ITEM 1. BUSINESS
(a) GENERAL DESCRIPTION OF THE BUSINESS
COMPANY OVERVIEW
Golf Trust of America, Inc. ("GTA") is a self-administered real estate investment trust ("REIT") formed to capitalize upon consolidation opportunities in the ownership of upscale golf courses throughout the United States. GTA was incorporated in Maryland on November 8, 1996. GTA holds its golf course interests through Golf Trust of America, L.P., a Delaware limited partnership and, in one instance, through a wholly-owned affiliate of Golf Trust of America, L.P. (collectively, the "Operating Partnership"), controlled by GTA. (In this Annual Report, the term "Company" generally includes GTA, the Operating Partnership, and their subsidiaries.) As of March 20, 2000, the Company holds participating interests in 47 golf courses (the "Golf Courses"), 43 of which are owned and four of which serve as collateral for a 30-year participating mortgage loan made by the Company to the owner of the Westin Innisbrook Resort ("Participating Mortgage"). Golf Course quantities are stated in terms of 18-hole equivalents, such that one 27-hole golf course facility would be counted as 1.5 golf courses. The Golf Courses are located in Florida (14), South Carolina (6), Illinois (3.5), Ohio (3), Michigan (3.5), California (2.5), Georgia (2), Virginia (2), Missouri (1.5), Nebraska (1.5), Texas (1.5), Alabama, Kansas, Kentucky, North Carolina, New Mexico, and West Virginia.
The Golf Courses which the Company owns are leased to multiple independent third party lessees (the "Lessees") pursuant to leases ("Participating Leases") which provide for payments ("Lease Payments") of fixed base rent ("Base Rent") and participating rent ("Participating Rent") based on growth in revenue at the Golf Courses, excepting a single Golf Course that is currently being managed by GTA as explained in the section titled "Events of Default under the Participating Lease" herein. The interest payment under the Participating Mortgage is structured similarly to the Participating Leases to provide the Company with base interest payments and additional interest payments based on growth in revenue at the Westin Innisbrook Resort. Neither the Company nor its executive officers own any interest in, or participate in the management of, the Lessees or the owner of the Westin Innisbrook Resort, Golf Host Resorts, Inc. (the "Westin Innisbrook Resort Owner").
The Company's executive offices are located at 14 North Adger's Wharf, Charleston, South Carolina 29401 and its telephone number is (843) 723-GOLF (4653).
SUBSIDIARIES AND THE OPERATING PARTNERSHIP
GTA has two wholly owned subsidiaries, GTA GP, Inc. ("GTA GP") and GTA LP, Inc. ("GTA LP"), each of which is a Maryland corporation (collectively, the "Subsidiaries"). The Subsidiaries exist solely to hold the Company's general and limited partnership interests in the Operating Partnership. The board of directors of each Subsidiary is comprised of the executive officers of GTA. The Operating Partnership was formed in Delaware in November 1996.
The Operating Partnership owns the Golf Courses that are subject to the Participating Leases and holds the Participating Mortgage. In addition, the Operating Partnership owned approximately 95% of the economic interest in a taxable subsidiary formed to hold title to a 14-acre development site adjacent to the Sandpiper Golf Course, with the balance owned for tax reasons by Mr. Blair, President and Mr. Young, a director of the Company. This site was sold in June of 1999, consequently, this legal entity was dissolved and the note receivable for the land is now held by GTA LP. As of March 22, 2000, GTA held a 64.4% interest in the Operating Partnership, through its Subsidiaries. GTA GP is the sole general partner of the Operating Partnership and GTA LP is a limited partner of the Operating Partnership. The other limited partners include those Prior Owners who received OP Units in exchange for the contribution of their Golf Courses, including Larry D. Young. The limited partners do not have day-to-day control over the Operating Partnership. However, the limited partners are entitled to vote on certain matters, including the sale of all or substantially all of the Company's assets or the merger or consolidation of the Operating Partnership, which decisions require the approval of the holders of at least 66.7% of the interests in the Operating Partnership (including GTA LP). Each of the limited partners (other than GTA LP), generally, may exercise Redemption Rights (as herein defined) for up to 50% of its OP Units beginning one year after transfer of their Golf Course to the Operating Partnership and the remaining 50% beginning two years after completion of such transfer for shares of Common Stock on a one-for-one basis or for cash at the election of the Company.
The current relationship among GTA, its subsidiaries, the Operating Partnership (including its wholly-owned affiliate), the limited partners (including many Prior Owners and the Westin Innisbrook Resort Owner) and the operators is described in the following chart (excepting the two single member LLCs established to manage foreclosure property as explained in the section titled "Events of Default under the Participating Lease" herein):
[CHART]
RECENT DEVELOPMENTS
Since March 26, 1999, the filing date of the Company's annual report on Form 10-K for the year ended December 31, 1998, the following developments have occurred:
PREFERRED INTEREST
On April 2, 1999, GTA completed a private placement of 800,000 shares of its 9.25% Series A Cumulative Convertible Preferred Stock, par value $0.01 per share ("Series A Preferred Stock"), at a price of $25.00 per share to a single purchaser, AEW Targeted Securities Fund, L.P., for gross proceeds of $20,000,000, less associated costs of approximately $878,000. The net proceeds were used as follows: (i) to pay down $1,025,000 under the Credit Facility; (ii) to repay promissory notes to Nations Credit of $5,169,000; (iii) to pay loan costs associated with the amendment and restatement of the Credit Facility of $1,399,000; (iv) to make new officer loans of $648,000; and (v) the balance for general working capital needs.
ACQUISITIONS
The following is a summary of the Company's acquisitions in 1999:
For the year ended December 31, 1999, the Company purchased two Golf Courses for an aggregate acquisition cost of approximately $15.9 million. In conjunction with the purchase of the Pete Dye Golf Club, the lessee executed two promissory notes: (i) a $2.3 million capital improvement loan to construct the new clubhouse, and (ii) a $3.5 million secured land loan. These two promissory notes initially bear interest at 10.5% per annum with annual increases of 5% per annum. The purchase price, together with the original principal balance of the promissory notes, totaled $21.7 million.
DISPOSITIONS
In June 1999, Sandpiper GTA Development, Inc. sold the undeveloped 14-acre parcel of land located near Sandpiper Golf Course in Santa Barbara, California for $5.3 million, which approximated our basis in the property. The sales price included a $4.2 million promissory note from the buyer secured by a first deed of trust on the parcel; the promissory note accrues interest at 10% per annum and matures one year from closing, subject to two one-year extensions. These extensions can only be exercised by the borrower subject to borrower's payment of all outstanding and accrued interest on the note, an installment payment of $1,000,000 from the buyer for each
extension, and an increase in the interest rate on the note to 12% per annum effective as of the second installment. The installment dates are June 2, 2000 and June 2, 2001. The promissory note matures on June 2, 2002, in the event that no extensions are exercised.
EVENTS OF DEFAULT UNDER THE PARTICIPATING LEASE
GTA has a policy of acting promptly and aggressively on tenant defaults in accordance with the terms of the Participating Leases. In the event a tenant fails to pay their rent in accordance with the applicable Participating Lease, an "Event of Default" (further defined under ITEM 2.
ITEM 2. PROPERTIES
The Company believes its investments are consistent with its goal of becoming a leading owner of, and participating in increased revenue from, nationally or regionally recognized upscale golf courses. The Golf Courses include a number of nationally recognized golf courses.
The Golf Courses include 22 upscale Daily Fee courses, 14.5 Resort Courses and 10.5 Private Country Clubs. "Daily Fee" courses are open to the public and generate revenues principally through green fees, golf cart rentals, food and beverage operations, merchandise sales and driving range charges. "Resort Courses" are Daily Fee golf courses that attract a significant percentage of players from outside the immediate area in which the golf course is located and generate a significant amount of revenue from golf vacation packages. The Company considers its Daily Fee and Resort Courses to be high-end Golf Courses because of the quality and maintenance of each Golf Course. 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 its Golf Courses is reflected in the green fees charged at each Golf Course, which significantly exceed national averages. The Company believes its focus on upscale Daily Fee golf courses and private country clubs, which attract golfers with attractive demographic and economic profiles, will result in stronger and less cyclical revenue growth in comparison to golf courses with lower green fees.
Five of the Golf Courses are located in the Myrtle Beach, South Carolina vicinity, a popular year-round golf destination area. Myrtle Beach is considered one of the nation's premier golf resort locations with just over 100 golf courses and approximately 4.2 million rounds played in 1999, according to the MYRTLE BEACH GOLF HOLIDAY-TM-. In addition to golf courses, Myrtle Beach offers a mix of entertainment, shopping and dining, as well as proximity to beaches. All of the Golf Courses located in the Myrtle Beach vicinity were developed and contributed to the Company by Legends Golf, a leading golf course owner, developer and operator in the Southeast and Mid-Atlantic regions of the United States.
Five of the Golf Courses are located near Tampa, Florida. Of these, four are located at the Westin Innisbrook Resort, a destination golf resort that includes one of the largest hotel and conference facilities in the state. The fifth course, Lost Oaks of Innisbrook, is located near the Westin Innisbrook Resort, and all five courses are near the Gulf of Mexico. Additionally, the courses benefit from the millions of tourists annually that visit Disney World-TM-, Busch Gardens-TM- and other regional recreational attractions.
The Company owns a fee simple interest in each of the Golf Courses with the exception of Oyster Bay and Mystic Creek, which are subject to long-term ground leases, and the four Golf Courses at the Westin Innisbrook Resort, where the Company holds a first lien on the Golf Courses and all of the related facilities (other than the separately-owned condominium units comprising the hotel). The Company additionally holds an option to purchase the Westin Innisbrook Resort and such facilities at the expiration of the Participating Mortgage for the lesser of its fair market value or a pre-determined number of shares of common stock in the Company.
Certain information regarding each of the Golf Courses owned by the Company or in which the Company has an interest as of December 31, 1999, is set forth on the following pages:
RESORT COURSES
Resort Courses are Daily Fee golf courses that draw a high percentage of players from outside the immediate area in which the course is located and generate a significant amount of revenue from golf vacation packages. Some Resort Courses are semi-private, in that they offer membership packages that allow members special privileges at the golf course, but also allow public play.
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 respective markets. Some high-end daily fee courses are semi-private, in that they offer membership packages but also allow public play.
PRIVATE CLUB COURSES
Private 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 generally are more stable and predictable than those of public courses, because the receipt of membership dues generally is independent of the level of course utilization.
THE PARTICIPATING LEASES
THE FOLLOWING SUMMARY OF THE PARTICIPATING LEASES IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PARTICIPATING LEASES, A FORM OF WHICH WAS PREVIOUSLY FILED. THE FOLLOWING DESCRIPTION OF THE PARTICIPATING LEASES DOES NOT PURPORT TO BE COMPLETE BUT CONTAINS A SUMMARY OF THE MATERIAL PROVISIONS THEREOF. PURSUANT TO THE COMPANY'S MULTIPLE INDEPENDENT LESSEE STRUCTURE, LEASES ARE INDIVIDUALLY NEGOTIATED AND CONSEQUENTLY VARY FROM ONE ANOTHER, AT TIMES IN MATERIAL WAYS.
All of the Participating Leases contain the same basic provisions described below. The leases for any golf course properties acquired by the Company in the future will contain such terms and conditions as are 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 below with respect to the Participating Leases. The Company anticipates that each new lease will be with an existing Lessee, with an affiliate of the seller or with an unaffiliated third party experienced in the operation of similar courses.
LEASE TERM
Each Participating Lease was entered into upon the conveyance to the Company of the underlying Golf Course. Generally, the Company's interest in each leased Golf Course includes the land, buildings and improvements, maintenance equipment, related easements and rights, and fixtures (collectively, the "Leased Property"). Each Leased Property is leased to the respective Lessee under a Participating Lease which, generally, has a primary term of 10 years (the "Fixed Term"). In addition, each Lessee generally has an option to extend the term of its Participating Lease for up to six terms of five years each (the "Extended Terms") subject to earlier termination upon the occurrence of certain contingencies described in the Participating Lease.
In addition, at the expiration of the Fixed Term and the Extended Terms, the Lessee will generally have a right of first offer to continue to lease the Golf Course on the terms and conditions pursuant to which the Company intends to lease the Golf Course to a third party.
USE OF THE GOLF COURSES
Each Participating Lease permits the Lessee to operate the Leased Property as a golf course, along with a clubhouse and other activities customarily associated with or incidental to the operation of a golf course and other facilities located at the golf course, including, where applicable, swim and tennis operations. Operations may include sale or rental of golf-related merchandise, sale of memberships, furnishing of lessons, operation of practice facilities and sales of food and beverages.
BASE RENT; PARTICIPATING RENT
The Participating Leases provide for the Company to receive, with respect to each Golf Course, the greater of Base Rent or an amount equal to Participating Rent plus the initial Base Rent payable under each Participating Lease. Participating Rent is generally equal to 33 1/3% of any increase in Gross Golf Revenue over Gross Golf Revenue for the 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 generally be increased annually by the Base Rent Escalator (generally, the lesser of (i) 3% or (ii) a multiple 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 generally limited to 5% - 7% during the first five years of the initial lease terms. "Gross Golf Revenue" generally is 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. In certain circumstances, the Company participates in food and beverage and merchandise revenue. Base Rent is required to be paid in twelve equal monthly installments in arrears on the first day of each calendar month. Participating Rent is payable quarterly in arrears.
TRIPLE NET LEASES
The Participating Leases are structured as triple net leases under which each Lessee is required to pay all real estate and personal property taxes, insurance, utilities and services, golf course maintenance and other operating expenses.
SECURITY DEPOSIT
As security for its affiliated Lessee's obligations under its Participating Leases, each prior owner of each Golf Course generally is obligated to pledge OP Units (or cash or other collateral acceptable to the Company) with a value initially up to 15% of the purchase price for the applicable Golf Course. The security deposit generally will not be released for two years. Beginning in the third year and any time thereafter, one-third of pledged collateral will be released if the net operating income to lease payment coverage ratio (the "Coverage Ratio") of the Lessee for the two prior fiscal years equals or exceeds 120%, 130% and 140%, respectively. If the Coverage Ratio falls below 120% at any time following the release of pledged collateral, then the Lessee shall be required to retain and not distribute profits until such time as the Lessee has retained cash equal to at least six-months of then-current Base Rent. 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 Golf Course and the value of any additional OP Units issued in connection with the exercise of the Lessee Performance Option. If the Company acquires any Expansion Facility, the security deposit also will be increased by an amount equal to approximately 15% of the purchase price of the Expansion Facility.
In instances where the Golf Course is not leased to a prior owner, the security deposit provided to the Company varies, and is generally less than where a Golf Course is leased back to its Prior Owners
and the Company seeks to cross-collateralize any security deposits otherwise provided by such Lessee or its affiliates to the Company.
GTA LESSEE ASSOCIATION
Each Lessee is a member of the GTA Lessee Association, which participates in cross-marketing of the Golf Courses and identifies each Golf Course as owned by the Company, thereby increasing the golfing consumer's brand name awareness of the Company. Membership in the GTA Lessee Association is designed to provide the Lessees, collectively, greater purchasing power with vendors than each would have individually. The GTA Lessee Association attempts to ensure a consistent, high-quality product at each member Golf Course.
MAINTENANCE AND MODIFICATIONS
Each Lessee, at its sole cost and expense, is required, to maintain and operate its respective Leased Property in good order, repair and appearance and to make such interior and exterior, structural and non-structural, foreseen and unforeseen, and ordinary and extraordinary repairs as are necessary and appropriate to keep such Leased Property in good order, repair and appearance. Each Lessee also must maintain each Golf Course it leases in substantially the same condition it was in at the commencement of the Participating Lease and otherwise in a condition comparable to other comparable golf courses in its vicinity. If the Company, in consultation with the GTA Lessee Association, determines that a Lessee has failed to comply with its maintenance and operation obligations, then the Company shall provide a written list to the Lessee of remedial work and/or steps to be performed. If the Lessee disputes the Company's assertions, then the matter shall be handled by a committee composed of members of the GTA Lessee Association and representatives of the Company.
The Company has generally established and will maintain, through the payment of additional rent, with respect to each Golf Course, a capital replacement reserve (a "Capital Replacement Fund") in an amount equal to between 2% and 5% of Gross Golf Revenue at such Golf Course, depending on certain factors, including the condition of the structures and the age and condition of the Golf Course. The Company and each Lessee will agree on the use of funds in these reserves and the Company has the right to approve each Lessee's annual and long-term capital expenditure budgets. Funds in the Capital Replacement Fund shall be paid to a Lessee to reimburse such Lessee for expenditures made in connection with approved capital replacements. The Lessees generally are obligated to increase their lease payment each year in an amount equal to the increase in the Capital Replacement Fund from the prior year. Amounts in the Capital Replacement Fund will be deemed to accrue interest at a money market rate. Generally, any amounts in the Capital Replacement Fund at the expiration of the applicable Participating Lease will be retained by the Company, with limited exceptions.
Except for its obligation to fund the Capital Replacement Fund and except for certain improvements, the Company is not required to build or rebuild any improvements on any Leased Property, or to make any repairs, replacements, alterations, restorations or renewals of any nature or description to any Leased Property, whether ordinary or extraordinary, structural or non-structural, foreseen or unforeseen, or to make any expenditure whatsoever with respect thereto, in connection with any Participating Lease, or to maintain any Leased Property in any way. In the event that the Company elects to fund additional capital improvements on a Golf Course, the Company generally will condition such election on an increase in minimum rent under the Participating Lease with respect to such Golf Course to reflect such expenditures.
During the Fixed Term and each Extended Term, each Lessee, at its sole cost and expense, may make alterations, additions, changes and/or improvements ("Lessee Improvements") to each Leased Property, without the Company's prior written consent, provided such alterations do not diminish the value or appearance of the Golf Course. All such Lessee Improvements will be subject to all the terms and provisions of each applicable Participating Lease and will become the property of the Company upon termination of such Participating Lease.
At the end of the Participating Lease, all remaining personal property at each Leased Property will become the property of the Company.
INSURANCE
Each Lessee is required to maintain insurance on its Leased Property 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 coverage, which at the time is usual and commonly obtained in connection with properties similar in type of building size and use to the Leased Property located in the geographic area where the Leased Property is located. Each insurance policy names the Company as additional insured or loss payee, as applicable. In 1999, the GTA Lessee Association selected a preferred vendor for insurance products and services for the purpose of providing lessees access to better rates and coverage.
ASSIGNMENT AND SUBLETTING
A Lessee, without the prior written consent of the Company (which consent may generally be withheld by the Company in its sole discretion, except in limited instances), may not 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 Lessee, as if such change of control were an assignment of the Participating Lease. However, each Lessee has the right to assign its Participating Lease to its affiliates.
Each Lessee, with the Company's prior approval, which approval the Company may withhold in its discretion, may be permitted to sublease portions of any Leased Property to sublessees to operate portions (but not the entirety of the operations customarily associated with or incidental to the operation of a golf course (e.g., driving range, restaurant, etc.).
COMPANY'S RIGHT OF FIRST OFFER
In the event a 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 Lessee must give the Company written notice of its intent to sell, which shall indicate the terms and conditions upon which such Lessee intends to sell its interest in the Participating Lease. The Company or its designee shall thereafter generally have a period of 60 days to elect to purchase the leasehold interest on the terms and conditions at which such Lessee proposes to sell its interest. If the Company or its designee elects not
to purchase the interest of the Lessee, then such Lessee shall be free to sell its interest to a third party, subject to the Company's approval as described above (see "-- Assignment and Subletting"). However, if the terms on which the Lessee intends to sell its interest are reduced by 5% or more, then such Lessee generally shall again offer the Company the right to acquire its interest, provided the Company shall have only 15 days to accept such offer.
LESSEE'S RIGHT OF FIRST OFFER
The Company may sell a Golf Course, but must first offer the Lessee of such course the right to purchase the Golf Course. The Company must give the relevant Lessee written notice of its intent to sell, which shall indicate the terms and conditions upon which the Company intends to sell such Golf Course. Such Lessee shall thereafter generally have a period of 60 days to elect to purchase the Golf Course on the terms and conditions at which the Company proposes to sell the Golf Course. If such Lessee elects not to purchase the Golf Course, then the Company shall be free to sell the Golf Course to a third party. However, if the price at which the Company intends to sell the Golf Course is reduced by 5% or more from the price offered to the Lessee, then generally the Company again shall offer such Lessee the right to acquire the Golf Course at the reduced price provided that such 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 caused by an insured risk, the Lessee will be obligated to diligently restore the Leased Property to substantially the same condition as existed immediately prior to such damage or destruction and, to the extent the insurance proceeds and the Capital Replacement Fund are insufficient to do so, such 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 Lessee may terminate the Participating Lease.
INDEMNIFICATION GENERALLY
Under each Participating Lease, the Lessee has agreed to indemnify, and 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 or misuse by such Lessee of the Leased Property, (iii) any impositions (which are the obligations of the relevant Lessee to pay pursuant to the applicable provisions of such Participating Lease) or the operations thereon, (iv) any failure on the part of the Lessee to perform or comply with any of the terms of the Participating Lease or any sublease, (v) any taxes levied against the Leased Property and (vi) any liability the Company may incur or suffer as a result of any permitted contest by the Lessee under any Participating Lease.
EVENTS OF DEFAULT
Events of Default are defined in each Participating Lease generally to include, among others, the following:
(i) if a Lessee fails to make a rent payment when such payment becomes due and payable and such failure is not cured by such Lessee within a period of 10 days after receipt of written notice thereof from the Company;
(ii) if a Lessee fails to observe or perform any material term, covenant or condition of a Participating Lease and such failure is not cured by such Lessee within a period of 30 days after receipt by such Lessee of written notice thereof from the Company, unless such failure cannot be cured with due diligence within a period of 30 days, in which case such failure will not constitute an Event of Default if such Lessee proceeds promptly and with due diligence to cure the failure and diligently completes the curing thereof within 120 days;
(iii) if a Lessee: (a) admits in writing its inability to pay its debts generally as they become due, (b) files a petition in bankruptcy or a petition to take advantage of any insolvency act, (c) makes an assignment for the benefit of its creditors, (d) is unable to pay its debts as they mature, (e) consents to the appointment of a receiver for itself or of the whole or any substantial part of its property or (f) files a petition or answer seeking reorganization or arrangement under the federal bankruptcy laws or any other applicable law or statute of the United States of America or any state thereof;
(iv) if the Lessee is liquidated or dissolved;
(v) if the Lessee voluntarily ceases operations on the Leased Property, except as a result of damage, destruction or a partial or complete condemnation or other unavoidable delays; or
(vi) if the 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 Lessee then upon not less than 10 days notice (only if required by the Participating Lease) of such termination and upon the expiration of such time, the Fixed or Extended Term, as the case may be, will terminate and all rights of the Lessee under the Participating Lease shall cease.
SEE "EVENTS OF DEFAULT" UNDER ITEM 1 FOR SPECIFIC COURSES TO WHICH THIS MAY APPLY.
GOVERNING LAW
The Participating Leases will be governed by and construed in accordance with the law of the state where the Golf Course is located. Because the Golf Courses are located in various states, the Participating Leases may be subject to restrictions imposed by applicable local law.
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. The Participating Leases provide that each Lessee is responsible for claims based on personal injury and property damage at the Golf Courses which are leased and require each Lessee to maintain insurance for such purposes. Although the Company is currently not party to any legal proceedings relating to the Golf Courses that would have a material adverse effect upon the Company's business or financial position, it is possible that in the future the Company could become a party to such proceedings.
LITIGATION ARISING THROUGH EVENTS OF DEFAULT
TIERRA DEL SOL GOLF CLUB: On November 3, 1999, GTA filed an eviction action against the tenant at Tierra Del Sol Golf Club with the District Clerk of Court in Valencia County, New Mexico, as a result of the tenant's failure to pay rent. As a result of this lawsuit, GTA took possession of this property on February 7, 2000, pursuant to an order issued by the District Court. GTA has created a wholly owned subsidiary, GTA Tierra Del Sol LLC, to operate this Golf Course during the 90-day grace period allowed by the Internal Revenue which permits these revenues from operations to be qualifying income for REIT tax purposes for this 90-day period. See further explanation of the Internal Revenue Code addressing this situation in the TAX STATUS section of this document.
OSAGE NATIONAL GOLF CLUB: On February 25, 2000, GTA declared an event of default under the Participating Lease as a result of the tenant's failure to pay rent. As a result GTA, the prior owner of the golf course, and the tenant entered into discussions to terminate the tenant's Participating Lease and the tenant's possessory rights at the Golf Course. We expect to have the Participating Lease terminated and obtain possession of the Golf Course within approximately 30-45 days. GTA has created a wholly owned subsidiary, GTA Osage LLC, which expects to assume management of the Golf Course during the 90-day grace period allowed by the Internal Revenue which permits these revenues from operations to be qualifying income for REIT tax purposes for this 90-day period. See further explanation of the Internal Revenue Code addressing this situation in the TAX STATUS section of this document.
MYSTIC CREEK GOLF COURSE: On October 25, 1999, GTA declared an event of default under the Participating Lease as a result of the tenant's failure to pay rent. On February 3, 2000, GTA filed an eviction action with a District Court in Oakland County, Michigan. A hearing was set for February 29,2000, but was stayed because the tenant filed a voluntary petition for Chapter 11 Bankruptcy in the United States Bankruptcy Court on February 25, 2000. It is our intention to continue the eviction action as soon as legally permissible to seek to shorten the time for the tenant to accept the lease (by bringing rent current) or reject the lease (which would mean a return of the property to GTA) and to seek to compel the payment of ongoing rent during the pendancy of the bankruptcy.
BRENTWOOD GOLF & COUNTRY CLUB: On November 21, 1999, GTA declared an event of default under the Participating Lease as a result of the tenant's failure to pay rent. On February 3, 2000, GTA filed an eviction action with a District Court in Oakland County, Michigan. In response, the tenant has filed a counterclaim against GTA. On March 8, 2000, a hearing was held and the Court ruled to remove
the case to Oakland County Circuit Court, where the action for possession and the allegations in the counterclaim will be heard. On March 28, 2000, an order was entered requiring escrow payment of rent and prorated taxes within seven days of the Order, and thereafter, within seven days of the 25th of each month. The first payment required will be February and March rents, and payments in the subsequent months will be the current months rent.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the shareholders in the fourth quarter of 1999.
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 NASDAQ American Stock Exchange (the "AMEX").
The following table sets forth for periods shown the high and low sales price for the Company's Common Stock on AMEX and distributions declared for the quarter.
SHAREHOLDER INFORMATION
As of March 22, 2000, the number of holders of record of Common Stock of the Company was approximately 145 and there were 8,118,147 shares outstanding. On that date a total of 4,905,086 OP Units (including 59,188 preferred OP units) were held by 21 entities, excluding the Company's two subsidiaries. On that date, 800,000 shares of the Company's Convertible Preferred Stock were held by a single holder.
DIVIDENDS
The Company intends to continue 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 distributions, for the year ended December 31, 1999, was $1.76 per share of Common Stock. For the period ended December 31, 1999, and including payments made for fourth quarter, the distributions represent 75% of 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, except Preferred OP Units which were issued at a specified dividend yield. Also, OP Units issued since the prior record date to partners other that GTA GP or GTA LP will receive a pro rata distribution based on duration of ownership.
The Company's actual cash available for distribution will be affected by a number of factors, including Gross Golf Revenues generated at the Golf Courses. The Company anticipates that cash available for distribution will 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 earnings and profits of the Company, the Company estimates that 2.3% of the 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 percent of its taxable income (excluding net capital gains). Based on the Company's results of operations for year ended December 31, 1999, the Company was required to distribute approximately $9.08 million 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 in order to meet such distribution requirements.
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.
RECENT SALES OF UNREGISTERED SECURITIES
On March 10, 1999, Restricted Stock grants totaling 44,000 common shares were issued to the Executive Officers of the Company under the 1998 Stock Based Incentive Plan. On January 30, 2000, Restricted Stock grants totaling 55,000 common shares were issued to the Executive Officers of the Company under the 1998 Stock Based Incentive Plan. On January 30, 2000, Stock Options were issued for 145,000 common shares to Executive Officers of The Company under the 1998 Stock Based Incentive Plan. These issuances were effected in reliance upon an exemption from registration under Section 4(2) of the Securities Act as a transaction not involving a public offering.
On May 11, 1999, the Operating Partnership issued 10,169 Preferred OP Units to the prior owner of Metamora Golf and Country Club as partial consideration for its interest in Metamora Golf and Country Club. On July 28, 1999, the Operating Partnership issued 48,949 Preferred OP Units to the prior owner of Pete Dye Golf Club as partial consideration for its interest in the Pete Dye Golf Club. OP Units may generally be redeemed by their holder one-year after issuance for cash or, at the option of the Company, shares of Common Stock on a one-for-one basis. This issuance was effected in reliance upon an exemption from registration under Section 4(2) of the Securities Act as a transaction not involving a public offering.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected consolidated financial information for the Company.
SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEETS (IN THOUSANDS)
(1) The 1997 quarterly distribution declared per share and unit includes $.41 declared in January 1998 related to the fourth quarter 1997.
(2) 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 (FFO) represents net income (loss) (computed in accordance with generally accepted accounting principles (GAAP)), excluding gains of real property, and after adjustments for unconsolidated partnerships and joint ventures. Effective 1/1/2000, FFO should include both recurring and non-recurring operating results - except those results defined as "extraordinary items" under GAAP and gains and losses from sales of depreciable operating property. 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 NAREIT definition may be different than similarly titled measures used by other REITs.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of Operations," and other sections of this report contain various "forward-looking statements" which represent the Company's expectations concerning future events including the following: statements regarding the Company's continuing ability to target and acquire high-quality golf courses; the expected availability of the Credit Facility, Bridge Loan and other debt and equity financing; the Lessees' and Mortgagee's future cash flows and ability to make Lease and Mortgage Payments; results of operations and overall financial performance and the expected tax treatment of the Company's operations; and the Company's beliefs about continued growth in the golf industry. 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. The following discussion should read in conjunction with the accompanying Consolidated Financial Statements appearing elsewhere herein.
OVERVIEW AND FORMATION
Golf Trust of America, Inc. (the "Company") conducts business through Golf Trust of America, L.P. (the "Operating Partnership"), of which the Company, as of March 22, 2000, owns 64.4 percent interest through its two wholly owned subsidiaries and is the general partner. Larry D. Young, a director of the Company, along with his affiliates, owns 27.0 percent of the Operating Partnership and is a significant lessee. Operators of the golf courses, their affiliates and an officer of the Company hold the remaining interest in the Operating Partnership.
Concurrent with the initial public offering of the Company's stock, the Company acquired ten initial golf courses in exchange for the issuance of 4.1 million OP units, the repayment of $47.5 million of notes payable and affiliate debt, and $6.2 million cash. The seven golf courses acquired from Legends Golf have been accounted for at a carryover basis as Legends Golf is considered the accounting acquirer under APB Opinion No. 16. The value of the OP units issued and debt assumed was approximately $73.7 million greater than the carryover basis of Legends Golf.
The Company was formed to capitalize upon consolidation opportunities in the ownership of upscale golf courses in the United States. The Company's principal business strategy is to own upscale golf courses and lease these golf courses to qualified third-party operators which may include the sellers of the courses. In addition to the ability to acquire golf courses for cash and/or the assumption of indebtedness, the Company has the ability to issue units of limited partnership interest ("OP Units") in the Operating Partnership. OP Unit holders are partners who have the right ("their Redemption Right"), subject to certain terms and conditions to convert their OP Units to shares of Common Stock, or to cash at the discretion of the Company. When the Company acquires a golf course in exchange for OP Units, in most instances the seller of the course does not recognize taxable income gain until it exercises the Redemption Right. OP Units can thus provide an attractive tax-deferred sale structure for golf course sellers. The Company believes it is highly regarded and recognized as having a significant presence in the ownership of upscale assets due to (i) its utilization of a multiple independent lessee structure (ii) management's substantial industry knowledge, experience, and relationships within the golf community, (iii) the Company's strategic alliances with prominent golf course operators and (iv) its ability to issue OP Units to golf course owners on a tax-deferred basis.
The Company's primary sources of revenue are lease payments under the participating leases and mortgage payments under the participating mortgage. The Company generally participates in the
increase in gross golf revenues over the base year. Base rent will generally increase each year between 3% and 5%. Annual increases in lease payments are generally limited to a maximum of 5% to 7% for the first five years of the lease term.
Management believes the principal source of growth in gross golf revenues at the golf courses will be increased green fees, cart fees, and other related fees (due to increases in rounds and/or rates). In order to achieve higher revenues, management believes the lessees will need to continue to offer golfers a high quality golf experience as it relates to the pace of play, condition of the golf course and overall quality of the facilities and services.
GOLF COURSE ACQUISITIONS
For the year ended December 31, 1999, the Company purchased two Golf Courses for an aggregate acquisition cost of approximately $15.9 million. In conjunction with the purchase of the Pete Dye Golf Club, the lessee executed two promissory notes: (i) a $2.3 million capital improvement loan to construct the new clubhouse and (ii) a $3.5 million secured land loan. These two promissory notes initially bear interest at 10.5% per annum with annual increases of 5% per annum. The purchase price, together with the original balance of the promissory notes totaled $21.7 million and were funded as follows: $8.6 million in cash, $10.0 million in assumed debt, $1.4 million in deferred payments ($0.7 million on the Pete Dye Clubhouse Construction and $0.7 million reserve for a Maintenance Facility and Wastewater Treatment at Metamora), and $1.7 million represented by the issuance of Preferred OP Units (approximately 59,000 OP Units) to the sellers.
DISPOSITIONS
In June 1999, Sandpiper GTA Development, Inc. sold the undeveloped 14-acre parcel of land located near Sandpiper Golf Course in Santa Barbara, California for $5.3 million, which approximated our basis in the property. The sales price included a $4.2 million promissory note from the buyer secured by a first deed of trust on the parcel; the promissory note accrues interest at 10% per annum and matures one year from closing, subject to two one-year extensions. These extensions can only be exercised by the borrower subject to borrower's payment of all outstanding and accrued interest on the note, an installment payment of $1,000,000 from the buyer for each extension, and an increase in the interest rate on the note to 12% per annum effective as of the second installment. The installment dates are June 2, 2000 and June 2, 2001. The Promissory Note matures on June 2, 2002 in the event no extentions are exercised.
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
For the years ended December 31, 1999, and December 31, 1998, the Company recognized $55,777,000 and $44,384,000, respectively, in revenue from the participating leases and from the mortgage note receivable. The increase in revenues of $11,393,000 or 25.7% is due to 1) minimum increases in rent (including additional rent on improvements at the courses acquired in 1997) of approximately $1,554,000, 2) rent for a full year of operations for 1998 acquisitions (including additional rent on improvements at these courses) of approximately $8,305,000, 3) rent from Golf Courses acquired in 1999 of approximately $1,179,000, 4) increased interest from the Mortgage Note Receivable of approximately $672,000, 5) increase in straight line rents of approximately $33,000, offset by 6) a decrease of approximately $350,000 in Participating Rent and/or Participating Interest.
Expenses totaled $23,397,000 and $17,083,000 for the years ended December 31, 1999 and December 31, 1998, respectively. The increase of $6,312,000 or 37%, reflects 1) additional depreciation of $5,658,000 for the acquisitions and improvements made during 1999 and a full year of depreciation for those courses added in 1998, 2) increase in loan cost amortization of $370,000, 3) a one-time charge of approximately $500,000 which was primarily severance costs related to the reorganization of the Acquisition department, and offset by 4) a reduction in general and administrative costs and restricted stock compensation expense of $209,000.
For the year ended December 31, 1999, interest expense was $15,603,000, compared to $9,673,000 for the year ended December 31, 1998. The increase of $5,930,000 can be primarily attributed to the increase of $60,000,000 in the average balance of outstanding debt for the four quarters of 1998 versus the average balance of outstanding debt for the four quarters of 1999. The increase in the average balance of outstanding debt is due to a full year of the outstanding debt obtained to fund 1998 acquisitions and to the $10,000,000 debt assumption in 1999 for the purchase of Pete Dye Golf Club. In addition, the interest rates have increased primarily in the last quarter of 1999 causing an increase in the interest expense on our floating rate debt which averaged approximately $133,900,000 in 1999.
Net income for the years ended December 31, 1999, and December 31, 1998, was $11,231,000 and $10,606,000, respectively for a year over year increase of $625,000.
For the year ended December 31, 1999 the diluted earnings per share was $1.27 reflecting a $0.07, or 5%, decrease over the prior year. This decrease is primarily due to Preferred Dividend payments in 1999 to AEW of $1,383,000 which reduces the earnings available to common shareholders. Diluted earnings per share prior to reduction for Preferred Dividends would be $1.45, or an 8% increase.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD FROM FEBRUARY 12 (INCEPTION) TO DECEMBER 31, 1997
For the year ended December 31, 1998 and the period from February 12 to December 31, 1997, the Company recognized $44,384,000 and $18,727,000, respectively, in revenue from the participating leases and from the mortgage note receivable. The increase in revenues of $25,657,000 or 137% is due to 1) minimum increases in rent of approximately $422,000, 2) rent of $14,735,000 from new course acquisitions and expansions subsequent to December 31, 1997, 3) $4,604,000 of increased interest from
the Mortgage Note Receivable, which was issued June 20, 1997, 4) the $369,000 increase in Participating Rent, 5) rent of $5,527,000 for a full year of operations for 1997 acquisitions.
Expenses totaled $17,083,000 and $5,705,000 for the year ended December 31, 1998 and the period from February 12 to December 31, 1997, respectively. The increase of $11,378,000 or 200%, reflects 1) additional depreciation of $8,494,000 for the acquisitions made during 1998 and a full year of depreciation for those courses added in 1997, and 2) additional general and administrative costs of $2,884,000 for loan cost amortization, for amortization of restricted stock compensation, additional salaries and administrative costs.
For the year ended December 31, 1998, interest expense was $9,673,000, compared to $1,879,000 for the period from February 12 to December 31, 1997. The increase for $7,794,000 reflects the increase in outstanding borrowings from $4,325,000 at December 31, 1997 to $210,634,000 at December 31, 1998. The proceeds of the current year borrowings ($188,600,000) and $14,968,000 of the proceeds of the Company's secondary offering were used primarily to fund $195,541,000 of the cash paid for acquisitions and improvements and advances of $5,963,000 under the mortgage note receivable commitment.
The loss on disposal of assets occurred when the golf carts at one course were traded in as part of a new leasing program and at another location where a new clubhouse was built and the existing facility was removed.
Net income for the period from February 12 to December 31, 1997 and the year ended December 31, 1998 was $5,969,000 and $10,606,000, respectively.
For the year ended December 31, 1998 the diluted earnings per share was $1.34, reflecting a $0.05, or 4%, increase over the period from February 12 to December 31, 1997.
LESSEE RESULTS OF OPERATIONS
GTA has a policy of acting promptly and aggressively on tenant defaults in accordance with the terms of the Participating Leases. In the event a tenant fails to pay their rent in accordance with the applicable Participating Lease, an "Event of Default" (further defined under ITEM 2. PROPERTIES) may be asserted by GTA as landlord.
In the third quarter of 1999, GTA elected to pursue legal remedies available to it under its Participating Leases as a result of tenant defaults at Bonaventure and the four Golf Courses previously leased to Granite Golf (I.E., Tiburon Golf Club, Silverthorn Country Club, Persimmon Ridge Golf Club and Black Bear Golf Course). As a result, GTA approved the assignment of the tenant's interest in these Participating Leases to a new lessee. The financial results submitted by the new lessee indicated that same store rounds at these Golf Courses for the fourth quarter 1999 increased--75% for Bonaventure and an average of 6% for the four Granite Golf Courses. Same store revenues for the fourth quarter 1999 increased 23% for Bonaventure and an average of 23% for the four Granite Golf Courses. GTA has also declared events of default in the past several months at four other Golf Courses "Tierra Del Sol Golf Club," "Osage National Golf Club," "Mystic Creek Golf Course," and "Brentwood Golf & Country Club".
GTA management believes that in cases where events of default occur under its Participating Leases, proactive management of the issues in a timely manner is required and, that such action is necessary (i) to ensure an effective and efficient legal process, (ii) to maintain the value of the Golf Course, and
(iii) to stabilize and/or improve operating performance of the applicable Golf Course. When GTA is forced to "foreclose" on a Golf Course, the Internal Revenue Code (Section 856(e)(4)(C)) allows a 90-day grace period during which GTA can operate the Golf Course and still permit these revenues to be qualifying income for REIT tax purposes. At the expiration of such period, the Golf Course should either be sold, leased to an experienced Golf Course operator, or an agreement must be secured with an independent contractor to assume management of the applicable Golf Course. Management by an independent contractor is allowed until the close of the third taxable year following the taxable year in which the "foreclosure" occurred.
GTA has elected to pursue legal remedies available to it under its Participating Lease to cure events of default that have occurred in the past several months at the four Golf Courses listed below:
GRANITE GOLF ASSIGNMENT OF LEASES
Granite golf or one of its affiliates was the lessee ("Granite") at four of our Golf Courses until June of 1999. Those Golf Courses included: Silverthorn Country Club, an 18-hole private Golf Course located in Florida and purchased in June of 1998 for $4,700,000; Black Bear Golf Course, an 18-hole high-end daily fee Golf Course located in Florida and purchased in November of 1997 for $4,784,000; Tiburon Golf Club, a 27-hole high-end daily fee Golf Course located in Nebraska and purchased in August of 1997 for $6,003,000; Persimmon Ridge Country Club, an 18-hole high-end daily fee Golf Course located in Kentucky and purchased in March of 1998 for $7,500,000. On June 24, 1999, GTA declared a tenant default under each of the Participating Leases where Granite Golf or one of its affiliates was the lessee for failure to timely pay rent under the respective Participating Leases. GTA applied the redemption value of Granite's OP units against past due rent obligations. W. Bradley Blair, II, President and Chief Executive Officer of GTA, purchased the 21,429 common shares (previously held by Granite as OP units) for $22.15 per share, the 10 day trailing average market price of GTA common stock, from Golf Trust of America, L.P., in conjunction with this default. Effective August 17, 1999, each of the tenant's interest in the Participating Leases with Granite was assigned to and assumed by Legends National Golf Management, LLC, an affiliate of Mr. Young. As yet, we have not restructured the Participating Leases in any material manner. However, new working capital loans aggregating $1.2 million and bearing interest under existing Participating Lease terms were committed by GTA to facilitate the transition period and to cover seasonal financial needs. The new lessee had a positive impact on the financial performance of these Golf Courses in the fourth quarter of 1999 reporting an average increase of 6% in same store rounds and an average increase of 23% in same store revenues for the four Golf Courses.
BONAVENTURE ASSIGNMENT OF LEASE
BONAVENTURE: This club is made up of two 18 hole, high-end daily fee Golf Courses located in Ft. Lauderdale, Florida which GTA purchased in January of 1998 for $24,500,000. Effective July 1, 1999, Mr. Young acquired the outstanding stock of Emerald Dunes - Bonaventure, Inc., the lessee at Bonaventure. There was no reduction in payment terms under the Participating Lease; however, the Participating Lease was modified to allow the new lessee additional capital improvement and working capital funding to facilitate the repositioning and improvement of the facility. The collateral to secure the lessee's obligations under the participating lease pledged by the initial lessee was released and substituted with equivalent collateral by Mr. Young and his affiliates. This restructure had a positive impact on the financial performance of the Course in the fourth quarter of 1999 with the lessee reporting an increase in same store rounds of 75% with a corresponding increase in same store revenue of 23%.
GTA ASSUMES MANAGEMENT OF TIERRA DEL SOL GOLF CLUB
TIERRA DEL SOL GOLF CLUB: This Golf Course is an 18 hole, high-end daily fee Golf Course located in Albuquerque, New Mexico which GTA purchased in May 1998 for $3,600,000. On November 3, 1999, GTA filed an eviction action against the tenant at Tierra Del Sol Golf Club with the District Clerk of Court in Valencia County, New Mexico, as a result of the tenant's failure to pay rent. As a result of this lawsuit, the tenant was removed and GTA took possession of this Golf Course on February 7, 2000, pursuant to an order issued by the District Court. GTA has created a wholly owned subsidiary, GTA Tierra Del Sol, LLC, to operate this Golf Course during the 90-day grace period. It is GTA's view that the operational problems at this Golf Course were due to the tenant's executive management; therefore, the existing Golf Course-level management team and all Course-level key employees at the Golf Course have remained employed at the Golf Course. GTA has also implemented additional financial reporting policies and procedures to enhance internal controls and facilitate tracking of the financial performance of the Golf Course. GTA has initiated a business plan to explore opportunities to (i) seek to re-let the Golf Course, (ii) enter into a management agreement with a more experienced golf operator than the original tenant, or (iii) potentially sell the Golf Course. OP Units initially pledged as collateral for the lease by the former tenant of the Golf Course have been redeemed and applied to past due rent obligations and other accrued charges. The collateral balance remaining after these outstanding amounts were cured is valued at approximately $170,000, which represents approximately five months of Base Rent, and will be recognized as Other Income in the first quarter of 2000.
OSAGE NATIONAL GOLF CLUB
OSAGE NATIONAL GOLF CLUB: This Golf Course is a 27-hole, high-end daily fee Golf Course in Lake of the Ozarks, Missouri, which GTA purchased in August 1998 for $11,200,000 in a sale-leaseback transaction. On February 25, 1999, GTA declared an event of default under the Participating Lease as a result of the tenant's failure to pay rent. As a result, GTA, the prior owner of the Golf Course, and the tenant entered into discussions to terminate the tenant's Participating Lease and the tenant's possessory rights at the Golf Course. We expect to have the Participating Lease terminated and obtain possession of the Golf Course within aproximately 30-45 days. We have created a wholly owned subsidiary, GTA Osage, LLC, which expects to assume management of the Golf Course during the 90-day grace period. In this role, GTA will facilitate the transition of management, implement additional internal controls to more effectively manage the operations of the Golf Course and implement additional financial reporting policies and procedures to improve the monitoring of the financial performance of the Golf Course. In addition, GTA has initiated a business plan to explore opportunities to (i) seek to re-let the Golf Course, (ii) enter into a management agreement with a more experienced golf course operator than the original tenant, or (iii) potentially sell the Golf Course. We expect that all Golf Course-level key management and employees will remain employed at the Golf Course. Under GTA management's current assumptions, the value of the tenant's collateral (66,124 OP units) securing the obligations of the defaulting tenant under the Participating Lease will be adequate to cover accrued rent (approximately $408,000 through February 25, 2000) and any other accrued charges. The remaining collateral value will be recognized as Other Income and should offset any possible shortfalls in revenue in fiscal year 2000 resulting from tenant's event of default.
MYSTIC CREEK GOLF COURSE
MYSTIC CREEK GOLF COURSE: This Golf Course is a 27-hole, high-end daily fee Golf Course located in Milford, Michigan, which GTA purchased in January 1998 for $10,000,000 in a sale-leaseback transaction. On October 25, 1999, GTA declared an event of default under the Participating Lease as a result of the tenant's failure to pay rent. On February 3, 2000, GTA filed an eviction action with a District Court in Oakland County, Michigan. A hearing was set for February 29, 2000, but was stayed because the tenant filed a voluntary petition for Chapter 11 Bankruptcy in the United States Bankruptcy Court on February 25, 2000. It is our intention to continue the eviction action as soon as legally permissible to seek to shorten the time for the tenant to accept the lease (by bringing the rent current) or reject the lease (which would mean a return of the Golf Course to GTA) and to seek to compel the payment of ongoing rent during the pendancy of the bankruptcy. The tenant continues to operate the Golf Course pending the resolution of the pending action and its bankruptcy. Under GTA management's current assumptions, the value of the tenant's collateral ($879,630 in cash and 52,724 OP units) securing the obligations of the defaulting tenant under the Participating Lease is adequate to cover accrued rent (approximately $554,000 through February 29, 2000) and any other accrued charges. The remaining collateral value will be recognized as Other Income and should offset any possible shortfalls in revenue in fiscal year 2000 resulting from tenant's event of default.
BRENTWOOD GOLF & COUNTRY CLUB: This Golf Course is an 18-hole, daily fee Golf Course in White Lake, Michigan, that GTA purchased in December of 1998 for $7,000,000. On November 21, 1999, GTA declared an event of default under the Participating Lease as a result of the tenant's failure to pay rent. On February 3, 2000, GTA filed an eviction action with a District Court in Oakland County, Michigan. In response, the tenant filed a counterclaim against GTA. On March 8, 2000, a hearing was held and the Court ruled that the case be moved to Oakland County Circuit Court, where the action for possession and the allegations in the counterclaim will be heard. On March 28, 2000, an order was entered requiring escrow payment of rent and prorated taxes within seven days of the Order, and thereafter, within seven days of the 25th of each month. The first payment required will be February and March rents, and payments in the subsequent months will be current months rent. Subject to the foregoing limitations, the tenant continues to operate the Golf Course pending resolution of the pending actions. Under management's current assumptions, the value of the tenant's collateral (a $350,000 Certificate of Deposit and 24,482 OP Units) securing the obligations of the defaulting tenant under the Participating Lease is adequate to cover accrued rent (approximately $455,000 through February 29, 2000) and any other accrued charges. Any remaining collateral value will be recognized as Other Income and will be used to offset any possible shortfalls in revenue in fiscal year 2000 resulting from tenant's event of default.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
CASH FLOWS
CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
Cash flow from operating activities for the year ended December 31,1999 was $24,467,000 compared to $30,593,000 for the year ended December 31, 1998. This reflects net income before minority interest, plus non-cash charges to income for depreciation, loan cost amortization, restricted stock compensation amortization, straight line rents and interest and working capital changes. The decrease of $6,126,000 year over year is primarily due to the release of escrowed funds from Golf Courses purchased in 1998.
Cash flows used in investing activities reflect increases in the Participating Mortgage notes receivable related to the Westin Innisbrook facility of $94,000, golf course acquisitions and capital additions of $15,371,000 offset by the disposition of a parcel of land at the Sandpiper Golf Course for $975,000. The Golf Course acquisitions and capital additions included the $3.3 million acquisition of an additional nine holes at Northgate Country Club, the cash portion of the Metamora Golf Course of $5.0 million, and $3.6 million for improvements at Eagle Ridge and $3.5 million in improvements at other Golf Courses. This compares to acquisitions of 22 Golf Courses plus capital additions totaling $195,541,000, and the increase in the Participating Mortgage notes receivable of $5,963,000 in the year ended December 31, 1998.
On April 2, 1999, GTA completed a private placement of 800,000 shares of its 9.25% Series A Cumulative Convertible Preferred Stock, par value $0.01 per share ("Series A Preferred Stock"), at a price of $25.00 per share to a single purchaser, AEW Targeted Securities Fund, L.P., for gross proceeds of $20,000,000, net of associated costs of approximately $878,000. The net proceeds were used as follows: (i) to pay down $1,025,000 under the Credit Facility, (ii) to repay promissory notes to Nations Credit of $5,169,000; (iii) to pay loan costs associated with the amendment and restatement of the Credit Facility of $1,399,000; (iv) to make new officer loans of $648,000; and (v) the balance for general working capital needs.
Cash flows used in financing activities, totaling $7,963,000 represents the net proceeds from the AEW offering of $19,122,000, net borrowings of $6,255,000 under the Credit Facility and Bridge Loan, proceeds from issuance of common stock $42,000, less promissory note payments to Nations Credit of $5,324,000 redemption of OP Units of $2,478,000, loans to officers of $1,278,000, and dividends and partner distributions totaling $24,302,000 for the year ended December 31,1999. The 1999 financing activities compare to net borrowings of $188,600,000 under the Credit Facility and Bridge Loan, less dividends and partner distributions totaling $27,135,000 for the year ended December 31,1998.
CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD FROM FEBRUARY 12 (INCEPTION) TO DECEMBER, 1997
Cash flow from operating activities for the year ended December 31,1998 was $30,593,000 compared to $13,644,000 for the period from February 12, 1997 to December 31,1997. This reflects net income
before minority interest, plus noncash charges to income for depreciation, loan cost amortization and working capital changes.
Cash flows used in investing activities reflect increases in the mortgage notes receivable of $5,963,000 and golf course acquisitions of $195,541,000 for the year ended December 31,1998. This compares to acquisitions and capital additions of $84,332,000 and the increase in the mortgage notes receivable of $64,406,000 in the period from February 12 to December 31,1997.
Cash flows provided by financing activities, totaling $157,834,000 represents the net borrowing of $188,600,000 under the Credit Facility and Bridge Loan, less dividends and partner distributions totaling $27,135,000 for the year ended December 31,1998. This compares to the initial and follow-on offering proceeds of $155,720,000 and borrowings of $4,325,000 to fund the 1997 acquisitions and the participating mortgage for the period from February 12, 1997 to December 31,1997. Distributions to partners and stockholders totaled $8,535,000 represented a partial period distribution of $.21 per share for the first quarter of 1997 and $.41 per share for the remaining quarters through December 31,1997.
FINANCING AND CAPITAL RESOURCES
REVOLVING CREDIT FACILITY AND LINE OF CREDIT
As of April 6, 1999, GTA amended and restated its unsecured Revolving Credit Facility ("Credit Facility") to increase the borrowing capacity to $200.0 million with a consortium of banks led by Bank of America, as lead agent. GTA pays interest-only on the Credit Facility with the principal balance due in April 2002. Borrowings typically bear interest at an adjusted Eurodollar rate plus an applicable margin. The applicable margin (between 1.50% and 2.00%) is subject to adjustment based upon certain leverage ratios. At December 31, 1999, all amounts outstanding under the Credit Facility were based on the Eurodollar rate and a margin of 1.75% for an average interest rate of 7.0% per annum. The amended and restated Credit Facility replaced the Bridge Loan.
The Credit Facility availability is limited to an unencumbered pool calculation, including a 20% limitation for working capital needs. Financial covenants include net worth, liquidity and cash flow covenants, among others. Non-financial covenants include restrictions on loans outstanding, construction in progress, loan to officers and changes in the Board of Directors, among others. At the present time, these covenants have been met.
In addition to the amended and restated Credit Facility, on April 6, 1999 GTA also obtained a $25.0 million unsecured line of credit from Bank of America which may be incorporated into the $200.0 million Credit Facility at a later date. The rates, covenants, conditions and other material provisions are essentially the same as the Credit Facility, except for the term, which was one year with an expiration date of April 1, 2000. In March of 2000, this line was granted a six-month extension with a new maturity date of October 1, 2000. The extension was granted with the same pricing that was in effect under the original line plus a 3/4% up-front commitment fee.
INTEREST RATE SWAP AGREEMENT
The interest rate swap agreement that GTA entered into with Bank of America in September 1998 expired on March 27, 2000. The notional amount under this agreement of $76,800,000 converted to floating rate debt as of the March 27th expiration date. This brings the total floating rate debt to
$210,700,000. As of the date of this filing, GTA had not entered into a new interest rate swap agreement.
UNIVERSAL SHELF REGISTRATION
GTA has on file with the Securities and Exchange Commission a universal shelf registration statement registering the issuance of debt securities, common stock, preferred stock or warrants as well as resales of securities issued upon redemption of certain OP Units by their holders, with a remaining availability of approximately $280.0 million. The exact amount of debt, common stock, preferred stock, and warrants issued will depend on acquisitions, asset shares, GTA's unsecured debt and preferred stock ratings, and the general interest rate environment.
The Company believes that its current borrowing capacity and anticipated cash flow from operations are sufficient to meet liquidity needs for the foreseeable future. There can be no assurance that the Company will be able to negotiate extensions of such facilities or borrow from other lenders on similar terms. There can be no assurance that the impact of market conditions on the debt and equity markets will not adversely affect the Company's future needs for capital.
FUTURE INVESTMENTS IN ASSETS
The Company intends to continue to analyze potential investments in additional golf courses as suitable opportunities arise, but the Company will not undertake investments unless adequate sources of financing are available. The Company anticipates that future acquisitions would be funded with debt financing provided by the Credit Facility, secured borrowing options, the issuance of OP Units 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.
COMMITMENTS TO LESSEES
The participating leases generally require the Company to reserve annually between 2% to 5% of the annual gross golf revenues of the golf courses to fund capital expenditures, which are funded on a monthly basis from the lessees in addition to the base rent. The lessees will fund any capital expenditures in excess of such amounts. The capital expenditure reserve is used for replacement and enhancement of the existing facilities and is allocated to short and long-term categories and therefore the balance may not be currently available to the lessees. At December 31, 1999, the amount reserved was $2,452,000 compared to $1,105,000 at December 31, 1998.
Under certain circumstances, the underlying base rent for a course will be increased when the Company agrees to pay for significant capital improvements or to expand the existing facilities. Of the Company's $8,478,000 outstanding capital improvement commitments (which includes the Pete Dye Clubhouse loan for $2,300,000), approximately $1,918,000 has been funded to date. This loan may be capitalized into the base rent when the Clubhouse is completed.
In limited circumstances the Company agrees to provide working capital loans to existing lessees. Working capital loans are evidenced by promissory notes or as set forth in the lease agreement and bear
interest at fixed rates between 9.74% and 10.5%. Of the Company's $12,224,000 working capital commitments, approximately $9,245,000 has been funded to date. In addition, a $3,500,000 land loan was funded to the Lessee of the Pete Dye Golf Club at the time of purchase. Typically, the Lessee is required to increase the pledged collateral for the funded amounts.
In summary, the Company has currently funded $14,663,000 of the total commitments to date of $24,202,000, and subject to certain conditions, anticipates it will fund the balance of $9,539,000 over the next two years.
The Company has agreed to maintain minimum loan balances of approximately $17.2 million for up to ten years to accommodate certain prior owners' efforts to seek to minimize certain adverse tax consequences from their contribution of their courses to the Company.
LITIGATION
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. Although the Company is currently not a party to any legal proceedings relating to the Golf Courses that would have a material adverse effect upon the Company's business or financial position, it is possible that in the future the Company could become a party to such proceedings.
SEE "LESSEE RESULTS OF OPERATIONS" REGARDING LITIGATION BETWEEN GTA AND CERTAIN LESSEES OF ITS OF GOLF COURSES ARISING THROUGH EVENTS OF DEFAULT.
NEW COURSES
The Company may from time to time be in various stages of negotiation and due diligence review for the acquisition of a golf course. Completion of such a transaction would be subject to negotiation and execution of definitive documentation and certain other customary closing conditions. No assurances can be given that the Company will continue to pursue or complete any future golf course acquisitions.
COMMITMENTS TO OFFICERS
Loans of approximately $890,000, secured by OP Units and common stock, with interest rates of between 4.4 % to 6.2 % per annum were made to officers of the Company for the payment of related taxes for Restricted Stock Grants issued in 1997, 1998 and 1999. Of this total, approximately $173,000 related to the Restricted Stock Grants issued on March 10, 1999 for 44,000 shares. It is expected that additional loans will be made to the officers to cover tax liabilities resulting from future vesting of the Restricted Stock Grants. Under the 1998 Senior Executive Loan Program, as amended on August 10, 1999, loans of $2.3 million have been made to officers of the Company to purchase Company stock on the open market. These loans are collateralized by the shares purchased, bear interest at between 4.51 % to 5.89 % per annum and are due at the earlier of (i) sale greater than $25 per share, (ii) within 3 years of the applicable employee termination or (iii) five years after the making of the loan. These Promissory Notes are recourse to the borrower. Upon any change of control of GTA, all outstanding amounts to the current officers of GTA are forgiven and the promissory notes are cancelled.
Of the total officer loans outstanding, approximately $725,000 in loans to the former Executive Vice President were reclassified to Other Assets from Stockholders' Equity upon his resignation in November of 1999.
ADOPTION OF SHAREHOLDER RIGHTS PLAN
On August 6, 1999, the Board of Directors of Golf Trust of America, Inc. declared a dividend distribution of one preferred stock purchase right ("Right") for each outstanding share of common stock to stockholders of record at the close of business on September 6, 1999 (the "Record Date"). Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series B Junior Participating Preferred Stock, par value $0.01 per share (the "Preferred Stock"), at a purchase price of $75.00, subject to adjustment. The agreement (the "Rights Agreement") is between the Company and the rights agent thereunder. On August 30, 1999, the Company filed a current report on Form 8-K more fully describing the terms of the Rights.
REORGANIZATION OF THE ACQUISITION DEPARTMENT
In November 1999, Mr. David D. Joseph resigned as Director of Acquisitions and Executive Vice President of the Company and as a member of our Board of Directors to pursue other business interests. At the present time, we do not contemplate replacing this management position due to (i) the current reduced priority on acquisitions, (ii) the skills of our existing acquisition staff, and (iii) our ability to utilize outside brokers and tenant introductions to support this function. As a part of the separation agreement, Mr. Joseph executed an extension to his covenant not to compete. A one-time charge of $0.5 million is included in the General & Administrative expenses for fourth quarter 1999 related to this reorganization.
STOCK REPURCHASE PROGRAM
On December 15, 1999, GTA announced that its Board of Directors authorized a program to repurchase up to one million shares of its common stock. Any such repurchases will be made on the open market or in block purchase transactions. The timing of any repurchases and the number of shares repurchased pursuant to the stock repurchase program are dependent upon market conditions and corporate requirements. Under this program, on January 4, 2000, GTA purchased 10,000 shares of its common stock at a price of $16.9375 per share.
UNSOLICITED PROPOSAL
On December 15, 1999, GTA received a letter from Schooner Capital LLC. In sum, Schooner expressed its belief that GTA's current real estate investment trust structure is not optimal to best leverage both current and future marketing opportunities. Schooner expressed interest in working with GTA on a going private transaction that would seek to address the interests of all shareholders. Schooner Capital LLC filed a 13D, a General Statement of Beneficial Ownership, on January 28, 2000. As yet, Schooner Capital LLC has not been willing to meet with our financial advisor, Banc of America Securities LLC, to review any proposal it may have.
APPOINTMENT OF FINANCIAL ADVISOR
After a deliberate interview and diligence process by management and review by the Company's Board of Directors, on February 9, 2000 GTA engaged Banc of America Securities LLC to act as its financial advisor to undertake a review of a broad range of strategic alternatives available to the Company in light of the current and prospective market conditions facing the Company and the REIT industry. Executive management is meeting regularly with our financial advisor in furtherance of considering alternatives to enhance shareholder value. These alternatives include the possiblity of a merger, sale, recapitalization, privatization or restructuring, including de-REITing (revoking election of REIT-tax status), among others. The professional fee structure of Banc of America Securities LLC should not have a material minimal impact on General & Administrative expenses for 2000.
FUNDS FROM OPERATIONS AND CASH AVAILABLE FOR DISTRIBUTION
Funds From Operations and Cash Available for Distribution are calculated as follows:
Noncash mortgage interest revenue and straight line rents represents the difference between interest revenue on the Participating Mortgage and the rent recognized and reported by the Company in accordance with generally accepted accounting principles ("GAAP") and the actual cash payments received by the Company. The participating leases generally require the Company to reserve annually between 2% to 5% of the gross golf revenues of the golf courses to fund capital expenditures. The lessees will fund any capital expenditures in excess of such amounts.
Preferred dividends/distributions represent preferred dividends paid on the 800,000 shares of 9.25% Series A Cumulative Convertible Preferred Stock that were issued to AEW Targeted Securities through a private placement in April of 1999 and preferred distributions on 59,118 preferred OP units issued to the sellers in the 1999 acquisitions of Pete Dye Golf Club and Metamora Golf & Country Club.
In accordance with the resolution adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") (as revised on October 27, 1999), Funds From Operations represents net income (computed in accordance with GAAP) including all operating results, both recurring and non-recurring -- EXCLUDING those results defined as "extraordinary items" under GAAP and gains (or losses) from sales of depreciable property. Funds From Operations should not be considered as an alternative to net income or other measurements under GAAP as an indication 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.
As noted above NAREIT approved a revision to the definition of FFO on October 27, 1999. Effective January 1, 2000, FFO includes both recurring and non-recurring results of operations which encompasses "costs of unusual compensation or severance arrangements." This definition has been applied in calculating FFO in this report. Under the former definition of FFO, the Company's non-recurring restructuring charge of $462,000 would be added back to Net Income in the FFO calculation resulting in Total FFO of $36,018,000 and Total Cash Available for Distribution of $31,011,000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective for fiscal quarters of fiscal years beginning after June 15, 1999 (subsequently delayed to June 15, 2000). SFAS No. 133 requires recording all derivative instruments as assets or liabilities measured at fair value. The Company does not expect this pronouncement to have a material impact on its financial results.
INFLATION
The golf course leases generally provide for initial term of 10 years with base rent and participating rent features. Base rent will increase by a base rent escalator for each year during the first five years of the term of each lease and for an additional five years if certain conditions are met. All of such leases are triple net lease requiring the lessees to pay for all maintenance and repair, insurance, utilities and services. The participating mortgage has a 5% increase in the base interest for up to five years, and an additional 3% for an additional five years if the performance option is exercised. As a result, the Company believes the effect of inflation on the Company is not material.
SEASONALITY
The golf industry is seasonal in nature because of weather conditions and fewer available tee times in the rainy season and the winter months. The operator of each of the daily fee golf courses may vary greens fees based on changes in demand. The Company does not expect seasonal fluctuation in Lessee revenues to have a significant impact on the Company's operating result. The Company's leases require Base Rent to be paid ratably throughout to year.
IMPACT OF YEAR 2000
There have been no malfunctions, to date, of the Company's computer system with respect to dates in the Year 2000 and thereafter. In addition, there has been no impact on the Company with respect to third parties and any Year 2000 complications that they may have experienced.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into any transactions using derivative commodity instruments. The Company is subject to market risk associated with changes in interest rates. Prior to the expiration of the Company's interest rate swap agreement on March 27, 2000, GTA's interest rate exposure was primarily limited to the $133.9 million of debt of the Company outstanding at December 31, 1999 that was priced at interest rates that float with the market. As of the date of this filing the Company has not entered in to a new interest rate swap agreement; therefore, the total outstanding debt subject to interest rate exposure is $210.7 million. A 25 basis point movement in the interest rate on the floating rate debt would result in an approximate $.527 million annualized increase or decrease in interest expense and cash flows. The remaining debt is fixed rate debt. Reference is made to Item 2 above and Note 7 for additional debt information.
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 CERTIFIED PUBLIC ACCOUNTANT
Effective February 28, 1997, the Company engaged BDO Seidman, LLP as principal accountants. There have been no changes in the most recent two fiscal years.
PART III
CERTAIN INFORMATION REQUIRED IN PART III IS OMITTED FROM THIS REPORT BUT WILL BE INCLUDED IN A DEFINITIVE PROXY STATEMENT WHICH THE COMPANY WILL FILE WITHIN 120 DAYS OF THE END OF ITS FISCAL YEAR PURSUANT TO REGULATION 14A FOR ITS ANNUAL MEETING OF SHAREHOLDERS TO BE HELD IN MAY 1999 (THE "PROXY STATEMENT").
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the Proxy Statement under the caption "Directors and Officers" is incorporated herein by this reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption "Executive Compensation" is incorporated herein by this reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management" is incorporated herein by this reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Proxy Statement under the caption "Certain Relationships and Related Transactions" is incorporated herein by this reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a) FINANCIAL STATEMENTS
1) FINANCIAL STATEMENTS
The financial statements filed as part of this Annual Report on Form 10-K are listed on page
2) FINANCIAL STATEMENT SCHEDULES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (SEE PAGE S-1) SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (SEE PAGE S-2)
3) EXHIBITS
The exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index that follows the financial statements.
b) REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed during the 4th Quarter of 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report for the year ended December 31, 1999 to be signed on its behalf by the undersigned, thereunto duly authorized, in Charleston, South Carolina, on March 27, 2000.
GOLF TRUST OF AMERICA, INC.
By: /S/ W. Bradley Blair, II
------------------------- W. Bradley Blair, II PRESIDENT & CHIEF EXECUTIVE OFFICER
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 Scott D. Peters, and each of them, our true and lawful attorneys-in-fact and agents, each with full power of substitution and re-substitution, 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:
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON EXHIBIT 8-K
REPORT OF MANAGEMENT
To the Directors and Stockholders of Golf Trust of America, Inc.:
The consolidated financial statements and other financial information of Golf Trust of America, Inc. in this report was prepared by management that is responsible for their contents. They reflect amounts based upon management's best estimates and informed judgments. In management's opinion, the financial statements present fairly the financial position, results of operations and cash flows of the Company in conformity with generally accepted accounting principles.
The Company maintains a system of internal accounting controls and procedures which is intended, consistent with reasonable cost, to provide reasonable assurance that transactions are executed as authorized, that they are included in the financial records in all material respects, and that accountability for assets is maintained. The accounting controls and procedures are supported by careful selection and training of personnel and a continuing management commitment to the integrity of the system.
The financial statements have been audited to the extent required by generally accepted auditing standards by BDO Seidman, LLP independent auditors. The independent auditors have evaluated the Company's internal control structure and performed tests of procedures and accounting records in connection with the issuance of their report on the fairness of the financial statements.
The Board of Directors has appointed an Audit Committee composed entirely of directors who are not employees of the Company. The Audit Committee meets with representatives of management and the independent auditors, both separately and jointly. The Committee discusses with the independent auditors and approves in advance the scope of the audit, reviews with the independent auditors the financial statements and their auditor's report, consults with and reviews management's administration of the system of internal accounting controls. The Committee reports to the Board on its activities and findings.
/S/ W. BRADLEY BLAIR, II /S/ SCOTT D. PETERS - ------------------------ ------------------- W. Bradley Blair, II Scott D. Peters Chairman, President and Chief Senior Vice President and Chief Executive Officer Financial Officer
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Directors and Stockholders of Golf Trust of America, Inc.:
We have audited the accompanying consolidated balance sheets of Golf Trust of America, Inc. and subsidiaries as of December 31, 1998 and 1999 and the related consolidated statements of income, stockholders' equity and cash flows for the period from February 12, 1997 (inception) through December 31, 1997, and each of the two years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Golf Trust of America, Inc. at December 31, 1998 and 1999 and the results of its operations and its cash flows for the period from February 12, 1997 (inception) through December 31, 1997 and each of the two years in the period ended December 31, 1999 in conformity with generally accepted accounting principles.
Charlotte, North Carolina /S/BDO SEIDMAN, LLP February 4, 2000
GOLF TRUST OF AMERICA, INC. CONSOLIDATED BALANCE SHEETS
See accompanying notes to financial statements
GOLF TRUST OF AMERICA, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
See accompanying notes to financial statements
GOLF TRUST OF AMERICA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
See accompanying notes to financial statements
GOLF TRUST OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
See accompanying notes to financial statements
GOLF TRUST OF AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying notes to financial statements
GOLF TRUST OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See accompanying notes to financial statements
GOLF TRUST OF AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Golf Trust of America, Inc. (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 upscale golf courses in the United States. The principal business strategy of the Company is to own upscale golf courses with superior marketplace positions and to lease the golf courses pursuant to long-term triple net leases 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" or "OP") or a wholly owned subsidiary of the Operating Partnership. Golf Trust of America, Inc., through its wholly owned subsidiaries GTA GP, Inc. ("GTA GP") and GTA LP, Inc. ("GTA LP"), holds a 64.4 percent interest as of March 22, 2000, in the Operating Partnership. GTA GP is the sole general partner of the Operating Partnership and owns a 0.2 percent interest therein. GTA LP is a limited partner in the Operating Partnership and owns a 58.69 percent interest therein. Larry D. Young, a director of the Company, along with his affiliates, owns 27.0 percent of the Operating Partnership and is a significant lessee. Operators of the golf courses, their affiliates and officers of the Company hold the remaining interest in the Operating Partnership.
The Company commenced operations on February 12, 1997 with the completion of its initial public stock offering ("IPO") which raised net proceeds of approximately $73.0 million through the sale of 3,910,000 shares of common stock. The Company contributed the net proceeds of the IPO to the Operating Partnership in exchange for a then 48.6 percent interest in the Operating Partnership. Concurrently with the closing of the IPO, the Operating Partnership acquired ten golf courses in exchange for the issuance of 4.1 million OP Units, the repayment of $47.5 million of related debt and $6.2 million in cash. Seven of the courses were acquired from Legends Golf, a group of companies controlled by Larry D. Young in exchange for 3,738,556 OP Units and the repayment of debt. The courses acquired from Legends Golf have been accounted for at a carryover basis as Legends Golf is considered the accounting acquirer under APB Opinion No. 16. The value of the OP Units issued and debt assumed was approximately $73.7 million greater than the carryover basis of Legends Golf. In November 1997, the Company completed a follow-on equity offering of 3,450,000 shares of common stock. The Company contributed the net proceeds of approximately $82.7 million to the Operating Partnership to repay approximately $60.6 million under the credit facility that had been used primarily for golf course acquisitions and for golf course acquisitions subsequent to the offering. On April 2, 1999, GTA completed a private placement of 800,000 shares of its 9.25% Series A Cumulative Convertible Preferred Stock, par value $0.01 per share ("Series A Preferred Stock"), at a price of $25.00 per share to a single purchaser, AEW Targeted Securities Fund, L.P., for gross proceeds of $20,000,000 net of associated costs of approximately $878,000. The net proceeds were used as follows: (i) to pay down $1,025,000 under the credit facility; (ii) to repay promissory notes to Nations Credit of $5,169,000; (iii) to pay loan costs associated with the amendment and restatement of the Credit Facility of $1,399,000; (iv) to make new officer loans of $648,000; and (v) the balance for general working capital needs.
In order for the Company to maintain its qualification as a REIT, not more than 50% in value of its Common Stock may be owned, directly or constructively, by five or fewer individuals. For the purpose of preserving the Company's REIT qualification, the Certificate of Incorporation prohibits direct or constructive ownership of more than 9.8% of the Common Stock by any person. Thus, although an OP Unit is convertible into a share of Common Stock, the conversion of the majority of the OP Units owned by affiliates of Larry D. Young is restricted by the Company through these ownership limitations in order to preserve its REIT status.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the Company, the Operating Partnership and their wholly owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company calculates the fair value of financial instruments and includes this additional information in the notes to the consolidated financial statements when the fair value is different than the carrying value. The carrying value of receivables, the mortgage notes receivable and liabilities reasonably approximates the fair value. The estimated fair value has been determined using available market information and appropriate valuation methodologies. However, considerable judgement is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
CONCENTRATION OF CREDIT RISK
The Company has cash and cash equivalents in a financial institution which is insured by the Federal Deposit Insurance Corporation (FDIC) for amounts up to $100,000 per institution. At December 31, 1999, 1998 and 1997, the Company had amounts in excess of FDIC limits. The Company limits its risk by placing its cash and cash equivalents in a high quality financial institution.
Concentration of credit risk with respect to the Company's portfolio of 47 golf courses for 1999 was:
(1)The courses operated by Legends Golf located in VA and in the Myrtle Beach areas of NC and SC plus the partial year of revenue on those courses that Legends assumed in 1999 located in Nebraska, Kentucky, and FL (4 out of 14 in that state) comprised approximately $15,131,000 in revenue or 27.0% of the total revenues.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
CONCENTRATION OF CREDIT RISK (CONT'D)
The Company mitigates concentration of credit risk with respect to its leases by requiring collateral of up to 15% of the initial purchase price. The Company has assessed the credit worthiness of its lessees and is continually evaluating and monitoring the ongoing and additional collateral requirements. These collateral requirements are adjusted annually for working capital loans to certain lessees and for capital improvements made at particular properties.
The Company is also subject to a concentration of credit risk from the participating mortgage. The Company has evaluated the credit worthiness of the borrower and its affiliates and has obtained a security interest in the property and equipment of the borrower. The Company has also obtained a limited guarantee of the debt service from the operator of the resort.
PROPERTY AND EQUIPMENT
Property and equipment is carried at the lower of cost or net realizable value (except for the golf courses acquired from Legends Golf that are carried at the prior basis of Legends Golf). Cost includes purchase price, closing costs and other direct costs associated with the purchase. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows:
The leases presently provide that at the end or termination of the existing leases, all improvements and fixtures placed on the rental property, become the property of the Company. In addition, the leases provide for a capital replacement reserve to be established by the Company for each property. The Company will approve disbursements from this fund for capital improvements to the properties and the acquisition of equipment.
The Company assesses whether there has been a permanent impairment in the value of rental property by considering factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Such factors include a lessee's ability to perform its duties and pay rent under the terms of the lease. If the property was leased at a significantly lower rent, the Company may recognize a permanent impairment of loss if the income stream were not sufficient to recover its investment. Such a loss would be determined as the difference between the carrying value and the fair value of the property. Management believes no permanent impairment has occurred in its net property carrying values.
LOAN COSTS
Loan costs, included in other assets, are amortized over the contractual term of the agreement. Accumulated amortization of these costs at December 31, 1999 and 1998 was approximately $1,826,000 and $868,000, respectively.
REVENUE RECOGNITION
The Company recognizes rental revenue on an accrual basis over the terms of the leases. The Company recognizes interest income ratably over the term of the loan.
See accompanying notes to financial statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
In May 1998, the Emerging Issues Task Force ("EITF") issued Issue No. 98-9, "Accounting for Contingent Rent in Interim Financial Periods." This statement provided that recognition of contingent rental income should be deferred until specified targets that trigger the contingent rent are achieved. Consequently, we generally will not recognize percentage rent until the third or fourth quarter of a tenant's fiscal year, which in some instances may be different than the third and fourth quarter of the calendar year. This statement applies to all contingent rental income effective with the second quarter of 1998. On a quarterly basis, there may be material impact to GTA's earnings per share, financial condition, and results of operations while, on an annual basis, there is no effect to GTA's earnings per share, financial condition, or results of operations. In November 1998, Issue No. 98-9 was withdrawn by the EITF. However, the Company has continued to account for contingent rents in accordance with Issue No. 98-9. As a result of EITF 98-9, no percentage rent or participating interest was recognized in the first three quarters of 1999.3.
INCOME TAXES
The Company qualifies as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). A REIT will generally not be subject to federal income taxation to the extent that it distributes at least 95% of its taxable income to its stockholders and complies with other requirements. When GTA is forced to foreclose on a Golf Course, the Internal Revenue Code (Section 856(e)(4)(C)) allows a 90-day grace period during which GTA can operate the Golf Course and still permit these revenues to be qualifying income for REIT tax purposes. At the expiration of such period, the property should either be sold or an agreement must be secured with an Independent Contractor to assume management. Management by an Independent Contractor is allowed until the close of the third taxable year following the taxable year in which the foreclosure occurred. The only Golf Course subject to this rule as of March 22, 2000, is Tierra Del Sol Golf Club; however, the other three Golf Courses ("Osage National Golf Club," "Mystic Creek Golf Course" and "Brentwood Golf & Country Club") currently in default may be subject to this rule within the next 30-45 days.
The Company paid distributions to common stockholders of $1.76 per share in 1999 of which $1.72 was ordinary income and $0.04 was return of capital. The Company paid distributions to common stockholders of $2.14 per share in 1998, of which $2.03 was ordinary income and $0.11 was return of capital. The Company paid distributions to common stockholders of $1.03 per share in 1997 which was ordinary income.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. The Company uses the "intrinsic value" method of accounting for its plan in accordance with Accounting Principle Board (APB) Opinion No. 25, and, therefore, recognized no compensation expense for stock options. For disclosure purposes only, the Black-Scholes option-pricing model was used to calculate the "fair values" of stock options.
USE OF ESTIMATES
The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
EARNINGS PER COMMON SHARE
Earnings per common share are presented under two formats: basic earnings per common share and diluted earnings per common share. Earnings per common share are computed by dividing net income (after deducting dividends on preferred stock) by weighted average number of common shares outstanding during the year. Diluted earnings per common share are computed by dividing net income (after deducting dividends on preferred stock) by the weighted average number of common shares outstanding during the year, plus the impact of those common stock equivalents (i.e., stock options, convertible preferred stock and OP Units) that are dilutive. Common Stock equivalents for the effect of dilutive stock options were 14,000, 270,000 and 91,000 for the years ended December 31, 1999 and 1998 and for the period from February 12, 1997 through December 31, 1997, respectively.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective for fiscal quarters of fiscal years beginning after June 15, 1999 (subsequently delayed to June 15, 2000). SFAS No. 133 requires recording all derivative instruments as assets or liabilities measured at fair value. The Company does not expect this pronouncement to have a material impact on its financial results.
3. ACQUISITION OF GOLF COURSES
The following is a summary of the acquisitions in 1999:
For the year ended December 31, 1999, the Company purchased two Golf Courses for an aggregate acquisition cost of approximately $15.9 million. In conjunction with the purchase of the Pete Dye Golf Club, the lessee executed two promissory notes: the first being a $2.3 million capital improvement loan to construct the new clubhouse and the second being a $3.5 million secured land loan. These two promissory notes initially bear interest at 10.5% per annum with annual increases of 5% per annum. The purchase price together with the promissory notes totaled $21.7 million and were funded as follows: $8.6 million in cash, $10.0 million in assumed debt, $1.4 million in deferred payments ($0.7 million on the Pete Dye Clubhouse Construction and $0.7 million reserve for a Maintenance Facility and Wastewater Treatment at Metamora), and $1.7 million represented by the issuance of Preferred OP Units (approximately 59,000 OP Units) to the sellers.
4. MORTGAGE NOTES RECEIVABLE
In June of 1997, the Operating Partnership closed and funded an initial $69.975 million participating loan to Golf Host Resorts, Inc. ("Golf Host Resorts"), which is affiliated with Starwood Capital Group LLC. The loan is secured by the Innisbrook Resort, a 63-hole destination golf and conference facility located near Tampa, Florida. The additional collateral includes, cash, excess land at the Innisbrook Resort and a security interest in the Tamarron Golf Course, which may be released upon the achievement of certain performance levels. The operator of the resort, Westin, has guaranteed up to $2.5 million of debt service for each of the first five years. The initial loan of $69.975 million is being followed by a $9 million loan, which is being used for a nine-hole expansion and other improvements to the Innisbrook Resort facilities.
The loan term is 30 years, with an initial base interest rate of 9.63% per annum (10.377% at December 31, 1999), annual increases (of at least 5% but no more than 7%) in the interest payment for the first five years, and a participating interest feature throughout the term based upon the growth in revenues, if any, over the base year. Participating interest of approximately $100,000 and $243,000 was received for the years ended December 31, 1999, December 31, 1998 respectively, and none for 1997.
Golf Host Resorts used $8,975,000 of the proceeds of the loan to purchase 274,039 OP Units, 159,326 shares of common stock of the Company and were granted an option to purchase an additional 150,000 shares of common stock of the Company at a price (subject to certain adjustments) of $26 per share, exercisable before December 31, 1999 (subject to extension in certain circumstances). The $5,677,000 used to purchase the OP Units has been recorded as a reduction in minority interest and the $3,298,000 used to purchase common stock has been recorded as a reduction of stockholders' equity. The OP Units and 2,985 common shares are pledged as collateral against the
loan. The 274,039 OP Units were converted to shares of common stock at the request of Golf Host Resorts on March 3, 2000. These shares continue to be pledged as collateral against the loan.
The Company recognizes interest income on a straight-line basis. Interest income in excess of the cash received for this mortgage recognized was approximately $814,000, $1,160,000 and $723,000, respectively, for the years ended December 31, 1999 and 1998 and for the period from February 12 to December 31, 1997.
5. LEASES
The non-cancelable leases generally provide for the Company to receive the greater of Base Rent or Participating Rent. Participating Rent is generally equal to the original Base Rent plus 33 1/3 percent of the difference between that year's Gross Golf Revenue and the Gross Golf Revenue at the Golf Course in the year prior to acquisition as adjusted in determining the original Base Rent. The Base Rent generally increases annually by the lesser of (i) 3% to 5% or (ii) a multiple of the change in the Consumer Price Index ). Annual increases in lease payments are generally limited to 5% to 7% during the first five years of the lease terms. Participating rent was $450,000, $657,000 and $280,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Scheduled future minimum rents to be received by the Company under the Leases, excluding Tierra Del Sol for whom we will recognize their Net Income, are as follows for the year ending December 31:
6. COMMITMENTS AND CONTINGENCIES
LESSEES
Typically, the Company leases its golf courses to affiliates of the prior owners and other qualified operators under non-cancelable lease agreements for an initial period of ten years with options to extend the term of each lease up to six consecutive times for a period of 5 years. From the minimum lease payments, the Company is generally required to make available a reserve of 2% to 5% of the annual gross golf revenue of each course for capital expenditure reimbursement to the lessee subject to approval by the Company. The capital expenditure reserve is used for replacement and enhancement of the existing facilities and is allocated to short and long-term categories and therefore the balance may not be currently available to the lessees. At December 31, 1999, the amount reserved was $2,452,000 compared to $1,105,000 at December 31, 1998.
Under certain circumstances, the underlying base rent for a course will be increased when the Company agrees to pay for significant capital improvements or to expand the existing facilities. Of the Company's $8,478,000 outstanding capital improvement commitments (which includes the Pete Dye Clubhouse loan for $2,300,000), approximately $1,918,000 has been funded to date. This loan may be capitalized into the base rent when the Clubhouse is completed.
In limited circumstances the Company agrees to provide working capital loans to existing lessees. Working capital loans are evidenced by promissory notes or as set forth in the lease agreement and bear interest at fixed rates between 9.74% and 10.5%. Of the Company's $12,224,000 working capital commitments, approximately $9,245,000 has been funded to date. In addition, a $3,500,000 land loan was funded to the lessee of the Pete Dye Golf Club at the time of purchase. Typically, the lessee is required to increase the pledged collateral for the funded amounts.
In summary, the Company has currently funded $14,663,000 of the total commitments to date of $24,202,000, and subject to certain conditions, anticipates it will fund the balance of $9,539,000 over the next two years.
The Company has agreed to maintain minimum loan balances of approximately $17.2 million for up to ten years to accommodate certain prior owner's efforts to seek to minimize certain adverse tax consequences from their contribution of their courses to the Company.
Under the Performance Option for the Participating Leases, during years three through five of each Participating Lease, the operator or its affiliate, subject to certain qualifications and restrictions, may elect one time to increase the Base Rent in order to receive additional OP Units or Common Stock. An operator's ability to exercise the Performance Option and the number of OP Units or Common Stock issuable to such Prior Owner in connection therewith, will depend on future operating results at the applicable Golf Course and therefore cannot be determined in advance.
LITIGATION
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. The Participating Leases provide that each Lessee is responsible for claims based on personal injury and property damage at the Golf Courses which are leased and require each Lessee to maintain insurance for such purposes. Although the Company is currently not party to any legal proceedings relating to the Golf Courses that would have a material adverse effect upon the Company's business or financial position, it is possible that in the future the Company could become a party to such proceedings.
EVENTS OF DEFAULT UNDER THE PARTICIPATING LEASE
An "event of default" may be declared when a tenant fails to pay rent timely under the Participating Lease. GTA has elected to pursue legal remedies available to it under its Participating leases to cure such events of default that have occurred at the following courses in the past several months: Tierra Del Sol Golf Club, Osage National Golf Club, Mystic Creek Golf Club and Brentwood Golf & Country Club. As a result GTA has taken possession of Tierra Del Sol Golf Club and is in various stages of litigation with regard to the possession of the other three Golf Courses. These Golf Courses have a combined Net Book Value of approximately $29,993,000 and each of them have adequate pledged collateral to cover accrued rent and related charges to date. Based on our review of underlying operations of these Golf Courses, we do not believe that there has been any permanent impairment in the value of these assets.
7. DEBT
Debt consists of the following:
REVOLVING CREDIT FACILITY AND LINE OF CREDIT
On April 6, 1999, GTA amended and restated its unsecured Revolving Credit Facility ("Credit Facility") to increase the borrowing capacity to $200.0 million with a consortium of banks led by Bank of America, as lead agent. GTA pays interest-only on the Credit Facility with the principal balance due in April 2002. Borrowings typically bear interest at an adjusted Eurodollar rate plus an applicable margin. The applicable margin (between 1.50% and 2.00%) is subject to adjustment based upon certain leverage ratios. At December 31, 1999, all amounts outstanding under the Credit Facility were based on the Eurodollar rate and a margin of 1.75% for an average interest rate of 7.1% per annum. The amended and restated Credit Facility replaced the Bridge Loan.
The Credit Facility availability is limited to an unencumbered pool calculation, including a 20% limitation for working capital needs of The Company. Financial covenants include net worth, liquidity and cash flow covenants, among others. Non-financial covenants include restrictions on loans outstanding, construction in progress, loans to officers and changes in certain members of the Board of Directors, among others. At the present time, these covenants have been met.
In addition to the amended and restated Credit Facility, on April 6, 1999 GTA also obtained a $25.0 million unsecured line of credit from Bank of America which may be incorporated into the $200.0 million Credit Facility at a later date. The rates, covenants, conditions and other material provisions are essentially the same as the Credit Facility, except for the term, which was one year with an expiration date of April 1, 2000. In March of 2000, this line was granted a six-month extension with a new maturity date of October 1, 2000. The extension was granted with the same pricing that was in effect under the original line plus a 3/4% up-front commitment fee.
DEBT MATURITIES
Aggregate maturities of long-term debt for each of the five years following December 31, 1999, are as follows:
INTEREST RATE SWAP AGREEMENT
In September 1998, the Company entered into an interest rate swap agreement with Bank of America N.A. to reduce the impact of changes in interest rates on its floating rate Credit Facility. The agreement, which covered a total notional amount of $76,800,000 matures on March 27, 2000. The swap agreement effectively converts a portion of the Company's floating rate debt to a fixed rate. The Company pays Bank of America N.A. a fixed rate of 5.08% per annum (for an all-inclusive rate of 6.83% for December 31, 1999). The Company is exposed to credit loss in the event of nonperformance by Bank of America N.A., however, the Company does not anticipate nonperformance by Bank of America N.A. As of the date of this filing, the Company had not entered in to a new interest rate swap agreement; therefore, $76,800,000 will convert to floating rate debt as of March 27, 2000 bringing the total floating rate debt to $210,700,000.
8. PREFERRED STOCK AND OTHER PREFERRED INTERESTS
SERIES A PREFERRED STOCK
On April 2, 1999, GTA completed a private placement of 800,000 shares of its 9.25% Series A Cumulative Convertible Preferred Stock, par value $0.01 per share ("Series A Preferred Stock"), at a price of $25.00 per share to a single purchaser, AEW Targeted Securities Fund, L.P.
Dividends on the Series A Preferred Shares are cumulative from the date of original issue and are payable quarterly in arrears, when, and as if declared by the Board of Directors, on the 15th day of January, April, July and October, commencing on July 15, 1999. Such dividends will be in an amount per share equal to the greater of (i) $0.578125 per quarter (or $2.3125 per annum)(equal to an annual rate of 9.25% of the $25 price per share) or (ii) the cash dividend paid or payable on the number of common shares into which a Series A Preferred Share is then convertible (determined on each of the quarterly dividend payment dates referred to above). The initial dividend paid in second quarter was prorated and paid on July 15, 1999 based on the number of days between April 2, 1999 and June 30, 1999, the final day of the fiscal quarter.
The Series A Preferred Stock is convertible, in whole or in part, at the option of the holder at any time into common shares at a conversion price of $26.25 per common share (equivalent to an initial conversion rate of approximately 0.95238 common shares per Series A Preferred Share), subject to adjustment in certain circumstances.
Except in certain circumstances relating to preservation of GTA's status as a "REIT", the Series A Preferred Shares are not redeemable at GTA's option prior to April 2, 2004. On and after such date, the Series A Preferred Shares will be redeemable, in whole but not in part, at the option of GTA on 20 days' notice for a cash payment equal to $25.00 plus accrued and unpaid dividends (whether or not declared) to the redemption date without interest, plus a premium initially equal to 4% of such sum and, thereafter, declining by 1% each year so that the premium is zero on and after April 2, 2008.
SERIES B OP UNITS
In May 1999, GTA acquired Metamora Golf and Country Club, an 18-hole upscale golf facility located in Metamora, Michigan for $5.9 million. As part of the purchase price, at the closing, 10,172 units of Series B OP Units valued at $295,000 were issued at $29.00 per share (which reflects a 20% conversion premium at the time of closing). The newly created Series B OP Units are convertible into OP Units on a one-for-one basis at the election of the holder. These perpetual preferred units are scheduled to pay a distribution of 8.25% based on the initial issuance price.
SERIES C OP UNITS
In July 1999, GTA acquired the Pete Dye Golf Club, an 18-hole upscale, private golf facility located in Bridgeport, West Virginia, approximately 90 miles south of Pittsburgh. As part of the $10.0 million purchase price, at the closing, 48,949 units of Series C OP Units valued at $1,350,000 were issued at $27.58 per share. The newly created Series C OP Units are convertible on a one-for-one basis into common OP Units basis at the election of the holder. These perpetual preferred units are scheduled to pay a distribution of 8.91% based on the initial issuance price.
9. STOCK OPTION AND AWARDS
EMPLOYEE STOCK OPTIONS AND AWARDS
The Compensation Committee of the Board of Directors ("Compensation Committee") determines compensation, including stock options and awards. Options are generally awarded with the exercise price equal to the market price at the date of grant and become exercisable in three to five years.
In February 1997, the Company adopted the 1997 Stock Incentive Plan (the "Stock Incentive Plan"). Under the Stock Incentive Plan, the Compensation Committee granted stock awards relating to 500,000 shares of Common Stock which vest ratably over a period of three years from the date of grant and expire ten years from the date of grant.
In February 1997, the Company adopted the 1997 Non-Employee Directors' Plan (the "Directors' Plan"). Under the Directors' Plan, the Compensation Committee is authorized to grant stock awards to purchase up to 100,000 shares of the Company's common stock at prices equal to the fair value of the stock on the date of grant. On February 6, 1997, 1998, 1999, and 2000, respectively, 20,000 options were granted and vested immediately. As of February 6, 2000, 20,000 shares remain available for options and restricted stock grants.
In May 1997, the Company adopted the 1997 Stock-Based Incentive Plan (the "New 1997 Plan"). Under the New 1997 Plan, the Compensation Committee is authorized to grant awards of up to 600,000 shares of the Company's common stock. Option grants generally vest ratably over a period of three years from the date of grant and expire ten years from the date of grant. At December 31, 1999, 42,968 shares remained available for options and restricted stock grants. On January 30, 2000, 25,000 options were issued under this plan leaving a remaining balance of 17,968.
On November 11, 1998, the Company adopted the 1998 Stock-Based Incentive Plan (the "1998 Plan") subject to approval by stockholders. Concurrently with the plan approval, the Compensation Committee granted 350,000 of the authorized 500,000 options at an exercise price of $25.06. These options generally vest ratably over a period of five years from the date of grant and expire ten years from the date of grant. Eighty-eight thousand of these options were cancelled upon the resignation the Company's executive Vice President in November 1999. In addition, 8,000 of the 44,000 shares that were granted in March 1999 were cancelled. At December 31, 1999, 202,000 shares remained available for options and restricted stock grants. On January 30, 2000, 145,000 options and 55,000 restricted shares were issued under this plan leaving a remaining balance of 2,000.
The New 1997 Plan and the 1998 Plan provides that the Company may grant stock options or restricted stock to executive officers and other key employees. Restricted stock is subject to restrictions determined by the Company's Compensation Committee. The shares of restricted stock will be sold at a purchase price equal to $0.01 and will vest over four-year period. Restricted stock has the same dividend and voting rights as other common stock and is considered to be currently issued and outstanding.
On September 19, 1997, the Company issued 70,000 restricted common shares for $.01 when the market price was $26.1875 to officers of the Company under the New 1997 Plan. On January 1, 1998 the Company issued 20,939 restricted common shares for $0.01 when the market price was $29.00 to officers of the Company under the New 1997 Plan. On March 10, 1999, the Company issued 44,000 restricted common shares for $.01 when the market prices was $22.75 to officers of the Company under the 1998 Plan. Subsequent to these issuances, loans of approximately $938,000, secured by OP Units and common stock, with interest rates of 4.4% to 6.2% were made to officers of the Company for the payment of related taxes through the date of this report. In November 1999, 11,904 of the previously issued grants were cancelled as a result of the resignation of one of the officers of the Company. Compensation expense is determined by reference to the market value on the date of grant and is being amortized on a straight-line basis over the vesting period. Such expense amounted to approximately $563,000 and $787,000 and $115,000 for the years ended December 31, 1999, 1998, and for the period ended 1997, respectively.
9. STOCK OPTIONS AND AWARDS (CONT'D)
LOANS TO OFFICERS
Loans of approximately $890,000, secured by OP Units and common stock, with interest rates of 4.4 to 6.2 % per annum were made to officers of the Company for the payment of related taxes for Restricted Stock Grants issued in 1997, 1998 and 1999. Of this total, approximately $173,000 related to the Restricted Stock Grants issued on March 10, 1999 for 44,000 shares. Additional loans will be made to the officers to cover tax liabilities resulting from future vesting of the Restricted Stock Grants. Under the 1998 Senior Executive Loan Program, as amended on August 10, 1999, loans of $2,300,000 have been made to officers of the Company to purchase Company stock on the open market. These loans are collateralized by the shares purchased, bear interest at 4.51 to 5.89 % per annum and are due at the earlier time of (i) sale greater than $25 per share, (ii) within 3 years of employee termination or (iii) 5 years. These Promissory Notes are recourse to the borrower. Upon any change of control in the lender, all outstanding amounts to the current officers of GTA are forgiven and the Promissory Notes are cancelled.
Of the total officer loans outstanding, approximately $725,000 in loans to the former Executive Vice President were reclassified to Other Assets from Stockholders Equity upon his resignation in November of 1999.
Transactions involving the plans are summarized as follows:
9. STOCK OPTIONS AND AWARDS (CONT'D).
Pro forma net income and earnings per share, as if the fair value method in SFAS No. 123 had been used to account for stock-based compensation, and the assumptions used, are as follows:
EMPLOYEE STOCK PURCHASE PLAN
Effective March 1, 1998, the Company adopted an Employee Stock Purchase Plan to provide substantially all employees an opportunity to purchase shares of its common stock through payroll deduction, up to 10% of eligible compensation with a $25,000 maximum deferral. Semi-annually, participant account balances will be used to purchase shares of stock at the lesser of 85 percent of the fair market value of shares at the beginning or ending of such six-month period. The Employee Stock Purchase Plan expires on February 28, 2008. A total of 250,000 shares will be available for purchase under this plan. Shares have been issued as per the table below:
Compensation expense related to the Employee Stock Purchase Plan was $12,000 for 1999 and $18,000 for 1998.
NON-AFFILIATED STOCK OPTIONS
In conjunction with the February 1998 purchase of the Emerald Dunes Golf Course, Raymond Finch, Jr. and Ray Finch, III (collectively, the "Finches"), were granted 50,000 options each, of which 25,000 in the aggregate will vest when, in any calendar year, the Company acquires $25.0 million in golf courses identified by the Finches. After year five, all options immediately vest if the stock price is $10.00 over the strike price at which the options were issued ($28.00) and if the Finches have otherwise undertaken to promote and market the Company. These options expire on May 1, 2003.
9. STOCK OPTIONS AND AWARDS (CONT'D).
In addition, options to acquire 20,000 shares of common stock were granted to J. Graffeo, J. Galante, H. Rostoff, I. Smoley and A. Inelli (for a total of 100,000 options) as partial consideration for their interest in the Polo Trace Golf Course. Ten Thousand of the options vested on January 4, 1999, at $26.75 and 10,000 vested on January 4, 2000, at $16.83. All 100,000 of these options expire on July 1, 2000.
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data is as follows (in thousands, except per share amounts):
11. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The pro forma financial information set forth below is presented as if the 1999 acquisitions (Note 3) had been consummated as of January 1, 1998. The pro forma financial information is not necessarily indicative of what actual results of operations of the Company would have been assuming the acquisitions had been consummated as of January 1, 1998, nor does it purport to represent a forecast of the results of operations for future periods (in thousands, except per share amounts).
The pro forma financial information includes the following adjustments: (1) increase in revenues; (2) an increase in depreciation and amortization expense; (3) an increase in interest expense; (4) an increase in interest income; and (5) an increase in income applicable to minority interest.
12. MINORITY INTEREST
Minority interest represents the OP Units not held by GTA, GP and GTA, LP and is adjusted for the OP Unit holders', proportionate share of net income and distributions. An OP Unit and share of Common Stock of the Company have the same economic characteristics inasmuch as they effectively share equally in the net income or loss and any distributions of the Operating Partnership. OP Unit holders have the right, subject to certain terms and conditions, to convert their OP Units to shares of Common Stock or to cash at the discretion of the Company. In 2000, 100% of the 5,252,995 OP Units will be convertible. The following activity occurred in the OP Unit activity and the minority interest account:
13. TRANSACTIONS WITH AFFILIATE AND SIGNIFICANT LESSEE
Legends Golf is a significant lessee of the golf courses in the Company's portfolio. Legends Golf is a golf course management group consisting of eight companies affiliated through common ownership that operates a portfolio of thirteen golf courses owned by the Company under triple-net leases. Legends Golf derives revenues from the operation of golf courses principally through receipt of green fees, membership fees, golf cart rentals, and sales of food, beverage and merchandise. During 1999, Legends Golf acquired five additional leases for six courses from the prior lessee in exchange for cash of $25 and the assumption of debt including advances from the Company of $2,899.
Capital improvement and working capital Advances from the Company totaling $5,328 bear interest at 10-percent. Advances of $661 are due in August 2000 with the balance due at the end of the lease term.
The following table sets forth certain combined condensed financial information for Legends Golf:
(Unaudited)
Total revenues from golf course operations for Legends Golf increased by $4.5 million or 19.7 percent to $27.4 million for the year ended December 31, 1999. The increase was primarily attributed to the additional revenue of $4.2 million from the additional six courses under lease and increases in the Myrtle Beach revenues of $1.0 million from higher green fees, cart fees, and food and beverage sales offset by a $0.7 million decrease of revenue inVirginia.
Operating loss increased from $4.7 million to $6.1 million for the years ended December 31, 1998 and 1999, respectively. The increase is primarily due to the additional administrative, operating, and transition expenses of $6.7 million related to the additional six Golf Courses under lease offset by reductions of $0.8 million in administrative and operating expenses at the Myrtle Beach and Virginia Golf Courses and the $4.5 million increase in revenues as noted above.
Legends Golf incurred a net loss of $0.9 million for the year ended December 31, 1999 compared to net income of $0.7 million for the year ended December 31, 1998 primarily as a result of the increase in the operating loss and an increase in interest expense of $0.3 million in 1999.
13. TRANSACTIONS WITH AFFILIATE AND SIGNIFICANT LESSEE (CONT'D)
RELATED PARTY TRANSACTIONS
Concurrent with the acquisition of the Sandpiper Golf Course, the Company formed Sandpiper-Golf Trust, LLC (of which the Operating Partnership is the sole member) to hold title to the golf course. In addition, the Operating Partnership owns approximately 95% of the economic interest in a preferred stock subsidiary formed to hold title to a 14 acre development site adjacent to the Sandpiper Golf Course, with the balance owned by Mr. Blair, President, and Mr. Young, in order to comply with certain REIT restrictions imposed by the Internal Revenue Code. This parcel of land was sold in June of 1999 and this related preferred stock subsidiary was dissolved effective December 31, 1999.
14. SUBSEQUENT EVENTS
PAYMENT OF DIVIDENDS
On December 15, 1999 the Board of Directors declared a quarterly dividend distribution of $0.44 per share for the quarter ended December 31, 1999, to common stockholders of record on December 31, 1999, which was paid on January 15, 2000. Preferred Stockholders were paid the dividend calculated according to their contracted yield.
ISSUANCE OF STOCK OPTIONS AND RESTRICTED STOCK GRANTS
As consistent with prior years, on February 6, 2000, 20,000 stock options at an exercise price of $17.938 were issued under the "Director's Plan" to GTA's independent directors. These options vested upon issuance.
On January 30, 2000, 25,000 stock options under the New 1997 Plan and 145,000 stock options under the 1998 Plan were issued to GTA employees at an exercise price of $17.25. These options vest ratably over a period of three years. On January 30, 2000, 55,000 restricted stock grants at a par value of $0.01 per share were issued to the Officers of GTA under the 1998 Plan.
STOCK REPURCHASE PROGRAM
On December 15, 1999, GTA announced that its Board of Directors authorized a program to repurchase up to one million shares of its common stock. Any such repurchases will be made on the open market or in block purchase transactions. The timing of any repurchases and the number of shares repurchased pursuant to the stock repurchase program are dependent upon market conditions and corporate requirements. Under this program, on January 4, 2000, GTA purchased 10,000 shares of its stock at a price of $16.9375 per share.
APPOINTMENT OF FINANCIAL ADVISOR
After an extended interview and diligence process by management and review by the Company's Board of Directors, on February 9, 2000 GTA engaged Banc of America Securities LLC to act as its financial advisor to undertake a review of a broad range of strategic alternatives available to the Company in light of the current and prospective market conditions facing the Company and the REIT industry. Executive management and/or the Board is meeting regularly with our financial advisor in furtherance of consideration of alternatives to enhance shareholder value. These alternatives include a merger, sale, recapitalization, privatization or restructuring, including de-REITing (revoking election of REIT-tax status), among others.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Compensation Committee of the Board of Directors Golf Trust of America, Inc. 1998 Non-Qualified Employee Stock Purchase Plan:
We have audited the accompanying statements of financial condition of the Golf Trust of America, Inc. 1998 Non-Qualified Employee Stock Purchase Plan (the Plan) as of December 31, 1998 and 1999, and the related statements of changes in net assets for the period from March 1, 1998 (inception) through December 31, 1998, and the year ended December 31, 1999. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial condition of the Plan at December 31, 1998 and 1999, and the changes in net assets for the period from March 1, 1998 (inception) through December 31, 1998, and the year ended December 31, 1999, in conformity with generally accepted accounting principles.
Charlotte, North Carolina /s/ BDO Seidman, LLP February 4, 2000
GOLF TRUST OF AMERICA, INC. 1998 NON-QUALIFIED EMPLOYEE STOCK PURCHASE PLAN STATEMENTS OF FINANCIAL CONDITION
ASSETS:
GOLF TRUST OF AMERICA, INC. 1998 NON-QUALIFIED EMPLOYEE STOCK PURCHASE PLAN STATEMENTS OF CHANGES IN NET ASSETS
See accompanying notes to financial statements
GOLF TRUST OF AMERICA, INC. 1998 NON-QUALIFIED EMPLOYEE STOCK PURCHASE PLAN NOTES TO FINANCIAL STATEMENTS
1. THE PLAN:
The Golf Trust of America, Inc. (the Company) 1998 Non-Qualified Employee Stock Purchase Plan (the Plan) was adopted by the Company's Board of Directors in March 1998 and became effective on March 1, 1998. The Plan is a non-qualified voluntary contribution plan designed to enable eligible employees and directors (the Participants) of the Company to purchase common stock in the Company at a discount. The Plan allows each Participant to purchase up to $25,000 per year of the Company's common stock. The Plan is administered by the Company that has delegated certain administrative responsibilities to the Compensation Committee of the Board of Directors of the Company. The Plan provides for a series of six month purchase periods ("purchase period"). A purchase period is a period of six months beginning each January 1 and July 1 and ending each June 30 and December 31, respectively. The price of the shares of the common stock purchased is the lesser of 85 percent of the closing price of such shares either on (a) the first day of each purchase period, or (b) the last day of each purchase period.
The Company has reserved 250,000 shares of common stock for participants under the Plan.
PARTICIPANTS CONTRIBUTIONS:
Full time employees who have completed three months service with the Company are eligible to participate in the Plan by payroll withholding at any time during each purchase period. Participants elect to participate in the Plan by completing and submitting an election form to the plan administrator.
EMPLOYER CONTRIBUTIONS:
Employer contributions represent the discount or aggregate difference between the market value price of the Company's common stock and the established discount purchase price at the end of a purchase period.
DISTRIBUTIONS:
The Company's transfer agent and registrar issues shares of common stock upon receipt of participant and Company contributions. The transfer agent and registrar then prepares stock certificates, which are registered in the participant's name, and holds such certificates on behalf of the participants or issues stock certificates to the participant upon their written request. Accordingly, all shares purchased under the provisions of the Plan are deemed to be immediately distributed to the participants.
WITHDRAWALS:
A participant may withdraw all or any part of the contributions made during a purchase period by delivering an amended election form to the plan administrator on or before the last day of such purchase period.
1. THE PLAN (CONT'D).
PLAN TERMINATION:
The Board of Directors of the Plan may terminate this Plan and any purchase period at any time (together with any related contribution elections) or may terminate any purchase period (together with any related contribution elections) at any time, provided, however, no such termination shall be retroactive unless the Board determines that applicable law requires a retroactive termination of this Plan.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF ACCOUNTING:
The accompanying financial statements have been prepared on the accrual basis of accounting.
ADMINISTRATIVE EXPENSES:
All administrative expenses of the Plan are paid by the Company.
DISTRIBUTIONS:
Distributions are recorded when common stock has been distributed to participants.
3. INTERNAL REVENUE SERVICE STATUS:
The Plan is not a qualified plan under Section 423(b) of the Internal Revenue Code. Participants are subject to any required tax withholding by the Company on the discount/compensation earned under the Plan.
4. DISTRIBUTIONS:
A summary of stock purchased and distributed for the purchase periods ended June 30th and December 31st is as follows:
5. SUBSEQUENT EVENT:
On January 4, 2000, an additional 1,592 shares of common stock with a market value of approximately $27,000 were purchased and distributed for the purchase period ended December 31, 1999.
LEGENDS GOLF
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, 1998 and 1999, and the related combined statements of operations, owners' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles.
BDO Seidman, LLP
February 12, 2000 Charlotte, North Carolina
LEGENDS GOLF
COMBINED BALANCE SHEETS
(IN THOUSANDS)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEGENDS GOLF
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEGENDS GOLF
COMBINED STATEMENTS OF OWNERS' EQUITY (CAPITAL DEFICIT)
(IN THOUSANDS)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEGENDS GOLF
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
The combined financial statements include the accounts of two S-Corporations (Golf Legends, Ltd. and Legends at Bonaventure, Inc.) and six limited liability companies (Legends of Virginia, LC; Legends Golf Management, LLC; Heritage Golf Management, LLC; Oyster Bay Golf Management, LLC; Legends National Golf Management, LLC; and Virginia Legends Golf Management, LLC). The entities, referred to collectively as Legends Golf (the Company), are engaged in the operation of 14 golf courses in South Carolina (5), Florida (4), Virginia (2), Kentucky, Nebraska, and North Carolina.
The operations of the companies listed above are being presented on a combined basis, as under the terms of the operating leases, the lease obligations are cross-collateralized among all Legends lessees. This presentation better presents the ability of the lessees to service the leases.
All significant intercompany balances and transactions have been eliminated. Additionally, certain classifications may vary from those of the individual company's financial statements.
All dollar amounts are presented in thousands unless otherwise indicated.
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. Membership dues are recognized ratably over the applicable period. Initiation fees are refundable and are not recognized as revenue.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with a maturity of three months or less to be cash equivalents.
INVESTMENTS IN PARTNERSHIP
The Company accounts for its investments in Golf Trust of America, LP (GTA, LP) under the equity method of accounting. Under this method, equity earnings (losses) are recorded as increases (decreases) to the investment account and dividend distributions, to the extent they do not lower the investment below zero, are recorded as reductions in the investments.
GOODWILL
Goodwill is amortized on a straight-line basis over 15 years.
1. 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.
Estimated useful lives for major asset categories approximate:
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. Golf course improvements, to the extent they are not reimbursed by the Landlord, are amortized over the lesser of their useful lives or the related lease term.
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 companies, no provision has been made for income taxes or related credits as under the Internal Revenue Code a limited liability company is treated as a partnership for income tax purposes. Therefore, the results of operations are includable in the income tax returns of the members.
USE OF ESTIMATES
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.
RECLASSIFICATION
Certain 1998 amounts have been reclassified to conform to 1999 presentation.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of trade receivables.
Concentration of credit risk with respect to trade receivables, which consists primarily of golf packages from hotels and charges, is limited due to the large number of hotels comprising the Company's customer base. 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, 1998 and 1999, the Company had no significant concentration of credit risk.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
The Company expenses advertising costs as incurred. Advertising costs are included in general and administrative costs in the amounts of $626, $655, and $867 for December 31, 1997, 1998, and 1999, respectively.
2. TRANSFER OF ASSETS AND INVESTMENT IN GTA, LP
On February 12, 1997, the Company transferred land and improvements, buildings, and certain equipment with a net book value of $36.3 million net of related debt of $34.8 million to Golf Trust of America, LP (GTA, LP) for approximately 3.7 million OP Units and reimbursement of approximately $522,500 of out-of-pocket expenses. Immediately prior to the transfer, the Company's majority owner contributed land, previously leased to the Company, at a value of $3.5 million. The transfer was concurrent with an initial public offering of the common stock of Golf Trust of America, Inc. (GTA, Inc.), its general partner. OP Units are convertible, subject to certain limitations as defined in the transfer agreement, to common shares of GTA, Inc. At December 31, 1999, the common stock equivalent value of the OP Units was approximately $63 million.
In addition, with the contribution of assets, the operations of the golf courses were transferred to four newly formed management companies. These companies entered into lease agreements with GTA, LP more fully described in Note 7. During 1998, the Company completed construction of two clubhouses in Virginia as required under the terms of the contribution agreement with GTA, LP at a cost of approximately $3.4 million. These assets were transferred to GTA, Inc. during 1998.
3. ACQUISITION OF LEASES
During 1999, Mr. Young and an affiliate acquired the operations of six additional golf courses under lease to GTA. Effective July 1, 1999, Mr. Young purchased the stock of Legends at Bonaventure, Inc. (formerly known as Emerald Dunes--Bonaventure, Inc.) for $25,000 plus the assumption of certain liabilities. Effective August 17, 1999, Legends National Golf Management, LLC acquired the leases for four courses through assignment from the Granite Golf Group in exchange for the assumption of certain liabilities. The acquisition value has been allocated as follows:
4. RELATED PARTY TRANSACTIONS
The Company's majority owner 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; Gleneagles, Ltd.; 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. The Company'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 Company for such services are as follows:
During 1997, 1998, and 1999, the Company recognized golf course revenue of $1,744, $2,972, and $3,653 respectively, under golf packages with an affiliated company.
Advances to and from affiliated companies, as shown on the combined balance sheets, have no fixed payment/repayment provisions. Interest income and expense on advances to and from affiliates are not recorded for financial statement purposes. Interest income of $577, in 1999 which approximates the borrowing rate on the payable to bank, was recognized on advances to Mr. Young.
Included in advances from affiliates is $2,899 payable to GTA, assumed by the Company in the acquisition of the Bonaventure lessee and $2,429 in additional advances from GTA to assist in the transition period for all the new leases. In August 2000, $661 is due and the balance has no fixed payment terms. All amounts bear interest at 10 percent per annum. Interest expense on these advances was $124.
5. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
6. RETIREMENT PLAN
The Company sponsors a 401(k) profit-sharing plan for all eligible employees of the Company and other affiliated companies including officers. Legends Group, Ltd. may annually elect to make matching contributions as defined in the plan. No matching contributions were made for the years ended December 31, 1997, 1998, and 1999.
7. LONG-TERM DEBT
Long-term debt consists of the following:
The $6 million loan agreement provides, among other covenants, restrictions on certain financial ratios, 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, 1999.
Total debt of all affiliated entities of which the Company is jointly liable is approximately $29,489 at December 31, 1999.
The Company has obtained commitments to extend the Payable to bank and payable to financial institution agreements to January 2001.
The aggregate annual maturities for the above mortgage notes payable at December 31, 1999, are as follows:
Notes payable increased primarily due to disbursements made to the majority owner.
8. COMMITMENTS AND CONTINGENCIES
LEASES
Concurrent with the transfer of assets, as described in Note 2, the Company entered into four lease agreements with GTA, LP. The leases provide for initial annual payments aggregating approximately $12 million with annual adjustments equal to the lesser of 3 percent or 200 percent of the consumer price index. In addition, the leases provide for percentage rents based on one-third of the increase in gross golf revenues, as defined in the agreement, over the base year of 1996. The leases assumed as described in Note 3 have similar terms. The leases, which have terms ending through December 31, 2006, may be renewed for up to six additional periods of five years each. In addition, the leases provide for reimbursements, subject to landlord approval, up to 2 percent of gross golf revenues, of certain qualified capital expenditures, as defined in the lease agreements. The Company records these expenditures as leasehold improvements or equipment as applicable until they are reimbursed by the lessor. As of December 31, 1999, the lessor had approximately $182 available to the Company under these lease agreements.
The Company also leases land from a third party under an agreement that expires in 2032. The lease requires rental payments of 10 percent of monthly green fees as defined in the lease agreement.
During 1996 and prior to the transfer of assets on February 12, 1997, the Company leased land from the sole stockholder.
Total rental expense approximated the following:
The Company also leases certain equipment under noncancelable operating leases. Total equipment lease expense approximated $1,000, $604, and $1,275 for 1997, 1998, and 1999, respectively.
Minimum lease commitments for all noncancelable operating leases at December 31, 1999, are as follows:
SELF-INSURANCE
The Company along with its affiliates maintains a self-insurance program for that portion of health care costs not covered by insurance. The Company is liable for claims up to $20 per employee annually with an annual aggregate maximum liability under the program for all companies of $336. Cumulative amounts estimated to be payable by the Company with respect to pending and potential claims have been accrued as liabilities.
9. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest:
During 1997 and 1998, the Company transferred assets and related debt to GTA, LP (see Note 2).
During 1999, the Company acquired certain lease rights in exchange for the assumption of certain liabilities (see Note 3).
SCHEDULE III GOLF TRUST OF AMERICA, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1999
SCHEDULE IV Golf Trust of America, Inc. Mortgage Loans on Real Estate December 31, 1999
PERIOD PAYMENT TERMS Note payable interest only of $605,117 at 10.377% monthly with 5% annual increases continuing until 2002. Amounts drawn on $9,000,000 Tranche I bear interest at 10.505% with 5% annual increases continuing until 2002.
EXHIBIT INDEX
Pursuant to Item 601(a)(2) of Regulation S-K, this exhibit index immediately precedes the exhibits.
The following exhibits are part of this Annual Report on Form 10-K for fiscal year 1999 (and are numbered in accordance with Item 601 of Regulation S-K). Items marked with an asterisk (*) are filed herewith.
* Filed herewith