Item 1 of this Annual Report on Form 10-K.
Automatic Hotel Charges
On April 29, 2005, Westin’s parent, Starwood Hotels & Resorts Worldwide, Inc., or Starwood, entered into an Assurance of Voluntary Compliance with the State of Florida Office of the Attorney General, or the Assurance. The Assurance provided, among other things, that for a period of two years Starwood would not charge certain undisclosed automatic fees to guests at certain hotels that are owned or managed by Starwood, including the Resort, and that the State of Florida Office of the Attorney General would release Starwood hotel owners, managed properties and franchisees from certain claims and liabilities relating to these undisclosed automatic fees. On August 9, 2005, in a matter related to the Assurance, the Company executed a settlement election form which formalized our agreement to participate in Starwood’s negotiated Automatic Hotel Charges Settlement (the “Settlement”). The Settlement settles certain class action lawsuits filed by private plaintiffs against Starwood alleging that Starwood charged certain undisclosed automatic fees to its guests, including guests at the Resort. Charging additional automatic fees is customary in the hospitality industry, and the fees reimburse the properties for certain costs such as, coffee in the rooms, newspapers, shoe shine and internet access. In addition to Starwood, several other hospitality industry competitors agreed to settlements with the State of Florida. As part of the Starwood Settlement, Starwood had the option of no longer charging undisclosed automatic fees, or, to disclose the fees in advertising materials, on its web site and through the room reservations process. Starwood elected to no longer charge the automatic fees in Florida. Based upon information known to management at this time, the Resort’s participation in the Settlement has not had a material adverse impact on our financial results, largely due to our ability to mitigate the loss of these automatic fees through increasing the average room rate, implementing certain golf service fees and renegotiating certain revenue sharing items with the participants in the Rental Pool.
As a result of the termination of the Westin Management Agreement, the Resort was released from the Settlement and as a consequence, has renegotiated certain revenue sharing items with the Rental Pool. The renegotiated Rental Pool agreement grants the Resort the right to reinstitute the automatic charges. The Resort has elected to reinstitute the automatic charges, effective November 1, 2006, and discloses these charges in its advertising materials, on its web site and during the room reservation process. The reinstitution of these automatic hotel charges is not expected to have a material impact upon the Resorts financial results.
Liquidity and Capital Resources
The accompanying financial statements have been prepared based on the assumption that we will continue as a going concern. As of December 31, 2006, we have working capital deficit of approximately $10,607 primarily due to the fact that the Westin Termination Fee of $5,594 and the Troon Supplemental Fee of $800 are classified as current liabilities. We reported a net loss of approximately $4,861 during the year ended December 31, 2006. These conditions raise substantial doubt about our ability to continue as a going concern. We continue to experience seasonal fluctuations in our net working capital position. Seasonality impacts our liquidity. Typically we have more available cash during the winter months, specifically in the first quarter, while we have very limited cash in the late summer months. In July 2004, after we took possession of the Resort’s operational assets, GTA, LP advanced us $2,000, to support the working capital requirements of the Resort. During 2005, GTA funded $1,050 to address our seasonal cash flow shortfalls. In October 2006, GTA funded an additional $600 pursuant to the terms of the Westin Termination Agreement and an additional $120 in February 2007 to fund operating expenses. Further, GTA funded approximately $203 and $33 for the beginning phase of the technological infrastructure capital investment in October 2006 and November 2006, respectively. The proceeds of these advances have been fully expended to support the Resort’s operational expense and existing obligations. The Resort repaid to GTA the $120 and the $33 advances from Resort operational cashflow in March 2007. While current Resort cash flow projections for 2007 indicate we may be in a breakeven cash situation by year-end 2007, a shortfall is anticipated in late summer to early fall due to certain obligations that the Resort must pay in August 2007, including obligations of approximately $1,060 for the quarterly rental pool distribution and $412 for the rental pool refurbishment payment. Therefore, a cash infusion of up to $1,000, in the aggregate may be necessary to fund the short-fall. If we are unable to either continue to improve our operating cash flows or otherwise obtain liquidity, then we may be unable to continue as a going concern.
The predecessor owner had a revolving credit line secured by the Resort’s accounts receivable; however, this credit line was terminated when the predecessor defaulted on the mortgage with GTA, LP. It may become necessary to seek further cash infusion from GTA, LP, to seek an accounts receivable revolving credit line (which we are currently pursuing) or to seek some other form of financing (which we are currently pursuing) to insure our ongoing viability.
We are currently negotiating the terms of a three year non-revolving credit facility with a Tampa community bank for approximately $1,200. The proceeds of which would be used to finance renovations at the Resort restaurants, information technology infrastructure upgrades and other property improvements at the Resort and to cover short-term working capital shortfalls. The three condominium units that the Company owns at the Resort will serve as collateral for this loan. We are also seeking to obtain a revolving accounts receivable line of credit for at least $500. However, there can be no assurance that we will enter into this loan facility or that we will be able to obtain an accounts receivable credit line.
Environmental Matters
See discussion under the caption “Environmental Matters” in Item 1 of this Annual Report on Form 10-K.
Off Balance Sheet Arrangements
As of December 31, 2006, we have no unconsolidated subsidiaries.
We do not have any relationships with unconsolidated entities or unconsolidated financial partnerships of the type often referenced as structured finance or special purpose entities, i.e., unconsolidated entities established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitment or intent to provide additional funding to any such entities. Accordingly, we believe we are not materially exposed to any market, credit, liquidity or financing risk that could arise if we had engaged in such relationships.
Contractual Obligations and Contingent Liabilities
We had the following contractual obligations as of December 31, 2006:
Interest is reflected, as applicable, in the commitments and obligations listed above. There are no open purchase orders which individually exceed $25.
(1) The Master Lease Agreement between us and the Rental Pool participants, or NMLA, as amended and restated on January 1, 2004, provides that participating condominium owners will be reimbursed by us for 50% of the amount of funds the individual owner invests in the refurbishment program, as defined in the NMLA, plus interest accruing at a rate of 5% per annum. In addition, for units entering the Rental Pool during 2005, we have agreed to reimburse those unit owners for up to 25% of their refurbishment costs plus interest at 2.5% per annum on the unpaid balance. Our obligation to make the reimbursement payments during the period from 2005 through 2012 is contingent upon a minimum unit participation in the Rental Pool being maintained. This minimum unit participation is defined and tested on a quarterly basis. Our projected obligation as presented in the table above recognizes reimbursement costs and interest payable to the owners, assuming that the participants meet the minimum threshold and a minimum of 575 units are participating in the Rental Pool on a continuing quarterly basis at all times. See Note 10 to our Financial Statements for further discussion of our reimbursement obligations.
(2) Pursuant to the Termination Agreement, the Westin termination fee of approximately $5,594 is due at the earlier of the sale of the Resort or March 31, 2008. This amount is included in the “Less than 1 year” column due to the fact that we are currently seeking a buyer for the Resort although as of March 26, 2007, no binding contract for the sale of the Resort has been executed.
Westin, as manager of the Resort, entered into a management agreement with Troon which provides for Troon to manage golf operations at the Resort. The agreement expires on July 15, 2009 and includes an option in our favor to extend the term of the agreement for an additional five years. Our obligations under the contract include a management fee based on a percentage of golf revenue. The agreement obligates us to pay Troon a base management fee equal to 2% of golf operating revenue. Included in the table above are cost estimates through the term of the lease based upon the 2007 budget for the Resort. Pursuant to the Troon management contract, a minimum supplemental fee of approximately $800 is due upon either the expiration of the contract or its early termination. On February 22, 2007, we sent Troon Golf LLC, or Troon, a notice of termination in regards to the Facilities Management Agreement pursuant to which Troon manages the golf operations at the Resort. We and Troon are in the process of negotiating the terms and conditions of the termination which we expect to be effective upon the conclusion of our negotiations and the execution of a termination agreement. We intend to manage the golf operations internally following the termination of the Troon management agreement.
(3) The mortgage note between GTA, LP and us is non-interest bearing and matures on June 19, 2027.
(4) We are a party to multiple agreements with miscellaneous service providers for, among other services, waste removal, uniform cleaning and replacement, armored car services, indoors plant maintenance and pest control. These services and contracts are individually immaterial and, therefore, are included in the aggregate and identified as other miscellaneous operational agreements in the table above.
(5) The working capital advances between our parent and us are non-interest bearing. Our parent has agreed not to request or demand payment prior to January 2008 at which point we may extend the date to request or demand payment.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have significant market risk with respect to foreign currency exchanges or other market rates. Our participating mortgage debt is non-interest bearing effective July 16, 2004, so we do not have interest rate risk with respect to that mortgage. We are not at risk for commodity price changes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements and Supplementary Data starting on page 32.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management assesses the costs and benefits of such controls and procedures based upon the prevailing facts and circumstances, including management’s reasonable judgment of such facts. As we neither controlled nor managed the Resort prior to July 15, 2004, our disclosure controls and procedures with respect to such persons and entities were necessarily more limited than those we maintain with respect to our own corporate operations. On July 15, 2004, we took title to the Resort; however, despite the fact that our amended management agreement with Westin provided us with heightened control and access to information, we did not directly assemble the financial information for the Resort (although we have taken steps that we deem to be reasonable under the circumstances to seek to verify such financial information) and consequently, our disclosure controls and procedures with respect to the Resort, while strengthened, were necessarily more limited than those we maintain with respect to our own corporate operations. Since July 15, 2004, we have focused upon integrating operations at the Resort into our disclosure controls and procedures and internal control procedures. In particular, those controls and procedures have been updated to account for the challenges presented by the increased size and scope of our operations now that we own the Resort. Effective January 1, 2007, we implemented a new general ledger accounting software package, or GL software, at the Resort to replace the former GL software of which the majority of the financial reports were proprietary to Westin. Our new GL software, know as Aptech, was used at the Resort prior to July 15, 2004 when Westin required that the Resort adopt their GL software so the accounting staff is familiar with the process and procedures in operating the new GL software. We do not currently believe that the change in the GL software will materially change our control over financial reporting or our disclosure controls and procedures.
The integration of a new business of significant size and scope of operations increases the risk that conditions may have been introduced that we did not anticipate in our design of our systems of control. Any pre-existing deficiencies in the predecessor owner’s financial systems, processes and related internal controls increase the risk that the historical unaudited financial statements of the Resort’s operations and cash flows which the predecessor owner has provided to us may not be accurate. We have out of necessity placed a certain amount of reliance on the historical financial information and reports of the Resort’s predecessor owner for the periods prior to July 16, 2004, and relied on the information provided by Westin as manager of the Resort until October 31, 2006. The integration process and the valuation procedures carried out by us in connection with taking title to the Resort prevented the Company from filing the pro-forma and related financial information related to the Resort within the timeframes specified under SEC rules. We have implemented some and continue to work towards implementing various initiatives intended to continue to improve our internal controls and procedures and disclosure controls and procedures, especially to address the systems and personnel issues raised in the course of taking title to the Resort and assuming management of the Resort.
As of December 31, 2006, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, Vice President and Principal Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Management concluded that as of December 31, 2006 our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in our Exchange Act reports. Except as described above, there have been no significant changes in our internal controls or in other factors which could significantly affect internal controls subsequent to the date we carried out our evaluation.
There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
Termination of Westin Management Agreement
On July 15, 2004, we entered in to a Management Agreement with Westin. The Management Agreement provided, among other things, that Westin would manage the Resort. By mutual agreement, on September 28, 2006, we entered in to a Termination and Release Agreement (the “Termination Agreement”) with Westin pursuant to which we and Westin agreed to terminate the Management Agreement as of October 31, 2006 (the “Termination Date”). In addition to the termination of the Management Agreement, the Termination Agreement provides that (i) on or prior to October 3, 2006, we or GTA shall deposit $600 in the Resort’s operating account (which we did) to be used in part to pay to Westin certain fees and charges accrued under the Management Agreement and which are expected to approximate this amount; (ii) on or prior to the earlier of March 31, 2008, or sale of the Resort by us, we will pay to Westin the termination fee provided under Section 4.4.2 of the Management Agreement calculated as of the Termination Date, estimated at $5,600; and (iii) Westin shall permit us to continue to access Westin’s “SAP” accounting system (which they have) for the operation of the Resort until March 31, 2007 for a total charge of $6,000. The owner plans to independently manage the Resort as of the Termination Date and no longer use the Westin brand or their reservation system.
The foregoing summary of the material terms of the terminated Management Agreement does not purport to be complete and is qualified in its entirety by reference to the Management Agreement, which is filed as Exhibit 10.4 to our Current Report on Form 8-K filed on July 29, 2004, and the Termination Agreement, which is filed as Exhibit 10.13 to our current report on Form 8-K filed October 3, 2006.
Amendment of Parcel F Defense and Escrow Agreement
On December 28, 2006, we together with GTA and GTA, LP entered into a First Amendment to Defense and Escrow Agreement (the “Amendment”) with GHR and the Escrow Agent. The Amendment, among other things, amends the distributions from a sale of Parcel F under the Defense and Escrow Agreement to reduce the distributions to us by $10and to reduce the distributions to GTA, LP by $700. The Amendment also provides that, in the event that the purchaser of Parcel F (“Parcel F, LLC”) receives a return of its earnest money deposit pursuant to an Amended and Restated Agreement for the Sale and Purchase of Real Property - Parcel F between GHR and Parcel F, LLC, dated June 29, 2004 (as amended), the GHR shall receive an offsetting payment of the lesser of $200, or the amount of earnest money returned to Parcel F, LLC. The Defense and Escrow Agreement was included as Exhibit 10.2 to GTA’s Current Report on Form 8-K which was filed on July 29, 2004.
In connection with the execution of the Amendment, GTA and Elk Funding entered into the Loan Satisfaction Agreement which provided, among other things, that when GHR receives $710 (which occurred on or about December 28, 2006) pursuant to the terms of the Amendment (i) GTA’s obligations to Elk Funding under Note A shall be deemed to be paid in full and satisfied, (ii) the loan documents between GTA and Elk Funding shall be deemed terminated and neither party shall have any further obligations under such documents and (iii) the Assignment of Defense and Escrow Agreement and the security interest created by such agreement shall be deemed terminated. As further consideration for the satisfaction of Note A, GTA consented to the extension of the closing deadline pursuant to the Second Amendment to the Amended and Restated Agreement for Sale and Purchase of Real Property - Parcel F between GHR and Parcel F, LLC. Elk Funding also consented to the Amendment as part of the Loan Satisfaction Agreement. Note A, made in the principal amount of $700, was secured by the Assignment of Defense and Escrow Agreement between GTA and Elk Funding. Note A, Note B (which was previously repaid by GTA) and the loan agreement relating to both notes were included as Exhibit 10.7 to GTA’s Current Report Form 8-K which was filed on July 29, 2004.
The Amendment was included as Exhibit 10.2.2 to our Current Report on Form 8-K filed on January 4, 2007. The description of the Amendment and the Loan Satisfaction Agreement are qualified in their entirety by the contents thereof.
On December 28, 2006, Note A was deemed satisfied, the obligations of the parties under the related loan documents were deemed terminated, and the Assignment of Defense and Escrow Agreement and the security interest created by such agreement were deemed terminated.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information about the members of our Audit Committee and our executive officers. Due to the fact that we are a limited liability company, we are sole member managed by Golf Trust of America, Limited Partnership through its general partner GTA GP, Inc.
Messrs. Jones, Reams, Wax, Loeb and Toor are members of our Audit Committee and directors of GTA. Each is deemed to be an independent director of GTA pursuant to the rules of the American Stock Exchange. Their terms as members of our Audit Committee track their respective terms as directors of GTA, unless they are removed by our sole member prior to the expiration of their respective terms. Messrs. Jones, Reams and Wax were appointed to our Audit Committee in 2004 and Messrs. Loeb and Toor were appointed to our Audit Committee in 2006.
(1) Resigned all positions effective February 5, 2007.
(2) Formerly the Controller for GTA, appointed Principal Accounting Officer of GTA on February 6, 2007 and Secretary of GTA on February 20, 2007.
Biographical Information
W. Bradley Blair, II is our Chief Executive Officer and President. He has been one of our officers since 2002. He is also the Chief Executive Officer, President and Chairman of GTA’s Board of Directors. He has been an officer of GTA since its initial public offering in 1997 and has served as our Chief Executive Officer and President since 2002. Mr. Blair has served as a member of the Board of Directors of NNN Healthcare/Office REIT, Inc. since September 2006. From 1993 until GTA’s initial public offering in February 1997, Mr. Blair served as Executive Vice President, Chief Operating Officer and General Counsel for The Legends Group. As an officer of The Legends Group, Mr. Blair was responsible for all aspects of operations, including acquisitions, development and marketing. From 1978 to 1993, Mr. Blair was the managing partner at Blair Conaway Bograd & Martin, P.A., a law firm specializing in real estate, finance, taxation and acquisitions. Mr. Blair earned a Bachelor of Science degree in Business from Indiana University and a Juris Doctorate degree from the University of North Carolina at Chapel Hill Law School.
R. Keith Wilt is our Vice President, and has served as our officer since July 16, 2004. He has held that position since we assumed control of the Resort, pursuant to the Settlement Agreement entered into on July 16, 2004 with GHR. From August 1999 through July 15, 2004, Mr. Wilt served as the Vice President and Treasurer of GHR. From March 1997 through
July 1999, Mr. Wilt served as the Chief Financial Officer of The Suncoast Companies, a design/build real estate developer in St. Petersburg, Florida. From 1991 though 1997, Mr. Wilt acted as an independent financial and systems consultant to a number of real estate development companies in the Tampa Bay area. From 1986 to 1991, Mr. Wilt was a Director of Information Services for TECO Energy, Inc. in Tampa, Florida. From 1975 to 1986, Mr. Wilt was the Assistant Treasurer and Corporate Tax Manager of Golf Host, Inc., the parent company of GHR. Mr. Wilt earned a Bachelors of Science degree in Accounting and Finance from Florida State University in 1975.
Scott D. Peters was our Chief Financial Officer and Secretary until his resignation on February 5, 2007. He was been one of our officers since 2002. He is also the Chief Financial Officer, Secretary and a member of GTA’s Board of Directors. He has been an officer of GTA since its initial public offering in 1997 and has served as our Chief Financial Officer and Secretary since 2002. Mr. Peters has been a board member of GTA since late 1999. In September 2004, Mr. Peters accepted a position as the Executive Vice President, Chief Financial Officer and a member of the board of managers at Triple Net Properties in Santa Ana, California. Mr. Peters had also served as President and Chief Executive Officer of G REIT, Inc. since December 2005, having served as that company’s Executive Vice President and Chief Financial Officer since September 2004, and he has served as Chief Executive Officer and Chairman of the Board of NNN Healthcare/Office REIT, Inc. since September 2006. From 1992 through 1996, Mr. Peters was the Senior Vice President and Chief Financial Officer of Pacific Holding Company/LSR in Los Angeles, developer of a master-planned residential community and country club, from September 1992 to June 1996, and Senior Vice President and Chief Financial Officer of Castle & Cooke Properties, Inc., a real estate development subsidiary of Dole Food Company, from February 1988 to August 1992. Mr. Peters received a Bachelor of Arts degree in Accounting and Finance from Kent State University.
Tracy S. Clifford was appointed GTA’s Principal Accounting Officer and Secretary upon the resignation of Scott D. Peters, GTA’s Senior Vice President, Secretary and Chief Financial Officer, on February 5, 2007. Ms. Clifford has been GTA’s Controller since September 1999. Prior to her employment with GTA in September 1999, Ms. Clifford was the Accounting Manager for United Healthcare of Georgia, Inc. from May 1995 through February 1999 and Finance Director from March 1999 until September 1999. From June 1993 through April 1995, Mrs. Clifford was employed by North Broward Hospital District in Fort Lauderdale, Florida initially as Senior Accountant (June 1993 through January 1994) and subsequently as Accounting Manager (February 1994 through April 1995). Mrs. Clifford is a Certified Public Accountant and worked as an auditor with Deloitte & Touche in Miami, Florida from 1991 to 1993. She received a Bachelor of Science Degree in Accounting from the College of Charleston and a Masters Degree in Business Administration from Georgia State University.
Raymond V. Jones has been a member of our Audit Committee since 2004. Mr. Jones also serves as a member of GTA’s Board of Directors. From 1984 to 1994 he was Managing Partner of Summit Properties Limited Partnership before it went public in 1994. From 1994 until retiring in March 1998, Mr. Jones was the Executive Vice President of Summit Properties Inc. Summit was a publicly traded REIT listed on the New York Stock Exchange and was one of the largest developers and operators of luxury garden multifamily apartment communities in the Southeastern United States. While at Summit, Mr. Jones oversaw the development of 26 communities comprising nearly 6,500 apartment homes in Georgia, North Carolina, South Carolina and Ohio. Prior to 1984, Mr. Jones served as General Operations Manager for both the Charlotte and Houston divisions of Ryan Homes, Inc. Mr. Jones earned a Bachelor of Arts degree in Political Science from George Washington University.
Fred W. Reams has been a member of our Audit Committee since 2004. Mr. Reams also serves as a member of GTA’s Board of Directors. From 1981 until his retirement on March 31, 2004, Mr. Reams served as the Chairman or President and Chief Investment Officer of Reams Asset Management Company, LLC, an independent private investment firm which he co-founded. From 1967 to 1981, Mr. Reams was employed in various investment management positions with the First National Bank of Michigan, Irwin Management Company, and Cummins, Inc. In addition, Mr. Reams served as President of the board of directors of the Otter Creek Golf Course from 1981 through 2003. Mr. Reams holds a Bachelor of Arts degree and a Master of Arts degree in Economics from Western Michigan University.
Edward L. Wax has been a member of our Audit Committee since 2004. Mr. Wax also serves as a member of GTA’s Board of Directors. Mr. Wax is currently Chairman Emeritus of Saatchi & Saatchi, a worldwide advertising and ideas company. From 1992 until his appointment to his current position in 1997, Mr. Wax served as Chairman and Chief Executive Officer of Saatchi & Saatchi. Mr. Wax had been responsible at Saatchi for the operations of 143 offices in 87 countries. Mr. Wax’s employment by Saatchi & Saatchi began in 1982. Mr. Wax was formerly Chairman of The American Association of Advertising Agencies as well as a director of both the Ad Council and the Advertising Educational Foundation. Mr. Wax also serves on the board of directors of Dollar Thrifty Automotive Group. Mr. Wax holds a Bachelor of Science degree in Chemical Engineering from Northeastern University and a Masters in Business Administration degree from the Wharton Graduate School of Business.
Jan H. Loeb has been a member of our Audit Committee since November 2006. Mr. Loeb is currently a portfolio manager for Amtrust Capital Management, Inc., a position he has held since February 2005. From February 2004 through January 2005, Mr. Loeb was a portfolio manager for Chesapeake Partners. From January 2002 through December 2004, Mr. Loeb was a Managing Director of Jefferies & Company, Inc., an investment banking firm which is based in New York City. From 1994 through 2001, Mr. Loeb was a Managing Director of Dresdner Kleinwort and Wasserstein, Inc., an investment banking firm based in New York City which was formerly known as Wasserstein Perella & Co., Inc. Mr. Loeb also serves on the board of directors of American Pacific Corporation, a chemical and aerospace corporation and serves on the boards of numerous charitable organizations. Mr. Loeb holds a B.B.A. degree from Bernard M. Baruch College.
Nauman S. Toor has been a member of our Audit Committee since November 2006. Mr. Toor has served as a Managing Director of Jefferies & Company, Inc., an investment banking firm which is based in New York City, since April 2001. As of December 31, 2006, Mr. Toor left Jefferies to form his own registered investment advisory firm. Mr. Toor started his career in investment banking with Kidder Peabody & Company in New York in 1990 and joined Jefferies & Company, Inc.’s investment banking group in 1994. Mr. Toor holds a Bachelor of Arts degree in economics from Ohio Wesleyan University and a Masters in Business Administration from Harvard Business School.
Committees
Audit Committee. The board of directors has established an audit committee to oversee our financial reporting process on behalf of the board of directors. Mr. Jones is the chairman of our audit committee. Our audit committee consists of Messrs. Wax, Reams, Jones, Toor and Loeb each of whom is independent under the rules of the Amex. Each member of our audit committee also meets the criteria for independence set forth in Rule 10A-3(b)(1) under the Exchange Act of 1934, as amended. None of the members of our audit committee has participated in the preparation of our financial statements or those of our subsidiaries during the past three years, and all are able to read and understand fundamental financial statements. Our audit committee’s role is to select the independent public accountants, to review with the independent public accountants the plans and results of the audit engagement, to approve professional services provided by the independent public accountants, to review the independence of the independent public accountants, to consider the range of audit and non-audit fees and to review the adequacy of our company’s internal accounting controls. Our management has the primary responsibility for the financial statements and the reporting process including the systems of internal controls. In fulfilling its oversight responsibilities, our audit committee reviewed the audited financial statements with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements. Our audit committee reviewed with the independent auditors, who are responsible for expressing an opinion on the conformity of those audited financial statements with accounting principles generally accepted in the United States of America, their judgments as to the quality, not just the acceptability, of our accounting principles and such other matters as are required to be discussed with our audit committee under generally accepted auditing standards. While financially literate under the applicable rules of the Amex, the members of our audit committee are not currently professionally engaged in the practices of accounting or auditing and are not all experts in the fields of accounting or auditing, including in respect of auditor independence. Members of our audit committee rely without independent verification on the information provided to them and on the representations made by management and our auditors, BDO Seidman, LLP. Accordingly, our audit committee’s oversight does not provide an independent basis to determine that management has maintained appropriate accounting and financial reporting principles or appropriate internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Our audit committee’s reviews, considerations and discussions do not provide assurance that BDO Seidman’s audit of our financial statements was carried out in accordance with generally accepted auditing standards, that the financial statements are presented in accordance with accounting principles generally accepted in the United States of America or that our public accountants are in fact “independent.” Our audit committee operates pursuant to a written amended and restated charter approved by our board of directors.
Audit Committee Financial Expert. Our “audit committee financial expert,” as defined by the rules of the Securities and Exchange Commission, is Mr. Fred W. Reams. Mr. Reams qualifies as an independent director pursuant to the standards of the American Stock Exchange. In addition:
(i) Mr. Reams, who is an audit committee financial expert, will not be deemed expert for any purpose, including without limitation for purposes of section 11 of the Securities Act of 1933 (15 U.S.C. 77k), as a result of being designated or identified as an audit committee financial expert.
(ii) The designation or identification of Mr. Reams as an audit committee financial expert does not impose on him any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of our audit committee and board of directors in the absence of such designation or identification.
(iii) The designation or identification of Mr. Reams as an audit committee financial expert does not affect the duties, obligations or liability of any other member of our audit committee or board of directors.
Other Committees. We may, from time to time, form other committees as circumstances warrant. No additional committees existed or were formed in the year ended December 31, 2006.
Directors and Officers Insurance
GTA maintains directors and officers liability insurance that insures our officers, managers and committee members from claims arising out of an alleged wrongful act by such persons while acting as executive officers, managers or committee members of our company, and it insures our company to the extent that we have indemnified our officers, managers and committee members for such loss.
Indemnification
Our organizational documents provide that we shall indemnify our officers, committee members and managers against certain liabilities to the fullest extent permitted under applicable law. Our organizational documents also provide that our officers, committee members and managers shall be exculpated from monetary damages to us to the fullest extent permitted under applicable law.
Code of Ethics
We have adopted the Code of Ethics of GTA. This Code of Ethics applies to our principal executive officer, our principal financial officer, our principal accounting officer, and our controller, as well as all of our officers and other employees. GTA’s Code of Ethics is filed as Exhibit 14.1 to its Annual Report on Form 10-K, filed on March 30, 2004. You may also obtain a free copy of our Code of Ethics by writing to our attention at 10 N. Adger’s Wharf, Charleston, South Carolina, 29401.
Until its termination on October 31, 2006, our management agreement with Westin provided that substantially all of the employees of the Resort are our employees, but were managed by Westin. As a result of this arrangement, we did not have direct control over these employees. Each employee at the Resort was subject to the Worldwide Code of Business Conduct and Ethics of Westin’s parent, Starwood Hotels & Resorts Worldwide, Inc, or Starwood. The text of Starwood’s code of conduct may be found on Starwood’s website. You may also obtain, without charge, a printed copy of the Starwood Code of Ethics by writing to our attention at 10 N. Adger’s Wharf, Charleston, South Carolina, 29401
.ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
We do not have a compensation committee. The compensation program for the one officer that we pay (our other officers are paid by our parent, GTA) is discretionary and is designed and implemented by the Chief Executive Officer of our parent, W. Bradley Blair.
Compensation Objectives. The objectives of our compensation structure are to:
1. retain (to the extent necessary) and reward experienced, highly motivated officer(s) who are capable of effectively managing the on-site responsibilities of the ongoing corporate operations of the Resort through to a sale of the Resort or longer term strategic plan; and
2. reward and encourage officer activity that results in enhanced performance results of the Resort and/or our company.
Elements of Compensation. Each element of compensation is designed to reward different performance goals, yet have the components work together to satisfy the ultimate goal of enhancing stockholder value in the context of the plan of liquidation. The elements of principal officer compensation are:
1. Base salary. Base salaries for our officer(s) are established based on their performance of their basic job description and through the performance of assigned responsibilities;
2. Cash bonuses. Cash bonuses reward the officer(s) for commendable performance of specially designated tasks or outstanding performance of assigned responsibilities pertaining to the sale of the Resort or real estate opportunities exceeding Mr. Blair’s expectations. These bonuses are discretionary and are not awarded based on a formula or a specific time frame.
3. Defined contribution plan. We have a 401(k) savings/retirement plan, which permits our eligible employees to defer up to 80% of their annual compensation, subject to certain limitations imposed by the Internal Revenue Code. The employees’ elective deferrals are immediately vested and nonforfeitable upon contribution to the 401(k) plan. We current offer a discretionary contribution matching policy of up to 50% of the first 6% invested by the employee.
4. Other elements. We contribute approximately 70% towards the cost of our officer(s)’ and their spouses’ and childrens’ health, dental and optical insurance. We also provide to our officer(s) at our sole cost life insurance coverage.
We are a single member limited liability company and do not have any stock. Our membership interests are not publicly traded; therefore, all required tables related to stock awards of options and grants have been omitted. We also do not have a pension plan or a board of directors; therefore, required tables for these items are omitted as well.
Summary Compensation Table
The following tables set forth the remuneration paid, distributed or accrued by us during the years ended December 31, 2006, 2005 and 2004 to our executive officers.
(1) Messrs. Blair and Peters and Ms. Clifford are not compensated directly by us for services as our executive officers; however, they receive compensation from GTA for service as its executive officers. In his capacity as President and Chief Executive Officer of GTA, total annual compensation of approximately $247,000 $232,000 and $1,492,000 for the years ended December 31, 2006, 2005 and 2004, respectively, was paid or accrued to Mr. Blair. In his capacity as Chief Financial Officer, Secretary and Vice President of GTA, total annual compensation of approximately $171,000, $80,000 and $494,000 for the years ended December 31, 2006, 2005 and 2004, respectively, was paid or accrued to Mr. Peters. In her capacity as Controller of GTA, total annual compensation of approximately $157,000, $110,000 and $107,000 for the years ended December 31, 2006, 2005 and 2004, respectively was paid or accrued to Ms. Clifford.
(2) Mr. Wilt was the Vice President, Treasurer and Principal Financial Officer of GHR, and he is presently our Vice President. Mr. Wilt received total compensation of $52,000 from GHR during the period from January 1, 2004 through July 15, 2004. Mr. Wilt also has a severance agreement with GTA to which we are not a party. Pursuant to this severance arrangement, Mr. Wilt will receive a benefit worth approximately $83,000 in connection with the sale of the Resort.
(3) Includes annual health and life insurance premiums and 401K contributions of $23,549 and $20,541 for the years ended December 31, 2006 and 2005, respectively, and $8,973 for the period July 16, 2004 to December 31, 2004 paid by us on behalf of Mr. Wilt.
We do not grant options or similar rights to our officers, and we do not have any equity compensation plans. In addition, we are not parties to employment agreements with our officers, but Messrs. Blair and Peters have employment agreements with GTA which are discussed in detail in GTA’s filings with the SEC.
We do not compensate our Audit Committee members for service in this capacity. GTA pays its independent directors (Messrs. Jones, Reams, Wax, Loeb and Toor) fees for their services as directors. GTA’s independent directors receive annual compensation of $10,000 plus a fee of $1,000 for attendance at each meeting of the board of directors of GTA (whether in person or telephonically), and $500 for attending each GTA committee meeting. GTA directors who are not independent directors are not paid any director fees. GTA reimburses the members of its Board of Directors for their reasonable and documented out-of-pocket travel expenses.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
We are wholly owned by GTA-IB Golf Resort, LLC, which is wholly owned by GTA, LP. GTA has sole voting and dispositive power over our interests through GTA, LP. GTA and GTA, LP are located at 10 North Adger’s Wharf, Charleston, South Carolina 29401.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with Management and Others
None.
(b) Certain Business Relationships
Mr. Blair and Ms. Clifford are executive officers of our parent, GTA. Mr. Peters was an executive officer of our parent until his resignation effective February 5, 2007. We owe GTA’s subsidiary, GTA, LP, $39 million pursuant to a promissory note and loan agreement relating to the Resort.
(c) Indebtedness of Management
None.
(d) Transactions with Promoters
Not applicable.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
BDO Seidman, LLP served as our independent registered accounting firm for the years ended December 31, 2006 and 2005.
The following fees were incurred for BDO Seidman, LLP’s services related to our years ended December 31, 2006 and 2005.
Audit Fees: approximately $167,000 and $246,000 for the fiscal years ended December 31, 2006 and 2005 for professional services rendered for the audit of our annual financial statements, review of the financials statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by the auditors in connection with statutory filings or engagements for those fiscal years.
Audit-Related Fees: None.
Tax Fees: None.
All other fees: None.
Our Audit Committee is required to pre-approve the audit and non-audit services performed by the independent auditor for us in order to assure that the provision of such services do not impair the auditor’s independence. Prior to the beginning of our fiscal year, our audit committee typically pre-approves certain general audit and non-audit services up to specified cost levels. Any audit or non-audit services that are not generally pre-approved in this manner require specific pre-approval by our audit committee. While our audit committee may delegate pre-approval authority to one or more of its members, the member or members to whom such authority is delegated must report any pre-approval decisions to our audit committee at its next scheduled meeting. Our audit committee does not delegate its responsibilities to pre-approve services performed by the independent auditor to management.
All of the services described in Items 9(e)(2) through 9(e)(4) of Schedule 14A were approved by our Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Financial Statements and Schedules
The financial statements and exhibits filed as part of this annual report on Form 10-K are listed on pages 32 and 63, and are incorporated herein by reference.
Financial Statements of GTA-IB, LLC and Golf Host Resorts, Inc. and Subsidiary-Predecessor Financial Statements
Report of Independent Registered Public Accounting Firm-BDO Seidman, LLP
Report of Independent Registered Public Accounting Firm-BDO Seidman, LLP
Combined Balance Sheets as of December 31, 2006 and December 31, 2005
Combined Statements of Loss and Changes in Member’s Deficit for the year ended December 31, 2006 and for the year ended December 31, 2005
Combined Statement of Cash Flows for the year ended December 31, 2006, the year ended December 31, 2005 and the Period July 16, 2004 to December 31, 2004, and Consolidated Statements of Cash Flows (Predecessor Basis) for the Period January 1, 2004 to July 15, 2004.
Notes to Combined/Consolidated Financial Statements
Introduction to Financial Statements of the Rental Pool Lease Operation-Historical Summary
Financial Statements of the Rental Pool Lease Operation
Report of Independent Registered Public Accounting Firm-BDO Seidman, LLP
Balance Sheet-Distribution Fund as of December 31, 2006 and 2005
Balance Sheet-Maintenance Escrow Fund as of December 31, 2006 and 2005
Statements of Operations-Distribution Fund for the years ended December 31, 2006, 2005 and 2004
Statements of Changes in Participants’ Fund Balances-Distribution fund for the years ended December 31, 2006, 2005 and 2004
Statements of Changes in Participants’ Fund Balances-Maintenance Escrow Fund for the years ended December 31, 2006, 2005 and 2004
Notes to Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Sole Member and Sole Manager of
GTA-IB, LLC
We have audited the accompanying combined balance sheets of GTA-IB, LLC and affiliates (a wholly owned subsidiary of Golf Trust of America, Inc., collectively “the Company”) as of December 31, 2006 and 2005, and the related combined statements of operations, changes in member’s deficit and cash flows for the years ended December 31, 2006 and 2005 and for the period from July 16, 2004 (inception) to December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, on July 16, 2004, GTA-IB, LLC took possession of the property pursuant to an agreement in settlement of a loan made by Golf Trust of America, Inc.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of GTA-IB, LLC and affiliates at December 31, 2006 and 2005, and the results of their operations and their cash flows for the years ended December 31, 2006 and 2005 and the period from July 16, 2004 (inception) to December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
The accompanying combined financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered a loss from operations for the period from July 16, 2004 (inception) to December 31, 2006, and at December 31, 2006 had deficiencies in working capital and equity that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
Charlotte, North Carolina
March 30, 2007
BDO Seidman, LLP
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholder and Board of Directors
Golf Host Resorts, Inc.
We have audited the consolidated statements of operations, changes in accumulated deficit and cash flows for the period from January 1, 2004 to July 15, 2004 of Golf Host Resorts, Inc. and Subsidiary. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of Golf Host Resorts, Inc. and Subsidiary’s operations and their cash flows for the period from January 1, 2004 to July 15, 2004 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered a loss from operations for the period from January 1, 2004 to July 15, 2004 and has a shareholder’s deficit that raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
Charlotte, North Carolina
March 24, 2005
BDO Seidman, LLP
GTA-IB, LLC
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 2006 AND 2005
(in thousands)
See notes to combined/consolidated financial statements.
GTA-IB, LLC
COMBINED STATEMENTS OF LOSS AND CHANGES IN MEMBER’S DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005, AND FOR THE PERIOD JULY 16, 2004
(INCEPTION) TO DECEMBER 31, 2004 AND CONSOLIDATED STATEMENTS OF LOSS AND CHANGES IN
ACCUMULATED DEFICIT (PREDECESSOR BASIS) FOR THE PERIOD JANUARY 1, 2004 TO JULY 15, 2004
(in thousands)
See notes to combined/consolidated financial statements.
GTA-IB, LLC
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 AND
FOR THE PERIOD JULY 16, 2004 (INCEPTION) TO DECEMBER 31, 2004, AND
CONSOLIDATED STATEMENTS OF CASH FLOWS (PREDECESSOR BASIS)
FOR THE PERIOD JANUARY 1, 2004 TO JULY 15, 2004
(in thousands)
See notes to combined/consolidated financial statements.
GTA-IB, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
(dollar amounts in thousands)
1. Innisbrook Resort Change in Ownership and Business
GTA-IB, LLC (the “Company”) is owned by GTA-IB Golf Resort, LLC, which in turn is 100% owned by Golf Trust of America, L.P. (the “Operating Partnership”). Golf Trust of America, Inc. (“GTA”) indirectly owns 99.6% of the Operating Partnership. The remaining 0.4% of the Operating Partnership is owned by its one limited partner. The Operating Partnership is GTA’s operating partnership. Golf Host Resorts, Inc. (“GHR”, “the predecessor owner” or “the former borrower”), an entity affiliated with Starwood Capital Group LLC, is the former owner of the Innisbrook Resort and Golf Club (the “Resort”) and the former borrower under a participating mortgage loan funded by the Operating Partnership. This participating mortgage loan was secured by the Resort, cash, undeveloped land at the Resort and 368,365 shares of GTA’s common stock. The Resort is a 72-hole destination golf and conference facility located near Tampa, Florida.
The Company entered into a Settlement Agreement dated July 15, 2004 (the “Settlement Agreement”) with the Operating Partnership and GHR, Golf Hosts, Inc., Golf Host Management, Inc., Golf Host Condominium, Inc. and Golf Host Condominium, LLC. The Settlement Agreement resolved a number of issues between the parties, including GHR’s default under the $79 loan made by the Operating Partnership to GHR in June 1997. As part of the Settlement Agreement, the Company took ownership of the Resort on July 15, 2004. In connection with the Settlement Agreement, the Company entered into a management agreement with Westin Management Company South (“Westin”), which provides for Westin’s management of the Resort, and Westin and Troon Golf L.L.C. (“Troon”) entered into a facility management agreement providing for Troon’s management of the golf facilities at the Resort. The current status of (i) the management agreement with Westin and (ii) the facility management agreement with Troon are discussed in Notes 10 and 12 below. In connection with the Settlement Agreement, the Company assumed control and operation of the Rental Pool Lease Operations at the Resort (the “Rental Pool”). The Rental Pool was operated and controlled by GHR prior to that time. On a year-to-year basis, approximately 500 of the 938 condominium units at the Resort are leased by the Company from the condominium owners and used as hotel accommodations for the Resort pursuant to rental pool lease arrangements. The Company is the lessee under these rental pool lease operation agreements. Those agreements provide that the Company will distribute a percentage of room revenues to participating condominium owners who permit the Company to lease their units as hotel accommodations.
The Operating Partnership had previously entered into an agreement with GHR and the prospective purchaser of Parcel F. This agreement, commonly known as the Parcel F Development Agreement, was executed on March 29, 2004 and amended on August 10, 2005 to add the Company as a party. The Parcel F Development Agreement includes the terms and conditions pursuant to which Parcel F may be developed, and includes restrictions on GHR, the owner of Parcel F, which are designed to avoid interference with the ongoing operations of the Resort. The Parcel F Development Agreement also contains provisions which the Company believes will increase the Operating Partnership’s ability to better manage the location of the access road for Parcel F.
GTA is presently in the process of liquidating pursuant to a plan of liquidation approved by its stockholders on May 22, 2001.
The settlement described above, pursuant to which the Company took title to the Resort, was accounted for using methods consistent with purchase accounting in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations. Accordingly, the Company, with the assistance of its then independent financial advisor, recorded the tangible and identified intangible assets of the Resort at their respective fair values. The long-term liabilities of the Resort were stated at their fair value based on net present value calculations. See Note 5 for further discussion. The settlement amount was allocated to the assets acquired, including the liabilities accrued as of July 15, 2004, based upon their estimated fair values as of that as indicated below:
Predecessor Owner - Organization and Business
As stated above GHR, a wholly owned subsidiary of Golf Hosts, Inc. (“GHI”) was the predecessor owner of the Resort.
Golf Host Condominium, Inc. (“GHC”), a wholly owned subsidiary of GHR, was formed on December 1, 1997. GHC’s assets consisted of three Innisbrook condominiums and a linen room within condominium lodge number 28.
2. Going Concern
As of December, 2006, the Resort has a working capital deficit of approximately $10,607. This working capital deficit resulted primarily from the reclassification of the Westin termination fee of $5,594 and the Troon supplemental fee of $800 from long term to short term obligations. Before this reclassification, the Resort had a working capital deficit of approximately $4,213. The Resort’s member deficit at December 31, 2006 is approximately $13,351. The Resort reported a net loss of approximately $4,861 for the year ended December 31, 2006. The Resort continues to experience seasonal fluctuations in its net working capital position due to the seasonality of the golf industry in Florida. This seasonality impacts our liquidity. In particular, there is generally more available cash during the winter months, specifically in the first quarter. Cash generally becomes very limited in the late summer months. Revenues generally decline at the Resort during the summer months because the hot Florida weather makes the Resort less appealing for group golf outings and vacation destination golfers. Additionally, tropical storm weather patterns, such as the hurricanes experienced in Florida in 2004 and those that affected the southeast coast in 2005, negatively impacted revenues for the Resort in the late summer-early fall season of 2005 and 2006 as groups and guests were hesitant to book reservations on the southeast coast during the hurricane season. Weather-related concerns may continue to negatively impact reservations in comparable periods (July through September) of subsequent years. The Resort uses seasonal pricing (peak, shoulder and off-peak) to maximize revenues. Generally, the Resort’s only source of cash is from its operations, if any. While certain steps have been taken in an effort to improve the long-term financial performance of the Resort since we assumed title to the Resort on July 15, 2004, current projections indicate an operational cash flow shortfall of up to $1,000 in the aggregate is likely to occur by late summer/early fall 2007. Further, now that the Westin Management Agreement is terminated, we have begun the capital improvement project of upgrading the technological infrastructure of the Resort and replacing certain components which were proprietary to Westin. Our projections indicate that the replacement of these components could require us to make an investment in the range of $1.0 to $2.0 million. GTA management continues to work diligently with the Resort’s management team to identify opportunities to improve the cash flow situation at the Resort. GTA is currently seeking a buyer for the Resort pursuant to its stockholder-approved plan of liquidation. GTA made intercompany advances to the Resort to support working capital needs in the amounts of $2,000, $400, $650, $600 and $120 in July 2004, September 2005, November 2005, October 2006 and February 2007, respectively. Further, GTA funded approximately $203 and $33 for the beginning phase of the technological infrastructure capital investment in October 2006 and November 2006, respectively. The $33 funded in November 2006 and the $120 funded in February 2007 was repaid to GTA by the Company in March 2007. In the event that the Resort is not sold, it may become necessary for the Resort to seek further cash infusion from GTA, if available, or to seek some other form of financing (which we are currently pursuing) or equity investment to seek to insure the Company’s ongoing viability through the consummation of the liquidation. There are no assurances that GTA, or any affiliate, will have the ability to provide future funding to the Resort, nor are there any assurances that the Company will be able to obtain financing which will allow the Company to remain viable.
3. Summary of Significant Accounting Policies
Principles of Combination
The financial statements and footnotes reflect the combined financial results of the Company, GTA-IB Condominium, LLC and GTA-IB Management, LLC. These legal entities are all wholly owned subsidiaries of the Operating Partnership, GTA-IB Condominium, LLC holds the title to three condominium units at the Resort that participate in the Rental Pool. GTA-IB Management, LLC is the entity that employs substantially all of the employees working at the Resort. There are no other operations of GTA-IB Condominium, LLC and GTA-IB Management, LLC. The Company holds title to the Resort and is the entity in which all of the Resort operations are recorded. All intercompany transactions and account balances have been eliminated in combination.
The predecessor owner’s consolidated financial statements include the accounts of Golf Host Resorts, Inc. and Golf Host Condominium, Inc.All significant intercompany account transactions and account balances have been eliminated in consolidation.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, accounts receivable, investments and notes payable. The Company places its temporary cash with high credit quality principal institutions. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. Although due dates of receivables vary based on contract terms, credit losses have been within management’s estimates in determining the level of allowance for doubtful accounts. Overall financial strategies are reviewed periodically.
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
• Accounts receivable and accounts payable: Due to their short term nature, the carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximate their fair value. The Company provides for any losses through its allowance for doubtful accounts.
• Long-term obligations: The carrying amount of the Company’s refurbishment obligations, capital leases and long-term liabilities approximate their fair value because they have been recorded at their net present values considering relevant risk factors.
Trade Accounts Receivable
Trade accounts receivable represents amounts due from Resort guests and is net of allowances of approximately $16 and $10 for doubtful accounts at December 31, 2006 and 2005, respectively. Groups with a recent prior direct billing positive history with the Resort are granted credit for billing. If a group has not been to the Resort within the past two years, an updated credit evaluation is conducted. The Company requires a deposit of approximately 25% of the total estimated contracted revenue. Additional deposits may be required depending on the outcome of the credit evaluation. Terms are negotiable by group contract but invoices are typically due 30 days from the receipt of invoice.
Westin, while manager, and the Company’s management review accounts receivable monthly to determine if any receivables are uncollectible. Any receivable considered to be uncollectible is included in the allowance for doubtful accounts. After all attempts to collect the receivable have failed, the receivable is written off against the allowance. The provision for doubtful accounts and the write-off net of recoveries for the respective periods are illustrated in the table below.
Inventories and Supplies
Inventories and supplies are recorded at the lower of cost, on a first-in, first-out basis, or market.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Costs of maintenance and repairs of property and equipment used in operations are charged to expense as incurred, while renewals and betterments are capitalized. When property and equipment are replaced, retired or otherwise disposed of, the costs are deducted from the asset and accumulated depreciation accounts. Gains or losses on sales or retirements of equipment are recorded in operating income.
Depreciation is recorded using the straight-line method. Estimates of useful lives used in computing annual depreciation are as follows:
Impairment of Long-Lived Assets
The Company periodically reviews its long-lived assets for impairment by comparing the carrying values of the assets with their estimated future undiscounted cash flows. If it is determined that an impairment loss has occurred, the loss is recognized during that period. The impairment loss is calculated as the difference between asset carrying values and fair value as determined by prices of similar items and other valuation techniques (discounted cash flow analysis), giving consideration to recent operating performance and pricing trends. There were no significant impairment losses related to long-lived assets for the years ended December 31, 2006, 2005 and 2004. A subsequent determination that the property, plant and equipment assets are impaired, however, could have a significant adverse impact on the Company’s results of operations or financial condition.
Intangible assets
The Company evaluates intangible assets for impairment annually or if a significant event occurs or circumstances change. Factors the Company considers important, which could indicate impairment, include the following: (1) significant under-performance relative to historical or projected future operating results; (2) significant changes in the manner of the Company’s use of the acquired assets or the strategy for the Company’s overall business; and (3) significant negative industry or economic trends. During the fourth quarter of 2006, the Company completed its annual intangible impairment assessment, and based on the results, the Company determined that no impairment of intangible existed at December 31, 2006, and there have been no indicators of impairment since that date. A subsequent determination that these assets are impaired, however; could have a significant adverse impact on the Company’s results of operations or financial condition.
Advertising
Advertising costs are expensed as incurred. Advertising costs for the respective periods were as follows:
Leases
Leases, which transfer substantially all of the benefits and risks of ownership of property, are classified as capital leases. Assets and liabilities are recorded at amounts equal to the present value of the minimum lease payments at the beginning of the lease term. Interest expense relating to the lease liabilities is recorded to affect constant rates of interest over the terms of the leases.
Leases, which do not transfer substantially all of the benefits and risks of ownership of property, are classified as operating leases, and the related rentals are charged to expense as incurred.
Predecessor Owner - Parent Company Allocations and Advances
GHR reimbursed GHI for administrative and other expenses based on estimated time and expenses incurred. Amounts charged were approximately $341 for the period January 1, 2004 to July 15, 2004. GHR also received cash advances from GHI to fund cash flow shortages.
Revenue and Rental Pool Distributions
Revenue from Resort operations is recognized as the related service is performed. Revenue from Resort operations includes revenue from rooms, food and beverage, golf and other minor operating departments. Rooms revenue includes rental revenues generated from condominium units owned by third parties participating in the Rental Pool lease operations. If these rental units were owned by the Company, normal costs associated with ownership such as depreciation, interest, real estate taxes and maintenance would have been incurred. (See Note 10 for distributions to rental pool participants).
The membership initiation fees at the Resort are nonrefundable and are initially recorded when received as deferred revenue and amortized over the average life of a membership which, based on historical information, is deemed to be ten years for full golf memberships and five years for resort, executive and tennis memberships.
Predecessor Owner - Interest Expense, Net
The Company’s cash management policy is to utilize cash resources to minimize net interest expense, through either temporary cash investments or reductions in existing interest-bearing obligations. Accordingly, temporary cash investments and interest income vary from period to period. Interest expense is net of interest income of approximately $16 for the period January 1, 2004 to July 15, 2004.
Use of Estimates
Preparation of these combined/consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions, which affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the combined/consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
4. Property and Equipment
Property and equipment as of December 31, 2006 and 2005 consists of the following:
Included in machinery and equipment is certain equipment including golf course maintenance equipment, vehicles and telecommunications equipment that are recorded under capital leases and that have a net book value at December 31, 2006 and 2005 of approximately $793 and $1,006, respectively. Depreciation expense of approximately $1,628, $1,528, $1,307 and $606 was recorded for the years ended December 31, 2006 and 2005, the period from January 1 to July 15, 2004, and the period from July 16 to December 31, 2004, respectively.
5. Intangibles and Other Assets
Intangible assets represent the value of the following contractual relationships that existed at July 15, 2004: the trademark and trade name of “Innisbrook;” the Rental Pool; the guest room bookings; the club memberships; and the water contract that provides irrigation water for the golf courses at no charge up to certain specified levels. The intangible assets are being amortized over the specific term or benefit period of each related contract.
Amortization expense amounted to approximately $1,729 for the year ended December 31, 2006, $2,273 for the year ended December 31, 2005 and $1,262 for the period from July 16, 2004 to December 31, 2004. Amortization for the predecessor owner was approximately $467 for the period January 1, 2004 to July 15, 2004. Of these amounts, approximately $1,321, $1,321 and $619 for the year ended December 31, 2006, 2005 and the period July 16, 2004 to December 31, 2004, respectively, are included in hotel expenses and are not included in depreciation and amortization in the Statements of Operations. The intangible assets of the predecessor owner consisted of the Rental Pool refurbishment asset and the management agreement between Westin and the predecessor owner, which was amortized over twenty years on a straight-line basis.
Anticipated amortization expense for the next five years and thereafter is illustrated in the table below:
Other assets include the Company’s interest in the net proceeds from the sale of Parcel F, a parcel of land located within the Resort. The value of our primary long-lived asset, Parcel F, was reduced from $2,200, which was the derived value at July 15, 2004, to $1,490 due to the fact that $710 of this value was transferred to GTA pursuant to the terms of the an amended agreement with the owner of Parcel F. Also included in other assets are certain design fees for the refurbishment program, utility deposits and club member initiation fees. The Company has a contractual right to be reimbursed for these design fees by the Rental Pool participants in the form of a deduction from the quarterly Rental Pool refurbishment payments. Utility deposits remain on account and are refundable to the Company upon sale of the Resort. The club initiation fees are paid by the club members quarterly, but in no event greater that two years from the date of membership activation. The amount of initiation fees listed below represent the payments due greater than one year from the respective balance sheet dates.
6. Other Payables and Accrued Expenses
Other payables and accrued expenses consist of the following:
7. Due to Related Parties and Other Long-Term Liabilities
Due to related parties:
The Company’s parent has agreed that it will not request or demand repayment of the advances it has made to the Company prior to January 1, 2008.
Master Lease Refurbishment Obligation
On July 16, 2004, the Company recorded a liability of $4,532 for the refurbishment program pursuant to the master lease agreement, or MLA, of the Rental Pool. This liability represented the Company’s obligation to pay to the various participants in the Rental Pool an amount equal to 50% of the cost to refurbish their respective units, and was recorded at the then net present value (calculated at a discount rate of 15%) of the total principal payments of $7,273. Principal and interest payments are due quarterly over the repayment period of the program, beginning with the first quarter of 2005 and ending with the fourth quarter of 2009. Interest on this liability accrues at a rate of 5% and is paid quarterly. Amortization of the discount is charged to interest expense ratably over the period from January 1, 2005 through December 31, 2009.
In addition, the Company agreed to provide a refurbishment reimbursement to the respective condominium owners for units placed into the Rental Pool during 2005. The owners of these units will be paid 25% of their refurbishment investment, with interest at 2.5% per annum. The owners of these units currently receive interest and will receive principal payments beginning in 2008 and ending in 2012 for total principal payments of approximately $92.
The amortization charged to interest expense for the years ended December 31, 2006 and 2005 and the period from July 16, 2004 to December 31, 2004 was $682, $768 and $248, respectively. The amortization expense for the period January 1, 2004 to July 15, 2004 was $585, and is included in Resort facilities expense. The net present value of this liability as of December 31, 2006 and 2005 is $4,254 and $4,647, respectively, of which $1,424 and $1,073, respectively, is included in current liabilities.
The corresponding benefit to the Resort from the MLA refurbishment program was included in the valuation of the rental pool intangible asset which is being amortized over the term of the current master lease agreement that expires in 2011. Minimum undiscounted principal payments on the MLA refurbishment program are as follows:
Our obligation to reimburse the Rental Pool Participants for their refurbishment expenses is contingent on the units remaining in the Rental Pool from the time of their refurbishment through 2009. If the unit does not remain in the Rental Pool during the reimbursement periods discussed above, the owner or successor owner will forfeit any unpaid installments at the time the unit is removed from the Rental Pool.
8. Line of Credit and Notes Payable - Predecessor Owner
GTA, LP was the lender under a note payable to GHR in the amount of $78,975. The note payable had two components: a $69,975 participating mortgage note and a $9,000 credit facility. The note payable was guaranteed by GHI and collateralized by substantially all assets other than the Resort’s accounts receivable and approximately 38 acres of undeveloped land. The participating mortgage note was used to finance GHR’s acquisition of the Resort and its purchase of GTA stock.
GHR incurred interest expense of approximately $4,940 on the GTA, LP note payable during the period January 1, 2004 to July 15, 2004.
GHR was informed by GTA on November 29, 2001 that GHR was in default on the $78,975 note payable arising from GHR’s failure to pay the October 2001 interest payment and all subsequent principal and interest payments, which have not been made. GTA, LP asserted its right to accelerate payment of the total outstanding principal and interest amounts.
GHR sought to negotiate a Settlement Agreement with GTA, LP. Effective July 15, 2004, GHR and GTA, LP entered into a Settlement Agreement that transferred to the Company the Resort property, three condominium units and linen room located at the Resort, the interest in GTA stock acquired by GHR and operations held by the parent of GHR, and all rights, title and interests of GHR under existing contracts and agreements. In addition, GHR provided a limited indemnity to defend and hold harmless GTA (and its affiliates) from and against any and all costs, liabilities, claims, losses, judgments or damages arising out of or in connection with a lawsuit known as the Class Action Lawsuit, as well as liabilities accruing on or before the closing date relating to employee benefits and liabilities for contracts or agreements not disclosed by GHR to GTA. In return, GTA, LP delivered to GHR a duly executed release.
9. Leases
The Company leases equipment under capital and operating leases. Lease expense was approximately $287 for the year ended December 31, 2006, $302 for the year ended December 31, 2005, $111 for the period July 16, 2004 to December 31, 2004, and $257 for the period January 1, 2004 to July 15, 2004. Future minimum lease payments under leases in excess of one year are as follows:
10. Commitments and Contingencies
Claims and Lawsuits
The Company is subject to claims and lawsuits in the normal course of operations. Management does not believe that the ultimate resolution of such matters will materially impair operations or have an adverse effect on the Company’s financial position and results of operations.
Employee Benefit Plans
The Company maintains a defined contribution Employee Thrift and Investment Plan, which provides retirement benefits for all eligible employees, including employees of GTA-IB Operations, LLC, who have elected to participate. Employees must fulfill a 90-day service requirement to be eligible to participate in this plan. The Company currently matches one half of the first 6% of the contributions of each employee. The Company made matching contributions of approximately $185 and $183 for the years ended December 31, 2006 and 2005, respectively and $77 for the period ended July 16 to December 31, 2004. The predecessor owner made matching contributions of approximately $94 for the period January 1, 2004 to July 15, 2004.
Westin Management Company South and Troon Golf L.L.C.
The Management Agreement between the Company and Westin provided that Westin will manage the Resort for a fee equal to 2.2% of the Resort’s gross revenue. Contemporaneously with the signing of the management agreement in July 2004, Westin entered into a management contract with Troon pursuant to which Troon was to manage the golf facilities of the Resort for a fee payable by the Company which equaled 2% of the Resort’s gross golf revenue. The Company paid monthly management fees to Westin and Troon. By mutual agreement, on September 28, 2006, the Company, Westin and the Company’s parent, or “GTA”, as guarantor, entered a Termination and Release Agreement (the “Termination Agreement”), pursuant to which the Company, GTA, and Westin agreed to terminate the Management Agreement as of October 31, 2006 (the “Termination Date”). In addition to the termination of the Management Agreement, the Termination Agreement provided that (i) on or prior to October 3, 2006, the Company or GTA would deposit $600 in the Resort’s operating account
(which GTA did) to be used in part to pay to Westin certain unpaid fees and charges which have accrued under the Management Agreement, (ii) on or prior to the earlier of March 31, 2008, or any sale of the Resort by the Company and GTA, the Company will pay to Westin the termination fee of approximately $5,594, and (iii) Westin will permit the Company and GTA to continue to access Westin’s “SAP” accounting system for the operation of the Resort until March 31, 2007 (which they have) for a total charge of $6. Subsequent to the termination of the Westin management contract, the Company and GTA have been managing the Resort operations internally. The amortization charged to interest expense for the year ended December 31, 2006 and to the year ended December 31, 2005 is $447 and $353, respectively.
Troon Supplemental Fee
The July 15, 2004 facility management agreement between Westin and Troon, which the Company assumed as a result of the Westin termination, provides for the payment of a supplemental fee to Troon, subject to the terms and conditions set forth in that agreement, of $800. If not earlier terminated, the facility management agreement will expire in July 15, 2009. The obligation, which is included in other long-term liabilities on the balance sheet, was recorded at its net present value on July 16, 2004. The net present value on that date was $682 (calculated at a discount rate of 7%). Amortization of the discount is charged to interest expense ratably over the period through December 31, 2006. The amortization charged to interest expense for the yearsended December 31, 2006 and 2005 is $48 and $48 respectively and $248 for the period from July 16, 2004 to December 31, 2004. The net present value of this liability as of December 31, 2006 and 2005 is $800 and $752, respectively. The Company had until November 30, 2006 to decide whether to assume or terminate the management agreement with Troon for Troon to continue to manage the golf facilities of the Resort. The Company and Troon agreed to extend the facilities management agreement for ten day incremental periods subsequent to November 30, 2006. See Note 12, Subsequent Events, for further discussion.
See Note 12 for further discussion regarding the status of the Troon management contract.
The payments made to Westin and Troon under their respective management agreements are reflected in the table below:
.
Rental Pool Operations
Historically, GHR and the Company as GHR’s successor, have offered several different Rental Pool programs to the condominium owners. Effective January 1, 2002, GHR offered a new Master Lease Agreement (“NMLA”) which permitted all Rental Pool participants the opportunity to convert to the new agreement. Each condominium owner may elect to participate in either the NMLA or continue with a prior agreement. If an owner elected to participate in the NMLA, the owner is prohibited from returning to the any previous agreement. Effective January 1, 2003, all but one Rental Pool participant elected to convert to the NMLA. As of January 1, 2004, all condominium owners participating in the rental pool are participating pursuant to the NMLA. The NMLA provides for Adjusted Gross Revenues, as defined, to be divided 40% to the Innisbrook Rental Pool participants and 60% to GTA-IB, LLC. In addition, GTA-IB, LLC has agreed, as part of the NMLA, to reimburse Rental Pool participants in the NMLA for up to 50% of actual unit refurbishment costs beginning in 2005 through 2009, so long as the Rental Pool participation threshold, as defined, is maintained (see Note 7). In addition, for any unit refurbished and placed in the Rental Pool operation during 2005, the Company must reimburse the owner for 25% of the refurbishment costs plus interest at 2.5% per annum. Should the Company elect to terminate the NMLA before its expiration in 2011, all unpaid balances of refurbishment costs and related interest would be due and payable to the Participants. Distributions to the Rental Pool participants of approximately $4,808 and $4,966 for the years ended December 31, 2006 and 2005, respectively, $1,556 for the period July 16, 2004 to December 31, 2004, and $2,499 for the period January 1, 2004 to July 15, 2004 are included in Other expenses on our financial statements.
Land Use Lawsuit
On March 10, 2005 in the Circuit Court of the Sixth Judicial Circuit, in and for Pinellas County, Florida, Civil Division, the Company filed a Motion to Intervene in the suit titled Innisbrook Condominium Association, Inc., C. Frank Wreath, Meredith P. Sauer, and Mark Banning, Plaintiffs (the “Plaintiffs”) vs. Pinellas County, Florida, Golf Host Resorts, Inc. and Innisbrook F LLC, Defendants (the “Defendants”), Case No. 043388CI-15 (the “Initial Land Use Lawsuit”). The Plaintiffs have filed a multi-count complaint seeking injunctive and declaratory relief with respect to the land use and development rights of a tract of undeveloped land located within the Resort commonly known as Parcel F. The Plaintiffs allege that there are no remaining development units (residential units) available to be developed within the Resort property. On March 29, 2005, the Company filed a Motion to Intervene as a defendant in the Initial Land Use Lawsuit in order to protect the Company’s property, and the Company’s land use and development rights with respect to Parcel F and its property. The court ruled in favor of all Defendants and against all Plaintiffs as to each count in both cases. Subsequent to the court’s oral rulings, defense counsel prepared a proposed final judgment which reflects the court’s factual findings and legal conclusions. On March 8, 2006, the court formally entered its final judgment on the record ruling in favor of the defendants on all counts and denying all claims asserted by the plaintiffs in both cases. On March 31, 2006, the plaintiffs in the consolidated cases filed a notice of appeal. The Second District Court of Appeal heard oral argument on February 4, 2007. The Appeal Court affirmed the Circuit Court judgment in favor of the defendants on February 28, 2007 and denied the plaintiffs-appellants’ motion for attorney fees. On March 13, 2007, the plaintiffs filed a motion for the Appeal Court to rehear their claims. As of March 26, 2007, the Appeal Court has not yet responded to this motion.
As an intervenor in the Initial Land Use Lawsuit, we sought to obtain a ruling from the court which preserves and protects our property, the land use and development rights with respect to Parcel F and our property in order to maximize the value of those rights as they relate both to Parcel F and the Resort in general. We have referred to these two matters as the Land Use Lawsuits. See further discussion of the Land Use Lawsuits under the heading “Risk Factors” in Part I, Item 1A