UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/x/ Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1999.
/ / Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to ________.
- -------------------------------------------------------------------------------
Commission File Number 000-22091
GOLF TRUST OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
Maryland 33-0724736
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
14 North Adger's Wharf, Charleston, South Carolina 29401
(Address of principal executive offices) (Zip Code)
(843)723-4653
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _.
On August 13, 1999, there were 7,735,855 common shares outstanding of the
registrant's only class of common stock.
GOLF TRUST OF AMERICA, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 1999
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998................. 3
Consolidated Statements of Income for the Three Months Ended June 30, 1999 and 1998.... 4
Consolidated Statements of Income for the Six Months Ended June 30, 1999 and 1998...... 5
Consolidated Statements of Stockholders' Equity for the Year Ended December 31, 1998 6
and the Three Months Ended June 30, 1999...............................................
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998 7
Notes to Consolidated Financial Statements............................................. 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 26
ITEM 2. CHANGES IN SECURITIES 27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 27
ITEM 5. OTHER INFORMATION 27
ITEM 6. EXHIBITS INDEX AND REPORT ON FORM 8-K 28
SIGNATURES 29
GOLF TRUST OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1999 1998
-----------------------------------
(UNAUDITED)
ASSETS
Property and equipment:
Land............................................................... $ 52,799 $ 55,462
Golf course improvements........................................... 179,533 171,348
Buildings.......................................................... 78,284 77,629
Furniture, fixtures, and equipment................................. 50,200 44,756
------------ -------------
Total property and equipment......................................... 360,816 349,195
Less accumulated depreciation...................................... 33,662 25,695
------------ -------------
Property and equipment, net.......................................... 330,681 323,500
------------ -------------
Mortgage notes receivable............................................ 72,850 72,252
Cash and cash equivalents ........................................... 2,500 1,891
Receivable from affiliates (Note 8).................................. 1,060 1,030
Other assets......................................................... 15,925 13,308
------------ -------------
Total assets......................................................... $ 419,489 $ 411,981
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt ................................................................ $ 204,440 $ 210,634
Accounts payable and other liabilities............................... 12,629 15,190
------------ -------------
Total liabilities.................................................... 217,069 225,824
------------ -------------
Commitments
Minority interest.................................................... 74,898 76,510
------------ -------------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, 20,000 -
800,000 shares issued............................................
Common stock, $.01 par value, 90,000,000 shares authorized,
7,730,206 and 7,637,488 shares issued and outstanding,
respectively..................................................... 77 76
Additional paid-in capital....................................... 121,176 120,253
Dividends in excess of accumulated earnings...................... (5,587) (3,958)
Unamortized restricted stock compensation........................ (2,255) (1,533)
Note receivable from stock sale ................................. (3,298) (3,298)
Loans to officers ............................................... (2,591) (1,893)
------------ -------------
Stockholders' equity................................................ 127,522 109,647
------------ -------------
Total liabilities and stockholders' equity.......................... $ 419,489 $ 411,981
============ =============
See accompanying notes to consolidated financial statements
3
GOLF TRUST OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998
--------------------------------------
REVENUES:
Rent from affiliates (Note 6)....................................$ 3,179 $ 3,152
Rent............................................................. 8,245 5,113
Mortgage interest ............................................... 2,296 2,183
-------- --------
Total revenues..................................................... 13,720 10,448
-------- --------
EXPENSES:
Depreciation and amortization ................................... 3,942 2,452
General and administrative....................................... 1,265 1,304
-------- --------
Total expenses..................................................... 5,207 3,756
-------- --------
Operating income................................................... 8,513 6,692
-------- --------
OTHER INCOME (EXPENSE):
Interest income.................................................. 240 91
Interest expense................................................. (3,830) (2,006)
Loss on sale of assets........................................... - (370)
-------- --------
Total other income (expense)....................................... (3,590) (2,285)
-------- --------
Net income before minority interest................................ 4,923 4,407
Income applicable to minority interest............................. 2,006 1,768
-------- --------
Net income.........................................................$ 2,917 $ 2,639
======== ========
Basic earnings per share...........................................$ 0.38 $ 0.35
======== ========
Weighted average number of shares (basic).......................... 7,728 7,632
======== ========
Diluted earnings per share.........................................$ 0.38 $ 0.33
======== ========
Weighted average number of shares (diluted)........................ 7,764 7,928
======== ========
See accompanying notes to consolidated financial statements
4
GOLF TRUST OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED)
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
-----------------------------------
REVENUES:
Rent from affiliates (Note 6)................................. $ 6,359 $ 6,307
Rent.......................................................... 16,095 8,752
Mortgage interest ............................................ 4,591 4,309
-------- --------
Total revenues.................................................. 27,045 19,368
-------- --------
EXPENSES:
Depreciation and amortization ................................ 7,953 4,273
General and administrative.................................... 2,776 2,460
-------- --------
Total expenses.................................................. 10,729 6,733
-------- --------
Operating income................................................ 16,316 12,635
-------- --------
OTHER INCOME (EXPENSE):
Interest income............................................... 373 163
Interest expense.............................................. (7,508) (2,922)
Loss on sale of assets.......................................... (370) -
-------- --------
Total other income (expense).................................... (7,135) (3,129)
-------- --------
Net income before minority interest............................. 9,181 9,506
Income applicable to minority interest.......................... 3,550 3,786
-------- --------
Net income...................................................... $ 5,631 $ 5,720
======== ========
Basic earnings per share........................................ $ 0.73 $ 0.75
======== ========
Weighted average number of shares (basic)....................... 7,705 7,632
======== ========
Diluted earnings per share...................................... $ 0.73 $ 0.73
======== ========
Weighted average number of shares (diluted)..................... 7,745 7,826
======== ========
See accompanying notes to consolidated financial statements
5
GOLF TRUST OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
NOTE
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE TOTAL
--------------- ------------ PAID-IN RETAINED UNEARNED FROM STOCK LOANS TO STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS COMPENSATION SALE OFFICERS EQUITY
--------------- ------------- ---------- -------- ------------ ---------- -------- -----------
BALANCE at January 1, 1998..... - - 7,611 $ 76 $127,488 $ 1,774 $(1,713) $(3,298) - $124,327
Issuance of restricted stock... - - 21 - (607) - 607 - - -
Issuance of shares of option
exercise and employee stock
purchase plans................ - - 5 - 159 - - - - 159
Amortization of restricted
stock compensation ........... - - - - - - 787 - - 787
Loans to officers.............. - - - - - - - - (1,893) (1,893)
Adjustments for minority
interest in operating
partnership................... - - - - (8,001) - - - - (8,001)
Dividends...................... - - - - - (16,338) - - - (16,338)
Net income..................... - - - - - 10,606 - - - 10,606
----------------------------------------------------------------------------------------------
BALANCE at December 31, 1998... - - 7,637 $ 76 $120,253 $(3,958) $(1,533) $(3,298) $(1,893) $109,647
==============================================================================================
Issuance of preferred stock.... 800 $20,000 - - - - - - - 20,000
Costs of preferred stock
issuance...................... - - - (878) - - - - (878)
Issuance of restricted stock... - - 44 1 1,000 - (1,001) - - -
Amortization of restricted
stock......................... - - - - - - 279 - - 279
Adjustments for minority interest
in operating partnership...... - - (483) - - - - (483)
Conversion of OP Units into
common Stock.................. - - 47 - 1,242 - - - - 1,242
Loans to officers.............. - - - - - - - - (698) (698)
Issuance of shares of employee
stock purchase plan........... - - 2 - 42 - - - - 42
Dividends...................... - - - - - (7,258) - - - (7,258)
Net income..................... - - - - - 5,629 - - - 5,629
----------------------------------------------------------------------------------------------
BALANCE at June 30, 1999....... 800 $20,000 7,730 $ 77 $121,176 $(5,587) $(2,255) $(3,298) $(2,591) $127,522
==============================================================================================
See accompanying notes to consolidated financial statements
6
GOLF TRUST OF AMERICA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 5,631 $ 5,720
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................................. 7,953 4,265
Loan cost amortization......................................... 421 280
Straight-line interest and rent................................ (640) (664)
Amortization of restricted stock compensation.................. 279 306
Income applicable to minority interest......................... 3,550 3,786
Increase in receivable from affiliates......................... (30) (375)
Increase (decrease) in other assets............................ 221 (4,938)
Increase (decrease) in accounts payable and other liabilities.. (2,561) 2,522
---------- ----------
Net cash provided by operating activities.......................... 14,824 10,902
---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Golf course acquisitions and improvements........................ (12,263) (136,236)
Increase in mortgage notes receivable............................ (104) (3,063)
Cash proceeds from sale of land................................. 975 -
---------- ----------
Net cash used in investing activities.............................. (11,392) (139,299)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings payments on line of credit....................... (1,025) 120,675
Payments on notes and line of credit............................ (5,169) (92)
Loan fees....................................................... (1,399) 5,000
Loans to officers............................................... (648) (765)
Preferred stock proceeds........................................ 20,000
Preferred stock cost............................................ (878)
Redemption of OP Units.......................................... (1,775) 159
Distributions to partners....................................... (4,671) (3,965)
Dividends paid.................................................. (7,258) (6,258)
---------- ----------
Net cash provided by (used in) financing activities............... (2,823) 114,754
---------- ----------
Net increase in cash.............................................. 609 (13,643)
Cash and cash equivalents, beginning of period.................... 1,891 14,968
---------- ----------
Cash and cash equivalents, end of period.......................... $ 2,500 $ 1,325
========== ==========
See accompanying notes to consolidated financial statements
7
GOLF TRUST OF AMERICA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during the period.................................. $ 7,508 $ 2,834
NON-CASH INVESTING AND FINANCING TRANSACTIONS
Property and equipment in accruals or deferred purchases.......... $ - $ 3,992
OP Units issued in golf course acquisitions and financing......... $ 979 $ 9,716
Debt acquired with acquisition ................................... $ - $ 12,927
See accompanying notes to consolidated financial statements
8
GOLF TRUST OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
GENERAL
The accompanying consolidated financial statements included the
accounts of Golf Trust of America, Inc., its wholly owned subsidiary
corporations and limited liability companies, and its majority-owned and
controlled partnership ("GTA"). The outside equity interests in the
consolidated partnership not owned and controlled by GTA are reflected as the
minority interest in the consolidated financial statements. All significant
inter-company balances and transactions have been eliminated in consolidation.
GTA is a self-administered real estate investment trust ("REIT")
formed to capitalize upon consolidation opportunities in the ownership of
upscale golf courses throughout the United States. We hold our golf course
interests through Golf Trust of America, L.P., a Delaware limited partnership
and, in one instance, through a wholly owned subsidiary of Golf Trust of
America, L.P. Currently, we hold participating interests in 46 golf courses
(the "golf courses"), 42 of which are owned by us and four of which serve as
collateral for a 30-year participating mortgage loan wherein we are the
lender. Of the 42 courses that we own, 40 are held in fee simple and two are
held pursuant to long-term ground leases. The golf courses are located in
Florida (14), South Carolina (6), Illinois (3.5), Ohio (3), California (2.5),
Michigan (3.5), Georgia (2), Virginia (2), Nebraska (1.5), Missouri (1.5),
Texas (1.5), Alabama, Kansas, Kentucky, North Carolina, and New Mexico. 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.
Because of the tax rules applicable to REIT's, we 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. Often times, we
lease the golf course back to the seller's affiliate in instances where 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.
INTERIM STATEMENTS
The accompanying consolidated financial statements for the three and
six months ended June 30, 1999 and 1998 have been prepared in accordance with
generally accepted accounting principles ("GAAP") and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. These financial statements
have not been audited by independent public accountants but include all
adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
condition, results of operations and cash flows for such periods. However,
these results are not necessarily indicative of results for any other interim
period or for the full year. The accompanying consolidated balance sheet as
of December 31, 1998 has been derived from the audited financial statements,
but does not include all disclosures required by GAAP.
Certain information and footnote disclosures normally included in
financial statements in accordance with GAAP have been omitted pursuant to
requirements of the Securities and Exchange Commission (the "SEC").
Management believes that the disclosures included in the accompanying interim
financial statements and footnotes are adequate to make the information not
misleading but should be read in conjunction with the consolidated financial
statements and notes thereto included in GTA's annual report of Form 10-K/A
for the year ended December 31, 1998.
9
GOLF TRUST OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
MINORITY INTEREST
The accompanying consolidated balance sheets have been adjusted to
reflect an accounting allocation for reporting purposes from additional paid
in capital to minority interest for the limited partners' percentage interest
in the net assets of Golf Trust of America, L.P. This adjustment had no
effect on earnings per share or results of operations or allocations of net
income to the general and limited partners of Golf Trust of America, L.P. The
reallocation for the six month period ended June 30, 1999 and the year ended
December 31, 1998 was approximately $0.5 million and $8.0 million,
respectively.
EARNINGS PER SHARE
The computation of basic earnings per share is computed by dividing
net income by the weighted average number of outstanding common shares during
the period. The computation of diluted earnings per share is based on the
weighted average number of outstanding common shares during the period and
the incremental common shares, using the treasury stock method for stock
options. The incremental common shares for the three months ended June 30,
1999 and 1998 were 36,000 and 296,000 respectively. The incremental common
shares for the six months ended June 30, 1999 and 1998 were 40,000 and
248,000 respectively. Since the conversion of the preferred shares would be
anti-dilutive, these amounts are not included in the calculation of diluted
shares.
PERCENTAGE RENT AND PARTICIPATING INTEREST
In May 1998, the define Emerging Issues Task Force ("EITF") issued
Issue No. 98-9, "Accounting for Contingent Rent in Interim Financial
Periods." This statement provided that recognition of contingent rental
income should be deferred until specified targets that trigger the contingent
rent are achieved. Consequently, WE generally will not recognize percentage
rent until the third or fourth quarter of a tenant's fiscal year, which in
some instances may be different than the third and fourth quarter of the
calendar year. This statement applies to all contingent rental income
effective with the second quarter of 1998. On a quarterly basis, there may be
material impact to GTA's earnings per share, financial condition, and results
of operations while, on an annual basis, there is no effect to GTA's earnings
per share, financial condition, or results of operations. In November 1998,
Issue No. 98-9 was withdrawn by the EITF. However, the Company has continued
to account for contingent rents in accordance with Issue No. 98-9. As a
result of EITF 98-9, no percentage rent or participating interest was
recognized in the first two quarters of 1999.
2. ACQUISITIONS AND DISPOSITION
In May 1999, GTA acquired Metamora Golf and Country Club, an 18-hole
upscale golf facility located in Metamora, Michigan for $5.9 million. GTA
leases the golf facility to an affiliate of Total Golf. Total Golf and its
affiliates lease 3.5 courses from GTA, including Mystic Creek Golf Club and
Brentwood Golf & Country Club. As part of the purchase price, 10,172 units of
Series B OP Units valued at $295,000 were issued at the closing of the
acquisition. The newly created Series B OP Units are convertible into OP
Units on a one-for-one basis at the election of the holder. Distributions on
the Series B OP Units are cumulative from the date of original issue and are
payable quarterly in arrears, when, as and if declared by the Board of
Directors, on the 15th day of January, April, July and October, commencing on
July 15, 1999. Such distributions will be in an amount per share equal to the
greater of (i) $0.60 per quarter (or $2.40 per annum) (equal to a annual rate
of 8.25% of the issue price per share) or (ii) the cash distribution paid or
payable on the number of OP Units into which a Series B OP Unit is then
convertible (determined on each of the quarterly distribution payment dates
referred to above). The initial distribution for the quarter in which the
closing occurred was prorated based on the number of days between issuance of
the Series B OP Units and June 30, 1999, the final day of the fiscal quarter.
10
GOLF TRUST OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. ACQUISITIONS AND DISPOSITION (CONTINUED)
On May 1, 1999, Olde Atlanta exercised its lessee performance
option, as permitted by the applicable participating lease. In this "re-cap"
procedure, earnings in excess of the tenant's rental obligations were
capitalized at our forward-looking equity cost of capital. The value of the
OP Unit was $22.19 and the acquisition cap rate was 12.5%. The tenant,
pursuant to the re-cap procedure, increased the collateral supporting its
obligation under the participating lease. The re-cap was calculated pursuant
to our normal underwriting process. Golf Trust of America, L.P. issued 30,826
OP Units valued at $684,000 and paid cash of $293,000, resulting in an
increase in base rent from $891,000 to $1,000,000.
In June 1999, Sandpiper GTA Development, Inc. (a taxable subsidiary
in which GTA holds a 95% economic interest,) sold the 14-acre parcel of land
located across from the Sandpiper Golf Course in Santa Barbara, California
for a total sales price of $5.3 million, which approximates the basis in the
property. The sales price included a $4.2 million note secured by a first
deed of trust on the parcel, which accrues interest at 10% per annum and is
due in one year with two one-year extensions. These extensions require
partial repayment and increase the interest rate to 12% for the third and
final year of the note.
3. LEASES
All of our golf course leases are participating leases that require the
lessees to make payments of a fixed amount of base rent and a variable amount
of additional rent based on growth in revenue at the golf course.
Participating rent will generally be paid each year in the amount, if any, by
which the sum of 33 1/3% of gross golf revenue exceeds the cumulative base
rent escalation since the commencement date of such leases. The base rent
generally increases annually by the lesser of 3% to 5%, or a multiple of the
change in the Consumer Price Index ("CPI"). Annual increases in lease
payments are generally limited to between 5% and 7% during the first five
years of the lease term. There was no participating rent (or participating
mortgage interest under the mortgage note receivable) for the three and six
months ended June 30, 1999, compared to $155,000 and $520,000 for the three
and six months ended June 30, 1998. The decrease in participating rent and
participating mortgage interest reflects the application of EITF No. 98-9 and
we believe that on an annualized basis the participating rent and
participating mortgage interest should be materially consistent with the
prior year.
4. COMMITMENTS
LESSEES
Typically, we lease our golf courses to affiliates of the prior owners
and other initial operators believed to be qualified under non-cancelable
participating leases for an initial term of ten years, with options to extend
the initial term of each participating lease up to a maximum of forty years.
From the lease payments, we are generally required to make available a
reserve of between 2% and 5% of the annual gross golf revenue of each course
for the replacement and enhancement of the existing facilities. These
reimbursements are allocated between short and long-term categories and,
therefore, the balance (at June 30, 1999, and 1998 of $2,056,000 and
$791,000, respectively) may not be currently available to the lessees.
Under certain circumstances, the base rent for a golf course will be
increased when GTA agrees to pay for significant capital improvements or for
expansion of the existing facilities. Of our $16.0 million capital
improvement commitments, approximately $7.0 million has been funded to date.
In limited circumstances, we agree to provide working capital loans to
existing lessees. Working capital loans are evidenced by promissory notes, or
as set forth in the participating lease, and bear interest at fixed rates
between 9.24% and 10.0%. Of our $9.0 million working capital commitments,
approximately $4.8 million has been funded to date. Typically, we require the
lessee to increase the pledged collateral for the funded amounts.
11
GOLF TRUST OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. COMMITMENTS (CONTINUED)
In addition, we are engaged in preliminary negotiations with the lessee
of one of the golf courses to increase the aggregate amount of the capital
improvement and working capital loans from $11.0 million to up to $22.0
million, subject to final approval by the Board of Directors.
To accommodate the tax objectives of certain golf course sellers who have
received OP Units as partial consideration for the acquisition cost of golf
courses, we have agreed to maintain minimum loan balances of approximately
$17.2 million for up to ten years.
5. DEBT
Debt consists of the following:
-------------------------------------------------------- --------------- --------------
JUNE 30, DECEMBER 31,
(IN THOUSANDS) 1999 1998
-------------------------------------------------------- --------------- --------------
REVOLVING CREDIT FACILITY
$200.0 million unsecured revolver with weighted $191,900 $125,000
average interest rates of 6.7% maturing April 2002 -
-------------------------------------------------------- --------------- --------------
BRIDGE LOAN
$100.0 million unsecured with weighted average - $ 67,925
interest rates of 6.7% maturing April 1999
-------------------------------------------------------- --------------- --------------
NOTES PAYABLE
Secured financing with net book value of the $ 12,540 $ 17,709
properties of $21.2 million with interest
rates of 8.75% maturing in November 2016
-------------------------------------------------------- --------------- --------------
TOTAL $204,440 $210,634
-------------------------------------------------------- --------------- --------------
REVOLVING CREDIT FACILITY AND BRIDGE LOAN
As of April 6, 1999, GTA amended and restated its unsecured Revolving
Credit Facility ("Credit Facility") to increase the borrowing capacity to
$200.0 million with a consortium of banks led by Bank of America, as lead
agent. GTA pays interest-only on the Credit Facility with the principal
balance due in April 2002. Borrowings typically bear interest at an adjusted
Eurodollar rate plus an applicable margin. The applicable margin (between
1.50% and 2.00%) is subject to adjustment based upon certain leverage ratios.
At June 30, 1999, all amounts outstanding under the Credit Facility were
based on the Eurodollar rate and a margin of 1.75% for an average interest
rate of 6.7% per annum. The amended and restated Credit Facility replaced the
Bridge Loan.
The Credit Facility availability is limited to an unencumbered pool
calculation, including a 20% limitation for working capital needs. Financial
covenants include net worth, liquidity and cash flow covenants, among others.
Non-financial covenants include restrictions on loans outstanding, construction
in progress, loan to officers and changes in the Board of Directors, among
others. At the present time, these covenants have been met.
In addition to the Credit Facility, on April 6, 1999 GTA also obtained a
$25.0 million unsecured line of credit from Bank of America which may be
incorporated into the $200.0 million Credit Facility at a later date. The
rates, covenants, conditions and other material provisions are essentially
the same as the Credit Facility, except for the term, which is one year in
the case of the $25 million line of credit.
12
GOLF TRUST OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. DEBT (CONTINUED)
DEBT MATURITIES
Aggregate maturities of long-term debt for each of the five years
following June 30, 1999 are as follows:
------------------- -------------
(In thousands) Amount
1999(6 months) $ 157
2000 $ 335
2001 $ 365
2002 $192,298
2003 $ 435
2004 $ 474
Thereafter $ 10,376
------------------- -------------
INTEREST RATE SWAP AGREEMENT
In September 1998, we entered into an interest rate swap agreement with
Bank of America to reduce the impact of changes in interest rates on our
Credit Facility. The swap agreement matures in February 2000, and has a total
notional amount of $76,800,000. The swap agreement effectively converts a
portion of our floating rate debt to fixed rate debt. We pay Bank of America
a fixed rate of 5.08% per annum (for an all-inclusive rate of 6.83% per annum
for June 30, 1999). We are exposed to credit loss in the event of
nonperformance by Bank of America.
13
GOLF TRUST OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. PREFERRED STOCK AND OTHER PREFERRED INTERESTS
SERIES A PREFERRED STOCK
On April 2, 1999, GTA completed a public offering of 800,000 shares of
its 9.25% Series A Cumulative Convertible Preferred Stock, par value $0.01
per share ("Series A Preferred Stock"), at a price of $25.00 per share to a
single purchaser, AEW Targeted Securities Fund, L.P.
Dividends on the Series A Preferred Shares are cumulative from the date
of original issue and are payable quarterly in arrears, when, and as if
declared by the Board of Directors, on the 15th day of January, April, July
and October, commencing on July 15, 1999. Such dividends will be in an amount
per share equal to the greater of (i) $0.578125 per quarter (or $2.3125 per
annum)(equal to an annual rate of 9.25% of the $25 price per share) or (ii)
the cash dividend paid or payable on the number of common shares into which a
Series A Preferred Share is then convertible (determined on each of the
quarterly dividend payment dates referred to above). The initial dividend for
the quarter was prorated and paid on July 15, 1999 based on the number of
days between April 2, 1999 and June 30, 1999, the final day of the fiscal
quarter.
The Series A Preferred Stock is convertible, in whole or in part, at the
option of the holder at any time into common shares at a conversion price of
$26.25 per common share (equivalent to an initial conversion rate of
approximately 0.95238 common shares per Series A Preferred Share), subject to
adjustment in certain circumstances.
Except in certain circumstances relating to preservation of GTA's status
as a "REIT", the Series A Preferred Shares are not redeemable at GTA's option
prior to April 2, 2004. On and after such date, the Series A Preferred Shares
will be redeemable, in whole but not in part, at the option of GTA on 20
days' notice for a cash payment equal to $25.00 plus accrued and unpaid
dividends (whether or not declared) to the redemption date without interest,
plus a premium initially equal to 4% of such sum and, thereafter, declining by
1% each year so that the premium is zero on and after April 2, 2008.
SERIES B OP UNITS
In May 1999, GTA acquired Metamora Golf and Country Club, an 18-hole
upscale golf facility located in Metamora, Michigan for $5.9 million. As part
of the purchase price, at the closing, 10,172 units of Series B OP Units
valued at $295,000 were issued at $29.00 per share (which reflects a 20%
conversion premium at the time of closing). The newly created Series B OP
Units are convertible into OP Units on a one-for-one basis at the election of
the holder. These perpetual preferred units are scheduled to pay a
distribution of 8.25% based on the initial issuance price.
14
GOLF TRUST OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. STOCK OPTIONS AND AWARDS
EMPLOYEE STOCK PURCHASE PLAN
On March 1, 1998, we adopted an Employee Stock Purchase Plan ("the
Plan") to provide most employees with an opportunity to purchase common
shares in GTA through payroll deductions of, up to 10% of eligible
compensation, with a $25,000 maximum deferral. Semi-annually, participant
account balances will be used to purchase common shares at the lesser of 85%
of the fair market value of common shares at the beginning or ending of such
six-month period. The Plan expires on February 28, 2008. A total of 250,000
common shares are available for purchase under this Plan. In January 1999,
1,768 common shares were issued and in July 1999, an additional 2,152 common
shares were issued. Compensation expense, related to the Plan, was $8,000 for
1999 compared to $10,000 in 1998.
RESTRICTED STOCK
For the six months ended June 30, 1999 and 1998, GTA granted 44,000 and
20,939 common shares, respectively, of restricted stock to employees under
GTA's 1998 and 1997 Stock-Based Incentive Plans. The market value of the
restricted stock grants in 1999 and 1998 totaled $1,001,000 and $607,000,
respectively. Unearned compensation is being amortized to an expense item
over the vesting period, which ranges from three to five years. Such expense
amounted to approximately $159,000 and $153,000 for the three months ended
June 30, 1999 and 1998, respectively, and $273,000 and $305,000 for the six
months ended June 30, 1999 and 1998, respectively. During the 4th quarter of
1998, the Compensation Committee accelerated to January 4, 1999 the vesting
of 6,685 common shares of restricted stock that otherwise would have vested in
September 19, 1999.
LOANS TO OFFICERS
In 1997, the Board of Directors of GTA approved a Company Policy, which
has subsequently been amended and restated with respect to loans to executive
officers and certain key employees relating to purchases of GTA common shares
(the "Loan Program"). Pursuant to the Loan Program, GTA may lend amounts to
certain GTA executive officers for one or more of the following purposes: (1)
to finance the purchase of common shares by certain executive officers on the
open market at the then-current market prices; and (2) to finance an
executive officer's payment of the exercise price of options to purchase
common shares granted to such employees under GTA's option plans; or (3) to
finance the annual tax liability of certain executive officers related to the
vesting of shares of common shares which constitute a portion of a restricted
stock award granted to such employees under GTA's option plans. The maximum
aggregate amount GTA may loan to an executive officer is determined on a
case-by-case basis by the Compensation Committee. Common shares, which are
the subject of a loan, serve as collateral for the repayment of the note
until the note has been paid in full. Each note bears interest at the
applicable federal rate, as defined by the Internal Revenue Service, in
effect on the execution date of the loan. Interest is paid on an annual basis
and varies from 4.4% - 6.0% per annum. Each note becomes due and payable in
full on the fifth anniversary of the execution date thereof. As of June 30,
1999, GTA had made loans in the amount of $2,600,000 and had an undisbursed
remaining commitment of $900,000.
15
GOLF TRUST OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. TRANSACTIONS WITH AFFILIATE AND SIGNIFICANT LESSEE
Legends Golf is a significant lessee of the golf courses in GTA's
portfolio. Legends Golf is a golf course management group consisting of eight
companies affiliated through common ownership that operates a portfolio of
golf courses owned by GTA under triple net leases. Legends Golf derives
revenues from the operation of golf courses principally through receipt of
green fees, membership fees, golf cart rentals, and sales of food, beverage
and merchandise.
The following table sets forth certain combined condensed financial
information for Legends Golf.
June 30, December 31,
(IN THOUSANDS) 1999 1998
-------------------------------------------------------------------------------
(UNAUDITED)
Current assets $ 7,856 $ 2,978
Non-current assets 15,648 20,650
------ --------
Total assets $ 23,504 $ 23,628
======== ========
Payable to Golf Trust of America, L.P. $ 1,060 $ 1,030
Other current liabilities 886 1,340
Total long-term liabilities 18,745 20,916
Total owners' equity 2,813 342
------- --------
Total liabilities and owners' equity $ 23,504 $ 23,628
========= ========
For the three months
ended June 30,
---------------------
(IN THOUSANDS) 1999 1998
---------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
Total Revenues $ 7,859 $ 7,908
Operating Income $ 743 $ 516
Net Income $ 2,016 $ 1,815
Total revenues from golf course operations for Legends Golf remained the
same for the three months ended June 30, 1999, compared to the three months
ended June 30, 1999. Increases in revenues in Myrtle Beach were offset by
decreases in the revenues in Virginia. Total rounds played decreased by
approximately 5.1% from the same period in 1998.
Operating income increased by $0.2 million to $0.7 million for the three
months ended June 30, 1999 compared to $0.5 million for the corresponding
period in 1998. The increase is primarily due to a decrease in maintenance
and administrative expenses. Net income was $2.0 million for the three months
ended June 30, 1999 compared to $1.8 million for the three months ended June
30, 1998, primarily due to the increased operating income net of a reduction
of the equity in earnings of Golf Trust of America, L.P.
16
GOLF TRUST OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. TRANSACTIONS WITH AFFILIATE AND SIGNIFICANT LESSEE (CONTINUED)
For the six months ended June 30,
---------------------------------
(IN THOUSANDS) 1999 1998
---------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
Total Revenues $ 13,610 $ 13,207
Operating Loss $ (280) $ (654)
Net Income $ 2,140 $ 2,094
Total revenue from golf course operations for Legends Golf increased by
$0.4 million to $13.6 million from $13.2 million for the six months ended
June 30, 1998. The increase was primarily attributable to increased greens
fees, cart rentals and food and beverage sales at the Myrtle Beach area
courses net of reduced green fees in Virginia.
Operating loss decreased by $0.4 million to $0.3 million for the six
month ended June 30, 1999 compared to $.7 million for the corresponding
period in 1998. The decrease was primarily the result of the increase in
revenues. Net income was $2.1 million for the six months ended June 30, 1998
compared to $2.0 million for the six months ended June 30, 1998, primarily due
to the reduction in operating loss net of the reduction in the equity in
earnings of Golf Trust of America, LP.
Effective July 1, 1999, Larry D. Young, a director of GTA, acquired the
stock of the lessee of the Bonaventure courses. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Lessee
Results of Operations - Bonaventure Restructuring."
9. SUBSEQUENT EVENTS
PAYMENT OF DIVIDENDS
On June 14, 1999, the Board of Directors declared a quarterly dividend
distribution of $0.44 per common share for the quarter ended June 30, 1999,
to stockholders of record on June 30, 1999, which was paid on July 15, 1999.
Also, on July 15, 1999, the Series A Preferred Stock, and Series B OP Unit
holders were paid partial period dividends of $0.572 per share and
distributions of $0.336 per unit, respectively. These amounts were funded
primarily from an advance on our Credit Facility.
ACQUISITION OF THE PETE DYE GOLF CLUB
On July 27, 1999, GTA acquired the Pete Dye Golf Club, an 18-hole
upscale, private golf facility located in Bridgeport, West Virginia,
approximately 90 miles south of Pittsburgh. The purchase price of $10.0
million includes the issuance of preferred OP Units valued at approximately
$1,350,000. The OP Units were issued in the form of Series C convertible
preferred OP Units at a conversion price of $27.58 per share and have a
preferred return equivalent to 8.91%. The course is leased to an affiliate of
the prior owner of the club. The initial term of the participating lease is
10 years with four 5-year extensions. In addition, GTA made the prior owner a
loan of $5.8 million, at a 10.5% per annum interest rate, to complete the
construction of a new clubhouse and other amenities at the club (of this $5.8
million amount, $5.1 million was funded at closing). The purchase and loan
were funded through a $10.0 million secured loan from City National Bank of
West Virginia, a $3.1 million advance on our Credit Facility and
$1,350,000 in preferred OP Units. The City National Bank loan bears interest
at prime, subject to adjustment quarterly (the interest rate was 8.0% per
annum at the time of closing) and is due in July 2002, with a requirement to
have the balance be no more than $5.0 million in July 2001.
17
GOLF TRUST OF AMERICA, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW AND FORMATION
Golf Trust of America, Inc. conducts business through an operating
partnership, Golf Trust of America, L.P., of which we own a 59.5% interest
through our two wholly owned subsidiaries, one of which is the general
partner. Larry D. Young, a director of GTA, along with his affiliates own
28.7% of the operating partnership and are a significant lessee. The remaining
interest in the operating partnership is held by operators of the golf
courses, their affiliates and officers of GTA.
"Management's Discussion and Analysis of Financial Condition and Results
of Operations," and other sections of this report contain various
"forward-looking statements" which represent our expectations concerning
future events, including the following: statements regarding GTA's continuing
ability to target and acquire high quality golf courses; the expected
availability of the Credit Facility and other debt and equity financing; the
lessees' future cash flows, results of operations and overall financial
performance; the expected tax treatment of our operations; a potential
paper-clip structure; and our beliefs about continued growth in the golf
industry. Because of the foregoing factors, the actual results achieved by
GTA in the future may differ materially from the expected results described
in our forward-looking statements. The following discussion should read in
conjunction with the accompanying Consolidated Financial Statements and Notes
thereto appearing elsewhere in this report and with GTA's Annual Report for
1998 on Form 10-K (as amended by Form 10-K/A).
GTA was formed to capitalize upon consolidation opportunities in the
ownership of upscale golf courses in the United States. Our principal
business strategy is to acquire upscale golf courses and then lease the golf
courses to qualified third party operators, including affiliates of the
sellers. We have the ability to issue units of limited partnership interest
("OP Units") in the operating partnership. OP Units are redeemable by their
holder for cash, or at our election, for common shares of GTA on a
one-for-one basis. When we acquire a golf course in exchange for OP Units, in
most instances the seller of the course does not recognize income until it
exercises the redemption right. OP Units can thus provide an attractive
tax-deferred sale structure for golf course sellers. We believe we have a
competitive advantage in the acquisition of upscale golf courses, including
those which might not otherwise be available for purchase, because of the
utilization of a multiple independent lessee structure, our substantial
industry knowledge, experience, and relationships within the golf community,
our strategic alliances with prominent golf course operators and our ability
to issue OP Units to golf course owners on a tax-deferred basis.
ACQUISITIONS AND DISPOSITION
In May 1999, GTA acquired Metamora Golf and Country Club, an 18-hole
upscale golf facility located in Metamora, Michigan for $5.9 million. GTA
leases the golf facility to an affiliate of Total Golf. Total Golf and its
affiliates lease 3.5 courses from GTA, including Mystic Creek Golf Club and
Brentwood Golf & Country Club. As part of the purchase price at closing,
10,172 Series B OP Units valued at $295,000 were issued. The newly created
Series B OP Units are convertible into common OP Units on a one-for-one basis
at the election of the holder. Distributions on the Series B OP Units are
cumulative from the date of original issuance and are payable quarterly in
arrears, when, as and if declared by the Board of Directors, on the 15th day
of January, April, July and October, commencing on July 15, 1999. Such
distributions will be in an amount per unit equal to the greater of (i) $0.60
per quarter (or $2.40 per annum) (equal to an annual rate of 8.25% of the
issue price per share) or (ii) the cash distribution paid or payable on the
number of common OP Units into which a Series B OP Unit is then convertible
(determined on each of the quarterly distribution payment dates referred to
above).
18
GOLF TRUST OF AMERICA, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS
ACQUISITIONS AND DISPOSITION (CONTINUED)
On July 27, 1999, GTA closed its acquisition of the Pete Dye Golf Club,
an 18-hole upscale, private golf facility located in Bridgeport, West
Virginia, approximately 90 miles south of Pittsburgh. The purchase price of
$10.0 million included the issuance at closing of preferred OP Units valued
at approximately $1,350,000. The OP Units were issued in the form of Series C
Convertible Preferred OP Units at a conversion price of $27.58 per unit and
have a preferred return equivalent to 8.91%. The course is leased to an
affiliate of the prior owner of the golf course. The initial term of the
participating lease is 10 years with four 5-year extensions. In addition, GTA
made the prior owner a loan of $5.8 million at a 10.5% per annum interest
rate to complete the construction of a new clubhouse and other amenities at
the golf course (of this $5.8 million amount, $5.1 million was funded at
closing). The purchase and loan were funded through a $10.0 million secured
loan from City National Bank of West Virginia, a $3.1 million advance on our
Credit Facility and $1,350,000 in preferred OP Units. The City National Bank
loan bears interest at prime, subject to adjustment quarterly (8.0% per annum
at the time of closing) and is due in July 2002, with a requirement to reduce
the balance outstanding to a maximum of $5.0 million by July 2001.
In June 1999, Sandpiper GTA Development, Inc. sold the undeveloped
14-acre parcel of land located across from the Sandpiper Golf Course in Santa
Barbara, California for $5.3 million, which approximates the basis in the
property. The sales price includes a $4.2 million note secured by a first
deed of trust on the parcel, and the note accrues interest at 10% per annum
and is due one year from closing with two one-year extensions. These
extensions require partial repayment and increase the interest rate to 12%
per annum for the third and final year of the note.
REVENUE GROWTH
Our primary sources of revenue are lease payments under the
participating leases and mortgage payments under the participating mortgage.
Participating rent is generally equal to 33-1/3% of the increase in gross
golf revenues over the gross golf revenues for the golf course for the base
year, as adjusted by us in determining the initial base rent. Base rent will
generally increase each year by the base rent escalator during the first five
years of the lease term, generally equal to the lesser of 3% to 5% or a
multiple of the change in the CPI over the prior year. Annual increases in
lease payments are generally limited to a maximum between 5% and 7% for the
first five years of the lease term.
We believe the principal source of growth in gross golf revenues at the
golf courses will be increased green fees, cart fees, and other related fees.
In order to achieve higher revenues, we believe the lessees will need to
continue to offer golfers a high quality golf experience as it relates to the
pace of play, condition of the golf course and overall quality of the
facilities.
19
GOLF TRUST OF AMERICA, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
For the three months ended June 30, 1999 and 1998, GTA received
$13,720,000 and $10,448,000, respectively, in revenue from the participating
leases and the mortgage note receivable, respectively. The increase in
revenues is due to (1) minimum increases of approximately $397,000, (2) a
full quarter of operations for 1999 for 1998 acquisitions resulting in
$2,819,000 in additional rental revenue, (3) rent from new course
acquisitions of $98,000, (4) $113,000 of additional interest from the
mortgage note receivable reflecting increased principal outstanding and
minimum increases under the mortgage note, and (5) the decrease in
participating rent of $155,000.
Expenses totaling $5,207,000 and $3,756,000 for the three months ended
June 30, 1999 and 1998, respectively, reflect depreciation and amortization
and general and administrative expenses. The increase reflects additional
depreciation of $1,490,000 for the 1998 acquisitions. Interest expense was
$3,830,000 for the three months ended June 30, 1999, compared to $2,006,000
for the three months ended June 30, 1998, due to the increased leverage
required to fund over $200 million in acquisitions for 1998.
The loss of the sale of assets in 1998 derived from one location where
the golf carts were traded in as part of a new leasing program, and another
location where a new clubhouse was built and the old facility replaced, and no
corresponding loss was incurred in 1999.
For the three months ended June 30, 1999 and 1998, net income was
$2,917,000 and $2,639,000, respectively. The increase in net income is
primarily the result of the loss from the sale of assets of $370,000
incurred in 1998 and for which no corresponding loss was incurred in 1999.
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
For the six months ended June 30, 1999 and 1998, respectively, GTA
received $27,045,000 and $19,368,000 in revenue from the participating leases
and from the mortgage note receivable, respectively. The increase in revenues
is due to (i) minimum base rental increases of approximately $559,000, (ii)
rent of $7,357,000 from new course acquisitions and expansions, (iii)
$281,000 in interest from the mortgage note receivable, as a result of future
advances, which was issued on June 20, 1997, and (iv) a $520,000 decrease in
participating rent, which, as discussed above in Note 1 to the Consolidated
Financial Statements, reflects primarily a change in accounting treatment for
contingent rents.
Expenses totaled $10,729,000 and $6,733,00 for the six months ended June
30, 1999 and 1998, respectively, and reflect depreciation, amortization,
general and administrative expenses. The increase reflects (i) additional
depreciation of $3,680,000 for the acquisitions made after June 30, 1998, and
(ii) additional general and administrative costs of $316,000.
Additional interest expense of $4,586,000 results from the acquisitions
made during 1998 and which were either partially included in the first six
months of 1998 or not included at all.
The loss of the sale of assets in 1998 derived from one location where
the golf carts were traded in as part of a new leasing program and another
location where a new clubhouse was built and the old facility replaced, and
no corresponding loss was incurred in 1999.
Net income for the six months ended June 30, 1999 and 1998, was
$5,631,000 and $5,720,000, respectively.
20
GOLF TRUST OF AMERICA, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS
LESSEE RESULTS OF OPERATIONS
OSAGE REDEMPTION OF UNPLEDGED OP UNITS
On March 19, 1999, we declared an event of default under the Osage
National Golf Club Lease for, among other reasons, tenant's failure to timely
pay rent. GTA, the prior owner and tenant agreed to address the default as
follows: (i) GTA redeemed certain unpledged OP Units owned by the prior owner
to bring rent and other sums due under the lease current; (ii) the prior
owner entered into a redemption agreement for all OP Units pledged as
collateral under the participating lease; (the redemption agreement is being
held in escrow and will be released from escrow and the pledged OP Units
redeemed as a termination payment in the event that another default occurs
under the participating lease before June 30, 2001); (iii) we obtained
greater control of operating accounts at the course and the tenant agreed to
fund an operating shortfall reserve account from excess cash flow up to a
maximum amount of $500,000 for the remaining term of the participating lease;
and (iv) we consented to a management agreement between the tenant and
Granite Golf Management, Inc. who will now manage the golf course.
On June 30, 1999, the parties entered into a Settlement Agreement and
First Amendment to Lease, along with several other related documents,
evidencing the foregoing. As a part of the transaction, we neither released
nor redeemed any collateral securing the participating lease, and we believe
we strengthened our collateral position by obtaining the right to promptly
redeem the existing pledged collateral as a termination payment in the event
of another default. Additionally, the terms of the participating lease were
not changed in any material way except for the inclusion of the operating
shortfall reserve account to be funded by the tenant. The operating results
of the golf course are generally consistent with management's expectations
and underwriting criteria.
BONAVENTURE LESSEE
Effective July 1, 1999, an affiliate of The Legends Group acquired the
outstanding stock of Emerald Dunes - Bonaventure, Inc., the lessee at
Bonaventure. The $181,000 funding still available under GTA's capital
improvement commitment to Bonaventure was converted to a working capital
reserve. There has been no reduction in payment terms under the participating
lease, however, we are considering modifying the participating lease to allow
the new lessee additional capital improvement and working capital funding to
facilitate the continued repositioning and improvement of the facility. The
collateral to secure the lessee's obligations under the participating lease
pledged by the initial lessee was released and substituted with equivalent
collateral held by Mr. Young and his affiliates. Mr. Young is a Director of
GTA.
GRANITE DEFAULT
On June 24, 1999, GTA declared a default under each of the participating
leases where Granite Golf or one of its affiliates is the lessee ("Granite")
(Tiburon Golf Club, Silverthorn Country Club, Persimmon Ridge Golf Club and
Black Bear Golf Course) for failure to timely pay rent under the terms of the
respective participating leases in part caused by corporate level
reorganizational measures undertaken by Granite Golf. GTA and the Granite
tenants have agreed to (i) permit us to redeem all of the OP Units and GTA
common shares pledged to us, and apply the same against past due obligations
and retain any balance, and (ii) permit us to terminate the participating
leases with the Granite tenants as a result of such defaults, subject to
permitting Granite the right to consult with GTA in the management of the
courses for a limited period which will help facilitate the orderly
transition of the course operations. We anticipate entering into new
participating leases with respect to the courses and have commenced
discussions to seek to re-let such courses. We do not believe the
participating leases will need to be restructured in any material manner, and
we believe the revenues and expenses of the courses, in the aggregate, is
consistent with our expectations and underwriting criteria.
21
GOLF TRUST OF AMERICA, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
Cash flow from operating activities for the six months ended June 30,
1999 and 1998 was $14,824,000 and $10,902,000, respectively. This reflects
net income before minority interest, plus non-cash charges to income for
depreciation, loan cost amortization, straight line rents and interest and
working capital changes. Our investing activities reflect course improvements
and capital replacement reserve costs of $12,263,000 for the first six months
of 1999 which included the $3.3 million acquisition of an additional nine
holes at Northgate Country Club, the cash portion of the Metamora Golf Course
for $5.0 million, the cash portion of the Olde Atlanta re-cap of $293,000,
and $3.6 million for improvements at Eagle Ridge and other courses. This
compares to our advances on our mortgage note receivable related to the
Westin Innisbrook facility of $3,063,000 and the cash portion of our golf
course acquisitions of $136,236,000 for the first six months of 1998. During
the first two quarters of 1998, we acquired 13 courses for a total investment
of $155,400,000, including $12,927,000 of assumed indebtedness and $9,716,000
in the issuance of OP Units. During the first six months of 1999, our
financing activities netted to $609,000. As previously mentioned on April 2,
1999, we sold 800,000 preferred shares for gross proceeds of $20,000,000 net
of associated costs of $878,000. With the proceeds we paid down $1,025,000
under the Credit Facility, repaid notes of $5,169,000, paid loan costs
associated with the amendment and restatement of the Credit Facility of
$1,399,000, made new officer loans of $648,000 and paid dividends and partner
distributions of $11,929,000 for the six months ended June 30, 1999. This
compares to $14,754,000 of financing activities for 1998, including net
borrowings of $125,675,000, less payment of dividends and partner
distributions of $10,223,000 for the six months ended June 30, 1998.
As of April 6, 1999, we amended and restated our unsecured revolving
credit facility ("Credit Facility") to $200.0 million with a consortium of
banks led by Bank of America, as lead agent. We pay interest only on the
Credit Facility with the principal balance due in April 2002. Borrowings
typically bear interest at an adjusted Eurodollar rate plus an applicable
margin. The applicable margin (between 1.50% and 2.00%) is subject to
adjustment based upon certain leverage ratios. At June 30, 1999, all amounts
outstanding under the Credit Facility were based on the Eurodollar rate and a
margin of 1.75%.
Funds available under the Credit Facility are limited to an unencumbered
pool calculation, including a 20% limitation for working capital needs.
Financial covenants include net worth, liquidity and cash flow covenants,
among others. Non-financial covenants include restrictions on loans
outstanding, construction in progress, loan to officers and changes in the
Board of Directors, among others. At the present time, these covenants have
been met.
In addition to the Credit Facility, we also obtained a $25.0 million
dollar unsecured line of credit from Bank of America which may be
incorporated into the $200.0 million Credit Facility at a later date. The
rates, covenants, conditions and other material provisions are essentially
the same as the Credit Facility, except for the term, which is one year in
the case of the $25 million line of credit. Currently, there are $700,000 of
borrowings outstanding under such facility.
In connection with the issuance of OP Units, we have agreed to maintain
a minimum loan balance of approximately $17.2 million for up to ten years to
accommodate certain prior owners' efforts to minimize certain adverse tax
consequences from their contribution of their courses to GTA.
22
GOLF TRUST OF AMERICA, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY (CONTINUED)
We intend to invest in additional golf courses as suitable opportunities
arise, but we will not undertake investments unless adequate sources of
financing are available. We anticipate that future acquisitions would be
funded with debt financing provided by the Credit Facility, the issuance of
OP Units or with net proceeds of additional equity offerings. In the future,
we may negotiate additional credit facilities or issue corporate debt
instruments. Any debt issued or incurred by GTA may be secured or unsecured,
long-term or short-term, fixed or variable interest rate and may be subject
to such other terms, as the Board of Directors deems prudent. Except as
described below, we currently have no binding agreement to acquire any
additional golf courses. We are currently in active negotiations regarding
the acquisition of additional golf courses.
We have on file with the Securities and Exchange Commission a universal
shelf registration statement registering the issuance of debt securities,
common stock, preferred stock or warrants as well as resales of securities
issued upon redemption of certain OP Units by their holders, with a remaining
availability of approximately $280.0 million. The exact amount of debt,
common stock, preferred stock, and warrants issued will depend on
acquisitions, asset shares, GTA's unsecured debt and preferred stock ratings,
and the general interest rate environment.
Our acquisition capabilities are enhanced by our existing capital
structure. We generally intend to maintain a capital structure with
consolidated indebtedness representing no more than 50% of our total
capitalization, although we have no express limitation on our ability to
incur indebtedness.
COMMITMENTS
Typically, we lease our golf courses to affiliates of the prior
owners and other qualified operators under non-cancelable participating
leases for an initial period of ten years with options to extend the term of
each participating lease up to forty years. From the lease payments, we are
generally required to make available a reserve between 2% and 5% of the
annual gross golf revenue of each course for the replacement and enhancement
of the existing facilities. These reimbursements are allocated between
short-term and long-term categories and, therefore, the balance which, at
June 30, 1999 and 1998 was $1,400,000 and $790,000, respectively, may not be
currently available to the lessees.
Under certain circumstances, the base rent for a course will be
increased when GTA agrees to pay for significant capital improvements or for
expansion of the existing facilities. Of our $16.0 million capital
improvement commitments, approximately $7.0 million has been funded as of
June 30, 1999.
In limited circumstances we agree to provide working capital loans to
existing lessees. Working capital loans are evidenced by promissory notes or
as set forth in the applicable participating lease, require appropriate
collateral and bear interest at fixed rates between 9.0% and 10.0% per annum.
Of our $9.0 million working capital commitments, approximately $4.8 million
has been funded to date.
In addition, we are engaged in preliminary negotiations with a lessee of
one of the golf courses to increase the aggregate amount of the capital
improvement and working capital loan from $11.0 million to up to $22.0
million. Working capital loans are evidenced by promissory notes or as set
forth in the participating lease.
In the normal course of business, we enter into commitments and letters
of intent to acquire golf courses and related facilities. We are in various
stages of negotiation and due diligence review for each of these
acquisitions. Completion of these transactions is subject to negotiation and
execution of definitive documentation and certain other customary closing
conditions. No assurances can be given that we will continue to pursue or
complete the acquisition of any of these golf course acquisitions.
23
GOLF TRUST OF AMERICA, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATING COMPANY
We, like many other REITs which are prohibited by tax laws from
operating their properties, are exploring the possibility of creating an
operating company, often called a "paper-clip" company. Such a structure
permits a REIT to form a new company, generally a public company, and
dividend shares in such company to its shareholders. The shares can then be
traded together, although there is no requirement that they do so. In our
case, any such new operating company would enter into leases with the REIT to
operate some or all of our golf courses.
The purpose of such a structure is generally twofold. First, it
minimizes any perceived conflict of interest between the operators of the
golf courses and the REIT, because the shareholders of each are generally the
same parties. Second, it permits shareholders to participate in the net
operating income at the golf course level.
For our purposes, we do not view such a structure as a material
departure from the business plan we have pursued from our inception. In
particular, even if we were to implement such a structure, we would still
actively target acquiring golf courses from experienced operators and lease
the courses back to such operators independent of the operating company. We
believe that such a structure would, however, permit us to more effectively
acquire and operate golf courses which today are leased to third parties
unaffiliated with the prior owner and to otherwise expand our platform for
golf course acquisitions.
Our analysis of the foregoing structure is preliminary at this time and
there are no assurances that we will undertake the implementation of the same
or that it would be advisable to do so.
24
GOLF TRUST OF AMERICA, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS
FUNDS FROM OPERATIONS AND CASH AVAILABLE FOR DISTRIBUTION
GTA considers Funds From Operations ("FFO") as an appropriate measure of
performance of an equity REIT. In accordance with the resolution adopted by
the Board of Governors of the National Association of Real Estate Investment
Trusts, Inc. ("NAREIT"), FFO represents net income (loss) (computed in
accordance with generally accepted accounting principles ("GAAP")), excluding
gains (or losses) from debt restructuring or sales of property, plus
depreciation of real property, and after adjustments for unconsolidated
partnership and joint ventures. FFO should not be considered as an
alternative to net income or other measurements under GAAP as an indicator of
operating performance or to cash flows from operating investing or financial
activities as a measure of liquidity. FFO does not reflect working capital
changes, cash expenditures for capital improvements or principal payments on
indebtedness. We believe that FFO is helpful to investors as a measure of the
performance of an equity REIT, because along with cash flows from operating
activities, financing activities and investing activities, it provides
investors with an understanding GTA's ability to incur and service debt and
make capital expenditures. Compliance with the NAREIT definition of FFO is
voluntary. Accordingly, GTA's calculation of funds from operations in
accordance with the NAREIT definition may be different than similarly titled
measures used by other REITs.
Cash available for distribution ("CAD") is defined as FFO less capital
expenditures funded by operations and straight line rent and interest
payments. GTA believes that in order to facilitate a clear understanding of
the consolidated historical operating results of GTA, FFO and CAD should be
examined in conjunction with net income as presented in the consolidated
financial statements and data included elsewhere in this report.
FFO and CAD for the three months ended June 30, 1999 and 1998 presented
on a historical basis are summarized in the following table:
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1998
--------------------------------
(UNAUDITED) (UNAUDITED)
Income before minority interest....................... $4,923 $ 4,442
Depreciation and amortization for real estate assets.. 3,942 2,452
Loss on sale of assets................................ - 370
Preferred Dividends................................... (458) -
Preferred Distributions............................... ( 3) -
--------------------------------
Funds from Operations................................. 8,404 7,244
Adjustments:
Non-cash mortgage interest and rent................. (321) (332)
Capital expenditure reserve......................... (601) (155)
--------------------------------
Cash Available for Distribution....................... 7,482 6,757
================================
Non-cash mortgage and rent interest revenue represents the difference
between revenue on the participating mortgage reported by the Company in
according with GAAP and the actual cash payment to be received by GTA. The
participating leases generally require GTA to reserve annually between 2.0%
and 5.0% of the gross golf revenues of the golf courses to fund a capital
replacement reserve. The lessees will fund any capital expenditures in excess
of such amounts.
25
GOLF TRUST OF AMERICA, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 1999
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES
TERMS OF SERIES A PREFERRED SECURITIES
On April 2, 1999, we completed a public offering of 800,000 shares of
GTA's 9.25% Series A Cumulative Convertible Preferred Stock, par value $0.01
per share ("Series A Preferred Stock"), at a price of $25.00 per share to a
single purchaser, AEW Targeted Securities Fund, L.P.
Dividends on the Series A Preferred Shares are cumulative from the date
of original issue and are payable quarterly in arrears, when, as and if
declared by the Board of Directors, on the 15th day of January, April, July
and October, commencing on July 15, 1999. Such dividends will be in an amount
per share equal to the greater of (i) $0.578125 per quarter (or $2.3125 per
annum)(equal to a annual rate of 9.25% of the $25 price per share) or (ii)
the cash dividend paid or payable on the number of Common Shares into which a
Series A Preferred Share is then convertible (determined on each of the
quarterly dividend payment dates referred to above). The initial dividend for
the quarter in which the closing of the offering occurred was prorated based
on the number of days between issuance of the shares and the final day of the
fiscal quarter.
The Series A Preferred Stock is convertible, in whole or in part, at the
option of the holder at any time, unless previously redeemed, into Common
Stock at a conversion price of $26.25 per Common Share (equivalent to an
initial conversion rate of approximately 0.95238 Common Share per Series A
Preferred Share), subject to adjustment in certain circumstances.
Except in certain circumstances relating to preservation of GTA's status
as a real estate investment trust ("REIT"), the Series A Preferred Shares are
not redeemable at GTA's option prior to April 2,2004. On and after such date,
the Series A Preferred Shares will be redeemable, in whole but not in part,
at the option of GTA on 20 days' notice for a cash payment equal to $25.00
plus accrued and unpaid dividends (whether or not declared) to the redemption
date without interest, plus a premium initially equal to 4% of such sum and
thereafter declining by 1% each year so that the premium is zero on and after
April 2, 2008. The offering of the Series A Preferred Stock was made pursuant
to a Prospectus Supplement dated April 2, 1999 relating to the Prospectus
dated June 5, 1998, which is a part of GTA's registration statement on Form
S-3 (File No. 333-56251).
TERMS OF SERIES B OP UNITS
In May 1999, GTA acquired Metamora Golf and Country Club, an 18-hole
upscale golf facility located in Metamora, Michigan for $5.9 million. GTA
leases the golf facility to an affiliate of Total Golf. Total Golf and its
affiliates lease 3.5 courses from GTA, including Mystic Creek Golf Club and
Brentwood Golf & Country Club. As part of the purchase price at the closing,
10,172 Series B Preferred OP Units valued at $295,000 were issued at $29.00
per Unit, which reflects a 20% conversion premium at the time of closing. The
newly created Series B Preferred OP Units are convertible into common OP
Units on a one-for-one basis at the election of the holder. These perpetual
preferred units pay a dividend of 8.25%.
26
GOLF TRUST OF AMERICA, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 1999
ITEM 2. CHANGES IN SECURITIES
TERMS OF SERIES C OP PREFERRED UNITS
On July 27, 1999, GTA acquired the Pete Dye Golf Club, an 18-hole
upscale, private golf facility located in Bridgeport, West Virginia,
approximately 90 miles south of Pittsburgh. The purchase price of $10.0
million included the issuance at closing of OP Units valued at approximately
$1,350,000. The OP Units were issued in the form of Series C convertible
preferred OP Units which have a conversion price of $27.58 per share and have
a preferred return of 8.91%.
ADOPTION OF SHAREHOLDER RIGHTS PLAN
On August 6, 1999, the Board of Directors of Golf Trust of America, Inc.
declared a dividend distribution of one preferred stock purchase right
("Right") for each outstanding share of Common Stock to stockholders of
record at the close of business on September 6, 1999 (the "Record Date").
Each Right entitles the registered holder to purchase from the Company one
one-hundredth of a share of Series B Junior Participating Preferred Stock,
par value $0.01 per share (the "Preferred Stock"), at a purchase price of
$75.00, subject to adjustment. The Agreement (the "Rights Agreement") between
the Company and the rights agent thereunder. Upon execution of the definitive
agreement, the Company will file a current report on Form 8-K more fully
describing the terms of the Rights.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
27
GOLF TRUST OF AMERICA, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 1999
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are part of this quarterly report on
Form 10-Q for the quarterly period ended June 30, 1999 (and are numbered in
accordance with Item 601 of Regulation S-K). Items marked with an asterisk
(*) are filed herewith.
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------
3.1 Articles of Amendment and Restatement of the Company, as filed
with the State Department of Assessments and Taxation of
Maryland on January 31, 1997, (previously filed as Exhibit
3.1A to the Company's Registration Statement on Form S-11
(Commission File No. 333-15965) Amendment No. 2 (filed January
30, 1997) and incorporated herein by reference).
3.2 Articles of Amendment of the Company, as filed with the
Maryland State Department of Assessments and Taxation on June
9, 1998 (previously filed as Exhibit 3.1B to the Company's
Quarterly Report on Form 10-Q (Commission file No. 000-22091)
filed August 14, 1998 and incorporated herein by reference).
3.3 Bylaws of the Company as amended by the 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).
10.1* Designation of Series B Preferred OP Units of Golf Trust of
America, L.P. dated May 11, 1999 (which designation has been
entered as Exhibit D3 to the First Amended and Restated
Agreement of Limited Partnership of Golf Trust of America,
L.P., dated February 12, 1997, as amended February 1, 1998
(the "Partnership Agreement").
10.2* Designation of Series C Preferred OP Units of Golf Trust of
America, L.P. dated July 28, 1999 (which designation has been
entered as Exhibit D4 to the Partnership Agreement).
27.1* Financial Data Schedule
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GOLF TRUST OF AMERICA, INC., registrant
By: /S/ W. BRADLEY BLAIR, II
------------------------------------
W. Bradley Blair, II
President and Chief Executive Officer
/S/ W. BRADLEY BLAIR, II 8/13/99
- ------------------------------------------ ----------------
W. Bradley Blair, II Date
President, Chief Executive Officer and
Chairman of the Board of Directors
/S/ SCOTT D. PETERS 8/13/99
- ------------------------------------------ ----------------
Scott D. Peters Date
Senior Vice President and
Chief Financial Officer
29
EXHIBIT INDEX
Pursuant to Item 601(a)(2) of Regulation S-K, this exhibit index
immediately precedes the exhibits.
The following exhibits are part of this Quarterly Report on Form
10-Q (and are numbered in accordance with Item 601 of Regulation S-K). Items
marked with an asterisk (*) are filed herewith.
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------
3.1 Articles 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 (incorporated by reference to Exhibit 3.1 of the
Company's Current Report on Form 8-K dated April 2, 1999 and
filed by the Company on April 13, 1999).
3.2 Articles of Amendment of the Company, as filed with the
Maryland State Department of Assessments and Taxation on June
9, 1998 (previously filed as Exhibit 3.1B to the Company's
Quarterly Report on Form 10-Q (Commission file No. 000-22091)
filed august 14, 1998 and incorporated herein by reference).
3.3 Bylaws of the Company as amended by the 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).
10.1* Designation of Series B Preferred OP Units of Golf Trust of
America, L.P. dated May 11, 1999 (which designation has been
entered as Exhibit D3 to the First Amended and Restated
Agreement of Limited Partnership of Golf Trust of America,
L.P., dated February 12, 1997, as amended February 1, 1998
(the "Partnership Agreement").
10.2* Designation of Series C Preferred OP Units of Golf Trust of
America, L.P. dated July 28, 1999 (which designation has
been entered as Exhibit D4 to the Partnership Agreement).
27.1* Financial Data Schedule
30