UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
___ OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission file number 0-5556
CONSOLIDATED-TOMOKA LAND CO.
(Exact name of registrant as specified in its charter)
Florida 59-0483700
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1530 Cornerstone Blvd., Suite 100
Daytona Beach, Florida 32117
(Address of principal executive offices) (Zip Code)
(386) 274-2202
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2)has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer Accelerated Filer X Non-accelerated filer
--- ---
Indicate by check mark whether the registrant is a shell company
(as defined by rule 12b-2 of the Exchange Act).
Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class of Common Stock Outstanding
November 1, 2006
$1.00 par value 5,693,007
1
CONSOLIDATED-TOMOKA LAND CO.
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2006 (Unaudited) and December 31, 2005 3
Consolidated Statements of Income -
Three Months and Nine Months
Ended September 30, 2006 and 2005 (Unaudited) 4
Consolidated Statement of Shareholders' Equity and
Comprehensive Income
Nine Months Ended September 30, 2006 and 2005 (Unaudited) 6
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2006
and 2005 (Unaudited) 7-8
Notes to Consolidated Financial Statements (Unaudited) 9-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-25
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 25
Item 4. Controls and Procedures 25
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 1A. Risk Factors 26
Item 6. Exhibits 27
SIGNATURES 28
2
CONSOLIDATED-TOMOKA LAND CO.
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, December 31,
2006 2005
------------ -----------
ASSETS
Cash $ 1,176,779 $ 1,127,143
Restricted Cash 2,103,639 7,840,167
Investment Securities 6,910,826 14,341,097
Land and Development Costs 12,887,017 9,142,551
Intangible Assets 5,200,132 4,591,944
Other Assets 4,912,393 5,205,415
---------- ----------
33,190,786 42,248,317
---------- ----------
Property, Plant and Equipment:
Land, Timber and Subsurface Interests 2,736,231 2,280,355
Golf Buildings, Improvements and Equipment 11,433,071 11,382,515
Income Properties Land, Buildings and Improvements 104,819,695 91,656,972
Other Furnishings and Equipment 2,428,915 1,769,407
---------- ----------
Total Property, Plant and Equipment 121,417,912 107,089,249
Less Accumulated Depreciation and Amortization (7,351,093) (6,079,090)
---------- ----------
Net- Property, Plant and Equipment 114,066,819 101,010,159
---------- ----------
TOTAL ASSETS $147,257,605 $143,258,476
=========== ===========
LIABILITIES
Accounts Payable $ 750,838 $ 248,698
Accrued Liabilities 8,134,752 6,083,047
Income Taxes Payable 384,983 5,157,171
Deferred Profit 1,696,020 5,345,006
Deferred Income Taxes 27,611,626 24,159,074
Notes Payable 8,020,679 7,297,593
---------- ----------
TOTAL LIABILITIES 46,598,898 48,290,589
---------- ----------
SHAREHOLDERS' EQUITY
Common Stock 5,692,539 5,667,796
Additional Paid in Capital 2,769,424 4,168,865
Retained Earnings 92,423,354 85,435,246
Accumulated other Comprehensive Loss (226,610) (304,020)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 100,658,707 94,967,887
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $147,257,605 $143,258,476
=========== ===========
See accompanying Notes to Financial Statements.
3
CONSOLIDATED-TOMOKA LAND CO.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
--------------------------- ------------------------
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
------------- ------------ ------------- ------------
$ $ $ $
INCOME:
Real Estate Operations:
Real Estate Sales
Sales and Other Income 5,095,658 3,735,564 14,620,160 26,989,590
Costs and Other Expenses (1,494,549) (635,538) (2,997,659) (5,415,413)
--------- --------- ---------- ----------
3,601,109 3,100,026 11,622,501 21,574,177
--------- --------- ---------- ----------
Income Properties
Leasing Revenues and Other Income 2,183,626 1,789,114 5,997,775 4,775,031
Costs and Other Expenses (407,697) (309,394) (1,069,569) (865,791)
--------- --------- ---------- ----------
1,775,929 1,479,720 4,928,206 3,909,240
--------- --------- ---------- ----------
Golf Operations
Sales and Other Income 1,027,067 920,836 3,909,816 3,648,055
Costs and Other Expenses (1,483,683)(1,439,149) (4,690,890) (4,509,401)
--------- --------- ---------- ----------
(456,616) (518,313) (781,074) (861,346)
--------- --------- ---------- ----------
Total Real Estate Operations 4,920,422 4,061,433 15,769,633 24,622,071
Profit on Sales of Other
Real Estate Interests 212,550 21,210 668,420 258,943
Interest and Other Income 38,831 207,070 484,516 676,116
--------- --------- ---------- ----------
Operating Income 5,171,803 4,289,713 16,922,569 25,557,130
General and Administrative Expenses (1,911,250) 51,130 (4,541,745) (6,212,496)
--------- --------- ---------- ----------
Income from Continuing Operations
Before Income Taxes 3,260,553 4,340,843 12,380,824 19,344,634
Income Taxes (824,138)(1,651,641) (3,996,028) (6,730,970)
--------- --------- ---------- ----------
Income Before Discontinued Operations
and Cumulative Effect of Change
in Accounting Principle 2,436,415 2,689,202 8,384,796 12,613,664
Income (Loss) from Discontinued
Operations, Net of Income Tax -- (355) 240,476 8,742
Cumulative Effect of Change in
Accounting Principle, Net of -- -- (216,093) --
Income Tax --------- --------- ---------- ----------
Net Income 2,436,415 2,688,847 8,409,179 12,622,406
========= ========= ========== ==========
4
Consolidated Statements of Income - continued
---------------------------------------------
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
--------------------------- ------------------------
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
--------------- ----------- ------------- ------------
Per Share Information:
Basic Income Per Share Information:
Income Before Discontinued Operations
and Cumulative Effect of
Change in Accounting Principle $0.43 $0.47 $1.48 $2.23
Income (Loss)from Discontinued Operations
Net of Income Tax -- - $0.04 --
Cumulative Effect of Change in
Accounting Principle, Net of
Income Tax -- (0.04)
--------- --------- ---------- ----------
Net Income $0.43 $0.47 $1.48 $2.23
========= ========= ========== ==========
Diluted Income Per Share Information:
Income Before Discontinued Operations
and Cumulative Effect of
Change in Accounting Principle $0.43 $0.47 $1.48 $2.20
Income (Loss) from Discontinued Operations
Net of Income Tax - 0.04 --
Cumulative Effect of Change in
Accounting Principle, Net of
Income Tax - - (0.04) --
--------- --------- ---------- ----------
Net Income $0.43 $0.47 $1.48 $2.20
========= ========= ========== ==========
Dividends $0.09 $0.08 $0.25 $0.22
========= ========= ========== ==========
See accompanying Notes to Financial Statements.
5
CONSOLIDATED-TOMOKA LAND CO.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(UNAUDITED)
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Shareholders' Comprehensive
Stock Capital Earnings Income Equity Income
--------- -------- ---------- ---------- ---------- -----------
Balance,
December 31, 2005 $5,667,796 $4,168,865 $85,435,246 $(304,020) $94,967,887
Net Income 8,409,179 8,409,179 $8,409,179
Other Comprehensive
Income:Cash Flow
Hedging Derivative,
Net of Tax 77,410 77,410 77,410
-----------
Comprehensive Income $8,486,589
===========
Stock Options:
Exercise of Liability
Classified Stock
Options 24,743 1,675,308 1,700,051
Adoption of SFAS
No. 123R
Reclassification for
Liability Based Plan (3,074,749) (3,074,749)
Cash Dividends
($.25 per share) (1,421,071) (1,421,071)
---------- ---------- ----------- ----------- ------------
Balance,
September 30, 2006 $5,692,539 $2,769,424 $92,423,354 $(226,610) $100,658,707
========== ========== =========== =========== ============
See accompanying Notes to Financial Statements.
6
CONSOLIDATED-TOMOKA LAND CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
-----------------------------
September 30, September 30,
2006 2005
------------- --------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $8,409,179 $12,622,406
Adjustments to Reconcile Net Income to Net Cash
Provided By Operating Activities:
Depreciation and Amortization 1,628,327 1,277,275
(Gain)/Loss on Sale of Property, Plant, and Equipment (436,971) 19,916
Deferred Income Taxes 3,452,552 2,208,047
Non Cash Compensation 1,348,525 2,803,328
(Increase) Decrease in Assets:
Notes Receivable -- 3,935,252
Land and Development Costs (3,744,466) 132,751
Other Assets 293,022 1,415
Increase (Decrease) in Liabilities:
Accounts Payable 502,140 (44,301)
Accrued Liabilities 157,748 1,641,057
Deferred Profit (3,648,986) --
Income Taxes Payable (4,655,432) 537,256
---------- ----------
Net Cash Provided By Operating Activities 3,305,638 25,134,402
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisition of Property, Plant, and Equipment (15,627,639) (29,677,147)
Intangible Assets (858,808) (1,833,793)
Decrease in Restricted Cash for Acquisitions
Through the Like-Kind Exchange Process 5,736,528 26,083,525
Net Decrease (Increase) in Investment Securities 7,430,271 (13,237,118)
Proceeds from Disposition of Property, Plant,
and Equipment 1,630,205
---------- ----------
Net Cash Used In Investing Activities (1,689,443) (18,664,533)
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from Notes Payable 5,540,000 267,000
Payments on Notes Payable (4,816,914) (1,630,021)
Cash Proceeds from Exercise of Stock Options 19,515 107,022
Cash Used to Settle Stock Appreciation Rights (771,333) (637,367)
Tax Expense Realized from Exercise of Stock Options (116,756) --
Dividends Paid (1,421,071) (1,245,740)
---------- ----------
Net Cash Used In Financing Activities (1,566,559) (3,139,106)
---------- ----------
Net Increase In Cash 49,636 3,330,763
Cash, Beginning of Year 1,127,143 273,911
---------- ----------
Cash, End of Period $1,176,779 $3,604,674
========== ==========
7
Consolidated Statements of Cash Flows (continued)
Supplemental Cash Flow Disclosure:
Income taxes of $5,129,248 and $4,068,891 were paid for the nine months ended
September 30 2006 and 2005, respectively.
During the third quarter of 2006, the Company made a charitable contribution
of 11 acres of land which had a fair market value of $950,000.
See accompanying Notes to Financial Statements.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Principles of Interim Statements. The unaudited consolidated
financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and note disclosures, which are normally included in
annual financial statements prepared in accordance with U.S.
generally accepted accounting principles have been omitted pursuant to
those rules and regulations. The consolidated financial statements reflect
all adjustments which are, in the opinion of management, necessary to
present fairly the Company's financial position and the results of
operations for the interim periods. The consolidated format is designed
to be read in conjunction with the last annual report. For further
information, refer to the consolidated financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2005.
The Consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Inter-company balances
and transactions have been eliminated in consolidation.
Certain reclassifications were made to the 2005 accompanying consolidated
financial statements to conform to the 2006 presentation.
2. Discontinued Operations. In accordance with SFAS No. 144, "Accounting for
Impairment of Disposal of Long-Lived Assets," the Company has classified
the revenues and income/(loss) of a vacant income property, a former
automobile dealer site, located in Daytona Beach, Florida, and sold on
May 26, 2006, as discontinued operations. Financial Statements for
2005 have been reclassified to reflect the discontinued operation.
Summary financial information for the operation is as follows:
Three Months Ended Nine Months Ended
------------------------------ -------------------------
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
------------- --------- ----------- ----------
Revenues $ -- $ 4,495 $ -- $ 36,171
============ ========= =========== ==========
Income (Loss) - (578) (45,475) 14,232
Income Tax Benefit (Expense) -- 223 17,542 (5,490)
Gain from Sale (Net of Income
Tax of $168,562) -- 268,409
----------- --------- ----------- ----------
Net Income $ $ (355) $ 240,476 $ 8,742
============ ========= =========== ==========
3. Common Stock and Earnings Per Share. Basic earnings per common
share were computed by dividing net income by the weighted
average number of shares of common stock outstanding during the
period. Diluted earnings per common share are based on the
assumption of the conversion of stock options at the beginning of
each period using the treasury stock method at average cost for
the periods.
9
Common Stock and Earnings per share-continued
---------------------------------------------
Three Months Ended Nine Months Ended
------------------------- ----------------------
September 30, September 30, September 30, September 30
2006 2005 2006 2005
------------- ------------- ------------- -----------
Income Available to Common Shareholders:
Income Before Discontinued Operations
and Cumulative Effect of Change in
Accounting Principle $2,436,415 $2,689,202 $8,384,796 $12,613,664
Discontinued Operations
(Net of Income Tax) -- (355) 240,476 8,742
Cumulative Effect of Change in
Accounting Principle
(Net of Income Tax) -- -- (216,093) -
--------- --------- ---------- ----------
Net Income $2,436,415 $2,688,847 $8,409,179 $12,622,406
========= ========= ========== ==========
Weighted Average Shares Outstanding 5,691,192 5,667,996 5,681,060 5,660,564
Common Shares Applicable to Stock
Options Using the Treasury Stock Method 7,452 96,589 11,526 83,516
--------- --------- ---------- ----------
Total Shares Applicable to Diluted
Earnings Per Share 5,698,644 5,764,585 5,692,586 5,744,080
========= ========= ========== ==========
Per Share Information:
Basic Income Per Share
Income Before Discontinued Operations
and Cumulative Effect of Change in
Accounting Principle $0.43 $0.47 $1.48 $2.23
Discontinued Operations (Net of Income) -- - 0.04 -
Cumulative Effect of Change in
Accounting Principle (Net of Income Tax) - - (0.04) -
--------- --------- ---------- ----------
Net Income $0.43 $0.47 $1.48 $2.23
========= ========= ========== ==========
Diluted Income Per Share
Income Before Discontinued Operations
and Cumulative Effect of change in
Accounting Principle $0.43 $0.47 $1.48 $2.20
Discontinued Operations (Net of Income Tax) -- - 0.04 -
Cumulative Effect of Change in
Accounting Principle (Net of Income Tax) - - (0.04) -
--------- --------- ---------- ----------
Net Income $0.43 $0.47 $1.48 $2.20
========= ========= ========== ==========
10
4. Notes Payable. Notes payable consist of the following:
September 30, 2006
-----------------------------------
Due Within
Total One Year
---------- ----------
$10,000,000 Line of Credit $ 898,501 $ 898,501
Mortgage Notes Payable 7,122,178 227,909
---------- ----------
$8,020,679 $1,126,410
========== ==========
Payments applicable to reduction of principal amounts will be
required as follows:
Year Ending September 30,
-------------------------
2007 $1,126,410
2008 266,726
2009 287,004
2010 308,824
2011 332,303
2012 & thereafter 5,699,412
----------
$8,020,679
==========
In the first nine months of 2006 and 2005, interest expensed and
paid totaled $406,334 and $532,235, respectively.
5. Stock Option Plan. The Company maintains a stock option plan
("the Plan") pursuant to which 500,000 shares of the Company's common
stock may be issued. ThePlan in place 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
share at the time of exercise. All options granted to date have been
non-qualified options.
On January 1, 2006, the Company adopted Financial Accounting Standards
Board Statement No. 123(revised 2004) "Share-Based Payment" (SFAS No.
123R)by using the modified prospective method of adoption. SFAS No.
123R requires the classification of share-based payment arrangements
as liability or equity instruments. Both the Company's stock options
and stock appreciation rights are liability-classified awards and are
required to be remeasured to fair value at each balance sheet date
until the award is settled. Prior to the adoption of SFAS No. 123R,
11
Stock Option Plan-continued
----------------------------
the Company valued its stock options by applying the intrinsic value-
based method, and its stock options were classified in shareholders'
equity. For liability-classified awards, SFAS No. 123R requires an
entity to remeasure the liability from its intrinsic value to its fair
value on the adoption date, and reflect any difference as the
cumulative effect of change in accounting principle, net of any
related tax effect. The Company remeasured the value of its stock
options and stock appreciation rights as of January 1, 2006, which
resulted in a cumulative effect of change in accounting principle, net
of tax, totaling $216,093. Upon adoption of SFAS No. 123R, the Company
also reclassified to liabilities the January 1, 2006, fair value of
its stock options, which had been classified within shareholders'
equity in the amount of $3,074,749.
Amounts recognized in the financial statements for stock options and
stock appreciation rights are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2006 2005 2006 2005
-------- --------- -------- ----------
Total Cost of Share-Based
Plans, Charged Against
Income, Before Tax Effect $ 815,865 $(1,163,481) $1,348,525 $ 2,803,328
======== ========= ======== ===========
Income Tax Expense (Benefit)
Recognized in Income $(314,720) $ 448,813 $(520,194) $(1,081,384)
======== ========= ======== ===========
Total cost of share-based plans for the nine months ended September 30, 2006
reflects $216,093 (cost of $351,800 net of $135,707 income tax benefit)
from the adoption of SFAS No. 123R and reflected as a Cumulative Effect of
Change in Accounting Principle on the Consolidated Statement of Income.
The fair value of each share option and stock appreciation right is
estimated on the measurement date using the Black-Scholes option
pricing model based on assumptions noted in the following table.
Expected volatility is based on the historical volatility and other
factors of the Company. The Company has elected to use the simplified
method of estimating the expected term of the options and stock
appreciation rights. Due to the small number of employees included in
the Plan, the Company uses the specific identification method to
estimate forfeitures and includes all participants in one group. The
risk-free rate for periods within the contractual term of the share
option is based on the U.S. Treasury rates in effect at the time of
measurement.
The Company issues new, previously unissued, shares as options are
exercised.
Assumptions at September 30, 2006:
------------------------------
Expected Volatility 29.47%
Expected Dividends .58%
Expected Term .5-6 years
Risk-Free Rate 4.59-5.02%
12
Stock Option Plan-continued
----------------------------
A summary of share option activity under the Plan as of September 30,
2006, and changes during the three months and nine months then ended
is presented below:
STOCK OPTIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2006 Wtd. Avg.
Shares Ex. Price
-------------------
Outstanding at June 30, 2006 181,200 $41.23
Granted - -
Exercised (8,000) 33.29
Expired - --
-----------------
Outstanding at September 30, 2006 173,200 $41.94
=================
STOCK APPRECIATION RIGHTS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2006 Wtd. Avg.
Shares Ex. Price
-------------------
Outstanding at June 30, 2006 181,200 $13.79
Granted - -
Exercised (8,000) 17.93
Expired - --
-----------------
Outstanding at September 30, 2006 173,200 $13.60
=================
STOCK OPTIONS FOR THE NINE MONTHS Wtd. Avg.
ENDED SEPTEMBER 30, 2006 Remaining
Contractual Aggregate
Wtd.Avg. Term Intrinsic
Shares Ex. Price (Years) Value
----------------------------------------------
Outstanding December 31, 2005 160,600 $30.82
Granted 55,000 67.27
Exercised (42,400) 26.20
Expired - --
------- ------ ------ -----------
Outstanding September 30, 2006 173,200 $41.94 8.04 $3,746,204
======= ====== ====== ===========
Exercisable at September 30, 2006 11,400 $27.74 6.85 $ 415,296
======= ====== ====== ===========
STOCK APPRECIATION RIGHTS FOR THE NINE MONTHS Wtd. Avg.
ENDED SEPTEMBER 30, 2006 Remaining
Contractual Aggregate
Wtd.Avg. Term Intrinsic
Shares Fair Value (Years) Value
----------------------------------------------
Outstanding December 31, 2005 160,600 $20.33
Granted 55,000 11.56
Exercised (42,400) 21.33
Expired - --
------- ------ ------ -----------
Outstanding September 30, 2006 173,200 $13.60 8.04 $2,017,187
======= ======= ====== ===========
Exercisable at September 30, 2006 11,400 $17.20 6.85 $223,621
======= ======= ====== ===========
13
Stock Option Plan-continued
----------------------------
In connection with the exercise of 42,400 option shares, 24,743 shares
of stock were issued and 17,657 shares of stock were surrendered to
relieve the stock option liability by $1,680,536. Cash proceeds
of $19,515 were received on the exercise of stock options.
The weighted-average fair value at September 30, 2006, of options
granted during 2006 and 2005 was $21.85 and $30.26, respectively.
Stock appreciation rights granted during 2006 and 2005 had
weighted-average fair values of $11.76 and $16.29, respectively.
The total intrinsic value of options exercised for the nine months
ended September 30, 2006,and 2005, was $1,511,390 and $1,316,582,
respectively. Stock appreciation rights exercised during the nine
months ended September 30,2006, and 2005, had intrinsic values of
$771,333 and $637,367,respectively.
As of September 30, 2006, there was $4,520,749, valued at fair
value, of total unrecognized compensation costs related to
non-vested stock options and stock appreciation rights granted
under the Plan. That cost is expected to be recognized over a
weighted-average period of 1.58 years. The liability for stock
options and stock appreciation rights valued at fair value,
reflected on the consolidated balance sheet at September 30, 2006,
was $4,012,178.
Had compensation cost from prior periods been determined under the fair
value method for all shares under SFAS No. 123, "Accounting for Stock-Based
Compensation" (as amended by Statement 148), the Company's net earnings
and earnings per share would have been as follows:
Three Nine
Months Ended Months Ended Year Ended
--------------- -------------- --------------------------
September 30, September 30, December 31, December 31,
2005 2005 2005 2004
--------------- -------------- ------------ ------------
Net Income as Reported $2,688,847 $12,622,406 $14,817,750 $14,651,739
Deduct:
Stock-Based Compensation
Under Fair Value Based Method
(Net of Tax) (52,455) (331,145) (384,910) (221,595)
Add Back:
Stock-Based Compensation Under
Intrinsic Value Method
(Net of Tax) (464,534) 864,787 1,174,283 402,683
------------------------- -------------------------
Pro Forma Net Income (Loss) $2,171,858 $13,156,048 $15,607,123 $14,832,827
========================= =========================
Basic Income Per Share:
As Reported $0.47 $2.23 $2.62 $2.60
Pro Forma $0.38 $2.32 $2.76 $2.63
Diluted Income Per Share:
As Reported $0.47 $2.20 $2.58 $2.58
Pro Forma $0.38 $2.29 $2.72 $2.61
14
6. Pension Plan. The Company maintains a defined benefit pension
plan. The pension benefits are based primarily on age, years of
service, and average compensation. The benefit formula provides for
a life annuity benefit.
Following are the components of the Net Period Benefit Cost:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
------------- ------------- ------------- ------------
Service Cost $ 69,291 $ 60,680 $ 207,873 $ 182,040
Interest Cost 95,915 86,011 287,745 258,033
Expected Return on Plan Assets (114,224) (118,596) (342,672) (355,788)
Net Amortization 17,480 3,432 52,440 10,296
--------- --------- -------- --------
Net Periodic Benefit Cost $ 68,462 $ 31,527 $ 205,386 $ 94,581
========= ========= ======== ========
A contribution of $44,630 was made in 2006.
7. Business Segment Data The Company primarily operates in three business
segments: real estate, income properties, and golf. Real estate operations
include commercial real estate, real estate development, residential, and
agricultural operations. The Company evaluates performance based on income
or loss from operations before income taxes. The Company's reportable
segments are strategic business units that offer different products. They
are managed separately because each segment requires different management
techniques, knowledge, and skills. Agriculture operations are not
considered a separate segment as they are immaterial from a financial
statement perspective.
Information about the Company's operations in different segments (with 2005
information reclassified from its previous presentation to exclude
discontinued operations) is as follows (amount in thousands):
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
------------ ------------- ------------- -------------
BUSINESS SEGMENT DATA
-------------------------------
Revenues:
Real Estate $ 5,096 $ 3,736 $ 14,620 $26,990
Income Properties 2,184 1,789 5,998 4,775
Golf 1,027 921 3,910 3,648
General, Corporate & Others 251 228 1,153 935
-------- -------- --------- --------
$ 8,558 $ 6,674 $ 25,681 $36,348
======== ======== ========= ========
Income/(loss)before tax:
Real Estate $ 3,601 $ 3,100 $ 11,623 $21,574
Income Properties 1,776 1,480 4,928 3,909
Golf (456) (518) (781) (861)
Corporate, General & Others (1,660) 279 (3,389) (5,277)
------- ------- --------- -------
$ 3,261 $ 4,341 $ 12,381 $19,345
======= ======= ========= =======
15
Business Segment Data-continued
--------------------------------
At September 30,
2006
---------------
Identifiable Assets:
Real Estate $ 20,016
Income Properties 106,917
Golf 9,043
Corporate, General & Other 11,282
-----------
$147,258
===========
Depreciation and Amortization:
Real Estate $ 216
Income Properties 1,027
Golf 320
Corporate, General & Other 65
-----------
$ 1,628
===========
Capital Expenditures:
Real Estate $ 1,042
Income Properties 14,462
Golf 51
Corporate, General & Other 73
-----------
$ 15,628
===========
Identifiable assets by industry are those assets that are used in the Company's
operations in each industry. General corporate assets and assets used in the
Company's other operations consist primarily of cash, investment securities,
and property, plant and equipment.
8. Recent Accounting Standards. The FASB issued FASB No. 157 "Fair Value
Measurements" (SFAS No. 157) which defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements. This
statement is effective for financial statements issued for fiscal years
beginning after November 18, 2007 and interim periods within those fiscal
years. The Company does not believe the SFAS No. 157 will have an impact
on its financial statements.
The Financial Accounting Standards Board issued FASB No. 158 "Employers'
Accounting for Defined Benefit Pension and other Post-retirement Plans -
an amendment of FASB Statements No. 87, 88, 106, and 132 " (SFAS No. 158).
This statement requires an employer to recognize the overfunded or
underfunded status of a defined benefit post-retirement plan as an asset
or a liability in its statement of financial position and to recognize
changes in that funded status in the year in which the changes occur
through comprehensive income. Additional disclosure information is also
required by the statement. An employer with publicly traded equity
securities is required to recognize the funded status of defined benefit
post-retirement plan, and to provide the required disclosures as of the end
of the fiscal year ending after December 15, 2006. The Company will adopt
SFAS No. 158 in the fourth quarter of 2006 and is currently evaluating
the impact of the statement.
In June 2006 the FASB issued Interpretation No. 48 "Accounting for
Uncertainty in Income Taxes an interpretation of FASB statement No. 109
(FIN 48). The interpretation clarifies the accounting for uncertainty in
income taxes recognized in a company's financial statements in accordance
with FASB Statement No. 109, "Accounting for Income Taxes."
16
Recent Accounting Standards-continued
-------------------------------------
This interpretation prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. This
interpretation is effective for fiscal years beginning after December 15,
2006. The Company does not expect FIN 48 to have an impact on its
financial statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin 108 (SAB 108), which expresses the staff's views
regarding the process of quantifying financial statement misstatements.
SAB 108 requires registrants to quantify misstatements using both the
balance sheet and income statement approaches and to evaluate whether
either approach results in quantifying an error that is material in
light of relevant quantitative and qualitative factors. The requirements
are effective for annual financial statements covering the first fiscal
year ending after November 15, 2006. The Company will adopt SAB 108 in
the fourth quarter of 2006 and is currently evaluating its impact.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The Management's Discussion and Analysis of Financial Condition and Results of
Operations is designed to be read in conjunction with the financial statements
and Management's Discussion and Analysis of Financial Condition and Results of
Operations in the last annual report on Form 10-K.
OPERATIONS OVERVIEW
-------------------
The Company is primarily engaged in the conversion of agricultural
lands to income properties, real estate land sales and development,
golf course operations, and agriculture operations. The Company has
substantial land holdings in the Daytona Beach, Florida area,
including its agriculture operations. The Company lands are
well-located in the growing central Florida Interstate 4/Interstate 95
corridors, 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. Although pricing levels and changes by the
Company and its immediate competitors can affect sales, the Company
generally enjoys a competitive edge due to lower cost basis associated with
long-time land ownership and a significant ownership position in the
immediate market.
The Company has experienced strong sales activity over the last four
years with many development activities taking place on or adjacent to
Company owned land. These activities include the sale of 120 acres of
land to Florida Hospital in 2005 for the construction of a new facility, which
commenced in the second quarter of 2006, the expansion of the
Daytona Beach Auto Mall, the opening of a second office building in
the Cornerstone Office Park, and the continued development within the
250-acre Gateway Commerce Park. Residential development has also been
strong on lands sold by the Company in prior years, including within
the LPGA International community, and on other lands both east and
west of Interstate 95. During the third quarter of 2006, the Company sold
approximately 100 acres of land on which a private high school is expected to be
constructed. These development activities tend to create additional buyer
interest and sales opportunities. While most national homebuilders have
experienced significant reductions in new sales contracts from the peak in mid
17
Operations Overview-continued
-----------------------------
to late 2005, the Company has experienced a relatively stable Daytona Beach
commercial real estate market. A backlog of contracts remains in place
for closings that the Company expects to occur in fourth quarter 2006.
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. At September 30, 2006, the Company had
invested approximately $110 million in twenty-five income properties
through this process, including two properties acquired during 2006. The two
properties acquired in 2006 are located in the Atlanta,
Georgia area, and are under lease to Dick's Sporting Goods and Best Buy.
With this investment base in income properties, lease revenue in
excess of $8.4 million is expected to be generated annually. This
income, along with income from additional future net-lease income property
investments, is expected to decrease earnings volatility and add to
overall financial performance. The Company is now in a position to consider
other forms of real estate investment to diversify and enhance potential
returns.
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 Company's agriculture operations consist of growing, managing, and
sales of timber and hay products on approximately 11,150 acres of
Company lands on the west side of Daytona Beach, Florida.
SUMMARY OF 2006 OPERATING RESULTS
---------------------------------
Net income for the third quarter of 2006 totaled $2,436,415, equivalent to $.43
per basic share, and represented a 9% decline from 2005's same period profit
of $2,688,847, equivalent to $.47 per basic share. The downturn in profits was
primarily attributable to increased stock option expense in 2006 as a decrease
in the Company's stock price in the third quarter of 2005 resulted in a
reversal in stock option expenses totaling $1,163,481 during that period.
Each of the Company's major business segments, real estate, income properties,
and golf operations, posted improved operating results during 2006's third
period when compared to the prior year.
For the first nine months of 2006, profits of $8,409,179, equivalent to $1.48
per basic share, were recorded. These profits represented a decrease from the
profits of $12,622,406, equivalent to $2.23 per basic share, earned in 2005's
nine-month period. The lower earnings were primarily the result of lower land
sales volume, with 2005 results including the sale of 120 acres, at a price
approximating $18 million, to Florida Hospital for the future site of its
hospital. Partially offsetting the lower land sales volume were improved
results from income properties and golf operations, along with lower stock
option expense accruals in 2006 when compared to 2005. The improvement in
income properties results was due to the addition of two properties during
2006 and seven properties throughout 2005. Included in 2006's first nine
months results were income, net of tax, from discontinued operations of
$240,476, equivalent to $.04 per share, which represented the operation and
sale of an auto dealership facility site in Daytona Beach, Florida, which
was being held as an income property.
18
Summary of 2006 Operating Results-continued
-------------------------------------------
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.
The following is the calculation of EBDDT:
Three Months Ended
------------------------------------
September 30, September 30,
2006 2005
------------------------------------
Net Income $2,436,415 $ 2,688,847
Add Back:
Depreciation and Amortization 602,218 452,202
Deferred Taxes 2,141,398 (406,804)
---------- -----------
Earnings Before Depreciation, $5,180,031 $ 2,734,245
Amortization and Deferred Taxes ========== ===========
Nine Months Ended
----------------------------------
September 30, September 30,
2006 2005
----------------------------------
Net Income $ 8,409,179 $ 12,622,406
Add Back:
Depreciation and Amortization 1,628,327 1,277,275
Deferred Taxes 3,452,552 2,208,047
---------- ----------
Earnings Before Depreciation, $13,490,058 $ 16,107,728
Amortization and Deferred Taxes ========== ===========
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 is calculated by adding depreciation, amortization, and deferred
income taxes to net income as they represent non-cash charges.
EBDDT totaled $5,180,031 for the third quarter of 2006, a significant increase
over 2005's third quarter EBDDT amounting to $2,734,245. These favorable
results where achieved despite the downturn in profits, as the add-back for
both depreciation and amortization and deferred taxes increased over the prior
year. The depreciation and amortization add-back increased with the additional
income properties acquired in 2005 and 2006. The deferred tax adjustment was
negative in 2005 with the reversal of deferred taxes on gains from year-end
2004 transactions for which the like-kind exchange process was not completed,
as the Company was unable to identify sufficient investment opportunities
which met its investment criteria. Also contributing to the deferred tax
adjustment in 2005 was the recognition of a gain, for tax purposes, on the
collection of a note receivable which had been treated as an installment sale
in prior years.
19
Summary of Operating Results-continued
--------------------------------------
For the first nine months of 2006, EBDDT totaled $13,490,058 compared to
$16,107,728 in 2005's same period. The decrease in EBDDT was the direct
result of lower earnings during 2006 as the add-back for depreciation and
amortization and deferred taxes rose over the prior year. These increased
add-backs again were the result of the addition of income properties in both
years and the reversal of deferred taxable gains in 2005 as the Company was
unable to identify sufficient investment opportunities for tax free exchange
which met its investment criteria.
REAL ESTATE OPERATIONS
----------------------
REAL ESTATE SALES.
Revenues amounting to $5,095,658 and profits of $3,601,109 were realized from
real estate sales during the third quarter of 2006. These profits, a 16%
improvement over 2005's third period income from real estate sales of
$3,100,026, were earned on the sale of 100 acres of property. Included in
property sales were $577,000 in profits realized on transactions,
which had been deferred in previous periods. During the third quarter of 2006
the Company made a charitable contribution of 11 acres of land which had a fair
market value of $950,000. In accordance with relevant accounting literature,
the transaction was recorded as a sale of real estate with an offsetting
charge to real estate costs and expenses. The recording of this transaction
was not reflected in the Company's Earnings Release dated October 17, 2006.
This form 10Q reflects additional real estate revenues and expenses of
$950,000 for the three and nine months ended September 30, 2006 compared
with the press release with no effect on stated net income and earnings
per share for the periods. Profits from 2005's third quarter period were
recorded on the sale of 13 acres of land.
For the first nine months of 2006, revenues of $14,620,160 were generated
from real estate sales resulting in profits of $11,622,501. These revenues
and profits were produced on the sale of 143 acres of land in addition to
$4,733,000 recognized on transactions which were deferred in 2005. An
additional $1,084,000 of profit was deferred at September 30, 2006, on two
transactions which closed in 2006 and will be recognized as road and utility
improvements are completed. The sale of 214 acres of land in 2005's nine-
month period, including the sale of 120 acres to Florida Hospital for
approximately $18 million, produced revenues and profits of $26,989,590 and
$21,574,177, respectively.
INCOME PROPERTIES.
Income properties revenues rose 22% for the third quarter of 2006 when compared
to prior year and resulted in a 20% increase in profitability. These
favorable results were achieved with the addition of two new properties in
2006 and seven new properties throughout 2005. Revenues and profits were
$2,183,626 and $1,775,929, respectively for 2006 compared to $1,789,114 and
$1,479,720, respectively for 2005's same period. Income properties costs and
expenses rose 32% primarily on additional depreciation associated with the
properties acquired.
The addition of the new properties in 2005 and 2006 also accounted for the
improved results for the nine-month period as profits increased 21% to
$4,928,206 on revenues of $5,997,775. For the first nine months of 2005
profit of $3,909,240 was generated on revenues totaling $4,775,031.
Additional depreciation expense accounted for the 24% gain in costs and
expenses during the nine-month period.
20
GOLF OPERATIONS.
Results from golf operations improved 12% on a 12% rise in revenues
during the third quarter of 2006 when compared to 2005's third quarter. Both
golf and food and beverage activities contributed to the favorable results
with golf revenues increasing 13% on a 14% gain in the number of rounds
played, and food and beverage revenues increasing 9%. Revenues of $1,027,067
were recorded in 2006's third quarter resulting in an operating loss of
$456,616. For the same period of 2005, revenues and operating losses of
$920,836 and $518,313 were posted, respectively. A 3% increase in golf costs
and expenses was attributed to the increased activity during the period.
For the first nine months of 2006, revenues from golf operations of
$3,909,816 produced an operating loss of $781,074. During 2005's first
nine-month period, revenues and operating losses amounted to $3,648,055 and
$861,346,respectively.
The 7% increase in revenues again was a combination of both golf and food
and beverage activities with golf revenues increasing 9% and food and
beverage revenues providing a 3% revenue gain. The gain in golf revenues
is associated with a 5% rise in the number of rounds played in addition to
a 6% climb in average fee per round played. Golf operations costs and
expenses increased 4% during the period on the additional volume and higher
golf course maintenance costs, and food and beverage payroll and operating
costs.
GENERAL, CORPORATE AND OTHER.
For the third quarter and first nine months of 2006, the sale of other real
estate interests generated income of $212,550 and $668,420, respectively.
These profits were realized on the release of subsurface interests on 610
acres of which 49 acres were released during the third quarter. Releases
were granted on 1,358 acres during 2005's first nine months, of which 138
were released in the third quarter. These releases generated income of
$21,210 and $258,943 for the three-month and nine-month periods, respectively.
Interest and other income decreased 81% to $38,831 in the third quarter of
2006, while declining 36% to $484,516 for the first nine months when compared
to 2005's same periods. Interest and other income totaled $207,070 and
$676,116 for 2005's third quarter three-month period and nine months,
respectively. Declines for both of these periods were attributed to lower
earnings on interest from mortgage notes receivable, as there were no notes
outstanding during 2006's first nine months, and lower earnings on funds
held for reinvestment through the like-kind exchange process. Lower
earnings from investment securities on lower funds held for investment,
also contributed to the decrease during the third quarter.
For the quarter ended September 30, 2006, general and administrative expenses
totaled $1,911,250 and represented a significant increase over the $51,130
credit recorded in 2005's same period. The credit in 2005 resulted from a
decrease in the Company's stock price causing a reversal of stock option
expense during the period. General and administrative expense declined 27%
to $4,541,745 for the nine-month period. The decrease resulted from lower
stock option expense in 2006 as the stock price of the Company rose
significantly during the first six months of 2005 creating an increase
for the six months of 2005, though the third quarter decreased. General and
administrative expenses totaled $6,212,496 for the first nine months of 2005.
During the first nine months of 2006, the Company made charitable contributions
of land to qualified organizations. As the Company has reasonable assurance
that it will generate taxable income over the five-year carryforward period
to utilize these income tax deductions, the contributions resulted in an
approximate $690,000 positive adjustment to the income tax provision in the
first nine months of 2006. This positive adjustment resulted in an
effective tax rate approximating 32% for the nine-month period.
21
General Corporate and Other-continued
-------------------------------------
During the first nine months of 2005, the Company generated significant
taxable income, and there was reasonable assurance the Company would produce
taxable income for the remainder of the year. Due to this taxable income,
the deferred tax asset valuation allowance associated with charitable
contribution carryforwards was reversed, resulting in a $695,000 positive
adjustment to the income tax provision for the nine month period of 2005
and an effective tax rate approximating 35%.
In May of 2006, the Company sold a former automobile dealership site located
in Daytona Beach, Florida, which was being held as an income property. The
financial results of operations and sale of this property have been reported
separately as discontinued operations in the financial statements. Income,
net of income taxes, of $240,476 and $8,742 were posted the first nine months
of 2006 and 2005, respectively.
On January 1, 2006, the Company implemented SFAS No. 123R. The
implementation resulted in the recording of a $216,093, net of income
tax, cumulative effect of change in accounting principle during the first
quarter of 2006.
LIQUIDITY AND CAPITAL RESOURCES.
Cash, restricted cash and investment securities totaled $10,191,244 at
September 30, 2006. This balance represented a decrease of $13,117,163 from
the balance at December 31, 2005. The primary uses of these funds were for
the acquisition of income properties, payment of income taxes, and road and
utility construction.
During the nine month period, two income properties were acquired in the
Atlanta, Georgia market through the like-kind exchange process.
In total $15.6 million was used during the period for the acquisition
of property, plant, and equipment, including the above mentioned properties,
with an additional $4.4 million expended on road and utility improvements.
The payment of income taxes for the nine months approximated $5.1 million and
included the payment of taxes resulting from the 2002 tax audit, and the
amendment of the 2003 and 2004 income tax returns as the result of the
settlement the Company reached with the Internal Revenue Service on its
like-kind exchange transactions which occurred within the Company's Development
of Regional Impact Lands.
Other uses of cash during the period included the payment of dividends totaling
$1,421,071, equivalent to $.25 per share.
At September 30, 2006, notes payable totaled $8,020,679 with $898,501
outstanding on the $10.0 million revolving line of credit.
The Company's Board of Directors and management periodically review the
allocation of any excess capital with a goal of providing the highest return
for all shareholders over the long run. The reviews include consideration of
various alternatives, including increasing regular dividends, declaring
special dividends, commencing a stock repurchase program, and retaining
funds for reinvestment. At its July 26, 2006 meeting, the Board increased
the quarterly dividend from $0.08 to $0.09 per share and reaffirmed its
support for 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.
22
Liquidity and Capital Resources-continued
-----------------------------------------
Capital expenditures for the remainder of the year, in addition to income
property investments, include approximately $3 million in road construction.
Capital to fund planned expenditures is expected to be provided from cash
and investment securities, as they mature, operating activities,
and current financing sources in place. The Company 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.
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 the first nine months of 2006, the Company closed two
transactions for which the Company 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 do not provide any offsets, rescission or buy-back if the
improvements are not made.
As the Company has retained post-closing obligations, a portion of the
revenues and profits on the sales were deferred in accordance with
SFAS No. 66. The transactions are being accounted for on a percentage
-of-completion method with revenues and profits recognized as costs are
incurred. For the nine months ended September 30, 2006, revenues and profits
of $1,105,746 and $1,084,173 were deferred, respectively. These profits will
be recognized as the off-site improvements are completed.
Also during the first nine months of 2006, revenues and profits of
$4,963,422 and $4,733,159, respectively, were recognized from 2005
closings, which had been deferred as a result of post-closing
obligations existing at the time of closing. A portion of the
obligations were completed during the first nine months of 2006, and thus
a portion of revenues and profits were recognized. At September 30, 2006,
deferred profits totaling $1,696,020 remained on the Company's balance sheet
to be recognized with the completion of the post-closing obligations.
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 impairment of long-lived assets
reflected in the consolidated financial statements.
23
Critical Accounting Policies-continued
--------------------------------------
At the time the Company's debt was refinanced, 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.
A liability in the amount of $368,922 at September 30, 2006, has been
established on the Company's balance sheet. The change in fair value,
net of applicable taxes, in the amount of $226,610 at September 30, 2006,
has been recorded as accumulated other comprehensive loss, a component
of shareholders' equity.
The Company maintains a stock option plan ("the Plan") pursuant to
which 500,000 shares of the Company's common stock may be issued. The
Plan in place 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.
On January 1, 2006, the Company adopted SFAS No. 123R by using the
modified prospective method of adoption. SFAS No. 123R requires the
classification of share-based payment arrangements as liability or
equity instruments.
24
Critical Accounting Policies-continued
--------------------------------------
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. For liability-
classified awards, SFAS No. 123R requires an entity to remeasure the liability
from its intrinsic value to its fair value on the adoption date, as the
cumulative effect of change in accounting principle, net of any related tax
effect. The Company remeasured the value of its stock options and stock
appreciation rights as of January 1, 2006, which resulted in a cumulative
effect of change in accounting principle, net of tax, totaling $216,093. Upon
adoption of SFAS No. 123R, the Company also reclassified to liabilities the
January 1, 2006, fair value of its stock options, which had been classified
within shareholders' equity in the amount of $3,074,749.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------- ----------------------------------------------------------
The principal market risk (i.e., the risk of loss arising from adverse
changes in market rates and prices) to which the Company is exposed is
interest rates. The objective of the Company's asset management
activities is to provide an adequate level of liquidity to fund
operations and capital expansion, while minimizing market risk. The
Company utilizes overnight sweep accounts and short-term investments
to minimize the interest rate risk. The Company does not actively
invest or trade in equity securities. The Company does not believe
that its interest rate risk related to cash equivalents and short-term
investments is material due to the nature of the investments.
The Company manages its debt, considering investment opportunities and
risk, tax consequences, and overall financial strategies. The Company
is primarily exposed to interest rate risk on its $8,000,000
($7,122,178 outstanding at September 30, 2006) long-term mortgage.
The borrowing bears a variable rate of interest based on market rates.
Management's objective is to limit the impact of interest rate changes
on earnings and cash flows and to lower the overall borrowing costs.
To achieve this objective, the Company entered into an interest rate
swap agreement during the second quarter of 2002, which effectively
fixed the interest rate paid by the Company.
ITEM 4. CONTROLS AND PROCEDURES.
---------------------------------
As of the end of the period covered by this report, an evaluation was
carried out under the supervision and with the participation of the
Company's management, including the Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"), of the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-
15(e) or 15d-15(e)under the Securities and Exchange Act of 1934 (the
"Exchange Act")). Based on that evaluation, the CEO and CFO have
concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized, and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
There were no changes in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) or 15d-15(f)under the
Exchange Act) during the third fiscal quarter covered by this report
that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There are no material pending legal proceedings to which
the Company or its subsidiaries is a party.
Item 1A. Risk Factors.
Certain statements contained in this report (other than
statements of historical fact) are forward-looking
statements. The words "believe," "estimate," "expect,"
"intend," "anticipate," "will," "could," "may," "should,"
"plan," "potential," "predict," "forecast," "project,"and
similar expressions and variations thereof identify certain
of such forward-looking statements, which speak only as of
the dates on which they were made. Forward-looking
statements are made based upon management's expectations
and beliefs concerning future developments and their
potential effect upon the Company. There can be no
assurance that future developments will be in accordance
with management's expectations or that the effect of
future developments on the Company will be those
anticipated by management.
We wish to caution readers that the assumptions
which form the basis for forward-looking statements with
respect to or that may impact earnings for the year ended
December 31, 2006, and thereafter, include many factors
that are beyond the Company's ability to control or
estimate precisely. These risks and uncertainties include,
but are not limited to, the strength of the real estate
market in the City of Daytona Beach in Volusia County,
Florida; the ability to successfully execute acquisition
or development strategies; any loss of key management
personnel; changes in local, regional, and national
economic conditions affecting the real estate development
business and income properties; the impact of environmental
and land use regulations; the impact of competitive real
estate activity; variability in quarterly results due to
the unpredictable timing of land sales; the loss of any
major income property tenants; and the availability of
capital. These risks and uncertainties may cause our
actual future results to be materially different than those
expressed in our forward-looking statements.
In addition to the other information set forth in this
report, you should carefully consider the factors discussed
in Part I "Item 1A. Risk Factors" in the Company's Annual
Report on Form 10-K for the year ended December 31, 2005.
There have been no material changes to those risk factors.
The risks described in the Annual Report on Form 10-K are
not the only risks facing the Company. Additional risks
and uncertainties not currently known to the Company or
that the Company currently deems to be immaterial also may
materially adversely affect the Company.
While we periodically reassess material trends and
uncertainties affecting our results of operations and
financial condition, we do not intend to review or revise
any particular forward-looking statement referenced herein
in light of future events.
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Items 2 through 5.Not Applicable
Item 6. Exhibits
Exhibit 31.1 - Certification furnished pursuant to
Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 31.2 - Certification furnished pursuant to
Section 302 of Sarbanes-Oxley Act of
2002.
Exhibit 32.1 - Certification pursuant to 18 U.S.C.
Section 1350, as Adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002.
Exhibit 32.2 - Certification pursuant to 18 U.S.C.
Section 1350, as Adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CONSOLIDATED-TOMOKA LAND CO.
(Registrant)
Date: November 9, 2006 By:/s/ William H. McMunn
----------------------------
William H. McMunn, President
and Chief Executive Officer
Date: November 9, 2006 By:/s/ Bruce W. Teeters
----------------------------
Bruce W. Teeters, Senior
Vice President - Finance
and Treasurer
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