AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 2000
REGISTRATION NO. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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GOLF TRUST OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
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Maryland
(State or other jurisdiction of incorporation or organization)
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33-0724736
(I.R.S. Employer Identification Number)
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14 North Adger's Wharf
Charleston, South Carolina 29401
(843) 723-4653
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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W. Bradley Blair, II
Chief Executive Officer
Golf Trust of America, Inc.
14 North Adger's Wharf
Charleston, South Carolina 29401
(843) 723-4653
COPY TO:
Peter T. Healy, Esq.
O'Melveny & Myers LLP
275 Battery Street, Suite 2600
San Francisco, California 94111
(415) 984-8833
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this registration statement, as determined
by the Selling Stockholders.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
====================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES BEING AMOUNT TO BE AGGREGATE OFFERING AGGREGATE OFFERING AMOUNT OF
REGISTERED (1) REGISTERED PRICE PER SHARE (2) PRICE(2) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
9.25% Series A Cumulative 800,000 shares $25.00 $20,000,000 $5,280
Convertible Preferred (3)
Stock (par value $0.01
per share)
- --------------------------------------------------------------------------------------------------------------------
Common Stock (par value $0.01 761,904 shares (6) (6) (6)
per share) (4) (5)
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(1) This Registration Statement is filed to register (a) the offer and resale
by the Selling Stockholders (as defined herein) of up to 800,000 shares of
9.25% Series A Cumulative Convertible Preferred Stock ("Series A preferred
stock"), (b) the deemed offer by the Selling Stockholders of the shares of
Common Stock issuable upon conversion of the Series A preferred stock
(equal in number to 761,904 shares of Common Stock plus such currently
indeterminate number of additional shares of Common Stock as may be
issuable upon conversion as a result of adjustments to the conversion price
(collectively, the "Underlying Common Stock")), which offer is deemed to
occur concurrently with the offer of the Series A preferred stock because
the Series A preferred stock is immediately convertible, and (c) the offer
and resale by the Selling Stockholders of some or all of the Underlying
Common Stock which may be issued to them or their predecessors in interest
upon conversion of the Series A preferred stock. The original issuance and
sale of the Series A preferred stock on April 2, 1999 and the concurrent
deemed offer of the Underlying Common Stock by the Company was registered
by the Company's Form S-3 Registration Statement (file no. 333-56251),
filed June 5, 1998, and the Prospectus Supplement thereto, dated April 2,
1999 and filed pursuant to Rule 424(b)(5) on April 5, 1999. The issuance of
the Underlying Common Stock upon conversion of the Series A preferred stock
will be exempt from registration under Section 3(a)(9) of the Securities
Act.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 of the General Rules and Regulations under the Securities Act.
(3) Calculated pursuant to Section 6(b)(2) of the Securities Act.
(4) This Registration Statement also relates to the rights ("Rights") to
purchase shares of Series B Junior Participating Preferred Stock of the
Registrant which are attached to all shares of Common Stock outstanding as
of, and issued subsequent to, September 6, 1999, pursuant to the terms of
the Registrant's Shareholder Rights Agreement, dated August 24, 1999. Until
the occurrence of certain prescribed events, the Rights are not
exercisable, are evidenced by the certificates for Common Stock and will be
transferred with and only with such Common Stock.
(5) Pursuant to Rule 416 of the General Rules and Regulations under the
Securities Act, this Registration Statement also registers such currently
indeterminate number of additional shares of Common Stock as may be issued
upon conversion of the Series A preferred stock as a result of adjustments
to the conversion price.
(6) No additional consideration will be received upon conversion of the Series
A preferred stock into the Underlying Common Stock and therefore, pursuant
to Rule 457(i) of the General Rules and Regulations under the Securities
Act, no registration fee is required with respect to the registration of
the Underlying Common Stock.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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PROSPECTUS
[GOLF TRUST LOGO]
800,000 SHARES 761,904 SHARES
SERIES A PREFERRED STOCK COMMON STOCK
We are Golf Trust of America, Inc., a real estate investment trust
focused on owning and acquiring upscale golf courses in a number of markets
across the United States. The selling stockholder named in this prospectus may
offer up to 800,000 shares of our 9.25% Series A cumulative convertible
preferred stock or, if the selling stockholder converts its Series A preferred
stock into common stock, the selling stockholder may offer any of the 761,904
shares of our common stock issuable upon conversion of the Series A preferred
stock. We will not receive any of the proceeds from the sale of any of these
shares by the selling stockholder. Our registration of these shares does not
necessarily imply that they will sold by the selling stockholder.
The terms of our Series A preferred stock include the following:
- Series A preferred stock may be converted into common stock at a ratio
equal to $25.00 divided by the conversion price, which currently is
$26.25 and is subject to standard anti-dilution adjustments. Currently,
this formula produces a conversion rate of approximately 0.95238 shares
of common stock for each share of Series A preferred stock.
- Dividends will accrue quarterly on each Series A preferred share in an
amount equal to the greater of (a) $0.578125 per quarter or (b) the
cash dividend payable on the number of common shares into which one
Series A preferred share may be converted.
- We are not allowed to redeem the Series A preferred stock before April
2, 2004, except in certain limited circumstances to preserve our status
as a real estate investment trust.
- On or after April 2, 2004, we may redeem the Series A preferred stock
in whole but not in part by paying each holder $25.00 per share, plus
any accrued but unpaid dividends through the date of redemption, plus a
premium initially equal to 4% of such redemption payment and thereafter
declining by 1% each year.
- Holders of the Series A preferred stock have very limited voting
rights.
Our common stock is traded on the American Stock Exchange under the
symbol "GTA." On June 15, 2000, the last reported sale price for the common
stock on the American Stock Exchange was $15.938 per share. On the date of this
prospectus, the Series A preferred stock is not listed on any stock exchange or
national market.
INVESTING IN OUR SERIES A PREFERRED STOCK AND OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS," BEGINNING ON PAGE 3.
The selling stockholder may sell its shares from time to time in one or
more types of transactions, which may include block transactions, on the
American Stock Exchange, in the over-the-counter market, in negotiated
transactions, through put or call option transactions relating to the shares,
through short sales of shares, or a combination of such methods of sale, at
market prices prevailing at the time of sale, at prices related to such market
prices, at negotiated prices, or at fixed prices. The selling stockholder may
sell its shares directly to purchasers or through agents, underwriters or
broker-dealers. If required by law, the names of any such agents and
underwriters involved in the sale and the applicable agent's commission,
dealer's purchase price or underwriter's discount, if any, will be set forth in
a supplement accompanying this prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JUNE 19, 2000
The term "GTA" refers to Golf Trust of America, Inc. Unless the context
otherwise requires, the terms "Golf Trust," the "Company," "we," "us" and "our"
refer collectively to Golf Trust of America, Inc. and all of its direct and
indirect subsidiaries, including Golf Trust of America, L.P., the operating
partnership through which GTA holds most of its assets. The name "Golf Trust of
America, Inc." and the related logo are our trademarks. This prospectus also
contains trademarks and tradenames of other parties.
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TABLE OF CONTENTS
Note Regarding Forward-Looking Statements.................................... 2
Risk Factors................................................................. 3
The Company.................................................................. 19
Our Business Strategies and Objectives....................................... 22
Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends... 25
Use of Proceeds.............................................................. 25
Description of Our Capital Stock............................................. 25
Federal Income Tax Considerations............................................ 33
ERISA Considerations......................................................... 49
Registration Rights of the Selling Stockholders.............................. 51
Selling Stockholders......................................................... 52
Plan of Distribution......................................................... 53
Experts...................................................................... 54
Legal Matters................................................................ 54
Incorporation of Information by Reference.................................... 54
Where You Can Find More Information.......................................... 55
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NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and any accompanying prospectus supplement, including
the information incorporated in it or them by reference, contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements
are those that predict or describe future events or trends and that do not
relate solely to historical matters. You can generally identify forward-looking
statements as statements containing the words "will," "believe," "expect,"
"anticipate," "intend," "estimate," "assume" or other similar expressions.
YOU SHOULD NOT RELY ON OUR FORWARD-LOOKING STATEMENTS BECAUSE THE
MATTERS THEY DESCRIBE ARE SUBJECT TO KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER UNPREDICTABLE FACTORS, MANY OF WHICH ARE BEYOND OUR CONTROL. Many relevant
risks are described under the caption "Risk Factors" in this prospectus as well
as throughout our disclosure documents, and you should consider the important
factors listed there as you read this prospectus. Our actual results,
performance or achievements may differ materially from the anticipated results,
performance or achievements that are expressed or implied by our forward-looking
statements. We assume no responsibility to update our forward-looking
statements.
2
RISK FACTORS
AN INVESTMENT IN OUR SHARES INVOLVES VARIOUS RISKS. PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN CONJUNCTION
WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR
SHARES.
TRADITIONAL REAL ESTATE RISKS
OUR EXPOSURE TO TYPICAL REAL ESTATE INVESTMENT RISKS COULD REDUCE OUR INCOME.
Our holdings are subject to the risks typically associated with
investments in real estate. Such risks include the possibility that our golf
courses will generate rent and capital appreciation, if any, at rates lower than
we anticipated or will yield returns lower than those available through other
investments. Income from our golf courses may be adversely affected by many
factors, including an increase in the local supply of golf courses, a decrease
in the number of golfers, adverse weather conditions, changes in government
regulation and general or local economic deterioration.
ILLIQUIDITY OF OUR REAL ESTATE MAY IMPAIR OUR ABILITY TO OPTIMIZE OUR PORTFOLIO
OF GOLF COURSES.
Real estate investments are relatively illiquid. Thus, our ability to
vary our portfolio in response to changes in economic and other conditions is
limited. In addition, a number of our golf courses are subject to additional
transfer restrictions. The ground lessors of our Oyster Bay and the Mystic Creek
golf courses have a right of first refusal to acquire these golf courses upon
any proposed sale. Each lessee of any of our golf courses generally has a right
of first offer to acquire the golf course(s) leased by it in the event of a
proposed sale. The right of first offer is void in the event of a default by the
lessee under the lease. The three courses located at the Legends
Resort--Heathland, Moorland and Parkland--are subject to conservatory easements
that prohibit developments other than golf courses on the property, limit the
ability to materially modify the existing layouts at such golf courses and
require that such golf courses be open for public play. In the event that a sale
of a golf course will result in a taxable gain to the prior owner of the golf
course, we have agreed in most instances to use reasonable efforts to structure
such a sale as a tax-deferred exchange. All of these factors may make it more
difficult for us to transfer a golf course even when such transfer may be in our
best interests.
WE MAY BE LIABLE FOR UNKNOWN ENVIRONMENTAL CONTAMINATION REGARDLESS OF WHO
CAUSED IT.
Operations at our golf courses involve the use and storage of various
hazardous materials such as herbicides, pesticides, fertilizers, motor oil and
gasoline. Under various federal, state and local laws, ordinances and
regulations, an owner or operator of real property may become liable for the
costs of removal or remediation of such hazardous substances released on or in
its property. These laws often impose such liability without regard to whether
the owner or operator knew of, or was responsible for, the release of the
hazardous substances. The presence of such substances, or the failure to
remediate such substances properly, may adversely affect the owner's ability to
sell the real estate or to use such real estate as collateral. Although all of
our golf courses have at least been subjected to a Phase I environmental audit
(which does not involve invasive procedures, such as soil sampling or ground
water analysis) by an independent environmental consultant, we cannot assure you
that these reports audit all potential environmental liabilities, that no prior
or adjacent owner created any material environmental condition not known to us
or the independent consultant or that future uses or conditions (including,
without limitation, changes in applicable environmental laws and regulations)
will not result in imposition
3
of environmental liability on us. While the leases and the participating
mortgage provide that the operators will indemnify us for certain potential
environmental liabilities at the golf courses, the current operators may have
only nominal capitalization.
A significant portion of the Sandpiper golf course was previously an
operating oil field and there is significant residual oil contamination on the
property. In connection with the acquisition of the property, we obtained an
indemnification from Atlantic Richfield Company (ARCO) in a form and in an
amount which we believe is adequate to protect us from liability for such
contamination. Certain circumstances may require ARCO to enter the property and
perform remediation actions.
UNINSURED LOSSES COULD RESULT IN THE LOSS OF ONE OR MORE OF OUR GOLF COURSE
INVESTMENTS.
The leases and the participating mortgage require that each operator
maintain insurance with respect to each of the golf courses it operates,
including comprehensive liability, fire, flood (but only to the extent
comparable golf courses in the area carry such insurance and such insurance is
available at commercially reasonable rates) and extended coverage insurance.
There are, however, certain types of losses (such as from hurricanes, floods or
earthquakes) that may be either uninsurable or not economically insurable.
Should an uninsured loss occur, we could suffer loses of our invested capital
and lose our anticipated revenue stream from the applicable golf course.
PORTFOLIO ACQUISITIONS ARE MORE DIFFICULT TO CLOSE THAN SINGLE-ASSET
ACQUISITIONS.
Our business and acquisition strategy may include the acquisition of
multiple golf courses in a single transaction to enable us to enlarge our
critical mass of assets which provide operating leverage. However, portfolio
acquisitions are more complex than single-asset acquisitions, and the risk that
a portfolio acquisition will not close may be greater than in a single-asset
acquisition. In addition, our costs for a portfolio acquisition that does not
close are generally greater than for a single-asset acquisition that does not
close. If we fail to close one or more portfolio acquisitions, then our ability
to increase our net income will be limited and a charge to earnings for costs
related to the failed acquisition(s) may occur.
Another risk associated with portfolio acquisitions is that a seller
may require that a group of assets be purchased as a package, even though one or
more of the assets in the portfolio does not meet our investment criteria or is
located in a market that is geographically distant from our principal markets.
In such cases, we may attempt to make a joint bid with another buyer, or we may
purchase the portfolio of assets with the intent to subsequently dispose of
those assets which do not meet our investment criteria. In the case of joint
bids, however, it is possible that the other buyer may default in its
obligations, which increases the risk that the acquisition will not close, with
the adverse consequences described above. In cases where we intend to dispose of
assets that we do not wish to own, we cannot assure you that we will be able to
sell or exchange such asset or assets in a timely manner or on beneficial terms.
4
IF OUR EXPERIENCE IS NOT APPLICABLE TO THE NEW MARKETS WE ARE ENTERING, WE MAY
SELECT POOR INVESTMENTS OR INCUR ADDED EXPENSES AND DELAYS.
Our historical industry expertise is in markets within the southern,
eastern and mid-western regions of the United States. In 1998 and 1999 we
expanded our ownership of golf courses into new market areas, including markets
in the western United States. If appropriate opportunities arise, we may make
other selective investments outside of our current markets. Entry into new
markets requires us to apply our experience to such new market areas, but we
cannot assure you that our historical expertise will be applicable to new market
areas. If we continue to expand into new market areas in the future, we may be
exposed to risks associated with:
- a lack of market knowledge and understanding of the local economy,
which may cause us to model prospective acquisitions incorrectly;
- an inability to identify appropriate golf course acquisition
opportunities, which may cause us to acquire courses that fail to meet
our investment criteria;
- an inability to obtain qualified operators for acquired golf courses,
which may cause actual lease payments to fall short of our model's
estimates; and
- an unfamiliarity with local governmental regulations, which may result
in unexpected expenses from owning and operating such golf courses.
GROUND LEASE DEFAULTS MAY CAUSE US TO LOSE OUR LEASEHOLD INTEREST IN TWO GOLF
COURSES.
We hold two of our golf courses, Oyster Bay and Mystic Creek, pursuant
to long-term ground leases. If we, as lessee, default under the applicable
ground lease, the ground lessor may terminate the ground lease subject to
certain terms and conditions. If the ground lease is terminated or is not
renewed, we would lose our investment in the Oyster Bay golf course or Mystic
Creek golf course, as applicable.
GROWTH STRATEGY RISKS
POSSIBLE UNAVAILABILITY OF CAPITAL MAY IMPAIR OUR GROWTH RATE.
The success of our growth strategy depends, in large part, upon our
continued access to capital with which to acquire additional golf courses. We
cannot assure you that our use of excess cash flow, borrowings or subsequent
issuances of common stock, OP Units or other securities will be sufficient to
raise the necessary capital. Since mid-1998, the capital markets have not been
receptive to equity offerings by real estate investment trusts and,
consequently, we have financed our acquisitions primarily through draws upon our
credit facility and the issuance of OP Units. However, on the date of this
prospectus, we have depleted our borrowing capacity under the Credit Facility
and only have approximately $9.9 million in borrowing capacity available under
our unsecured credit line. If we are unable to secure public or private equity
financing or to increase our borrowing capacity, our expansion rate may decline,
which may cause our current earnings growth rates to decline. As a result, our
ability to pay distributions to our stockholders may be impaired and the market
prices of our equity securities may fall.
COMPETITION FOR ACQUISITIONS MAY IMPAIR OUR GROWTH RATE.
We compete for golf course acquisition opportunities with entities
organized for purposes substantially similar to our objectives as well as other
purchasers of golf courses. From time to time
5
we may compete for golf course acquisition opportunities with entities having
substantially greater financial resources and a broader geographic knowledge
base than we have. These entities may also be able to accept more risk than we
prudently can manage. Thus, competition may reduce the number of suitable golf
course acquisition opportunities available to us.
INABILITY TO MANAGE GROWTH EFFECTIVELY MAY REDUCE CASH AVAILABLE FOR
DISTRIBUTION.
Our success will depend upon the ability of each operator effectively
to manage all of its golf courses, as well as our ability to select an
appropriate lessee for each additional golf course we acquire. However, we
cannot assure you that the current or future operators will operate efficiently.
If, because of pressure to sustain our growth rate or for other reasons, we
lease an operator more golf courses than it can manage or if we select an
unqualified operator and as a result such operator defaults in its lease
payments to us, then our cash available for distribution to stockholders will be
reduced.
WE DEPEND ON ACQUISITIONS TO INCREASE CASH AVAILABLE FOR DISTRIBUTION.
Our success in implementing our growth plan depends significantly on
our ability to acquire additional golf courses at attractive prices. We do not
expect internal growth from increases in revenues at our golf courses to provide
as much growth in cash available for distribution to stockholders as the
acquisition of additional golf courses. If we are unable to acquire additional
golf courses at attractive prices, our ability to grow and to maintain or
increase cash available for distribution per share may be adversely affected.
RISKS RELATED TO OUR BUSINESS
OUR FINANCING OF GOLF COURSE CONSTRUCTION AND OPERATIONS IS SUBJECT TO INCREASED
RISK OF LOSS COMPARED TO INVESTMENTS IN COMPLETED GOLF COURSES
We have agreed to fund significant additional construction at certain
of our golf courses, including construction funding for Sandpiper golf course,
and we anticipate that we may make other construction advances or loans,
generally either (a) as financing that repays constructions costs, whether in
the form of a loan repayment or increase in the base rent payment, or (b) where
the loan is secured by property with a pre-construction value that is within our
investment guidelines. We have also made and anticipate that we may make in the
future seasonal, repositioning, and/or capital improvement related working
capital loans to tenants, including to the operator of the Sandpiper golf
course, the operator of the Bonaventure golf courses, and the operators of the
golf courses previously leased by affiliates of Granite Golf but assumed in 1999
by Legends Golf. Capital improvement loans and working capital loans often
involve a higher degree of risk than other lending because, among other reasons:
- repayment is dependent upon successful completion of the project;
- the project, as constructed or rehabilitated, requires certain
assumptions concerning the increase in green fees and number of rounds
played, which, if not realized, significantly increases the possibility
of a lessee default;
- estimating construction costs and timing is difficult;
- construction costs may exceed budgeted amounts; and
- timing delays may occur.
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A borrower default on a construction loan may decrease our cash
available for distribution to stockholders. The construction loans or advances
and operating lines are generally non-recourse beyond our interest in the golf
course and any security deposit pledged by the applicable tenant. Consequently,
in the event of a lessee default or failure to repay a construction loan or
operating line, we may be unable to recover the amount of our advances and
recognize a loss equal to the amount of the indebtedness.
OUR LIMITED OPERATING HISTORY MAY NOT REVEAL FLAWS IN OUR BUSINESS PLAN.
We began operations in February 1997 and have a limited operating
history. We cannot assure you that we will be able to generate sufficient
revenue from operations to make anticipated distributions to stockholders. We
are also still subject to the risks generally associated with the formation of
any new business. Our management has limited experience operating a public
company or a REIT and limited experience working together.
OPERATORS MAY DEVOTE INSUFFICIENT TIME AND ENERGY TO MANAGING OUR COURSES
BECAUSE OF THEIR OTHER BUSINESS INTERESTS
In addition to management of our golf courses, many of our golf course
operators devote significant time to other business interests, including in many
instances resort and residential development on property adjacent to the golf
courses and the operation of golf courses. As a result, the golf course
operators are subject to competing demands on their time, and may not devote
sufficient time to operations of our golf courses, which may result in less
revenue being generated from our golf courses than if they had devoted full time
to our golf courses.
THE SOUTHEASTERN U.S. CONCENTRATION OF OUR INVESTMENTS LEAVES US VULNERABLE TO
REGIONALLY ADVERSE EVENTS OR CONDITIONS.
Our expansion into new markets has not eliminated the geographic
concentration of our investments. Seven of our golf courses are located in North
Carolina and South Carolina and fourteen of our golf courses are located in
Florida. The concentration of our investments in these areas leaves us
vulnerable to regionally adverse events or conditions such as competition,
hurricanes and other weather conditions, overbuilding and economic recession. If
North Carolina, South Carolina or Florida is subject to such events or
conditions, our cash available for distribution will be more adversely affected
than it would have been if our investments were more geographically diverse.
CONFLICTS OF INTEREST
ONE OF OUR DIRECTORS MAY OPPOSE THE SALE OF CERTAIN GOLF COURSES TO AVOID
PERSONAL TAX LIABILITY.
Mr. Young, one of our directors, and his affiliates have an unrealized
gain in their interests in some of the golf courses they transferred to us. If
we were to sell such courses, the sale may cause adverse tax consequences to
that director. Therefore, our interests and the interests of such director could
differ in connection with the disposition of such golf courses.
ONE OF OUR DIRECTORS MAY OPPOSE ENFORCEMENT OF CONTRACTS THAT ARE ADVERSE
TO HIS AFFILIATES.
Because Mr. Young, one of our directors, is the principal owner of
Legends Golf, which contributed seven golf courses to us, and of the Legends
lessees, which lease those seven golf courses from us, there may be a conflict
of interest with respect to the enforcement of the contribution agreements
7
executed by Legends Golf, as well as with respect to enforcement and termination
of the leases to the Legends lessees.
OTHER CONFLICTS MAY ARISE IN THE FUTURE.
Other transactions between us and affiliates of the lessees may also
give rise to conflicts of interest, such as future acquisitions of golf courses
and selection of operators for such golf courses.
IF OUR KEY EXECUTIVES RESIGN, OUR GROWTH RATE MAY DECLINE.
Our ability to identify golf course acquisition opportunities and
manage our portfolio depends to a large extent upon the experience and abilities
of our founders, W. Bradley Blair, II, who serves as our Chief Executive Officer
and President, and Scott D. Peters, who serves as our Senior Vice President and
Chief Financial Officer. The loss of the services of either of these individuals
could have a material adverse effect on our growth rate, as well as on our
operations and business prospects generally.
WE MAY CHANGE OUR INVESTMENT AND FINANCING POLICIES AT ANY TIME WITHOUT NOTICE.
Our board of directors determines our investment and financing policies
and our policies with respect to certain other activities, including our growth,
outstanding indebtedness, capitalization, distributions and operations. Although
our board of directors has no present intention to amend or revise these
policies, our board of directors may do so at any time without a vote of our
stockholders and without notice.
RISKS RELATING TO OUR LEASES AND THE PARTICIPATING MORTGAGE
OUR USE OF ADJUSTMENTS AND PROJECTIONS IN ESTABLISHING LEASE PAYMENTS AND
PARTICIPATING MORTGAGE PAYMENTS MAY RESULT IN UNSUSTAINABLY HIGH PAYMENTS BEING
OWED TO US BY OUR OPERATORS.
We generally value golf courses and establish lease payments (and the
payments under the participating mortgage), based on selected adjustments to the
golf courses' historical operating results or estimates of future performance of
the golf courses. These adjustments include projected increases in revenues from
golf course operations and elimination of certain operating expenses. If such
adjustments are not appropriate, or if estimates of future performance are not
met, the operator to whom we lease a golf course may not be able to make its
scheduled payments to us. Failure of an operator to make such payments would
have a material adverse effect on our operations.
BECAUSE OUR REVENUES ARE HIGHLY DEPENDENT ON GOLF COURSE LEASE PAYMENTS (AND
MORTGAGE INTEREST PAYMENTS), PAYMENT DEFAULTS BY OUR GOLF COURSE OPERATORS WOULD
REDUCE OUR CASH AVAILABLE FOR DISTRIBUTION.
Our ability to make distributions to stockholders depends primarily
upon the ability of our golf course operators to make lease or interest payments
to us which, in turn, depends primarily on their ability to generate sufficient
revenues in excess of operating expenses at the golf courses. Operators' failure
or delay to made scheduled payments to us may be caused by reduced revenue at
the golf courses they operate or may occur because their rent was originally set
at an unsustainably high level or otherwise. To date, we have declared events of
default under the leases of six operators for non-payment or under-payment of
rent. These operators leased a total of 11.5 golf courses from us. (We count our
golf courses in terms of eighteen-hole equivalents, such that a 27-hole facility
counts as 1.5 courses.) The leases of
8
two of these operators (representing 6.5 golf courses) were assigned to Legends
Golf, which leases seven other golf courses from us. The operator of one of the
default courses was evicted through foreclosure on February 7, 2000, and we have
been operating that course since February 7, 2000. We consider that the initial
risk caused by the defaults of these three operators has been greatly reduced.
We are currently involved in default legal proceedings with the remaining three
operators (representing 4 golf courses). These events of default are described
in more detail in our most recent annual and quarterly reports. These events of
default and any future failure or delay by an operator in making scheduled
payments to us may adversely affect our ability to make anticipated
distributions to stockholders.
IF WE ARE FORCED TO TERMINATE A LEASE OR FORECLOSE ON THE PARTICIPATING
MORTGAGE, FINDING A REPLACEMENT OPERATOR MAY BE DIFFICULT.
Our golf course operators are generally limited-purpose entities that
have nominal capitalization. Although failure on the part of an operator to
comply with the material terms of its lease would give us the right to terminate
its lease, recover any collateral pledged as a security deposit, repossess the
applicable golf course and enforce the lease payment obligations under the
lease, we would then be required to find another lessee to lease such golf
course or risk compromising our ability to maintain REIT status. It may be
difficult for us to find suitable replacement operators following a default,
particularly in instances where the prior operator was not able to operate
profitably. In such instances we would likely be required to reduce the base
rent at the golf course and consequently our cash available for distribution
would be reduced.
OUR GOLF COURSES MAY BE LESS ATTRACTIVE TO PROSPECTIVE BUYERS BECAUSE THE LEASES
MUST REMAIN IN PLACE FOLLOWING A SALE.
The leases under which we lease our golf courses to operators have
terms of up to 40 years (including extensions) and do not terminate when a golf
course is sold. It may therefore be difficult for us to sell a golf course. If
sold, the value to a prospective buyer, and therefore the price we receive for a
golf course, may be less than if the applicable lease terminated upon the sale.
WE DO NOT CONTROL DAY-TO-DAY OPERATIONS OR MANAGEMENT OF THE GOLF COURSES AND
THUS CANNOT CORRECT INEFFICIENT OPERATIONS.
In order to qualify as a REIT for federal income tax purposes, we may
not operate our golf courses or participate in the decisions affecting daily
operations there. Each of the operators manages its respective golf course. The
leases generally have initial terms of 10 years and generally may be extended at
the option of each lessee for up to six five-year renewal terms. We will not
have the authority to require any operator to operate the golf courses in a
particular manner, or to govern any particular aspect of their operation (e.g.,
setting green fees), except as set forth in the applicable lease (or the
participating mortgage). Thus, even if we believe an operator is operating a
golf course inefficiently or in a manner that does not result in a maximization
of participating rent (or participating interest) and, therefore, does not
increase our cash available for distribution to stockholders, we may not require
the operator to change its method of operation. We are limited to seeking
redress only if an operator violates the terms of the applicable lease (or the
participating mortgage, as applicable), in which case our primary remedy is to
terminate the leases (or the participating mortgage, as applicable) and seek to
recover damages from such operator. If a lease is terminated, we will be
required to find another lessee or risk losing our ability to maintain REIT
status.
9
A DEFAULT ON THE PARTICIPATING MORTGAGE COULD SUBJECT US TO FORECLOSURE EXPENSE
AND DELAY AND WE MAY BE UNABLE TO RECOVER OUR FULL INVESTMENT.
A default by the borrower under the $78.975 million participating
mortgage we originated in June 1997 (see page 19) could materially and adversely
affect our results from operations. A default under the participating mortgage
may require us to become involved in expensive and time-consuming proceedings,
including bankruptcy, reorganization or foreclosure proceedings, in an attempt
to recover some or all of our investment. The source of any recovery will be the
Westin Innisbrook Resort, located near Tampa, Florida, which is the property
underlying the participating mortgage. Because of our status as a REIT, we may
not operate the Westin Innisbrook Resort in the event of foreclosure.
Accordingly, in the event of a foreclosure, we will be materially dependent upon
our ability to lease the Westin Innisbrook Resort on favorable economic terms
and the value of the real property underlying the participating mortgage, each
of which may be affected by numerous factors outside our control.
LACK OF AMORTIZATION OF PARTICIPATING MORTGAGE INCREASES THE RISK OF BORROWER
DEFAULT AT MATURITY.
The participating mortgage does not provide for the amortization of
principal during its term. As a result, the entire principal balance of the
participating mortgage will be due in one balloon payment at its maturity.
Failure to amortize the principal balance of the participating mortgage may
increase the risk of a default during the term, and at maturity, of the
participating mortgage. A default under the participating mortgage would have a
material adverse effect on our ability to fund anticipated distributions to
stockholders.
GOLF INDUSTRY RISKS
OPERATING RISKS MAY REDUCE THE GOLF COURSE OPERATORS' ABILITY TO MAKE SCHEDULED
PAYMENTS TO US.
The lessees of our golf courses are subject to the operating risks
common to the golf industry. These risks include, among other things:
- increases in operating costs due to inflation and other factors may
not be offset by increased dues and fees;
- dependence on tourism, particularly for resort courses, may cause
seasonal revenue fluctuations; and
- declines in general and local economic conditions may reduce golf
participation.
- increased supply resulting in increased competition and concern with
regard to the balance of supply and demad as further explained in
the next risk factor below.
These factors could adversely affect the golf course operators' ability to
generate revenues and to make scheduled payments to us under the leases and the
participating mortgage which, in turn, may adversely affect our ability to make
expected distributions to our stockholders.
10
INCREASED COMPETITION FOR GOLFERS' BUSINESS MAY REDUCE THE GOLF COURSE
OPERATORS' ABILITY TO MAKE SCHEDULED PAYMENTS TO US.
Our golf courses face competition for golfers from other golf courses,
both locally and nationally. A substantial number of new golf courses have
opened in recent years and a number of new courses currently are under
development, or planned for development, including golf courses located near our
golf courses. These new golf courses could increase the competition faced by one
or more of our golf courses and reduce the rounds played and revenues associated
with one or more of our golf courses. Any such decrease in revenues may
adversely affect the net operating income of our golf course operators and,
therefore, their ability to make scheduled payments to us.
THE CONCENTRATION OF OUR INVESTMENTS IN THE GOLF INDUSTRY LEAVES OUR
PROFITABILITY VULNERABLE TO A DOWNTURN IN THE GOLF INDUSTRY.
Our current strategy is to acquire golf courses and related facilities.
As a result, we are subject to risks inherent in investments in a single
industry. The effects on cash available for distribution to our stockholders
resulting from a downturn in the golf industry will be more pronounced than if
we had more fully diversified our investments.
SEASONAL GOLF REVENUE VARIATIONS WILL REQUIRE OUR GOLF COURSE OPERATORS TO
MANAGE CASH FLOWS PROPERLY OVER TIME SO AS TO MEET THEIR NON-SEASONAL SCHEDULED
PAYMENTS TO US.
The golf industry is seasonal. Seasonal variations in revenue at the
golf courses may require the golf course operators to supplement revenue at the
applicable golf course to make scheduled payments to us. Failure of a golf
course operator to manage properly its cash flow may result in such operator
having insufficient cash on hand to make its scheduled payments to us during low
seasons and, therefore, may adversely affect our cash available for distribution
to stockholders.
ADVERSE WEATHER CONDITIONS MAY DAMAGE OUR GOLF COURSES OR REDUCE THE OPERATORS'
ABILITY TO MAKE SCHEDULED PAYMENTS TO US.
Several climatological factors beyond the control of the golf course
operators may influence the revenues at the golf courses, including adverse
weather such as hurricanes, heat waves, frosts and floods. In the event of
adverse weather or destruction of the turf grass at a golf course, the number of
rounds played at such golf course could decrease, which could have a negative
impact on any participating rent or participating interest received from the
affected golf course and the ability of the applicable golf course operator to
make its scheduled payments to us. The golf courses in the Southeastern United
States are susceptible to damage from hurricanes, which damage (including loss
of revenue) is not generally insurable at commercially reasonable rates.
Consequently, a hurricane may adversely affect both the value of our investment
in a particular golf course as well as the ability of the operator of such golf
course to make its scheduled payments to us. Additionally, hurricanes may damage
local accommodations such as hotels and condominiums, thereby limiting
availability of players, particularly at our "resort courses," which are daily
fee golf courses that attract a significant percentage of players from outside
the area and generate a significant amount of revenue from golf vacation
packages.
DECLINING GOLF PARTICIPATION MAY DECREASE OUR OPERATORS' ABILITY TO MAKE
SCHEDULED PAYMENTS TO US.
The success of efforts to attract and retain members at private country
clubs and the number of rounds played at public golf courses historically has
been dependent upon discretionary spending by
11
consumers, which may be adversely affected by regional and economic conditions.
A decrease in the number of golfers or their rates of participation or in
consumer spending on golf could have an adverse effect on our operators'
revenues, including green fees, golf cart rentals, range fees, membership dues,
membership initiation fees, and transfer fees, which may decrease their ability
to make their scheduled payments to us.
FACTORS BEYOND OUR CONTROL SUCH AS DROUGHT, WATER RATIONING, PLANT DISEASE OR
INSECTS COULD CAUSE TURF GRASS DETERIORATION, THEREBY REDUCING OPERATORS'
REVENUES AND THEIR ABILITY TO MAKE SCHEDULED PAYMENTS TO US.
General turf grass conditions must be satisfactory to attract play on
the golf courses. Severe weather or other factors, including disease and insect
infestation, could adversely affect the turf grass conditions at the golf
courses. Turf grass conditions at the golf courses also depend to a large extent
on the quality and quantity of water available. The quality and quantity of
water available at our golf courses are affected by various factors, many of
which are beyond our control. We cannot assure you that drought or environmental
concerns or rationing or other governmental regulation will not adversely affect
the supply of water to one or more of our golf courses in the future. Turf grass
deterioration could reduce operators' revenues and their ability to make
scheduled payments to us.
RISKS RELATED TO OUR REIT STATUS
IF WE FAIL TO QUALIFY AS A REIT, OR IF THE OPERATING PARTNERSHIP FAILS TO
QUALIFY AS A PARTNERSHIP FOR TAX PURPOSES, OUR TAX LIABILITY WILL GREATLY
INCREASE AND OUR CASH AVAILABLE FOR DISTRIBUTION WILL GREATLY DECREASE.
We believe we operate, and we intend to continue to operate, so as to
qualify as a REIT under the Internal Revenue Code of 1986, at least until our
board of directors determines that revoking our REIT status would be in our best
interest. Until then, we cannot assure your that we qualify or will remain
qualified as a REIT. Qualification as a REIT involves the application of highly
technical and complex tax code provisions for which there are only limited
judicial or administrative interpretations. The complexity of these provisions
and of the applicable income tax regulations that have been promulgated under
the tax code is greater in the case of a REIT that holds its assets in
partnership form like we do. The determination of various factual matters and
circumstances not entirely within our control may affect our qualification as a
REIT. In addition, we cannot assure you that legislation, new regulations,
administrative interpretations or court decisions will not significantly change
the tax laws with respect to REIT qualification or the federal income tax
consequences of such qualification. See "Federal Income Tax Considerations."
If we fail to qualify as a REIT in any taxable year, we would not be
allowed a deduction for distributions to stockholders in computing taxable
income and would be subject to federal income tax on our taxable income at
regular corporate rates. Unless entitled to relief under certain statutory
provisions, we would also be disqualified from treatment as a REIT for the four
taxable years following the year during which qualification was lost. As a
result, our cash available for distribution to stockholders would be reduced for
each of the years involved. Although we currently operate and intend to continue
to operate in a manner designed to qualify as a REIT, future economic, market,
legal, tax or other considerations may cause us to fail to qualify as a REIT or
may cause our board of directors to revoke our REIT election.
Our operating partnership has been structured to be classified as a
partnership for federal income tax purposes. If the Internal Revenue Service
were to challenge successfully the status of the operating
12
partnership as a partnership for federal income tax purposes, the operating
partnership would be treated as an association taxable as a regular corporation.
In such event, the character of our assets and items of gross income would
change, possibly preventing us from qualifying as a REIT. In addition, the
imposition of a corporate income tax on the operating partnership would reduce
the amount of cash available for distribution to our stockholders.
IN ORDER TO PRESERVE OUR REIT STATUS, WE MAY HAVE TO BORROW TO FUND
DISTRIBUTIONS TO STOCKHOLDERS WHICH WE WOULD NOT OTHERWISE MAKE.
In order to qualify as a REIT, we generally are required to distribute
to stockholders at least 95% of our net taxable income each year. In addition,
we are subject to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions paid with respect to any calendar year are less than the
sum of 85% of our ordinary income, 95% of our capital gain net income and all of
our undistributed income from prior years.
We intend to make distributions to our stockholders to comply with the
95% distribution requirements of the federal tax code and to avoid the
nondeductible excise tax. Our income and cash flow will consist primarily of
rent payments under the leases and interest payments under the participating
mortgage. Differences in timing between the receipt of income and the payment of
expenses in arriving at taxable income and the effect of required debt
amortization payments could require us to borrow funds on a short-term basis to
meet the distribution requirements that are necessary to achieve the tax
benefits associated with qualifying as a REIT.
For federal income tax purposes, we are required to report interest
income from the participating mortgage, including participating interest, or a
yield-to-maturity loan on a straight-line basis over the life of the
participating mortgage. Based on our estimate of future revenue, we expect to
recognize for tax purposes interest income equal to approximately 11.5% per year
with respect to the participating mortgage, which interest income will initially
exceed the cash payments we receive under the participating mortgage. In
addition, upon the occurrence of any event which directly or indirectly results
in the transfer of 5% of the equity interest in the borrower to a third party
during the term of the participating mortgage, the borrower is required to pay
us an amount equal to $19 million, discounted from the maturity date of the
participating mortgage to the date of such event at 11.5% per annum, and we will
recognize income in such amount. We are then required to lend this amount to the
borrower, and the amount so lent accrues interest at 11.5% per annum. As a
result of these provisions, we will be deemed at various times to have received
income without having any corresponding cash payment. Consequently, to maintain
our REIT status or to avoid a corporate level tax, we may be required to borrow
money to make cash distributions, which may reduce our borrowing capacity that
would otherwise be available to fund our operations and acquisitions. As a
result, our growth rate may decline.
RISKS RELATED TO THE SECURITIES MARKETS AND THIS OFFERING
THE ABSENCE OF A PUBLIC MARKET FOR THE SERIES A PREFERRED STOCK MAY DECREASE ITS
LIQUIDITY.
The Series A preferred stock is a recent issue of securities for which
there is no active trading market. We do not intend to apply to list the Series
A preferred stock on the American Stock Exchange or any other exchange or
national market (except as may be required under the Registration Rights
Agreement). Thus, no trading market for the Series A preferred stock is likely
to develop and investors in the Series A preferred shares may be unable to find
a buyer for such shares (without first converting them into common stock).
13
BECAUSE THE SERIES A PREFERRED SHARES HAVE LIMITED VOTING RIGHTS, AS A HOLDER OF
SERIES A PREFERRED SHARES YOU MAY BE UNABLE TO PREVENT US FROM TAKING ACTIONS
THAT YOU BELIEVE WOULD DISADVANTAGE YOU, SUCH AS ENGAGING IN A MERGER OR
REVOKING OUR REIT STATUS.
The Series A preferred shares do not have the right to vote on matters
that are submitted to a vote of the common shares. Instead the Series A
preferred shares have the right to vote only on the matters listed in the
Articles Supplementary, which is our charter document that defines the rights of
the Series A preferred shares. The rights of the Series A preferred shares are
summarized beginning on page 27. As an example of the Series A preferred shares'
voting rights, we are not allowed to alter the terms of our charter or the terms
of the partnership agreement of our Operating Partnership in a way that would be
adverse to the Series A preferred shares unless we obtain the approval of
two-thirds of the Series A preferred shares. However, under this rule, neither
of the following changes is considered adverse: (a) the creation of further
parity stock or junior stock; or (b) any change in connection with a merger (or
the sale of all or substantially all of our assets) so long as we are the
surviving company or all outstanding Series A preferred shares are exchanged for
shares in the surviving corporation with substantially identical rights. As a
result of these limited voting rights, as a holder of Series A preferred shares,
you may be unable to prevent us from taking actions that you believe would
disadvantage you, such as engaging in a merger or revoking our REIT status
COMMON STOCK PRICE FLUCTUATIONS MAY CAUSE SERIES A PREFERRED STOCK PRICE
FLUCTUATIONS.
The price of the Series A preferred stock may be influenced by the
market price for the common stock into which it is convertible. A number of
factors may adversely influence the price of our common stock in the public
trading markets, many of which are beyond our control. In particular, an
increase in market interest rates will result in higher yields on other
financial instruments and may lead purchasers of common stock to demand a higher
annual distribution rate on the price paid for the common stock, which could
adversely affect the market price of the common stock. The market price of the
common stock may also depend upon the liquidity of such securities, the market
for similar securities, general economic conditions and our financial condition,
among other considerations.
INTEREST RATE RISKS
INTEREST RATE MISMATCH MAY REDUCE OUR CASH AVAILABLE FOR DISTRIBUTION.
We have a substantial amount of floating rate debt that was incurred in
connection with golf course acquisitions made in 1998. The participating
mortgage bears interest at a fixed rate and the participating leases have fixed
rent payments (subject to certain adjustments, including participating rent and
mortgage payments). Accordingly, increases in interest payable by us under the
credit facility will increase our operating expenses with no corresponding
increases in revenue. Consequently, significant rise in interest rates could
adversely affect our ability to make distributions to stockholders.
WE MAY LOSE MONEY ON INTEREST RATE SWAPS IF THE COUNTERPARTY DEFAULTS OR IF
THE AGREEMENT IS NOT ENFORCEABLE.
We may, in the future, convert a portion of our outstanding debt
through the purchase of an interest rate swap agreement. In the event that such
provider of the interest rate swap becomes financially unsound or insolvent, we
could be forced to unwind our agreements with such provider and, as a result,
may take a loss on such interest rate agreements. Although we intend to purchase
interest rate swaps only from financially sound institutions and to monitor the
financial strength of such institutions on a periodic basis, we cannot assure
you that we will avoid such third-party risks. In addition, we accept legal risk
14
upon entering into interest rate swap agreements. We cannot assure you that
these agreements will be enforceable. An agreement that is not enforceable may
subject us to unexpected interest rate risk and have a material adverse affect
on our results of operations.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKETS MAY ADVERSELY AFFECT OUR
STOCK PRICE AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS, THEREBY
SLOWING OUR ACQUISITION RATE.
Sales of a substantial number of shares of common stock, or the
perception that such sales could occur, may adversely affect prevailing market
prices for our common stock. In addition to the 8,118,147 shares of common stock
currently outstanding, as of June 15, 2000, an aggregate of 800,000 Series A
preferred shares and 4,905,086 OP Units were outstanding (excluding OP Units
held by our subsidiaries). Series A preferred shares are convertible into common
stock at a ratio of 0.95238 common share for each Series A preferred share. OP
Units are units of limited partnership interest in our operating partnership,
which is the vehicle through which we own our golf course interests. Subject to
certain restrictions and limitations, the OP Units may be tendered for
redemption by their holders, for cash or, at our option, for shares of
newly-issued common stock on a one-for-one basis beginning one year after their
issuance. We may issue additional OP Units in future golf course acquisitions or
in connection with an operator's exercise of the performance option (which is an
incentive-based performance structure in some leases and in the participating
mortgage, under which, during years three through five, the operator or its
affiliate may elect one time to increase the base rent or base interest, as
applicable, in order to receive additional OP Units or common stock, or, with
respect to the participating mortgage, to require us to make an additional
advance under the participating mortgage). The shares of common stock issuable
upon conversion of the Series A preferred stock and redemption of the OP Units
may be sold in the public markets. We have granted the holders of the Series A
preferred stock and the OP Units registration rights to facilitate their sale of
such common shares.
Our acquisition strategy depends in large part on our access to
additional capital through sales of equity securities, including issuances of
stock for cash and issuances of OP Units in exchange for property. The market
price of our common stock and the value of our OP Units may be adversely
affected by the "overhang" of common shares potentially issuable upon conversion
of the Series A Shares and redemption of the OP Units. If so, our acquisition
rate would decline. We cannot predict the effect, if any, that future sales of
shares, or the perception that such sales could occur, will have on the price of
the common stock.
OWNERSHIP OF OVER 9.8% OF OUR COMMON OR PREFERRED STOCK IS PROHIBITED AND
ATTEMPTED EXCESS ACQUISITIONS ARE VOID.
In order for us to maintain our qualification as a REIT, not more than
50% in value of our outstanding shares of capital stock may be owned, directly
or constructively, by five or fewer individuals (as defined in the federal tax
code) during the latter half of any taxable year (other than 1997). In addition,
rent from related party tenants is not qualifying income for purposes of the
gross income tests under the federal tax code. Two sets of constructive
ownership rules (one to determine whether a REIT is closely held and one to
determine whether rent is from a related party tenant) apply in determining
whether these requirements are met. For the purpose of preserving our REIT
qualification, our charter prohibits direct or constructive ownership of more
than 9.8% of the lesser of the total number or value of the outstanding shares
of our common stock or more than 9.8% of the outstanding shares of our preferred
stock. The constructive ownership rules are complex and may cause the
outstanding stock owned, directly or constructively, by a group of related
individuals and/or entities to be deemed to be constructively owned by one
individual or entity. As a result, the acquisition of less than 9.8% of the
outstanding stock (or the acquisition of an interest in an entity which owns
common stock or preferred
15
stock) by an individual or entity could cause that individual or entity (or
another individual or entity) to own constructively in excess of 9.8% of the
outstanding stock, and thus be subject to our charter's ownership limit. Direct
or constructive ownership of shares of common stock or preferred stock in excess
of the ownership limit would cause the violative transfer or ownership to be
void or cause such shares to be transferred by operation of law to a charitable
trust.
CERTAIN PROVISIONS OF MARYLAND LAW, OUR CHARTER AND BYLAWS AND OUR SHAREHOLDER
RIGHTS PLAN MAY HAVE AN ANTI-TAKEOVER EFFECT THEREBY PREVENTING INVESTORS FROM
RECEIVING A "CONTROL PREMIUM" FOR THEIR SHARES.
Certain provisions of our charter and bylaws and our shareholder rights
plan, as well as Maryland corporate law, may have anti-takeover effects and may
delay, defer or prevent a takeover attempt that might be in the stockholders'
best interest. For example, such provisions may (a) defer or prevent tender
offers for our common stock, which offers may be beneficial to stockholders, or
(b) defer or prevent purchases of large blocks of our common stock, thereby
limiting the opportunity for stockholders to receive a premium for their common
stock over then-prevailing market prices. These provisions include the
following:
- OWNERSHIP LIMIT. The ownership limit described above limits related
investors (including any voting group) from acquiring over 9.8% of our
common stock without our permission.
- PREFERRED STOCK. Our charter authorizes our board of directors to issue
preferred stock in one or more classes and to establish the preferences
and rights (including the right to vote and the right to convert into
common stock) of any class of preferred stock issued, all without any
stockholder vote. See "Description of Our Capital Stock--General."
- STAGGERED BOARD. Our board of directors is divided into three classes
of directors. The current terms of the first, second and third classes
expire in 2001, 2002, and 2000 respectively. Directors of each class
serve for a three-year term and until their successors are elected and
qualified. The affirmative vote of two-thirds of all outstanding common
stock is required to remove a director.
- SHAREHOLDER RIGHTS PLAN. We have adopted a shareholder rights plan that
may discourage any investor from acquiring over 15% of our common stock
because, upon such an acquisition without board approval, all other
common shareholders will have the right to purchase a specified amount
of our common stock at a 50% discount from market price. Our
shareholder rights plan is incorporated by reference as an exhibit in
the registration statement of which this prospectus is a part, see
"Where You Can Find More Information."
- MARYLAND BUSINESS COMBINATION STATUTE. Under the Maryland General
Corporation Law, certain "business combinations" (including the
issuance of equity securities) between a Maryland corporation and any
person who owns, directly or indirectly, 10% or more of the voting
power of the corporation's shares of capital stock must be approved by
80% of voting shares. In addition, such a 10% holder may not engage in
a business combination with the Maryland corporation for five years
following the date he or she became such a 10% holder.
- MARYLAND CONTROL SHARE ACQUISITION STATUTE. Maryland law provides that
"Control Shares" of a corporation acquired in a "Control Share
Acquisition" have no voting rights except to the extent approved by a
vote of two-thirds of the votes eligible under the statute to be cast
on the matter (unless the corporation has opted out of the Control
Share Acquisition statute). "Control Shares" are voting shares of
beneficial interest that, if aggregated with all other such shares of
beneficial interest previously acquired by the acquiror, would entitle
the acquiror directly or indirectly to exercise voting power in
electing directors within one of the following ranges of voting power:
(i) one-fifth or more but less than one-third, (ii) one-third or more
but less than a majority or
16
(iii) a majority of all voting powers. Control Shares do not include
shares of beneficial interest the acquiring person is then entitled to
vote as a result of previously having obtained stockholder approval. A
"Control Share Acquisition" means the acquisition of Control Shares,
subject to certain exceptions.
If voting rights are not approved at a meeting of stockholders then,
subject to certain conditions and limitations, the issuer may redeem
any or all of the Control Shares (except those for which voting rights
have previously been approved) for fair value. If voting rights for
Control Shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares of beneficial
interest entitled to vote, all other stockholders may exercise
appraisal rights.
Our Bylaws contain a provision exempting from the Control Share
Acquisition statute any and all acquisitions by any person of our
common stock. However, our board of directors may decide to amend or
eliminate such provision at any time in the future.
ERISA RISKS
MAINTAINING OUR PLAN ASSETS REGULATION EXEMPTION MAY REQUIRE US TO FOREGO
OTHERWISE ATTRACTIVE OPPORTUNITIES.
Under the Plan Assets Regulation, promulgated by the Department of
Labor under the Employee Retirement Income Security Act of 1974 ("ERISA"), when
employee benefit plans (as defined in Section 3(3) of ERISA) or plans (as
defined in Section 4975 of the tax code) invest in our equity securities, all of
our underlying assets are deemed to be assets of such benefit plans, and we
become subject to strict fiduciary duties in our management of such assets,
unless an exception applies. We assume that benefit plans own shares of our
common stock and may come to own shares of our Series A preferred stock and,
thus, that our assets may be deemed to be plan assets unless an exception
applies. One exception is for plan investment in a "publicly-offered security."
While we believe this exception applies to investments in our common stock, we
do not expect the Series A preferred stock to qualify as a "publicly-offered
security" since the Series A preferred stock may be held by fewer than 100
persons for the foreseeable future. On the date of this prospectus, all of the
Series A preferred shares are held by a single entity which has represented to
us that it is not a benefit plan. If Series A preferred shares come to be held
by a benefit plan, we will need to qualify under another exception. One such
exception is for plan investment in an "operating company," such as a "real
estate operating company" or a "venture capital operating company."
Our board of directors intends to take such reasonable steps as may be
necessary to qualify for one or more of the exceptions available under the Plan
Assets Regulation so that our assets are not treated as assets of any investing
plan. Specifically, we believe that we qualify, and we intend to continue to
qualify, as a real estate operating company and/or as a venture capital
operating company. Due to the nature of our specific investments and our
operating structure, though, we cannot assure you that we will qualify as an
operating company. Moreover, in order to qualify under one of these exceptions,
we may be precluded from making certain investments that might otherwise be
suitable and/or we may not be able to dispose of certain assets when we would
otherwise desire to do so.
If our assets were determined to be plan assets, in whole or in part,
then certain transactions that we might enter into in the ordinary course of
business might constitute non-exempt prohibited transactions under ERISA and/or
Section 4975 of the tax code and might have to be foregone or rescinded. For
example, if we were to engage in a transaction with a party-in-interest with
respect to any plan investing in the Series A preferred stock, such as the
purchase, sale or leasing of real property with a
17
plan sponsor (or an affiliate), the transaction would be prohibited under ERISA
and the tax code, and we and such plan sponsor could be subject to sanctions.
OUR SECURITIES MAY BE AN INAPPROPRIATE INVESTMENT FOR ERISA PLANS.
In considering an investment in our Series A preferred stock or our
common stock, a fiduciary of a profit-sharing, pension stock bonus plan, or
individual retirement account, including a plan for self-employed individuals
and their employees or any other employee benefit plan subject to prohibited
transaction provisions of the tax code or the fiduciary responsibility
provisions of ERISA should consider (a) whether the ownership of such securities
is in accordance with the documents and instruments governing such ERISA Plan;
(b) whether the ownership of such securities is consistent with the fiduciary's
responsibilities and satisfies the requirements of Part 4 of Subtitle B of Title
I of ERISA (where applicable) and, in particular, the diversification, prudence
and liquidity requirements of Section 404 of ERISA; (c) ERISA's prohibitions on
improper delegation of control over, or responsibility for, "plan assets" and
ERISA's imposition of co-fiduciary liability on a fiduciary who participates in,
permits (by action or inaction) the occurrence of, or fails to remedy a known
breach of duty by another fiduciary; and (d) the need to value the assets of the
ERISA Plan annually.
18
THE COMPANY
We are a real estate investment trust formed to capitalize upon
consolidation opportunities in the ownership of upscale golf courses throughout
the United States. We are self-administered, which means that our operating
decisions are made by our officers under the supervision of our board of
directors, unlike many other real estate investment trusts, or REITs, which are
managed by external management companies. Golf Trust of America, Inc., or GTA,
was incorporated in Maryland on November 8, 1996. We hold our golf course
interests through Golf Trust of America, L.P., a Delaware limited partnership
that we control, and, in one instance, through a wholly-owned subsidiary of Golf
Trust of America, L.P. We refer to this partnership and its subsidiaries as our
Operating Partnership. In this Prospectus, the term "Company" generally includes
GTA, the Operating Partnership and all of their subsidiaries. Currently, the
Company holds participating interests in 47 golf courses (the "Golf Courses"),
43 of which are owned by us and four of which serve as collateral for a 30-year
participating mortgage loan made by the Company. Of the 43 courses that we own,
41 are held in fee simple and 2 are held pursuant to long-term ground leases.
The golf courses are located in Florida (14), South Carolina (6), Illinois
(3.5), Ohio (3), Georgia (2), Virginia (2), California (2.5), Michigan (3.5),
Nebraska (1.5), Texas (1.5), Missouri (1.5), Alabama, Kansas, Kentucky, North
Carolina, West Virginia, and New Mexico. Throughout this Prospectus, 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.
We had no significant operations prior to our initial public offering
of common stock ("IPO") in February 1997. In the IPO, we raised net proceeds of
approximately $73.0 million and acquired ten golf courses. In November 1997, we
raised net proceeds of approximately $82.7 million in a follow-on public
offering of common stock. Since the IPO, we acquired interests in 37 additional
golf courses.
We elected to be taxed as a real estate investment trust ("REIT") for
federal income tax purposes for the year ending December 31, 1997 and have not
revoked that election. If we continue to comply with certain REIT requirements
under the Internal Revenue Code of 1986, as amended (the "Tax Code"), we will
generally not be required to pay income tax at the corporate level.
Because of the tax rules applicable to REITs, we generally cannot
operate our golf courses. Thus, when we acquire a golf course, we lease it back
to an affiliate of the seller or to another qualified operator. In most cases we
prefer to lease the golf course back to the seller's affiliate since we believe
that the seller's familiarity with local conditions and continuity of management
facilitates the golf course's growth and profitability (which we participate in
under certain conditions as described below). However, we also have developed
strong relationships with multi-course operators who lease a number of our golf
courses.
One exception to the REIT rule against operating our own golf courses
is that if one or more of our tenants defaults under its lease, the tax code
allows a 90-day grace period after eviction of the tenant during which we may
operate the golf course and during which our revenues from such operations will
remain qualifying income for REIT tax purposes. At the expiration of such
period, we would generally have to either sell the golf course, lease it to an
experienced golf course operator, or reach an agreement with an independent
contractor to assume management of the golf course. Management by an independent
contractor is allowed until the close of the third taxable year following the
taxable year in which the eviction occurred. If one of these options is not
implemented at the expiration of such period, the revenues from operations at
the golf course will generally be considered non-qualifying income for purposes
of the tax code's REIT income tests. If we recognize too much non-qualifying
income, we will lose our status as a REIT, which could cause our tax liability
to increase substantially and our cash
19
available for distribution to decrease substantially. See "Risk Factors--Risks
Related to our REIT Status."
All of our golf course leases are participating leases ("Participating
Leases") that require the lessees ("Lessees") to make payments ("Lease
Payments") of a fixed amount of base rent ("Base Rent") and a variable amount of
additional rent based on growth in revenue at the golf courses ("Participating
Rent").
In June 1997, we originated a $78.975 million participating mortgage
secured by a first lien on the Westin Innisbrook Resort near Tampa, Florida (the
"Participating Mortgage"), which includes four golf courses. The Participating
Mortgage was made to the owner of the Westin Innisbrook Resort, Golf Host
Resorts, Inc., which is an affiliate of Starwood Capital Group, LLC
("Starwood"). The Westin Innisbrook Resort is a destination golf resort named by
ESQUIRE as one of the top 10 resorts in North America. The four golf courses at
the resort are operated by Troon Management Company, LLC ("Troon Golf"), an
affiliate of Starwood. The hotel and conference facilities at the resort are
operated by an affiliate of Westin Hotels & Resorts Company ("Westin") pursuant
to a long-term management agreement. The Participating Mortgage is structured
much like our typical Participating Lease. That is, the Participating Mortgage
provides for interest payments of base interest (a fixed amount of interest) and
Participating Interest (a variable amount of additional interest based on growth
in revenue at the Westin Innisbrook Resort). The Participating Mortgage gives us
the right to buy the Westin Innisbrook Resort upon the expiration of the term of
the Participating Mortgage. Neither the Company nor its executive officers own
any interest in, or participate in the management of, the Lessees, Golf Host
Resorts, Inc., Starwood, Troon Golf or Westin.
Our executive offices are located at 14 North Adger's Wharf,
Charleston, South Carolina 29401 and our telephone number is (843) 723-GOLF
(4653). We maintain an internet site at www.golftrust.com. Neither the
information contained in our website nor the information contained in the
websites linked to our website is a part of this Prospectus.
THE OPERATING PARTNERSHIP AND OUR SUBSIDIARIES.
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 GTA'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. On the date of this
Prospectus, GTA holds 64.4% of the common interests and 100% of the Series A
preferred interests 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
the Westin Innisbrook Resort owner and those golf course sellers who received
units of limited partnership interest in the Operating Partnership ("OP Units")
in exchange for the contribution of their golf courses to the Company. The
Operating Partnership has from time to time issued preferred OP Units. Series A
preferred OP Units were issued to subsidiaries of GTA in exchange for the
contribution of the proceeds from GTA's sale of Series A Preferred Stock. To
date, 10,169 Series B and 48,949 Series C preferred OP Units have been issued in
connection with golf course acquisition transactions. These OP Units are
generally convertible into common OP Units on a one-for-one basis. The complete
terms of the preferred OP Units have been filed as exhibits to GTA's Annual
Reports on Form 10-K. 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,
20
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 common interests in the
Operating Partnership (including GTA LP). Mr. Young, a director of GTA, controls
limited partners holding, in the aggregate, 27.0% of the common interests in the
Operating Partnership. Each of the limited partners (other than GTA LP) has the
right to redeem its OP Units for cash or, at the election of the Company, for
shares of our common stock on a one-for-one basis under certain terms and
conditions. Generally, such redemption right (a) may not be exercised during the
first year following issuance of the OP Units, (b) is limited to up to 50% of
the newly-issued OP Units during the second year following their issuance and
(c) may be exercised as to 100% of the OP Units commencing two years after their
issuance.
The relationship among GTA, its Subsidiaries, the Operating Partnership
and the limited partners (including many prior owners who contributed their golf
courses to the Company and the Westin Innisbrook Resort owner/operator) is
described in the following chart (percentage interests are given as of June 15,
2000, the date of this Prospectus):
SUMMARY DIAGRAM OF COMPANY STRUCTURE
[GRAPHIC]
In addition, we have from time to time created limited liability
companies, or LLCs, to hold some of our golf course interests or to operate a
golf course following the tenant's default under its lease. We currently have
three such LLCs, each of which is wholly-owned by GTA or the Operating
Partnership. The first of these, Sandpiper-Golf Trust, LLC, holds our interest
in the Sandpiper golf course. The others, GTA Tierra Del Sol, LLC and GTA Osage,
LLC, were formed to operate golf courses following the original tenant's
default. GTA Osage, LLC is not currently operating any golf course and holds no
significant assets. We may create similar LLCs or other subsidiaries in the
future.
21
OUR BUSINESS STRATEGIES AND OBJECTIVES
Our primary objectives are to increase cash available for distribution
per share and to enhance stockholder value. Our main strategies for such growth
are to:
- own interests in additional golf courses or portfolios of golf courses
that meet our investment criteria; and,
- participate in the internal growth or increased revenues at our current
golf courses and any additional golf courses.
ACQUISITIONS
We intend to concentrate our investment activities on golf courses,
potentially including portfolios of golf courses, available at attractive prices
that meet one or more of the investment criteria discussed below. Currently,
ownership of golf courses in the United States is largely fragmented among
thousands of small owner/operators. We believe the current lack of consolidation
in the golf course industry results from the fact that many golf courses are
developed by independent entrepreneurs who lack access to the capital needed to
expand their holdings. In addition, many golf course owners have no desire to
expand their holdings and instead take great pride in managing the one or two
golf courses they personally developed.
We believe that our multiple financing sources and our ability to
attract sellers give us a distinct advantage in the acquisition of upscale golf
course interests.
MULTIPLE FINANCING SOURCES FOR ACQUISITIONS. We have access to a
variety of debt financing sources (including an unsecured syndicated $200
million credit facility and a $25 million unsecured line of credit
(collectively, the "Credit Facility"). As of June 15, 2000, we had approximately
$9.9 million of unused borrowing capacity available under the Credit Facility.
From time to time we also expect to have access to equity financing sources
(including the issuance of OP Units). Our ability to issue OP Units provides us
with a currency that can be used to purchase golf courses in transactions that
may be tax deferred for the seller. That is, when the Company acquires a golf
course in exchange for OP Units, the golf course seller generally may defer tax
recognition of its gain (or loss) on the exchange until the seller redeems its
OP Units. Each OP Unit is redeemable for cash in an amount generally equal to
the current market price of our common stock on the date of redemption. (But we
can elect simply to deliver shares of our common stock instead of cash. Thus, in
essence, OP Units are convertible into shares of our common stock on a
one-for-one basis.)
We cannot assure you that we will have access to sufficient debt and
equity financing at attractive prices to allow us to acquire additional golf
courses.
ABILITY TO ATTRACT SELLERS. We believe that we can attract sellers of
golf courses by offering them the following benefits:
- the seller enjoys the tax-deferment associated with OP Unit
transactions;
- the seller achieves diversification of its golf course investment (in
that the seller contributes its single golf course to the Company in
exchange for OP Units which represent an interest in the Company's
whole portfolio of golf courses).
22
- the seller retains the ability to control operations at its golf course
by leasing it back from the Company (this may be important to a
small-to mid-sized entrepreneur whose life's work is invested in his or
her golf course);
- the seller receives the right to obtain additional OP Units through
exercise of the Lessee Performance Option (discussed below), which can
be exercised if the lessee's revenues exceed certain targets; and
- the seller, as lessee, enjoys marketing and purchasing economies of
scale gained from participation in the Lessee Advisory Association
(discussed below).
In certain instances, state and federal tax laws make sale-leaseback
transactions prohibitively expensive. In those instances, we may enter into
another participating mortgage; that is, we would provide financing to the owner
of a golf course and, in exchange, the owner would give us a first-lien
participating mortgage on the golf course. We expect that any such participating
mortgage would provide for interest payments of fixed base interest and variable
participating interest based on the amount of revenue at the encumbered golf
course. In addition, we would expect any such participating mortgage to enable
us to buy the encumbered golf course upon the expiration of the term of the
mortgage.
INVESTMENT CRITERIA. We intend to continue to concentrate our
investment activities in upscale golf courses at attractive prices that satisfy
one or more of the following criteria:
- upscale daily fee golf courses that target avid golfers willing to pay
the premium associated with upscale golf courses;
- private or semi-private golf courses with proven operating histories
and a potential for significant cash flow growth;
- resort golf courses with superior facilities and service that attract
affluent destination golfers;
- golf courses which are located near one or more of our current golf
courses;
- golf courses owned by operators who have a strong regional presence and
afford us an opportunity to expand in a particular region;
- newly developed, well-designed golf courses with a high potential for
growth; and
- well-maintained golf courses in high barrier-to-entry markets.
We cannot assure you that we will be able to find additional golf
courses that satisfy our investment criteria.
INTERNAL GROWTH
Based on the experience of our management, we believe there are
opportunities for revenue growth through effective marketing and efficient
operations at many of the golf courses we acquire. The Participating Leases and
the Participating Mortgage have been structured to provide the operators with
incentives to manage and maintain the golf courses in a manner which increases
revenues. We participate in any increased revenues above a defined baseline
through the Participating Rent and Participating Interest features of the
Participating Leases and the Participating Mortgage, respectively.
PARTICIPATING LEASES. For each calendar year, the Participating Leases
generally require the lessee to pay us the greater of (a) an amount equal to the
Base Rent (as adjusted by the Base Rent Escalator (defined below)) for the
applicable golf course and (b) an amount equal to Base Rent (without adjustment
by the Base Rent Escalator) for the applicable golf course PLUS the
Participating Rent for the applicable golf course. The Participating Rent is
equal to 33.33% of the difference between the Gross Golf Revenue (defined below)
for the current calendar year and the Gross Golf Revenue for the calendar
23
year preceding our acquisition of an interest in the applicable golf course, as
adjusted in determining the original Base Rent. The Base Rent Escalator is an
annual increase of Base Rent by the lesser of (i) 3% and (ii) a multiple of the
Consumer Price Index for the prior calendar year. The Base Rent Escalator
applies during each of the first five calendar years of the applicable
Participating Lease and, if the Lessee Performance Option is exercised, for an
additional five years thereafter. However, annual increases in the Lease
Payments under the Participating Leases are generally limited to between 5% and
7% during the first five years of each Participating Lease. Gross Golf Revenue
is generally defined as all revenues from the golf course, including green fees,
golf cart rentals, range fees, membership dues, member initiation fees and
transfer fees, but excluding food and beverage and merchandise revenue.
PARTICIPATING MORTGAGE. The $78.975 million Participating Mortgage is
similar in structure to the Participating Leases and the Company expects to
realize similar returns on the Participating Leases and the Participating
Mortgage. Under the Participating Mortgage, the Company made an initial advance
of $69.975 million in June 1997 to the borrower, Golf Hosts Resorts, Inc. The
borrower owns the Westin Innisbrook Resort, which serves as collateral for the
Participating Mortgage. The initial advance was followed by additional advances
of approximately $9.0 million in the aggregate which was used for a nine-hole
expansion and other improvements. The loan term is 30 years, with an initial
Base Interest rate of 9.63% per annum and an interest rate of 9.75% per annum on
the amount of the loan in excess of $69.975 million. The loan provides for
minimum increases in the aggregate annual payment of Base Interest of 5% per
year for the first five years and a participating interest feature throughout
the term based upon the growth in Gross Golf Revenues, as well as in other
revenues, at the Westin Innisbrook Resort over a 1996 base year. The annual
increases in the mortgage payments are limited to 7% during the first five
years.
PERFORMANCE OPTION FOR THE PARTICIPATING LEASE. Certain of the
Participating Leases contain provisions designed to encourage the lessees to
grow aggressively the revenue of the golf courses (the "Performance Option").
Subject to certain qualifications and restrictions, the Performance Option
allows the lessee to receive additional OP Units or shares of our common stock
in exchange for increasing the Base Rent. The Performance Option may be
exercised only if the net operating income for the applicable golf course
(including a reserve for capital expenditures) exceeds 113.5% of the Lease
Payment for that golf course (after taking account of adjustments for the
increased Base Rent). If the Performance Option is exercised, then the Base Rent
is increased by an amount which is accretive to our FFO (Funds from Operations).
Following the lessee's exercise of the Performance Option, the adjusted Base
Rent will be further increased annually by the Base Rent Escalator for a period
of five years. The number of OP Units or shares of our common stock that a
lessee will receive in connection with its exercise of the Performance Option
depends on future events at the applicable golf course and, therefore, cannot be
determined in advance. To date, only one of the lessees has exercised the
Performance Option.
PERFORMANCE OPTION FOR THE PARTICIPATING MORTGAGE. The structure of the
Performance Option for the Participating Mortgage is similar to the Performance
Option for the Participating Leases. Subject to certain qualifications and
restrictions, under the Performance Option for the Participating Mortgage,
during years three and five of the Participating Mortgage, the Westin Innisbrook
Resort owner may elect one time to require the Company to make an additional
advance (the "Performance Advance") under the Participating Mortgage for the
purpose of funding the purchase of additional OP Units by the Westin Innisbrook
Resort owner. The Performance Option for the Participating Mortgage may be
exercised only if the then-current-year net operating income of the Westin
Innisbrook Resort, inclusive of a capital replacement reserve, exceeds 113.5% of
such operator's Participating Mortgage obligation after taking into account the
increased amount of Base Interest. If the Performance Advance is made, interest
on the Performance Advance will be calculated to be accretive to the Company's
Funds From Operations on a per share basis. Following exercise of the
Performance Option for the Participating Mortgage, the adjusted Base Interest
will be increased by 3% per year for five years. The Westin Innisbrook Resort
24
Owner's ability to exercise the Performance Option will depend on future
operating results and therefore cannot be determined in advance.
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The following table sets forth our consolidated ratios of earnings to
combined fixed charges and preferred stock dividends for the periods shown:
Period from
Quarter February 12,
Ended Year Year 1997 to
March 31, Ended December Ended December December 31,
2000 31, 1999 31, 1998 1997
--------- -------------- -------------- ------------
Ratio ................................................1.81x 1.94x 2.73x 6.45x
Our consolidated ratios of earnings to combined fixed charges and
preferred stock dividends were computed by dividing our earnings in the
applicable year by our combined fixed charges and preferred stock dividends for
the corresponding year. For the purposes of these calculations, our earnings
consist of pre-tax income from continuing operations plus fixed charges less
capitalized interest. In addition, for the purposes of these calculations, our
fixed charges consist of interest expense, capitalized interest and amortized of
debt issuance costs. Prior to April 2, 1999, we had not issued any preferred
shares.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale by the Selling
Stockholders (as defined herein) of the shares of common stock or Series A
preferred stock covered by this Prospectus.
DESCRIPTION OF OUR CAPITAL STOCK
The description of the Company's capital stock set forth below does not
purport to be complete and is qualified in its entirety by reference to the
Company's Articles of Incorporation, as amended, restated and supplemented
through the date hereof (our "Charter") and the Company's bylaws, as amended and
restated through the dated hereof (our "Bylaws), copies of which are
incorporated by reference as exhibits to the Registration Statement of which
this Prospectus is a part. See "Where You Can Find More Information."
GENERAL
Under our Charter, the total number of shares of all classes of stock
that the Company has authority to issue is 100,000,000 consisting of 90,000,000
shares of common stock, par value $0.01 per share ("Common Stock"), and
10,000,000 shares of preferred stock, par value $0.01 per share ("preferred
stock"). On June 15, 2000, the Company had issued and outstanding 8,118,147
shares of Common Stock and 800,000 shares of preferred stock.
25
Shares of preferred stock may be issued from time to time, in one or
more series, as authorized by our board of directors. Prior to issuance of
shares of each series, our board of directors is required by the Maryland
General Corporation Law and the Company's Charter to fix for each series,
subject to the Company's Charter, the terms, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption, as are
permitted by Maryland law. Our board of directors could authorize the issuance
of shares of preferred stock with terms and conditions that could have the
effect of discouraging a takeover or other transaction that holders of Common
Stock might believe to be in their best interests or in which holders of some,
or a majority, of the shares of Common Stock might receive a premium for their
shares over the then market price of such shares of Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent, registrar and dividend disbursing agent for the
Common Shares is ChaseMellon Stockholder Services, L.L.C., San Francisco,
California. The Company is acting as its own transfer agent, registrar, dividend
disbursing agent, conversion agent and redemption agent for the Series A
preferred shares.
SERIES A PREFERRED STOCK
GENERAL.
The Company issued 800,000 shares of Series A preferred stock on April
2, 1999. On or prior to such date, our board of directors classified and
designated such shares and authorized the issuance thereof. When issued, the
Series A preferred shares were validly issued, fully paid and nonassessable. The
holders of the Series A preferred shares have no preemptive rights with respect
to any shares of the Company or any other securities of the Company convertible
into or carrying rights or options to purchase any such shares. The Series A
preferred shares are not subject to any sinking fund or other obligation of the
Company to redeem or retire the Series A preferred shares (except mandatory
redemption upon certain liquidation events). Unless converted or redeemed by the
Company, the Series A preferred shares will have a perpetual term, with no
maturity.
The Company does not intend to apply to list the Series A preferred
shares on any securities exchange or national market (except as may be required
under the Registration Rights Agreement). Consequently, it is unlikely that a
trading market for the Series A preferred shares will ever develop.
UNDERLYING COMMON STOCK
As described below, the Series A preferred shares are convertible into
shares of the Company's Common Stock. The Company's Common Stock is listed on
the American Stock Exchange under the symbol "GTA." The American Stock Exchange
has approved the listing of the Common Shares underlying the Series A preferred
shares subject only to official notice of issuance. The Company will take any
other action necessary to ensure that any Common Shares issued upon conversion
of Series A preferred shares are freely transferable and not subject to any
resale restrictions under the Securities Act of 1933, as amended (the
"Securities Act"), or any applicable state securities or Blue Sky laws (other
than any Common Shares which are held by an "affiliate" (as defined in Rule 144
under the Securities Act)). Certain holders of such underlying Common Stock may
have the right to cause the Company to register their shares for resale, see
"Registration Rights of the Selling Stockholders."
26
TERMS AND CONDITIONS OF THE SERIES A PREFERRED STOCK
The following chart summarizes the terms of the Series A preferred
stock. The preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, terms and conditions
of redemption and other terms and conditions of the Series A preferred stock are
set forth in the Articles Supplementary, the form of which is included as an
exhibit to the registration statement of which this prospectus is a part, see
"Where You Can Find More Information," and the following chart is qualified in
its entirety by reference to the Articles Supplementary.
SERIES A PREFERRED STOCK: SUMMARY OF TERMS
Title..................................... 9.25% Series A Cumulative
Convertible Preferred Stock.
Dividends................................. Dividends on the Series A preferred
shares are cumulative from the date
of original issue and are payable
quarterly in arrears on the 15th
day of January, April, July and
October, commencing on July 15,
1999, to the extent declared by our
board of directors. Such dividends
will be in an amount per share
equal to the greater of:
- $0.578125 per quarter (or
$2.3125 per annum), equal
to an annual rate of
9.25% of the $25.00 price
per share; or
- the cash dividend
(exclusive of non-regular
dividends) 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 was prorated
based on the number of days between
issuance of the shares and June 30,
1999, the final day of that fiscal
quarter.
Conversion................................ The Series A preferred shares are
convertible at the option of each
holder at any time into a number of
shares of Common Stock determined
by dividing $25.00 (plus any
dividends accrued but unpaid in
respect of prior dividend periods)
by the conversion price of the
Series A preferred stock, which
initially is $26.25 and is subject
to standard anti-dilution
adjustments. On the date of this
Prospectus, this formula produces a
conversion rate of approximately
0.95238 Common Shares for each
Series A preferred share.
Liquidation Preference.................... Upon any liquidation, dissolution
or winding up of the Company,
whether voluntary or involuntary, a
holder of Series A preferred stock
will be entitled to receive the
greater of:
- a liquidation preference
of $25.00 plus all
accrued but unpaid
dividends; or
- the amount that he or she
would have received as
the holder of the
underlying Common Shares
if the Series A preferred
shares had been converted
into Common Shares
immediately prior to the
liquidation dissolution
or winding up.
27
Redemption at the Option of the
Company................................... Except in certain circumstances
relating to the preservation of our
status as a REIT (see "Description
of Capital Stock--Restrictions on
Ownership"), the Series A preferred
shares are not redeemable by the
Company 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 the Company
on 30 days' notice for a cash
payment equal to the $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 no
redemption premium is payable on or
after April 2, 2008.
Redemption at the Option of the
Holder.................................... Upon either (a) a change of control
(as defined in the Articles
Supplementary) or (b) a sale,
transfer or capital lease of all or
substantially all of the assets of
the Company, each record holder of
Series A preferred shares will have
the right, but not the obligation,
to elect to cause the Company to
redeem all of such holder's Series
A preferred shares for $25.00, plus
accrued and unpaid dividends
(whether or not declared) to the
redemption date without interest.
Ranking................................... With respect to the payment of
dividends and amounts upon
liquidation, the Series A preferred
shares will rank senior to the
Common Shares, which are the only
equity shares of the Company
currently outstanding. The Company
has the right to issue preferred
shares that rank junior to, or in
parity to, the Series A preferred
shares as to the payment of
dividends or amounts upon
liquidation, dissolution and
winding up without the consent of
any holder of Series A preferred
stock. With the approval of 100% of
the Series A preferred shares, the
Company may issue shares that rank
senior to the Series A preferred
shares as to the payment of
dividends or amounts upon
liquidation, dissolution and
winding up.
Maturity.................................. The Series A preferred shares have
no stated maturity and will not be
entitled to the benefits of any
sinking fund or subject to any
obligation on the Company to redeem
or retire the Series A preferred
shares.
Trading................................... We do not intend to list the Series
A preferred shares on any
securities exchange or market
(except as may be required under
the Registration Rights Agreement).
Accordingly, it is unlikely that
any trading market for the Series A
preferred shares will develop. The
Common Shares, into which the
Series A preferred shares are
convertible, are listed on the
American Stock Exchange under the
symbol "GTA."
Voting Rights............................. As a holder of Series A preferred
shares, you will generally have no
voting rights except as required by
law. However, if we fail to pay
dividends on any shares of Series A
preferred stock for six or more
quarterly periods, the number of
directors of Golf
28
Trust will increase by two. As a
holder of Series A preferred stock,
you will be entitled to vote,
separately as a class with the
holders of all other series of
preferred stock upon which like
voting rights have been conferred
and are exercisable, for the
election of such two additional
directors until we have fully paid
all dividends on the Series A
preferred shares. In addition,
before we can issue any shares that
rank senior to the Series A
preferred stock, we need the
approval of holders of 100% of the
Series A preferred stock.
Similarly, we need the approval of
two-thirds of the holders of the
Series A preferred stock before we
may engage in any capital
transaction or financing if, PRO
FORMA after giving effect thereto,
the Company's ratio of cash flow to
fixed charges for each of the four
most recent fiscal quarters would
be less than 1.75 to 1. Finally, we
are not allowed to alter the terms
of certain of our organizational
documents in a way that would be
adverse to the Series A preferred
shares without the approval of
two-thirds of the Series A
preferred shares. However, under
this rule, neither of the following
changes is considered adverse: (a)
the creation of further parity
stock or junior stock; or (b) any
change in connection with a merger
or the sale of all or substantially
all of our assets so long as we are
the surviving company or all
outstanding Series A preferred
shares are exchanged for shares in
the surviving corporation with
substantially identical rights.
Transfer and Ownership Limitations........ Subject to certain exceptions, no
person, directly or indirectly, may
own more than 9.8% of (i) the
number of outstanding Common Shares
or (ii) the number of outstanding
Series A preferred shares. See
"--Restrictions on Ownership,"
below.
COMMON STOCK
Subject to the preferential rights of the Series A preferred stock and
any future classes of preferred stock, the holders of Common Stock are entitled
to such distributions as may be declared from time to time by our board of
directors from funds available therefor, and upon liquidation are entitled to
receive pro rata all assets of the Company available for distributions to such
holders. All shares of Common Stock issued pursuant to this Prospectus will be
fully paid and nonassessable and the holders thereof will not have preemptive
rights.
The holders of Common Stock are entitled to one vote per share on all
matters voted on by stockholders, including elections of directors, and, except
as otherwise required by law or provided in any resolution adopted by our board
of directors with respect to any class of preferred stock establishing the
powers, designations, preferences and relative, participating, option or other
special rights of such series, the holders of such shares of Common Stock
exclusively possess all voting power. The Charter does not provide for
cumulative voting in the election of directors.
The Charter provides for a staggered board of directors consisting of
three classes as nearly equal in size as practicable. Each class holds office
until the third annual meeting for selection of directors following the election
of such class, except that the initial terms of the three classes expire in
1998, 1999
29
and 2000, respectively. The provisions relating to the staggered board may be
amended only upon the vote of the holders of at least 66.67% of the capital
stock entitled to vote for the election of directors.
Pursuant to the Maryland General Corporation Law, a corporation
generally cannot dissolve, amend its articles of incorporation, merge, sell all
or substantially all of its assets, engage in a share exchange or engage in
similar transactions outside the ordinary course of business unless approved by
the affirmative vote of stockholders holding at least two-thirds of the shares
entitled to vote on the matter unless a lesser percentage (but not less than a
majority of all of the votes to be cast on the matter) is set forth in the
corporation's Articles of Incorporation. The Company's Articles of Incorporation
do not provide for a lesser percentage in such situations.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Tax Code, it must meet
certain requirements concerning the ownership of its outstanding shares of
capital stock. Specifically, not more than 50% in value of the Company's
outstanding shares of capital stock may be owned, directly or indirectly, by
five or fewer individuals (as defined in the Tax Code to include certain
entities) during the last half of a taxable year (other than its 1997 taxable
year), and the Company must be beneficially owned by 100 or more persons during
at least 335 days of a taxable year of 12 months or during a proportionate part
of a shorter taxable year (other than its 1997 taxable year). See "Federal
Income Tax Considerations." In addition, the Company must meet certain
requirements regarding the nature of its gross income in order to qualify as a
REIT. One such requirement is that at least 75% of the Company's gross income
for each year must consist of rents from real property and income from certain
other real property investments. The rents received by the Operating Partnership
from a Lessee would not qualify as rents from real property, which would likely
result in loss of REIT status for the Company, if the Company were at any time
to own, directly or constructively, 10% or more of the ownership interests in a
Lessee within the meaning of Section 856(d)(2)(B) of the Tax Code.
Because our board of directors believes it is essential for the Company
to qualify as a REIT, the Charter, subject to certain exceptions described
below, provides that no person may own, or be deemed to own by virtue of the
constructive ownership provisions of the Tax Code, more than 9.8% of the lesser
in value of the total number or value of the outstanding shares of Common Stock
or preferred stock (the "Ownership Limit"). The constructive ownership rules of
the Tax Code are complex and may cause shares owned actually or constructively
by two or more related individuals and/or entities to be constructively owned by
one individual or entity. As a result, the acquisition of less than 9.8% of the
outstanding shares of Common Stock or 9.8% of the shares of preferred stock (or
the acquisition of an interest in an entity which owns the shares) by an
individual or entity could cause that individual or entity (or another
individual or entity) to own constructively in excess of 9.8% of the outstanding
shares of Common Stock or 9.8% of the outstanding shares of preferred stock, and
thus subject such shares to the Ownership Limit provisions of the Charter. The
Charter also prohibits any transfer of Common or preferred stock that would (i)
result in the Common and preferred stock being owned by fewer than 100 persons
(determined without reference to any rules of attribution), (ii) result in the
Company being "closely held" within the meaning of Section 856(h) of the Tax
Code, or (iii) cause the Company to own, directly or constructively, 10% or more
of the ownership interests in a tenant of the Company's real property, within
the meaning of Section 856(d)(2)(B) of the Tax Code. Except as otherwise
provided below, any such acquisition or transfer of the Company's capital stock
(including any constructive acquisition or transfer of ownership) shall be null
and void, and the intended transferee or owner will acquire no rights to, or
economic interests in, the shares.
Subject to certain exceptions described below, any purported transfer
of Common or preferred stock that would (i) result in any person owning,
directly or indirectly, Common or preferred stock in
30
excess of the Ownership Limit, (ii) result in the Common and preferred stock
being owned by fewer than 100 persons (determined without reference to any rules
of attribution), (iii) result in the Company being "closely held" within the
meaning of Section 856(h) of the Tax Code, or (iv) cause the Company to own,
directly or constructively, 10.0% or more of the ownership interests in a tenant
of the Company's or the Partnership's real property, within the meaning of
Section 856(d)(2)(B) of the Tax Code, will be designated as "Shares-in-Trust"
and transferred automatically to a trust (the "Share Trust") effective on the
day before the purported transfer of such Common or preferred stock. The record
holder of the Common or preferred stock that is designated as Shares in Trust
(the "Prohibited Owner") will be required to submit such number of Common or
preferred stock to the Share Trust for designation in the name of the "Share
Trustee". The Share Trustee will be designated by the Company. The beneficiary
of the Share Trust (the "Beneficiary") will be one or more charitable
organizations that are named by the Company.
Shares-in-Trust will remain issued and outstanding Common or preferred
stock and will be entitled to the same rights and privileges as all other shares
of the same class or series. The Share Trustee will receive all dividends and
distributions on the Shares-in-Trust and will hold such dividends or
distributions in trust for the benefit of the Beneficiary. The Share Trustee
will vote all Shares-in-Trust. The Share Trustee will designate a permitted
transferee of the Shares-in-Trust, provided that the permitted transferee (i)
purchases such Shares-in-Trust for valuable consideration and (ii) acquires such
Shares-in-Trust without such acquisition resulting in a transfer to another
Share Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required
to repay to the Share Trustee the amount of any dividends or distributions
received by the Prohibited Owner (i) that are attributable to any
Shares-in-Trust and (ii) the record date of which was on or after the date that
such shares became Shares-in-Trust. The Prohibited Owner generally will receive
from the Share Trustee the lesser of (i) the price per share such Prohibited
Owner paid for the Common or preferred stock that were designated as
Shares-in-Trust (or, in the case of a gift or devise, the Market Price (as
defined below) per share on the date of such transfer) and (ii) the price per
share received by the Share Trustee from the sale or other disposition of such
Shares-in-Trust. Any amounts received by the Share Trustee in excess of the
amounts to be paid to the Prohibited Owner will be distributed to the
Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Shares-in-Trust (or, in the
case of a gift or devise, the Market Price per share on the date of such
transfer) or (ii) the Market Price per share on the date that the Company, or
its designee, accepts such offer. The Company will have the right to accept such
offer for a period of 90 days after the later of (i) the date of the purported
transfer which resulted in such Shares-in-Trust and (ii) the date the Company
determines in good faith that a transfer resulting in such Shares-in-Trust
occurred.
"Market Price" on any date shall mean the average of the Closing Price
(as defined below) for the five consecutive Trading Days (as defined below)
ending on such date. The "Closing Price" on any date shall mean the last sale
price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Common or preferred stock is not listed or admitted to trading on the New
York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the shares of Common or preferred stock are listed
or admitted to trading or, if the shares of Common or preferred stock are not
listed or admitted to trading on any national securities exchange, the last
quoted price, or if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the National Association
of Securities Dealers, Inc. Automated Quotation System or, if such system is no
longer in
31
use, the principal other automated quotations system that may then be in use or,
if the shares of Common or preferred stock are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Common or preferred stock as
selected by our board of directors. "Trading Day" shall mean a day on which the
principal national securities exchange on which the shares of Common or
preferred stock are listed or admitted to trading is open for the transaction of
business or, if the shares of Common or preferred stock are not listed or
admitted to trading on any national securities exchange, shall mean any day
other than a Saturday, a Sunday or a day on which banking institutions in the
State of New York are authorized or obligated by law or executive order to
close.
Any person who acquires or attempts to acquire Common or preferred
stock in violation of the foregoing restrictions, or any person who owned shares
of Common or preferred stock that were transferred to a Share Trust, will be
required (i) to give immediately written notice to the Company of such event,
(ii) to submit to the Company such number of shares of Common or preferred stock
to be transferred to the Share Trust and (iii) to provide to the Company such
other information as the Company may request in order to determine the effect,
if any, of such transfer on the Company's status as a REIT.
All persons who own, directly or indirectly, more than 5% (or such
lower percentages as required pursuant to regulations under the Tax Code) of the
outstanding shares of Common and preferred stock must within 30 days after
January 1 of each year, provide to the Company a written statement or affidavit
stating the name and address of such direct or indirect owner, the number of
shares of Common and preferred stock owned directly or indirectly, and a
description of how such shares are held. In addition, each direct or indirect
stockholder shall provide to the Company such additional information as the
Company may request in order to determine the effect, if any, of such ownership
on the Company's status as a REIT and to ensure compliance with the Ownership
Limit.
The Ownership Limit generally will not apply to the acquisitions of
shares of Common or preferred stock by an underwriter that participates in a
public offering of such shares. In addition, our board of directors, upon
receipt of a ruling from the Service or an opinion of counsel and upon such
other conditions as our board of directors may direct, may exempt a person from
the Ownership Limit under certain circumstances. The foregoing restrictions will
continue to apply until our board of directors, with the approval of the holders
of at least two-thirds of the outstanding shares of all votes entitled to vote
on such matter at a regular or special meeting of the stockholders of the
Company, determines to terminate its status as a REIT.
The Ownership Limit will not be automatically removed even if the REIT
provisions of the Tax Code are changed so as to remove any ownership
concentration limitation. Any change of the Ownership Limit would require an
amendment to the Charter. Such amendment requires the affirmative vote of
holders holding at least two-thirds of the outstanding shares entitled to vote
on the matter.
All certificates representing shares of Common or preferred stock will
bear a legend referring to the restrictions described above.
LIMITATIONS ON CHANGES IN CONTROL
GENERAL. The provisions of the Charter and the Bylaws providing for
ownership limitations, a staggered board of directors and the authorization of
our board of directors to issue preferred stock without stockholder approval
could have the effect of delaying, deferring or preventing a change in control
of the Company or the removal of existing management, and as a result could
prevent the stockholders of the Company from being paid a premium for their
shares of Common Stock.
32
SHAREHOLDER RIGHTS AGREEMENT. The Company has adopted a Shareholder
Rights Agreement (the "Rights Agreement"), the purpose of which is, among other
things, to enable stockholders to receive fair and equal treatment in the event
of any proposed acquisition of the Company. The Rights Agreement may have the
effect of delaying, deferring or preventing a change in control of the Company
and, therefore, could adversely affect the stockholders' ability to realize a
premium over the then-prevailing market price for the Common Stock in connection
with such a transaction. A fuller description of the Rights Agreement can be
found in the Company's Current Report on Form 8-K filed with the SEC on August
30, 1999, which includes the Rights Agreement as an exhibit, see "Where You Can
Find More Information."
In connection with the adoption of the Rights Agreement, the Board of
Directors declared a dividend distribution of one Preferred Stock Purchase Right
(a "Right") for each outstanding share of the Company's Common Stock to
stockholders of record as of the close of business on September 6, 1999 (the
"Record Date"). Each Right entitles the registered holder thereof to purchase
from the Company one one-hundredth of a share of Series B Junior Participating
Preferred Stock, par value $0.01 per share, of the Company, at a cash exercise
price of $75.00, subject to adjustment.
The Rights are currently not exercisable and are attached to and trade
with all shares of Common Stock outstanding as of, and issued subsequent to, the
Record Date. The Rights will separate from the Common Stock and will become
exercisable upon the earlier of:
- - 10 business days following a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 15% or more of the
outstanding shares of Common Stock (the "Stock Acquisition Date"), other
than as a result of repurchases of stock by the Company or certain
inadvertent actions by institutional or certain other stockholders or
- - 10 business days (or such later date as the Board shall determine)
following the commencement of a tender offer or exchange offer that would
result in a person or group becoming an Acquiring Person.
The Rights will expire at 5:00 P.M. (New York City time) on September 6, 2009,
unless earlier redeemed or exchanged by the Company.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
that may be relevant to a prospective holder of Securities in the Company is
based on current law. This discussion does not purport to deal with all aspects
of taxation that may be relevant to particular stockholders in light of their
personal investment or tax circumstances, or to certain types of stockholders
(including insurance companies, tax-exempt organizations (except as described
below), financial institutions or broker-dealers, foreign corporations and
persons who are not citizens or residents of the United States (except as
described below)) subject to special treatment under the federal income tax
laws.
The statements in this discussion are based on current provisions of
the Tax Code, existing, temporary, and currently proposed Treasury Regulations
promulgated under the Tax Code, the legislative history of the Tax Code,
existing administrative rulings and practices of the Service, and judicial
decisions. No assurance can be given that future legislative, judicial, or
administrative actions or decisions, which may be retroactive in effect, will
not affect the accuracy of any statements in this Prospectus with respect to the
transactions entered into or contemplated prior to the effective date of such
changes.
33
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND
SALE OF THE SECURITIES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REAL
ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER
TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
GENERAL.
The Company elected to be taxed as a REIT under Sections 856 through
860 of the Tax Code, commencing with its short taxable year beginning on
February 12, 1997 and ending on December 31, 1997. The Company believes that it
is organized and operates in such a manner as to qualify for taxation as a REIT
under the Tax Code, and the Company intends to operate in such a manner, but no
assurance can be given that it will operate in a manner so as to qualify or
remain qualified as a REIT.
These sections of the Tax Code are highly technical and complex. The
following sets forth the material aspects of the sections that govern the
federal income tax treatment of a REIT and its stockholders. This summary is
qualified in its entirety by the applicable Tax Code provisions, rules and
regulations promulgated thereunder, and administrative and judicial
interpretations thereof. O'Melveny & Myers LLP has acted as tax counsel to the
Company.
In the opinion of O'Melveny & Myers LLP, the Company has qualified as a
REIT for the Company's taxable years ending December 31, 1997, December 31,
1998, and December 31, 1999 and the Company's organization and method of
operation will enable it to continue to meet the requirements for qualification
and taxation as a REIT under the Tax Code. It must be emphasized that this
opinion is based on various assumptions and is conditioned upon certain
representations made by the Company as to factual matters, including a REIT
qualification analysis provided by the Company. In addition, this opinion is
based upon the factual representations of the Company concerning its business
and properties as set forth in this Prospectus. Moreover, such qualification and
taxation as a REIT depends upon the Company's having met, and its continuing
ability to meet, through actual annual operating results, the distribution level
tests, diversity of stock ownership test, and the various other qualification
tests imposed under the Tax Code discussed below, the results of which were not
and will not be reviewed by O'Melveny & Myers LLP. Accordingly, no assurance can
be given that the actual results of the Company's operation for any particular
taxable year satisfied or will satisfy such requirements. See "--Failure to
Qualify." Said opinion letter of O'Melveny & Myers LLP is filed as an exhibit to
the registration statement of which this Prospectus is a part.
In any year in which the Company qualifies as a REIT, in general it
will not be subject to federal income tax on that portion of its taxable income
or capital gain which is distributed to stockholders. The Company will, however,
be subject to tax at normal corporate rates upon any taxable income or capital
gain not distributed.
Notwithstanding its qualification as a REIT, the Company may also be
subject to taxation in certain other circumstances. If the Company should fail
to satisfy the 75% or the 95% gross income test (as discussed below), and
nonetheless maintains its qualification as a REIT because certain other
requirements are met, it will be subject to a 100% tax on the gross income
attributable to the greater of the amount by which the Company fails either the
75% or the 95% test, multiplied by a fraction intended to reflect the Company's
profitability. The Company will also be subject to a tax of 100% on net income
from "prohibited transactions" (which are, in general, certain sales or other
dispositions of property held primarily for sale to customers in the ordinary
course of business, other than foreclosure property) and, if
34
the Company has (i) net income from the sale or other disposition of
"foreclosure property" (generally, property acquired by reason of a default on
indebtedness or a lease) which is held primarily for sale to customers in the
ordinary course of business or (ii) other non-qualifying income from foreclosure
property, it will be subject to tax on such income from foreclosure property at
the highest corporate rate. In addition, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income for
such year, and (iii) any undistributed taxable income from prior years, the
Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. The Company may also be
subject to the corporate "alternative minimum tax," on its items of tax
preference, as well as tax in certain situations not presently contemplated.
REQUIREMENTS FOR QUALIFICATION.
The Tax Code defines a REIT as a corporation, trust or association (i)
which is managed by one or more trustees or directors; (ii) the beneficial
ownership of which is evidenced by transferable shares, or by transferable
certificates of beneficial interest; (iii) which would be taxable as a domestic
corporation, but for Sections 856 through 859 of the Tax Code; (iv) which is
neither a financial institution nor an insurance company subject to certain
provisions of the Tax Code; (v) the beneficial ownership of which is held by 100
or more persons; (vi) during the last half of each taxable year not more than
50% in value of the outstanding stock of which is owned, directly or
constructively, by five or fewer individuals (as defined in the Tax Code to
include certain entities); and (vii) which meets certain other tests, described
below, regarding the nature of its income and assets. The Tax Code provides that
conditions (i) to (iv), inclusive, must be met during the entire taxable year
and that condition (v) must be met during at least 335 days of a taxable year of
12 months, or during a proportionate part of a taxable year of less than 12
months. Conditions (v) and (vi) will not apply until after the first taxable
year for which an election is made to be taxed as a REIT. Additionally, if for
any taxable year of the Company beginning after December 31, 1997, the Company
complies with regulations requiring the maintenance of records to ascertain
ownership of its outstanding stock and the Company does not know or have reason
to know that it failed to satisfy condition (vi), it will be treated as having
satisfied that condition for any such taxable year.
The Company believes that it has issued sufficient shares to allow it
to satisfy conditions (v) and (vi). In addition, the Company's Charter provides
for restrictions regarding the transfer and ownership of shares, which
restrictions are intended to assist the Company in continuing to satisfy the
share ownership requirements described in (v) and (vi) above. Such transfer and
ownership restrictions are described in "Description of Capital
Stock--Restrictions on Ownership."
The Company currently has two wholly-owned corporate subsidiaries and
may have additional corporate subsidiaries in the future. Tax Code Section
856(i) provides that a corporation that is a "qualified REIT subsidiary" shall
not be treated as a separate corporation, and all assets, liabilities, and items
of income, deduction, and credit of a "qualified REIT subsidiary" shall be
treated as assets, liabilities, and items of income, deduction, and credit of
the REIT. A "qualified REIT subsidiary" is a corporation, all of the capital
stock of which is held by the REIT. Thus, in applying the requirements described
herein, any "qualified REIT subsidiaries" owned by the Company will be ignored,
and all assets, liabilities, and items of income, deduction, and credit of such
subsidiaries will be treated as assets, liabilities and items of income,
deduction, and credit of the Company. Each of the Company's current wholly-owned
subsidiaries is a "qualified REIT subsidiary." (The Company also owns, through
its interest in the Operating Partnership, a minority interest in a taxable
corporation.) The Company's wholly-owned subsidiaries therefore will not be
subject to federal corporate income taxation, although they may be subject to
state and local taxation.
35
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the assets and gross
income of the partnership retain the same character in the hands of the REIT for
purposes of Section 856 of the Tax Code, including for purposes of satisfying
the gross income tests and the asset tests. Thus, the Company's proportionate
share of the assets, liabilities and items of income of the Operating
Partnership will be treated as assets, liabilities and items of income of the
Company for purposes of applying the requirements described herein. A summary of
the rules governing the federal income taxation of partnerships and their
partners is provided below in "Federal Income Tax Considerations -- Tax Aspects
of the Operating Partnership."
INCOME TESTS.
In order to qualify and maintain qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property" and, in certain circumstances, interest) or from certain types of
temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from such real property investments, dividends, interest and gain
from the sale or disposition of stock or securities (or from any combination of
the foregoing). Third, short-term gain from the sale or other disposition of
stock or securities, gain from prohibited transactions and gain on the sale or
other disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year. The 30% gross income test however, need not
be satisfied for any taxable year of the Company beginning after December 31,
1997.
Pursuant to the Participating Leases, the Lessees lease from the
Company the land, buildings, improvements and equipment comprising the golf
courses for a 10-year period, with, options to extend for up to six additional
terms of five years each. The Participating Leases provide that the Lessees are
obligated to pay to the Company (i) Base Rent and, if applicable, Participating
Rent and (ii) certain other additional charges.
In order for the Base Rent, the Participating Rent and the additional
charges to constitute "rents from real property," the Participating Leases must
be respected as true leases for federal income tax purposes and not treated as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the Participating Leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties, (ii) the form of the agreement, (iii)
the degree of control over the property that is retained by the property owner
(e.g., whether the lessee has substantial control over the operation of the
property or whether the lessee was required simply to use its best efforts to
perform its obligations under the agreement), and (iv) the extent to which the
property owner retains the risk of loss with respect to the property (e.g.,
whether the lessee bears the risk of increases in operating expenses or the risk
of damage to the property).
In addition, Tax Code Section 7701(e) provides that a contract that
purports to be a service contract (or a partnership agreement) is treated
instead as a lease of property if the contract is properly treated as such,
taking into account all relevant factors, including whether or not: (i) the
service recipient is in physical possession of the property, (ii) the service
recipient controls the property, (iii) the service recipient has a significant
economic or possessory interest in the property (e.g., the property's use is
likely
36
to be dedicated to the service recipient for a substantial portion of the useful
life of the property, the recipient shares the risk that the property will
decline in value, the recipient shares in any appreciation in the value of the
property, the recipient shares in savings in the property's operating costs, or
the recipient bears the risk of damage to or loss of the property), (iv) the
service provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under the
contract, (v) the service provider does not use the property concurrently to
provide significant services to entities unrelated to the service recipient, and
(vi) the total contract price does not substantially exceed the rental value of
the property for the contract period. Since the determination whether a service
contract should be treated as a lease is inherently factual, the presence or
absence of any single factor may not be dispositive in every case.
The Company believes that each Participating Lease will be treated as a
true lease for federal income tax purposes. Such belief is based, in part, on
the following facts: (i) the Operating Partnership and the Lessees intend for
their relationship to be that of a lessor and lessee and such relationship is
documented by lease agreements, (ii) the Lessees have the right to exclusive
possession and use and quiet enjoyment of the golf courses during the term of
the Participating Leases, (iii) the Lessees bear the cost of, and are
responsible for, day-to-day maintenance and repair of the golf courses, other
than the cost of certain capital expenditures, and dictate how the golf courses
are operated, maintained, and improved, (iv) the Lessees bear all of the costs
and expenses of operating the golf courses (including the cost of any inventory
used in their operation) during the term of the Participating Leases other than
the cost of certain furniture, fixtures and equipment, and certain capital
expenditures), (v) the Lessees benefit from any savings in the costs of
operating the golf courses during the term of the Participating Leases, (vi) in
the event of damage or destruction to a golf course, the Lessees are at economic
risk because they will be obligated either (A) to restore the property to its
prior condition, in which event they will bear all costs of such restoration in
excess of any insurance proceeds or (B) in certain circumstances, terminate the
Participating Lease, (vii) the Lessees have indemnified the Operating
Partnership against all liabilities imposed on the Operating Partnership during
the term of the Participating Leases by reason of (A) injury to persons or
damage to property occurring at the golf courses or (B) the Lessees' use,
management, maintenance or repair of the golf courses, (viii) the Lessees are
obligated to pay substantial Base Rent for the period of use of the golf
courses, and (ix) the Lessees stand to incur substantial losses (or reap
substantial gains) depending on how successfully they operate the golf courses.
Such opinion is also based upon the representation of the Company to the effect
that upon termination of the Participating Leases (including the optional
fixed-rate renewal periods), each such golf course is expected to have a
remaining useful life equal to at least 20% of its expected useful life when
contributed to the Operating Partnership, and a fair market value equal to at
least 20% of its fair market value when contributed to the Operating
Partnership.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Participating Leases that discuss whether
such leases constitute true leases for federal income tax purposes. If the
Participating Leases are recharacterized as service contracts or partnership
agreements, rather than true leases, part or all of the payments that the
Operating Partnership receives from the Lessees may not be considered rent or
may not otherwise satisfy the various requirements for qualification as "rents
from real property." In that case, the Company likely would not be able to
satisfy either the 75% or 95% gross income tests and, as a result, would lose
its REIT status.
Rents received by the Company will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described above
only if several conditions are met. First, the amount of rent must not be based
in whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the Tax Code
37
provides that rents received from a tenant will not qualify as "rents from real
property" in satisfying the gross income tests if the REIT, or an owner of 10%
or more of the REIT, directly or constructively owns 10% or more of such tenant
(a "Related Party Tenant"). The Charter provides that no stockholder may own,
directly or constructively, in excess of 9.8% of the Common Stock. Third, if
rent attributable to personal property, leased in connection with a lease of
real property, is greater than 15% of the total rent received under the lease,
then the portion of rent attributable to such personal property will not qualify
as "rents from real property." Finally, for rents received to qualify as "rents
from real property," the REIT generally must not operate or manage the property
or furnish or render services to the tenants of such property, other than
through an independent contractor from whom the REIT derives no revenue,
provided, however, the Company may directly perform certain services that are
"usually or customarily rendered" in connection with the rental of space for
occupancy only and are not otherwise considered "rendered to the occupant" of
the property. For taxable years of the Company beginning after December 31,
1997, the Company may operate or manage the property or furnish or render
services to the tenants of such property without disqualifying any rents
received from such property as "rents from real property," provided that any
amounts received or accrued (directly or indirectly) by the Company for any such
activities or services do not exceed 1% of all amounts received or accrued
(directly or indirectly) by the Company with respect to such property. However,
any amounts received or accrued (directly or indirectly) by the Company for any
such activities or services will not qualify as "rents from real property," even
to the extent such amounts do not exceed the 1% threshold. The Company does not
and will not (i) charge rent for any property that is based in whole or in part
on the income or profits of any person (except by reason of being based on a
percentage of receipts or sales, as described above), (ii) rent any property to
a Related Party Tenant, (iii) with the exception of one golf course derive
rental income attributable to personal property (other than personal property
leased in connection with the lease of real property, the amount of which is
less than 15% of the total rent received under the lease), or (iv) perform
services considered to be rendered to the occupant of the property, other than
through an independent contractor from whom the Company derives no revenue
(subject to the 1% de minimis rule discussed above for taxable years of the
Company beginning after December 31, 1997). With respect to one golf course, a
portion of the revenues derived under the Participating Lease applicable to such
golf course (the portion attributable to personal property) will not be
considered as "rents from real property." The amount of the anticipated
disqualified income under such Participating Lease, however, will not prevent
the Company from qualifying as a REIT or subject it to any federal income
taxation.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
The participating interest feature of the Participating Mortgage will
cause the Participating Mortgage to have original issue discount ("OID"), which
is treated as interest income. See "Annual Distribution Requirements" for a
discussion of the effect of OID on the ability of the Company to meet the REIT
distribution requirements.
If the Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Tax Code.
These relief provisions will be generally available if the Company's failure to
meet such tests was due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of these relief provisions. As
discussed above in "General," even if these relief provisions apply, a tax would
be imposed with respect to the excess net income.
38
ASSET TESTS.
The Company, at the close of each quarter of its taxable year, must
also satisfy three tests relating to the nature of its assets. First, at least
75% of the value of the Company's total assets must be represented by real
estate assets (including (i) its allocable share of real estate assets held by
partnerships in which the Company owns an interest and (ii) stock or debt
instruments held for not more than one year purchased with the proceeds of a
stock offering or long-term (at least five years) debt offering of the Company),
cash, cash items and government securities. Second, not more than 25% of the
Company's total assets may be represented by securities other than those in the
75% asset class. Third, of the investments not included in the 75% asset class,
the value of any one issuer's securities owned by the Company may not exceed 5%
of the value of the Company's total assets and the Company may not own more than
10% of any one issuer's outstanding voting securities (except for its ownership
interest in the stock of a qualified REIT subsidiary).
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied all of the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets and
the asset requirements either did not exist immediately after the acquisition of
any particular asset or was not wholly or partly caused by such an acquisition
(i.e., the discrepancy arose from changes in the market values of its assets).
If the condition described in clause (ii) of the preceding sentence were not
satisfied, the Company still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the quarter in which it arose.
ANNUAL DISTRIBUTION REQUIREMENTS.
The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its stockholders in an amount
at least equal to (i) the sum of (a) 95% of the Company's "REIT taxable income"
(computed without regard to the dividends paid deduction and the Company's net
capital gain) and (b) 95% of the net income (after tax), if any, from
foreclosure property, minus (ii) the sum of certain items of noncash income.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend payment
after such declaration. To the extent that the Company does not distribute all
of its net capital gain or distributes at least 95%, but less than 100%, of its
"REIT taxable income," as adjusted, it will be subject to tax thereon at regular
ordinary and capital gain corporate tax rates. For any taxable year of the
Company beginning after December 31, 1997, the Company may elect to retain and
pay taxes on all or a portion of its net long-term capital gains for such year,
in which case, the Company's stockholders would include in their income as
long-term capital gains their proportionate share of such undistributed capital
gains. The stockholders would be treated as having paid their proportionate
share of the capital gains tax paid by the Company, which amounts would be
credited or refunded to the stockholders. Furthermore, if the Company should
fail to distribute during each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain income for
such year, and (iii) any undistributed taxable income from prior periods, the
Company is subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. For the Company's taxable
years ending after December 31, 1997, the Company may elect to retain and pay
taxes on all or a portion of its net long-term capital gains for such year, in
which case the Company's stockholders would include in income their
proportionate share of such undistributed long-term capital gain and claim a
credit for their share of the taxes paid by the Company. The Company intends to
make timely distributions sufficient to satisfy this annual distribution
requirement.
39
It is possible that the Company, from time to time, may not have
sufficient cash or other liquid assets to meet the 95% distribution requirement
due to timing differences between (i) the actual receipt of income and actual
payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in arriving at taxable income of the Company. In the
event that such timing differences occur, in order to meet the 95% distribution
requirement, the Company may find it necessary to arrange for short-term, or
possibly long-term, borrowings or to pay dividends in the form of taxable stock
dividends.
The participating interest feature of the Participating Mortgage will
cause the Participating Mortgage to have OID, which will require the Company to
accrue, as interest income, the full amount of such OID even though the Company
may not be in receipt of a like amount of related cash payments during such
year. The inclusion of OID in income without the related cash may make it more
likely that the Company will have to borrow to meet the 95% distribution
requirement. For the Company's taxable years beginning after December 31, 1997,
OID is not included in determining whether the Company has met the 95%
distribution requirements, although the Company will still be subject to tax on
such income to the extent not distributed.
In addition, upon the happening of a "Transfer Triggering Event", the
Company will have to accrue additional interest income without any related cash
payment in the year the "Transfer Triggering Event" occurs, and will have
additional OID without any related cash payment from that date until the
maturity of the Participating Mortgage. If the "Transfer Triggering Event"
occurs after the Company's taxable year ending December 31, 1997, such
additional accrued interest will have no effect on the ability of the Company to
meet the 95% distribution requirement, although the Company may have to borrow
to pay its tax on such "phantom" income.
The Company calculates its "REIT taxable income" based upon the
conclusion that the Operating Partnership is the owner for federal income tax
purposes of all of the golf courses other than the golf courses that secure the
Participating Mortgage. As a result, the Company expects that depreciation
deductions with respect to all such golf courses will reduce its "REIT taxable
income." This conclusion is consistent with the opinion of O'Melveny & Myers LLP
as described above, which in turn is based upon representations from the Company
as to the expected useful life and future fair market value of each such golf
course. If the Service were to successfully challenge this position, the Company
might be deemed retroactively to have failed to meet the distribution
requirement and would have to rely on the payment of a "deficiency dividend" in
order to retain its REIT status.
Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Thus, the Company
may be able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest based upon the amount of
any deduction taken for deficiency dividends.
PARTNERSHIP ANTI-ABUSE RULE
The United States Treasury Department has issued a regulation (the
"Anti-Abuse Rule") under the partnership provisions of the Tax Code (the
"Partnership Provisions") that authorizes the Service, in certain "abusive"
transactions involving partnerships, to disregard the form of the transaction
and recast it for federal tax purposes as the Service deems appropriate. The
Anti-Abuse Rule applies where a partnership is formed or utilized in connection
with a transaction (or series of related transactions) with a principal purpose
of substantially reducing the present value of the partners' aggregate federal
tax liability in a manner inconsistent with the intent of the Partnership
Provisions. The Anti-Abuse Rule states that the Partnership Provisions are
intended to permit taxpayers to conduct joint business (including
40
investment) activities through a flexible economic arrangement that accurately
reflects the partners' economic agreement and clearly reflects the partners'
income without incurring any entity-level tax. The purposes for structuring a
transaction involving a partnership are determined based on all of the facts and
circumstances, including a comparison of the purported business purpose for a
transaction and the claimed tax benefits resulting from the transaction. A
reduction in the present value of the partners' aggregate federal tax liability
through the use of a partnership does not, by itself, establish inconsistency
with the intent of the Partnership Provisions.
The Anti-Abuse Rule contains an example in which a corporation that
elects to be treated as a REIT contributes substantially all of the proceeds
from a public offering to a partnership in exchange for a general partner
interest. The limited partners of the partnership contribute real property
assets to the partnership, subject to liabilities that exceed their respective
aggregate bases in such property. In addition, the limited partners have the
right, beginning one year after the formation of the partnership, to require the
redemption of their limited partnership interests in exchange for cash or REIT
stock (at the Company's option) equal to the fair market value of their
respective interests in the partnership at the time of the redemption. The
example concludes that the use of the partnership is not inconsistent with the
intent of the Partnership Provisions and, thus, cannot be recast by the Service.
Based on the foregoing, the Anti-Abuse Rule should not have any adverse impact
on the Company's ability to qualify as a REIT. However, the Anti-Abuse Rule is
extraordinarily broad in scope and is applied based on an analysis of all of the
facts and circumstances. As a result, there can be no assurance that the Service
will not attempt to apply the Anti-Abuse Rule to the Company. If the conditions
of the Anti-Abuse Rule are met, the Service is authorized to take appropriate
enforcement action, including disregarding the Operating Partnership for federal
tax purposes or treating one or more of its partners as nonpartners. Any such
action potentially could jeopardize the Company's status as a REIT.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will they be
required to be made. In such event, to the extent of current and accumulated
earnings and profits, all distributions to stockholders will be taxable as
ordinary income, and, subject to certain limitations of the Tax Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, the Company will also be
disqualified from taxation as a REIT for the four taxable years following the
year during which qualification was lost. It is not possible to state whether in
all circumstances the Company would be entitled to such statutory relief.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable domestic stockholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be taken into
account by them as ordinary income and will not be eligible for the dividends
received deduction for corporations. Distributions (or, for taxable years of the
Company beginning after December 31, 1997, net long-term capital gains retained
by the Company) that are designated as capital gain dividends will be taxed as
long-term capital gain (to the extent they do not exceed the Company's actual
net capital gain for the taxable year) without regard to the period for which
the stockholder has held its stock. However, corporate stockholders may be
required to treat up to 20% of certain capital gain dividends as ordinary
income. Distributions in excess of current and accumulated earnings and profits
will not be taxable to a stockholder to the extent that they do not exceed the
adjusted
41
basis of the stockholder's shares, but rather will reduce the adjusted basis of
such shares. To the extent that such distributions exceed the adjusted basis of
a stockholder's shares they will be included in income as long-term capital gain
(or short-term capital gain if the shares have been held for one year or less)
assuming the shares are a capital asset in the hands of the stockholder. In
addition, any dividend declared by the Company in October, November or December
of any year payable to a stockholder of record on a specified date in any such
month shall be treated as both paid by the Company and received by the
stockholder on December 31 of such year, provided that the dividend is actually
paid by the Company during January of the following calendar year. Stockholders
may not include in their individual income tax returns any net operating losses
or capital losses of the Company.
In general, any loss upon a sale or exchange of shares by a stockholder
who has held such shares for six months or less (after applying certain holding
period rules), will be treated as a long-term capital loss to the extent of
distributions from the Company required to be treated by such stockholder as
long-term capital gain.
BACKUP WITHHOLDING
The Company will report to its domestic stockholders and the Service
the amount of dividends paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a stockholder may be
subject to backup withholding at the rate of 31% with respect to dividends paid
unless such holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (b) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A stockholder that does not provide the Company with his
correct taxpayer identification number may also be subject to penalties imposed
by the Service. Any amount paid as backup withholding will be creditable against
the stockholder's income tax liability. In addition, the Company may be required
to withhold a portion of capital gain distributions made to any stockholders who
fail to certify their non-foreign status to the Company. The Service has issued
final regulations that will alter the technical requirements relating to backup
withholding compliance as applied to foreign stockholders for distributions made
after December 31, 1999. See "--Taxation of Foreign Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
In Revenue Ruling 66-106, 1966-1 C.B. 151, the Service ruled that
amounts distributed by a REIT to a tax-exempt employees' pension trust did not
constitute "unrelated business taxable income" ("UBTI"). Revenue rulings are
interpretive in nature and subject to revocation or modification by the Service.
However, based upon Revenue Ruling 66-106 and the analysis therein,
distributions by the Company to a stockholder that is a tax-exempt entity should
not constitute UBTI, provided that the tax-exempt entity has not financed the
acquisition of its shares with "acquisition indebtedness" within the meaning of
the Tax Code and the shares are not otherwise used in an unrelated trade or
business of the tax-exempt entity.
In certain circumstances, a pension trust that owns more than 10% of
the Company's stock will be required to treat a percentage of the dividends
received from the Company as UBTI (the "UBTI Percentage"). The UBTI Percentage
is the gross income derived by the Company from an unrelated trade or business
(determined as if the Company were a pension trust) divided by the gross income
of the Company for the year in which the dividends are paid. The UBTI Percentage
rule will apply to a pension trust holding more than 10% of the Company's stock
only if (i) the UBTI Percentage is at least 5%, (ii) the Company qualifies as a
REIT by reason of the modification of the 5/50 Rule that allows the
beneficiaries of the pension trust to be treated as holding shares of the
Company in proportion to their
42
actuarial interests in the pension trust and (iii) either (A) one pension trust
owns more than 25% of the value of the Company's stock or (B) a group of pension
trusts individually holding more than 10% of the value of the Company's stock
collectively owns more than 50% of the value of the Company's stock.
TAXATION OF FOREIGN STOCKHOLDERS
The rules governing United States federal income taxation of
nonresident alien individuals, foreign corporations, foreign partnerships and
other foreign stockholders (collectively, "Non-U.S. Stockholders") are complex
and no attempt will be made herein to provide more than a summary of such rules.
Prospective Non-U.S. Stockholders should consult with their own tax advisors to
determine the impact of federal, state and local income tax laws with regard to
an investment in shares, including any reporting requirements.
Distributions by the Company that are not attributable to gain from
sales or exchanges by the Company of United States real property interests and
not designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions, ordinarily,
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the Common Stock is treated as
effectively connected with the conduct by the Non-U.S. Stockholder of a United
States trade or business, the Non-U.S. Stockholder generally will be subject to
a tax at graduated rates, in the same manner as U.S. stockholders are taxed with
respect to such dividends (and may also be subject to the 30% branch profits tax
in the case of a Non-U.S. Stockholder that is a foreign corporation). The
Company expects to withhold United States income tax at the rate of 30% on the
gross amount of any such dividends made to a Non-U.S. Stockholders unless (i) a
lower treaty rate applies or (ii) the Non-U.S. Stockholder files an Service Form
4224 with the Company certifying that the investment to which the distribution
relates is effectively connected to a United States trade or business of such
Non-U.S. Stockholder. Lower treaty rates applicable to dividend income may not
necessarily apply to dividends from a REIT, however. The Service has issued
final regulations that will modify the manner in which the Company complies with
the withholding requirements for distributions made after December 31, 1999.
Distributions in excess of current and accumulated earnings and profits of the
Company will not be taxable to a stockholder to the extent that they do not
exceed the adjusted basis of the stockholder's shares, but rather will reduce
the adjusted basis of such shares. To the extent that such distributions exceed
the adjusted basis of a Non-U.S. Stockholder's shares, they will give rise to
tax liability if the Non-U.S. Stockholder otherwise is subject to tax on any
gain from the sale or disposition of his shares in the Company (as described
below). If it cannot be determined at the time a distribution is made whether or
not such distribution will be in excess of current and accumulated earnings and
profits, the distribution will be subject to withholding at the same rate
applicable to dividends. However, amounts thus withheld are refundable if it is
subsequently determined that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company.
In August 1996, the U.S. Congress passed the Small Business Job
Protection Act of 1996, which requires the Company to withhold 10% of any
distribution in excess of the Company's current and accumulated earnings and
profits. That statute is effective for distributions made after August 20, 1996.
Consequently, although the Company intends to withhold at a rate of 30% on the
entire amount of any distribution, to the extent that the Company does not do
so, any portion of a distribution not subject to withholding at a rate of 30%
will be subject to withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT, distributions
(or for taxable years of the Company beginning after December 31, 1997, net
long-term capital gains retained and designated as capital gain dividends by the
Company) that are attributable to gain from sales or exchanges by the
43
Company of United States real property interests will be taxed to a Non-U.S.
Stockholder under the provisions of the Foreign Investment in Real Property Tax
Act of 1980, as amended ("FIRPTA"). Under FIRPTA, these distributions are taxed
to a Non-U.S. Stockholder as if such gain were effectively connected with a
United States trade or business. Non-U.S. Stockholders would thus be taxed at
the same capital gain rates applicable to U.S. stockholders (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals). Also, distributions subject to FIRPTA
may be subject to a 30% branch profits tax in the hands of a foreign corporate
stockholder not entitled to treaty relief or exemption. The Company is required
by applicable Treasury Regulations to withhold 35% of any distribution that
could be designated by the Company as a capital gains dividend. This amount is
creditable against the Non-U.S. Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. However, because the shares of the Company are
publicly-traded, no assurance can be given that the Company will continue to be
a "domestically-controlled REIT." In addition, a Non-U.S. Stockholder that owns,
actually or constructively, 5% or less of the Company's stock throughout a
specified "look back" period will not recognize gain on the sale of his stock
taxable under FIRPTA if the shares are traded on an established securities
market. Furthermore, gain not subject to FIRPTA will be taxable to a Non-U.S.
Stockholder if (i) investment in the shares is effectively connected with the
Non-U.S. Stockholder's United States trade or business, in which case the
Non-U.S. Stockholder will be subject to the same treatment as U.S. stockholders
with respect to such gain (except that a stockholder that is a foreign
corporation may also be subject to the 30% branch profits tax), or (ii) the
Non-U.S. Stockholder is a nonresident alien individual who was present in the
United States for 183 days or more during the taxable year and has a "tax home"
in the United States, in which case the nonresident alien individual will be
subject to a 30% tax on the individual's capital gains. If the gain on the sale
of shares were to be subject to taxation under FIRPTA, the Non-U.S. Stockholder
will be subject to the same treatment as U.S. stockholders with respect to such
gain (subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of nonresident alien individuals and, in the case of
foreign corporations, subject to the possible application of the 30% branch
profits tax).
STATE AND LOCAL TAXES
The Company, any of its subsidiaries, the Operating Partnership or the
Company's stockholders may be subject to state and local tax in various states
and localities, including those states and localities in which it or they
transact business, own property, or reside. The state tax treatment of the
Company and the stockholders in such jurisdictions may differ from the federal
income tax treatment described above. Consequently, prospective stockholders
should consult their own tax advisors regarding the effect of state and local
tax laws upon an investment in the Common Stock.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
The following discussion summarizes certain federal income tax
considerations applicable to the Company's investment in the Operating
Partnership. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
CLASSIFICATION AS A PARTNERSHIP.
The Company will be entitled to include in its income its distributive
share of the Operating Partnership's income and to deduct its distributive share
of the Operating Partnership's losses only if the
44
Operating Partnership is classified for federal income tax purposes as a
partnership rather than as a corporation or an association taxable as a
corporation. An organization formed as a partnership will be treated as a
partnership, rather than as a corporation, for federal income tax purposes if
(i) it is not expressly classified as a corporation under Section
301.7701-2(b)(1) through (8) of the Treasury Regulations; (ii) it does not elect
to be classified as an association taxable as a corporation; and (iii) it is not
treated as a corporation by virtue of being classified as a "publicly traded
partnership."
The Operating Partnership will not request a ruling from the Service
that it will be classified as a partnership for federal income tax purposes.
Instead, at the Closing of this Offering, O'Melveny & Myers LLP will deliver its
opinion that, based on the provisions of the Partnership Agreement, certain
factual assumptions and certain representations described in the opinion, the
Operating Partnership will be treated for federal income tax purposes as a
partnership and not as an association taxable as a corporation. Currently the
Operating Partnership is not expressly classified as, and will not elect to be
classified as, a corporation for federal income tax purposes. Unlike a tax
ruling, an opinion of counsel is not binding upon the Service, and no assurance
can be given that the Service will not challenge the status of the Operating
Partnership as a partnership for federal income tax purposes. If such challenge
were sustained by a court, the Operating Partnership would be treated as a
corporation for federal income tax purposes, as described below. In addition,
the opinion of O'Melveny & Myers LLP is based on existing law, which is to a
great extent the result of administrative and judicial interpretation. No
assurance can be given that administrative or judicial changes would not modify
the conclusions expressed in the opinion.
Under Section 7704 of the Tax Code, a partnership is treated as a
corporation for federal income tax purposes if it is a "publicly traded
partnership" (except in situations in which 90% or more of the partnership's
gross income is of a specified type). A partnership is deemed to be publicly
traded if its interests are either (i) traded on an established securities
market, or (ii) readily tradable on a secondary market (or the substantial
equivalent thereof). While the OP Units will not be traded on an established
securities market, they could possibly be deemed to be traded on a secondary
market or its equivalent due to the Redemption Rights enabling the partners to
dispose of their OP Units.
The Treasury Department recently issued regulations (the "PTP
Regulations") governing the classification of partnerships under Section 7704.
These regulations provide that the classification of partnerships is generally
based on a facts and circumstances analysis. However, the regulations also
provide limited "safe harbors" which preclude publicly traded partnership
status. Pursuant to one of those safe harbors, interests in a partnership will
not be treated as readily tradable on a secondary market or the substantial
equivalent thereof if (i) all interests in the partnership were issued in a
transaction (or transactions) that was not required to be registered under the
Securities Act, and (ii) the partnership does not have more than 100 partners at
any time during the partnership's taxable year. In determining the number of
partners in a partnership for this purpose, a person owning an interest in a
flow-through entity (i.e., a partnership, grantor trust, or S corporation) that
owns an interest in the partnership is treated as a partner in such partnership
only if (x) substantially all of the value of the person's interest in the
flow-through entity is attributable to the flow-through entity's interest
(direct or indirect) in the partnership and (y) a principal purpose of the use
of the flow-through entity is to permit the partnership to satisfy the
100-partner limitation.
The Operating Partnership is expected to have fewer than 100 partners
(including persons owning interests through flow-through entities). The
Operating Partnership has not issued any OP Units required to be registered
under the Securities Act. Thus, the Operating Partnership presently qualifies
for the safe harbors provided in the PTP Regulations. If the Operating
Partnership were to have more than 100 partners (including, in certain
circumstances, persons owning interests through flow-through entities), it
nevertheless would be treated as a partnership for federal income tax purposes
(rather than an association taxable as a corporation) if at least 90% of its
gross income in each taxable year (commencing with the
45
year in which it is treated as a publicly traded partnership) consists of
"qualifying income" with the meaning of Section 7704(c)(2) of the Tax Code
(including interest, dividends, "real property rents" and gains from the
disposition of real property (the "90% Passive-Type Income Exception"). Because
of the substantial ownership of the Operating Partnership by the Lessees (or
their affiliates), the Operating Partnership currently would not be eligible for
the 90% Passive-Type Income Exception. Thus, if the Operating Partnership were
to have more than 100 partners (including, in certain circumstances, persons
owning interests through flow-through entities), the Company would be required
to place appropriate restrictions on the ability of the Limited Partners to
exercise their Redemption Rights as and if deemed necessary to ensure that the
Operating Partnership does not constitute a publicly traded partnership.
However, there is no assurance that the Operating Partnership will at all times
in the future be able to avoid treatment as a publicly traded partnership. The
opinion of O'Melveny & Myers LLP as to the classification of the Partnership is
based on an assumption that the Operating Partnership will continue to fall
within a safe harbor from publicly traded partnership status.
If for any reason the Operating Partnership were taxable as a
corporation, rather than as a partnership, for federal income tax purposes, the
Company would not be able to satisfy the income and asset requirements for REIT
status. See "Federal Income Tax Considerations--Requirements for
Qualification--Income Tests" and "--Requirements for Qualification--Asset
Tests." In addition, any change in the Operating Partnership's status for tax
purposes might be treated as a taxable event, in which case the Company might
incur a tax liability without any related cash distribution. See "Federal Income
Tax Considerations--Requirements for Qualification--Distribution Requirements."
Further, items of income and deduction of the Operating Partnership would not
pass through to its partners, and its partners would be treated as stockholders
for tax purposes. Consequently, the Operating Partnership would be required to
pay income tax at corporate tax rates on its net income, and distributions to
its partners would constitute dividends that would not be deductible in
computing the Operating Partnership's taxable income.
The following discussion assumes that the Operating Partnership will be
treated as a partnership for federal income tax purposes.
PARTNERSHIP ALLOCATIONS.
Although a partnership agreement will generally determine the
allocation of income and losses among partners, such allocations will be
disregarded for tax purposes if they do not comply with the provisions of
Section 704(b) of the Tax Code and the Treasury Regulations promulgated
thereunder. Generally, Section 704(b) and the Treasury Regulations promulgated
thereunder require that partnership allocations respect the economic arrangement
of the partners.
If an allocation is not recognized for federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to such item. The Operating Partnership's
allocations of taxable income and loss are intended to comply with the
requirements of Section 704(b) of the Tax Code and the Treasury Regulations
promulgated thereunder.
TAX ALLOCATIONS WITH RESPECT TO THE GOLF COURSES.
Pursuant to Section 704(c) of the Tax Code, income, gain, loss and
deduction attributable to appreciated or depreciated property (such as the golf
courses) that is contributed to a partnership in exchange for an interest in the
partnership must be allocated in a manner such that the contributing partner is
charged with, or benefits from, respectively, the unrealized gain or unrealized
loss associated
46
with the property at the time of the contribution. The amount of such unrealized
gain or unrealized loss is generally equal to the difference between the fair
market value of contributed property at the time of contribution and the
adjusted tax basis of such property at the time of contribution (a "Book-Tax
Difference"). Such allocations are solely for federal income tax purposes and do
not affect the book capital accounts or other economic or legal arrangements
among the partners. The Operating Partnership was formed by way of contributions
of appreciated property (including the golf courses). Consequently, the
Partnership Agreement requires such allocations to be made in a manner
consistent with Section 704(c) of the Tax Code.
In general, the Prior Owners will be allocated depreciation deductions
for tax purposes which are lower than such deductions would be if determined on
a pro rata basis. In addition, in the event of the disposition of any of the
contributed assets (including the golf courses) which have a Book-Tax
Difference, all income attributable to such Book-Tax Difference will generally
be allocated to the Prior Owners and the Company will generally be allocated
only its share of capital gains attributable to appreciation, if any, occurring
after the closing of the Offering. This will tend to eliminate the Book-Tax
Difference over the life of the Operating Partnership. However, the special
allocation rules of Section 704(c) do not always entirely eliminate the Book-Tax
Difference on an annual basis or with respect to a specific taxable transaction
such as a sale. Thus, the carryover basis of the contributed assets in the hands
the Operating Partnership will cause the Company to be allocated lower
depreciation and other deductions, and possibly an amount of taxable income in
the event of a sale of such contributed assets in excess of the economic or book
income allocated to it as a result of such sale. This may cause the Company to
recognize taxable income in excess of cash proceeds, which might adversely
affect the Company's ability to comply with the REIT distribution requirements.
See "--Taxation of the Company--Annual Distribution Requirements." The foregoing
principles also apply in determining the earnings and profits of the Company for
purposes of determining the portion of distributions taxable as dividend income.
The application of these rules over time may result in a higher portion of
distributions being taxed as dividends than would have occurred had the Company
purchased the contributed assets at their agreed values.
The Treasury Regulations under Section 704(c) of the Tax Code allow
partnerships to use any reasonable method of accounting for Book-Tax Differences
so that the contributing partner receives the tax benefits and burdens of any
built-in gain or loss associated with the contributed property. The Operating
Partnership has generally determined to use the "traditional method" (which is
specifically approved in the Treasury Regulations) for accounting for Book-Tax
Differences with respect to the properties contributed to it.
The Operating Partnership may elect alternative methods of accounting
for Book-Tax Differences with respect to any properties contributed to it in the
future.
BASIS IN OPERATING PARTNERSHIP INTEREST.
The Company's adjusted tax basis in its interest in the Operating
Partnership generally (i) will be equal to the amount of cash and the basis of
any other property contributed to the Operating Partnership by the Company, (ii)
will be increased by (a) its allocable share of the Operating Partnership's
income and (b) its allocable share of indebtedness of the Operating Partnership
and (iii) will be reduced, but not below zero, by the Company's allocable share
of (a) losses suffered by the Operating Partnership, (b) the amount of cash
distributed to the Company and (c) by constructive distributions resulting from
a reduction in the Company's share of indebtedness of the Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss exceeds the adjusted tax basis of the Company's partnership
interest in the Operating Partnership, the recognition
47
of such excess loss will be deferred until such time and to the extent that the
Company has adjusted tax basis in its interest in the Operating Partnership. To
the extent that the Operating Partnership's distributions, or any decrease in
the Company's share of the indebtedness of the Operating Partnership (such
decreases being considered a cash distribution to the partners), exceeds the
Company's adjusted tax basis, such excess distributions (including such
constructive distributions) constitute taxable income to the Company. Such
taxable income will normally be characterized as a capital gain, and if the
Company's interest in the Operating Partnership has been held for longer than
the long-term capital gain holding period (currently one year), the
distributions and constructive distributions will constitute long-term capital
gain. Under current law, capital gains and ordinary income of corporations are
generally taxed at the same marginal rates.
SALE OF THE GOLF COURSES.
The Company's share of any gain realized by the Operating Partnership
on the sale of any property held by the Operating Partnership as inventory or
other property held primarily for sale to customers in the ordinary course of
the Operating Partnership's trade or business will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. See
"--Requirements for Qualification--Income Tests." Such prohibited transaction
income may also have an adverse effect upon the Company's ability to satisfy the
income tests for qualification as a REIT. See "--Requirements for
Qualification--Income Tests." Under existing law, whether property is held as
inventory or primarily for sale to customers in the ordinary course of a
partnership's trade or business is a question of fact that depends on all the
facts and circumstances with respect to the particular transaction. The
Operating Partnership intends to hold the golf courses for investment with a
view to long-term appreciation, to engage in the business of acquiring,
developing, owning, and operating the golf courses (and other golf courses) and
to make such occasional sales of the golf courses, including peripheral land, as
are consistent with the Operating Partnership's investment objectives.
REDEMPTION OF PREFERRED STOCK
A cash redemption of shares of the preferred stock paid to taxable
domestic Stockholders will be treated under Section 302 of the Tax Code as a
distribution taxable as a dividend (to the extent of the Company's current and
accumulated earnings and profits) at ordinary income rates unless the redemption
satisfies one of the tests set forth in Section 302(b) of the Tax Code and is
therefore treated as a sale or exchange of the redeemed shares. The cash
redemption will be treated as a sale or exchange if it (i) is "substantially
disproportionate" with respect to the holder, (ii) results in a "complete
termination" of the holder's stock interest in the Company, (iii) is in partial
liquidation of the Company and in redemption of stock of a non-corporate
shareholder, or (iv) is not essentially equivalent to a "dividend" with respect
to the holder, all within the meaning of Section 302(b) of the Tax Code. In
determining whether any of these tests have been met, shares of capital stock
(including Common Stock and other equity interests in the Company) considered to
be owned by the holder by reason of certain constructive ownership rules set
forth in the Tax Code, as well as shares of capital stock actually owned by the
holder, must generally be taken into account. Because the determination as to
whether any of the alternative tests of Section 302(b) of the Tax Code will be
satisfied with respect to any particular holder of the preferred stock depends
upon the facts and circumstances at the time that the determination must be
made, prospective holders of the Series A preferred stock are advised to consult
their own tax advisors to determine such tax treatment at the time of the
redemption.
If a cash redemption of shares of the preferred stock is not treated as
a distribution taxable as a dividend to a particular holder, it will be treated
as to that holder as a taxable sale or exchange. As a result, such holder will
recognize gain or loss for federal income tax purposes in an amount equal to the
difference between (i) the amount of cash and the fair market value of any
property received (less any
48
portion thereof attributable to accumulated and declared but unpaid dividends,
which will be taxable as a dividend to the extent of the Company's current and
accumulated earnings and profits), and (ii) the holder's adjusted basis in the
shares of the preferred stock for tax purposes. Such gain or loss will be
capital gain or loss if the shares of preferred stock have been held as a
capital asset, and will be long-term gain or loss if such shares have been held
for more than one year.
If a cash redemption of shares of the preferred stock is treated as a
distribution taxable as a dividend, the amount of the distribution will be
measured by the amount of cash and the fair market value of any property
received by the holder. The holder's adjusted basis in the redeemed shares of
Series A preferred stock for tax purposes will be transferred to the holder's
remaining shares of capital stock in the Company, if any.
CONVERSION OF PREFERRED STOCK INTO COMMON STOCK
In general, no gain or loss will be recognized for federal income tax
purposes upon conversion of the preferred stock solely into shares of Common
Stock. The basis that a holder will have for tax purposes in the shares of
Common Stock received upon conversion will be equal to the adjusted basis for
the holder in the shares of preferred stock so converted, and, provided that the
shares of preferred stock were held as a capital asset, the holding period for
the shares of Common Stock received would include the holding period for the
shares of preferred stock converted. A holder will, however, generally recognize
gain or loss on the receipt of cash in lieu of fractional shares of Common Stock
in an amount equal to the difference between the amount of cash received and the
holder's adjusted basis for tax purposes in the preferred stock for which cash
was received. Furthermore, under certain circumstances, a holder of shares of
preferred stock will recognize dividend income to the extent of proceeds
received with respect to dividends in arrears on the shares at the time of
conversion into Common Stock.
ADJUSTMENTS TO CONVERSION PRICE
Adjustments in the conversion price (or failure to make such
adjustments) pursuant to the antidilution provisions of a series of preferred
stock or otherwise may result in constructive distributions to the holders of
such series of preferred stock that could, under certain circumstances, be
taxable to them as dividends pursuant to Section 305 of the Tax Code. If such a
constructive distribution were to occur, a holder of preferred stock could be
required to recognize ordinary income for tax purposes without receiving a
corresponding distribution of cash.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Tax Code impose certain restrictions on (a) employee benefit
plans (as defined in section 3(3) of ERISA) and the plans described in section
4975(e)(1) of the Tax Code (collectively, "Plans") such as pension plans,
profit-sharing plans, employee benefit plans, retirement plans, individual
retirement accounts and Keogh plans, (b) any entities whose underlying assets
include Plan assets by reason of a Plan's investment in such entities ("Plan
Asset Entities") and (c) persons who have certain specified relationships to
such Plans and Plan Asset Entities ("Parties-in-Interest" under ERISA and
"Disqualified Persons" under the Tax Code). Moreover, based on the reasoning of
the United States Supreme Court in JOHN HANCOCK LIFE INS. CO. V. HARRIS TRUST
AND SAV. BANK (which is reported at 114 S.Ct. 517 (1993)), an insurance
company's general account may be deemed to include assets of the Plans investing
in the general account (E.G., through the purchase of an annuity contract), and
the insurance company might be treated as a Party-in-Interest or Disqualified
Person with respect to a Plan by virtue of such investment. ERISA also imposes
49
certain duties on persons who are fiduciaries of Plans subject to ERISA and
prohibits certain transactions between a Plan and Parties-in-Interest or
Disqualified Persons with respect to such Plans.
ACQUIRING AND HOLDING OUR SECURITIES
Any Plan fiduciary that proposes to cause a Plan to purchase our
securities should consult with its counsel with respect to the potential
applicability of ERISA and the Tax Code to such investment and determine on its
own whether any exceptions or exemptions are applicable and whether all
conditions of any such exceptions or exemptions have been satisfied. Moreover,
each Plan fiduciary should determine whether, under the general fiduciary
standards of investment prudence and diversification, an investment in our
securities is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
Any placement agent or underwriter engaged by the selling stockholders
or certain affiliates thereof may be "Parties-in-Interest" or "Disqualified
Persons" with respect to a number of Plans. Accordingly, investment in our
securities by such a Plan could be deemed to constitute a transaction prohibited
under Title I of ERISA or Section 4975 of the Tax Code (E.G., the direct or
indirect transfer to or use by a Party-in-Interest or Disqualified Person of
assets of a Plan). Such transactions may, however, be subject to one or more
statutory or administrative exemptions such as Prohibited Transaction Class
Exemption ("PTCE") 90-1, which exempts certain transactions involving insurance
company pooled separate accounts; PTCE 91-38, which exempts certain transactions
involving bank collective investment funds; PTCE 84-14, which exempts certain
transactions effected on behalf of a Plan by a "qualified professional asset
manager"; PTCE 95-60, which exempts certain transactions involving insurance
company general accounts; PTCE 96-23, which exempts certain transactions
effected on behalf of a Plan by an "in-house asset manager"; or another
available exemption. Such exemptions may not, however, apply to all of the
transactions that could be deemed prohibited transactions in connection with a
Plan's investment.
THE TREATMENT OF OUR UNDERLYING ASSETS UNDER ERISA
The Department of Labor ("DOL") has issued a regulation (which has been
compiled at 29 C.F.R. ss. 2510.3-101) describing what constitute assets of a
plan with respect to a Plan's investment in another entity (the "Plan Assets
Regulation"). This regulation provides that, as a general rule, the underlying
assets and properties of corporations, partnerships, trusts and certain other
entities in which a Plan purchases an "equity interest" will be deemed for
certain provisions of ERISA and Section 4975 of the Tax Code to be assets of the
investing Plan unless certain exceptions apply. The Plan Assets Regulation
defines an "equity interest" as any interest in an entity other than an
instrument that is treated as indebtedness under applicable local law and which
has no substantial equity features. The Series A preferred shares and the Common
Shares offered hereby should be treated as "equity interests" for purposes of
the Plan Assets Regulation.
One exception under the Plan Assets Regulation provides that when a
Plan invests in an "operating company" the operating company's underlying assets
will not be deemed to be Plan assets. "Operating company" is defined by the Plan
Assets Regulation to mean a company that is primarily engaged in the production
or sale of a product or service other than the investment of capital, but it
also is defined to include a company that qualifies as a "venture capital
operating company" or a "real estate operating company." To be a "venture
capital operating company," an entity must have, on the date of its first
long-term investment and on certain annual testing dates thereafter, at least
50% of its assets (other than short term investments pending long-term
commitment or distribution to investors), valued at cost, invested in "venture
capital investments." A venture capital investment is an investment in an
operating
50
company (other than a venture capital operating company) with respect to which
the entity has or obtains management rights. To be a "real estate operating
company" an entity must have, on the date of its first long-term investment and
on certain annual testing dates thereafter, at least 50% of its assets (other
than short-term investments pending long-term commitment or distribution to
investors), valued at cost, invested in real estate that is managed or developed
and with respect to which such entity has the right to substantially participate
in such management or development activities. To be a "venture capital operating
company" or "real estate operating company," the entity must also, in the
ordinary course of business, actually exercise the applicable rights or engage
in the management or development activities.
Another exception under the Plan Assets Regulation provides that an
investing Plan's assets will not include any of the underlying assets of an
entity if the class of "equity" interests in question is a class of
"publicly-offered securities." Publicly-offered securities are securities that
are (i) widely held (I.E., held by 100 or more investors who are independent of
the issuer and of each other), (ii) freely transferable, and (iii) part of a
class of securities registered under Section 12(b) or 12(g) of the Exchange Act.
Although we believe that our Common Stock qualifies as a publicly-offered
security, our Series A preferred stock does not so qualify and consequently,
ownership of our Series A preferred stock by a Plan may, under certain
circumstances, cause our underlying assets to be deemed to be Plan assets,
unless another exemption is available.
Our board of directors intends to take reasonable steps as may be
necessary to qualify for one or more of the exceptions available under the Plan
Assets Regulation so that our assets are not treated as assets of any investing
Plan. Specifically, we believe that Golf Trust of America, Inc. qualifies, and
we intend to cause it to continue to qualify, as a real estate operating company
and/or as a venture capital operating company. Due to the nature of its specific
investments and its operating structure, no assurances can be made, however,
that Golf Trust of America, Inc. will qualify as either a venture capital
operating company or real estate operating company. Moreover, in order to
qualify under one of these rules, we may be precluded from making certain
investments that might otherwise be suitable or we may not be able to dispose of
certain assets at the time we would otherwise desire to do so.
If our assets were determined to be Plan assets, in whole or in part,
there could be a number of adverse consequences under ERISA and the Tax Code.
For example, if we were to engage in a transaction with a Party-in-Interest with
respect to any plan investing in our Common Stock or preferred stock, such as
the purchase, sale or leasing of real property with a Plan sponsor (or an
affiliate), the transaction would be prohibited under ERISA and the Tax Code,
and we and such Plan sponsor could be subject to sanctions.
The sale of the Series A preferred stock and the Common Stock is in no
respect a representation by us or any other person that such an investment meets
all relevant legal requirements with respect to investments by Plans generally
or that such an investment is appropriate for any particular Plans or that an
exemption from the Plan Assets Regulation is or will be applicable.
REGISTRATION RIGHTS OF THE SELLING STOCKHOLDERS
On April 2, 1999, the Company sold 800,000 shares of Series A preferred
stock to a single purchaser in a registered offering. Because of the extent of
such purchaser's holdings, such purchaser may be deemed to be an affiliate of
the Company under Securities Act Rule 144 and thus subject to the resale
restrictions imposed by Rule 144 on affiliates. In addition, a large sale by
such entity may be deemed a distribution requiring registration under the
Securities Act. To address these concerns, the Company entered into a
Registration Rights Agreement with such original purchaser which granted certain
registration rights to the purchaser and to any subsequent holders of such
purchasers' shares who
51
acquire the shares as Registrable Securities (collectively, "Holders").
"Registrable Securities" is defined to mean the Series A preferred stock and the
underlying common stock, PROVIDED, HOWEVER, that any such securities shall cease
to be Registrable Securities when (i) a registration statement covering such
securities has been declared effective and such securities have been disposed of
by the holder thereof pursuant to such effective registration statement or any
other effective registration statement, (ii) such securities are transferred by
the holder thereof to any person other than a Holder pursuant to Rule 144 (or
any successor rule or similar provision then in effect, but not Rule 144A) under
the Securities Act, including a sale pursuant to the provisions of Rule 144(k),
or (iii) such securities shall have ceased to be outstanding. In the
Registration Rights Agreement, the Company agreed to file a "shelf" registration
statement with the Securities and Exchange Commission covering resales from time
to time by the Holders of their Series A preferred shares and any underlying
common shares into which their Series A preferred shares may have been
converted. This Prospectus is a part of such registration statement.
The Company agreed to keep such registration effective until it is no
longer necessary for the unrestricted resale of the Holders' shares. In
addition, if at any time the shelf registration is not effective, the Holders
will have the right to cause the Company to prepare and file a registration
statement covering proposed resales. Finally, such Holders will have the right
to include their Registrable Securities in any new registration proposed by the
Company, subject to the prior similar rights of the Operating Partnership's
limited partners. This summary of the Holders' registration rights is qualified
in its entirety by the provisions of the Registration Rights Agreement, a copy
of which is available from the Company upon request.
SELLING STOCKHOLDERS
On the date of this Prospectus, AEW Targeted Securities Fund, L.P.
("AEW") holds all 800,000 shares of Series A preferred stock, making it the sole
owner of the securities covered by this Prospectus. In this Prospectus, the term
"Selling Stockholder" includes AEW and also includes donees and pledgees selling
shares covered by this Prospectus that were received, directly or indirectly,
from AEW after the date of this Prospectus. The term "Selling Stockholder" also
includes any direct or indirect transferees of the shares covered by this
Prospectus if, but only if, such transferee is an "affiliate" of the Company or
acquires the shares as "restricted stock," as such terms are defined in Rule 144
under the Securities Act. On the date of this Prospectus, none of the shares of
Series A preferred stock have been converted into Common Stock and thus none of
the underlying shares of Common Stock to which this Prospectus also relates have
been issued. Based on the current conversion price, see "Description of Our
Capital Stock--Series A preferred stock," the 800,000 shares of Series A
preferred stock held by AEW are convertible into 761,904 shares of Common Stock.
According to their Schedule 13G filing with the SEC dated April 16, 1999,
affiliates of AEW hold an additional 199,800 shares of our Common Stock.
Assuming that AEW sells all of the securities covered by this Prospectus in this
offering and that AEW and its affiliates do not otherwise alter their April 16,
1999 position in our shares, following the offering AEW will own none of our
Series A preferred stock or Common Stock and affiliates of AEW will own none of
our Series A preferred stock and approximately 2.36% of our Common Stock.
AEW Targeted Securities Fund, L.P. does not hold any position, office
or other material relationship with Golf Trust or any predecessor or affiliate
of Golf Trust except that, in connection with its investment in Golf Trust, AEW
Targeted Securities Fund, L.P. was given the right to give non-binding advice to
Golf Trust's officers and directors and to receive certain non-public financial
reports and advance notice of certain events. AEW Targeted Securities Fund, L.P.
has represented to the Company that it is aware that the federal securities laws
may limit its ability to sell shares if it possesses material, non-public
information about the Company.
52
PLAN OF DISTRIBUTION
The Company is registering shares of Series A preferred stock and the
underlying shares of Common Stock (collectively, the "Securities") on behalf of
the Selling Stockholders. All costs, expenses and fees in connection with the
registration of the Securities offered hereby will be borne by the Company.
Underwriting discounts, brokerage commissions and similar selling expenses, if
any, attributable to the sale of the Securities will be borne by the Selling
Stockholders.
Sales of Securities may be effected by Selling Stockholders from time
to time in one or more types of transactions (which may include block
transactions) on the American Stock Exchange, in the over-the-counter market, in
negotiated transactions, through put or call options transactions relating to
the Securities, through short sales of Securities, or a combination of such
methods of sale, at market prices prevailing at the time of sale, at prices
related to such market prices, or at negotiated prices. Such transactions may or
may not involve brokers or dealers.
The Selling Stockholders may effect such transactions by selling
Securities directly to purchasers, to or through broker-dealers, which may act
as agents or principals, or to underwriters which will acquire shares for their
own account and resell them in one or more transactions. Such broker-dealers or
underwriters may receive compensation in the form of discounts, concessions, or
commissions from the Selling Stockholders and/or the purchasers of Securities
for whom such broker-dealers may act as agents or to whom they sell as
principal, or both (which compensation as to a particular broker-dealer might be
in excess of customary commissions) and such discounts, concessions, or
commissions may be allowed ore reallowed or paid to dealers.
The Selling Stockholders and any broker-dealers that act in connection
with the sale of the Securities might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, and any commissions received by
such broker-dealers and any profit on the resale of the Securities sold by them
while acting as principals might be deemed to be underwriting discounts or
commissions under the Securities Act of 1933, as amended. The Company has agreed
to indemnify each Selling Stockholder against certain liabilities, including
liabilities arising under the Securities Act. The Selling Stockholders may agree
to indemnify any agent, dealer or broker-dealer that participates in
transactions involving sales of the Securities against certain liabilities,
including liabilities arising under the Securities Act.
Because Selling Stockholders may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act, the Selling Stockholders
will be subject to the prospectus delivery requirements of the Securities Act,
which may include delivery through the facilities of the American Stock Exchange
pursuant to Rule 153 under the Securities Act. The Company has informed the
Selling Stockholders that the anti-manipulative provisions of Regulation M
promulgated under the Securities Exchange Act of 1934, as amended, may apply to
their sales in the market.
Selling Stockholders also may resell all or a portion of their
Securities in open market transactions in reliance upon Rule 144 under the
Securities Act, provided they meet the criteria and conform to the requirements
of such Rule.
In addition, upon Golf Trust being notified by a Selling Stockholder
that a donee or pledgee intends to sell more than 500 shares of Common Stock or
Series A preferred stock, a supplement to this Prospectus will be filed.
53
EXPERTS
The annual financial statements incorporated by reference in this
Prospectus have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent and for the periods set forth in their report
incorporated herein by reference, and are incorporated herein in reliance upon
such report given upon the authority of said firm as experts in auditing and
accounting.
LEGAL MATTERS
The validity of the Securities registered hereby will be passed upon
for the Company by O'Melveny & Myers LLP, San Francisco, California.
INCORPORATION OF INFORMATION BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with it. This means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus and the information we file later with
the SEC will automatically update and supersede this information.
The following documents, which have been filed with the Commission, are
hereby incorporated by reference:
1. Annual Report on Form 10-K, as amended, of the Company for the
fiscal year ended December 31, 1999 (including portions of the
Company's definitive Proxy Statement incorporated therein by
reference);
2. Quarterly Report on Form 10-Q of the Company for the fiscal
quarter ended March 31, 2000;
3. The description of the Common Stock of the Company included in
the Company's Registration Statement on Form 8-A, filed with
the Commission on February 7, 1997, including the information
incorporated therein by reference and including any amendment
or reports filed for the purpose of updating such description;
4. The description of the Series A preferred stock of the Company
included in the Company's Registration Statement on Form 8-A,
filed with the Commission on April 28, 1999, including the
information incorporated therein by reference and including
any amendment or reports filed for the purpose of updating
such description; and
5. The description of the preferred stock purchase rights under
the Company's Shareholder Rights Plan included in the
Registration Statement on Form 8-A, filed by the Company with
the Commission on August 30, 1999, including the information
incorporated therein by reference and including any amendment
or reports filed for the purpose of updating such description.
In addition, all reports and other documents that we file with the
Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act after the
date of this Prospectus and prior to the termination of the offering shall be
deemed to be incorporated by reference in this Prospectus from the date of the
filing of such documents (except that each time we file a new annual report on
Form 10-K, any annual, quarterly or current report filed prior to such filing
shall no longer be incorporated this Prospectus). Any statement contained in a
document incorporated by reference shall be deemed to be modified or superseded
for
54
purposes of this Prospectus to the extent that a statement contained in a later
document modifies or supersedes such statement. Any statements so modified or
superseded shall not be deemed to constitute a part of this Prospectus, except
as so modified or superseded.
We will provide without charge to each person to whom this Prospectus
is delivered, upon written or oral request of such person, a copy of any or all
of the documents referred to above which have been or may be incorporated by
reference in this Prospectus (other than the exhibits to such documents).
Requests for such documents should be directed to Golf Trust of America, Inc.,
14 North Adger's Wharf, Charleston, South Carolina 29401, Attention: Investor
Relations (telephone: (843) 723-4653).
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance with
the Exchange Act we file annual and quarterly reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). Our reports, proxy statements and most other information that we
file with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at regional offices of the Commission
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. You may obtain information on the operation of the
Commission's public reference room by calling 1-800-SEC-0330. Copies of our
filed materials can be obtained by mail from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
The Commission also maintains an Internet site that contains our reports, proxy
statements and other information as well as such documents from other companies
that file electronically with the Commission and the address is
http://www.sec.gov. We maintain an Internet site at http://www.golftrust.com.
Neither the information contained in our website nor the information contained
in the websites linked to our website is a part of this Prospectus.
We have filed with the Commission a Registration Statement on Form S-3
under the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder, with respect to the Securities. This Prospectus, which
is part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement and the exhibits thereto. For further
information concerning Golf Trust and the Securities, reference is made to the
Registration Statement and the exhibits and schedules filed therewith, which may
be obtained as described above.
No dealer, sales representative or any other person has been authorized
to give any information or to make any representations in connection with this
Offering other than those contained in this Prospectus or any accompanying
Prospectus Supplement, and, if given or made, such information or representation
must not be relied upon as having been authorized by the Company or any
underwriter. This Prospectus and any accompanying Prospectus Supplement do not
constitute an offer to sell, or a solicitation of an offer to buy, any
securities other than the registered securities to which they relate or an offer
to, or solicitation of, any person in any jurisdiction where such offer or
solicitation would be unlawful. Neither the delivery of this Prospectus and any
accompanying Prospectus Supplement nor any sale made hereunder or thereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or thereof or that
the information contained herein or therein is correct as of any time subsequent
to the date hereof or thereof.
55
================================================================================
YOU SHOULD RELY ONLY ON THE INFORMATION INCORPORATED BY REFERENCE OR CONTAINED
IN THIS PROSPECTUS OR ANY SUPPLEMENT. WE HAVE NOT AUTHORIZED ANYONE ELSE TO
PROVIDE YOU WITH DIFFERENT OR ADDITIONAL INFORMATION. WE ARE NOT MAKING AN OFFER
OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD
NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS OR ANY SUPPLEMENT IS ACCURATE
AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THOSE DOCUMENTS.
---------------------
TABLE OF CONTENTS
Note Regarding Forward Looking Statements............ 2
Risk Factors......................................... 3
The Company.......................................... 19
Our Business Strategies and Objectives............... 22
Ratios of Earnings to Combined Fixed Charges
and preferred stock Dividends................. 25
Use of Proceeds...................................... 25
Description of Our Capital Stock..................... 25
Federal Income Tax Considerations.................... 33
ERISA Considerations................................. 49
Registration Rights of the Selling Stockholders...... 51
Selling Stockholders................................. 52
Plan of Distribution................................. 53
Experts.............................................. 54
Legal Matters........................................ 54
Incorporation of Certain Information
by Reference.................................. 54
Where You Can Find More Information.................. 55
800,000 SHARES
9.25% SERIES A CUMULATIVE
CONVERTIBLE PREFERRED STOCK
[GOLF TRUST LOGO]
761,904 SHARES
COMMON STOCK
----------
PROSPECTUS
----------
JUNE 19, 2000
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, payable by the
Company in connection with the registration of the securities being registered.
All amounts are estimates except the SEC registration fee and the American Stock
Exchange Fee.
DESCRIPTION AMOUNT
SEC Registration Fee.................................... $ 5,280
American Stock Exchange Fee............................. 17,500
Printing and Engraving.................................. 5,000
Legal Fees and Expenses................................. 30,000
Accountants' Fees and Expenses.......................... 10,000
Miscellaneous........................................... 5,000
-------
TOTAL.......................................... $73,060
=======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 2-418 of the Maryland General Corporation Law (the "MGCL")
empowers the Company to indemnify, subject to the standards set forth therein,
any person who is a party in any action in connection with any action, suit or
proceeding brought or threatened by reason of the fact that the person was a
director, officer, employee or agent of such company, or is or was serving as
such with respect to another entity at the request of such company. The MGCL
also provides that the Company may purchase insurance on behalf of any such
director, officer, employee or agent.
The Company's Charter provides for indemnification of the officers and
directors of the Company substantially identical in scope to that permitted
under Section 2-418 of the MGCL. The Bylaws of the Company also provide that the
expenses of officers and directors incurred in defending any action, suit or
proceeding, whether civil, criminal, administrative or investigative, must be
paid by the Company as they are incurred and in advance of the final disposition
of the action, suit or proceeding, upon receipt of an undertaking by or on
behalf of the director or officer to repay all amounts so advanced if it is
ultimately determined by a court of competent jurisdiction that the officer or
director is not entitled to be indemnified by the Company.
The Company has agreed to indemnify its directors and officers to the
fullest extent permitted by applicable provisions of the MGCL, provided that any
settlement of a third party action against a director or officer is approved by
the Company, and subject to limitations for actions initiated by the director or
officer, penalties paid by insurance, and violations of Section 16(b) of the
Securities Exchange Act of 1934, as amended, and similar laws.
The Company's Charter limits the liability of the Company's directors
and officers for money damages to the Company and its Stockholders to the
fullest extent permitted from time to time by Maryland law. Maryland law
presently permits the liability of directors and officers to a corporation or
its Stockholders for money damages to be limited, except (i) to the extent that
it is proved that the director or officer actually received an improper benefit
or profit or (ii) if a judgment or other final adjudication is entered in a
proceeding based on a finding that the director's or officer's action, or
II-1
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. This provision
does not limit the ability of the Company or its Stockholders to obtain other
relief, such as an injunction or rescission.
Insofar as indemnification for liabilities arising out of the
Securities Act of 1933 may be permitted to directors officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the act an will be governed by the final adjudication of such
issue.
ITEM 16. EXHIBITS.
The following exhibits are part of this Registration Statement on Form
S-3 and are numbered in accordance with Item 601 of Regulation S-K.
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------
4.1 Articles of Amendment and Restatement of the Company, as filed
with the State Department of Assessments and Taxation of
Maryland on January 31, 1997, (previously filed as Exhibit
3.1A to the Company's Registration Statement on Form S-11
(Commission File No. 333-15965) Amendment No. 2 (filed January
30, 1997) and incorporated herein by reference).
4.2 Articles of Amendment of the Company, as filed with the State
Department of Assessments and Taxation of Maryland on June 9,
1998 (previously filed as Exhibit 3.2B to the Company's
Quarterly Report on Form 10-Q (Commission File No. 000-22091),
filed August 14, 1998, and incorporated herein by reference).
4.3 Articles Supplementary of the Company relating to the Series A
preferred stock, as filed with the State Department of
Assessments and Taxation of the State of Maryland on April 2,
1999 (previously filed as Exhibit 3.1 to the Company's Current
Report on Form 8-K, filed April 13, 1999, and incorporated
herein by reference).
4.4 Articles Supplementary of the Company relating to the Series B
Junior Participating Preferred Stock, as filed with the State
Department of Assessments and Taxation of the State of
Maryland on August 27, 1999 (previously filed as Exhibit 3.1
to the Company's Current Report on Form 8-K, filed August 30,
1999, and incorporated herein by reference).
4.5 Form of Share Certificate for the Common Stock (previously
filed as Exhibit 4.3 to the Company's Current Report on Form
8-K, filed August 30, 1999, and incorporated herein by
reference).
II-2
4.6 Form of Share Certificate for the Series A preferred stock
(previously filed as Exhibit 3.2 to the Company's Current
Report on Form 8-K, filed April 13, 1999, and incorporated
herein by reference).
4.7 Bylaws of the Company, as amended by our board of directors on
February 16, 1998 and as currently in effect (previously filed
as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q
(Commission File No. 000-22091), filed May 15, 1998, and
incorporated herein by reference).
4.8 Shareholder Rights Agreement, by and between the Company and
ChaseMellon Shareholder Services, L.L.C., as rights agent,
dated August 24, 1999 (previously filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K, filed August 30, 1999,
and incorporated herein by reference).
5.1* Opinion of O'Melveny & Myers LLP as to legality of the shares
being registered.
8.1* Opinion of O'Melveny & Myers LLP as to certain federal income
tax matters.
12.1 Statements regarding computation of ratios (previously filed
as Exhibit 12.1 to the Company's Annual Report on Form 10-K,
filed March 30, 2000, and incorporated by this reference).
23.1* Consent of BDO Seidman LLP.
23.2 Consent of O'Melveny & Myers LLP (included within the opinions
filed as Exhibits 5.1 and 8.1).
24.1 Powers of Attorney (included under the caption "Signatures")
- ----------------------
* Included in this filing.
ITEM 17. UNDERTAKINGS
(a) Golf Trust of America, Inc. hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof which individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent
II-3
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply insofar
as the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) Golf Trust of America, Inc. hereby undertakes that,
for purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offering therein, and the offering of such securities
at that time shall be deemed to be the initial BONA FIDE offering thereof.
(c) Golf Trust of America, Inc. hereby undertakes that,
for purposes of determining any liability under the Securities Act of 1933, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance under Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b) (1) or (4), or 497
(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(d) Golf Trust of America, Inc. hereby undertakes that,
for the purpose of determining any liability under the Securities Act of 1933,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registrations statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions described under
Item 15 of this registration statement, or otherwise (other than insurance), the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in such
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the Securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction
II-4
the question whether such indemnification by it is against public policy as
expressed in such Act and will be governed by the final adjudication of such
issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Charleston, State of South Carolina, on June 15,
2000.
GOLF TRUST OF AMERICA, INC.
By: /s/ W. Bradley Blair, II
-------------------------------------
W. Bradley Blair, II
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
Each of the undersigned officers and directors of Golf Trust of
America, Inc. (the "Company"), hereby constitutes and appoint W. Bradley Blair,
II and Scott D. Peters, and each of them, his true and lawful attorneys-in-fact
and agents, each with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to sign the initial
filing of the Company's registration statement on form S-3 any and all
amendments to thereto, including post-effective amendments, 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 connection therewith,
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.
SIGNATURE TITLE DATE
- ------------------------------------------- ---------------------------------------- ----------------------------------------
/s/ W. Bradley Blair, II President, Chief Executive Officer and June 15, 2000
- ------------------------------------------ Chairman of the Board of Directors
W. Bradley Blair, II
/s/ Scott D. Peters Senior Vice President, Chief Financial June 15, 2000
- ------------------------------------------ Officer and Director
Scott D. Peters
/s/ Tracy Clifford Controller June 15, 2000
- ------------------------------------------
Tracy Clifford
/s/ Roy C. Chapman Director June 15, 2000
- ------------------------------------------
Roy C. Chapman
/s/ Raymond V. Jones Director June 15, 2000
- ------------------------------------------
Raymond V. Jones
* Director June 15, 2000
- ------------------------------------------
Fred W. Reams
/s/ Larry D. Young Director June 15, 2000
- ------------------------------------------
Larry D. Young
/s/ Edward L. Wax Director June 15, 2000
- ------------------------------------------
Edward L. Wax
* POWER OF ATTORNEY
By: /s/ W. Bradley Blair, II
-------------------------------
W. Bradley Blair, II
Attorney-in-Fact and Agent
S-1
EXHIBIT INDEX
Pursuant to Item 601(a)(2) of Regulation S-K, this exhibit index
immediately precedes the exhibits.
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------
4.1 Articles of Amendment and Restatement of the Company, as filed
with the State Department of Assessments and Taxation of
Maryland on January 31, 1997, (previously filed as Exhibit
3.1A to the Company's Registration Statement on Form S-11
(Commission File No. 333-15965) Amendment No. 2 (filed January
30, 1997) and incorporated herein by reference).
4.2 Articles of Amendment of the Company, as filed with the State
Department of Assessments and Taxation of Maryland on June 9,
1998 (previously filed as Exhibit 3.2B to the Company's
Quarterly Report on Form 10-Q (Commission File No. 000-22091),
filed August 14, 1998, and incorporated herein by reference).
4.3 Articles Supplementary of the Company relating to the Series A
preferred stock, as filed with the State Department of
Assessments and Taxation of the State of Maryland on April 2,
1999 (previously filed as Exhibit 3.1 to the Company's Current
Report on Form 8-K, filed April 13, 1999, and incorporated
herein by reference).
4.4 Articles Supplementary of the Company relating to the Series B
Junior Participating Preferred Stock, as filed with the State
Department of Assessments and Taxation of the State of
Maryland on August 27, 1999 (previously filed as Exhibit 3.1
to the Company's Current Report on Form 8-K, filed August 30,
1999, and incorporated herein by reference).
4.5 Form of Share Certificate for the Common Stock (previously
filed as Exhibit 4.3 to the Company's Current Report on Form
8-K, filed August 30, 1999, and incorporated herein by
reference).
4.6 Form of Share Certificate for the Series A preferred stock
(previously filed as Exhibit 3.2 to the Company's Current
Report on Form 8-K, filed April 13, 1999, and incorporated
herein by reference).
4.7 Bylaws of the Company, as amended by our board of directors on
February 16, 1998 and as currently in effect (previously filed
as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q
(Commission File No. 000-22091), filed May 15, 1998, and
incorporated herein by reference).
4.8 Shareholder Rights Agreement, by and between the Company and
ChaseMellon Shareholder Services, L.L.C., as rights agent,
dated August 24, 1999 (previously filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K, filed August 30, 1999,
and incorporated herein by reference).
5.1* Opinion of O'Melveny & Myers LLP as to legality of the shares
being registered.
8.1* Opinion of O'Melveny & Myers LLP as to certain federal income
tax matters.
12.1 Statements regarding computation of ratios (previously filed
as Exhibit 12.1 to the Company's Annual Report on Form 10-K,
filed March 30, 2000, and incorporated by this reference).
23.1* Consent of BDO Seidman LLP.
23.2 Consent of O'Melveny & Myers LLP (included within the opinions
filed as Exhibits 5.1 and 8.1).
24.1 Powers of Attorney (included under the caption "Signatures")
- --------------------
* Included in this filing.