Sun Setting for Cay Clubs?

The future of Cay Clubs looks dependent upon the successful merger with Keys Hospitality Acquisition Corp - a shell company formed to acquire other businesses.

Shareholders of Keys Hospitality Acquisition will soon vote on whether to acquire Cay Clubs.

The merger has significant risks. Filings with the SEC detail those risk factors. These will be distributed to the voting shareholders. According to the filings, if 20% of IPO shareholders vote against the merger, the deal will not happen.

Cay Clubs is clearly in trouble - despite layoffs, cancelled fishing tournaments, and backing out of other deals. Currently, Cay Clubs is past due on payments - while much more coming due.

According to filings with Security and Exchange commission, "At March 31, 2007, Cay Clubs had approximately $91 million in long-term indebtedness, of which approximately $73.8 million matures within one year and the remainder matures within three years. Cay Clubs is presently past due on $1.0 million in payments on $54.3 million in underlying indebtedness, of which approximately $9.2 million has been declared in default by the lender."

Below are some of the most notable risk factors detailed in the SEC filing:

• Inability to renew or refinance indebtedness as it matures and to remedy a default and repay past due amounts on existing indebtedness could cause Cay Clubs to surrender the related asset and adversely impact its ability to continue executing its business plan.
• Cay Clubs’ inability to pay its property management and/or lease payments to previous buyers has impacted Cay Clubs’ credibility in the market.
• Cay Clubs is subject to the risks of the real estate market and the risks associated with real estate ownership and development, including the risks and uncertainties relating to the cost and availability of construction materials, services and land for new properties.
• Although Cay Clubs owns certain of its condominium resort facilities, certain properties are actually owned by Sunvest Communities U.S.A. L.C. or its affiliates and therefore Cay Clubs is forced to rely upon Sunvest or its affiliates in order to properly execute its business plan with respect to such properties, and if such business plan is unable to be properly executed, Cay Clubs’ revenues and earnings will be reduced.
• If Cay Clubs’ relationship with IMG Academies is terminated, then such event could prevent Cay Clubs from executing all or a portion of its existing business plan and therefore significantly reduce Cay Clubs’ revenues and earnings.
• Cay Clubs is vulnerable to the risk of unfavorable weather conditions and continued inclement weather could reduce Cay Clubs’ revenues and earnings.
• Cay Clubs faces significant competition.
• Cay Clubs’ future growth requires additional capital whose availability is not assured.
• Because Cay Clubs’ business depends on the acquisition of new land, the unavailability of desirable land could reduce Cay Clubs’ revenues or negatively affect its results of operations.

Amazingly, the board of directors of Keys Hospitality Acquisition "determined unanimously that the merger proposal is fair to, and in the best interests of, Key and its stockholders.

According to the filing:

"directors determined the fair market value of Cay Clubs by analyzing the value of each of Cay Clubs’ properties in the following manner: (i) valued the unsold condo-hotel units based on past sales of units at the property and in comparable Cay Clubs properties; (ii) valued the unsold wet and dry boat slips based on market comparables; (iii) valued any amenities, extra land or development rights in the property based on the price a developer would pay for the land in order to achieve a reasonable profit margin; and (iv) valued the potential cash flow from hotel/resort operation by using a multiple of eight times cash flow (derived from Cay Clubs’ financials and projections for the particular property). For each Cay Clubs’ property, an asset value was reached by adding the four sources of value described above (if applicable) and any debt associated with the property was subtracted from such amount to arrive at an equity value for each property. The board did not apply any discounts for time value of money or risks. These equity values for all of the Cay Clubs’ properties were then aggregated to yield a total equity number significantly in excess of the initial consideration to be paid to Cay Clubs’ members in the merger. In addition, Key’s board also reviewed projected sales and earnings that can be generated by Cay Clubs and compared these to public companies operating
in segments similar to Cay Clubs. Accordingly, Key’s board has unanimously approved and declared advisable the merger and unanimously recommends that you vote or instruct your vote to be cast “FOR” the approval of the merger proposal."

Notice part "(i) valued the unsold condo-hotel units based on past sales of units at the property and in comparable Cay Clubs properties."

This alone is a red flag and means that Keys Hospitality is not pricing the condo units based on post-crash prices, but on prices it received in the past.

Given the monumental crash in the South Florida condo market, Keys Hospitality Acquisition Corp. shareholders might want to do their own evaluation of the value of the Cay Clubs assets.

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Diesel Fumes and Your Heart

Occasionally, sad news is reported that a scuba diver has died - most often from an apparent heart attack.
And most people assume that the cause was an unfit diver suddenly exerting too much energy.

But a study published this week may point to another contributor to the problem.

According to a study by the University of Edinburgh, diesel exhaust can change the heart's electrical activity. The study looked at air pollution and its effect on physiology of the heart.

I bring this up since most dive boats have diesel engines, and breathing some of the exhaust fumes is often unavoidable. Could there be a link between dive deaths and diesel exhaust? Should those at risk avoid breathing those fumes?

Here is a reprint of that story to help you decide:

A study by the University of Edinburgh and Umeå University measured the effects of diesel exhaust on heart and blood vessel function in men who have previously experienced a heart attack.

The research, funded by the British Heart Foundation and published in the New England Journal of Medicine, found that inhalation of diesel exhaust caused changes in the heart's electrical activity, suggesting that air pollution reduces the amount of oxygen available to the heart during exercise.

Dr Nicholas Mills, of the University's Centre for Cardiovascular Sciences, said: "This study provides an explanation for why patients with heart disease are more likely to be admitted to hospital on days in which air pollution levels are increased. Most people tend to think of air pollution as having effects on the lungs but, as this study shows, it can also have a major impact on how our heart functions."

Twenty men who had suffered a previous heart attack were carefully screened to ensure they did not suffer from angina or heart rhythm problems and that their heart condition was stable and appropriately treated. The men were exposed for one hour to either filtered air or dilute diesel exhaust while intermittently riding a stationary bicycle in a carefully monitored exposure chamber in Umeå University. Heart function was monitored continuously and blood tests taken six hours after leaving the chamber.

Electrical monitoring of the heart showed that inhalation of diesel exhaust caused a three-fold increase in the stress of the heart during exercise. In addition, the body's ability to release a "guardian" protein known as t-PA (tissue plasminogen activator), which can prevent blood clots from forming, was also reduced by more than one third following exposure. The link between air pollution and heart disease is strongest for the fine exhaust particles produced by road traffic.

Researchers are particularly interested in diesel engines because they generate 10-100 times more pollutant particles than petrol engines. The number of diesel-powered automobiles is increasing in Europe and other parts of the world. "Diesel exhaust consists of a complex mixture of particles and gases. Before we can recommend the widespread use of particle traps in diesel engines, we need to show that particles are the responsible component," Dr Mills said. "If we do that, then it is likely that devices to filter particles from exhaust, will reduce exposure and benefit public health."

Professor Peter Weissberg, Medical Director of the British Heart Foundation (BHF), said: "There is already evidence that air pollution can make existing heart conditions worse. This research is helping us work out why. It shows that in patients with coronary heart disease, diesel exhaust can reduce the amount of oxygen available to the heart during exercise, which may increase the risk of a heart attack.

"Because of the overwhelming benefits of exercise on heart health, we would still encourage heart patients to exercise regularly, but preferably not when there is a lot of local traffic around. Heart patients can look out for pollution levels on their local weather forecasts."

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Waterfront Market To Stay Open?

News of the Waterfront Market closing has shocked most people in Key West.

Restaurants are stunned. Residents are in mourning.

I heard rumors that Buco was throwing in the towel two weeks ago after the last Bight Board meeting. I didn't want to believe it, and I didn't want to spread the rumor. If it were true, it was bad news. But if I was wrong, it would be an awful false rumor to spread.

Now that the news is out (and I won't be the shot messenger) let me offer some hope.

Key West Chronicle has learned that a "white knight" has stepped forward and may purchase the Waterfront Market from Buco and continue its operation. Also, employees have been instructed to no longer tell people that the market is closing at the end of September.

And this makes all the sense in the world. The business is a valuable business - and Buco would be far better off selling it than simply closing its doors.

Lets hope so.

But none of this diminishes the poor sighted city plan to get every last dollar from their tenants. I have said it before on this blog: The best tenant is not necessarily the highest paying tenant.

What the city is missing in its oversimplified method of looking at tenants is the value of GOODWILL - an intangible asset. (Goodwill is a term used to reflect the fact that an ongoing business had some "intrinsic value" beyond its assets, such as the reputation the firm enjoyed with its clients, community, and customers.)

Though the Waterfront/Buco situation is more complex than has been reported (and I won't go into any further detail), the City is foolishly squandering the quality of life enjoyed by its residents - all for a few dollars more, while ignoring the value of the Waterfront Market's goodwill.

Remember, the search for a highest-paying tenant usually takes months and months. And when finally found, that tenant is unproven - and with the enormous rent, possibly unstable.

The best tenant is the tenant that adds value to the community, is viable over the long run, and is a respectable partner. That is the definition of the Waterfront Market and Buco.

Above all, best wishes and high praises to Buco. You are the best.

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