Item
1.
Condensed
Consolidated Financial Statements
|
|
|
|
Condensed
Consolidated Balance Sheets
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets
|
|
|
Cash
and cash equivalents
|
|
$
|
6,467,376
|
|
|
$
|
5,437,186
|
|
|
Accounts
receivable
|
|
|
469,017
|
|
|
|
2,790,318
|
|
|
Receivable
from affiliates
|
|
|
712,819
|
|
|
|
645,123
|
|
|
Inventories
|
|
|
107,803
|
|
|
|
95,541
|
|
|
Other
current assets
|
|
|
233,849
|
|
|
|
261,726
|
|
|
Deferred
tax asset
|
|
|
-
|
|
|
|
93,000
|
|
|
Total
current assets
|
|
|
7,990,864
|
|
|
|
9,322,894
|
|
|
|
|
|
Real
estate and golf management contract rights
acquired
|
|
|
3,285,587
|
|
|
|
3,843,504
|
|
|
Less
accumulated amortization
|
|
|
(924,472
|
)
|
|
|
(1,482,389
|
)
|
|
Total
contract rights acquired, net
|
|
|
2,361,115
|
|
|
|
2,361,115
|
|
|
|
|
|
Real
estate
|
|
|
Real
estate held for sale
|
|
|
802,211
|
|
|
|
792,382
|
|
|
Real
estate held for or under development
|
|
|
14,943,815
|
|
|
|
11,666,315
|
|
|
Total
real estate
|
|
|
15,746,026
|
|
|
|
12,458,697
|
|
|
|
|
|
Property
and equipment,
net of accumulated depreciation
|
|
|
of
$639,539 and $202,216 in 2007 and 2006, respectively
|
|
|
5,095,930
|
|
|
|
1,266,646
|
|
|
|
|
|
Other
assets
|
|
|
Investment
in unconsolidated affiliates
|
|
|
3,850,252
|
|
|
|
4,096,627
|
|
|
Deposits
|
|
|
100,000
|
|
|
|
135,800
|
|
|
Deferred
tax assets, non-current
|
|
|
4,435,000
|
|
|
|
53,000
|
|
|
Total
other assets
|
|
|
8,385,252
|
|
|
|
4,285,427
|
|
|
|
|
|
Total
assets
|
|
$
|
39,579,187
|
|
|
$
|
29,694,779
|
|
The
accompanying Notes to Condensed Consolidated Financial Statements are
an
integral part of these
statements.
|
Landmark
Land Company, Inc.
|
|
|
Condensed
Consolidated Balance Sheets
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
Current
portion of notes payable to others
|
|
$
|
8,379,628
|
|
|
$
|
669,361
|
|
|
Payable
to affiliates
|
|
|
1,192,074
|
|
|
|
1,192,074
|
|
|
Accounts
payable and accrued expenses
|
|
|
391,382
|
|
|
|
714,039
|
|
|
Accrued
payroll and related expenses
|
|
|
350,859
|
|
|
|
269,763
|
|
|
Accrued
interest due affiliates
|
|
|
806,303
|
|
|
|
771,140
|
|
|
Accrued
interest due others
|
|
|
294,758
|
|
|
|
239,776
|
|
|
Dividends
payable
|
|
|
-
|
|
|
|
382,698
|
|
|
Other
liabilities and deferred credits
|
|
|
161,144
|
|
|
|
218,762
|
|
|
Real
estate sales contract deposits
|
|
|
305,194
|
|
|
|
1,360,640
|
|
|
Current
income taxes
|
|
|
85,000
|
|
|
|
2,532,000
|
|
|
Total
current liabilities
|
|
|
11,966,342
|
|
|
|
8,350,253
|
|
|
|
|
|
Long
term liabilities
|
|
|
Notes
payable to others
|
|
|
8,002,318
|
|
|
|
8,637,274
|
|
|
|
|
|
Total
liabilities
|
|
|
19,968,660
|
|
|
|
16,987,527
|
|
|
|
|
|
Stockholders'
equity
|
|
|
Preferred
stock, Series C, non-voting, $.50 par value; $100
|
|
|
|
|
|
|
|
|
|
liquidation
value; $10 cumulative annual dividend;
|
|
|
|
|
|
|
|
|
|
50,000
shares authorized; 10,000 shares issued and outstanding,
|
|
|
|
|
|
|
stated
at liquidation value
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
Common
stock, $.50 par value; 20,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
|
8,804,468
shares issued; 7,567,530 shares outstanding
|
|
|
4,402,234
|
|
|
|
4,402,234
|
|
|
Additional
paid-in capital
|
|
|
30,406,772
|
|
|
|
30,304,044
|
|
|
Treasury
stock, at cost, 1,236,938 shares
|
|
|
(1,299,820
|
)
|
|
|
(1,299,820
|
)
|
|
Accumulated
deficit
|
|
|
(14,833,943
|
)
|
|
|
(21,649,514
|
)
|
|
Accumulated
other comprehensive loss
|
|
|
(64,716
|
)
|
|
|
(49,692
|
)
|
|
Total
stockholders' equity
|
|
|
19,610,527
|
|
|
|
12,707,252
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
39,579,187
|
|
|
$
|
29,694,779
|
|
The
accompanying Notes to Condensed Consolidated Financial Statements are
an
integral part of these
statements.
|
Landmark
Land Company, Inc.
|
|
|
Condensed
Consolidated Statements of Operations
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate sales
|
|
$
|
4,149,806
|
|
|
$
|
4,618,532
|
|
|
$
|
17,489,740
|
|
|
$
|
16,732,115
|
|
|
Golf
course revenue
|
|
|
283,506
|
|
|
|
298,049
|
|
|
|
1,025,215
|
|
|
|
1,068,686
|
|
|
Golf
merchandise sales
|
|
|
63,552
|
|
|
|
67,324
|
|
|
|
219,704
|
|
|
|
229,907
|
|
|
Food
and beverage sales
|
|
|
62,252
|
|
|
|
39,244
|
|
|
|
235,852
|
|
|
|
129,718
|
|
|
Management
and consulting fees
|
|
|
478,548
|
|
|
|
959,598
|
|
|
|
1,676,678
|
|
|
|
2,679,278
|
|
|
Reimbursement
of out-of-pocket expenses
|
|
|
401,945
|
|
|
|
404,358
|
|
|
|
1,214,386
|
|
|
|
1,059,166
|
|
|
Total
revenues
|
|
|
5,439,609
|
|
|
|
6,387,105
|
|
|
|
21,861,575
|
|
|
|
21,898,870
|
|
|
|
|
|
Costs
of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of real estate sold
|
|
|
2,486,071
|
|
|
|
2,960,538
|
|
|
|
11,438,259
|
|
|
|
10,619,267
|
|
|
Real
estate operating expenses
|
|
|
477,762
|
|
|
|
335,350
|
|
|
|
1,482,268
|
|
|
|
967,826
|
|
|
Cost
of golf merchandise sold
|
|
|
37,863
|
|
|
|
37,950
|
|
|
|
133,585
|
|
|
|
132,830
|
|
|
Cost
of food and beverage sold
|
|
|
30,181
|
|
|
|
17,067
|
|
|
|
110,386
|
|
|
|
56,606
|
|
|
Golf
operating expenses
|
|
|
473,109
|
|
|
|
376,513
|
|
|
|
1,383,083
|
|
|
|
1,116,409
|
|
|
Out-of-pocket
expenses
|
|
|
401,945
|
|
|
|
404,358
|
|
|
|
1,214,386
|
|
|
|
1,059,166
|
|
|
Management
and consulting payroll and related expenses
|
|
|
931,621
|
|
|
|
894,207
|
|
|
|
2,887,795
|
|
|
|
2,454,904
|
|
|
Depreciation
and amortization
|
|
|
151,237
|
|
|
|
102,806
|
|
|
|
438,313
|
|
|
|
284,294
|
|
|
Total
costs of revenue
|
|
|
4,989,789
|
|
|
|
5,128,789
|
|
|
|
19,088,075
|
|
|
|
16,691,302
|
|
|
|
|
|
Operating
income
|
|
|
449,820
|
|
|
|
1,258,316
|
|
|
|
2,773,500
|
|
|
|
5,207,568
|
|
|
|
|
|
General,
administrative and other expenses
|
|
|
(614,497
|
)
|
|
|
(233,502
|
)
|
|
|
(1,855,558
|
)
|
|
|
(712,102
|
)
|
|
|
|
|
Other
income (expenses)
|
|
|
|
Equity
in loss of unconsolidated affiliates
|
|
|
(12,444
|
)
|
|
|
(79,886
|
)
|
|
|
(137,199
|
)
|
|
|
(398,639
|
)
|
|
Interest
income
|
|
|
69,173
|
|
|
|
54,880
|
|
|
|
188,641
|
|
|
|
112,485
|
|
|
Interest
expense
|
|
|
(155,482
|
)
|
|
|
(82,218
|
)
|
|
|
(448,522
|
)
|
|
|
(266,123
|
)
|
|
Total
other income (expenses)
|
|
|
(98,753
|
)
|
|
|
(107,224
|
)
|
|
|
(397,080
|
)
|
|
|
(552,277
|
)
|
|
|
|
|
Net
income (loss) before income taxes
|
|
|
(263,430
|
)
|
|
|
917,590
|
|
|
|
520,862
|
|
|
|
3,943,189
|
|
|
|
|
|
Federal
and state income taxes
|
|
|
47,442
|
|
|
|
(363,000
|
)
|
|
|
(308,718
|
)
|
|
|
(1,394,181
|
)
|
|
|
|
|
Net
income (loss)
|
|
$
|
(215,988
|
)
|
|
$
|
554,590
|
|
|
$
|
212,144
|
|
|
$
|
2,549,008
|
|
|
|
|
|
Basic
income (loss) per common share
|
|
$
|
(0.03
|
)
|
|
$
|
0.07
|
|
|
$
|
0.02
|
|
|
$
|
0.32
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
7,567,530
|
|
|
|
7,660,055
|
|
|
|
7,567,530
|
|
|
|
7,660,055
|
|
|
|
|
|
Diluted
income (loss) per common share
|
|
$
|
(0.03
|
)
|
|
$
|
0.07
|
|
|
$
|
0.02
|
|
|
$
|
0.32
|
|
|
|
|
|
Diluted
weighted average shares outstanding
|
|
|
7,567,530
|
|
|
|
7,660,055
|
|
|
|
7,725,538
|
|
|
|
7,661,452
|
|
The
accompanying Notes to Condensed Consolidated Financial Statements are
an
integral part of these
statements.
|
|
|
|
Condensed
Consolidated Statements of Comprehensive Income
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(215,988
|
)
|
|
$
|
554,590
|
|
|
$
|
212,144
|
|
|
$
|
2,549,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(8,817
|
)
|
|
|
(1,141
|
)
|
|
|
(15,024
|
)
|
|
|
(6,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
(224,805
|
)
|
|
$
|
553,449
|
|
|
$
|
197,120
|
|
|
$
|
2,542,190
|
|
The
accompanying Notes to Condensed Consolidated Financial Statements are
an
integral part of these
statements.
|
|
|
|
Condensed
Consolidated Statements of Cash Flows
|
|
|
Nine
Months Ended September 30, 2007 and 2006
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
income for the period
|
|
$
|
212,144
|
|
|
$
|
2,549,008
|
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
provided
(used) by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
438,313
|
|
|
|
284,294
|
|
|
Director
and employee bonus paid in stock or options
|
|
|
102,728
|
|
|
|
107,068
|
|
|
Equity
in loss of unconsolidated affiliates
|
|
|
137,199
|
|
|
|
398,639
|
|
|
(Increase)
decrease in
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
2,321,301
|
|
|
|
(19,890
|
)
|
|
Receivable
from affiliates
|
|
|
175,205
|
|
|
|
1,566,651
|
|
|
Inventories
|
|
|
(12,262
|
)
|
|
|
1,572
|
|
|
Other
current assets and deposits
|
|
|
63,677
|
|
|
|
(532,680
|
)
|
|
Increase
(decrease) in
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
(322,657
|
)
|
|
|
(229,206
|
)
|
|
Accrued
payroll and related expenses
|
|
|
81,096
|
|
|
|
84,415
|
|
|
Accrued
interest
|
|
|
90,145
|
|
|
|
70,859
|
|
|
Other
liabilities and deferred credits
|
|
|
(57,618
|
)
|
|
|
59,553
|
|
|
Federal
and state income tax liabilities
|
|
|
131,000
|
|
|
|
1,351,000
|
|
|
Real
estate sales contract deposits
|
|
|
(1,055,446
|
)
|
|
|
804,703
|
|
|
Net
cash provided by operating activities
|
|
|
2,304,825
|
|
|
|
6,495,986
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(4,268,406
|
)
|
|
|
(82,972
|
)
|
|
Sale
of property and equipment, net
|
|
|
810
|
|
|
|
15,531
|
|
|
Purchase
and development of real estate inventory
|
|
|
(14,909,521
|
)
|
|
|
(13,458,684
|
)
|
|
Sale
of real estate inventory
|
|
|
11,622,192
|
|
|
|
10,850,227
|
|
|
Investment
in unconsolidated affiliates
|
|
|
(148,750
|
)
|
|
|
(4,487,500
|
)
|
|
Net
cash (used) by investing activities
|
|
|
(7,703,675
|
)
|
|
|
(7,163,398
|
)
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
Proceeds
from debt to others
|
|
|
18,157,593
|
|
|
|
11,887,631
|
|
|
Repayments
on debt to others
|
|
|
(11,082,282
|
)
|
|
|
(9,626,238
|
)
|
|
Cash
dividends on common stock
|
|
|
(571,271
|
)
|
|
|
(547,490
|
)
|
|
Cash
dividends on preferred stock
|
|
|
(75,000
|
)
|
|
|
(78,562
|
)
|
|
Net
cash provided by financing activities
|
|
|
6,429,040
|
|
|
|
1,635,341
|
|
|
|
|
|
Net
increase in cash during period
|
|
|
1,030,190
|
|
|
|
967,929
|
|
|
|
|
|
Cash
balance, beginning of period
|
|
|
5,437,186
|
|
|
|
4,944,004
|
|
|
|
|
|
Cash
balance, end of period
|
|
$
|
6,467,376
|
|
|
$
|
5,911,933
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest, including $80,000 and $291,103 paid to affiliates
in
2007 and 2006, respectively.
|
|
$
|
846,666
|
|
|
$
|
486,366
|
|
The
accompanying Notes to Condensed Consolidated Financial Statements are
an
integral part of these
statements.
Landmark
Land Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis
of Presentation
The
accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for condensed interim financial
information and with the instructions to Form 10-Q and Article 3 of Regulation
S-X promulgated by the Securities and Exchange
Commission. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been
included. Operating results for the nine-month period ended September
30, 2007 are not necessarily indicative of the results that may be expected
for
the fiscal year ending December 31, 2007. There have been no
significant changes to accounting policies or critical estimates during the
third quarter of 2007. For further information, please refer to the
audited financial statements and footnotes thereto included in the company’s
Form 10-KSB for the year ended December 31, 2006, as filed with the Securities
and Exchange Commission.
The
accompanying financial statements include the assets, liabilities, revenues
and
expenses of Landmark Land Company, Inc. and its wholly-owned subsidiaries,
Landmark of Spain, Inc., DPMG, Inc., LML Caribbean, LTD., South Padre Island
Development, LLC, and SPIBS, LLC. The two entities related to the
South Padre project, South Padre Island Development, LLC and SPIBS, LLC,
are
sometimes collectively referred to as “South Padre”. All significant
inter-company accounts and transactions have been eliminated in
consolidation.
Landmark
of Spain, Inc. owns a 50% interest in a Spanish company, Landmark Developments
of Spain, S.L. Landmark of Spain, Inc. accounts for its investment on
the equity basis. Landmark Developments of Spain, S.L. reported the
following results for the periods shown below:
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
736,170
|
|
|
$
|
501,458
|
|
|
$
|
2,008,379
|
|
|
$
|
1,527,158
|
|
|
Gross
profit (loss)
|
|
$
|
336,241
|
|
|
$
|
(25,547
|
)
|
|
$
|
745,913
|
|
|
$
|
(377,533
|
)
|
|
Profit
(loss) from continuing operations
|
|
$
|
336,241
|
|
|
$
|
(25,547
|
)
|
|
$
|
745,913
|
|
|
$
|
(377,533
|
)
|
|
Net
income (loss)
|
|
$
|
336,241
|
|
|
$
|
(25,547
|
)
|
|
$
|
745,913
|
|
|
$
|
(377,533
|
)
|
The
company has a receivable from this affiliate of $404,978 as of September
30,
2007.
LML
Caribbean, LTD owns one third interest in Apes Hill Development, SRL (“Apes
Hill”) and accounts for its investment on the equity basis. Apes Hill
began development and marketing of a golf-oriented real estate project in
Barbados in the fourth quarter of 2005. While most costs are being
capitalized in the Barbados subsidiary, certain start-up and marketing costs
are
expensed as incurred. Apes Hill reported the following results for
the periods shown below:
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
S
|
-
|
|
|
S
|
-
|
|
|
Gross
loss
|
|
$
|
(541,707
|
)
|
|
$
|
(201,360
|
)
|
|
$
|
(1,530,480
|
)
|
|
$
|
(629,641
|
)
|
|
Loss
from continuing operations
|
|
$
|
(541,707
|
)
|
|
$
|
(201,360
|
)
|
|
$
|
(1,530,480
|
)
|
|
$
|
(629,641
|
)
|
|
Net
loss
|
|
$
|
(541,707
|
)
|
|
$
|
(201,360
|
)
|
|
$
|
(1,530,480
|
)
|
|
$
|
(629,641
|
)
|
The
company has a receivable from Apes Hill in the amount of $298,740 at September
30, 2007 representing unpaid management fees and out-of-pocket
expenses. The amount is reported in the balance sheet as Receivable
from affiliates.
DPMG
Inc.
owns a 50% interest in Presidential Golf Club, LLC and accounts for its
investment on the equity basis. Presidential is constructing a golf
course in Maryland and all costs incurred to date have been
capitalized. At September 30, 2007, the company has an investment of
$700,000 in Presidential that is included on the balance sheet as Investment
in
unconsolidated affiliates and a receivable of $9,101 included as Receivable
from
affiliates. With its contribution of $21,250 in July 2007, the
company completed funding its $700,000 capital commitment to
Presidential.
2. Earnings
Per Share
Earnings
per share are computed using weighted average number of common shares
outstanding during the year. Diluted earnings per share reflect the
common stock options granted to employees, directors and legal counsel in
2006
and 2007. The following is a reconciliation of the numerators and
denominators used in the calculation of earnings per share:
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(215,988
|
)
|
|
$
|
554,590
|
|
|
$
|
212,144
|
|
|
$
|
2,549,008
|
|
|
Less: Preferred
dividends
|
|
$
|
(25,000
|
)
|
|
$
|
(25,000
|
)
|
|
$
|
(75,000
|
)
|
|
$
|
(78,562
|
)
|
|
Net
income available to common shareholders
|
|
$
|
(240,988
|
)
|
|
$
|
529,590
|
|
|
$
|
137,144
|
|
|
$
|
2,470,446
|
|
|
Weighted
average common shares outstanding
|
|
|
7,567,530
|
|
|
|
7,660,055
|
|
|
|
7,567,530
|
|
|
|
7,660,055
|
|
|
Incremental
shares from assumed exercise of dilutive options
|
|
|
-
|
|
|
|
-
|
|
|
|
158,008
|
|
|
|
1,397
|
|
|
Diluted
weighted average common shares outstanding
|
|
|
7,567,530
|
|
|
|
7,660,055
|
|
|
|
7,725,538
|
|
|
|
7,661,452
|
|
|
Basic
income per common share
|
|
$
|
(0.03
|
)
|
|
$
|
0.07
|
|
|
$
|
0.02
|
|
|
$
|
0.32
|
|
|
Diluted
income per common share
|
|
$
|
(0.03
|
)
|
|
$
|
0.07
|
|
|
$
|
0.02
|
|
|
$
|
0.32
|
|
The
dilutive effect of the employee stock options and directors’ options
is reported using the treasury stock method (i.e., the assumed proceeds received
from exercise of the options are assumed to be used to purchase treasury
shares
at the average market price for the period). In accordance with Statement
of Financial Accounting Standards (SFAS) No. 128,
Earnings Per Share
,
if there is a loss from continuing operations, the common stock equivalents
are
deemed antidilutive and diluted earnings (loss) per share is calculated in
the
same manner as basic earnings (loss) per share.
3. Stock
Options
On
September 30, 2007 the company had two share-based compensation
plans. The compensation cost related to options granted, based on the
grant date fair value, was estimated in accordance with the provisions of
SFAS
No. 123R and has been charged against income for the nine-months ended September
30, 2007 and 2006 in the amounts of $102,728 and $107,068,
respectively. The deferred income tax benefit related to the director
and legal counsel expenses was approximately $22,000 and $38,000 in the
respective periods.
During
the second and fourth quarters of 2006 the company granted stock options
to
employees and directors as reported in the company’s Form 10KSB for the year
ended December 31, 2006. On May 23, 2007, the company granted options
to one outside director and certain employees. On August 10, 2007,
the company granted options to one outside director and one
employee. The company is accounting for the options using the fair
value method. Using the Black Scholes Merton model, the May and
August 2007 director’s options were valued at $.73 and $.63 per share,
respectively and, since the options are immediately exercisable, the total
values of $36,300 and $31,386 were charged to expense and credited to paid-in
capital on the grant dates. The May and August 2007 employee options
were valued at $1.03 and $.87 per share, respectively. Since the
employee options vest at the end of five years, the estimated value is being
expensed over the five year vesting period. The Statement of
Operations for the period ended September 30, 2007 includes expense for the
employee options in the amount of $35,042, with the same amount credited
to
paid-in capital.
Stock
Option Agreements
. The company has entered into agreements with
its outside directors and legal counsel under which it granted options to
purchase the company’s common shares. On May 23, 2007, one outside
director was granted options to purchase a total of 50,000 shares. On
August 10, 2007, another outside director was granted options to purchase
a
total of 50,000 shares. The options were granted with an exercise
price equal to the fair market value at the time of grant. These
options are immediately vested and expire five years from the date of
grant.
The
fair
value of each option award is estimated on the date of grant using a Black
Scholes Merton option valuation model that uses the assumptions noted in
the
following table. Expected volatility is estimated based upon the
historical volatility of entities with characteristics (size, industry, etc.)
similar to the company and the company’s own historical
volatility. The expected term of the options granted represents the
period of time that options are expected to be outstanding. The risk
free rate is based upon the U.S. Treasury constant maturity yield for a period
comparable to the expected term. The dividend rate is an estimate of
the expected yield on the company stock over the expected term.
|
Assumption
|
2007
|
|
|
|
|
Expected
volatility
|
43%
|
|
Expected
term (in years)
|
2.5
|
|
Risk
free rate
|
4.51%-4.79%
|
|
Expected
dividends
|
3.50%-3.92%
|
A
summary
of option activity during the nine months ended September 30, 2007 under
the
director and legal counsel agreements is presented below:
|
Options
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
Weighted-
Average Remaining Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2007
|
|
|
200,000
|
|
|
|
2.00
|
|
3.8
years
|
|
|
|
|
Granted
|
|
|
100,000
|
|
|
|
2.70
|
|
4.9
years
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
300,000
|
|
|
|
2.23
|
|
4.1
years
|
|
|
100,000
|
|
|
Exercisable
at September 30, 2007
|
|
|
300,000
|
|
|
|
2.23
|
|
4.1
years
|
|
|
100,000
|
|
There
was
no related unrecognized cost as of September 30, 2007.
Incentive
Stock Option Plan.
The company’s Incentive Stock
Option Plan (Plan) was adopted by the Board of Directors on April 29, 2006,
and
approved by shareholders on November 18, 2006. The Plan permits the
grant of stock options for up to 766,000 shares of common stock to company
employees. Option awards are generally granted with an exercise price
not less than the fair market value, as determined by the Board of Directors
pursuant to the Plan, of the company’s stock at the time of
grant. Generally, options must be granted within ten years of the
plan adoption date with vesting five years from date of grant and exercise
within five years from date of vesting.
The
fair
value of each option award is estimated on the date of grant using a Black
Scholes Merton option valuation model that uses the assumptions noted in
the
following table. Expected volatility is estimated based upon the
historical volatility of entities with characteristics (size, industry, etc.)
similar to the company and the company’s own historical
volatility. The expected term of the options granted represents the
period of time that options granted are expected to be
outstanding. The expected forfeiture rate represents the percentage
of options expected to be forfeited before vesting. The risk free rate is
based
upon the U.S. Treasury constant maturity yield for a period comparable to
the
expected term. The dividend rate is an estimate of the expected yield
on the company stock over the expected term.
|
Assumption
|
2007
|
|
|
|
|
Expected
volatility
|
43%
|
|
Expected
term (in years)
|
7.5
|
|
Expected
forfeiture
|
10%
|
|
Risk
free rate
|
4.68%-4.80%
|
|
Expected
dividends
|
3.50%-3.92%
|
A
summary
of option activity during the nine months ended September 30, 2007 under
the
company’s incentive stock option plan is presented below:
|
Options
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2007
|
|
|
247,500
|
|
|
|
1.70
|
|
|
|
|
|
|
Granted
|
|
|
201,500
|
|
|
|
2.85
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
11,000
|
|
|
|
1.74
|
|
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
438,000
|
|
|
|
2.23
|
|
9.2
years
|
|
$
|
188,490
|
|
|
Exercisable
at September 30, 2007
|
|
|
-
|
|
|
|
-
|
|
-
|
|
|
-
|
|
A
summary
of the status of the company’s non-vested options as of June 30, 2007, and
changes during the six months ended June 30, 2007, is presented
below:
|
Non-vested
Options
|
|
Shares
|
|
|
Weighted-Average
Grant-Date
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
Non-vested
at January 1, 2007
|
|
|
247,500
|
|
|
$
|
0.56
|
|
|
Granted
|
|
|
201,500
|
|
|
$
|
1.03
|
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
11,000
|
|
|
$
|
0.60
|
|
|
Non-vested
at September 30, 2007
|
|
|
438,000
|
|
|
$
|
0.77
|
|
As
of
September 30, 2007, there was $268,335 of total unrecognized compensation
cost
related to non-vested share-based compensation arrangements granted under
the
incentive stock option plan. That cost is expected to be recognized
over the remaining 4.9 years vesting period for outstanding grants under
the
Plan.
4. Reclassifications
Certain
reclassifications have been made in the 2006 financial statements to conform
to
the 2007 presentation. These changes had no effect on net
income.
5. Commitments
In
the
third quarter of 2007, the company closed its purchase of approximately 1,775
acres adjacent to the South Padre Island Golf Club development in Laguna
Vista,
Texas, for a cash price of $4,500,000. The property consists of
approximately 700 developable acres which were previously under option to
Landmark, as well as additional acres, most of which are wetlands or other
environmentally sensitive areas. The purchase was financed by a new
$4.5 million line of credit from International Bank of Commerce, with interest
at prime, for a 2-year period, renewable for an additional 2 years assuming
the
renewed principal does not exceed $3.5 million. The loan is secured
by a first lien on the purchased land and a subordinate lien on other real
estate securing the other lines of credit.
The
company’s subsidiary, South Padre, provides a one-year latent defects warranty
and a ten-year structural warranty on the houses it builds. The
accompanying financial statements include a provision for warranty expense
calculated as approximately .5% of gross house sales. The summary of
warranty accruals for the nine months ended September 30, 2007 and 2006
follows:
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty
accrual balance January 1,
|
|
$
|
146,635
|
|
|
$
|
82,260
|
|
|
Provision
for warranty
|
|
|
74,440
|
|
|
|
58,214
|
|
|
Payments
|
|
|
(87,808
|
)
|
|
|
(14,562
|
)
|
|
Warranty
accrual balance September 30,
|
|
$
|
133,267
|
|
|
$
|
125,912
|
|
6. Income
Taxes
The
company reported income before income taxes of $520,862 for the nine-month
period ended September 30, 2007. The provision for federal and state income
taxes totals $308,718 and is comprised of estimated federal taxes of $228,000
and state taxes of $80,718. The federal tax liability is offset by
utilization of a deferred tax benefit related to a net operating loss carried
forward from 2002, except for approximately $16,000 alternative minimum tax
which cannot be offset by the NOL. Certain stock based compensation,
airplane expenses and meals, which cannot be deducted for income tax purposes,
and the inability to utilize the NOL against most of the state income tax
provision and the alternative minimum tax result in an effective tax rate
significantly higher than in prior periods.
Financial
Accounting Standards Board Interpretation (FIN) No. 48,
Accounting for
Uncertainty in Income Taxes
was issued in July 2006 and interprets SFAS No.
109,
Accounting for Income Taxes
. FIN 48 requires all
taxpayers to analyze all material positions they have taken or plan to take
in
all tax returns that have been filed or should have been filed with all taxing
authorities for all years still subject to challenge by those taxing
authorities. If the position taken is “more-likely-than-not” to be
sustained by the taxing authority on its technical merits and if there is
more
than a 50% likelihood that the position would be sustained if challenged
and
considered by the highest court in the relevant jurisdiction, the tax
consequences of that position should be reflected in the taxpayer’s GAAP
financial statements. Earlier proposed interpretations of SFAS 109
had recommended a “probable” standard for recognition of tax consequences rather
than the “more-likely-than-not” standard finally adopted.
The
company was required to implement FIN 48 at the beginning of the current
fiscal
year. Consequently, the company analyzed its tax positions and
adjusted its balance sheet effective January 1, 2007 to recognize a deferred
tax
benefit from tax positions that meet the “more-likely-than-not” standard but did
not meet the earlier “probable” standard for recognition in the GAAP financial
statements. The principal adjustment relates to the company’s net
operating loss reported in the 2002 federal and state tax returns upon final
resolution of the company’s litigation with the U. S. government as discussed in
Notes 1 and 13 to the Consolidated Financial Statements in Form 10KSB for
the
year ended December 31, 2006. The adjustment increased deferred tax
assets by $4,500,000 representing benefits to be realized in future years,
reduced current tax liabilities by $2,367,000 representing the benefit utilized
to offset taxable income in the 2006 federal return and reduced the accumulated
deficit by $6,867,000 -- the total benefit recognized on January 1.
It
should
be noted that the estimated net future benefit available to the company from
all
its deferred tax positions is approximately $49,900,000 at September 30,
2007;
however, realization of that benefit is dependent on the company’s ability to
generate taxable income in the future. In view of historical
earnings, the company has established a valuation allowance against the asset
in
the approximate amount of $45,465,000, reducing the net benefit to $4,435,000
included on the September 30, 2007 balance sheet.
The
company had no material unrecognized tax benefits at September 30, 2007,
nor
does it expect any significant change in that status during the next 12
months. No accrued interest or penalties or uncertain tax positions
have been included on the statements of operations or the statement of financial
condition as of the date of implementation. Should the company adopt
tax positions for which it would be appropriate to accrue interest and
penalties, such costs would be reflected in the tax expense for the period
in
which such costs accrued. The company is subject to U.S. federal
income tax and to several state and foreign jurisdictions. Returns
filed for tax periods ending after December 31, 2003 are still open to
examination by those relevant taxing authorities.
7.
Segment Information
The
company’s operations are comprised of four segments – real estate, golf,
management services and corporate investments and administration. The
following tables summarize operations for the three months and nine months
ended
September 30, 2007 and 2006 by segment:
|
|
|
Three
Months Ended September 30, 2007
|
|
|
|
|
Real
Estate
|
|
|
Golf
|
|
|
Management
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,149,806
|
|
|
$
|
409,310
|
|
|
$
|
880,493
|
|
|
|
-
|
|
|
$
|
5,439,609
|
|
|
Costs
of revenue
|
|
|
(2,963,833
|
)
|
|
|
(541,153
|
)
|
|
|
(1,333,566
|
)
|
|
|
-
|
|
|
|
(4,838,552
|
)
|
|
Depreciation
and amortization
|
|
|
(8,221
|
)
|
|
|
(32,495
|
)
|
|
|
(8,452
|
)
|
|
|
(102,069
|
)
|
|
|
(151,237
|
)
|
|
Operating
income (loss)
|
|
|
1,177,752
|
|
|
|
(164,338
|
)
|
|
|
(461,525
|
)
|
|
|
(102,069
|
)
|
|
|
449,820
|
|
|
General
and administrative
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(614,497
|
)
|
|
|
(614,497
|
)
|
|
Other
income (expenses)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(98,753
|
)
|
|
|
(98,753
|
)
|
|
Federal
& state income taxes
|
|
|
(1,165,406
|
)
|
|
|
107,740
|
|
|
|
380,721
|
|
|
|
724,387
|
|
|
|
47,442
|
|
|
Net
income (loss)
|
|
$
|
12,346
|
|
|
$
|
(56,598
|
)
|
|
$
|
(80,804
|
)
|
|
$
|
(90,932
|
)
|
|
$
|
(215,988
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived
assets
|
|
$
|
16,105,315
|
|
|
$
|
1,127,435
|
|
|
$
|
3,726,733
|
|
|
$
|
10,628,840
|
|
|
$
|
31,588,323
|
|
|
Other
assets
|
|
|
1,493,950
|
|
|
|
219,067
|
|
|
|
1,184,986
|
|
|
|
5,092,861
|
|
|
|
7,990,864
|
|
|
Total
assets
|
|
$
|
17,599,265
|
|
|
$
|
1,346,502
|
|
|
$
|
4,911,719
|
|
|
$
|
15,721,701
|
|
|
$
|
39,579,187
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2006
|
|
|
|
|
Real
Estate
|
|
|
Golf
|
|
|
Management
|
|
|
Corporate
|
|
|
Total
|
|
|
Revenue
|
|
$
|
4,618,532
|
|
|
$
|
404,617
|
|
|
$
|
1,363,956
|
|
|
|
-
|
|
|
$
|
6,387,105
|
|
|
Costs
of revenue
|
|
|
(3,295,888
|
)
|
|
|
(431,530
|
)
|
|
|
(1,298,565
|
)
|
|
|
-
|
|
|
|
(5,025,983
|
)
|
|
Depreciation
and amortization
|
|
|
(4,249
|
)
|
|
|
(17,749
|
)
|
|
|
(80,808
|
)
|
|
|
-
|
|
|
|
(102,806
|
)
|
|
Operating
income (loss)
|
|
|
1,318,395
|
|
|
|
(44,662
|
)
|
|
|
(15,417
|
)
|
|
|
-
|
|
|
|
1,258,316
|
|
|
General
and administrative
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(233,502
|
)
|
|
|
(233,502
|
)
|
|
Other
income (expenses)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(107,224
|
)
|
|
|
(107,224
|
)
|
|
Federal
& state income taxes
|
|
|
(514,776
|
)
|
|
|
14,294
|
|
|
|
5,238
|
|
|
|
132,244
|
|
|
|
(363,000
|
)
|
|
Net
income (loss)
|
|
$
|
803,619
|
|
|
$
|
(30,368
|
)
|
|
$
|
(10,179
|
)
|
|
$
|
(208,482
|
)
|
|
|
554,590
|
|
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
|
Real
Estate
|
|
|
Golf
|
|
|
Management
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
17,489,740
|
|
|
$
|
1,480,771
|
|
|
$
|
2,891,064
|
|
|
|
-
|
|
|
$
|
21,861,575
|
|
|
Costs
of revenue
|
|
|
(12,920,527
|
)
|
|
|
(1,627,054
|
)
|
|
|
(4,102,181
|
)
|
|
|
-
|
|
|
|
(18,649,762
|
)
|
|
Depreciation
and amortization
|
|
|
(19,302
|
)
|
|
|
(92,629
|
)
|
|
|
(23,722
|
)
|
|
|
(302,660
|
)
|
|
|
(438,313
|
)
|
|
Operating
income (loss)
|
|
|
4,549,911
|
|
|
|
(238,912
|
)
|
|
|
(1,234,839
|
)
|
|
|
(302,660
|
)
|
|
|
2,773,500
|
|
|
General
and administrative
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,855,558
|
)
|
|
|
(1,855,558
|
)
|
|
Other
income (expenses)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(397,080
|
)
|
|
|
(397,080
|
)
|
|
Federal
& state income taxes
|
|
|
(2,696,759
|
)
|
|
|
141,605
|
|
|
|
731,896
|
|
|
|
1,514,540
|
|
|
|
(308,718
|
)
|
|
Net
income (loss)
|
|
$
|
1,853,152
|
|
|
|
(97,307
|
)
|
|
$
|
(502,943
|
)
|
|
$
|
(1,040,758
|
)
|
|
$
|
212,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2006
|
|
|
|
|
Real
Estate
|
|
|
Golf
|
|
|
Management
|
|
|
Corporate
|
|
|
Total
|
|
|
Revenue
|
|
$
|
16,732,115
|
|
|
$
|
1,428,311
|
|
|
$
|
3,738,444
|
|
|
|
-
|
|
|
$
|
21,898,870
|
|
|
Costs
of revenue
|
|
|
(11,587,093
|
)
|
|
|
(1,305,845
|
)
|
|
|
(3,514,070
|
)
|
|
|
-
|
|
|
|
(16,407,008
|
)
|
|
Depreciation
and amortization
|
|
|
(11,536
|
)
|
|
|
(49,717
|
)
|
|
|
(223,041
|
)
|
|
|
-
|
|
|
|
(284,294
|
)
|
|
Operating
income (loss)
|
|
|
5,133,486
|
|
|
|
72,749
|
|
|
|
1,333
|
|
|
|
-
|
|
|
|
5,207,568
|
|
|
General
and administrative
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(712,102
|
)
|
|
|
(712,102
|
)
|
|
Other
income (expenses)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(552,277
|
)
|
|
|
(552,277
|
)
|
|
Federal
& state income taxes
|
|
|
(1,815,031
|
)
|
|
|
(25,722
|
)
|
|
|
(471
|
)
|
|
|
447,043
|
|
|
|
(1,394,181
|
)
|
|
Net
income (loss)
|
|
$
|
3,318,455
|
|
|
$
|
47,027
|
|
|
$
|
862
|
|
|
$
|
(817,336
|
)
|
|
$
|
2,549,008
|
|
8.
Recent
Accounting
Pronouncements
In
September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157), which provides guidance on how to measure assets and liabilities
that use fair value. SFAS 157 will apply whenever another U.S. GAAP
standard requires assets or liabilities to be measured at fair value, but
does
not expand the use of fair value to new circumstances. This standard
also will require additional disclosures in both annual and quarterly
reports. We will adopt SFAS 157 in January 2008. We are
currently evaluating the potential impact this standard may have on our
financial position and results of operations.
In
February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115
(SFAS 159). Under SFAS 159, entities may elect
to measure eligible items at fair value on a contract-by-contract basis,
with
changes in fair value recognized in earnings each reporting
period. The election, called the fair value option, will enable
entities to achieve an offset accounting effect for changes in fair value
of
certain related assets and liabilities without having to apply complex
hedge
accounting provisions. We are permitted to adopt SFAS 159 in January
2008, but do not anticipate using this fair value option.
Item
2.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The
company, through subsidiaries, owns and manages for others, interests in
real
estate and golf oriented real estate developments. After a long
period of relative dormancy, the company acquired its first operating companies,
DPMG, Inc. and its affiliates, on August 31, 2003 and subsequently, South
Padre
Island Development, L.P. on October 1, 2004. The company’s
consolidated statements of operations and cash flows for the nine months
ended
September 30, 2007 and 2006 include the operations of the company and its
subsidiaries identified in Note 1 to the Condensed Financial Statements.
Year to
year comparisons should be analyzed carefully and historical results should
not
be assumed to be indicative of the company’s future operations.
Management’s
analysis of the company’s operations during the three months and nine months
ended September 30, 2007 and 2006 and comments on its current financial
condition are as follows:
Revenue
Real
estate sales
at South Padre totaled 30 lots and 81 houses that generated
$17,490,000 in revenue during the nine months ended September 30, 2007, of
which
2 lots and 17 houses closed during the third quarter of 2007, generating
revenue
of $4,150,000. In 2006, South Padre sold 80 lots and 67 houses
generating $16,732,000 in revenue during the nine months ended September
30,
including 24 lots and 22 houses that closed during the third quarter generating
revenue of $4,619,000. The increased revenue in 2007 over 2006
results primarily from the higher proportion of houses closed. The
2007 closings are largely on sales contracts that were executed in late
2006. The slump in residential real estate sales that has received
attention in the national press has reached south Texas this year, with new
sales contracts in 2007 running noticeably below the level of the previous
two
years. At September 30, 2007, South Padre had 14 non-contingent
contracts for houses under construction with a sales value of approximately
$2,332,000. At December 31, 2006, there were 80 contracts for houses
and lots with a sales value of approximately $13,347,000.
Golf
related revenue, including revenue from the clubhouse restaurant opened
in
January 2007, totaled $409,000 during the third quarter of 2007. Paid
golf rounds totaled 6,300. In the same period of 2006 South Padre
reported $404,000 in golf revenue from approximately 6,600 rounds
played. Comparison of the operations for the first nine months show
revenue of $1,481,000 on 25,400 rounds in 2007 and $1,428,000 on 26,100
rounds
in 2006 with the increased revenue coming from the new restaurant
operations.
The
golf
course is a public, daily fee course, but is operated primarily as an amenity
for the surrounding real estate development. As discussed under Note
5 to the Condensed Consolidated Financial Statements, the company has purchased
approximately 1,775 acres of vacant land adjacent to the current South Padre
development. The company anticipates phased development of that land
to meet future demand in this long-term development property. While
the company expects a continuing long term demand for residential housing
at the
South Padre development, fluctuations in the national economy, weather, interest
rates and other factors may affect golf and real estate operations from year
to
year.
Management
and consulting
agreements generated $479,000 in fee revenue in the quarter
ended September 30, 2007 compared to $960,000 during the same period of
2006. For the first nine months of 2007 fee revenue totaled
$1,677,000 compared to $2,679,000 for the same period in 2006. The
reduced fees reflect lower fees from Spain, Puerto Rico, New York, and Missouri,
which were partially offset by an increase in fees from Barbados. The
company was also reimbursed for out-of-pocket expenses related to its management
agreements in the amount of $402,000 during the third quarter of 2007 and
$404,000 in the third quarter of 2006. Reimbursements were $1,214,000
and $1,059,000 for the first nine months of 2007 and 2006,
respectively. Reimbursements in 2007 include $292,000 related to
operating costs of the company airplane acquired in January 2007.
Costs
of Revenues
Cost
of real estate sold,
including land, development, construction and closing
costs, totaled $2,486,000 or 60% of sales in the third quarter of
2007. During the same period of 2006 South Padre reported costs of
real estate sold totaling $2,961,000 or 64% of real estate
sales. Cost of real estate sold for the nine months ended
September 30, 2007 was $11,438,000 (65% of sales) and $10,619,000 (63%) for
the
same period in 2006. Gross profit margins differ among various
subdivision lot developments and various house models constructed; consequently,
the gross profit margin realized in any reporting period will vary according
to
the mix of products sold during the period. While house sales
generally generate more revenue, the gross profit margin on vertical
construction is typically lower than on lot development.
Real
estate operating expenses
not included in
cost of real estate sold
totaled $478,000 and $1,482,000 respectively in the three-month
and
nine-month periods ended September 30, 2007 compared to $335,000 and $968,000
in
the same periods of 2006. Cost increases were experienced in an
expanded rental pool operation, increased home owners’ association subsidies,
increased administrative staffing and street repairs. The company
also refined its capitalization of construction department overhead to job
costs, resulting in a lesser share of costs reported as cost of sales and
a
greater share as operating expenses.
Cost
of golf merchandise sold and food and beverage sold
in the three-month and
nine-month periods ending September 30, 2007 totaled $68,000 (54% of sales)
and
$244,000 (also 54% of sales) and $54,000 (51% of sales) and $189,000 (53%)
for
the same periods of 2006.
Golf
operating expenses
totaled $473,000 in the third quarter of 2007 and
$1,383,000 for the first nine months of 2007 compared to $377,000 and $1,116,000
in the same periods of 2006.
Management
and consulting payroll and related expenses
totaled $932,000 and $2,888,000
respectively during the three-month and nine-month periods ending September
30,
2007 compared to $894,000 and $2,455,000 for the same periods in
2006. The higher costs reflect salary increases granted since the
first quarter of 2006 plus the addition of a new senior vice president and
other
supporting staff.
Depreciation
and amortization
included in the company’s consolidated statements of
operations was $151,000 and $438,000 in the three-month and nine-month periods
ending September 30, 2007. In the same periods of 2006, the company
reported $103,000 and $284,000. The increase is primarily a result of
depreciation on the airplane acquired in January 2007.
General,
administrative and other expense
General,
administrative and other expenses
totaled $614,000 and $1,856,000
respectively in the third quarter and first nine months of 2007 compared
to
$234,000 and $712,000 in the same periods of 2006. The increase
primarily reflects the cost of operating the airplane purchased in January
2007
and includes $922,000 of un-reimbursed airplane operating costs for the nine
months ended September 30, 2007.
Other
income and expense
Equity
in loss of unconsolidated affiliates
reflects the company’s share of the
operating profits or losses of the following unconsolidated
affiliates:
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
Ownership
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Landmark
Developments of Spain, S.L.
|
|
|
50%
|
|
|
$
|
168,000
|
|
|
$
|
(13,000
|
)
|
|
$
|
373,000
|
|
|
$
|
(189,000
|
)
|
|
Apes
Hill Development SRL
|
|
|
33%
|
|
|
$
|
(180,000
|
)
|
|
$
|
(67,000
|
)
|
|
$
|
(510,000
|
)
|
|
$
|
(210,000
|
)
|
|
Presidential
Golf Club, LLC
|
|
|
50%
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
(12,000
|
)
|
|
$
|
(80,000
|
)
|
|
$
|
(137,000
|
)
|
|
$
|
(399,000
|
)
|
Interest
income
increased from $55,000 and $112,000 respectively in the third
quarter and first nine months of 2006 to $69,000 and $189,000 in the same
periods this year, due primarily to higher average cash balances invested
on a
short-term basis.
Interest
expense
increased to $155,000 in the third quarter of 2007 and $449,000 for
the first nine months of 2007 compared to $82,000 and $266,000 for the same
periods last year, primarily as a result of interest on the airplane
debt.
Federal
and state income taxes
The
company reported income (loss) before income taxes of $(263,000) and $521,000
respectively for the third quarter and first nine months of 2007 compared
to
$918,000 and $3,943,000 in the same periods last year. For the nine
months ended September 30, 2007 the provision for federal and state income
taxes
totals $309,000 and is comprised of estimated federal taxes of $228,000 and
state taxes of $81,000. The federal tax liability is offset by
utilization of a deferred tax benefit related to a net operating loss carried
forward from 2002, except for approximately $16,000 alternative minimum tax
which cannot be offset by the NOL.
Net
income
The
company reported a net loss of $216,000 for the third quarter of 2007and
net
income of $212,000 for the first nine months of 2007. In the
comparable periods of 2006, the company reported net income of $555,000 and
$2,549,000. The significant decrease results primarily from decreased
management fee revenue and increased operating costs related to the airplane
as
previously discussed.
Liquidity
and capital resources
Current
assets
total $7,991,000 at September 30, 2007 compared to $9,323,000 at
December 31, 2006.
The
reduction reflects collection of the Gyrodyne receivable discussed in the
company’s Form 8K filed February 16, 2007 and subsequent use of a portion of the
cash collected for real estate development and other operating
uses.
Real
estate and golf management contract rights acquired
remained unchanged
during the third quarter of 2007. The only contracts in this asset
group with significant unamortized cost relate to a property in the Hudson
Valley of New York state. While no fees are currently being realized
from these contracts as government approvals are pending for the proposed
development, the company expects to recover all costs from future construction
supervision fees and profit incentive fees.
Real
estate
held for either development or sale totaled $15,746,000 at September
30, 2007 compared to $12,459,000 at December 31, 2006. As discussed
in Note 5 to the Condensed Consolidated Financial Statements above, the company
has purchased additional land at South Padre to develop as needed to meet
market
demand over the next several years.
Property
and equipment
increased approximately $3,829,000, net of depreciation, in
the first nine months of 2007. The increase is due primarily to the
purchase of the airplane in January 2007.
Liabilities
totaled $19,969,000 at September 30, 2007, an increase of approximately
$2,981,000 from December 31, 2006. The increase reflects the new
loans for the airplane (3,798,000 balance at September 30, 2007) and raw
land at
South Padre ($4,366,000 at September 30, 2007), partially offset by $1,032,000
net repayment of other real estate development debt, $2,447,000 reduction
of
income taxes payable resulting, primarily, from FIN 48 adjustments recorded
January 1, 2007, $1,055,000 reduction in sales escrow deposits and $649,000
reduction in other current liabilities.
Although
the company’s current liabilities exceed current assets, the company anticipates
that approximately $7,606,000 of the debt to others due within one year will
be
repaid from sale proceeds of real estate inventory at South Padre that is
pledged to secure that debt. Debt to affiliates in the approximate amount
of
$1,998,000, including $806,000 in accrued interest, is due on demand, but
is
owed to stockholders of the company who advanced the funds in prior years
to
provide working capital liquidity. The company anticipates its cash
and credit resources to be adequate for anticipated current needs.
The
company has no
off-balance sheet arrangements
that have or are
reasonably likely to have a material current or future effect on the company’s
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures, or capital
resources.
Stockholders’
equity
increased by approximately $6,903,000 in the first nine months
of 2007, reflecting the implementation of FIN 48 with a $6,867,000
credit to equity as previously discussed in Note 6 to the Condensed Consolidated
Financial Statements, the company’s net income of $212,000, and stock based
compensation of $103,000, partially offset by $75,000 of dividends paid on
preferred stock, $189,000 dividends declared and paid on common stock, and
$15,000 of comprehensive loss (unrealized loss on foreign currency
translation).
There
were no commitments regarding purchase or sale of the company's stock at
September 30, 2007; however, see Note 3 to the Condensed Consolidated Financial
Statements regarding stock options granted during 2006 and 2007.
Critical
accounting estimates
Future
realization of the significant deferred tax asset recognized January 1, 2007
as
a result of adopting FIN 48 (discussed in Note 6 to the Condensed Consolidated
Financial Statements), is dependent on the company’s ability to generate taxable
income in future years. The company has established a valuation
allowance to reduce the carrying value of the asset to an amount likely to
be
realized. While estimates of future income are always uncertain, the
diversification of the company’s recent investments into foreign real estate
affiliates makes current estimates even more challenging. Realization
of the tax asset will be significantly affected by, among other factors,
whether
the new investments are profitable and whether or when those profits are
taxable
in the U.S. Any significant change in the various factors affecting
the company’s expectations of future taxable earnings could require a change in
the valuation allowance. Any change in the valuation allowance would be
reflected in the company’s operating statement for the period such change is
recognized. During the first nine months of 2007 the valuation
allowance was increased by $16,000 related to the current provision for
alternative minimum tax.