . . . . . . . . . . . . . . . . . . . . . . . 727 558 Golf carts. . . . . . . . . . . . . . . . . . . . . . . . . 1,439 1,373 Construction-in-progress. . . . . . . . . . . . . . . . . . 16,821 332 ------- ------- 41,668 45,888 Less accumulated depreciation . . . . . . . . . . . . . . . 9,569 10,828 ------- ------- Net property and equipment. . . . . . . . . . . . . . . . . $33,099 $35,060 ------- ------- ------- -------
5. RETIREMENT PLAN
The Legends Group, Ltd. sponsors a defined-contribution retirement plan for all eligible employees of Legends Golf and other affiliated companies including officers. The plan provides for contributions by Legends Golf equal to the level funding amount as calculated and defined in the plan agreement. The actual benefit, at any point in time for each participant, is the actual value of the participant's account based on the earnings or losses experienced by the plan. Retirement plan expense was:
YEAR ENDED DECEMBER 31, AMOUNT ---------------------- ------ 1994. . . . . . . . . . . . . $93 1995. . . . . . . . . . . . . $71 1996. . . . . . . . . . . . . $99
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
6. LONG-TERM DEBT
Long-term debt consists of the following:
- --------------------- (1) Legends Golf, along with certain affiliated companies (The Legends Group, Ltd. and Marsh Harbour, Ltd.), participates in a debt agreement with a bank consisting of two term notes totaling $17,547 as of December 31, 1996. The aforementioned companies are jointly liable for the debt and the sole stockholder has guaranteed the loans.
Effective October 26, 1996, the rate was adjusted to the bank's prime rate.
(2) On April 19, 1995, Legends of Virginia, LC obtained a loan with a bank totaling $13,925. In addition, on this date, the affiliated entities amended an existing loan agreement of which the Legends of Virginia, LC is jointly liable. These loans are guaranteed by the majority member and collateralized by two new golf courses, New Kent and Stonehouse, and existing affiliated courses and clubhouses and other assets of the majority member.
The loan agreements provide, among other covenants, restrictions on certain financial ratios, a minimum aggregate cash balance of $250, payments to the sole stockholder, capital expenditures, indebtedness, liens, changes in the nature of the business and significant other limitations as to the use of funds. The Company has obtained a waiver of certain of the covenants as of December 31, 1995 and 1996.
These $13,917 and $12,537 notes were transferred to Gulf Trust of America, Inc. (Note 9). The portion related to the affiliates was repaid.
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
6. LONG-TERM DEBT (CONTINUED)
Legends Golf is jointly liable as a guarantor, along with the sole stockholder, and other affiliated entities for additional amounts totaling $3,035.
Total debt of all affiliated entities of which the Company is jointly liable is approximately $33,118 at December 31, 1996.
The aggregate annual maturities for the above mortgage notes payable at December 31, 1996, are as follows:
DECEMBER 31, AMOUNT ------------ ------ 1997. . . . . . . . . . . . . . . $26,698 1998. . . . . . . . . . . . . . . 240 1999. . . . . . . . . . . . . . . 220 2000. . . . . . . . . . . . . . . 156 ------- Total . . . . . . . . . . . . . . $27,314 ------- -------
7. COMMITMENTS AND CONTINGENCIES
LEASES
Legends Golf leases the land for two entities included in the combined financials from the sole stockholder. Legends has four leases from the sole stockholder one expiring in 2006, two expiring in 2009, and one in 2012. An additional lease from a third party expires in 2032. The leases require rental payments of 10 percent of monthly green fees as defined in the lease agreements. The leases do not contain an option to purchase the land. Total rental expense approximated the following:
THIRD YEAR ENDED DECEMBER 31, STOCKHOLDER PARTY ----------------------- ----------- ------- 1994. . . . . . . . . . $ 728 $ 228 1995. . . . . . . . . . $ 734 $ 248 1996. . . . . . . . . . $ 726 $ 231
Minimum lease commitments for noncancelable operating leases for various equipment and golf carts in effect at December 31, 1996, are as follows:
YEAR ENDING DECEMBER 31. AMOUNT ----------------------- ------ 1997. . . . . . . . . . . . . . . . . . $ 531 1998. . . . . . . . . . . . . . . . . . 531 1999. . . . . . . . . . . . . . . . . . 494 2000. . . . . . . . . . . . . . . . . . 86 ------ Total . . . . . . . . . . . . . . . . . $1,642 ------ ------
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
SELF-INSURANCE
Legends Golf along with its affiliates maintain a self-insurance program for that portion of health care costs not covered by insurance. Legends Golf is liable for claims up to $15 per employee annually with an annual aggregate maximum liability under the program for all companies of $225. Cumulative amounts estimated to be payable by Legends Golf with respect to pending and potential claims have been accrued as liabilities.
8. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest:
YEAR ENDED DECEMBER 31, AMOUNT ----------------------- --------- 1994. . . . . . . . . . . . . $ 1,016 1995. . . . . . . . . . . . . $ 1,574 1996. . . . . . . . . . . . . $ 2,012
During 1994, equipment having a net book value of $827 and cash of $333 was exchanged for similar new equipment having a value of $1,159.
During 1994, $1,078 of receivables from the sole stockholder were settled through the declaration of a dividend.
During 1994, the Company acquired $2,365 of construction costs through advances from an unaffiliated company.
On May 11, 1994, the Company received contributed land on which to build two golf courses. The value of the land has been estimated at $1,000,000 based on management's estimates of the relationship of assessed value to fair value. The $1,000,000 has been recognized as revenue in the period in which the Company entered into the contract.
During 1995, the Company acquired $14,895 of property and equipment through advances from an affiliated company.
During 1995, $898 of land lease payable to stockholder were netted against receivables from the stockholder.
During 1996, equipment having a net book value of $711 and cash of $399 was exchanged for similar new equipment having a value of $1,110.
LEGENDS GOLF
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
9. SUBSEQUENT EVENT
On February 12, 1997, the Companies contributed the land and improvements, buildings and certain equipment with a net book value of $33,136 net of related debt of $26,385 to Golf Trust of America, LP (GTA, LP). The contribution was concurrent with an initial public offering of the common stock of Golf Trust of America, Inc. (GTA, Inc.), its general partner. The Companies received limited partnership units convertible to common shares of GTA, Inc. and cash of $8.4 million.
Concurrent with the contribution of assets, the Companies transferred the operations of the golf courses along with related assets and liabilities to four newly formed affiliated lessee companies (Legends Lessees) which have entered into lease agreements with GTA, LP. Under the terms of the leases, the Legends Lessees will pay annual base rent of approximately $12,057,000 plus percentage rent based on the increase in gross golf revenues as defined. The Legends Lessees are responsible for all expense related to the operations of the courses.
The remaining assets of the Companies consist of limited partnership units in GTA, LP and receivables and payables from affiliates.
LIST OF EXHIBITS
The following exhibits are part of this Annual Report on Form 10-K for fiscal year 1996 (and are numbered in accordance with Item 601 of Regulation S-K). Items marked with an asterisk (*) are filed herewith.
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------- 3.1 Articles of Amendment and Restatement of the Company, as filed with the State Department of Assessments and Taxation of Maryland on January 31, 1997, (previously filed as Exhibit 3.1A to the Company's Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 2 (filed January 30, 1997) and incorporated herein by reference).
3.2 Bylaws of the Company as currently in effect (previously filed as Exhibit 3.2 to the Company's Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 1 (filed January 15, 1997) and incorporated herein by reference).
10.1* First Amended and Restated Agreement of Limited Partnership of the Operating Partnership (including Exhibit A (schedule of partners and partnership interests) as of March 24, 1997).
10.2.0 Form of Participating Lease between the Operating Partnership and the Initial Lessees relating to the Initial Courses (previously filed as Exhibit 10.2 to the Company's Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 1 (filed January 15, 1997) and incorporated herein by reference).
10.2.1* Schedule of material differences among the Participating Leases for the Initial Courses (included in lieu of the full text of each lease pursuant to Instruction 2 to Item 601 of Regulation S-K).
10.3 Option to Purchase and Right of First Refusal Agreement between (i) the Company and the Operating Partnership and (ii) Larry D. Young dated as of February 6, 1997 (previously filed as Exhibit 10.3 to the Company's Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 2 (filed January 30, 1997) and incorporated herein by reference).
10.4.0 Form of Contribution and Leaseback Agreement between the Operating Partnership and the Prior Owners relating to the Initial Courses (previously filed as Exhibit 10.4 to the Company's Registration Statement on Form S-11 (Commission File No. 333-15965) (filed November 12, 1996) and incorporated herein by reference).
10.4.1* Schedule of material differences among the Contribution and Leaseback Agreements relating to the Initial Courses (included in lieu of the full text of each agreement pursuant to Instruction 2 to Item 601 of Regulation S-K).
10.5 1997 Stock Incentive Plan of the Company (previously filed as Exhibit 10.6 to the Company's Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 1 (filed January 15, 1997) and incorporated herein by reference).
10.6 1997 Non-Employee Directors' Plan (previously filed as Exhibit 10.7 to the Company's Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 1 (filed January 15, 1997) and incorporated herein by reference).
10.7* Employment Agreement between the Company and W. Bradley Blair, II dated February 7, 1997.
10.8* Employment Agreement between the Company and David J. Dick dated February 7, 1997.
10.9* Employment Agreement between the Company and Scott D. Peters dated February 7, 1997.
16.1 Letter of Price Waterhouse LLP, former independent accountants of the Company (previously filed as Exhibit 16.1 to the Company's amended Current Report on Form 8-K dated February 26, 1997 (filed March 17, 1997) and incorporated herein by reference).
21.1 List of Subsidiaries of the Company (previously filed as Exhibit 22.1 to the Company's Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 1 (filed January 15, 1997) and incorporated herein by reference).
24.1 Powers of Attorney. See the "Signatures" section of this Annual Report.
27.1 Financial Data Schedule. _________________________
* Filed herewith.