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Article by DailyStocks_admin    (05-30-08 06:12 AM)

Filed with the SEC from May 15 to May 21:

Consolidated-Tomoka Land (CTO)
Wintergreen Advisers said it's nominating Dianne Neal for membership to CTO's board of directors, to fill the vacancy created by Bob D. Allen's retirement from the board. The shareholder also submitted the names of Frank O'Connor and Maryanne Connors Brennan as substitute candidates in case Neal's candidacy is unsuccessful. Wintergreen also said it initiated discussions with CTO on maximizing the value of its Daytona properties through direct development or partnerships. Wintergreen currently holds 1,481,474 shares (25.9% of the total outstanding).

BUSINESS OVERVIEW

Consolidated-Tomoka Land Co. (the “Company,” “we,” “our,” or “us”) is primarily engaged in real estate, income properties, and golf operations (collectively, which is referred to as “The Real Estate Business”) through its wholly owned subsidiaries, Indigo Group Inc., Indigo Development Inc., Indigo International Inc., Indigo Group Ltd., Indigo Commercial Realty Inc., W. Hay Inc., W. Hay LLC, and Palms Del Mar Inc. Real estate operations include land sales and development, agricultural operations, and leasing properties for oil and mineral exploration. Income properties primarily consist of owning properties leased on a triple-net and double-net basis. Golf operations consist of the operation of two golf courses, a clubhouse facility, and food and beverage activities. These operations are predominantly located in Volusia County, Florida, with various income properties located in Florida, Georgia, and North Carolina.

Identifiable assets by segment are those assets that are used in each segment. General corporate assets and those used in the Company’s other operations consist primarily of cash, investment securities, notes receivable, and property, plant, and equipment.

BUSINESS PLAN

In 1999, we adopted a business plan that we believed could increase shareholder value year-after-year and also produce stable earnings during depressed real estate markets. We committed to minimize corporate debt and overhead. The real estate market has always been cyclical. In down markets, significant debt can severely weaken a real estate company by forcing it to sell off valuable assets at a discount. Although our revenues and profits have grown significantly, we have only 17 corporate employees—the same number we had in 2000.

Except for our agricultural operations, we subcontract all other work depending on work load. To cover operating expenses and produce stable income during challenging economic conditions, we accumulated a debt-free $110 million portfolio of net-lease properties. These strategic initiatives have allowed us to continue to sell at the highest prices per square-foot in our market. We have a policy of not discounting prices to make a sale even during challenging times. We can afford to hold our lands until the market improves. In short, we believe that our business plan allows us to increase shareholder value in both good and bad times.

Our business plan accelerates the conversion of our agricultural lands, which are all located in Daytona Beach, into a geographically diverse portfolio of low risk income properties utilizing income tax deferral under Section 1031 of the Internal Revenue Code. Our long-held lands are carried on our books at a very low tax basis, and as a result, land sales generate very large taxable gains. The 1031 exchange process allows us to postpone, hopefully indefinitely, the related income taxes and reinvest 100% of the gross sale proceeds. To equal the equivalent after-tax returns from the 1031 process, alternative investments would need to yield a safe return greater than 40%. Our 1031 investment strategy offers a number of options that can further increase shareholder value. For example, because our portfolio is comprised of net-lease credit-tenants, we have the option of borrowing against a property on a non-recourse basis and reinvesting the borrowed funds into any number of alternate investments, including self-development, without triggering the repayment of the deferred taxes. We expect that leveraging our portfolio in future years will allow us to further increase our return on investment and shareholder value. We test alternative strategies under our business plan, which are reviewed annually by the Board of Directors. This analysis consistently indicates that our 1031 tax strategy yields the highest potential shareholder value year after year.

Real estate sales and development are a highly localized activity. Our success is based on execution of our business plan by a small, but talented, team of employees with the local knowledge and contacts to market our products and obtain the necessary entitlements. Our strategy coupled with our long-term vision are the steps in building shareholder value. While we often refer to “selling land,” in reality, we are exchanging our essentially non-income producing asset—our agricultural land—into a new higher-value asset that produces predictable income. Coupled with our self-development of certain select income product types, we are growing our assets, cash flow, profits, and shareholder value.

In 2007, we expanded into self-development of select office and flex office/warehouse properties. In 2008, we will expand into the pre-permitting and development of larger warehouse properties in our Gateway Commerce Center. During 2007, we analyzed our Daytona Beach land holdings to determine which core properties we wished to retain for the long term. These identified sites all have the potential to develop over time into high-value net-lease income properties that we believe would meet our adopted criteria to hold for the long term in our portfolio. We anticipate that these select properties will be comprised of build to suit-lease back, self-developed or land leases.

REAL ESTATE OPERATIONS

COMMERCIAL DEVELOPMENT. In 1993, the Company received Development of Regional Impact (“DRI”) approval on a 4,500-acre tract of land located both east and west of Interstate 95 in Daytona Beach, Florida. The tract of land includes approximately 3,000 acres west of Interstate 95 in a mixed-used development known as LPGA International. The LPGA International development includes the headquarters of the Ladies Professional Golf Association, along with two championship golf courses, clubhouse facilities, and residential communities. In addition to these uses, the DRI also provides for resort facilities, and other commercial uses. All of the remaining property within the LPGA International development was sold to MSKP Volusia Partners LLC, a Morgan Stanley-Kitson Partnership (“MSKP”) in 2007. MSKP assumed responsibilities as master developer of the project in 2004. The property is expected to be developed into several distinct communities, with lots to be sold to major builders.

The Company continues to own approximately 750 acres of land within the DRI, primarily located east of Interstate 95. At the end of 2002, the Company closed the sale of the first corporate headquarters site at the Company’s new Cornerstone Office Park located within the 250-acre Gateway Business Center at the southeast quadrant of the Interstate 95 interchange at LPGA Boulevard. Development of the office park was substantially completed in 2003, with the opening in January 2004 of the first office building owned and constructed by a third party, which includes the Company’s corporate office. A second site was sold within the development during 2005, with a companion 47,000 square-foot office building owned and constructed by a third party, which opened in early 2006.

Development of a 12 acre, 4 lot commercial complex located at the corner of LPGA and Williamson Boulevards commenced in 2007. Site work, building plans and permitting have been completed. This parcel will include a 23,000 square-foot “Class A” office building. A lease is currently in negotiation, with a credit rated tenant for a significant portion of the building space.

Development of the Gateway Commerce Park, a 250-acre industrial, warehouse, and distribution park located south of Gateway Business Center on the east side of Interstate 95 in Daytona Beach, commenced in 2004 with the first phase substantially completed prior to year-end 2004. The first sale within the development closed in February 2004, with construction of a 60,000 square-foot manufacturing and distribution facility by a third party completed in late 2004. Through December 2007, seven sales totaling approximately 70 acres have closed within the Gateway Commerce Park with buildings approximating 285,000 square feet constructed and an additional 60,000 square feet currently under construction. The buildings under construction include a two building 30,000 square-foot flex office space complex being self developed by the Company to be held in its portfolio of income properties. Total buildout, including expansions of existing buildings, on the sold and developed parcels will approximate 650,000 square feet.

Indigo Commercial Realty Inc., a commercial real estate brokerage company formed in 1981, is the Company’s agent in the management of developed and undeveloped acreage. Approximately 24 acres of fully developed sites located in the Daytona Beach area and owned by Indigo Group Inc. were available for sale at December 31, 2007. All development and improvement have been completed at these sites.

RESIDENTIAL. During 2005, Indigo Group Ltd. sold its remaining residential lot inventory in Tomoka Heights, a 180-acre development adjacent to Lake Henry in Highlands County, Florida. The remaining residential lots in Riverwood Plantation, a 180-acre community in Port Orange, Florida, were sold during 2004.

AGRICULTURAL OPERATIONS. The Company’s agricultural lands encompass approximately 10,700 acres on the west side of Daytona Beach, Florida. Management believes the geographic location of this tract is excellent. In addition to access by major highways (Interstate 95, State Road 40, and International Speedway Boulevard), the internal road system for forestry and other agricultural purposes is good. In the summer of 1998 wildfires ravaged central Florida, destroying approximately 8,500 acres of the Company’s timber land. This event and the sale of an approximate 11,000-acre parcel to St. Johns River Water Management District in 1997 have reduced the Company’s potential for future income from sales of forest products. Expenses associated with forestry operations consist primarily of real estate taxes, with additional expenses including the costs of installing and maintaining roads and drainage systems, reforestation, and wildfire suppression.

After the wildfires experienced in 1998, the Company began replanting approximately 1,000 acres annually in timber. It is anticipated that the newly planted timber will reach maturity in 14 to 20 years. Based on current growth projections, a significant portion of the replanted lands east of Interstate 95 and along LPGA Boulevard and certain lands west of Interstate 95 appear to be in the path of the area’s growth, which could result in some portions of the property being sold prior to the maturity of the timber crop. This predicament prompted the Company to develop a business plan in the early 2000’s for conversion of unplanted and immature timber lands into other agricultural uses that would produce saleable crops on a shorter maturity schedule.

In late 2004, the Company formed a wholly owned subsidiary, W. Hay LLC, to manage the conversion of these timber lands into hay production. Annually, management assesses which areas should be converted from timber into hay operations. These decisions are based on the current economics of both the timber and hay businesses, and the then current evaluation of the estimated maturity date of planted timber parcels. As mature timber is harvested, the decision to replant or convert is evaluated on the same criteria. It is currently anticipated that over time a significant portion of the Company’s lands will be converted into hay production.

During 2005, the Company hired staff to manage and operate equipment for the ongoing hay operations. Approximately 80 acres of land were planted during 2005, with the first harvest in the first quarter of 2006. During 2006 and 2007, the Company continued to expand its hay operations with the addition of new employees and equipment. At the end of 2007, approximately 650 acres were planted with an additional 580 acres in various stages of clearing and planting. Harvesting activities were limited both in 2006 and 2007 due to a significant shortage of rainfall in those years.

SUBSURFACE INTERESTS. The Company owns full or fractional subsurface oil, gas, and mineral interests in approximately 516,000 “surface” acres of land owned by others in various parts of Florida, equivalent to approximately 283,000 acres in terms of full interest. The Company leases its interests to mineral exploration firms when such firms deem exploration to be financially feasible.

Leases on 800 acres have reached maturity, but in accordance with their terms, are held by the leasing oil companies without annual rental payments because these acres contain oil wells, from which the Company receives royalties.

The Company’s current policy is to not release any ownership rights with respect to its reserved mineral rights. The Company will release surface entry rights or other rights upon request of a surface owner who requires such a release for a negotiated release price based on a percentage of the surface value. In connection with any release, the Company charges a minimum administrative fee.

At December 31, 2007, there were two producing oil wells on the Company’s interests. Volume in 2007 was 103,899 barrels and volume in 2006 was 105,533 barrels from two producing wells. Production in barrels for prior recent years was: 2005 – 95,062, 2004 – 109,114, 2003 – 100,098, and 2002 – 115,453.

During the third quarter of 2004, CVS Corp. (“CVS”) completed the acquisition of a portion of the Eckerd pharmacy chain, including all of the Florida stores. As part of the integration of the Eckerd chain into its system, some of the acquired stores were closed.

Four stores owned by the Company were closed by CVS. The tenant is obligated on the leases and continues to make lease payments. Two of the four closed stores have been subleased.

Other rental property is limited to ground leases for billboards, a communication tower site, and hunting leases covering 6,800 acres. A 12-acre auto dealership site, formerly under lease, was sold in 2006 at a profit approximating $437,000 before income taxes.

GOLF OPERATIONS

On September 1, 1997, responsibility for the operations of the LPGA International golf courses was transferred from the City of Daytona Beach to a wholly owned subsidiary of the Company. The agreement with the City of Daytona Beach provided for a second golf course and a clubhouse to be constructed by the Company in return for a long-term lease from the City on both golf courses.

The second golf course was constructed by the Company and opened for play in October 1998. The first phase of the clubhouse, which consisted primarily of the cart barn, was completed in 1999. Construction of the final phase of the clubhouse, consisting of a 17,000 square-foot facility including a pro shop, locker rooms, formal dining and banquet rooms, and a swimming pool, was completed in December 2000 and opened for business in January 2001.

GENERAL, CORPORATE, AND OTHER OPERATIONS

Land development beyond that discussed at “Business—Real Estate Operations” will necessarily depend upon the long-range economic and population growth of Florida and may be significantly affected by fluctuations in economic conditions, prices of Florida real estate, and the amount of resources available to the Company for development.

EMPLOYEES

The Company has twenty-six employees, nine of which work for W. Hay, LLC, and considers its employee relations to be satisfactory.

CEO BACKGROUND

John C. Adams, Jr.—age 71
Retired in 2006 as executive vice president of Brown & Brown, Inc. (an insurance agency).

William H. Davison—age 64
Retired in 2007 as Chairman of the Board, president and chief executive officer of SunTrust Bank, East Central Florida.

Gerald L. DeGood—age 65
Consultant since June 1999; partner in Arthur Andersen LLP from 1974 to June 1999.

James E. Gardner—age 69
Retired in 2000 as president and chief executive officer of ITT Community Development Corporation.

William H. McMunn—age 61
President of the Company since January 2000 and chief executive officer since April 2001.

John C. Myers, III—age 61
President and chief executive officer of the Reinhold Corporation (a privately owned family corporation with Florida land holdings, forestry, an ornamental tree nursery and other investments), since 1993.

William L. Olivari—Age 64
Certified Public Accountant and Partner in Olivari and Associates (an accounting firm).

William J. Voges—age 53
President and chief executive officer since 1997, and general counsel since 1990 of The Root Organization (a private investment company with diversified holdings, including real estate).


MANAGEMENT DISCUSSION FROM LATEST 10K

OPERATIONS OVERVIEW

The Company is primarily engaged in real estate land sales and development, reinvestment of land sales proceeds into income properties, and golf course operations. The Company owns approximately 11,200 acres in Florida, of which approximately 10,200 are located within and form a substantial portion of the western boundary of The City of Daytona Beach. The Company lands are well located in the growing central Florida Interstate 4 corridor, providing an excellent opportunity for reasonably stable land sales in the near-term future and following years.

With its substantial land holdings in Daytona Beach, the Company has parcels available for the entire spectrum of real estate uses. Along with land sales, the Company selectively develops parcels primarily for commercial uses. Sales and development activity on and around Company owned lands have been strong in the last six years. Although pricing levels and changes by the Company and its immediate competitors can affect sales, the Company generally enjoys a competitive edge due to low costs associated with long-time land ownership and a significant ownership position in the immediate market.

During 2007, the Company sold approximately 486 acres of land consisting of 263 upland acres and 223 wetland acres. These land sales primarily occurred within the Company’s western Daytona Beach area core land holdings and continue the trend over the last several years of strong sales and development activities. These activities included the sale of 120 acres of land to Florida Hospital in 2005 for the construction of a new facility, which is under construction and anticipated to open in 2009, the expansion of the Daytona Beach Auto Mall, the opening of a second office building in the Cornerstone Office Park, the continued development within the 250-acre Gateway Commerce Park and Interstate Commerce Park adjacent to Interstate 95, and the sale of approximately 100 acres of land on which a private high school is under development and anticipated to open in 2008. During the first quarter of 2007, construction began on the future site of the City of Daytona Beach police headquarters. This parcel was sold by the Company to the City of Daytona Beach in 2006 at a discounted sales price, for which the Company received a charitable contribution deduction. The site is located adjacent to Gateway Commerce Park. In early 2008, development also commenced on a 288-unit apartment complex on lands sold by the Company during 2007.

These commercial and residential development activities tend to create additional buyer interest and sales opportunities. Although residential development and construction has slowed significantly from its peak in mid-to-late 2005, the Company continues to experience a relatively stable Daytona Beach commercial real estate market. A reasonably strong backlog of contracts is in place for closing in 2008.

In 2000, the Company initiated a strategy of investing in income properties utilizing the proceeds of agricultural land sales qualifying for income tax deferral through like-kind exchange treatment for tax purposes. By the end of 2007, the Company had invested approximately $110 million in twenty-five income properties through this process, with an additional $10.4 million held by a qualified intermediary for future investment in additional properties. The Company plans to utilize the majority of these funds held by the intermediary for an anticipated second quarter 2008 purchase of a triple-net lease property in Charlotte, North Carolina, for approximately $9.7 million. A contract to purchase this property was entered into during February, 2008.

With an investment base of approximately $110 million in income properties, lease revenue of approximately $8.5 million is being generated annually. This income, along with income from additional net-lease income property investments, will decrease earnings volatility in future years and add to overall financial performance. This has enabled the Company to enter into the business of building, leasing, and holding in its portfolio select income properties that are strategically located on Company lands.

Golf operations consist of the operation of two golf courses, a clubhouse facility, and food and beverage activities within the LPGA International mixed-use residential community on the west side of Interstate 95, south and east of LPGA Boulevard. The Champions course was designed by Rees Jones and the Legends course was designed by Arthur Hills.

Prior to 2007, golf operations revenues had grown despite an overall decline in golf course revenues in Florida. The Florida golf industry has been hurt by over building of golf courses and hurricane activity in past years. During 2007, changes in management within the operation caused a negative impact on both revenues and income from the operation. With a new management team in place, the Company looks to resume improvements annually in its golf operations. Improvement in golf course operations is a function of increased tourist demand, a reduction in new golf course construction which has been experienced in the last several years, and most importantly, increased residential growth in LPGA International and adjoining land to the west and northwest. LPGA International and nearby projects currently under development are planned to contain about 6,000 additional dwelling units. The Company’s efforts to improve revenues and profitability have focused on providing quality products and services while maintaining consistent and stringent cost control for both golf course and food service activities.

SUMMARY OF 2007 OPERATING RESULTS

For the year ended December 31, 2007, profits of $13,532,838 were earned, equivalent to $2.37 per share. These profits represented a 4% decrease from calendar year 2006 profits totaling $14,028,322, equivalent to $2.47 per share. The downturn was primarily attributed to lower profits from commercial land sales and increased losses from golf operations. Earnings from income properties partially offset these declines with a 3% increase in earnings resulting from two properties acquired mid-year 2006 being in place for the entire year. General and administrative expenses declined in 2007 compared to 2006 due to lower stock option expense accruals. Included in 2006’s results was income, net of tax, from discontinued operations of $240,476, equivalent to $.04 per share, representing the operation and sale of an auto dealership facility site in Daytona Beach, that was being held as an income property. Also included in net income for 2006 was a charge of $216,093, net of tax, equivalent to $.04 per share, for the cumulative effect of a change in accounting principles due to the adoption of SFAS No. 123 (revised 2004) “Share Based Payment” (“SFAS 123R”) accounting for stock options.

The Company also uses Earnings before Depreciation, Amortization and Deferred Taxes (EBDDT) as a performance measure. The Company’s strategy of investing in income properties through the deferred tax like-kind exchange process produces significant amounts of depreciation and deferred taxes.

EBDDT is calculated by adding depreciation, amortization, and change in deferred income tax to net income, as they represent non-cash charges. EBDDT is not a measure of operating results or cash flows from operating activities as defined by U.S. generally accepted accounting principles. Further, EBDDT is not necessarily indicative of cash availability to fund cash needs and should not be considered as an alternative to cash flow as a measure of liquidity. The Company believes, however, that EBDDT provides relevant information about operations and is useful, along with net income, for an understanding of the Company’s operating results.

EBDDT totaled $19,390,631 for the year ended December 31, 2007. This EBDDT represented a decrease of 10% from the EBDDT of $21,626,683 for the 2006 fiscal year. The downturn is not only the result of lower net income, but also a reduction in the add-back for deferred taxes. The add-back for deferred taxes declined as some gains from real estate transactions were not deferred for tax purposes, as they did not meet the criteria established by the tax code, or the Company was unable to identify properties which met its reinvestment criteria.

RESULT OF OPERATIONS

2007 Compared to 2006

REAL ESTATE OPERATIONS

REAL ESTATE SALES

The sale of 486 acres of land, consisting of 263 upland acres and 223 wetland acres, during calendar year 2007, including the charitable contribution of 25 acres of land valued at $1,500,000, produced revenues and profits of $25,947,800 and $19,013,088, respectively. Also included in sales was the sale of $1,900,000 of impact fee credits. These revenues and profits represented downturns of 10% and 13%, respectively, when compared to 2006 twelve month results. The average sales price of commercial acreage was $229,675 per upland acre during the year with the price for residential acres sold averaging $47,087 per upland acre. Costs and expenses rose substantially during the period due to the higher cost basis associated with both the charitable contribution and impact fees. The sale of 213 acres of property during 2006 produced profits totaling $21,811,380 on revenues of $28,941,749. Profits from real estate sales during 2006 also included the recognition of profits, totaling $4,780,000, which had previously been deferred in 2005 due to post-closing obligations. Average sales prices per upland acre were $139,389 and $100,000 for commercial and residential acreages, respectively.

INCOME PROPERTIES

The addition of two properties in mid-year 2006 accounted for the revenue and profits gains from income properties of 7% and 3%, respectively, in 2007 compared to the prior year results. Profits from income properties amounted to $6,956,345 for the full year of 2007 on revenues totaling $8,725,096. During 2006’s twelve-month period, profits of $6,723,017 were realized on revenues totaling $8,183,729. Income properties costs and expenses rose 21% during 2007, to $1,768,751, due to the increased depreciation and operating costs associated with the properties acquired.

GOLF OPERATIONS

Golf operations posted a loss of $1,749,191 during the 2007 year. This loss represented an increase of 18% when compared to losses of $1,477,892 recorded for the prior year. Revenues realized were down 1%, to $5,160,070 for the period from $5,210,725 in 2006. The revenue decrease was attributed to both golf and food and beverage activities with each declining 1%. The number of golf rounds played during 2007 was in line with the prior year, while the average rate per round played fell 3%. Golf operations costs and expenses rose 3% for the twelve-month period to $6,909,261. The higher expenses were principally associated with increased golf course maintenance expense and food and beverage payroll costs. Golf costs and expenses totaled $6,688,617 for the year ended December 31, 2006.

GENERAL, CORPORATE, AND OTHER

During 2007, profit on sales of other real estate interests totaled $2,579,827 on the release of surface and subsurface entry rights on 4,049 acres. The release of surface and subsurface entry rights on 610 acres during 2006 produced profits of $679,315.

Interest and other income rose 16%, to $663,231 in the twelve months of 2007, when compared to interest and other income of $573,735 recorded during 2006. Higher interest on investment securities and mortgage notes receivable, on higher outstanding balances, was offset by lower interest earned on funds held by an intermediary for reinvestment through the like-kind exchange process.

General and administrative expenses totaling $6,170,242 for 2007 represented a 10% decrease from the costs amounting to $6,819,371 in the prior year. Lower stock option expenses, due to the lower stock price of the Company, accounted for this decline. Offsetting the decrease in stock option expense were higher legal fees, primarily associated with Securities and Exchange Commission compliance, and pension and other post-retirement benefit costs.

The effective income tax rate approximated 36% in 2007 and 35% in calendar year 2006. Both rates were somewhat lower than the Company’s typical effective income tax rate approximating 38%. The lower tax rates are associated with the utilization and/or the release of valuation allowances associated with charitable contributions. Charitable contributions of land to qualified organizations were made in 2006 and 2007. As the Company has reasonable assurance that it will generate taxable income to utilize a portion of these income tax deductions over the five-year carryforward period, the contributions result in positive adjustments to the income tax provision for both periods. A valuation allowance has been established for the portion of the deductions the Company projects it will not be able to utilize.

MANAGEMENT DISCUSSION FOR LATEST QUARTER
SUMMARY OF 2008 OPERATING RESULTS

During the first quarter of 2008, the Company posted a profit of $156,124, equivalent to $.03 per share. These profits were earned during the first quarter, on strong results from income properties and decreased general and administrative expenses, despite no land sales closings in the first quarter. A loss of $583,812, equivalent to $.10 per share, was recorded during 2007’s first quarter.

The Company also uses Earnings before Depreciation, Amortization and Deferred Taxes (EBDDT) as a performance measure. The Company’s strategy of investing in income properties through the deferred tax like-kind exchange process produces significant amounts of depreciation and deferred taxes.


EBDDT is calculated by adding depreciation, amortization, and deferred income tax to net income as they represent non-cash charges. EBDDT is not a measure of operating results or cash flows from operating activities as defined by U.S. generally accepted accounting principles. Further, EBDDT is not necessarily indicative of cash availability to fund cash needs and should not be considered as an alternative to cash flow as a measure of liquidity. The Company believes, however, that EBDDT provides relevant information about operations and is useful, along with net income, for an understanding of the Company’s operating results.

EBDDT totaled $348,037 for the quarter ended March 31, 2008, in line with the $333,210 EBDDT recorded in the first quarter of 2007. During 2008 the add-back for deferred taxes was negative as income taxes previously deferred on gains from real estate transactions became currently due when the Company received funds held by the intermediary. The like-kind exchange process utilizing these funds was not completed, as reinvestment property which met the Company’s criteria could not be identified within the time constraints.

RESULT OF OPERATIONS


R EAL ESTATE SALES

An operating loss of $342,934 was recorded during the first quarter of 2008, as the result of no land sales transactions closing during the period. During the first quarter of 2007, the sale of 83 acres of land, including a charitable contribution of 25 acres valued at $1,500,000, produced revenues and profits from land sales totaling $4,676,566 and $909,550, respectively. Also included in sales during the first period of 2007 was the sale of approximately $1,900,000 of impact fee credits. Cost and expenses were substantially higher in 2007’s first quarter with the higher cost basis associated with both the charitable contribution and impact fee credits.

INCOME PROPERTIES

Earnings from income properties totaled $1,744,230 for the quarter ended March 31, 2008. These earnings were achieved on revenues of $2,173,473. Both earnings and revenues represented modest increases over revenues and income of $2,160,785 and $1,735,569, respectively, recorded during the first quarter of 2007.

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13

GOLF OPERATIONS

Golf operations posted a loss of $237,417 for the quarter ended March 31, 2008 on revenues totaling $1,379,551. This loss represented an 18% improvement over the loss of $291,006 in 2007’s same period on revenues of $1,566,207. Revenues in the first quarter of 2008 represented a decline of 12% when compared to the prior year, with revenues from golf activities decreasing 9% and food and beverage revenues falling 21%. The average rate per round played increased 3% during the period, but was offset by a 10% decline in the number of rounds played. Golf operations costs and expenses decreased 13% during the period when compared to the prior year as the result of the reduced activity, lower payroll, and decreased golf course maintenance expenses.

GENERAL, CORPORATE, AND OTHER

Interest and other income rose 101%, to $302,628 in the first three months of 2008, when compared to interest and other income of $150,709 recorded during 2007’s same period. Higher interest earned on mortgage notes receivable associated with year-end 2007 real estate transactions and increased interest earned on funds held by an intermediary for reinvestment through the like-kind exchange process accounted for the increase.

General and administrative expenses totaling $1,221,000 for 2008’s first quarter represented a 65% decrease from the costs amounting to $3,484,705 in the prior year. This decline was primarily due to lower stock option expenses, due to the lower price of Company stock. Also contributing to the decline were lower other post-retirement benefit costs recorded in 2008.

LIQUIDITY AND CAPITAL RESOURCES

Cash, restricted cash, and investment securities, which totaled $16,266,283 at March 31, 2008, decreased $5,178,187 since December 31, 2007. The primary uses of these funds were for the payment of income taxes, development and construction activities, and the continued conversion of Company lands to hay. Income taxes of $2,410,000 were paid in the first quarter of 2008. Development and construction activity approximated $1,650,000 during the three-month period and included construction of roads on the Company’s core lands adjacent to LPGA Blvd. and the construction of the 30,000 square-foot flex office space complex in Gateway Commerce Center. Approximately $860,000 was expended on clearing and planting of lands for the hay operation. Additionally, funds totaling $572,580 were used to pay dividends equivalent to $.10 per share.

Capital expenditures for the remainder of 2008 are projected to approximate $10 million, in addition to the $9.7 million dollars expended for the triple-net lease Harris Teeter supermarket purchased in April. These funds are intended to be used on road construction, conversion of timber lands to hay, and the development and construction of two income properties on Company owned land. The first property, expected to be completed in the second quarter, is the two building 30,000 square-foot flex office space complex located in Gateway Commerce Park. The second property will be a 23,000 square-foot office building located on LPGA Boulevard. This office building will be approximately 40% pre-leased to a credit tenant with the remainder held as speculative space at this time. These two self-developed projects are expected to be 50% financed upon completion.

Capital to fund the planned expenditures in 2008 is expected to be provided from cash and investment securities (as they mature), operating activities, and financing sources that are currently in place. The Company also has the ability to borrow on a non-recourse basis against its existing income properties, which are all free of debt as of the date of this filing. As additional funds become available through qualified sales, the Company expects to invest in additional real estate opportunities.

The Company’s Board of Directors and management continually review the allocation of any excess capital with the goal of providing the highest return for all shareholders over the long term. The reviews include consideration of various alternatives, including increasing or decreasing regular dividends, declaring special dividends, commencing a stock repurchase program, and retaining funds for reinvestment. The Board of Directors has reaffirmed its support for both the continuation of the 1031 tax deferred exchange strategy for investment of agricultural land sales proceeds and self-development of income properties on Company owned lands.

CRITICAL ACCOUNTING POLICIES

The profit on sales of real estate is accounted for in accordance with the provisions of SFAS No. 66, “Accounting for Sales of Real Estate.” The Company recognizes revenue from the sale of real estate at the time the sale is consummated unless the property is sold on a deferred payment plan and the initial payment does not meet criteria established under SFAS No. 66, or the Company retains continuing involvement with the property.

During 2005 and 2006, the Company closed transactions for which it had post-closing obligations to provide off-site utilities and/or road improvements. Full cash payment was received at closing, and warranty deeds were transferred and recorded. The sales contracts did not provide any offsets, rescission, or buy-back if the improvements were not completed. During the first quarter of 2007, a portion of the post-closing obligations were competed, and revenues and profits of $140,087 and $73,402, were recognized, respectively on these transactions. Post-closing obligations still existed at March 31, 2007, on two transactions and in accordance with SFAS No. 66 revenues and profits of $527,164 and $427,628, respectively, were deferred at that time. All obligations were completed during 2007 and no revenues or profits were deferred at March 31, 2008.

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company has reviewed the recoverability of long-lived assets, including real estate and development and property, plant, and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may or may not be recoverable. Real estate and development is evaluated for impairment by estimating sales prices less costs to sell. Impairment on income properties and other property, plant, and equipment is measured using an undiscounted cash flow approach. There has been no material impairment of long-lived assets reflected in the consolidated financial statements.

At the time the Company’s debt was refinanced in 2002, the Company entered into an interest rate swap agreement. This swap arrangement changes the variable-rate cash flow exposure on the debt obligations to fixed cash flows so that the Company can manage fluctuations in cash flows resulting from interest rate risk. This swap arrangement essentially creates the equivalent of fixed-rate debt. The above referenced transaction is accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Certain Hedging Activities,” and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of SFAS No. 133.” The accounting requires the derivative to be recognized on the balance sheet at its fair value and the changes in fair value to be accounted for as other comprehensive income or loss. The Company measures the ineffectiveness of the interest rate swap derivative by comparing the present value of the cumulative change in the expected future cash flows on the variable leg of the swap with the present value of the cumulative change in the expected future interest cash flows on the floating rate liability. This measure resulted in no ineffectiveness for the periods ended March 31, 2008 and March 31, 2007. A liability in the amount of $793,199 at March 31, 2008, has been established on the Company’s balance sheet. The change in fair value, net of applicable taxes, in the cumulative amount of $487,222 at March 31, 2008, has been recorded as accumulated other comprehensive loss, a component of shareholders’ equity.

The Company maintains a stock option plan pursuant to which 500,000 shares of the Company's common stock may be issued. The current Plan was approved at the April 25, 2001 shareholders’ meeting. Under the Plan, the option exercise price equals the stock market price on the date of grant. The options vest over five years and all expire after ten years. The Plan provides for the grant of (1) incentive stock options, which satisfy the requirements of Internal Revenue Code (IRC) Section 422, and (2) non-qualified options, which are not entitled to favorable tax treatment under IRC Section 422. No optionee may exercise incentive stock options in any calendar year for shares of common stock having a total market value of more than $100,000 on the date of grant (subject to certain carryover provisions).

In connection with the grant of non-qualified options, a stock appreciation right for each share covered by the option may also be granted. The stock appreciation right will entitle the optionee to receive a supplemental payment, which may be paid in whole or in part in cash or in shares of common stock, equal to a portion of the spread between the exercise price and the fair market value of the underlying shares at the time of exercise. All options granted to date have been non-qualified options, with a stock appreciation right granted for each option share granted.

Both the Company’s stock options and stock appreciation rights are liability classified awards under SFAS No. 123R and are required to be remeasured to fair value at each balance sheet date until the award is settled.

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