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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
| þ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Year Ended December 31, 2008
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number
001-31931
001-31931
WOODBRIDGE HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
| Florida (State or other jurisdiction of incorporation or organization) |
11-3675068 (I.R.S. Employer Identification No.) |
|
| 2100 West Cypress Creek Road Ft. Lauderdale, Florida (Address of principal executive offices) |
33309 (Zip Code) |
(954) 940-4950
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
| Class A Common Stock, Par Value $0.01 Per Share (Title of each class) |
Pink Sheet Electronic Quotation Service (Name of each exchange on which registered) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Exchange Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of June 30, 2008, the aggregate market value of the registrant’s common stock held by
non-affiliates of the registrant was $88.2 million based on the $5.80 closing sale price as
reported on the New York Stock Exchange.
The number of shares outstanding for each of the registrant’s classes of common stock, as of March
12, 2009 is as follows:
| Class of Common Stock | Shares Outstanding | |||
Class A common stock, $0.01 par value |
16,656,525 | |||
Class B common stock, $0.01 par value |
243,807 | |||
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement relating to the registrant’s 2009 Annual Meeting
of Shareholders are incorporated by reference in Part III of this report. The financial statements
of Bluegreen Corporation are incorporated by reference in Part II of this report and are filed as
an exhibit to this report.
Woodbridge Holdings Corporation
Annual Report on Form 10-K for the year ended December 31, 2008
Annual Report on Form 10-K for the year ended December 31, 2008
TABLE OF CONTENTS
Table of Contents
PART I
Some of the statements contained or incorporated by reference herein include forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act” ), that involve substantial risks and uncertainties. Some of the forward-looking
statements can be identified by the use of words such as “anticipate,” “believe,” “estimate,”
“may,” “intend,” “expect,” “will,” “should,” “seek” or other similar expressions. Forward-looking
statements are based largely on management’s expectations and involve inherent risks and
uncertainties described in this report. When considering those forward-looking statements, you
should keep in mind the risks, uncertainties and other cautionary statements in this report,
including those identified under Item 1A. — Risk Factors. These risks are subject to change based
on factors which are, in many instances, beyond the Company’s control. Some factors which may
affect the accuracy of the forward-looking statements apply generally to the real estate industry,
while other factors apply directly to us. Any number of important factors could cause actual
results to differ materially from those in the forward-looking statements including: the impact
of economic, competitive and other factors affecting the Company and its operations; the market
for real estate in the areas where the Company has developments, including the impact of market
conditions on the Company’s margins and the fair value of our real estate inventory; the risk
that the value of the property held by Core Communities may decline, including as a result of the
current downturn in the residential and commercial real estate and homebuilding industries; the
risk that the development of parcels and master-planned communities will not be completed as
anticipated; continued declines in the estimated fair value of our real estate inventory and the
potential for write-downs or impairment charges; the effects of increases in interest rates and
availability of credit to buyers of our inventory; accelerated principal payments on our debt
obligations due to re-margining or curtailment payment requirements; the ability to obtain
financing and to renew existing credit facilities on acceptable terms, if at all; the Company’s
ability to access additional capital on acceptable terms, if at all; the risks associated with the
Company’s business strategy, including the Company’s ability to successfully make investments
notwithstanding current adverse conditions in the economy and the credit markets; and the
Company’s success at managing the risks involved in the foregoing. Many of these factors are
beyond our control. The Company cautions that the foregoing factors are not exclusive.
ITEM 1. BUSINESS
General Description of Business
Woodbridge Holdings Corporation (“Woodbridge,” “we,” “us,” “our,” or the “Company”) (formerly
Levitt Corporation), directly and through its wholly owned subsidiaries, historically has been a
real estate development company with activities in the Southeastern United States. We were
organized in December 1982 under the laws of the State of Florida. Historically, our operations
were primarily within the real estate industry; however, our current business strategy includes the
pursuit of investments and acquisitions within or outside of the real estate industry, as well as
the continued development of master-planned communities. Under this business model, we likely will
not generate a consistent earnings stream and the composition of our revenues may vary widely due
to factors inherent in a particular investment, including the maturity and cyclical nature of, and
market conditions relating to, the business invested in. Net investment gains and other income
will be based primarily on the success of our investments as well as overall market conditions.
Business Segments
In 2008, Woodbridge engaged in business activities through the Land Division, consisting of
the operations of Core Communities, LLC (“Core Communities” or “Core”), which develops
master-planned communities, and through the Other Operations segment (“Other Operations”), which
includes the parent company operations of Woodbridge (the “Parent Company”), the consolidated
operations of Pizza Fusion Holdings, Inc. (“Pizza Fusion”), the consolidated operations of Carolina
Oak Homes, LLC (“Carolina Oak”), which engaged in homebuilding in South Carolina prior to the
suspension of those activities during the fourth quarter of 2008, and other activities through
Cypress Creek Capital Holdings, LLC (“Cypress Creek Capital”) and Snapper Creek Equity Management,
LLC (“Snapper Creek”). An equity investment in
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Bluegreen Corporation (“Bluegreen”) and an
investment in Office Depot, Inc. (“Office Depot”) are also
included in the Other Operations segment.
Until November 9, 2007, the Company also engaged in homebuilding activities through Levitt and
Sons, LLC (“Levitt and Sons”) and reported results of operations through two additional reporting
segments, Primary Homebuilding and Tennessee Homebuilding. On November 9, 2007, Levitt and Sons
filed a voluntary bankruptcy petition and, accordingly, the Company deconsolidated Levitt and Sons
as of that date. As a result of the deconsolidation of Levitt and Sons, the results of operations
of the Primary Homebuilding segment, with the exception of Carolina Oak, and Tennessee Homebuilding
segments were only included as separate segments through November 9, 2007, the date of Woodbridge’s
deconsolidation of Levitt and Sons (see Note 24 to our audited consolidated financial statements
included in Item 8 for financial information of Levitt and Sons). The presentation and allocation
of the assets, liabilities and results of operations of each segment may not reflect the actual
economic costs of the segment as a stand-alone business. If a different basis of allocation were
utilized, the relative contributions of the segment might differ but, in management’s view, the
relative trends in segments would not likely be impacted. See Item 7. “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and (Note 21) to our audited
consolidated financial statements contained under Item 8. “Financial Statements and Supplementary
Data” for a discussion of trends, results of operations, and other relevant information on each
segment.
Land Division
Core Communities was founded in May 1996 to develop a master—planned community in Port St.
Lucie, Florida now known as St. Lucie West. Historically, its activities focused on the development
of a master-planned community in Port St. Lucie, Florida called Tradition, Florida and a community
outside of Hardeeville, South Carolina called Tradition Hilton Head. Tradition, Florida has been
in active development for several years, while Tradition Hilton Head is in the early stage of
development. As a master-planned community developer, Core Communities engages in four primary
activities: (i) the acquisition of large tracts of raw land; (ii) planning, entitlement and
infrastructure development; (iii) the sale of entitled land and/or developed lots to homebuilders
and commercial, industrial and institutional end-users; and (iv) the development and leasing of
commercial space to commercial, industrial and institutional end-users.
St. Lucie West is a 4,600 acre master-planned community located in St. Lucie County, Florida.
It is bordered by Interstate 95 to the west and Florida’s Turnpike to the east. The community
blends residential, commercial and industrial developments where residents have access to commerce,
recreation, entertainment, religious, and educational facilities all within the community. St.
Lucie West is completely sold out and substantially built out. There are more than 6,000 homes in
St. Lucie West housing nearly 15,000 residents.
Tradition, Florida encompasses more than 8,200 total acres and is planned to include a
4.5-mile long employment corridor along I-95, educational and health care facilities, commercial
properties, residential developments and other uses in a series of mixed-use parcels. As part of
the employment corridor, a 120-acre research park is being marketed as the Florida Center for
Innovation at Tradition (“FCI”), within which the Torrey Pines Institute for Molecular Studies
(TPIMS) has built its new headquarters. FCI is planned to consist of just under two million
square feet of research and development space, a 300 bed Martin Memorial Health Systems hospital, a
27-acre lake with a 1-mile fitness trail and recreational amenities, state-of-the-art fiber optic
cabling, underground electrical power and proximity to high-quality housing, restaurants, hotels
and shopping. Mann Research Center also purchased a 22.4 acre parcel within the FCI on which it
intends to build a 400,000-square-foot life sciences complex. Oregon Health & Science
University’s Vaccine and Gene Therapy Institute also announced plans to locate a
120,000-square-foot facility within FCI. Special assessment bonds are being utilized to provide
financing for certain infrastructure developments.
Tradition Hilton Head encompasses almost 5,400 total acres and is currently entitled for up to
9,500 residential units and 1.5 million square feet of commercial space, in addition to
recreational areas, educational facilities and emergency services.
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Our Land Division recorded $11.3 million in sales in 2008 compared to $16.6 million in 2007 as
demand for residential and commercial inventory in Florida remained slow. The overall slowdown in
the real estate markets and disruptions in credit markets continue to have a negative effect on
demand for
residential land in our Land Division which historically was partially mitigated by increased
commercial leasing revenue. Traffic at the Tradition, Florida information center remains slow,
reflecting the overall state of the Florida real estate market. In response to these market
conditions, the Land Division has concentrated on commercial property. In addition to sales of
parcels to developers, the Land Division plans to continue to internally develop certain projects
for leasing to third parties subject to market demand. Core generated higher revenues in 2008
compared to 2007 due to increased rental income associated with the leasing of certain commercial
properties and increased revenues relating to irrigation services provided to homebuilders,
commercial users, and the residents of Tradition, Florida. Retailers at Tradition, Florida
include nationally branded retail stores such as Target, Babies R Us, Bed, Bath and Beyond, Office
Max, The Sports Authority, TJ Maxx, Petsmart, LA Fitness and Old Navy.
Our Land Division’s land in development and relevant data as of December 31, 2008 were as
follows:
| Non- | Third | |||||||||||||||||||||||||||||||
| Date | Acres | Closed | Current | Saleable | Saleable | Acres | Acres | |||||||||||||||||||||||||
| Acquired | Acquired | Acres (a) | Inventory | Acres (b) | Acres (b) | Backlog | Available | |||||||||||||||||||||||||
Currently in Development |
||||||||||||||||||||||||||||||||
Tradition, Florida |
1998 – 2004 | 8,246 | 1,831 | 6,415 | 2,583 | 3,832 | — | 3,832 | ||||||||||||||||||||||||
Tradition Hilton Head |
2005 | 5,390 | 166 | 5,224 | 2,417 | 2,807 | 10 | 2,797 | ||||||||||||||||||||||||
Total Currently in Development |
13,636 | 1,997 | 11,639 | 5,000 | 6,639 | 10 | 6,629 | |||||||||||||||||||||||||
| (a) | Closed acres for Tradition Hilton Head include 150 acres owned by Carolina Oak, a wholly owned subsidiary of Woodbridge. The revenue from this sale was eliminated in consolidation. | |
| (b) | Actual saleable and non-saleable acres may vary over time due to changes in zoning, project design, or other factors. Non-saleable acres include, but are not limited to, areas set aside for roads, parks, schools, utilities, wetlands and other public purposes. |
Other Operations
Other Operations consist of the operations of our Parent Company, Carolina Oak, and Pizza
Fusion, other activities through Cypress Creek Capital and Snapper Creek, our equity investment in
Bluegreen and an investment in Office Depot.
Investment in Bluegreen Corporation
We own approximately 9.5 million shares of the outstanding common stock of Bluegreen, which
represents approximately 31% of that company’s issued and outstanding common stock. Bluegreen is a
leading provider of vacation and residential lifestyle choices through its resorts and residential
community businesses. Bluegreen is organized into two divisions: Bluegreen Resorts and Bluegreen
Communities.
Bluegreen Resorts acquires, develops and markets vacation ownership interests (“VOIs”) in
resorts generally located in popular high-volume, “drive-to” vacation destinations. Bluegreen
Communities acquires, develops and subdivides property and markets residential land homesites, the
majority of which are sold directly to retail customers who seek to build a home in a high quality
residential setting, in some cases on properties featuring a golf course and related amenities.
Bluegreen also generates significant interest income through its financing of individual
purchasers of VOIs and, to a nominal extent, homesites sold by its Bluegreen Communities division.
During 2008, we began evaluating our investment in Bluegreen for other-than-temporary
impairment in accordance with Financial Accounting Standards Board (“FASB”) Staff Position
(“FSP”) FAS 115-1/FAS 124-1, “The Meaning of Other-than-Temporary Impairment and Its
Application to Certain Investments” (“FSP FAS 115-1/FAS 124-1”), Accounting Principles
Board Opinion No. 18, “The Equity Method of Accounting for
Investments in Common Stock”,
(“APB No. 18”) and Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin
No. 59 (“SAB No. 59”) as the fair value of the Bluegreen stock had fallen below the carrying
value of our investment in Bluegreen of approximately $12 per share. We analyzed various
quantitative and qualitative factors including our intent and ability to hold the investment,
the severity and duration of the impairment and the prospects for the improvement of fair value.
On July 21, 2008, Bluegreen’s Board of Directors entered into a non-binding letter of intent for
the sale of Bluegreen’s outstanding common stock for $15 per share to a third party, with a due
diligence and exclusivity period through September 15, 2008. This due diligence and exclusivity
period was subsequently extended through November 15, 2008. In October 2008, Bluegreen disclosed
that the third party buyer had been unable to obtain the financing necessary to execute a sale
transaction, therefore, no assurances could be provided that a sale would be completed. As of
December 31, 2008, the exclusivity period had expired and Bluegreen was not able to consummate
a sale.
At September 30, 2008, our investment in Bluegreen was $119.4 million compared to the $65.8
million trading value (calculated based upon the $6.91 closing price of Bluegreen’s common
stock on the New York Stock Exchange on September 30, 2008). We determined that our investment
in Bluegreen was other-than-temporarily impaired due to the severity of the decline in the fair
value of the investment, the probability that a sale could not be executed by Bluegreen, and due
to the deterioration of the debt and equity markets in the third quarter of 2008. Therefore, we
recorded an impairment charge of $53.6 million, adjusting the carrying value of our investment
in Bluegreen to $65.8 million at September 30, 2008. Additionally, after further evaluation of
our investment in Bluegreen as of December 31, 2008, based on, among other things, the continued
decline of Bluegreen’s common stock price and the continued deterioration of the equity markets,
we determined that an additional impairment of the investment in Bluegreen was appropriate.
Accordingly, we recorded a $40.8 million impairment charge (calculated based upon the $3.13
closing price of Bluegreen’s common stock on the New York Stock Exchange on December 31, 2008)
and adjusted the carrying value of our investment in Bluegreen to $29.8 million. On March 13,
2009, the closing price of Bluegreen’s common stock was $1.12 per share.
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Bluegreen has announced that it is implementing strategic initiatives in order to conserve
cash that will significantly reduce sales, eliminate certain marketing programs, and reduce capital
spending and overhead by eliminating a significant number of employees, among other things. During
the fourth quarter of 2008, Bluegreen recorded $15.6 million in restructuring charges in connection
with the implementation of these initiatives and recorded an $8.5 million impairment charge related
to its goodwill.
Investment in Office Depot
During March 2008, we, together with Woodbridge Equity Fund LLLP, a newly formed limited
liability limited partnership wholly-owned by us, purchased 3,000,200 shares of Office Depot common
stock, which represented approximately one percent of Office Depot’s outstanding stock. These
Office Depot shares were acquired at an average price of $11.33 per share for an aggregate purchase
price of approximately $34.0 million. During June 2008, we sold 1,565,200 shares of Office Depot
common stock at an average price of $12.08 per share for an aggregate sales price of approximately
$18.9 million.
During December 2008, we performed an impairment analysis of our remaining investment in
Office Depot common stock in accordance with FSP FAS 115-1/FAS 124-1. As result of the impairment
analysis, we concluded that based on deteriorating economic conditions which could negatively
impact the future earning potential of Office Depot, the continued decline of the Office Depot
stock price, the continued decline in the overall economy and credit markets and the
unpredictability of the recovery of the Office Depot stock price, there was an other-than-temporary
impairment associated with our investment in Office Depot. As a result, we recorded an
other-than-temporary impairment charge of approximately $12.0 million representing the difference
of the average cost value of $11.33 per share and the fair value of $2.98 per share as of December
31, 2008, which represented our new basis in this investment. On March 13, 2009, the closing price
of Office Depot’s common stock on the New York Stock Exchange was $1.10 per share.
Acquisition of Pizza Fusion
Pizza Fusion is a restaurant franchise operating in a niche market within the quick service
and organic food industries. Founded in 2006, Pizza Fusion was operating 16 locations in Florida
and California through December 31, 2008 and entered into franchise agreements to open an
additional 14 stores over 2009.
On September 18, 2008, our wholly-owned subsidiary, Woodbridge Equity Fund II LP, purchased
for an aggregate of $3.0 million 2,608,696 shares of Series B Convertible Preferred Stock of Pizza
Fusion,
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together with warrants to purchase up to an additional 1,500,000 shares of Series B
Convertible Preferred Stock of Pizza Fusion at an exercise price of $1.44 per share. We also have
options, exercisable on or prior to September 18, 2009, to purchase up to 521,740 additional shares
of Series B Convertible Preferred Stock of Pizza Fusion at a price of $1.15 per share and, upon
exercise of such options, will receive warrants to purchase up to 300,000 additional shares of
Series B Convertible Preferred Stock of Pizza Fusion at an exercise price of $1.44 per share. The
warrants have a 10 year term and are subject to earlier termination under certain circumstances.
We evaluated our investment in Pizza Fusion under FASB Interpretation No. 46(R),
“Consolidation of Variable Interest Entities” (“FIN No. 46(R)”), and determined that Pizza Fusion
is a Variable Interest Entity (“VIE”). Furthermore, we concluded that we are the primary
beneficiary and as such, consolidated the financial statements of
Pizza Fusion as of September 18,
2008. We will continue to review our primary beneficiary status for any potential changes in
ownership or capital structure that may cause us to reconsider whether we should continue to
consolidate the financial statements of Pizza Fusion. The financial statements of Pizza Fusion at
December 31, 2008 were not material. See (Note 3) to our audited consolidated financial statements
for further information.
Carolina Oak
In 2007, we acquired from Levitt and Sons all of the outstanding membership interests in
Carolina Oak, a South Carolina limited liability company (formerly known as Levitt and Sons of
Jasper County, LLC), for the following consideration: (i) assumption of the outstanding principal
balance of a loan in the amount of $34.1 million which is collateralized by a 150 acre parcel of
land owned by Carolina Oak located in Tradition Hilton Head, (ii) execution of a promissory note in
the amount of $400,000 to serve as a deposit under a purchase agreement between Carolina Oak and
Core Communities of South Carolina, LLC and (iii) the assumption of specified payables in the
amount of approximately $5.3 million.
During the fourth quarter of 2008, as a result of, among other things, a further deterioration
in consumer confidence, an overall softening of demand for new homes, a decline in the overall
economy, increasing unemployment, a deterioration in the credit markets, and the direct and
indirect impact of the turmoil in the mortgage loan market, we made a decision to suspend Carolina
Oak’s homebuilding activities until the residential housing market improves. Consequently, the
purchase agreement between Carolina Oak and Core Communities of South Carolina was canceled and the
$400,000 deposit was forfeited. Carolina Oak sold and delivered 8 units during 2008 and, as of
December 31, 2008, had 6 completed unsold units. Carolina Oak has an additional 91 lots that are
ready and available for home construction. The community was originally planned to consist of
approximately 403 additional units. However, there can be no assurance as to when homebuilding
activities in this community will be resumed.
At December 31, 2008, we reviewed Carolina Oak project’s inventory of real estate for
impairment in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). The estimated
fair market value of the project was determined based on an appraisal performed by an independent
third party. The independent appraisal considered, among other things, general economic
conditions, competition in the market where the community is located, alternative product offerings
that may impact sales price, the number of homes that can be built on the site, and alternative
uses for the property such as the possibility of a sale of the entire community to another builder
or the sale of individual home sites. We assessed the fair value of the project based on the
appraisal performed by a third party because we believe an independent appraisal is the best
estimate in determining fair value under the current circumstances. As a result of the analysis,
we recorded an impairment charge of $3.5 million in cost of sales for the year ended December 31,
2008, which is reflected in the Other Operations segment.
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As previously reported, the results of operations and financial condition of Carolina Oak as
of and for the years ended December 31, 2007 and 2006 were included in the Primary Homebuilding
segment because its financial metrics were similar in nature to the other homebuilding projects
within that segment. However, due to our acquisition of Carolina Oak and the deconsolidation of
Levitt and Sons, which comprised our Primary and Tennessee Homebuilding segments, as of November 9,
2007, the results of operations and financial condition of Carolina Oak as of and for the year
ended December 31, 2008 are included in the Other Operations segment.
Corporate Headquarters
Through May 2008, our 80,000 square foot office building served as our corporate office in
Fort Lauderdale, Florida. We relocated our corporate headquarters to a smaller space at the
BankAtlantic corporate offices pursuant to a sublease agreement with BFC Financial Corporation, our
controlling shareholder (“BFC”). Our previous corporate headquarters building is currently 50%
occupied by an unaffiliated third party pursuant to a lease which expires in 2010. We will continue
to seek to lease the vacated space in our former corporate headquarters to third parties, including
our affiliates, in 2009. We
evaluated the former corporate headquarters office building for impairment in accordance with
SFAS No. 144 and determined that the carrying value approximated fair value and, therefore, no
impairment was deemed necessary.
Other Investments and Joint Ventures
In the past we have sought to mitigate the risks associated with certain real estate projects
by entering into joint ventures.
We entered into an indemnity agreement in April 2004 with a joint venture partner at Altman
Longleaf relating to, among other obligations, that partner’s guarantee of the joint venture’s
indebtedness. Our liability under the indemnity agreement was limited to the amount of any
distributions from the joint venture which exceeds our original capital and other contributions.
Levitt Commercial, LLC, our wholly-owned subsidiary (“Levitt Commercial”) owned a 20% interest in
Altman Longleaf, LLC, which owned a 20% interest in this joint venture. This joint venture
developed a 298-unit apartment complex in Melbourne, Florida, with construction commencing in 2004
and ending in 2006. An affiliate of our joint venture partner was the general contractor. Our
original capital contributions totaled approximately $585,000 and we have received approximately
$1.2 million in distributions since 2004. In December 2008, our interest in the joint venture was
sold and we received approximately $182,000 as a result of the sale and we were released from any
potential obligation of indemnity which may have arisen in connection with the joint venture.
Levitt Commercial
In 2007, our Other Operations segment also consisted of Levitt Commercial, which was formed in
2001 to develop industrial, commercial, retail and residential properties. In 2007, Levitt
Commercial ceased development activities after it sold all of its remaining units. Levitt
Commercial’s revenues for the year ended December 31, 2007 amounted to $6.6 million which reflected
the delivery of the remaining 17 flex warehouse units at its remaining development project.
Homebuilding Division
Acquired in December 1999, Levitt and Sons was a developer of single family homes and townhome
communities for active adults and families in Florida, Georgia, Tennessee and South Carolina.
Levitt and Sons operated in two reportable segments, Primary Homebuilding and Tennessee
Homebuilding.
Increased inventory levels combined with weakened consumer demand for housing and tightened
credit requirements has negatively affected sales, deliveries and margins throughout the
homebuilding industry. In both the Primary Homebuilding and Tennessee Homebuilding segments,
Levitt and Sons experienced decreased orders, decreased margins and increased cancellation rates on
homes in backlog. Excess supply, particularly in previously strong markets like Florida, in
combination with a reduction in
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demand resulting from tightened credit requirements and reductions
in credit availability, as well as buyers’ fears about the direction of the market, exerted a
continuous cycle of downward pricing pressure for residential homes.
On November 9, 2007 (the “Petition Date”), Levitt and Sons and substantially all of its
subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of
Title 11 of the United States Code (the “Chapter 11 Cases”) in the United States Bankruptcy Court
for the Southern District of Florida ( the“Bankruptcy Court”). The Debtors commenced the Chapter 11
Cases in order to preserve the value of their assets and to facilitate an orderly wind-down of
their businesses and disposition of their assets in a manner intended to maximize the recoveries of
all constituents. See Item 3. “Legal Proceedings” for the current status of the Chapter 11 Cases.
In connection with the filing of the Chapter 11 Cases, we deconsolidated Levitt and Sons as of
November 9, 2007, eliminating all future operations from our financial results of operations. As a
result of the deconsolidation of Levitt and Sons, in accordance with Accounting Research Bulletin
(“ARB”) No. 51, “Consolidated Financial Statements” (“ARB No. 51”), we recorded our interest in
Levitt and Sons under the cost method of accounting. Under cost method accounting, income is
recognized only to the extent of cash received in the future or when Levitt and Sons is legally
released from its bankruptcy obligations through the approval of the Bankruptcy Court, at which
time any recorded loss in excess of the investment
in Levitt and Sons can be recognized into income. As of November 9, 2007, Woodbridge had a
negative investment in Levitt and Sons of $123.0 million and there were outstanding advances due
from Levitt and Sons of $67.8 million at Woodbridge resulting in a net negative investment of $55.2
million. Included in the negative investment was approximately $15.8 million associated with
deferred revenue related to intra-segment sales between Levitt and Sons and Core Communities.
During the fourth quarter of 2008, the Company identified approximately $2.3 million of deferred
revenue on intercompany sales between Core and Carolina Oak that had been misclassified against the
negative investment in Levitt and Sons. As a result, the Company recorded a $2.3 million
reclassification between inventory of real estate and the loss in excess of investment in
subsidiary in the consolidated statements of financial condition. As a result, as of December 31,
2008, the net negative investment was $52.9 million. During the pendency of the Chapter 11 Cases, we
also incurred certain administrative costs in the amount of $1.6 million and $748,000 for the years
ended December 31, 2008 and 2007, respectively, relating to certain services and benefits provided
by us in favor of the Debtors. These costs included the cost of maintaining employee benefit
plans, providing accounting services, human resources expenses, general liability and property
insurance premiums, payroll processing expenses, licensing and third-party professional fees
(collectively, the “Post Petition Services”).
As previously reported, the results of operations for the year ended December 31, 2007
included the results of operations for the Debtors through November 9, 2007, with the exception of
Carolina Oak, which was included for the full year in 2007 as it was not part of the Chapter 11
Cases as discussed above.
Recent Developments
Bankruptcy of Levitt and Sons
On February 20, 2009, the Bankruptcy Court presiding over Levitt and Sons’ Chapter 11
bankruptcy case entered an order confirming a plan of liquidation jointly proposed by Levitt and
Sons and the Official Committee of Unsecured Creditors. That order also approved the settlement
pursuant to the settlement agreement we entered into on June 27, 2008
(See Item 3 “Legal Proceedings”). No appeal or rehearing of the court’s order was
timely filed by any party, and the settlement was consummated on March 3, 2009, at which time, payment was made in accordance with
the terms and conditions of the settlement agreement. The cost of settlement and reversal of the related $52.9 million liability will be recognized into income in the
first quarter of 2009. See Item 3. “Legal Proceedings” for further discussion of the Chapter 11
Cases.
Executive Compensation Program
On September 29, 2008, our Board of Directors approved the terms of incentive programs for
certain of our employees including certain of our named executive officers, pursuant to which a
portion of their compensation will be based on the cash returns
realized by us on our
investments. The programs relate to the performance of existing investments and new investments
designated by the Board (together, the “Investments”). All
of our investments have been
or will be held by individual limited partnerships or other legal entities established for such
purpose. Participating executives and employees will have interests
in the entities, which will be
the basis of their incentives under the programs. Our named executive officers may have interests
tied both to the performance of a particular investment as well as interests relating to the
performance of the portfolio of investments as a whole.
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Woodbridge, in its capacity as investor in the investment program, will be entitled to
receive a return of its invested capital and a specified rate of return on its invested
capital prior to our executive officers or employees being entitled to receive any portion of the
realized profits (the share to which they may be entitled is referred to as the “Carried
Interest”). For existing investments, the amount of invested capital was determined as of September
1, 2008, by our Board of Directors. Once we receive our priority return
of our
invested capital and the stated return (which accrues from
September 1, 2008), we will
also generally be entitled to additional amounts that provide it with (i) at least approximately
87% of the aggregate proceeds related to our status as an investor in
excess of our invested capital in that investment, plus (ii) at least 35% of all other amounts earned
from third parties with respect to that investment (i.e., income not
related to our
status as an investor, such as management fees charged to third parties). The remaining proceeds
will be available under the incentive programs for distribution among those employees directly
responsible for the relevant Investments and our executive officers. The compensation committee of
our Board of Directors will determine the allocations to our named executive officers. These
allocations are identified in advance for each of the executive officers. Although the
compensation committee can alter these allocations on a prospective basis, the total amount payable
to employees and officers cannot be changed. Management will determine the amounts to be allocated
among the other employee participants. The incentive programs relating to both individual
investments and the program established for the executive officers with respect to the overall
performance of the portfolio of investments contain clawback obligations that are intended to
reduce the risk that the participants will be distributed amounts
under the programs prior to our receipt of at least a return of our
invested capital and the stated return. To the extent that named
executive officers participate in the performance of a particular
investment, their clawback obligations nevertheless refer to the
performance of the portfolio as a whole. The programs
contemplate that the clawback obligations will be funded solely from holdback accounts established
with respect to each participant. Amounts equal to a portion of Carried Interest distribution to
such participant (initially 25% and which can be increased, when appropriate, to as high as 75%)
will be deposited into holdback accounts
or otherwise made available for our benefit. There are also general vesting and
forfeiture provisions applicable to each participant’s right to receive any Carried Interest, the
terms of which may vary by individual. Our Board of Directors believes that the above-described
incentive plans appropriately align payments to participants with the performance of our
investments.
The “Executive Incentive Plan” which set forth the terms of the Carried Interests of certain
executive officers in the performance of the overall investments of
Woodbridge and the “Investment
Programs” entered into to date which set forth the Carried Interests of employees and certain
executive officers in the performance of particular individual investments are included as exhibits
to this Annual Report. These exhibits (rather than the general descriptions contained herein)
embody the legally binding terms of the incentive arrangements, which
were executed on March 13, 2009.
Acquisition of Pizza Fusion
On September 18, 2008, our wholly-owned subsidiary, Woodbridge Equity Fund II LP, purchased
for an aggregate of $3.0 million 2,608,696 shares of Series B Convertible Preferred Stock of Pizza
Fusion, together with warrants to purchase up to an additional 1,500,000 shares of Series B
Convertible Preferred Stock of Pizza Fusion at an exercise price of $1.44 per share. See (Note 3)
to our audited consolidated financial statements for further details regarding the acquisition of
Pizza Fusion.
Reclassification of Discontinued Operations
In June 2007, Core Communities began soliciting bids from several potential buyers to purchase
assets associated with two of Core’s commercial leasing projects (the “Projects”). As the criteria
for assets held for sale had been met in accordance with SFAS No. 144, the assets were reclassified
to assets held for sale and the liabilities related to those assets were reclassified to
liabilities related to assets held for sale in prior periods. The results of operations for these
assets were reclassified as discontinued operations in the third quarter of 2007 and we ceased
recording depreciation expense on these Projects. During the fourth quarter of 2008, we determined
that given the difficulty in predicting the timing or probability of a sale of these assets
associated with the Projects as a result of, among other things, the economic downturn and
disruptions in credit markets, the requirements of SFAS No. 144 necessary to classify these assets
held for sale and to be included in discontinued operations were no longer met and management could
not assert the Projects can be sold within a year. Therefore, the results of operations for these
Projects were reclassified for the three years ending December 31, 2008 back into continuing
operations in the consolidated statements of operations. In accordance with SFAS No. 144, we
recorded a depreciation recapture of $3.2 million at December 31, 2008 to account for the
depreciation not recorded while the assets were classified as discontinued operations. Total assets
and liabilities related to the Projects were $92.7 million and $76.1 million, respectively, for the
year ended December 31, 2008, and $96.2 million and 80.1 million,
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respectively, for the year ended
December 31, 2007. In addition, total revenues related to the Projects for the years ended December
31, 2008, 2007 and 2006 were $8.7 million, $4.7 million and $1.8 million, respectively, while
income (loss) related to the assets for the same periods in 2008, 2007 and 2006 was $6.0 million,
$1.8 million and $(21,000), respectively.
Business Strategy
Our business strategy involves the following principal goals:
Continue to develop master-planned communities. While The Land Division’s strategy has
generally been focused on the development of its master-planned communities in Florida and South
Carolina, current economic conditions have required that development activities be reduced to a
minimum. As supply and demand for both commercial and residential development approach a more
reasonable balance, Core will further evaluate its position to determine when it may be
economically feasible to once again initiate more expansive development activities than currently
exist. Nevertheless, Core continues to market parcels to homebuilders, and the Land Division
continues to focus on its commercial operations through sales to developers and through its efforts
to internally develop projects for leasing to third parties. A major component of Core’s long term
strategy is the development of communities that will responsibly serve its residents and
businesses. The overall goal of its developments is to facilitate a regional roadway network and
establish model communities that will set an example for future development. Core has established a
series of community design standards which have been incorporated into the overall planning effort
of master-planned communities including: utilizing a mix of housing types, including single-family
neighborhoods and a variety of higher density communities; and having a neighborhood Town Center,
Community School parcels, a workplace environment and community parks. The intent is to
establish well-planned, innovative communities that are sustainable for the long-term.
We view our commercial projects opportunistically and intend to periodically evaluate the
short and long term benefits of retention or disposition. Margins on land sales and the many factors which impact the margin have
and may continue to fall below historical levels given the current downturn in the real
estate markets. Recent trends in home sales may require us to continue to hold our land inventory
longer than originally projected. We intend to review each parcel ready for development to
determine whether to market the parcel to third parties, to internally develop the parcel for
leasing, or hold the parcel and determine later whether to pursue third party sales or internal
development opportunities. Our decision will be based, in part, on the condition of the commercial
real estate market and our evaluation of future prospects. Our land development activities in our
master-planned communities offer a source of land for future homebuilding by others. Much of our
master-planned community acreage is under varying development orders and is not immediately
available for construction or sale to third parties at prices that maximize value. Third-party
homebuilder sales remain an important part of our ongoing strategy to generate cash flow, maximize
returns and diversify risk, as well as to create appropriate housing alternatives for different
market segments in our master-planned communities.
Operate efficiently and effectively. We raised a significant amount of capital in 2007 through a rights offering and have
implemented significant reductions in workforce levels. We intend to continue our focus on
aligning our staffing levels with business goals and current and anticipated future market
conditions. We also intend to continue to focus on expense management initiatives throughout the
organization.
Pursue investment opportunities. We intend to pursue acquisitions and investments, using a
combination of our cash and stock and third party equity and debt financing. These investments may
be within or outside of the real estate industry and may also include investments with affiliated
entities. We also intend to explore a variety of funding structures which might leverage or
capitalize on our available cash and other assets currently owned by us. We may acquire entire
businesses, or majority or minority, non-controlling interests in companies. Investing on this
basis will present additional risks, including the risks inherent in the industries in which we
invest and potential integration risks if we seek to integrate the acquired operations into our
operations.
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Seasonality
We have historically experienced volatility, but not necessarily seasonality, in our results
of operations from quarter-to-quarter due to the nature of the real estate business. Historically,
land sale revenues have been sporadic and have fluctuated dramatically. In addition, margins on
land sales and the many factors which impact margins may remain below historical levels given the
current downturn in the real estate markets where we own properties. We are focusing on maximizing
our sales efforts with homebuilders at our master-planned communities. However, due to the
uncertainty in the real estate market, we expect to continue to experience a high level of
volatility in our Land Division and Other Operations segment.
Competition
The real estate development industry is highly competitive and fragmented. We compete with
third parties in our efforts to sell land to homebuilders. We compete with other local, regional
and national real estate companies and homebuilders, often within larger subdivisions designed,
planned and developed by such competitors. Some of our competitors have greater financial,
marketing, sales and other resources than we do.
In addition, there are relatively low barriers to entry into the real estate market. There
are no required technologies that would preclude or inhibit competitors from entering our markets.
Our competitors may independently develop land. A substantial portion of our operations are in
Florida and South Carolina, and we expect to continue to face additional competition from new
entrants into our markets.
Employees
As of December 31, 2008, we employed a total of 84 individuals, of which 55 were part of our
Land Division and 29 were part of our Other Operations segment. Our employees are not represented
by any collective bargaining agreements and we have never experienced a work stoppage. We believe
our employee relations are satisfactory. In January 2009, as part of our continuing efforts to
align our staffing levels with our current operations, 14 employees were terminated in our Land
Division.
Additional Information
Our Internet website address is www.woodbridgeholdings.com. Our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are
available free of charge through our website, as soon as reasonably practicable after such material
is electronically filed with, or furnished to, the SEC. Our Internet website and the information
contained in or connected to our website are not incorporated into this Annual Report on Form 10-K.
Our website also includes printable versions of our Corporate Governance Guidelines, our Code
of Business Conduct and Ethics and the charters for each of the Audit, Compensation and
Nominating/Corporate Governance Committees of our Board of Directors.
Executive Officers of the Registrant
| Name | Position | Age | ||||
Alan B. Levan
|
Chairman of the Board and Chief Executive Officer (Principal Executive Officer) | 64 | ||||
John E. Abdo
|
Vice-Chairman of the Board | 65 | ||||
Seth M. Wise
|
President | 39 | ||||
John K. Grelle
|
Chief Financial Officer (Principal Accounting Officer) | 65 | ||||
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Alan B. Levan has been the Chairman and Chief Executive Officer of Woodbridge Holdings
Corporation and its predecessors, and has held the same roles at BFC Financial Corporation since
1978. Mr. Levan is also Chairman, President and CEO of BankAtlantic Bancorp. He possesses extensive
experience in the management of portfolio companies and serves on the board of directors of several
BFC and Woodbridge-related companies, including Bluegreen.
John E. Abdo has been the Vice Chairman of Woodbridge Holdings Corporation and its
predecessors since its inception and of BFC Financial Corporation since 1993, while serving as a
BFC board member since 1988. He has been the Vice Chairman of the Board of Directors and Chairman
of the Executive Committee of BankAtlantic Bancorp, Inc. since 1987. He is also Vice Chairman of
the Board of Directors of Bluegreen Corporation, and a member of the Board of Directors of
Benihana, Inc.
Seth M. Wise, President of Woodbridge Holdings Corporation has worked in the real estate
industry for over twenty years. He also serves as President of Woodbridge subsidiary Core
Communities. He began his career in commercial lending as a credit analyst at BankAtlantic. Mr.
Wise spent 5 years in retail leasing as a Senior Leasing Executive with the Washington, D.C. based
Targoff and Company and then joined the Abdo Companies as a development partner in 1996. In 2001,
he joined Woodbridge Holdings Corporation as President of the commercial development subsidiary, Levitt
Commercial. He then became Executive Vice President of Woodbridge Holdings Corporation in 2003 and
ultimately named its President in 2005.
John K. Grelle has been the Chief Financial Officer of Woodbridge Holdings Corporation since
2007. From 2003 through October 2007, when Mr. Grelle joined Tatum, LLC, Mr. Grelle was the founder
and principal of a business formation and strategic development consulting firm. From 1996 through
2003, Mr.Grelle served as Senior Vice President and Chief Financial Officer of ULLICO Inc., a
financial services conglomerate with assets in excess of $4 billion and, from 1993 through 1995, he
served as Managing Director of DCG Consulting.
ITEM 1A. RISK FACTORS
RISKS RELATING TO OUR REAL ESTATE OPERATIONS
Through Core Communities and Carolina Oak, we engage in real estate activities which are
speculative and involve a high degree of risk.
The real estate industry is highly cyclical by nature. The current market is experiencing a
significant decline, and future market conditions are uncertain. There are many factors which
affect the real estate industry, and many of these factors are beyond our control, including:
| • | overbuilding or decreases in demand to acquire land; | ||
| • | the availability and cost of financing; | ||
| • | unfavorable interest rates and increases in inflation; | ||
| • | changes in national, regional and local economic conditions; | ||
| • | cost overruns, inclement weather, and labor and material shortages; | ||
| • | the impact of present or future environmental legislation, zoning laws and other regulations; | ||
| • | availability, delays and costs associated with obtaining permits, approvals or licenses necessary to develop property; and | ||
| • | increases in real estate taxes, insurance and other local government fees. |
The real estate market has experienced a significant downturn, and the duration and ultimate
severity of the downturn is uncertain. A continued deterioration of economic conditions will
adversely affect our operating results and financial condition.
The downturn in the real estate market, which is now in its fourth year, has become one of the
most severe in U.S. history. This downturn, which resulted from a decline in consumer confidence,
decline in real estate prices and an oversupply of real estate available for sale, has been
exacerbated by, among other things, a decline in the overall economy, increasing unemployment, fear
of job loss and a decline in
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the securities and credit markets. The government’s legislative and
administrative measures aimed at restoring liquidity to the credit markets and improving conditions
in the real estate markets has only recently begun and there is no
indication yet whether these measures have or will
effectively stabilize prices and real estate values or restore consumer confidence and increase
demand in the real estate markets.
As a result of this downturn, and specifically the adverse impact that the combination of the
lower demand and higher inventories has had on the amount of land that we are able to develop and
sell and the prices at which we are able to sell the land, our operating results and financial
condition have been adversely affected. We cannot predict the duration or ultimate severity of the
current challenging conditions, nor can we provide assurance that our responses to the current
downturn or the government’s attempts to address the troubles in the economy will be successful. If
these conditions persist or continue to worsen, they will further adversely affect our operating
results and financial condition.
Because real estate investments are illiquid, the downturn in the real estate market and in the
economy in general has had, and may continue to have, an adverse impact on our business and cash
flow.
Real estate investments are generally illiquid. Like other companies that invest in real
estate, we have a limited ability to vary our portfolio of real estate investments in response to
changes in economic and other conditions. In addition, as a result of the sustained downturn in
the real estate market, and in the economy in general, the estimated market value of our real estate
properties has decreased and may continue to decrease in the future. Moreover, we may not be able
to timely dispose of properties when we find dispositions advantageous or necessary, or complete
the disposition of properties under contract to be sold, and any such dispositions may not provide
proceeds in excess of the amount of our investment in the property or even in excess of the amount
of any indebtedness secured by the property. As a result, we are susceptible to the risks
associated with further declines in real estate values, including the risk that we may be required
to record additional impairment write-downs with respect to our real estate inventory in the future
if the current real estate environment does not improve or if the market value of our real estate
properties otherwise continues to decline. We had $241.3 million of real estate inventory at
December 31, 2008.
The commercial real estate market has been adversely affected by the current economic and credit
environment.
Economic conditions may make it more difficult to achieve projected rental and occupancy rates
on Core’s commercial leasing projects, which may adversely impact the net operating income of the
projects. The risks relating to Core’s commercial leasing projects include, without limitation:
| • | the risk that a significant tenant or a number of tenants may file for bankruptcy protection, creating the possibility that past due rents may never be recovered; | ||
| • | the risk that leases with certain existing tenants may become overly burdensome to the lessee due to reduced business activity, and lease concessions and modifications may be necessary to avoid defaults; | ||
| • | the risk that the current adverse economic conditions and limited availability of credit may continue or deteriorate further, causing market capitalization rates on commercial properties to increase beyond present levels, thus reducing the value at which commercial projects can be sold; | ||
| • | the risk that net operating income at the commercial leasing projects may not be sufficient to meet certain debt service coverage ratio requirements, which would result in requirements for additional principal curtailment payments in order to bring the loans into compliance; and | ||
| • | the risk that vacant space will take longer to lease and that rental rates will be lower than projected or necessary to operate the project profitably. |
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Commercial leasing projects may not yield anticipated returns, which could harm our operating
results, reduce cash flow, or the ability to sell commercial assets.
A component of our business strategy is the development of commercial properties and assets
for sale. These developments may not be as successful as expected due to the commercial leasing
related risks discussed herein, as well as the risks associated with real estate development
generally.
Additionally, development of commercial projects involves the risk associated with the
significant time lag between commencement and completion of the project. This time lag subjects us
to greater risks relating to fluctuations in the general economy, our ability to obtain
construction or permanent financing on favorable terms, if at all, our ability to achieve projected
rental rates, the pace that we will be able to lease new tenants, higher than estimated
construction costs (including labor and material costs), and delays in the completion of projects
because of, among other factors, inclement weather, labor disruptions, construction delays or
delays in receiving zoning or other regulatory approvals, or man-made or natural disasters.
We utilize community development district and special assessment district bonds to fund development
costs, and we will be responsible for assessments until the underlying property is sold.
We establish community development district and special assessment district bonds to access
tax-exempt bond financing to fund infrastructure development at Core’s master-planned communities.
We are responsible for any assessed amounts until the underlying property is sold. Accordingly, if
we continue to hold certain of our properties longer than originally projected (as a result of a
continued downturn in the real estate markets or otherwise), we may be required to pay a higher
portion of annual assessments on such properties. In addition, we could be required to pay down a
portion of the bonds in the event our entitlements were to decrease as to the number of residential
units and/or commercial space that can be built on the properties encumbered by the bonds.
Moreover, Core has guaranteed payments for assessments under the district bonds in Tradition,
Florida which would require funding if future assessments to be allocated to property owners are
insufficient to repay the bonds.
The availability of tax-exempt bond financing to fund infrastructure development at Core’s
master-planned communities may be adversely impacted by recent disruptions in credit markets,
including the municipal bond market, by general economic conditions and by fluctuations in the real
estate market. If we are not able to access this type of financing, we would be forced to obtain
substitute financing, and there is no assurance that we would be able to obtain substitute
financing on acceptable terms, if at all. If we are not able to obtain financing for infrastructure
development, Core would be forced to use its own funds or delay
development activity at its master-planned communities.
Core’s results are subject to significant volatility.
Due to the nature and size of Core’s individual land transactions, Core’s results and our
consolidated results have historically been subject to significant volatility. Land sale revenues
have been sporadic and have fluctuated dramatically based upon, among other factors, changing sales
prices and costs attributable to the land sold. Due to the current downturn in the real estate
market, margins on land sales may continue to decline and there is no assurance that they will
return to prior levels. If the real estate markets deteriorate further or if the current downturn
is prolonged, we may not be able to sell land at prices above our carrying cost or even in amounts
necessary to repay our indebtedness. In addition to the impact of economic and market factors, the
sales price and margin of land sold varies depending upon: the location; the parcel size; whether
the parcel is sold as raw land, partially developed land or individually developed lots; the degree
to which the land is entitled; and whether the designated use of land is residential or commercial.
In addition, our ability to realize margins may be affected by circumstances beyond our
control, including:
| • | shortages or increases in prices of construction materials; | ||
| • | natural disasters in the areas in which we operate; |
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| • | lack of availability of adequate utility infrastructure and services; and | ||
| • | our need to rely on local subcontractors who may not be adequately capitalized or insured. |
Any of these circumstances could give rise to delays in the start or completion of development
at, or increase the cost of developing, Core’s master-planned communities. We compete with other
real estate developers, both regionally and nationally, for labor as well as raw materials, and the
competition for materials has recently become global. Increased costs in labor and materials could
cause increases in construction costs. In addition, the cost of sales of real estate is dependent
upon the original cost of the land acquired, the timing of the acquisition of the land, and the
amount of land development, interest and real estate tax costs capitalized to the particular land
parcel during active development. Future margins will continue to vary based on these and other
market factors.
We are dependent upon certain key tenants in our commercial developments, and decisions made by
these tenants or adverse developments in the business of these tenants could have a negative impact
on our financial condition.
Our commercial real estate centers are supported by anchor tenants which, due to size,
reputation or other factors, are particularly responsible for drawing other tenants and shoppers to
our centers in certain cases. We are subject to the risk that certain of these anchor tenants may
be unable to make their lease payments or may decline to extend a lease upon its expiration.
In addition, an anchor tenant may decide that a particular store is unprofitable and close its
operations, and, while the anchor tenant may continue to make rental payments, its failure to
occupy its premises could have an adverse effect on the property. A lease termination by an anchor
tenant or a failure by that anchor tenant to occupy the premises could result in lease terminations
or reductions in rent by other tenants in the same shopping center. Vacated anchor tenant space
also tends to adversely affect the entire shopping center because of the loss of the departed
anchor tenant’s power to draw customers to the center. We may not be able to quickly re-lease
vacant space on favorable terms, if at all. Any of these developments could adversely affect our
financial condition or results of operations.
It may be difficult and costly to rent vacant space and space which may become vacant in future
periods.
Our goal is to improve the performance of our properties by leasing available space and
re-leasing vacated space. However, we may not be able to maintain our overall occupancy levels.
Our ability to continue to lease or re-lease vacant space in our commercial properties will be
affected by many factors, including our properties’ locations, current market conditions and the
provisions of the leases we enter into
with the tenants at our properties. In fact, many of the factors which could cause our current
tenants to vacate their space could also make it more difficult for us to re-lease that space. The
failure to lease or to re-lease vacant space on satisfactory terms could harm our operating
results.
If we are able to re-lease vacated space, there is no assurance that rental rates will be
equal to or in excess of current rental rates. In addition, we may incur substantial costs in
obtaining new tenants, including brokerage commission fees paid by us in connection with new leases
or lease renewals, and the cost of leasehold improvements.
Additional adverse changes in economic conditions where we conduct our operations could further
reduce the demand for real estate and, as a result, could further adversely impact our results of
operations and financial condition.
Adverse changes in national, regional and local economic conditions, especially in Florida and
to a lesser extent South Carolina where our operations are concentrated, have had and may continue
to have a negative impact on our business. Continued adverse changes in, among other things,
employment levels, job growth, consumer confidence, interest rates and population growth, or a
continued oversupply of land for sale may further reduce demand and depress real estate prices,
which, in turn, could adversely impact our results of operations and financial condition.
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If prospective purchasers of our inventory and tenants are not able to obtain suitable financing,
our results of operations may further decline.
Our results of operations are dependent in part on the ability of prospective purchasers of
our real estate inventory and prospective commercial tenants to secure financing. The recent
deterioration of the credit markets and the related tightening of credit standards may impact the
ability of prospective purchasers and tenants to secure financing on acceptable terms, if at all.
This may, in turn, negatively impact land sales and long-term rental and occupancy rates as well as
the value of Core’s commercial properties.
Natural disasters could have an adverse effect on our real estate operations.
The Florida and South Carolina markets in which we operate are subject to the risks of natural
disasters such as hurricanes and tropical storms. These natural disasters could have a material
adverse effect on our business by causing the incurrence of uninsured losses, increased insurance
rates, including homebuyer insurance rates, delays in construction, and shortages and increased
costs of labor and building materials.
In addition to property damage, hurricanes may cause disruptions to our business operations.
Approaching storms may require that operations be suspended in favor of storm preparation
activities. After a storm has passed, construction-related resources such as sub-contracted labor
and building materials are likely to be redeployed to hurricane recovery efforts. Governmental
permitting and inspection activities may similarly be focused primarily on returning displaced
residents to homes damaged by the storms rather than on new construction activity. Depending on
the severity of the damage caused by the storms, disruptions such as these could last for several
months.
A portion of our revenues from land sales in Core’s master-planned communities are recognized for
accounting purposes under the percentage of completion method. Therefore, if our actual results
differ from our assumptions, our profitability may be reduced.
Under the percentage of completion method of accounting for recognizing revenue, we record
revenue and cost of sales as work on the project progresses based on the percentage of actual work
incurred compared to the total estimated costs. This method relies on estimates of total expected
project costs. Revenue and cost estimates are reviewed and revised periodically as the work
progresses. Adjustments are reflected in sales of real estate and cost of sales in the period when
such estimates are revised. Variation of actual results compared to our estimated costs in Core’s
master-planned communities could cause material changes to our net margins.
Product liability litigation and claims that arise in the ordinary course of business may be
costly.
Our commercial real estate development business is subject to construction defect and product
liability claims arising in the ordinary course of business. These claims are common in the
commercial real estate industries and can be costly. We have, and many of our subcontractors have,
general liability, property, errors and omissions, workers compensation and other business
insurance. However, these insurance policies only protect us against a portion of our risk of loss
from claims. In addition, because of the uncertainties inherent in these matters, we cannot
provide reasonable assurance that our insurance coverage or our subcontractor arrangements will be
adequate to address all warranty, construction defect and liability claims in the future. In
addition, the costs of insuring against construction defect and product liability claims, if
applicable, are substantial and the amount of coverage offered by insurance companies is also
currently limited. There can be no assurance that this coverage will not be further restricted and
become more costly. If we are not able to obtain adequate insurance against these claims, we may
experience losses that could negatively impact our operating results.
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We are subject to governmental regulations that may limit our operations, increase our expenses or
subject us to liability.
We are subject to laws, ordinances and regulations of various federal, state and local
governmental entities and agencies concerning, among other things:
| • | environmental matters, including the presence of hazardous or toxic substances; | ||
| • | wetland preservation; | ||
| • | health and safety; | ||
| • | zoning, land use and other entitlements; | ||
| • | building design; and | ||
| • | density levels. |
In developing a project and building commercial properties, we may be required to obtain the
approval of numerous governmental authorities regulating matters such as:
| • | the installation of utility services such as gas, electric, water and waste disposal; | ||
| • | the dedication of acreage for open space, parks and schools; | ||
| • | permitted land uses; and | ||
| • | the construction design, methods and materials used. |
These laws or regulations could, among other things:
| • | establish building moratoriums; | ||
| • | limit the number of commercial properties that may be built; | ||
| • | change building codes and construction requirements affecting property under construction; | ||
| • | increase the cost of development and construction; and | ||
| • | delay development and construction. |
We may also at times not be in compliance with all regulatory requirements. If we are not in
compliance with regulatory requirements, we may be subject to penalties or we may be forced to
incur significant expenses to cure any noncompliance. In addition, some of our land has not yet
received planning approvals or entitlements necessary for development. Failure to obtain
entitlements necessary for land development on a timely basis or to the extent desired may
adversely affect our operating results.
Several governmental authorities have also imposed impact fees as a means of defraying the
cost of providing governmental services to developing areas, and many of these fees have increased
significantly during recent years.
Building moratoriums and changes in governmental regulations may subject us to delays or increased
costs of construction or prohibit development of our properties.
We may be subject to delays or may be precluded from developing in certain communities because
of building moratoriums or changes in statutes or rules that could be imposed in the future. The
State of Florida and various counties have in the past and may in the future continue to declare
moratoriums on the issuance of building permits and impose restrictions in areas where the
infrastructure, such as roads, schools, parks, water and sewage treatment facilities and other
public facilities, does not reach minimum standards. Additionally, certain counties in Florida,
including counties where we are developing projects, have enacted more stringent building codes
which have resulted in increased costs of construction. As a consequence, we may incur significant
expenses in connection with complying with new regulatory requirements that we may not be able to
pass on to purchasers or tenants.
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We are subject to environmental laws and the cost of compliance could adversely affect our
business.
As a current or previous owner or operator of real property, we may be liable under federal,
state, and local environmental laws, ordinances and regulations for the costs of removal or
remediation of hazardous or toxic substances on, under or in the property. These laws often impose
liability whether or not we knew of, or were responsible for, the presence of such hazardous or
toxic substances. The cost of investigating, remediating or removing such hazardous or toxic
substances may be substantial. The presence of any such substance, or the failure to promptly
remediate any such substance, may adversely affect our ability to sell or lease the property, to
use the property for its intended purpose, or, if we deem necessary or desirable in the future, to
borrow funds using the property as collateral.
Increased insurance risk could negatively affect our business.
Insurance and surety companies may take actions that could negatively affect our business,
including increasing insurance premiums, requiring higher self-insured retentions and deductibles,
requiring additional collateral or covenants on surety bonds, reducing limits, restricting
coverages, imposing exclusions, and refusing to underwrite certain risks and classes of business.
Any of these actions may adversely affect our ability to obtain appropriate insurance coverage at
reasonable costs which could have a material adverse effect on our business.
Our results may vary.
Like other companies engaged in real estate activities, we historically have experienced, and
expect to continue to experience, variability in operating results on a quarterly basis and from
year to year. Factors expected to contribute to this variability include:
| • | the cyclical nature of the real estate industry; | ||
| • | prevailing interest rates and the availability of financing; | ||
| • | weather; | ||
| • | cost and availability of materials and labor; | ||
| • | competitive conditions; | ||
| • | timing of sales of land; | ||
| • | the timing of receipt of regulatory and other governmental approvals for land development projects; and | ||
| • | the timing of the sale of our commercial leasing operations. |
Levitt and Sons had surety bonds on most of their projects, some of which were subject to indemnity
by Woodbridge.
Levitt and Sons had $33.3 million in surety bonds relating to its ongoing projects at the time
of the filing of the Chapter 11 Cases. In the event that these obligations are drawn and paid by
the surety, Woodbridge could be responsible for up to $11.7 million plus costs and expenses in
accordance with the surety indemnity agreement for these instruments. As of December 31, 2008, we
had a $1.1 million in surety bonds accrual at Woodbridge related to certain bonds where management
considers it probable that
the Company will be required to reimburse the surety under the indemnity agreement. It is unclear
given the uncertainty involved in the Chapter 11 Cases whether and to what extent the outstanding
surety bonds of Levitt and Sons will be drawn and the extent to which Woodbridge may be responsible
for additional amounts beyond this accrual. It is unlikely that Woodbridge would have the ability
to receive any repayment, assets or other consideration as recovery of any amount it is required to
pay. If losses on additional surety bonds are identified, we will need to take additional charges
associated with Woodbridge’s exposure under our indemnities, and this may have a material adverse
effect on our results of operations and financial condition.
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RISKS RELATING TO OUR OTHER ACTIVITIES AND TO OUR COMPANY, GENERALLY
Our outstanding debt instruments impose restrictions on our operations and activities and could
adversely affect our financial condition.
At December 31, 2008, our consolidated debt was approximately $350.0 million, of which $215.3
million related to Core Communities.
Certain loans which provide the primary financing for Tradition, Florida and Tradition Hilton
Head have annual appraisal and re-margining requirements. These provisions may require Core
Communities, in circumstances where the value of its real estate securing these loans declines, to
pay down a portion of the principal amount of the loans to bring the loans within specified minimum
loan-to-value ratios. Accordingly, should land prices decline to the point at which the loans fall
below their specified minimum loan-to-value ratios, reappraisals could result in significant future
re-margining payments. In addition, all of our outstanding debt instruments require us to comply
with certain financial covenants. Further, one of our debt instruments contains cross-default
provisions, which could cause a default on this debt instrument if we default on other debt
instruments. If we fail to comply with any of these restrictions or covenants, the holders of the
applicable debt could cause our debt to become due and payable prior to maturity. These
accelerations or significant re-margining payments could require us to dedicate a substantial
portion of our cash and cash flow from operations to payment of or on our debt and reduce our
ability to use our cash for other purposes.
Core’s loan agreements generally require repayment of specified amounts upon a sale of a
portion of the property collateralizing the debt. Core also is subject to provisions in some of its
loan agreements that may require additional principal payments, known as curtailment payments. Core
made curtailment payments totaling approximately $19.9 million during 2008. Additional curtailment
payments may be required in the future if the unfavorable current trends in the real estate market
continue.
For 2009, our anticipated minimum principal debt payment obligations total approximately $3.6
million, assuming the exercise of all loan extensions available at our discretion, in each case
exclusive of any re-margining payments that could be required in the event that property serving as
collateral becomes impaired, curtailment payments which may be required in the event sales are
below contractual minimums and any additional amounts which may become due upon a sale of the
property securing the loan. Our business may not generate sufficient cash flow from operations,
and future borrowings may not be available under our existing credit facilities or any other
financing sources in an amount sufficient, to enable us to service our indebtedness or fund our
other liquidity needs. We may need to refinance all or a portion of our debt on or before
maturity, which, due to, among other factors, the recent disruptions in the credit and capital
markets, we may not be able to do on favorable terms or at all.
Core is engaging a restructuring firm to review its cash flow models and analyze the terms of
its outstanding indebtedness, and, where appropriate, to enter into discussions with its lenders
relating to a restructuring of Core’s debt. If Core is not successful in restructuring its debt,
it may not have sufficient resources to timely meet its obligations.
Core’s obligations are independent of Woodbridge and Woodbridge is not legally obligated to
support Core. There is no assurance that Woodbridge will provide
additional resources to Core in the event that Core requires
additional funds in order to meet its obligations as they become due.
If Core is not able to meet its obligations as they become due, the
lenders under the defaulted loans could foreclose on any
property which serves as collateral for the defaulted loan and Core
could be forced to cease or significantly curtail its operations,
which would likely result in significant impairment charges and
losses at Woodbridge.
Our current business strategy may require us to obtain additional capital, which may not be
available on favorable terms, if at all.
There is no assurance that we will be able to continue to develop our real estate projects and
pursue new investments as currently contemplated using solely our capital on hand. As a result, we
may in the future need to obtain additional financing in an effort to successfully implement our
business strategy. These funds may be obtained through public or private debt or equity
financings, additional bank borrowings or from strategic alliances. We may not be successful in
obtaining additional funds in a timely manner, on favorable terms or at all, especially in light of
the current adverse conditions in the capital and credit markets and, with respect to funding of
Core’s master-planned communities, the adverse conditions
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in municipal bond markets which may
impact our ability to access tax-exempt bond financing. Moreover, certain of our bank financing
agreements contain provisions that limit the type and amount of debt we may incur in the future
without our lenders’ consent. If we are unable to obtain any additional capital necessary to fund
our real estate operations or pursue or consummate new investments, we may be required to delay,
scale back or abandon some or all of our land development activities, or liquidate certain of our
assets, and we may not be able to successfully implement our business strategy with respect to new
investments. The occurrence of any of the above events may adversely impact our operating results
and financial condition.
We are subject to the risks of the businesses that we currently hold investments in, and our future
acquisitions may reduce our earnings, require us to obtain additional financing, and expose us to
additional risks.
We currently hold investments in Bluegreen, Office Depot and Pizza Fusion, and, as a result,
we are subject to the risks faced by those companies in their respective industries. Each has been
adversely affected by a downturn in the economy, loss of consumer confidence and disruptions in the
credit markets. In addition, our business strategy includes the possibility of making material
investments in other industries. While we will seek investments and acquisitions primarily in
companies that provide opportunities for growth with seasoned and experienced management teams, we
may not be successful in identifying these opportunities. Further, investments or acquisitions
that we do complete may not prove to be successful. Acquisitions may expose us to additional
risks, including the risks faced by the acquired businesses, and may have a material adverse effect
on our results of operations if, among other things, the acquired businesses do not perform as
expected or the acquisitions do not otherwise accomplish our strategic objectives.
In addition, we will likely face competition in making investments or acquisitions which could
increase the costs associated with the investment or acquisition. Our investments or acquisitions
could initially reduce our per share earnings and add significant amortization expense or
intangible asset charges. Since our acquisition strategy involves holding investments for the
foreseeable future and because we do not expect to generate significant excess cash flow from
operations, we may rely on additional debt or equity financing to implement our acquisition
strategy. The issuance of debt will result in additional leverage which could limit our operating
flexibility, and the issuance of equity could result in additional dilution to our then-current
shareholders. In addition, such financing could consist of equity securities which have rights,
preferences or privileges senior to our Class A or Class B Common Stock. We do not intend to seek
shareholder approval of any investments or acquisitions unless required by law or regulation.
If current economic and credit market conditions do not improve and the book value of our
investments continue to exceed the trading value of the shares we own, we may incur additional
impairment charges in the future relating to those investments, which would adversely impact our
financial condition and operating results.
We own approximately 9.5 million shares of Bluegreen common stock, representing approximately
31% of Bluegreen’s outstanding common stock. During 2008, we evaluated our investment in Bluegreen
for impairment and determined that there was an other-than-temporary impairment associated with
such investment at September 30, 2008. As a result, we recorded an impairment charge of $53.6
million and adjusted the carrying value of our investment in Bluegreen as of September 30, 2008
from $119.4 million to $65.8 million. Additionally, after further evaluation of our investment in
Bluegreen as of December 31, 2008, we determined that an additional impairment of our investment in
Bluegreen was appropriate. Accordingly, we recorded a $40.8 million impairment charge (calculated
based upon the $3.13 closing price of Bluegreen’s common stock on the New York Stock Exchange on
December 31, 2008). The carrying value of our investment in Bluegreen as of December 31, 2008 was
$29.8 million. There can be no
assurance that we will not be required to record a further impairment charge in the future
relating to our investment in Bluegreen. On March 13, 2009, the closing price of Bluegreen’s common
stock on the New York Stock Exhange was $1.12 per share.
We also own approximately 1.4 million shares of Office Depot common stock, representing less
than 1% of Office Depot’s outstanding common stock. These shares are accounted for as
available-for-sale securities and are carried at fair value. During 2008, we evaluated our
investment in Office Depot for impairment and determined that an impairment charge was necessary.
Accordingly, we recorded an other-
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than-temporary impairment of $12.0 million associated with our
investment in Office Depot. As of December 31, 2008, the cost of our investment in Office Depot was
$16.3 million while the carrying value of such investment, recorded at fair value, was $4.3
million. If current market conditions do not improve or if the trading price of Office Depot’s
common stock does not otherwise increase, then we may be required to record future
other-than-temporary impairment adjustments. On March 13, 2009, the closing price of Office Depot’s
common stock on the New York Stock Exchange was $1.10 per share.
In the event we record impairments in the future with respect to our current or future
investments, then the cost of the investment determined to be impaired will be written down to its
fair value with a corresponding charge to earnings, which would adversely impact our financial
condition and operating results.
We are subject to certain additional risks relating to our investment in Bluegreen.
Although Bluegreen’s common stock is traded on the New York Stock Exchange, the shares of
Bluegreen common stock we own may be deemed restricted stock, which would limit our ability to
liquidate our investment in Bluegreen if we choose to do so. In addition, while we have made a
significant investment in Bluegreen, we do not expect to receive any dividends from the company in
the foreseeable future.
For the year ended December 31, 2008, our earnings from our investment in Bluegreen were $9.0
million (after the amortization of approximately $9.2 million related to the change in the basis as
a result of the impairment charge at September 30, 2008), compared to $10.3 million in 2007, and
$9.7 million in 2006. At December 31, 2008, the carrying value of our investment in Bluegreen was
$29.8 million. A significant portion of our earnings and book value are dependent upon
Bluegreen’s ability to operate its business plan successfully, which may be difficult given the
current economic environment.
The loss of the services of our key management and personnel could adversely affect our business.
Our ability to successfully implement our business strategy will depend on our ability to
attract and retain experienced and knowledgeable management and other professional staff. There is
no assurance that we will be successful in attracting and retaining key management personnel.
Our controlling shareholders have the voting power to control the outcome of any shareholder vote,
except in limited circumstances.
As of December 31, 2008, BFC Financial Corporation owned all of the issued and outstanding
shares of our Class B Common Stock, and 3,735,391 shares, or approximately 22.4%, of our issued and
outstanding Class A Common Stock. In the aggregate, these shares represent approximately 23.6% of
our total equity and approximately 59% of
our total voting power. Since our Class A Common Stock and Class B Common Stock vote as a single
group on most matters, BFC is in a position to control our Company and elect a majority of our
Board of Directors. Additionally, Alan B. Levan, our Chairman and Chief Executive Officer, and
John E. Abdo, our Vice Chairman, collectively beneficially own shares of BFC’s Class A and Class B
Common Stock representing approximately 73.8% of BFC’s total voting power. As a result, Alan B.
Levan and John E. Abdo effectively have the voting power to control the outcome of any vote of our
shareholders, except in those limited circumstances where Florida law mandates that the holders of
our Class A Common Stock vote as a separate class. BFC’s interests may conflict with the interests
of our other shareholders.
Our net operating loss carryforwards could be substantially limited if we experience an ownership
change as defined in the Internal Revenue Code.
We have experienced and continue to experience net operating losses. Under the Internal
Revenue Code, we may utilize our net operating loss carryforwards in certain circumstances to
offset future taxable income and to reduce federal income tax liability, subject to certain
requirements and restrictions. However, if we experience an “ownership change,” as defined in
Section 382 of the Internal Revenue Code, then our ability to use our net operating loss
carryforwards could be substantially limited, which could have
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a negative impact on our financial
position and results of operations. Generally, there is an “ownership change” if, at any time, one
or more shareholders owning 5% or more of a company’s common stock have aggregate increases in
their ownership of such stock of more than 50 percentage points over the prior three-year period.
In September 2008, our Board of Directors adopted a shareholder rights plan designed to
preserve shareholder value and protect our ability to use our net operating loss carryforwards by
providing a deterrent to holders of less than 5% of our Class A Common Stock from acquiring a 5% or
greater ownership interest in our Class A Common Stock. However, there can be no assurance that
the shareholder rights plan will successfully prevent against an “ownership change” or otherwise
preserve our ability to utilize our net operating loss carryforwards to offset any future taxable
income, nor can there be any assurance that we will be in a position to utilize our net operating
loss carryforwards in the future even if we do not experience an “ownership change.”
In the event that the Company chooses to de-register its securities from registration with the
Securities and Exchange Commission, it would no longer file reports with the Securities and
Exchange Commission and this could result in lower prices and more limited trading of the
Company’s securities as well as adversely impact the Company’s ability to raise capital.
In order to further reduce costs, the Company may choose to de-register its securities from
the Securities and Exchange Commission, which would result in less information about the Company
being publicly available to investors and could result in a lower trading price of the Company’s
Class A common stock.
During 2008, the Company failed to meet the minimum continued listing requirements of the New
York Stock Exchange necessary to cause the Company’s Class A common stock to maintain its listing
on the New York Stock Exchange and, consequently, the Company’s Class A common stock was de-listed.
The Company’s Class A common stock is now quoted on the Pink Sheets. In order to further reduce
costs, the Company may choose to de-register its securities from the Securities and Exchange
Commission, as the cost of public reporting is significant. Pursuant to the rules of the
Securities and Exchange Commission, if at any time the number of record holders of the Company’s
Class A common stock falls below 300, including accounts held through depositories and
institutional custodians, then the Company would be permitted to elect to de-register its
securities, which de-registration would be effective 90 days after making the appropriate filing
with the Securities and Exchange Commission. If the Company de-registers its securities from the
Securities and Exchange Commission, then the Company would cease filing periodic reports with the
Securities and Exchange Commission, including current reports on Form 8-K, quarterly reports on
Form 10-Q and annual reports on Form 10-K, which would result in less information about the Company
being publicly available to investors. Accordingly, this could result in a lower trading price of
the Company’s Class A common stock, may make it more difficult for the holders of the Company’s
Class A common stock to sell or purchase shares of the Company’s Class A common stock, and may
cause it to be more difficult for the Company to raise capital, which, in the event additional
capital is required to operate the Company’s business, could materially and adversely impact the
Company’s business, prospects, financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal and executive offices are located at the Corporate Headquarters of BankAtlantic,
2100 West Cypress Creek Road, Fort Lauderdale, Florida 33309. Woodbridge utilizes space pursuant to
a sublease agreement with BFC. We own an office building located at 2200 West Cypress Creek Road,
Fort Lauderdale, Florida 33309. Two floors of this office building are currently leased to a third
party and we will continue to seek to lease to third parties, including our affiliates, the
remaining space available at this office building. Core Communities owns its executive office
building in Port St. Lucie, Florida. We also have various month-to-month leases on the trailers we
occupy in Tradition Hilton Head. In addition to our properties used for offices, we additionally
own commercial space in Florida that is leased to third parties. Because of the nature of our real
estate operations, significant amounts of property are held as inventory and property and equipment
in the ordinary course of our business.
ITEM 3. LEGAL PROCEEDINGS
In re: Levitt and Sons, LLC, et al., No. 07-19845-BKC-RBR, U.S. Bankruptcy Court Southern District
of Florida
On November 9, 2007, the Debtors filed voluntary petitions for relief under the Chapter 11
Cases in the Bankruptcy Court. The Debtors commenced the Chapter 11 Cases in order to preserve the
value of their assets and to facilitate an orderly wind-down of their businesses and disposition of
their assets in a manner intended to maximize the recoveries of all constituents.
On November 27, 2007, the Office of the United States Trustee (the “U.S. Trustee), appointed
an official committee of unsecured creditors in the Chapter 11 Cases (the “Creditors’ Committee”).
On January 22, 2008, the U.S. Trustee appointed a Joint Home Purchase Deposit Creditors Committee
of Creditors Holding Unsecured Claims (the “Deposit Holders Committee”, and together with the
Creditors Committee, the “Committees”) The Committees have a right to appear and be heard in the
Chapter 11 Cases.
On November 27, 2007, the Bankruptcy Court granted the Debtors’ Motion for Authority to Incur
Chapter 11 Administrative Expense Claim (“Chapter 11 Admin. Expense Motion”) thereby authorizing
the Debtors to incur a post petition administrative expense claim in favor of Woodbridge for Post
Petition Services. While the Bankruptcy Court approved the incurrence of the amounts as unsecured post
petition administrative expense claims, the cash payments of such claims was subject to additional
court approval. In addition to the unsecured administrative expense claims, we had pre-petition
secured and unsecured claims against the Debtors. The Debtors scheduled the amounts due to us in
the Chapter 11 Cases. Our
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unsecured pre-petition claims scheduled by Levitt and Sons were
approximately $67.3 million and the secured pre-petition claim scheduled by Levitt and Sons is
approximately $460,000. We also filed contingent claims with respect to any liability we may have
arising out of disputed indemnification obligations under certain surety bonds. Lastly, we
implemented an employee severance fund in favor of certain employees of the Debtors. Employees who
received funds as part of this program as of December 31, 2008, which totaled approximately $3.9
million paid as of that date, have assigned their unsecured claims to Woodbridge.
In 2008, the Debtors asserted certain claims against Woodbridge, including an entitlement to a
portion of the $29.7 million federal tax refund which Woodbridge received as a consequence of
losses incurred at Levitt and Sons in prior periods; however, the parties entered into the
Settlement Agreement described below.
On June 27, 2008, Woodbridge entered into a settlement agreement (the “Settlement Agreement”)
with the Debtors and the Joint Committee of Unsecured Creditors (the “Joint Committee”) appointed
in the Chapter 11 Cases. Pursuant to the Settlement Agreement, among other things, (i) Woodbridge
agreed to pay to the Debtors’ bankruptcy estates the sum of $12.5 million plus accrued interest
from May 22, 2008 through the date of payment, (ii) Woodbridge agreed to waive and release
substantially all of the claims it had against the Debtors, including its administrative expense
claims through July 2008, and (iii) the Debtors (joined by the Joint Committee) agreed to waive and
release any claims they had against Woodbridge and its affiliates. After certain of Levitt and
Sons’ creditors indicated that they objected to the terms of the Settlement Agreement and stated a
desire to pursue claims against Woodbridge, Woodbridge, the Debtors and the Joint Committee entered
into an amendment to the Settlement Agreement, pursuant to which Woodbridge would, in lieu of the
$12.5 million payment previously agreed to, pay $8 million to the Debtors’ bankruptcy estates and
place $4.5 million in a release fund to be disbursed to third party creditors in exchange for a
third party release and injunction. The amendment also provided for an additional $300,000 payment
by Woodbridge to a deposit holders fund. The Settlement Agreement, as amended, was subject to a
number of conditions, including the approval of the Bankruptcy Court. On February 20, 2009, the
Bankruptcy Court presiding over Levitt and Sons’ Chapter 11 bankruptcy case entered an order
confirming a plan of liquidation jointly proposed by Levitt and Sons and the Official Committee of
Unsecured Creditors. That order also approved the settlement pursuant to the Settlement Agreement,
as amended. No appeal or rehearing of the court’s order was timely filed by any party, and the
settlement was consummated on March 3, 2009.
Robert D. Dance, individually and on behalf of all others similarly situated v. Woodbridge Holdings
Corp. (formerly known as Levitt Corp.), Alan B. Levan, and George P. Scanlon, Case No.
08-60111-Civ-Graham/O’Sullivan, Southern District of Florida
On January 25, 2008, plaintiff Robert D. Dance filed a purported class action complaint as a
putative purchaser of our securities against us and certain of our officers and directors,
asserting claims under the federal securities law and seeking damages. This action was filed in
the United States District Court for the Southern District of Florida and is captioned Dance v.
Levitt Corp. et al., No. 08-CV-60111-DLG. The securities litigation purports to be brought on
behalf of all purchasers of our securities beginning on January 31, 2007 and ending on August 14,
2007. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Exchange
Act, and Rule 10b-5 promulgated thereunder by issuing a series of false and/or misleading
statements concerning our financial results, prospects and condition.
Westchester Fire Insurance Company vs. City of Brooksville Case No. 8: CA-09-486
On February 9, 2009, the City of Brooksville, Florida filed a complaint in the Circuit Court
of the Fifth Judicial Circuit in and for Hernando County, Florida. Woodbridge was named as one of
the defendants. The lawsuit alleged that Levitt Corporation failed to construct certain public
works projects in the City as it was required to do under a Plat Approval granted by the City for
the Cascades at Southern Hills project. The lawsuit sought recovery from Westchester Fire
Insurance Company, which provided surety bonds for Levitt’s performance of the public works.
Although Woodbridge was named as a defendant, no cause of action was asserted against Woodbridge.
The case was subsequently voluntarily
dismissed without prejudice. Separately, on January 16, 2009, a federal declaratory action was
filed by Westchester Fire against the City of Brooksville, Florida in the Federal District Curt for
the Middle District
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of Florida. Woodbridge is not a party in that litigation. However, it is
anticipated that the federal court declaratory action will resolve the dispute between all parties
in its entirety. Based on the claim made by the City on the bonds, at the surety’s request,
Woodbridge posted a $4.0 million letter of credit as security while the matter is litigated with
the City.
We are party to additional various claims and lawsuits which arise in the ordinary course of
business. We do not believe that the ultimate resolution of these claims or lawsuits will have a
material adverse effect on our business, financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None submitted.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
On November 20, 2008, our Class A common stock was de-listed from the New York Stock Exchange
(“NYSE”), where it was previously listed and traded under the symbol “WDG”. Our Class A common
stock is currently being quoted on the Pink Sheets Electronic Quotation Service (“Pink Sheets”)
under the symbol “WDGH.PK.” BFC is the sole holder of our Class B common stock and there is no
trading market for our Class B common stock. The Class B common stock may only be owned by BFC or
its affiliates and is convertible into Class A common stock at the discretion of the holder on a
share-for-share basis.
The following table sets forth the high and low per share sales prices of our Class A common
stock for each quarter during 2007 and 2008. Prices for 2007 and through November 19, 2008 are as
reported on the New York Stock Exchange. Prices for the period beginning on November 20, 2008 and
ending on December 31, 2008 are as quoted on the Pink Sheets.
| 2007 | 2008 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
First Quarter |
$ | 77.20 | $ | 45.95 | $ | 13.15 | $ | 7.00 | ||||||||
Second Quarter |
$ | 59.10 | $ | 42.35 | $ | 11.50 | $ | 5.50 | ||||||||
Third Quarter |
$ | 53.10 | $ | 10.00 | $ | 6.60 | $ | 0.78 | ||||||||
Fourth Quarter |
$ | 20.00 | $ | 7.70 | $ | 3.25 | $ | 0.02 | ||||||||
The stock prices do not include retail mark-ups, mark-downs or commissions. On March 13,
2009, the closing quoted price of our Class A common stock as reported on the Pink Sheets was
$0.65 per share.
Shareholder Return Performance Graph
Set forth below is a graph comparing the cumulative total returns (assuming reinvestment of
dividends) for the Class A common stock, the Dow Jones U.S. Total Home Construction Index and the
Russell 2000 Index and assumes $100 was invested on January 2, 2004.
| Symbol | 1/2/04 | 12/31/04 | 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | ||||||||||||||||||||||
Woodbridge Class A common stock |
WDGH.PK | 100.00 | 152.48 | 113.60 | 61.31 | 11.04 | 0.60 | |||||||||||||||||||||
Dow Jones US Total Home
Construction Index |
DJUSHB | 100.00 | 140.43 | 161.22 | 127.99 | 56.58 | 38.48 | |||||||||||||||||||||
Russell 2000 Index |
RTY | 100.00 | 116.18 | 120.04 | 140.44 | 136.58 | 89.05 | |||||||||||||||||||||
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Holders
On
March 16, 2009, there were approximately 653 record holders of our Class A Common Stock and
16,656,525 shares of our Class A Common Stock were issued and outstanding. Our controlling
shareholder, BFC, holds all of the 243,807 shares of our Class B common stock issued and
outstanding.
Dividends
On January 22, 2007 our Board of Directors declared a cash dividend of $0.10 per share on our
Class A common stock and Class B common stock, which was paid in February 2007. There were no
other dividends declared during the years ended December 31, 2008 or 2007.
The Board has not adopted a policy of regular dividend payments. The payment of dividends in
the future is subject to approval by our Board of Directors and will depend upon, among other
factors, our results of operations and financial condition. We do not expect to pay dividends to
shareholders for the foreseeable future.
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Stock Repurchases
In November 2008, our Board of Directors approved a stock repurchase program which authorized
us to repurchase up to 5 million shares of our Class A Common Stock from time to time on the open
market or in private transactions. There can be no assurance that we will repurchase all of the
shares authorized for repurchase under the program, and the actual number of shares repurchased
will depend on a number of factors, including levels of cash generated from operations, cash
requirements for acquisitions and investment opportunities, repayment of debt, current stock price,
and other factors. The stock repurchase program does not have an expiration date and may be
modified or discontinued at any time. In the fourth quarter of 2008, the Company repurchased
2,385,624 shares at a cost of $1.4 million which have been recorded as treasury stock in the
Statements of Financial Condition. These treasury stock shares repurchased by the Company were
canceled and retired on February 25, 2009 subsequent to December 31, 2008. At December 31, 2008,
2,614,376 shares remained available for repurchase under the stock repurchase program.
The following table provides a summary of the stock repurchase activity under the stock
repurchase program during the fourth quarter of 2008:
| Total number of | Maximum number of | |||||||||||||||
| shares repurchased | shares that may yet | |||||||||||||||
| Total number of | Average price paid | as part of publicly | be repurchased | |||||||||||||
| Period | shares repurchased | per share | announced program | under the program | ||||||||||||
November 1 - November 30, 2008 |
13,220 | $ | 0.4603 | 13,220 | 4,986,780 | |||||||||||
December 1 - December 31, 2008 |
2,372,404 | $ | 0.6038 | 2,372,404 | 2,614,376 | |||||||||||
Total |
2,385,624 | $ | 0.6030 | 2,385,624 | 2,614,376 | |||||||||||
Reverse Stock Split
On September 26, 2008, we effected a one-for-five reverse stock split. As a result of the
reverse stock split, each five shares of our Class A Common Stock outstanding at the time of the
reverse stock split automatically converted into one share of Class A Common Stock and each five
shares of our Class B Common Stock outstanding at the time of the reverse stock split automatically
converted into one share of Class B Common Stock. As a result, the number of outstanding shares of
Class A Common Stock decreased from 95,197,445 to 19,042,149, and the number of outstanding shares
of Class B Common Stock decreased from 1,219,031 to 243,807. The number of authorized shares of our
Class A and Class B Common Stock as well as the number of shares of Class A Common Stock available
for issuance under our equity compensation plans and the number of shares of Class A Common Stock
underlying stock options and other exercisable or convertible instruments were also ratably
decreased in connection with the reverse split. All share and per share data presented in this
report for prior periods have been retroactively adjusted to reflect the reverse stock split.
Shareholder Rights Plan
As previously reported, in September 2008, we adopted a shareholder rights plan aimed at
preserving our ability to utilize our net operating loss carryforwards to offset future taxable
income. Under Section 382 of the Internal Revenue Code, if we experience an “ownership change” (as
defined in Section 382), then our ability to use the net operating loss carryforwards would be
substantially limited. Accordingly, we adopted the rights plan to deter shareholders from acquiring
a 5.0% or greater ownership interest in our Class A Common Stock, as any such acquisition might
qualify as an “ownership change” under Section 382. Shareholders who owned more than 5.0% of our
Class A Common Stock as of October 9, 2008 were not required to divest any of their shares.
As part of the adoption of the rights plan, our Board of Directors declared a dividend of one
right for each share of our Class A Common Stock and Class B Common Stock held of record as of the
close of
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business on October 9, 2008. These rights are not exercisable and are not transferable
apart from our Class A Common Stock or Class B Common Stock until the earlier of (i) the
10th business day after such time as a person or group acquires beneficial ownership of
5.0% or more of our Class A Common Stock and (ii) the tenth business day after a person or group
commences a tender or exchange offer, the consummation of which would result in beneficial
ownership by a person or group of 5.0% or more of our Class A Common Stock. Upon such time, if any,
as the rights become exercisable, each rights holder (other than the shareholder whose acquisition
triggered the exercisability of the rights and such shareholder’s associates and affiliates) may,
for $12.00 per right, purchase shares of our Class A Common Stock with a market value of $24.00. As
a result, the rights plan will generally cause substantial dilution to any person or group that
acquires beneficial ownership of 5.0% or more of the outstanding shares of our Class A Common Stock
without the approval of our Board of Directors.
The rights plan will expire on September 29, 2018 unless the rights are earlier redeemed or
exchanged in accordance with the rights plan or the rights plan is earlier terminated by our Board
of Directors.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data as of and for the
years ended December 31, 2004 through 2008. Certain selected financial data presented
below as of and for the years ended December 31, 2004 through 2008, are derived from our
audited consolidated financial statements. In connection with the filing of the Chapter 11
Cases, Woodbridge deconsolidated Levitt and Sons as of November 9, 2007, eliminating all
future operations of Levitt and Sons from Woodbridge’s financial results of operations (See
Note 24 to our audited consolidated financial statements included in Item 8 for financial
information of Levitt and Sons). As a result of the deconsolidation, the consolidated
financial condition data for the year ended December 31, 2007 does not include the Primary
and Tennessee Homebuilding segments other than the results of Carolina Oak, which was
acquired by Woodbridge from Levitt and Sons in 2007. In 2008, the
results of operations of Core’s commercial leasing projects were
reclassified from discontinued operations back into continuing
operations. Therefore, the results of operations for these projects
were reclassified for all periods presented in the table below. See
(Note 2) to our audited consolidated financial statements for
further discussion. This table is a summary and should be
read in conjunction with the audited consolidated financial statements and related notes
thereto which are included elsewhere in this report.
| As of and for the Year Ended December 31, | ||||||||||||||||||||
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
| (Dollars in thousands, except per share, unit and average price data) | ||||||||||||||||||||
Consolidated Operations: |
||||||||||||||||||||
Revenues from sales of real estate |
$ | 13,837 | 410,115 | 566,086 | 558,112 | 549,652 | ||||||||||||||
Cost of sales of real estate (a) |
12,728 | 573,241 | 482,961 | 408,082 | 406,274 | |||||||||||||||
Margin (a) |
1,109 | (163,126 | ) | 83,125 | 150,030 | 143,378 | ||||||||||||||
Earnings from Bluegreen Corporation |
8,996 | 10,275 | 9,684 | 12,714 | 13,068 | |||||||||||||||
Selling, general & administrative expenses |
50,754 | 117,924 | 121,151 | 87,639 | 71,001 | |||||||||||||||
Impairment
of investment in Bluegreen Corporation |
(94,426 | ) | — | — | — | — | ||||||||||||||
Impairment
of other investments |
(14,120 | ) | — | — | — | — | ||||||||||||||
Net (loss) income |
$ | (140,331 | ) | (234,620 | ) | (9,164 | ) | 54,911 | 57,415 | |||||||||||
Basic (loss) earnings per common share (e) |
$ | (7.35 | ) | (30.00 | ) | (2.27 | ) | 13.58 | 15.19 | |||||||||||
Diluted (loss) earnings per common share (e) |
$ | (7.35 | ) | (30.00 | ) | (2.29 | ) | 13.15 | 14.64 | |||||||||||
Basic weighted average common shares
outstanding (thousands) (c) (e) |
19,088 | 7,821 | 4,045 | 4,044 | 3,779 | |||||||||||||||
Diluted weighted average common shares
outstanding (thousands) (c) (e) |
19,088 | 7,821 | 4,045 | 4,156 | 3,861 | |||||||||||||||
Dividends declared per common share (e) |
$ | — | 0.10 | 0.40 | 0.40 | 0.20 | ||||||||||||||
Consolidated Financial Condition Data: |
||||||||||||||||||||
Cash |
$ | 114,798 | 195,181 | 48,391 | 113,562 | 125,522 | ||||||||||||||
Inventory of real estate |
$ | 241,318 | 227,290 | 822,040 | 611,260 | 413,471 | ||||||||||||||
Investment in Bluegreen Corporation |
$ | 29,789 | 116,014 | 107,063 | 95,828 | 80,572 | ||||||||||||||
Total assets |
$ | 559,254 | 712,851 | 1,090,666 | 895,673 | 678,467 | ||||||||||||||
Total debt |
$ | 349,952 | 353,790 | 615,703 | 407,970 | 268,226 | ||||||||||||||
Total liabilities |
$ | 439,724 | 451,745 | 747,427 | 545,887 | 383,678 | ||||||||||||||
Shareholders’ equity |
$ | 119,530 | 261,106 | 343,239 | 349,786 | 294,789 | ||||||||||||||
Book value per share (d) |
$ | 7.07 | 13.56 | 86.50 | 88.17 | 74.33 | ||||||||||||||
| (a) | Margin is calculated as sales of real estate minus cost of sales of real estate. Included in cost of sales of real estate for the year ended December 31, 2008 is an impairment charge associated with the Carolina Oak homebuilding project in the amount of $3.5 million. Additionally, included in cost of sales of real estate for the years ended December 31, 2007 and 2006 are homebuilding inventory impairment charges and write-offs of deposits and pre-acquisition costs of $206.4 million and $31.1 million, respectively, in our Primary Homebuilding segment. In our Tennessee Homebuilding segment, impairment charges amounted to $11.2 million and $5.7 million in the years ended December 31, 2007 and 2006, respectively, which were included in cost of sales. | |
| (b) | Diluted (loss) earnings per share takes into account the dilutive effect of our stock options and restricted stock using the treasury stock method and the dilution in earnings we recognize as a result of outstanding Bluegreen securities that entitle the holders thereof to acquire |
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| shares of Bluegreen’s common stock. | ||
| (c) | The weighted average number of common shares outstanding in basic and diluted (loss) earnings per common share for 2006, 2005 and 2004 were retroactively adjusted for the number of shares representing the bonus element arising from the rights offering that closed on October 1, 2007. Under the rights offering, shares of our Class A common stock were issued on October 1, 2007 at a purchase price below the market price of such shares on that date resulting in the bonus element of 1.97%. The number of weighted average shares of Class A common stock was retroactively increased by this percentage for 2006, 2005 and 2004. | |
| (d) | Book value per share is calculated as shareholders equity divided by total number of shares issued and outstanding as of December 31 of each year. | |
| (e) | On September 26, 2008, we effected a one-for-five reverse stock split. As a result of the reverse stock split, each five shares of our Class A Common Stock outstanding at the time of the reverse stock split automatically converted into one share of Class A Common Stock and each five shares of our Class B Common Stock outstanding at the time of the reverse stock split automatically converted into one share of Class B Common Stock. Accordingly, all share and per share data presented in this report for prior periods have been retroactively adjusted to reflect the reverse stock split. |
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Executive Overview
We continue to focus on managing our real estate holdings during this challenging period for
the real estate industry, and on efforts to bring costs in line with our strategic objectives. We
have taken steps to align our staffing levels and compensation with these objectives. Our goal is
to pursue acquisitions and investments in diverse industries, including investments in affiliates,
using a combination of our cash and stock and third party equity and debt financing. This
business strategy may result in acquisitions and investments both within and outside of the real
estate industry. We may acquire entire businesses or majority or minority, non-controlling
interests in companies. Under this business model, we likely will not generate a consistent
earnings stream and the composition of our revenues may vary widely due to factors inherent in a
particular investment, including the maturity and cyclical nature of, and market conditions
relating to, the business invested in. We expect that net investment gains and other income will
depend on the success of our investments as well as overall market conditions. We also intend to
pursue strategic initiatives with a view to enhancing liquidity. These initiatives may include
pursuing alternatives to monetize a portion of our interests in certain of Core’s assets through
sale, possible joint ventures or other strategic relationships.
Our operations have historically been concentrated in the real estate industry which is
cyclical in nature. Our largest subsidiary is Core Communities, a developer of master-planned
communities, which sells land to residential builders as well as to commercial developers, and
internally develops, constructs and leases income producing commercial real estate. In addition,
our Other Operations segment consists of an equity investment in Bluegreen, a NYSE-listed company,
which represents approximately 31% of Bluegreen’s outstanding common stock, a consolidated
investment in Pizza Fusion, a private company in which we made a $3.0 million investment in the
third quarter of 2008 which represents approximately 41% of Pizza Fusion’s outstanding stock, and a
cost method investment in Office Depot, a NYSE- listed company in which we own less than 1% of the
outstanding common stock. Bluegreen is engaged in the acquisition, development, marketing and sale
of ownership interests in primarily “drive-to” vacation resorts, and the development and sale of
golf communities and residential land. Our Other Operations segment also includes the activities of
our consolidated subsidiary, Carolina Oak, which engaged in homebuilding activities at Tradition
Hilton Head prior to the suspension of those activities during the fourth quarter of 2008. As
previously reported, the results of operations and financial condition of Carolina Oak as of and
for the years ended December 31, 2007 and 2006 were included in the Primary Homebuilding segment
because its financial metrics were similar in nature to the other homebuilding projects within that
segment. However, due to our acquisition of Carolina Oak and the deconsolidation of Levitt and Sons
as of November 9, 2007, which comprised our Primary Homebuilding and Tennessee Homebuilding
segments, the results of operations and financial condition of Carolina Oak as of and for the year
ended December 31, 2008 are included in the Other Operations segment.
Financial and Non-Financial Metrics
Performance and prospects are evaluated using a variety of financial and non-financial
metrics. The key financial metrics utilized to evaluate historical operating performance include
revenues from sales of real estate, margin (which we measure as revenues from sales of real estate
minus cost of sales of real estate), margin percentage (which we measure as margin divided by
revenues from sales of real estate), net (loss) income and return on equity. We also continue to evaluate
and monitor selling, general and administrative expenses as a percentage of revenue, our ratios of
debt to shareholders’ equity and debt to total capitalization and our cash requirements.
Non-financial metrics used to evaluate historical performance include saleable acres in our Land
Division and the number of acres in our backlog. In evaluating future prospects, management
considers financial results as well as non-financial information such as acres in backlog (measured
as land subject to an executed sales contract). The ratio of debt to shareholders’ equity and cash
requirements are also considered when evaluating future prospects, as are general economic factors
and interest rate trends. These metrics are not an exhaustive list, and management may from time
to time utilize different financial and non-financial information or may not use all of the metrics
mentioned above.
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Critical Accounting Policies and Estimates
Management views critical accounting policies as accounting policies that are important to the
understanding of our financial statements and also involve estimates and judgments about inherently
uncertain matters. In preparing financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the consolidated statements of financial condition and
assumptions that affect the recognition of revenues and expenses on the consolidated statements of
operations for the periods presented. These estimates require the exercise of judgment, as future
events cannot be determined with certainty. Material estimates that are particularly susceptible
to significant change in subsequent periods relate to revenue and cost recognition on percent
complete projects, reserves and accruals, impairment reserves of assets, valuation of real estate,
estimated costs to complete construction, reserves for litigation and contingencies and deferred
tax valuation allowances. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis of making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results could differ significantly from these
estimates if conditions change or if certain key assumptions used in making these estimates
ultimately prove to be materially incorrect.
We have identified the following accounting policies that management views as critical to the
accurate portrayal of our financial condition and results of operations.
Loss in excess of investment in Levitt and Sons
Under ARB No. 51, consolidation of a majority-owned subsidiary is precluded where control does
not rest with the majority owners. Under these rules, legal reorganization or bankruptcy represents
conditions which can preclude consolidation or equity method accounting as control rests with the
Bankruptcy Court, rather than the majority owner. As described elsewhere in this report, Levitt and
Sons, our wholly-owned subsidiary, filed a petition for bankruptcy on November 9, 2007.
Accordingly, we deconsolidated Levitt and Sons as of November 9, 2007, eliminating all future
operations from our financial results of operations. In accordance with ARB No. 51, we follow the
cost method of accounting to record our interest in Levitt and Sons. Under cost method accounting,
income may be recognized to the extent only cash is received in the future or when Levitt and Sons
is legally released from its bankruptcy obligations through the approval of the Bankruptcy Court,
at which time any loss in excess of the investment in Levitt and Sons will be recognized into
income. See (Note 24) to our audited consolidated financial statements for further discussion.
Fair Value Measurements
Effective January 1, 2008, we partially adopted the provisions of SFAS No. 157, “Fair Value
Measurements” (“SFAS No. 157”), which requires us to disclose the fair value of our investments in
unconsolidated trusts and equity securities, including our investments in Bluegreen and Office
Depot. Under this standard, fair value is defined as the price that would be received upon the sale
of an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date (an exit price). In determining fair value, we are sometimes required to
use various valuation techniques. SFAS No. 157 establishes a hierarchy for inputs used in measuring
fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs
by requiring that the most observable inputs be used when available. As a basis for considering
such assumptions, SFAS No. 157 establishes a three-tier fair value hierarchy, which prioritizes the
inputs used in measuring fair value as follows:
| • | Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities; | ||
| • | Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and | ||
| • | Level 3. Unobservable inputs, when there is little or no market data, which require the reporting entity to develop its own assumptions. |
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When valuation techniques, other than those described as Level 1 are utilized, management must
make estimations and judgments in determining the fair value for its investments. The degree to
which management’s estimation and judgment is required is generally dependent upon the market
pricing available for the investments, the availability of observable inputs, the frequency of
trading in the
investments and the investment’s complexity. If we make different judgments regarding
unobservable inputs, we could potentially reach different conclusions regarding the fair value of
our investments.
Investments
We determine the appropriate classifications of investments in equity securities at
the acquisition date and re-evaluate the classifications at each balance sheet date. For
entities where we are not deemed to be the primary beneficiary under
FIN No. 46(R) or in which we
have less than a controlling financial interest evaluated under AICPA
Statement of Position 78-9, “Accounting for Investments
in Real Estate Ventures” or Emerging Issues Task Force
No. 04-5, “Determining Whether a General Partner, or the
General Partners as a Group, Controls a Limited Partnership or
Similar Entity When the Limited Partners Have Certain Rights”,
these entities are accounted for using the equity or cost method of accounting. Typically,
the cost method is used if we own less than 20% of the investee’s stock and the equity
method is used if we own more than 20% of the investee’s stock. However, we have concluded
that the percentage ownership of stock is not the sole determinant in applying the equity
or the cost method, but the significant factor is whether the investor has the ability to
significantly influence the operating and financial policies of the investee.
Equity Method
We follow the equity method of accounting to record our interests in entities in which we do
not own the majority of the voting stock or record our investment in VIEs in which we are not the
primary beneficiary. These entities consist of Bluegreen Corporation and statutory business
trusts. The statutory business trusts are VIEs in which we are not the primary beneficiary. Under
the equity method, the initial investment in a joint venture is recorded at cost and is
subsequently adjusted to recognize our share of the joint venture’s earnings or losses.
Distributions received and other-than-temporary impairments reduce the carrying amount of the
investment.
Cost Method
We use the cost method for investments where we own less than a 20% interest and do not have
the ability to significantly influence the operating and financial policies of the investee in
accordance with relative accounting guidance. SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities”, requires us
to designate our securities as held to maturity, available for sale, or trading, depending on our
intent with regard to our investments at the time of purchase. There are currently no
securities classified as held to maturity or trading.
Impairment
Securities classified as available-for-sale are carried at fair value with net unrealized
gains or losses reported as a component of accumulated other comprehensive income (loss), but do
not impact our results of operations. Changes in fair value are taken to income when a decline in
value is considered other-than-temporary.
We review our equity and cost method investments quarterly for indicators of
other-than-temporary impairment in accordance with FSP FAS 115-1/FAS 124-1 and SAB No. 59. This
determination requires significant judgment in which we evaluate, among other factors, the fair
market value of the investments, general market conditions, the duration and extent to which the
fair value of the investment is less than cost, and our intent and ability to hold the investment
until it recovers. We also consider specific adverse conditions related to the financial health of,
and business outlook for, the investee, including industry and sector performance, rating agency
actions, changes in operational and financing cash flow factors. If a decline in the fair value of
the investment is determined to be other-than-temporary, an impairment charge is recorded to reduce
the investment to its fair value and a new cost basis in the investment is established.
Goodwill and Intangible Assets
We recorded certain intangible assets in connection with our acquisition of Pizza Fusion.
Intangible assets consist primarily of franchise contracts which were valued using a discounted
cash flow
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methodology and are amortized over the average life of the franchise contracts. The
estimates of useful lives and expected cash flows require us to make significant judgments
regarding future periods that are subject to outside factors. In accordance with SFAS No. 144, we
evaluate when events and circumstances indicate that assets may be impaired and when the
undiscounted cash flows estimated to be generated by those assets are less than their carrying
amounts. The carrying value of these assets is dependent upon estimates of future earnings that we
expect to generate. If cash flows decrease significantly, intangible
assets may be impaired and would be written down to their fair value.
On at least an annual basis, we conduct a review of our goodwill in accordance with SFAS No.
142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), to determine whether the carrying
value of goodwill exceeds the fair market value using a discounted cash flow methodology. In the
year ended December 31, 2006, we conducted an impairment review of the goodwill related to our
Tennessee Homebuilding segment, the operations of which were comprised of the activities of Bowden
Building Corporation, which we acquired in 2004. We used a discounted cash flow methodology to
determine the amount of impairment resulting in completely writing off goodwill of approximately
$1.3 million in the year ended December 31, 2006. The write-off is included in other expenses in
the consolidated statements of operations.
Revenue Recognition
Revenue and all related costs and expenses from house and land sales are recognized at the
time that closing has occurred, when title and possession of the property and the risks and rewards
of ownership transfer to the buyer, and when we do not have a substantial continuing involvement in
accordance with SFAS No. 66, “Accounting for Sales of Real Estate” (“SFAS 66”). In order to
properly match revenues with expenses, we estimate construction and land development costs incurred
and to be incurred, but not paid at the time of closing. Estimated costs to complete are determined
for each closed home and land sale based upon historical data with respect to similar product types
and geographical areas and allocated to closings along with actual costs incurred based on a
relative sales value approach. To the extent the estimated costs to complete have significantly
changed, we will adjust cost of sales in the current period for the impact on cost of sales of
previously sold homes and land to ensure a consistent margin of sales is maintained.
Revenue is recognized for certain land sales on the percentage-of-completion method when the
land sale takes place prior to all contracted work being completed. Pursuant to the requirements
of SFAS 66, if the seller has a continuing involvement with the property and does not transfer
substantially all of the risks and rewards of ownership, profit is recognized based on the nature
and extent of the seller’s continuing involvement. In the case of our land sales, this
involvement typically consists of final development activities. We recognize revenue and related
costs as work progresses using the percentage-of-completion method, which relies on estimates of
total expected costs to complete required work. Revenue is recognized in proportion to the
percentage of total costs incurred in relation to estimated total costs at the time of sale.
Actual revenues and costs to complete construction in the future could differ from our current
estimates. If our estimates of development costs remaining to be completed and relative sales
values are significantly different from actual amounts, then our revenues, related cumulative
profits and costs of sales may be revised in the period that estimates change.
Other revenues consist primarily of rental property income, marketing revenues, irrigation
service fees, and title and mortgage revenue. Irrigation service connection fees are deferred and
recognized systematically over the life of the irrigation plant. Irrigation usage fees are
recognized when billed as the service is performed. Rental property income consists of rent revenue
from long-term leases of commercial property. We review all new leases in accordance with SFAS No.
13 “Accounting for Leases”. If the lease contains fixed escalations for rent, free-rent periods or
upfront incentives, rental revenue is recognized on a straight-line basis over the life of the lease.
Effective January 1, 2006, Bluegreen adopted AICPA Statement of Position 04-02, “Accounting
for Real Estate Time-Sharing Transactions” (“SOP 04-02”). This Statement amends FASB Statement No.
67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects” (“FAS No. 67”),
to state that the guidance for incidental operations and costs incurred to sell real estate
projects does not apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the
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guidance in SOP 04-02. Bluegreen’s adoption of SOP 04-02
resulted in a one-time, non-cash, cumulative effect of change in accounting principle charge of
$4.5 million to Bluegreen for the year ended December 31, 2006, and accordingly reduced the
earnings in Bluegreen recorded by us by approximately $1.4 million for the same period.
Income Taxes
We record income taxes using the liability method of accounting for deferred income taxes.
Under this method, deferred tax assets and liabilities are recognized for the expected future tax
consequence of temporary differences between the financial statement and income tax basis of our
assets and liabilities. We estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating our tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred revenue, for tax and
accounting purposes. These differences result in deferred tax assets and liabilities, which are
included within our consolidated statements of financial condition. The recording of a net
deferred tax asset assumes the realization of such asset in the future. Otherwise, a valuation
allowance must be recorded to reduce this asset to its net realizable value. We consider future
pretax income and ongoing prudent and feasible tax strategies in assessing the need for such a
valuation allowance. In the event that we determine that we may not be able to realize all or part
of the net deferred tax asset in the future, a valuation allowance for the deferred tax asset is
charged against income in the period such determination is made. See Item 1. “Business — Recent
Developments” for a description of the shareholder rights plan we adopted in September 2008 which
is aimed at preserving our ability to use our net operating loss carryforwards to offset future
taxable income.
We file a consolidated Federal and Florida income tax return. Separate state returns are
filed by subsidiaries that operate outside the state of Florida. Even though Levitt and Sons and
its subsidiaries have been deconsolidated from Woodbridge for financial statement purposes, they
continue to be included in our Federal and Florida consolidated tax returns until the discharge of
Levitt and Sons from bankruptcy. See (Note 21) for information regarding the bankruptcy filing of
Levitt and Sons. As a result of the deconsolidation of Levitt and Sons, all of Levitt and Sons’ net
deferred tax assets are no longer presented in the consolidated statement of financial condition at
December 31, 2008 but remain a part of Levitt and Sons’ condensed consolidated financial statements
at December 31, 2008 and accordingly will be part of the tax return.
We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes — an interpretation of FASB No. 109” (“FIN 48”), on January 1, 2007. FIN 48 provides
guidance on recognition, measurement, presentation and disclosure in financial statements of
uncertain tax positions that a company has taken or expects to take on a tax return. FIN 48
substantially changes the accounting policy for uncertain tax positions. As a result of the
implementation of FIN 48, we recognized a decrease of $260,000 in the liability for unrecognized
tax benefits, which was accounted for as an increase to the January 1, 2007 balance of retained
earnings. At December 31, 2008 and 2007, we had gross tax-affected unrecognized tax benefits of
$2.4 million, of which $0.2 million, if recognized, would affect the effective tax rate.
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Consolidated Results of Operations
| 2008 | 2007 | |||||||||||||||||||
| Year Ended December 31, | vs. 2007 | vs. 2006 | ||||||||||||||||||
| 2008 | 2007 | 2006 | Change | Change | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
Revenues |
||||||||||||||||||||
Sales of real estate |
$ | 13,837 | 410,115 | 566,086 | (396,278 | ) | (155,971 | ) | ||||||||||||
Other revenues |
11,701 | 10,458 | 9,241 | 1,243 | 1,217 | |||||||||||||||
Total revenues |
25,538 | 420,573 | 575,327 | (395,035 | ) | (154,754 | ) | |||||||||||||
Costs and expenses |
||||||||||||||||||||
Cost of sales of real estate |
12,728 | 573,241 | 482,961 | (560,513 | ) | 90,280 | ||||||||||||||
Selling, general and administrative expenses |
50,754 | 117,924 | 121,151 | (67,170 | ) | (3,227 | ) | |||||||||||||
Interest expense |
10,867 | 3,807 | — | 7,060 | 3,807 | |||||||||||||||
Other expenses |
— | 3,929 | 3,677 | (3,929 | ) | 252 | ||||||||||||||
Total costs and expenses |
74,349 | 698,901 | 607,789 | (624,552 | ) | 91,112 | ||||||||||||||
Earnings from Bluegreen Corporation |
8,996 | 10,275 | 9,684 | (1,279 | ) | 591 | ||||||||||||||
Impairment
of investment in Bluegreen Corporation |
(94,426 | ) | — | — | (94,426 | ) | — | |||||||||||||
Impairment
of other investments |
(14,120 | ) | — | — | (14,120 | ) | — | |||||||||||||
Interest and other income |
8,030 | 11,264 | 7,844 | (3,234 | ) | 3,420 | ||||||||||||||
Loss before income taxes |
(140,331 | ) | (256,789 | ) | (14,934 | ) | 116,458 | (241,855 | ) | |||||||||||
Benefit for income taxes |
— | 22,169 | 5,770 | (22,169 | ) | 16,399 | ||||||||||||||
Net loss |
$ | (140,331 | ) | (234,620 | ) | (9,164 | ) | 94,289 | (225,456 | ) | ||||||||||
Basic loss per share (c) |
$ | (7.35 | ) | (30.00 | ) | (2.27 | ) | 22.65 | (27.73 | ) | ||||||||||
Total diluted loss per share (a) (c) |
$ | (7.35 | ) | (30.00 | ) | (2.29 | ) | 22.65 | (27.71 | ) | ||||||||||
Basic weighted average shares outstanding (b) (c) |
19,088 | 7,821 | 4,045 | 11,267 | 3,776 | |||||||||||||||
Diluted weighted average shares outstanding (b)
(c) |
19,088 | 7,821 | 4,045 | 11,267 | 3,776 | |||||||||||||||
| (a) | Diluted loss per share takes into account (i) the dilution in earnings we recognize from Bluegreen as a result of outstanding securities issued by Bluegreen that enable the holders thereof to acquire shares of Bluegreen’s common stock and (ii) the dilutive effect of our stock options and restricted stock using the treasury stock method. | |
| (b) | The weighted average number of common shares outstanding in basic and diluted loss per common share for 2006 were retroactively adjusted for a number of shares representing the bonus element arising from the rights offering that closed on October 1, 2007. Under the rights offering, shares of our Class A common stock were issued on October 1, 2007 at a purchase price below the market price of such shares on that date resulting in the bonus element of 1.97%. The number of weighted average shares of Class A common stock was retroactively increased by this percentage for 2006. | |
| (c) | On September 26, 2008, we effected a one-for-five reverse stock split. As a result of the reverse stock split, each five shares of our Class A Common Stock outstanding at the time of the reverse stock split automatically converted into one share of Class A Common Stock and each five shares of our Class B Common Stock outstanding at the time of the reverse stock split automatically converted into one share of Class B Common Stock. Accordingly, all share and per share data presented in this report for prior periods have been retroactively adjusted to reflect the reverse stock split. |
As of November 9, 2007, the accounts of Levitt and Sons were deconsolidated from our
consolidated statements of financial condition and statements of operations. Therefore, the
financial data and comparative analysis in the preceding table reflected operations through
November 9, 2007 related to the Primary Homebuilding and Tennessee Homebuilding segments compared
to full year results of operations in 2006, with the exception of Carolina Oak which was included
in the above table for the full year in 2007 since this subsidiary was not part of the Chapter 11
Cases.
For the Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007
We incurred a consolidated net loss of $140.3 million for the year ended December 31, 2008 as
compared to a consolidated net loss of $234.6 million for the year ended December 31, 2007. During
2008,
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we recorded impairment charges of $112.0 million, of which $108.5 million related to our
investments and $3.5 million related to Carolina Oak’s inventory of real estate, compared to
impairment charges of $226.9
million related to Levitt and Sons’ inventory of real estate recorded during 2007 in
cost of sales. Levitt and Sons incurred a net loss of $231.4 million for the year ended December
31, 2007, which represented 98.6% of our consolidated net loss for that period. As previously
disclosed, we deconsolidated Levitt and Sons as of November 9, 2007. Excluding the results of
Levitt and Sons, the net loss increased by $135.0 million for the year ended December 31, 2008,
primarily due to impairment charges recorded in 2008 relating to our investments in Bluegreen,
Office Depot and unconsolidated trusts, and impairment charges relating to Carolina Oak’s inventory
of real estate. No impairment charges related to these items were recorded in 2007. In addition,
our total revenues decreased in both the Land Division and Other Operations segment during 2008 as
sales of real estate decreased reflecting a further deterioration of the real estate markets,
interest expense increased because less assets qualified for interest capitalization, our earnings
from Bluegreen decreased as Bluegreen’s net income decreased in 2008 compared to 2007 and the
benefit for income taxes decreased as our effective tax rate for 2008 was 0.0% compared to 8.6% in
2007.
Revenues from sales of real estate decreased to $13.8 million for the year ended December 31,
2008 from $410.1 million for the year ended December 31, 2007. This decrease was primarily
attributable to the deconsolidation of Levitt and Sons at November 9, 2007 as well as a decrease in
sales of real estate in the Land Division and Other Operations. Levitt and Sons’ revenues from
sales of real estate amounted to $387.7 million in 2007. Revenues from sales of real estate for the
year ended December 31, 2008 in the Land Division decreased to $11.3 million, from $16.6 million in
2007 reflecting the sale of approximately 35 acres in 2008 compared to 40 acres in 2007. In Other
Operations, revenues from sales of real estate for the year ended December 31, 2008 were $2.5
million reflecting the delivery of 8 units in Carolina Oak, compared to revenues from sales of real
estate of $6.6 million in Levitt Commercial reflecting the delivery of 17 units in 2007.
Other revenues increased $1.2 million to $11.7 million for the year ended December 31, 2008,
compared to $10.5 million during the year ended December 31, 2007. Other revenues increased
primarily as a result of higher leasing revenues due to the opening of the Landing at Tradition
retail power center in late 2007. The increase was offset in part by decreased title and mortgage
operations revenues associated with Levitt and Sons as it was not included in the consolidated
results of operations for the year ended December 31, 2008. In addition, there was decreased
marketing income associated with Tradition, Florida.
Cost of sales of real estate decreased to $12.7 million during the year ended December 31,
2008, as compared to $20.7 million (excluding cost of sales, which included impairment provisions,
associated with Levitt and Sons) for the year ended December 31, 2007 as sales of real estate
decreased in the Land Division and Other Operations. Cost of sales of real estate in the Land
Division decreased as we sold approximately 35 acres in the year ended December 31, 2008, compared
to approximately 40 acres in 2007. In Other Operations, we delivered 8 units in Carolina Oak in the
year ended December 31, 2008, compared to the delivery of 17 units in Levitt Commercial in 2007. In
addition, we recorded $3.5 million of impairment charges related to Carolina Oak’s inventory of
real estate in 2008, compared to $9.3 million in impairment charges related to capitalized interest
in Other Operations recorded in 2007.
Selling, general and administrative expenses decreased $67.2 million to $50.8 million during
the year ended December 31, 2008 compared to $117.9 million during the year ended December 31,
2007. This decrease was primarily related to the deconsolidation of Levitt and Sons at November 9,
2007. Selling, general and administrative expenses attributable to Levitt and Sons in the year
ended December 31, 2007 were $66.6 million. Consolidated selling, general and administrative
expenses, excluding those attributable to Levitt and Sons, remained relatively unchanged in 2008
compared to 2007 totaling $50.8 million in the year ended December 31, 2008, and $51.3 million in
2007. We incurred higher property management expenses related to our commercial leasing activities,
higher property tax expense due to less acreage in active development and higher expenses related
to the support of community and commercial associations in our master-planned communities in the
Land Division as well as higher other administrative expenses associated with marketing activities
in South Carolina in 2008 compared to 2007. In addition, depreciation expenses were higher in 2008
mainly as a result of a depreciation recapture related to the reclassification of discontinued
operations, and insurance costs were higher due to the absorption of certain of Levitt and Sons’
insurance costs. The above increases were offset by lower office related expenses, decreased
severance charges and decreased employee compensation, benefits and incentives expense reflecting a
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lower associate headcount in the year ended December 31, 2008 compared to 2007 as a result of staff
reductions. The number of employees decreased to 84 employees at December 31, 2008 from 125
employees at December 31, 2007.
Interest expense consists of interest incurred minus interest capitalized. Interest incurred
for the years ended December 31, 2008 and 2007 totaled $22.4 million and $50.8 million,
respectively, while interest capitalized totaled $11.5 million for the year ended December 31, 2008
compared to $47.0 million in 2007. Interest expense for the year ended December 31, 2008 was $10.9
million compared to $3.8 million in 2007. The increase in interest expense was due to the
completion of certain phases of development associated with our real estate inventory late in 2007,
which resulted in a decreased amount of assets which qualified for interest capitalization and,
therefore, the expensing of the related interest was only recorded in the fourth quarter of 2007
compared to the full year of 2008. Interest incurred was lower mainly due to decreases in the
average interest rates on our debt and lower outstanding balances of notes and mortgage notes
payable primarily due to the deconsolidation of Levitt and Sons at November 9, 2007. At the time
of land or home sales, the capitalized interest allocated to inventory is charged to cost of sales.
Cost of sales of real estate for the years ended December 31, 2008 and 2007 included previously
capitalized interest of approximately $326,000 and $17.9 million, respectively.
We did not incur other expenses in the year ended December 31, 2008, compared to $3.9 million
in 2007, which consisted of a surety bond accrual, a write-off of leasehold improvements and title
and mortgage operations expense. Due to the cessation of most development activity at Levitt and
Sons’ projects, we evaluated Woodbridge’s exposure on the surety bonds and letters of credit
supporting any Levitt and Sons projects based on indemnities Woodbridge provided to the bond
holders and recorded $1.8 million in surety bonds accrual related to certain bonds where management
considered it probable that reimbursement of the surety under the applicable indemnity agreement
would be required. In addition to the surety bond accrual, the Other Operations segment also
recorded a write-off of leasehold improvements. As part of reductions in workforce, we vacated
certain leased space. Leasehold improvements in the amount of $564,000 related to the vacated
space will not be recovered and were written-off in the year ended December 31, 2007. In addition,
title and mortgage operations expense related to Levitt and Sons was $1.5 million.
Bluegreen reported a net loss for the year ended December 31, 2008 of $516,000, compared to
net income of $31.9 million in 2007. For the year ended December 31, 2008, our interest in
Bluegreen’s earnings was $9.0 million (after the amortization of approximately $9.2 million related
to the change in the basis as a result of the impairment charge on this investment at September 30,
2008), compared to $10.3 million in 2007. We review our investment in Bluegreen for impairment on a
quarterly basis or as events or circumstances warrant for other-than-temporary declines in value.
Based on the evaluations performed, we recorded an other-than-temporary impairment charge of $53.6
million at September 30, 2008 and an additional other-than-temporary impairment charge of $40.8
million at December 31, 2008. See (Note 10) to our audited consolidated financial statements
included in Item 8 for further details of the impairment analysis of our investment in Bluegreen.
Interest and other income decreased to $8.0 million in the year ended December 31, 2008, from
$11.3 million in 2007. This decrease was related to a $5.8 million decrease in forfeited deposits
in 2008 due to the deconsolidation of Levitt and Sons at November 9, 2007. The decrease was
partially offset by a $2.5 million gain on sale of property and equipment and a $1.2 million gain
on sale of equity securities during 2008.
We had an effective tax rate of 0.0% in the year ended December 31, 2008 compared to 8.6% in
the year ended December 31, 2007. The decrease in the effective tax rate is a result of recording a
valuation allowance for those deferred tax assets that are not expected to be recovered in the
future. Due to large taxable losses in 2007 and 2008 and expected taxable losses in the foreseeable
future, we may not have sufficient taxable income of the appropriate character in the future and
prior carryback years to realize any portion of the net deferred tax asset. At December 31, 2008,
we had $155.6 million in gross deferred tax assets. After consideration of $2.3 million of
deferred tax liabilities, a valuation allowance of $154.1 million was recorded. The increase in
the valuation allowance from December 31, 2007 is $75.5 million. See Item 1. “Business — Recent
Developments” for a description of the shareholder rights plan we adopted
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during September 2008
which is aimed at preserving our ability to use our net operating loss carryforwards to offset
future taxable income.
For the Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
We had a consolidated net loss of $234.6 million for the year ended December 31, 2007 as
compared to a net loss of $9.2 million for the year ended December 31, 2006. The significant loss
in the
year ended December 31, 2007 was the result of $226.9 million of impairment charges recorded
relating to inventory of real estate of which $217.6 million was recorded in the Homebuilding
Division and $9.3 million was recorded in the Other Operations segment related to capitalized
interest. This compares to $36.8 million of impairment charges recorded in the year ended December
31, 2006. In addition, there were decreased sales of real estate and margins on sales of real
estate by all segments, and higher selling, general and administrative expenses in the Other
Operations segment and our Land Division. Interest expense was $3.8 million for the year ended
December 31, 2007 while there was no interest expense in 2006. These increased expenses and lower
sales of real estate were slightly offset by higher interest and other income as a result of higher
interest income and forfeited deposits, and an increase in other revenues related to increased
commercial lease activity generating higher rental revenues.
Revenues from sales of real estate decreased to $410.1 million for the year ended December 31,
2007 from $566.1 million for the year ended December 31, 2006. This decrease was attributable to
fewer homes delivered in the Homebuilding Division, and fewer sales in both Other Operations and
the Land Division. The Homebuilding Division had lower revenue despite the average sales price of
units delivered increasing to $321,000 in 2007 compared to $302,000 in the same period in 2006 due
to the number of deliveries decreasing to 1,144 homes as compared to 1,660 homes during the same
period in 2006. In Other Operations, Levitt Commercial delivered 17 units during the year ended
December 31, 2007 recording $6.6 million in revenues compared to 29 units during the year ended
December 31, 2006 and $11.0 million in revenues. The Land Division sold approximately 40 acres in
the year ended December 31, 2007 as compared to 371 acres in 2006. These decreases were slightly
offset by an increase in land sales recorded by the Homebuilding Division which totaled $20.1
million for the year ended December 31, 2007 while there were no comparable sales in 2006.
Other revenues increased $1.2 million to $10.5 million for the year ended December 31, 2007,
from $9.2 million during the year ended December 31, 2006, due to increased commercial lease
activity generating higher rental revenues, offset in part by lower title and mortgage operations
revenues due to fewer closings.
Cost of sales of real estate increased $90.3 million to $573.2 million during the year ended
December 31, 2007, as compared to $483.0 million for the year ended December 31, 2006. The
increase in cost of sales was due to increased impairment charges in an aggregate amount of $226.9
million recorded in 2007 compared to $36.8 million recorded in 2006. In addition, included in cost
of sales was approximately $18.8 million associated with sales by both segments of the Homebuilding
Division of land that management decided not to develop further, while there were no similar sales
or costs in 2006. These increases were offset by lower cost of sales due to fewer land sales
recorded by the Land Division and the Other Operations segment and fewer units delivered by both
segments of the Homebuilding Division.
Consolidated margin percentage declined during the year ended December 31, 2007 to a negative
margin of 39.8% compared to a margin of 14.7% in the year ended December 31, 2006 primarily related
to the impairment charges recorded in the Homebuilding Division and Other Operations segment.
Consolidated gross margin excluding impairment charges was 15.5% in the year ended December 31,
2007 compared to a gross margin of 21.2% in 2006. The decline was associated with significant
discounts offered in 2007 in an attempt to reduce cancellations and encourage buyers to close,
aggressive pricing discounts on “spec units” and a lower margin being earned on land sales.
Selling, general and administrative expenses decreased $3.2 million to $117.9 million during
the year ended December 31, 2007 compared to $121.2 million during the year ended December 31, 2006
primarily as a result of decreased employee compensation and benefits and other general and
administrative charges in the Homebuilding Division and Other Operations as a result of the
multiple reductions in force that occurred in 2007. In addition, annual incentive compensation
recorded in 2007 was significantly less
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throughout all segments of the business compared to the
year ended December 31, 2006 due to the significant reductions in force in the Homebuilding
Division and significant operating losses in 2007. In addition, Levitt and Sons was
deconsolidated as of November 9, 2007 and the selling, general and administrative expenses of
Levitt and Sons were reflected through November 9, 2007 compared to a full year of selling, general
and administrative expenses in 2006. These decreases were slightly offset by increased selling,
general and administrative expenses in the Land Division segment related to operating costs
associated with the commercial leasing business and increasing activity in the master-planned
community in Tradition Hilton Head and restructuring related expenses recorded in Other Operations
and the Homebuilding Division in the amount of $7.4 million which included severance related
expenses,
facilities expenses, and independent contractor expenses. As a percentage of total revenues,
selling, general and administrative expenses increased to 28.0% during the year ended December 31,
2007, from 21.1% during 2006 as a result of decreased revenues.
Interest incurred totaled $50.8 million and $42.0 million for the years ended December 31,
2007 and 2006, respectively. While all interest was capitalized in the year ended December 31,
2006, only $47.0 million was capitalized in 2007. This resulted in interest expense of $3.8 million
in the year ended December 31, 2007, compared to no interest expense in the same period in 2006.
The increase in interest expense was due to the completion of certain phases of development
associated with our real estate inventory, which resulted in a decreased amount of assets which
qualified for interest capitalization in 2007 compared to 2006. Interest incurred was higher due
to higher average debt balances for the year ended December 31, 2007 as compared to the same period
in 2006, as well as increases in the average interest rate on our variable-rate debt. At the time
of home closings and land sales, the capitalized interest allocated to such inventory is charged to
cost of sales. Cost of sales of real estate for the years ended December 31, 2007 and 2006 included
previously capitalized interest of approximately $17.9 million and $15.4 million, respectively.
Other expenses increased slightly to $3.9 million during the year ended December 31, 2007 from
$3.7 million in 2006. In the year ended December 31, 2007, we recorded a surety bond accrual of
$1.8 million that did not exist in 2006. In addition to the surety bond accrual, the Other
Operations segment also recorded a write-off of leasehold improvements which did not exist in 2006.
As part of the reductions in force discussed above and the Chapter 11 Cases, we vacated certain
leased space. Leasehold improvements in the amount of $564,000 related to the vacated space will
not be recovered and were written-off in the year ended December 31, 2007. These increases were
offset as we did not record a write-down of goodwill in 2007, compared to the write-down of
goodwill in 2006 of approximately $1.3 million associated with the Tennessee Homebuilding segment.
In addition, title and mortgage expense decreased due to the decrease in closings.
Bluegreen reported net income for the year ended December 31, 2007 of $31.9 million, as
compared to net income of $29.8 million in 2006. In the first quarter of 2006, Bluegreen adopted
SOP 04-02 and recorded a one-time, non-cash, cumulative effect of change in accounting principle
charge of $4.5 million, which contributed to the slight increase in 2007. Our interest in
Bluegreen’s income was $10.3 million for the year ended December 31, 2007 compared to $9.7 million
in 2006.
Interest and other income increased from $7.8 million during the year ending December 31, 2006
to $11.3 million during the same period in 2007. The increase was due to higher forfeited deposits
on cancelled contracts in our Homebuilding Division as well as higher interest income due to the
investment of the proceeds from the Rights Offering.
The benefit for income taxes had an effective rate of 8.6% in the year ended December 31, 2007
compared to 38.6% in the year ended December 31, 2006. The decrease in the effective tax rate was
the result of recording a valuation allowance in the year ended December 31, 2007 for those
deferred tax assets that are not expected to be recovered in the future. At December 31, 2007, we
had $102.6 million in gross deferred tax assets. After consideration of $24.0 million of deferred
tax liabilities and the ability to carryback losses, a valuation allowance of $78.6 million was
recorded. The increase in the valuation allowance from December 31, 2006 was $78.1 million.
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Land Division Results of Operations
| 2008 | 2007 | |||||||||||||||||||
| Year Ended December 31, | vs. 2007 | vs. 2006 | ||||||||||||||||||
| 2008 | 2007 | 2006 | Change | Change | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
Revenues |
||||||||||||||||||||
Sales of real estate |
$ | 11,268 | 16,567 | 69,778 | (5,299 | ) | (53,211 | ) | ||||||||||||
Other revenues |
10,592 | 7,585 | 3,816 | 3,007 | 3,769 | |||||||||||||||
Total revenues |
21,860 | 24,152 | 73,594 | (2,292 | ) | (49,442 | ) | |||||||||||||
Costs and expenses |
||||||||||||||||||||
Cost of sales of real estate |
6,632 | 7,447 | 42,662 | (815 | ) | (35,215 | ) | |||||||||||||
Selling, general and administrative expenses |
24,608 | 19,077 | 15,119 | 5,531 | 3,958 | |||||||||||||||
Interest expense |
3,637 | 2,629 | — | 1,008 | 2,629 | |||||||||||||||
Total costs and expenses |
34,877 | 29,153 | 57,781 | 5,724 | (28,628 | ) | ||||||||||||||
Interest and other income |
5,685 | 4,489 | 2,650 | 1,196 | 1,839 | |||||||||||||||
(Loss) income before income taxes |
(7,332 | ) | (512 | ) | 18,463 | (6,820 | ) | (18,975 | ) | |||||||||||
Provision for income taxes |
— | (5,910 | ) | (6,936 | ) | 5,910 | 1,026 | |||||||||||||
Net (loss) income |
$ | (7,332 | ) | (6,422 | ) | 11,527 | (910 | ) | (17,949 | ) | ||||||||||
Operational data: |
||||||||||||||||||||
Acres sold (a) |
40 | 40 | 371 | — | (331 | ) | ||||||||||||||
Margin percentage (b) |
41.1 | % | 55.0 | % | 38.9 | % | (13.9 | )% | 16.1 | % | ||||||||||
Unsold saleable acres |
6,639 | 6,679 | 6,871 | (40 | ) | (192 | ) | |||||||||||||
Acres subject to sales contracts — Third
parties |
10 | 259 | 74 | (249 | ) | 185 | ||||||||||||||
Aggregate sales price of acres subject to
sales contracts to third parties |
$ | 1,050 | 77,888 | 21,124 | (76,838 | ) | 56,764 | |||||||||||||
| (a) | Includes 5 acres sold related to commercial projects. | |
| (b) | Margin percentage is calculated by dividing margin (sales of real estate minus cost of sales of real estate) by sales of real estate. Sales of real estate and margin percentage include lot sales, revenues from look back provisions and recognition of deferred revenue associated with sales in prior periods. |
Due to the nature and size of individual land transactions, our Land Division results are
subject to significant volatility. Although we have historically realized margins of between
approximately 40.0% and 60.0% on Land Division sales, margins on land sales are likely to be below
the historical range given the downturn in the real estate markets and the significant decrease in
demand in Florida. Margins will fluctuate based upon changing sales prices and costs attributable
to the land sold. In addition to the impact of economic and market factors, the sales price and
margin of land sold varies depending upon: the location; the parcel size; whether the parcel is
sold as raw land, partially developed land or individually developed lots; the degree to which the
land is entitled; and whether the designated use of the land is residential or commercial. The
cost of sales of real estate is dependent upon the original cost of the land acquired, the timing
of the acquisition of the land, the amount of land development and interest and real estate tax costs
capitalized to the particular land parcel during active development. Allocations to cost of sales
involve significant management judgment and include an estimate of future costs of development,
which can vary over time due to labor and material cost increases, master plan design changes and
regulatory modifications. Accordingly, allocations are subject to change based on factors which are
in many instances beyond management’s control. Future margins will continue to vary based on these
and other market factors. If conditions in the real estate markets do not improve or deteriorate
further, we may not be able to sell land at prices above our carrying cost or even in amounts
necessary to repay our indebtedness.
The number and sales value of acres subject to third party sales contracts decreased to 10
acres
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with a sales value of $1.1 million at December 31, 2008, compared with 259 acres with a sales
value of $77.9 million at December 31, 2007. While the backlog is not an exclusive indicator of
future sales
activity; it provides an indication of potential future sales activity. In addition,
contracts in the backlog are subject to cancellation.
For the Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007
Revenues from sales of real estate decreased to $11.3 million during the year ended December
31, 2008, compared to $16.6 million in 2007. Sales of real estate in Tradition, Florida for the
year ended December 31, 2008 consisted of the sale of 31 acres generating revenues of $8.0 million,
net of deferred revenue, as compared to the sale of 37 acres generating revenues of $12.7 million,
net of deferred revenue, in 2007. In addition, in the year ended December 31, 2008, we sold 11
lots encompassing approximately 4 acres in Tradition Hilton Head, recognizing revenues of $1.1
million, net of deferred revenue, compared to the sale of 9 residential lots encompassing
approximately 3 acres, recognizing revenues of $1.1 million, net of deferred revenue, in 2007. In
addition, revenues for the year ended December 31, 2008 included “look back” revenue of $145,000
compared to $1.5 million in the year ended December 31, 2007. “Look back” revenue relates to
incremental revenue received from homebuilders based on the final resale price to the homebuilder’s
customer. We also recognized deferred revenue on previously sold bulk land and residential lots
totaling approximately $1.9 million for the year ended December 31, 2008, compared to recognition
of deferred revenue of approximately $1.3 million in 2007. These amounts included approximately
$159,000 and $733,000 in 2008 and 2007, respectively, of intercompany sales in prior periods and
were eliminated in consolidation.
Other revenues increased approximately $3.0 to $10.6 million for the year ended December 31,
2008, compared to $7.6 million during 2007. The increase was primarily the result of higher leasing
revenues associated with the opening of the Landing at Tradition retail power center in late 2007.
This increase was offset in part by decreased marketing income associated with Tradition, Florida.
Cost of sales decreased $815,000 to $6.6 million during the year ended December 31, 2008, as
compared to $7.4 million in 2007 due to the decrease in sales of real estate. Costs of sales for
the year ended December 31, 2008 represents the costs associated with the sale of approximately 35
acres of land compared to the costs associated with the sale of approximately 40 acres in 2007.
Margin percentage decreased to 41.1% in the year ended December 31, 2008 from 55.0% in the
year ended December 31, 2007. The decrease in margin is attributable to a decrease in the average
sales price per acre and less “lookback revenue” recognized in 2008 compared to 2007. “Lookback
revenue” margin percentage is 100% because the associated costs were fully expensed at the time of
closing.
Selling, general and administrative expenses increased to $24.6 million during the year ended
December 31, 2008 compared to $19.1 million in 2007. The increase was primarily due to higher
other administrative expenses associated with increased marketing activities in Tradition Hilton
Head, higher repairs and maintenance expenses related to damages from tropical storms and higher
depreciation expense associated with the South Carolina irrigation facility placed in service in
2008 and a depreciation recapture as a result of the reclassification of discontinued operations.
Additionally, we incurred higher property management expenses related to our commercial leasing
activities, higher compensation and benefits expenses, higher expenses associated with our support
of the community and commercial associations in our master-planned communities and higher property
tax expense due to the completion of certain projects in the year ended December 31, 2008 compared
to 2007. These increases were offset in part by a decrease in incentives and commissions expense.
Interest incurred for the years ended December 31, 2008 and 2007 was $12.0 million and $14.4
million, respectively, while interest capitalized totaled $8.3 million for the year ended December
31, 2008 compared to $11.8 million during 2007. This resulted in interest expense of $3.6 million
in the year ended December 31, 2008, compared to $2.6 million in 2007. The interest expense in the
year ended December 31, 2008 of approximately $3.6 million mainly related to $1.1 million of
interest expense associated with an intercompany loan with the Parent Company from funds borrowed
by Core and approximately $2.5 million due to the completion of certain phases of development
associated with our real estate inventory which resulted in a decreased amount of assets which
qualified for interest capitalization. The interest
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expense in the year ended December 31, 2007 of
approximately $2.6 million was attributable to the intercompany loan mentioned above. The
capitalization of this interest occurred at the Parent Company level and all intercompany interest
expense and income was eliminated in consolidation. Interest incurred was lower in 2008 due to
decreases in the average interest rates on our notes and mortgage notes payable,
partly offset by higher average debt balances for the year ended December 31, 2008 compared to
2007. At the time of land sales, the capitalized interest allocated to such inventory is charged
to cost of sales. Cost of sales of real estate for the years ended December 31, 2008 and 2007
included previously capitalized interest of approximately $84,000 and $66,000, respectively.
Interest and other income increased to $5.7 million in the year ended December 31, 2008, from
$4.5 million in the year ended December 31, 2007. Interest and other income increased primarily
due to a $2.5 million gain on sale of property and equipment and higher forfeited deposits in 2008
compared to 2007. The increase was partially offset by lower intercompany interest income related
to the intercompany loan mentioned above.
For the Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
Revenues from sales of real estate decreased to $16.6 million during the year ended December
31, 2007, compared to $69.8 million in 2006. Sales of real estate in Tradition, Florida for the
year ended December 31, 2007 consisted of the sale of 37 acres generating revenues of $12.7
million, net of deferred revenue, as compared to the sale of 208 acres generating revenues of
$51.2 million in 2006. In 2007, demand for residential land in Tradition, Florida slowed
dramatically. In addition, in the year ended December 31, 2007, we sold 9 residential lots
encompassing approximately 3 acres in Tradition Hilton Head generating revenues of $1.1 million,
net of deferred revenue, compared to sales to third parties in Tradition Hilton Head encompassing
10 acres generating revenues of $4.7 million in the year ended December 31, 2006 and an additional
150 acres transferred to Carolina Oak which was eliminated in consolidation. In addition,
revenues for the year ended December 31, 2007 included “look back” revenues of $1.5 million
compared to $870,000 in the year ended December 31, 2006. We also recognized deferred revenue on
previously sold bulk land and residential lots totaling approximately $1.3 million for the year
ended December 31, 2007, of which $733,000 related to sales to affiliated segments and was
eliminated in consolidation. There was no similar activity for the year ended December 31, 2006.
Other revenues increased approximately $3.8 million to $7.6 million for the year ended
December 31, 2007, compared to $3.8 million during 2006. This was due to increased revenues
related to irrigation services provided to homebuilders, commercial users and the residents of
Tradition, Florida, marketing income associated with Tradition, Florida, and leasing revenues
associated with our commercial leasing business.
Cost of sales decreased $35.2 million to $7.4 million during the year ended December 31, 2007,
as compared to $42.7 million for the same period in 2006 due to the decrease in sales of real
estate.
Margin percentage increased to 55.0% in the year ended December 31, 2007 from 38.9% in the
year ended December 31, 2006. The increase in margin was primarily due to increased commercial
sales in 2007 which generated a higher margin and 100% margin
percentage being realized on “lookback” revenue
because the associated costs were fully expensed at the time of closing.
Selling, general and administrative expenses increased to $19.1 million during the year ended
December 31, 2007 compared to $15.1 million in the same period in 2006. The increase was the
result of higher employee compensation and benefits, increased operating costs associated with the
commercial leasing business and increased other general and administrative costs. The number of
full time employees increased to 67 at December 31, 2007, from 59 at December 31, 2006, as
additional personnel were added to support development activity in Tradition Hilton Head. General
and administrative costs increased due to increased expenses associated with our commercial leasing
activities, increased legal expenditures, increased insurance costs and increased marketing and
advertising expenditures designed to attract buyers in Florida and establish a market presence in
South Carolina.
Interest incurred for the years ended December 31, 2007 and 2006 was $14.4 million and $6.7
million, respectively. Interest capitalized totaled $11.8 million for the year ended December 31, 2007
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compared to $6.7 million during 2006. The interest expense in the year ended December 31,
2007 of approximately $2.6 million was attributable to funds borrowed by Core Communities but then
loaned to Woodbridge. The capitalization of this interest occurred at the consolidated level and
all intercompany interest expense and income was eliminated on a consolidated basis. As noted
above, interest incurred was higher due to higher outstanding balances of notes and mortgage notes
payable and an increase in the average interest rate on variable-rate debt. At the time of land
sales, the capitalized interest allocated to
such inventory is charged to cost of sales. Cost of sales of real estate for the years ended
December 31, 2007 and 2006 included previously capitalized interest of approximately $66,000 and
$443,000, respectively.
Interest and other income increased from $2.7 million during the year ending December 31,
2006, to $4.5 million during 2007. Interest and other income increased primarily due to higher
intercompany interest income associated with the aforementioned intercompany loan to Woodbridge
which was eliminated in consolidation. The increase was partially offset by a gain on sale of fixed
assets which totaled $1.3 million in the year ended December 31, 2006 compared to $20,000 in 2007.
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Other Operations Results of Operations
| 2008 | 2007 | |||||||||||||||||||
| Year Ended December 31, | Vs. 2007 | Vs. 2006 | ||||||||||||||||||
| 2008 | 2007 | 2006 | Change | Change | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
Revenues |
||||||||||||||||||||
Sales of real estate |
$ | 2,484 | 6,574 | 11,041 | (4,090 | ) | (4,467 | ) | ||||||||||||
Other revenues |
1,109 | 952 | 1,435 | 157 | (483 | ) | ||||||||||||||
Total revenues |
3,593 | 7,526 | 12,476 | (3,933 | ) | (4,950 | ) | |||||||||||||
Costs and expenses |
||||||||||||||||||||
Cost of sales of real estate |
16,151 | 16,793 | 11,649 | (642 | ) | 5,144 | ||||||||||||||
Selling, general and administrative expenses |
26,717 | 32,508 | 28,174 | (5,791 | ) | 4,334 | ||||||||||||||
Interest expense |
8,315 | 1,073 | — | 7,242 | 1,073 | |||||||||||||||
Other expenses |
— | 2,390 | 8 | (2,390 | ) | 2,382 | ||||||||||||||
Total costs and expenses |
51,183 | 52,764 | 39,831 | (1,581 | ) | 12,933 | ||||||||||||||
Earnings from Bluegreen Corporation |
8,996 | 10,275 | 9,684 | (1,279 | ) | 591 | ||||||||||||||
Impairment
of investment in Bluegreen Corporation |
(94,426 | ) | — | — | (94,426 | ) | — | |||||||||||||
Impairment
of other investments |
(14,120 | ) | — | — | (14,120 | ) | — | |||||||||||||
Interest and other income |
4,001 | 7,367 | 4,059 | (3,366 | ) | 3,308 | ||||||||||||||
Loss before income taxes |
(143,139 | ) | (27,596 | ) | (13,612 | ) | (115,543 | ) | (13,984 | ) | ||||||||||
Benefit for income taxes |
— | 34,297 | 5,639 | (34,297 | ) | 28,658 | ||||||||||||||
Net (loss) income |
$ | (143,139 | ) | 6,701 | (7,973 | ) | (149,840 | ) | 14,674 | |||||||||||
Our Other Operations segment includes the operations of the Parent Company, Carolina Oak, and
Pizza Fusion, other activities through Cypress Creek Capital and Snapper Creek, an equity
investment in Bluegreen and an investment in Office Depot. We currently own approximately 9.5
million shares of the common stock of Bluegreen, which represents approximately 31% of Bluegreen’s
outstanding shares as of December 31, 2008. Under equity method accounting, we recognize our
pro-rata share of Bluegreen’s net income (net of purchase accounting adjustments) as pre-tax
earnings. Bluegreen has not paid dividends to its shareholders; therefore, our earnings represent
only our claim to the future distributions of Bluegreen’s earnings. Accordingly, we record a tax
liability on our portion of Bluegreen’s net income. Our earnings in Bluegreen increase or decrease
concurrently with Bluegreen’s reported results. Furthermore, a significant reduction in Bluegreen’s
financial position could potentially result in additional impairment charges on our investment
against our future results of operations. For a complete discussion of Bluegreen’s results of
operations and financial position, we refer you to the financial statements of Bluegreen which are
filed as Exhibit 99.1 to this Form 10-K.
For the Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007
Sales of real estate in the year ended December 31, 2008 were $2.5 million reflecting the
delivery of 8 units in Carolina Oak, compared to sales of real estate of $6.6 million in 2007
reflecting the delivery of 17 units at Levitt Commercial. There were no units in backlog at
December 31, 2008 or December 31, 2007. Levitt Commercial completed the sale of all remaining flex
warehouse units in inventory in 2007 and ceased development activities thereafter.
Other revenues in the year ended December 31, 2008 were $1.1 million compared to $952,000 in
2007. The increase was due to an increase in leasing revenues.
Cost of sales of real estate in the year ended December 31, 2008 was $16.2 million compared to
$16.8 million in 2007. Cost of sales of real estate for the year ended December 31, 2008 related to
the delivery of 8 units in Carolina Oak and a $3.5 million impairment charge related to Carolina
Oak’s inventory of real estate while cost of sales of real estate in 2007 was comprised of the cost
of sales of the 17 units delivered in Levitt Commercial, the expensing of interest previously
capitalized and capitalized
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interest impairment charges related to the cessation of development on
certain Levitt and Sons’ projects.
Bluegreen reported a net loss for the year ended December 31, 2008 of $516,000, as compared to
net income of $31.9 million in 2007. For the year ended December 31, 2008, our interest in
Bluegreen’s income was $9.0 million (after the amortization of approximately $9.2 million related
to the change in the basis as a result of the impairment charge at September 30, 2008), compared to
$10.3 million in 2007. We review our investment in Bluegreen for impairment on a quarterly basis or
as events or circumstances warrant for other-than-temporary declines in value. Based on the
evaluations performed, we recorded an other-than-temporary impairment charge of $53.6 million at
September 30, 2008 and an additional other-than-temporary impairment charge of $40.8 million at
December 31, 2008. See (Note 10) to our audited consolidated financial statements included in Item
8 for further details of the impairment analysis of our investment in Bluegreen.
Selling, general and administrative expenses decreased $5.8 million to $26.7 million during
the year ended December 31, 2008 compared to $32.5 million in 2007. The decrease was attributable
to decreased compensation and benefits expenses, decreased office related expenses and decreased
severance charges related to the reductions in workforce associated with the bankruptcy filing of
Levitt and Sons. The decrease in compensation, benefits and office related expenses is attributable
to decreased headcount, as the number of employees decreased from 47 at December 31, 2007 to 29 at
December 31, 2008. These decreases were offset in part by increases in professional fees
associated with our investments and the bankruptcy filing of Levitt and Sons, and increased
insurance costs due to the absorption of certain of Levitt and Sons’ insurance costs.
Interest incurred was approximately $11.5 million and $10.8 million for the years ended
December 31, 2008 and 2007, respectively, while interest capitalized totaled $3.2 million for the
year ended December 31, 2008 compared to $9.8 million during 2007. This resulted in interest
expense of $8.3 million in the year ended December 31, 2008, compared to $1.1 million in 2007. The
increase in interest expense was due to the completion of certain phases of development associated
with our real estate inventory late in 2007, which resulted in a decreased amount of assets which
qualified for interest capitalization and, therefore, the expensing of the related interest was
only recorded in the fourth quarter of 2007 compared to the full year of 2008. The increase in
interest incurred was attributable to higher average debt balances for the year ended December 31,
2008 compared to 2007, offset in part by lower average interest rates. Cost of sales of real estate
in the year ended December 31, 2008 included previously capitalized interest of approximately
$242,000, which primarily related to the delivery of 8 units in Carolina Oak, compared to
approximately $250,000 in 2007 related to the delivery of 17 units in Levitt Commercial.
We did not incur other expenses in the year ended December 31, 2008. Other expenses for the
year ended December 31, 2007 were $2.4 million and consisted of a surety bonds accrual and a
write-off of leasehold improvements. In 2007, we recorded $1.8 million in surety bonds accrual
related to certain bonds where management considered it probable that reimbursement of the surety
under the applicable indemnity agreement would be required. In addition to the surety bond accrual,
we also recorded a write-off of leasehold improvements as we vacated certain leased space as part
of our workforce reductions and the Levitt and Sons bankruptcy. Leasehold improvements in the
amount of $564,000 related to this vacated space will not be recovered and were written off in the
year ended December 31, 2007.
Interest and other income was approximately $4.0 million for the year ended December 31, 2008
compared to $7.4 million in 2007. This decrease was primarily the result of our realization of
interest income related to intersegment loans to the Primary and Tennessee Homebuilding segments in
the year ended December 31, 2007 which was eliminated in consolidation, whereas no comparable
interest income was realized during 2008.
For the Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
Revenue from sales of real estate was $6.6 million in the year ended December 31, 2007
compared to $11.0 million in the year ended December 31, 2006. Levitt Commercial delivered 17
flex warehouse units in 2007 while 29 units were delivered during 2006. Levitt Commercial
completed the sale of all flex warehouse units in inventory in 2007.
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Other revenues decreased to $952,000 in the year ended December 31, 2007 from $1.4 million in
2006 due to the reduction in leasing revenue received from a sub-tenant in one office building.
Cost of sales of real estate increased to $16.8 million during the year ended December 31,
2007, as compared to $11.6 million during the year ended December 31, 2006 due to an increase of
$9.3 million in capitalized interest impairment charges. This increase was offset in part by a
decrease of $3.8 million in cost of sales related to fewer deliveries of commercial warehouse
units, as we delivered 12 fewer flex warehouse units in the year ended December 31, 2007 as
compared to 2006. In addition, interest in Other Operations is amortized to cost of sales in
accordance with the relief rate used in the Company’s operating segments, and due to the lower
sales in 2007, the operating segments experienced decreased interest amortization which resulted in
less amortization by the Other Operations segment.
Bluegreen reported net income for the year ended December 31, 2007 of $31.9 million, as
compared to net income of $29.8 million in 2006. In the first quarter of 2006, Bluegreen adopted
SOP 04-02 and recorded a one-time, non-cash, cumulative effect of change in accounting principle
charge of $4.5 million, which contributed to the slight increase in 2007. Our interest in
Bluegreen’s income was $10.3 million for the year ended December 31, 2007 compared to $9.7 million
in 2006.
Selling, general and administrative expenses increased $4.3 million to $32.5 million during
the year ended December 31, 2007 compared to $28.2 million in 2006. The increase was attributable
to $5.1 million of restructuring related charges associated with Woodbridge and Levitt and Sons
employees. In the third and fourth quarters of 2007, substantially all of Levitt and Sons’
employees were terminated and 22 employees were terminated at Woodbridge primarily as a result of
the Chapter 11 Cases. Woodbridge recorded approximately $2.4 million in the year ended December 31,
2007 of severance benefits to terminated Levitt and Sons employees to supplement the limited
termination benefits which could be paid by Levitt and Sons to those employees. The restructuring
related expenses were slightly offset by lower stock based compensation and annual incentive
compensation expense as a result of the multiple reductions in force that occurred in 2007 and
significant operating losses in 2007. The decrease in non-cash stock based compensation expense
was attributable to the large number of employee terminations that occurred in 2007 which resulted
in a reversal of stock compensation amounts previously accrued. The reversal related to forfeited
options in connection with the terminations.
Interest incurred in Other Operations was approximately $10.8 million and $7.4 million for the
year ended December 31, 2007 and 2006, respectively. While all interest was capitalized in the year
ended December 31, 2006, $9.8 million was capitalized in 2007 due to a decreased level of
development associated with a portion of our real estate inventory which resulted in a decreased
amount of qualified assets for interest capitalization. The increase in interest incurred was
attributable to an increase in the average balance of our borrowings as a result of our issuance of
trust preferred securities during 2006, and the aforementioned funds borrowed by Core Communities
but then loaned to Woodbridge.
Other expenses increased to $2.4 million during the year ended December 31, 2007 from $8,000
in 2006. In the year ended December 31, 2007, we recorded a $1.8 million surety bond accrual that
did not exist in 2006. In addition to the surety bond accrual, the Other Operations segment also
recorded a write-off of leasehold improvements which also did not exist in 2006. As part of the
reductions in force discussed above and the Chapter 11 Cases, we vacated certain leased space.
Leasehold improvements in the amount of $564,000 related to this vacated space will not be
recovered and were written off in the year ended December 31, 2007.
Interest and other income was approximately $7.4 million for the year ended December 31, 2007
compared to $4.1 million in 2006. This increase was primarily the result of the Rights Offering we
completed in October 2007, the proceeds of which resulted in higher average cash balances at the
Parent Company in the year ended December 31, 2007 which generated higher interest income, as well
as interest income related to intersegment loans to the Primary and Tennessee Homebuilding segments
which were eliminated in consolidation.
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Primary Homebuilding Segment Results of Operations
| 2008 | 2007 | |||||||||||||||||||
| Year Ended December 31, | vs. 2007 | vs. 2006 | ||||||||||||||||||
| 2008 | 2007 | 2006 | Change | Change | ||||||||||||||||
| (Dollars in thousands, except average price data) | ||||||||||||||||||||
Revenues |
||||||||||||||||||||
Sales of real estate |
$ | — | 345,666 | 424,420 | (345,666 | ) | (78,754 | ) | ||||||||||||
Other revenues |
— | 2,243 | 4,070 | (2,243 | ) | (1,827 | ) | |||||||||||||
Total revenues |
— | 347,909 | 428,490 | (347,909 | ) | (80,581 | ) | |||||||||||||
Costs and expenses |
||||||||||||||||||||
Cost of sales of real estate |
— | 501,206 | 367,252 | (501,206 | ) | 133,954 | ||||||||||||||
Selling, general and administrative expenses |
— | 61,568 | 65,052 | (61,568 | ) | (3,484 | ) | |||||||||||||
Interest expense |
— | 7,258 | — | (7,258 | ) | 7,258 | ||||||||||||||
Other expenses |
— | 1,539 | 2,362 | (1,539 | ) | (823 | ) | |||||||||||||
Total costs and expenses |
— | 571,571 | 434,666 | (571,571 | ) | 136,905 | ||||||||||||||
Interest and other income |
— | 6,933 | 2,982 | (6,933 | ) | 3,951 | ||||||||||||||
(Loss) income before income taxes |
— | (216,729 | ) | (3,194 | ) | 216,729 | (213,535 | ) | ||||||||||||
Benefit (provision) for income taxes |
— | 1,396 | 1,508 | (1,396 | ) | (112 | ) | |||||||||||||
Net (loss) income |
$ | — | (215,333 | ) | (1,686 | ) | 215,333 | (213,647 | ) | |||||||||||
Operational data: |
||||||||||||||||||||
Homes delivered |
— | 998 | 1,320 | (998 | ) | (322 | ) | |||||||||||||
Construction starts |
— | 558 | 1,445 | (558 | ) | (887 | ) | |||||||||||||
Average selling price of homes delivered |
$ | — | 338,000 | 322,000 | (338,000 | ) | 16,000 | |||||||||||||
Margin percentage (a) |
— | (45.0 | )% | 13.5 | % | 45.0 | % | (58.5 | )% | |||||||||||
Gross sales contracts (units) |
— | 765 | 1,108 | (765 | ) | (343 | ) | |||||||||||||
Sales contracts cancellations (units) |
— | 382 | 261 | (382 | ) | 121 | ||||||||||||||
Net orders (units) |
— | 383 | 847 | (383 | ) | (464 | ) | |||||||||||||
Net orders (value) |
$ | — | 94,782 | 324,217 | (94,782 | ) | (229,435 | ) | ||||||||||||
Backlog of homes (units) |
— | — | 1,126 | — | (1,126 | ) | ||||||||||||||
Backlog of homes (value) |
$ | — | — | 411,578 | — | (411,578 | ) | |||||||||||||
| (a) | Margin percentage is calculated by dividing margin (sales of real estate minus cost of sales of real estate) by sales of real estate. |
As of November 9, 2007, the accounts of Levitt and Sons were deconsolidated from our
consolidated statements of financial condition and statements of operations. Therefore, the
financial data and comparative analysis in the table above reflected operations through November 9,
2007 in the Primary Homebuilding segment compared to full year results of operations in 2006, with
the exception of the results of Carolina Oak which were included in the above results for the full
year in 2007 since this subsidiary was not part of the Chapter 11 Cases. Carolina Oak’s results of
operations were immaterial to the segment, but were included in the Primary Homebuilding segment
because it was engaged in homebuilding activities and because the financial metrics from this
company were similar in nature to the other homebuilding projects within this segment that existed
in 2006 and 2007.
There are no results of operations or financial metrics included in the preceding table for
the year ended December 31, 2008 due to the deconsolidation of Levitt and Sons from our
consolidated financial statements at November 9, 2007. Therefore, a comparative analysis is not
included in this section. For further information regarding Levitt and Sons’ results of operations,
see (Note 24) to our audited consolidated financial statements included in Item 8.
Historically, the results of operations of Carolina Oak were included as part of the Primary
Homebuilding segment. The results of operations of Carolina Oak after January 1, 2008 are included
in the
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Other Operations segment as a result of the deconsolidation of Levitt and Sons at November 9,
2007, and the acquisition of Carolina Oak by Woodbridge.
For the Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
Revenues from sales of real estate decreased to $345.7 million during
the year ended December 31, 2007, from $424.4 million during 2006 despite the increase in average
sales price of deliveries from $322,000 in 2006 to $338,000 in 2007. During the year ended
December 31, 2007, 998 homes were delivered compared to 1,320 homes delivered during 2006. The
decrease in units delivered was partially offset by increased land sales. We recognized $8.0
million of revenue attributable to the sale of land that management decided not to develop further,
while there were no land sales in 2006.
Other revenues decreased $1.8 million to $2.2 million for the year ended December 31, 2007,
compared to $4.1 million during 2006. Other revenues in the Primary Homebuilding segment decreased
due to lower revenues from our title company due to fewer closings.
Cost of sales increased to $501.2 million during the year ended December 31, 2007, compared to
$367.3 million for 2006. The increase was primarily due to the increased impairment charges on
inventory of real estate and an increase in cost of sales associated with the land sale that
occurred in the year ended December 31, 2007 slightly offset by a decrease in cost of sales due to
a fewer number of deliveries. Impairment charges were $206.4 million in the year ended December
31, 2007 compared to $31.1 million in impairment charges in 2006.
Margin percentage (defined as sales of real estate minus cost of sales of real estate, divided
by sales of real estate) declined to a negative 45.0% in the year ended December 31, 2007 from
13.5% in the year ended December 31, 2006 mainly attributable to the impairment charges recorded in
the year ended December 31, 2007. Margin percentage excluding impairments declined from 20.8% in
the year ended December 31, 2006 to 14.7% during the year ended December 31, 2007. This decline
was primarily attributable to significant discounts offered in an effort to reduce cancellations
and to encourage buyers to close, and aggressive pricing discounts on spec units as well as lower
margin earned on the $8.0 million land sale mentioned above.
Selling, general and administrative expenses decreased to $61.6 million during the year
ended December 31, 2007, compared to $65.1 million in 2006 primarily as a result of lower employee
compensation and benefits expense and decreased office and administrative expenses as a result of
the multiple reductions in force that occurred in 2007. In addition, no annual incentive
compensation was recorded in 2007 for the Primary Homebuilding segment. In addition, Levitt and
Sons was deconsolidated as of November 9, 2007 and the selling, general and administrative expenses
of Levitt and Sons were reflected through November 9, 2007 compared to a full year of selling,
general and administrative expenses in 2006. These decreases were offset in part by increased
legal costs primarily related to the preparation of the Levitt and Sons bankruptcy filing. As a
percentage of total revenues, selling, general and administrative expense was approximately 17.7%
for the year ended December 31, 2007 compared to 15.2% in 2006.
Interest incurred totaled $31.2 million and $27.2 million for the years ended December 31,
2007 and 2006, respectively. While all interest was capitalized during the year ended December 31,
2006, $23.9 million in interest was capitalized during the year ended December 31, 2007 due to a
decreased level of development occurring in the projects in the Primary Homebuilding segment in
2007 which resulted in a decreased amount of qualified assets for interest capitalization.
Interest incurred increased as a result of higher average debt balances for the year ended December
31, 2007 as compared to 2006. At the time of home closings and land sales, the capitalized
interest allocated to such inventory was charged to cost of sales. Cost of sales of real estate
for the years ended December 31, 2007 and 2006 included previously capitalized interest of
approximately $14.1 million and $9.7 million, respectively.
Other
expenses decreased to $1.5 million during the year ended December 31, 2007 from $2.4
million in 2006 as a result of a decrease in title and mortgage expense. Title and mortgage
expense mostly relates to closing costs and title insurance costs for closings processed
internally. These costs were lower in 2007 due to the decrease in closings.
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Interest and other income increased from $3.0 million during the year ended December 31, 2006
to $6.9 million during 2007 mainly as a result of an increase in forfeited deposits of $3.5 million
resulting from increased cancellations of home sale contracts.
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Tennessee Homebuilding Segment Results of Operations
| 2008 | 2007 | |||||||||||||||||||
| Year Ended December 31, | vs. 2007 | vs. 2006 | ||||||||||||||||||
| 2008 | 2007 | 2006 | Change | Change | ||||||||||||||||
| (Dollars in thousands, except average price data) | ||||||||||||||||||||
Revenues |
||||||||||||||||||||
Sales of real estate |
$ | — | 42,042 | 76,299 | (42,042 | ) | (34,257 | ) | ||||||||||||
Total revenues |
— | 42,042 | 76,299 | (42,042 | ) | (34,257 | ) | |||||||||||||
Costs and expenses |
||||||||||||||||||||
Cost of sales of real estate |
— | 51,360 | 72,807 | (51,360 | ) | (21,447 | ) | |||||||||||||
Selling, general and administrative expenses |
— | 5,010 | 12,806 | (5,010 | ) | (7,796 | ) | |||||||||||||
Interest expense |
— | 151 | — | (151 | ) | 151 | ||||||||||||||
Other expenses |
— | — | 1,307 | — | (1,307 | ) | ||||||||||||||
Total costs and expenses |
— | 56,521 | 86,920 | (56,521 | ) | (30,399 | ) | |||||||||||||
Interest and other income |
— | 83 | 127 | (83 | ) | (44 | ) | |||||||||||||
(Loss) income before income taxes |
— | (14,396 | ) | (10,494 | ) | 14,396 | (3,902 | ) | ||||||||||||
(Provision) benefit for income taxes |
— | (1,700 | ) | 3,241 | 1,700 | (4,941 | ) | |||||||||||||
Net (loss) income |
$ | — | (16,096 | ) | (7,253 | ) | 16,096 | (8,843 | ) | |||||||||||
Operational data: |
||||||||||||||||||||
Homes delivered |
— | 146 | 340 | (146 | ) | (194 | ) | |||||||||||||
Construction starts |
— | 171 | 237 | (171 | ) | (66 | ) | |||||||||||||
Average selling price of homes delivered |
$ | — | 205,000 | 224,000 | (205,000 | ) | (19,000 | ) | ||||||||||||
Margin percentage (a) |
— | (22.2 | )% | 4.6 | % | 22.2 | % | (26.8 | )% | |||||||||||
Gross sales contracts (units) |
— | 266 | 412 | (266 | ) | (146 | ) | |||||||||||||
Sales contracts cancellations (units) |
— | 156 | 143 | (156 | ) | 13 | ||||||||||||||
Net orders (units) |
— | 110 | 269 | (110 | ) | (159 | ) | |||||||||||||
Net orders (value) |
$ | — | 20,621 | 57,776 | (20,621 | ) | (37,155 | ) | ||||||||||||
Backlog of homes (units) |
— | — | 122 | — | (122 | ) | ||||||||||||||
Backlog of homes (value) |
$ | — | — | 26,662 | — | (26,662 | ) | |||||||||||||
| (a) | Margin percentage is calculated by dividing margin (sales of real estate minus cost of sales of real estate) by sales of real estate. |
As of November 9, 2007, the accounts of Levitt and Sons were deconsolidated from our
consolidated statements of financial condition and statements of operations. Therefore, the
financial data and comparative analysis in the above table reflects the operations of the Tennessee
Homebuilding segment through November 9, 2007 compared to full year results of operations in 2006.
There are no results of operations or financial metrics included in the preceding table for
the year ended December 31, 2008 due to the deconsolidation of Levitt and Sons from our
consolidated financial statements at November 9, 2007. Therefore, a comparative analysis is not
included in this section. For further information regarding Levitt and Sons’ results of operations,
see (Note 24) to our audited consolidated financial statements included in Item 8.
For the Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
Revenues from sales of real estate decreased to $42.0 million during the year ended December
31, 2007, from $76.3 million during 2006. During the year ended December 31, 2007, 146 homes were
delivered at an average sales price of $205,000 as compared to 340 homes delivered at an average
price of $224,000 during the year ended December 31, 2006. The average sales prices of homes
delivered in 2007 declined due to the product mix sold, discounts on deliveries, and aggressive
pricing on spec sales. This decrease was offset by an increase of $11.1 million of revenue
recognized related to a land sale that occurred in the year ended December 31, 2007 related to
property that management decided to not develop
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further. There were no land sales in 2006.
Additionally, included in revenues are certain lot sales
occurring in the year ended December 31, 2007.
Cost of sales of real estate decreased to $51.4 million during the year ended December
31, 2007, as compared to $72.8 million during 2006 due to a decrease in home deliveries. The
decrease in home deliveries was offset by increased impairment charges related to inventory, and
increased cost of sales associated with land sales. Included in cost of sales in the year ended
December 31, 2007 was $11.1 million associated with land sales. There were no land sales in 2006.
In addition, impairment charges increased $5.5 million from $5.7 million in the year ended
December 31, 2006 to $11.2 million in the year ended December 31, 2007.
Margin percentage decreased to a negative margin of 22.2% in the year ended December 31, 2007
from 4.6% in the year ended December 31, 2006. The decrease in margin percentage was primarily
attributable to impairment charges, which increased by $5.5 million in the year ended December 31,
2007 compared to 2006. Margin percentage excluding impairment charges declined from 12.0% during
the year ended December 31, 2006 to 4.6% during the year ended December 31, 2007 due to the mix of
homes delivered with lower average selling prices and minimal to no margin being generated on the
land or lot sales that occurred during the period.
Selling, general and administrative expenses decreased $7.8 million to $5.0 million during the
year ended December 31, 2007 compared to $12.8 million during 2006 primarily as a result of lower
employee compensation and benefits, decreased broker commission costs and decreased advertising and
marketing costs. The decrease in employee compensation and benefits was mainly a result of the
multiple reductions in force that occurred in 2007 in connection with the filing of the Levitt and
Sons bankruptcy. Decreased broker commission costs were due to lower revenues generated in the
year ended December 31, 2007 compared to 2006 and the decreases associated with marketing and
advertising are attributable to a decreased focus in 2007 on advertising in the Tennessee market.
In addition, selling, general and administrative expenses related to the Tennessee Homebuilding
segment are reflected through November 9, 2007 compared to a full year of selling, general and
administrative expenses in 2006. These decreases were offset in part by increased severance
related expense related to Tennessee employees, payroll taxes and other benefits associated with
the terminations that occurred in 2007.
Interest incurred totaled $1.9 million and $2.7 million for the years ended December 31, 2007
and 2006, respectively. While all interest was capitalized during the year ended December 31,
2006, $1.8 million in interest was capitalized during the year ended December 31, 2007 due to the
decreased level of development in the projects in this segment in 2007 which resulted in less
assets being qualified for interest capitalization. Interest incurred decreased as a result of
lower average debt balances for the year ended December 31, 2007 as compared to 2006. At the time
of home closings and land sales, the capitalized interest allocated to such inventory was charged
to cost of sales. Cost of sales of real estate for the years ended December 31, 2007 and 2006
included previously capitalized interest of approximately $1.3 million and $2.1 million,
respectively.
There were no other expenses in the year ended December 31, 2007 compared to $1.3 million in
2006. Other expenses in the year ended December 31, 2006 reflected the write-off of $1.3 million
in goodwill related to the Bowden acquisition.
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FINANCIAL CONDITION
Our
total assets at December 31, 2008 and 2007 were $559.3 million and $712.9 million,
respectively. The change in total assets primarily resulted from:
| • | a net decrease in cash and cash equivalents of $80.4 million, which resulted from cash used in operations of $32.9 million, cash used in investing activities of $41.9 million and cash used in financing activities of $5.6 million; | ||
| • | an increase in restricted cash of $19.1 million primarily related to the funding of the Levitt and Sons Settlement Agreement, providing collateral for a letter of credit as a result of a surety bond claim and the establishment of an interest reserve for one of Core’s loan agreements; | ||
| • | a decrease in current income tax receivable as a result of the receipt of a $29.7 million federal income tax refund; | ||
| • | a decrease in our investment in Bluegreen of $86.2 million as a result of impairment charges recorded during 2008; | ||
| • | a net increase of our investment in other equity securities of $4.3 million as a result of the acquisition (net of shares sold) of shares of Office Depot and a $3.0 million investment in Pizza Fusion; | ||
| • | an increase in our investment in certificates of deposit of $9.6 million as a result of our investment in FDIC insured certificates of deposit in 2008; | ||
| • | a net increase in inventory of real estate of $14.0 million primarily associated with the land development activities of the Land Division; and | ||
| • | a decrease in property and equipment of $8.8 million due to the sale of three ground lease parcels and a depreciation adjustment related to the reclassification into continuing operations of two of Core’s commercial leasing assets previously classified as discontinued operations. |
Total liabilities at December 31, 2008 and 2007 were $439.7 million and $451.7 million,
respectively. The change in total liabilities primarily resulted from:
| • | a net decrease in notes and mortgage notes payable of $3.8 million primarily due to curtailment payments made in connection with a development loan collateralized by land in Tradition Hilton Head, offset in part by draws on lines of credit in the Land Division; and | ||
| • | an increase in our current tax liability of approximately $2.4 million relating to our FIN 48 liability which was netted against our current tax asset in 2007; and | ||
| • | a net decrease in accounts payable and other accrued liabilities of approximately $8.1 million primarily attributable to decreased severance and construction accruals due to payments made during the year ended December 31, 2008. |
LIQUIDITY AND CAPITAL RESOURCES
Management assesses our liquidity in terms of our cash and cash equivalent balances and our
ability to generate cash to fund our operating and investment activities. During the year ended
December 31, 2008, our primary sources of funds were the proceeds from the sale of real estate
inventory, borrowings from financial institutions and an income tax refund. We separately manage our liquidity at the Parent Company level and at the operating subsidiary
level. Subsidiary operations, consisting primarily of Core Communities’ operations, are generally
financed using proceeds from sales of real estate inventory and debt financing using land or other
developed assets as loan collateral. Many of the financing agreements contain covenants at the
subsidiary level. Parent Company guarantees are provided only in limited circumstances and, when
provided, are generally provided on a limited basis. We intend to use
available cash and our borrowing capacity to pursue development of our master-planned communities and to pursue investments generally. We are also
exploring ways to monetize a portion of our investment in certain of Core’s assets through joint
ventures or other strategic relationships, including the possible
sale of such assets. We have historically utilized community development
districts to fund development costs at Core when possible. We also will use available cash to repay
borrowings and to pay operating expenses.
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We believe that our current financial condition and credit relationships,
together with anticipated cash flows from operations and other sources of funds, which may include
proceeds from the disposition of certain properties or investments, will provide for our
anticipated liquidity needs. We expect to meet our long-term liquidity requirements through the means described above, as
well as long-term secured and unsecured indebtedness, and future issuances of equity and/or debt
securities.
Woodbridge (Parent Company level)
As of December 31, 2008 and 2007, Woodbridge had cash of $107.3 million and $162.0 million,
respectively. Our cash decreased by $54.7 million during the year ended December 31, 2008
primarily due to the repayment of a $40.0 million intercompany loan to Core, the acquisition (net
of shares sold) of 1,435,000 shares of Office Depot common stock for an aggregate cost (net of
proceeds received from shares sold) of $16.3 million, severance related payments of approximately
$4.9 million, a $3.0 million investment in Pizza Fusion and an increase in restricted cash of $16.4
million primarily related to funding the Levitt and Sons Settlement Agreement, and providing $4.3
million as collateral for a letter of credit. These decreases were offset in part by the receipt of
approximately $29.7 million of a federal income tax refund and the receipt from Core of a $30.0
million cash dividend payment. The remaining balance was used in operations and to pay accrued
expenses.
In October 2007, Woodbridge acquired from Levitt and Sons all of the membership interests in
Carolina Oak, which owns a 150 acre parcel in Tradition Hilton Head. In connection with this
acquisition, the credit facility collateralized by the 150 acre parcel (the “Carolina Oak Loan”)
was modified, and Woodbridge became the obligor under the Carolina Oak Loan. Woodbridge was
previously a guarantor of this loan and as partial consideration for Woodbridge becoming the
obligor of the Carolina Oak Loan, its membership interests in Levitt and Sons, previously pledged
by Woodbridge to the lender, was released. At December 31, 2008, the outstanding balance on the
Carolina Oak Loan was $37.5 million. The loan is collateralized by a first mortgage on the 150 acre
parcel in Tradition Hilton Head and guaranteed by Carolina Oak. The Carolina Oak Loan is due and
payable on March 21, 2011 but may be extended for one additional year at the discretion of the
lender. Interest accrues under the facility at the Prime Rate (3.25% at December 31, 2008) and is
payable monthly. The Carolina Oak Loan is subject to customary terms, conditions and covenants,
including periodic appraisal and re-margining and the lender’s right to accelerate the debt upon a
material adverse change with respect to Woodbridge. At December 31, 2008, there was no immediate
availability to draw on this facility based on available collateral, and we were in compliance with
the loan covenants.
At November 9, 2007, the date of the deconsolidation of Levitt and Sons, Woodbridge had a
negative investment in Levitt and Sons of $123.0 million and there were outstanding advances due to
Woodbridge from Levitt and Sons of $67.8 million, resulting in a net negative investment of $55.2
million. During the fourth quarter of 2008, the Company identified approximately $2.3 million of
deferred revenue on intercompany sales between Core and Carolina Oak that had been misclassified
against the negative investment in Levitt and Sons. As a result, the Company recorded a $2.3
million reclassification between inventory of real estate and the loss in excess of investment in
subsidiary in the consolidated statements of financial condition. As a result, as of December 31,
2008, the net negative investment was $52.9 million. After the filing of the Levitt and Sons’
bankruptcy, Woodbridge incurred certain administrative costs relating to services performed for
Levitt and Sons and its employees (the “Post Petition Services”) in the amounts of $1.6 million and
$748,000 in the years ended December 31, 2008 and 2007, respectively. In addition, the Debtors
asserted certain claims against Woodbridge, including an entitlement to a portion of the $29.7
million federal tax refund which Woodbridge received as a consequence of losses experienced at
Levitt and Sons in prior periods; however, the parties entered into the Settlement Agreement
described below which resolved this issue.
On June 27, 2008, Woodbridge entered into the Settlement Agreement with the Debtors and the
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Joint Committee appointed in the Chapter 11 Cases. Pursuant to the Settlement Agreement, among
other things, (i) Woodbridge agreed to pay to the Debtors’ bankruptcy estates the sum of $12.5
million plus
accrued interest from May 22, 2008 through the date of payment, (ii) Woodbridge agreed to
waive and release substantially all of the claims it has against the Debtors, including its
administrative expense claims through July 2008, and (iii) the Debtors (joined by the Joint
Committee) agreed to waive and release any claims they may have against Woodbridge and its
affiliates. After certain of Levitt and Sons’ creditors indicated that they objected to the terms
of the initial Settlement Agreement and stated a desire to pursue claims against Woodbridge,
Woodbridge, the Debtors and the Joint Committee agreed in principal to an amendment to the
Settlement Agreement, pursuant to which Woodbridge would, in lieu of the previously agreed $12.5
million payment, pay $8 million to the Debtors’ bankruptcy estates and place $4.5 million in a
release fund to be disbursed to third party creditors in exchange for a third party release and
injunction. The amendment also provided for an additional $300,000 payment to a deposit holders
fund. The Settlement Agreement, as amended, was subject to a number of conditions, including the
approval of the Bankruptcy Court. As of December 31, 2008, the settlement amount was classified as
restricted cash. On February 20, 2009, the Bankruptcy Court presiding over Levitt and Sons’ Chapter
11 bankruptcy case entered an order confirming a plan of liquidation jointly proposed by Levitt and
Sons and the Official Committee of Unsecured Creditors. That order also approved the settlement
pursuant to the Settlement Agreement, as amended. No appeal or rehearing of the court’s order was
timely filed by any party, and the settlement was consummated on March 3, 2009.
We effected a one-for-five reverse stock split during the third quarter of 2008 which
converted each five shares of our Class A Common Stock into one share of Class A Common Stock and
each five shares of our Class B Common Stock into one share of Class B Common Stock. The reverse
stock split proportionately reduced the number of authorized shares and the number of outstanding
shares of our Class A Common Stock and Class B Common Stock, but did not have any impact on our
shareholders’ proportionate equity interests or voting rights in the Company. We pursued the
reverse stock split based on the continued listing requirements of the New York Stock Exchange.
While the reverse stock split was effected for the purpose of addressing issues with respect to the
trading price of our Class A Common Stock and our compliance with the New York Stock Exchange’s
continued listing requirements, our Class A Common Stock ultimately failed to meet the New York
Stock Exchange’s continued listing requirement regarding average market capitalization over a
consecutive thirty-day trading period. As a result, our Class A Common Stock was suspended from
trading on the New York Stock Exchange beginning with the opening of trading on November 20, 2008.
Our Class A Common Stock currently trades on the Pink Sheets under the ticker symbol “WDGH.PK”.
Core Communities
At December 31, 2008 and 2007, Core had cash and cash equivalents of $16.9 million and $33.1
million, respectively. Cash decreased $16.2 million during the year ended December 31, 2008
primarily as a result of a $30.0 million dividend payment to the Parent Company, an increase in
restricted cash of $2.7 million mainly related to the funding of an interest reserve, $19.9 million
of curtailment payments mentioned below and cash used to fund the continued development at Core’s
projects as well as selling, general and administrative expenses. These decreases were partially
offset by Core’s receipt of $40.0 million from the Parent Company as a repayment of an intercompany
loan. At December 31, 2008, Core had no immediate availability under its various lines of credit.
Core has incurred and expects to continue to incur significant land development expenditures
in both Tradition, Florida and in Tradition Hilton Head. Tradition Hilton Head is in the early
stage of the master-planned community’s development cycle and significant investments have been
made and will be required in the future to develop the community infrastructure. Sales in Tradition
Hilton Head have been limited to golf course lots sold to various builders and an intercompany land
sale in December 2006. Recent investments in Tradition, Florida have been primarily to build
infrastructure to support the master-planned community and the sale of various commercial land
parcels. The current investment in land and development, as well as property and equipment has
been financed primarily through a combination of secured borrowings, which totaled $212.0 million
at December 31, 2008, and proceeds from bonds issued by community development districts and special
assessment districts which support the development of infrastructure improvements while burdening
the developed property with long-term tax assessments. This financing at December 31, 2008
consisted of district bonds totaling $218.7 million with approximately
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$130.5 million currently
outstanding and approximately $82.4 million available to fund future development expenditures.
These bonds are further discussed below in “Off Balance Sheet Arrangements and Contractual
Obligations”. We expect that the availability of tax-exempt bond financing to fund infrastructure
development at our master-planned communities could be adversely affected by the
disruptions in credit markets, including the municipal bond market, by general economic conditions
and by fluctuations in the real estate market. If we are not able to access this type of
financing, we would pursue substitute financing, which may not be available on favorable terms, or
at all. If we are not able to obtain financing for infrastructure development, we would be forced
to use our own funds or delay development activity at our master-planned communities.
In July 2008, Core refinanced $9.1 million of construction loans. The new loan has an
interest rate of 30-day LIBOR plus 210 basis points or Prime Rate (current rate at December 31,
2008 was Prime Rate of 3.25%) and a maturity date of July 2010 with a one year extension subject to
certain conditions.
Core’s loan agreements generally require repayment of specified amounts upon a sale of a
portion of the property collateralizing the debt. Core was subject to provisions in one of its
loan agreements collateralized by land in Tradition Hilton Head that require additional principal
payments, known as curtailment payments, in the event that actual sales are below the contractual
requirements. A curtailment payment of $14.9 million relating to Tradition Hilton Head was paid in
January 2008. In June 2008, Core modified this loan agreement, terminating the revolving feature of
the loan and reducing an approximately $19 million curtailment payment due in June 2008 to $17.0
million, $5.0 million of which was paid in June 2008. The loan was further modified in December
2008, reducing the loan to $25 million, eliminating the curtailment requirements, extending the
loan to February 2012 and increasing the interest rate to Prime Rate plus 1%, with a floor of 5.00%
(the interest rate was 5% as of December 31, 2008) and the establishment of an interest reserve
classified as restricted cash.
The loans, which provide the primary financing for Tradition, Florida and Tradition Hilton
Head, have annual appraisal and re-margining requirements. These provisions may require Core, in
circumstances where the value of the real estate collateralizing these loans declines, to pay down
a portion of the principal amount of the loan to bring the loan within specified minimum
loan-to-value ratios. Accordingly, should land prices decline, reappraisals could result in
significant future re-margining payments. Additionally, the loans which provide the primary
financing for the commercial leasing projects contain certain debt service coverage ratio
covenants. If net operating income from these projects falls below levels necessary to maintain
compliance with these covenants, Core would be required to make principal curtailment payments
sufficient to reduce the loan balance to an amount which would bring Core into compliance with the
requirement, and these curtailment payments could be significant.
In January of 2009, Core was advised by one of its lenders that they had received an external
appraisal on the land that serves as collateral for a development mortgage note payable with an
outstanding balance of $86.9 million at December 31, 2008. The appraised value would suggest the
potential for a remargining payment to bring the note payable back in line with the minimum
loan-to-value requirement. The lender is conducting their internal review procedures of the
appraisal, including the determination of the appraised value. As of the date of this filing, the
lender’s evaluation is continuing and until such time as there is final conclusion on the part of
the lender, the amount of a possible re-margin, if any, is not determinable.
All of Core’s debt facilities contain financial covenants generally requiring certain net
worth, liquidity and loan to value ratios. Further, Core’s debt facilities contain cross-default
provisions under which a default on one loan with a lender could cause a default on other debt
instruments with the same lender. At December 31, 2008, Core was in compliance with these financial
covenants; however, there is no assurance that Core will remain in compliance in future periods. If
Core fails to comply with any of these restrictions or covenants, the lenders under the applicable
debt facilities could cause Core’s debt to become due and payable prior to maturity. These
accelerations or significant re-margining payments could require Core to dedicate a substantial
portion of its cash to payment of its debt and reduce its ability to use its cash to fund
operations or investments. If Core does not have sufficient cash to satisfy these required
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payments, then Core would need to seek to refinance the debt or seek other funds, which may not be
available on attractive terms, if at all. Possible liquidity sources available to Core include the
sale of real estate inventory, including commercial properties, debt or outside equity financing,
including secured borrowings using unencumbered land. While funding from Woodbridge is a possible
source of liquidity, Woodbridge is under no obligation to provide funding to Core and there can be
no assurance that it will do so.
Given the overall condition of the homebuilding industry in Florida and the current oversupply
of single-family residential land in the St. Lucie market, we do not expect any meaningful
single-family residential land sales by Core in the near future. Management efforts will be
focused on commercial and other land sales in Florida and Hilton Head. Core’s business may not
generate sufficient cash flow from operations, and future borrowings may not be available under its
existing credit facilities or any other financing sources in an amount sufficient to enable Core to
service its indebtedness, or to fund its other liquidity needs. We may need to refinance all or a
portion of Core’s debt on or before maturity, which we may not be able to do on favorable terms or
at all. Recent disruptions in the credit and capital markets could make it more difficult for us
to obtain financing than in prior periods. Core’s obligations are independent of the Parent Company
and the Parent Company is not legally obligated to support Core.
Off Balance Sheet Arrangements and Contractual Obligations
In connection with the development of certain of Core’s projects, community development,
special assessment or improvement districts have been established and may utilize tax-exempt bond
financing to fund construction or acquisition of certain on-site and off-site infrastructure
improvements near or at these communities. If these improvement districts were not established,
Core would need to fund community infrastructure development out of operating cash flow or through
sources of financing or capital, or be forced to delay its development activity. The obligation to
pay principal and interest on the bonds issued by the districts is assigned to each parcel within
the district, and a priority assessment lien may be placed on benefited parcels to provide security
for the debt service. The bonds, including interest and redemption premiums, if any, and the
associated priority lien on the property are typically payable, secured and satisfied by revenues,
fees, or assessments levied on the property benefited. Core pays a portion of the revenues, fees,
and assessments levied by the districts on the properties it still owns that are benefited by the
improvements. Core may also be required to pay down a specified portion of the bonds at the time
each unit or parcel is sold. The costs of these obligations are capitalized to inventory during the
development period and recognized as cost of sales when the properties are sold.
Core’s bond financing at December 31, 2008 and 2007 consisted of district bonds totaling
$218.7 million with outstanding amounts of approximately $130.5 million and $82.9 million,
respectively. Further, at December 31, 2008 and 2007, there was approximately $82.4 million and
$129.5 million, respectively, available under these bonds to fund future development expenditures.
Bond obligations at December 31, 2008 mature in 2035 and 2040. As of December 31, 2008, Core
Communities owned approximately 16% of the property subject to assessments within the community
development district and approximately 91% of the property subject to assessments within the
special assessment district. During the years ended December 31, 2008, 2007 and 2006, Core
recorded approximately $584,000, $1.3 million and $1.7 million, respectively, in assessments on
property owned by it in the districts. Core is responsible for any assessed amounts until the
underlying property is sold and will continue to be responsible for the annual assessments if the
property is never sold. Accordingly, if the current adverse conditions in the homebuilding
industry do not improve and Core is forced to hold its land inventory longer than originally
projected, Core would be forced to pay a higher portion of annual assessments on property which is
subject to assessments. In addition, Core has guaranteed payments for assessments under the
district bonds in Tradition, Florida which would require funding if future assessments to be
allocated to property owners are insufficient to repay the bonds. Management has evaluated this
exposure based upon the criteria in SFAS No. 5, “Accounting for Contingencies”, and has determined
that there have been no substantive changes to the projected density or land use in the development
subject to the bond which would make it probable that Core would have to fund future shortfalls in
assessments.
In accordance with Emerging Issues Task Force Issue No. 91-10, “Accounting for Special
Assessments and Tax Increment Financing”, we record a liability for the estimated developer
obligations that are fixed and determinable and user fees that are required to be paid or
transferred at the time the
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parcel or unit is sold to an end user. At December 31, 2008 and 2007,
the liability related to developer obligations was $3.3 million and is included in the accompanying
consolidated statement of financial condition as of December 31, 2008 and 2007, and includes
amounts associated with Core’s ownership of the property.
We entered into an indemnity agreement in April 2004 with a joint venture partner at Altman
Longleaf relating to, among other obligations, that partner’s guarantee of the joint venture’s
indebtedness. Our liability under the indemnity agreement was limited to the amount of any
distributions from the joint
venture which exceeds our original capital and other contributions. Levitt Commercial owned a
20% interest in Altman Longleaf, LLC, which owned a 20% interest in this joint venture. This joint
venture developed a 298-unit apartment complex in Melbourne, Florida. An affiliate of our joint
venture partner was the general contractor. Construction commenced on the development in 2004 and
was completed in 2006. Our original capital contributions totaled approximately $585,000 and we
have received approximately $1.2 million in distributions since 2004. In December 2008, our
interest in the joint venture was sold and we received approximately $182,000 as a result of the
sale. Accordingly, we were released from any potential obligation of indemnity which may have
arisen in connection with the joint venture.
The following table summarizes our contractual obligations as of December 31, 2008 (in
thousands):
| Payments due by period | ||||||||||||||||||||
| Less than | 13 - 36 | 37 - 60 | More than | |||||||||||||||||
| Category (1) | Total | 12 Months | Months | Months | 60 Months | |||||||||||||||
Long-term debt obligations (2) |
$ | 349,952 | 3,567 | 197,233 | 27,574 | 121,578 | ||||||||||||||
Interest payable on long-term debt |
244,269 | 18,140 | 31,476 | 18,855 | 175,798 | |||||||||||||||
Operating lease obligations |
3,797 | 1,279 | 1,062 | 386 | 1,070 | |||||||||||||||
Severance related termination
obligations |
129 | 129 | — | — | — | |||||||||||||||
Independent contractor agreements |
681 | 681 | — | — | — | |||||||||||||||
Total obligations |
$ | 598,828 | 23,796 | 229,771 | 46,815 | 298,446 | ||||||||||||||
| (1) | Long-term debt obligations consist of notes, mortgage notes and bonds payable. Interest payable on these long-term debt obligations is the interest that will be incurred related to the outstanding debt. Operating lease obligations consist of lease commitments. The timing of contractual payments for debt obligations assumes the exercise of all extensions available at our sole discretion. | |
| (2) | In addition to the above scheduled payments, Core’s borrowing agreements generally require repayment of specified amounts upon a sale of a portion of the property collateralizing the debt or upon a reappraisal of the underlying collateral if declines in value cause the loan to exceed maximum loan to value ratios. In addition, Core is subject to provisions in its borrowing agreements that require additional principal payments, known as curtailment payments, in the event that sales are below those agreed to at the inception of the borrowing. Total curtailment payments during 2008 amounted to $19.9 million, consisting of a $14.9 million curtailment payment which was paid in January 2008 and an additional $5 million million curtailment payment which was paid in June 2008. Additionally, certain borrowings may require increased principal payments on our debt obligations due to re-margining requirements. |
In addition to the above contractual obligations, we have $2.4 million in unrecognized tax
benefits related to FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an
interpretation of FASB No. 109” (“FIN No. 48”). FIN No. 48 provides guidance for how a company
should recognize, measure, present and disclose in its financial statements uncertain tax positions
that a company has taken or expects to take on a tax return.
Tradition Development Company, LLC, a wholly-owned subsidiary of Core Communities (“TDC”), has
an existing advertising agreement with the operator of a Major League Baseball team
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pursuant to
which, among other advertising rights, TDC obtained a royalty-free license to use, among others,
the trademark “Tradition Field” at the sports complex located in Port St. Lucie and the naming
rights to that complex. The initial term of the agreement terminates on December 31, 2013;
provided, however, that upon payment of a specified buy-out fee and compliance with other
contractual procedures, TDC has the right to terminate the agreement at any time. Required
cumulative payments under the agreement through December 31, 2013 are approximately $923,000 and are included under
“Operating lease obligations” in the table above.
We have future obligations relating to the termination of facilities associated with property
and equipment leases that we had entered into that were no longer providing a benefit to us, as
well as
termination fees related to contractual obligations we cancelled. As of December 31, 2008,
these obligations amounted to $640,000 and are included under “Operating lease obligations” in the table above.
At December 31, 2008 and 2007, we had outstanding surety bonds and letters of credit of
approximately $8.2 million and $7.1 million, respectively, related primarily to obligations to
various governmental entities to construct improvements in our various communities. We estimate
that approximately $5.0 million of work remains to complete these improvements. We do not believe
that any outstanding bonds or letters of credit will likely be drawn upon.
In the ordinary course of business we sell land to third parties where obligations exist to
complete site development and infrastructure improvements subsequent to the sale date. Future
development and construction obligations amount to $5.2 million at December 31, 2008, which are
expected to be incurred over the next two years. The timing of future development will depend on
factors such as the timing of future sales, demographic growth rates in the areas in which these
obligations occur and the impact of any future deterioration or improvement in the local real
estate market.
Levitt and Sons had $33.3 million in surety bonds related to its ongoing projects at the time
of the filing of the Chapter 11 Cases. In the event that these obligations are drawn and paid by
the surety, Woodbridge could be responsible for up to $11.7 million plus costs and expenses in
accordance with the surety indemnity agreements executed by Woodbridge. As of December 31, 2008 and
2007, we had $1.1 million and $1.8 million, respectively, in surety bonds accruals at Woodbridge
related to certain bonds which management considers it to be probable that Woodbridge will be
required to reimburse the surety under applicable indemnity agreements. During the year ended
December 31, 2008, Woodbridge performed under its indemnity agreements and reimbursed the surety
$532,000 while no reimbursements were made in 2007. It is unclear given the uncertainty involved in
the Chapter 11 Cases whether and to what extent the remaining outstanding surety bonds of Levitt
and Sons will be drawn and the extent to which Woodbridge may be responsible for additional amounts
beyond this accrual. There is no assurance that Woodbridge will not be responsible for amounts
well in excess of the $1.1 million accrual. It is considered unlikely that Woodbridge will receive
any repayment, assets or other consideration as recovery of any amounts it may be required to pay.
In September 2008, a surety filed a lawsuit to require Woodbridge to post $5.4 million of
collateral against a portion of the $11.7 million surety bonds exposure in connection with two
bonds totaling $5.4 million with respect to which a municipality made claims against the surety. We
believe that the municipality does not have the right to demand payment under the bonds and we
initiated a lawsuit against the municipality and do not believe that a loss is probable.
Accordingly, we did not accrue any amount related to this claim as of December 31, 2008. Since
claims were made on the bonds, the surety requested that Woodbridge post a $4.0 million letter of
credit as security while the matter is litigated with the municipality and we have complied with
that request.
On November 9, 2007, Woodbridge put in place an employee fund and offered up to $5 million of
severance benefits to terminated Levitt and Sons employees to supplement the limited termination
benefits paid by Levitt and Sons to those employees. Levitt and Sons was restricted in the payment
of termination benefits to its former employees by virtue of the Chapter 11 Cases. Woodbridge
incurred severance and benefits related restructuring charges of approximately $2.2 million during
the year ended December 31, 2008. For the year ended December 31, 2008, the Company paid
approximately $4.1 million in severance and termination charges related to the above described fund
as well as severance for employees other than Levitt and Sons employees. Employees entitled to
participate in the fund either received a payment stream, which in certain cases extends over two
years, or a lump sum payment, dependent on a variety of factors.
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At December 31, 2008, $129,000
was accrued to be paid with respect to this employee fund and the severance accrual for our other
employees and is included under “Severance related termination
obligations” in the table above.
The independent contractor related expense relates to two contractor agreements entered into
with former Levitt and Sons employees. The agreements were for past and future consulting
services. The total commitment related to these agreements included
under “Independent contractor agreements” in the table
above was $681,000 as of December 31, 2008
and will be paid monthly through 2009. The expense associated with these arrangements is included
in selling, general and administrative expenses for the Other Operations segment for the years
ended December 31, 2008 and 2007.
Impact of Inflation
The financial statements and related financial data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without considering changes
in the relative purchasing power of money over time due to inflation.
Inflation could have a long-term impact on us because any increase in the cost of land,
materials and labor would result in a need to increase the sales prices of land which may not be
possible. In addition, inflation is often accompanied by higher interest rates which could have a
negative impact on demand and the costs of financing land development activities. Rising interest
rates as well as increased materials and labor costs may reduce margins.
New Accounting Pronouncements
See (Note 2) to our audited consolidated financial statements for a description of our new
accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is defined as the risk of loss arising from adverse changes in market valuations
that arise from interest rate risk, foreign currency exchange rate risk, commodity price risk and
equity price risk. We have a risk of loss associated with our borrowings as we are subject to
interest rate risk on our long-term debt. At December 31, 2008, we had $244.5 million in borrowings
with adjustable rates tied to the Prime Rate and/or LIBOR rates and $102.2 million in borrowings
with fixed or initially-fixed rates. Consequently, the impact on our variable rate debt from
changes in interest rates may affect our earnings and cash flows but would generally not impact the
fair value of such debt except to the extent of the change in credit spreads. With respect to fixed
rate debt, changes in interest rates generally affect the fair market value of the debt but not our
earnings or cash flow.
We are subject to equity pricing risks associated with our investments in Bluegreen and Office
Depot. The value of these securities will vary based on the results of operations and financial
condition of these investments, the general liquidity of Bluegreen and Office Depot common stock
and general equity market conditions. The trading market for the shares of these investments may
not be liquid enough to permit us to sell the common stock of these investments that we own without
significantly reducing the market price of these shares, if we are able to sell them at all.
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The table below sets forth our debt obligations, principal payments by scheduled maturity,
weighted-average interest rates and estimated fair market value as of December 31, 2008 (dollars in
thousands):
| Fair Market | ||||||||||||||||||||||||||||||||
| Value at | ||||||||||||||||||||||||||||||||
| Payments due by year | December 31, | |||||||||||||||||||||||||||||||
| 2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | Total | 2008 | |||||||||||||||||||||||||
Fixed rate debt: |
||||||||||||||||||||||||||||||||
Notes and mortgage
payable (a) |
723 | 561 | 573 | 504 | 499 | 99,332 | 102,192 | 28,384 | ||||||||||||||||||||||||
Average interest rate |
8.09 | % | 8.11 | % | 8.12 | % | 8.13 | % | 8.14 | % | 8.15 | % | 8.12 | % | ||||||||||||||||||
Variable rate debt: |
||||||||||||||||||||||||||||||||
Notes and mortgage
payable (a) |
2,797 | 8,102 | 187,895 | 25,751 | 707 | 19,217 | 244,469 | 227,145 | ||||||||||||||||||||||||
Average interest rate |
4.04 | % | 4.04 | % | 4.07 | % | 5.39 | % | 5.86 | % | 5.86 | % | 4.22 | % | ||||||||||||||||||
Total debt obligations |
3,520 | 8,663 | 188,468 | 26,255 | 1,206 | 118,549 | 346,661 | 255,529 | ||||||||||||||||||||||||
| (a) | Fair value calculated using current estimated borrowing rates. |
Assuming the variable rate debt balance of $244.5 million outstanding at December 31, 2008
(which does not include approximately $85.1 million of initially fixed-rate obligations which will
not become floating rate during 2009) was to remain constant, each one percentage point increase in
interest rates would increase the interest incurred by us by approximately $2.2 million per year.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Woodbridge Holdings Corporation
| 62 | ||||
| 64 | ||||
| 65 | ||||
| 66 | ||||
| 67 | ||||
| 68 | ||||
| 70 | ||||
| 114 |
Bluegreen Corporation
The financial statements of Bluegreen Corporation, which is considered a significant subsidiary,
are required to be included in this report. The financial statements of Bluegreen Corporation for
the three years ended December 31, 2008, including the Report of Independent Registered Certified
Public Accounting Firm of Ernst & Young LLP, are included as exhibit 99.1 to this report.
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Report of Independent Registered Certified Public Accounting Firm
To the Board of Directors and Shareholders of Woodbridge Holdings Corporation
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of
Woodbridge Holdings Corporation and its subsidiaries (the “Company”)
at December 31, 2008 and 2007, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2008 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material
respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31,
2008, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s
management is responsible for these financial statements and
financial statement schedule, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in Management’s Report on Internal Control Over Financial
Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated
audits. We did not audit the financial statements of Bluegreen Corporation, an approximate 31
percent-owned equity investment of the Company which reflects a net
investment totaling $115.1
million and $116.0 million at December 31, 2008 and 2007,
respectively, (prior to an other-than-temporary impairment
recorded by the Company of approximately $85.2 million, net of
the amortization of $9.2 million of basis difference, in the
year ending December 31, 2008) and equity in the net
earnings (loss) of approximately ($154,000) (prior to the amortization of approximately $9.2 million
related to the change in the basis of the Company’s investment as a result of impairment charges
of $94.4 million), $10.3 million and $9.7 million for the years ended December 31, 2008, 2007 and
2006, respectively. The financial statements of Bluegreen Corporation were audited by other
auditors whose report thereon has been furnished to us, and our opinion on the financial
statements expressed herein, insofar as it relates to the amounts included for Bluegreen
Corporation, is based solely on the report of the other auditors. We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinions.
As discussed in Note 2 to the consolidated financial statements, the Company adopted the
provisions of FASB Interpretation No. 48 — Accounting for Uncertainty in Income Taxes — an
interpretation of FASB No. 109 in January 1, 2007.
As
discussed in Notes 2, 20 and 24, on November 9, 2007 (the “Petition Date”), Levitt and Sons, LLC
(“Levitt and Sons”) and substantially all of its subsidiaries filed voluntary petitions for
relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy
Court for the Southern District of Florida. As a result, Levitt and Sons was deconsolidated from
the Company as of the Petition Date and has been prospectively reported as a cost method
investment. On the Petition Date, Levitt and Sons had total assets, total liabilities and net
shareholder’s deficit of approximately $373 million, $480 million, and $107 million,
respectively.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance
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of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers
LLP |
||
Fort Lauderdale, Florida |
||
March 19, 2009 |
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Woodbridge Holdings Corporation
Consolidated Statements of Financial Condition
December 31, 2008 and 2007
(In thousands, except share data)
Consolidated Statements of Financial Condition
December 31, 2008 and 2007
(In thousands, except share data)
| 2008 | 2007 | |||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 114,798 | 195,181 | |||||
Restricted cash |
21,288 | 2,207 | ||||||
Current income tax receivable |
— | 27,407 | ||||||
Inventory of real estate |
241,318 | 227,290 | ||||||
Investments: |
||||||||
Bluegreen Corporation |
29,789 | 116,014 | ||||||
Other equity securities |
4,278 | — | ||||||
Certificates of deposits, short-term |
9,600 | — | ||||||
Unconsolidated trusts |
419 | 2,565 | ||||||
Property and equipment, net |
109,477 | 118,243 | ||||||
Intangible assets |
4,324 | — | ||||||
Other assets |
23,963 | 23,944 | ||||||
Total assets |
$ | 559,254 | 712,851 | |||||
Liabilities and Shareholders’ Equity |
||||||||
Accounts payable, accrued liabilities and other |
$ | 33,913 | 42,026 | |||||
Customer deposits |
592 | 715 | ||||||
Current income tax payable |
2,380 | — | ||||||
Notes and mortgage notes payable |
264,900 | 268,738 | ||||||
Junior subordinated debentures |
85,052 | 85,052 | ||||||
Loss in excess of investment in subsidiary |
52,887 | 55,214 | ||||||
Total liabilities |
439,724 | 451,745 | ||||||
Shareholders’ equity: |
||||||||
Preferred stock, $0.01 par value
Authorized: 5,000,000 shares
Issued and outstanding: no shares |
— | — | ||||||
Class A Common Stock, $0.01 par value
Authorized: 30,000,000 shares
Issued: 19,042,149 and 19,010,804 shares, respectively |
190 | 190 | ||||||
Class B Common Stock, $0.01 par value
Authorized: 2,000,000 shares
Issued and outstanding: 243,807 shares |
2 | 2 | ||||||
Additional paid-in capital |
339,780 | 337,565 | ||||||
Accumulated deficit |
(218,868 | ) | (78,537 | ) | ||||
Accumulated other comprehensive (loss) income |
(135 | ) | 1,886 | |||||
| 120,969 | 261,106 | |||||||
Less — common stock in treasury, at cost (2,385,624 in 2008) |
(1,439 | ) | — | |||||
Total shareholders’ equity |
119,530 | 261,106 | ||||||
Total liabilities and shareholders’ equity |
$ | 559,254 | 712,851 | |||||
See accompanying notes to consolidated financial statements.
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Woodbridge Holdings Corporation
Consolidated Statements of Operations
For each of the years in the three year period ended December 31, 2008
(In thousands, except per share data)
Consolidated Statements of Operations
For each of the years in the three year period ended December 31, 2008
(In thousands, except per share data)
| 2008 | 2007 | 2006 | ||||||||||
Revenues: |
||||||||||||
Sales of real estate |
$ | 13,837 | 410,115 | 566,086 | ||||||||
Other revenues |
11,701 | 10,458 | 9,241 | |||||||||
Total revenues |
25,538 | 420,573 | 575,327 | |||||||||
Costs and expenses: |
||||||||||||
Cost of sales of real estate |
12,728 | 573,241 | 482,961 | |||||||||
Selling, general and administrative expenses |
50,754 | 117,924 | 121,151 | |||||||||
Interest expense |
10,867 | 3,807 | — | |||||||||
Other expenses |
— | 3,929 | 3,677 | |||||||||
Total costs and expenses |
74,349 | 698,901 | 607,789 | |||||||||
Earnings from Bluegreen Corporation |
8,996 | 10,275 | 9,684 | |||||||||
Impairment
of investment in Bluegreen Corporation |
(94,426 | ) | — | — | ||||||||
Impairment
of other investments |
(14,120 | ) | — | — | ||||||||
Interest and other income |
8,030 | 11,264 | 7,844 | |||||||||
Loss before income taxes |
(140,331 | ) | (256,789 | ) | (14,934 | ) | ||||||
Benefit for income taxes |
— | 22,169 | 5,770 | |||||||||
Net loss |
$ | (140,331 | ) | (234,620 | ) | (9,164 | ) | |||||
Loss per common share: |
||||||||||||
Basic |
$ | (7.35 | ) | (30.00 | ) | (2.27 | ) | |||||
Diluted |
$ | (7.35 | ) | (30.00 | ) | (2.29 | ) | |||||
Weighted average common shares outstanding: |
||||||||||||
Basic |
19,088 | 7,821 | 4,045 | |||||||||
Diluted |
19,088 | 7,821 | 4,045 | |||||||||
Dividends declared per common share: |
||||||||||||
Class A common stock |
$ | — | 0.10 | 0.40 | ||||||||
Class B common stock |
$ | — | 0.10 | 0.40 | ||||||||
See accompanying notes to consolidated financial statements.
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Woodbridge Holdings Corporation
Consolidated Statements of Comprehensive Loss
For each of the years in the three year period ended December 31, 2008
(In thousands)
Consolidated Statements of Comprehensive Loss
For each of the years in the three year period ended December 31, 2008
(In thousands)
| 2008 | 2007 | 2006 | ||||||||||
Net loss |
$ | (140,331 | ) | (234,620 | ) | (9,164 | ) | |||||
Other comprehensive income: |
||||||||||||
Pro-rata share of unrealized (loss) gain
recognized by Bluegreen Corporation on retained
interests in notes receivable sold |
(2,021 | ) | (870 | ) | 1,263 | |||||||
Benefit (provision) for income taxes |
— | 335 | (487 | ) | ||||||||
Pro-rata share of unrealized (loss) gain
recognized by Bluegreen Corporation on retained
interests in notes receivable sold (net of tax) |
(2,021 | ) | (535 | ) | 776 | |||||||
Comprehensive loss |
$ | (142,352 | ) | (235,155 | ) | (8,388 | ) | |||||
See accompanying notes to consolidated financial statements.
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Woodbridge Holdings Corporation
Consolidated Statements of Shareholders’ Equity
For each of the years in the three year period ended December 31, 2008
(In thousands)
Consolidated Statements of Shareholders’ Equity
For each of the years in the three year period ended December 31, 2008
(In thousands)
| Accumulated | ||||||||||||||||||||||||||||||||||||||||||||
| Shares of Common | Class A | Class B | Additional | Retained | Unearned | Common Stock | Compre- | |||||||||||||||||||||||||||||||||||||
| Stock Outstanding | Common | Common | Paid-In | Earnings | Compen- | In Treasury | hensive | |||||||||||||||||||||||||||||||||||||
| Class A | Class B | Stock | Stock | Capital | (Deficit) | sation | Shares | Amount | Income (loss) | Total | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2005 |
3,723 | 244 | $ | 37 | $ | 2 | $ | 181,243 | $ | 166,969 | $ | (110 | ) | — | $ | — | $ | 1,645 | $ | 349,786 | ||||||||||||||||||||||||
Issuance of restricted common stock |
1 | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Reversal of unamortized stock
compensation related to restricted
stock upon adoption of FAS 123 ( R) |
— | — | — | — | (110 | ) | — | 110 | — | — | — | — | ||||||||||||||||||||||||||||||||
Share based compensation related to
stock options and restricted stock |
— | — | — | — | 3,250 | — | — | — | — | — | 3,250 | |||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | (9,164 | ) | — | — | — | — | (9,164 | ) | |||||||||||||||||||||||||||||||
Pro-rata share of unrealized gain
recognized by Bluegreen on sale of
retained interests, net of tax |
— | — | — | — | — | — | — | — | — | 776 | 776 | |||||||||||||||||||||||||||||||||
Issuance of Bluegreen common
stock, net of tax |
— | — | — | — | 177 | — | — | — | — | — | 177 | |||||||||||||||||||||||||||||||||
Cash dividends paid |
— | — | — | — | — | (1,586 | ) | — | — | — | — | (1,586 | ||||||||||||||||||||||||||||||||
Balance at December 31, 2006 |
3,724 | 244 | $ | 37 | $ | 2 | $ | 184,560 | $ | 156,219 | $ | — | — | $ | — | $ | 2,421 | $ | 343,239 | |||||||||||||||||||||||||
Issuance of restricted common stock |
2 | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Issuance from Rights Offering, net
of issue costs |
15,285 | — | 153 | — | 152,498 | — | — | — | — | — | 152,651 | |||||||||||||||||||||||||||||||||
Share based compensation related to
stock options and restricted stock |
— | — | — | — | 2,193 | — | — | — | — | — | 2,193 | |||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | (234,620 | ) | — | — | — | — | (234,620 | ) | |||||||||||||||||||||||||||||||
Pro-rata share of unrealized loss
recognized by Bluegreen on sale of
retained interests, net of tax |
— | — | — | — | — | — | — | — | — | (535 | ) | (535 | ) | |||||||||||||||||||||||||||||||
Issuance of Bluegreen common
stock, net of tax |
— | — | — | — | (279 | ) | — | — | — | — | — | (279 | ) | |||||||||||||||||||||||||||||||
Tax asset valuation allowance
associated with Bluegreen capital
transactions |
— | — | — | — | (1,407 | ) | — | — | — | — | — | (1,407 | ) | |||||||||||||||||||||||||||||||
Cash dividends paid |
— | — | — | — | — | (396 | ) | — | — | — | — | (396 | ) | |||||||||||||||||||||||||||||||
Cumulative impact of change in
accounting for uncertainties in income
taxes (FIN 48 — see Note 16) |
— | — | — | — | — | 260 | — | — | — | — | 260 | |||||||||||||||||||||||||||||||||
Balance at December 31, 2007 |
19,011 | 244 | $ | 190 | $ | 2 | $ | 337,565 | $ | (78,537 | ) | $ | — | — | $ | — | $ | 1,886 | $ | 261,106 | ||||||||||||||||||||||||
Issuance of restricted common stock |
31 | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Purchase of treasury shares |
— | — | — | — | — | — | — | 2,386 | (1,439 | ) | — | (1,439 | ) | |||||||||||||||||||||||||||||||
Share based compensation related to
stock options and restricted stock |
— | — | — | — | 990 | — | — | — | — | — | 990 | |||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | (140,331 | ) | — | — | — | — | (140,331 | ) | |||||||||||||||||||||||||||||||
Pro-rata share of unrealized loss
recognized by Bluegreen on sale of
retained interests |
— | — | — | — | — | — | — | — | — | (2,021 | ) | (2,021 | ) | |||||||||||||||||||||||||||||||
Issuance of Bluegreen common
Stock |
— | — | — | — | 1,225 | — | — | — | — | — | 1,225 | |||||||||||||||||||||||||||||||||
Balance at December 31, 2008 |
19,042 | 244 | $ | 190 | $ | 2 | $ | 339,780 | $ | (218,868 | ) | $ | — | 2,386 | $ | (1,439 | ) | $ | (135 | ) | $ | 119,530 | ||||||||||||||||||||||
See accompanying notes to consolidated financial statements
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Woodbridge Holdings Corporation
Consolidated Statements of Cash Flows
For each of the years in the three year period ended December 31, 2008
(In thousands)
Consolidated Statements of Cash Flows
For each of the years in the three year period ended December 31, 2008
(In thousands)
| 2008 | 2007 | 2006 | ||||||||||
Operating activities: |
||||||||||||
Net loss |
$ | (140,331 | ) | (234,620 | ) | (9,164 | ) | |||||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||||
Depreciation and amortization |
7,341 | 5,207 | 3,703 | |||||||||
Change in deferred income taxes |
— | (1,187 | ) | (14,263 | ) | |||||||
Earnings from Bluegreen Corporation |
(8,996 | ) | (10,275 | ) | (9,684 | ) | ||||||
Earnings from unconsolidated trusts |
(218 | ) | (220 | ) | (178 | ) | ||||||
Impairment
of investment in Bluegreen Corporation |
94,426 | — | — | |||||||||
Impairment
of other investments |
14,120 | — | — | |||||||||
(Gain) loss from real estate joint ventures |
(182 | ) | 27 | 417 | ||||||||
Share-based compensation expense related to stock options and restricted stock |
990 | 1,962 | 3,250 | |||||||||
Gain on sale of property and equipment |
(2,520 | ) | — | (1,329 | ) | |||||||
Gain on sale of equity securities |
(1,178 | ) | — | — | ||||||||
Impairment of property and equipment |
114 | 533 | 245 | |||||||||
Impairment of inventory |
3,491 | 226,879 | 38,083 | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Inventory of real estate |
(19,964 | ) | 26,950 | (255,968 | ) | |||||||
Notes receivable |
(63 | ) | 2,903 | (1,640 | ) | |||||||
Other assets |
309 | 2,180 | 5,174 | |||||||||
Income taxes receivable |
27,407 | — | — | |||||||||
Income taxes payable |
2,380 | — | — | |||||||||
Customer deposits |
(123 | ) | (23,974 | ) | (8,990 | ) | ||||||
Accounts payable, accrued expenses and other liabilities |
(9,900 | ) | (31,662 | ) | 9,824 | |||||||
Net cash used in operating activities |
(32,897 | ) | (35,297 | ) | (240,520 | ) | ||||||
Investing activities: |
||||||||||||
Investment in real estate joint ventures |
— | (229 | ) | (469 | ) | |||||||
Distributions from real estate joint ventures |
182 | 47 | 576 | |||||||||
(Increase) decrease in restricted cash |
(19,081 | ) | (1,321 | ) | 421 | |||||||
Purchase of equity securities |
(33,978 | ) | — | — | ||||||||
Acquisition of Pizza Fusion |
(3,000 | ) | — | — | ||||||||
Purchase of short-term investments |
(9,600 | ) | — | — | ||||||||
Proceeds from sale of equity securities |
18,904 | — | — | |||||||||
Investments in unconsolidated trusts |
— | — | (928 | ) | ||||||||
Distributions from unconsolidated trusts |
218 | 220 | 178 | |||||||||
Proceeds from sale of property and equipment |
5,588 | 30 | 1,943 | |||||||||
Deconsolidation of subsidiary cash balance |
— | (6,387 | ) | — | ||||||||
Capital expenditures |
(1,154 | ) | (38,749 | ) | (29,476 | ) | ||||||
Net cash used in investing activities |
(41,921 | ) | (46,389 | ) | (27,755 | ) | ||||||
Financing activities: |
||||||||||||
Proceeds from notes and mortgage notes payable |
27,522 | 236,839 | 379,732 | |||||||||
Proceeds from junior subordinated debentures |
— | — | 30,928 | |||||||||
Repayment of notes and mortgage notes payable |
(31,130 | ) | (158,923 | ) | (202,927 | ) | ||||||
Cash paid for stock repurchase |
(1,439 | ) | — | — | ||||||||
Payments for debt issuance costs |
(518 | ) | (1,695 | ) | (3,043 | ) | ||||||
Payments for stock issue costs |
— | (196 | ) | — | ||||||||
Proceeds from issuance of common stock |
— | 152,847 | — | |||||||||
Cash dividends paid |
— | (396 | ) | (1,586 | ) | |||||||
Net cash (used in) provided by financing activities |
(5,565 | ) | 228,476 | 203,104 | ||||||||
(Decrease) increase in cash and cash equivalents |
$ | (80,383 | ) | 146,790 | (65,171 | ) | ||||||
Cash and cash equivalents at the beginning of period |
195,181 | 48,391 | 113,562 | |||||||||
Cash and cash equivalents at end of period |
$ | 114,798 | 195,181 | 48,391 | ||||||||
See accompanying notes to consolidated financial statements.
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Woodbridge Holdings Corporation
Consolidated Statements of Cash Flows
For each of the years in the three year period ended December 31, 2008
(In thousands)
Consolidated Statements of Cash Flows
For each of the years in the three year period ended December 31, 2008
(In thousands)
| 2008 | 2007 | 2006 | ||||||||||
Supplemental cash flow information |
||||||||||||
Interest paid on borrowings, net of amounts capitalized |
$ | 11,101 | 5,927 | 963 | ||||||||
Income taxes (refunded) paid |
(29,711 | ) | 4,556 | 17,140 | ||||||||
Supplemental disclosure of non-cash operating,
investing and financing activities: |
||||||||||||
Change in shareholders’ equity resulting from the change
in other comprehensive (loss) gain, net of taxes |
$ | (2,021 | ) | (535 | ) | 776 | ||||||
Change in shareholders’ equity from the net effect
of Bluegreen’s capital transactions, net of taxes |
1,225 | (279 | ) | 177 | ||||||||
Decrease in inventory from reclassification to property and equipment |
— | 2,859 | 8,412 | |||||||||
Increase in deferred tax liability due to cumulative impact of change in
accounting for uncertainties in income taxes (FIN 48 — see Note 16) |
— | 260 | — | |||||||||
Assets and liabilities assumed upon acquisition of Pizza Fusion (see Note 3) |
||||||||||||
At
November 9, 2007, all accounts of Levitt and Sons were deconsolidated from the Company. Refer to (Note 24) for an analysis
of the balances at the time of deconsolidation.
See accompanying notes to consolidated financial statements.
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Woodbridge Holdings Corporation
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
1. Description of Business
Woodbridge Holdings Corporation (“Woodbridge” or the “Company”) (formerly Levitt Corporation),
directly and through its wholly owned subsidiaries, historically has been a real estate development
company with activities in the Southeastern United States. The Company was organized in December
1982 under the laws of the State of Florida. Historically, the Company’s operations were primarily
within the real estate industry, however, the Company’s current business strategy includes the
pursuit of investments and acquisitions within or outside of the real estate industry, as well as
the continued development of master-planned communities. Under this business strategy, the Company
likely will not generate a consistent earnings stream and the composition of the Company’s revenues
may vary widely due to factors inherent in a particular investment, including the maturity and
cyclical nature of, and market conditions relating to, the businesses in which the Company invests.
Net investment gains and other income will be based primarily on the success of the Company’s
investments as well as overall market conditions.
In 2008, Woodbridge engaged in business activities through the Land Division, consisting of
the operations of Core Communities, LLC (“Core Communities” or “Core”), which develops
master-planned communities, and through the Other Operations segment (“Other Operations”), which
includes the parent company operations of Woodbridge (the “Parent Company”), the consolidated
operations of Pizza Fusion Holdings, Inc. (“Pizza Fusion”), the consolidated operations of Carolina
Oak Homes, LLC (“Carolina Oak”), which engaged in homebuilding in South Carolina prior to the
suspension of those activities during the fourth quarter of 2008, and other activities through
Cypress Creek Capital Holdings, LLC (“Cypress Creek Capital”) and Snapper Creek Equity Management,
LLC (“Snapper Creek”). An equity investment in Bluegreen Corporation (“Bluegreen”) and an
investment in Office Depot, Inc. (“Office Depot”) are also included in the Other Operations
segment.
Core Communities was founded in May 1996 to develop a master-planned community in Port St.
Lucie, Florida now known as St. Lucie West. During 2008, its activities focused on the development
of a master-planned community in St. Lucie, Florida called Tradition, Florida and a community
outside of Hardeeville, South Carolina called Tradition Hilton Head (formerly known as Tradition,
South Carolina). Tradition, Florida has been in active development for several years, while
Tradition Hilton Head is in the early stage of development. As a master-planned community
developer, Core Communities engages in four primary activities: (i) the acquisition of large
tracts of raw land; (ii) planning, entitlement and infrastructure development; (iii) the sale of
entitled land and/or developed lots to homebuilders and commercial, industrial and institutional
end-users; and (iv) the development and leasing of commercial space to commercial, industrial and
institutional end-users.
In October 2007, Woodbridge acquired from Levitt and Sons all of the outstanding membership
interests in Carolina Oak for the following consideration: (i) the assumption of the outstanding
principal balance of a loan in the amount of $34.1 million which is collateralized by a 150 acre
parcel of land owned by Carolina Oak located in Tradition Hilton Head, (ii) the execution of a
promissory note in the amount of $400,000 to serve as a deposit under a purchase agreement between
Carolina Oak and Core Communities of South Carolina, LLC and (iii) the assumption of specified
payables in the amount of approximately $5.3 million. The principal asset of Carolina Oak is a 150
acre parcel of land located in Tradition Hilton Head.
Prior to November 9, 2007, the Company also conducted homebuilding operations through Levitt
and Sons, LLC (“Levitt and Sons”), which comprised the Company’s Homebuilding Division. The
Homebuilding Division consisted of two reportable operating segments, the Primary Homebuilding
segment and the Tennessee Homebuilding segment. Acquired in December 1999, Levitt and Sons was a
developer of single family homes and townhome communities for active adults and families in
Florida, Georgia, Tennessee and South Carolina. On November 9, 2007 (the “Petition Date”), Levitt
and Sons and substantially all of its subsidiaries (collectively, the “Debtors”) filed voluntary
petitions for relief under Chapter 11 of Title 11 of the United States Code (the “Chapter 11
Cases”) in the United States Bankruptcy Court for the Southern District of Florida ( the“Bankruptcy
Court”). In connection with the filing of the
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Chapter 11 Cases, Woodbridge deconsolidated Levitt
and Sons as of November 9, 2007, eliminating all future operations of Levitt and Sons from
Woodbridge’s financial results of operations. Since Levitt and
Sons’ results are no longer consolidated and Woodbridge believes that it is not probable that
it will be obligated to fund future operating losses at Levitt and Sons, any adjustments reflected
in Levitt and Sons’ financial statements subsequent to November 9, 2007 are not expected to affect
the results of operations of Woodbridge.
On November 13, 2008, the Company was notified by the New York Stock Exchange that its Class A
Common Stock had fallen below the New York Stock Exchange’s continued listing requirement regarding
average global market capitalization over a consecutive thirty-day trading period. As a result, the
Company’s Class A Common Stock was suspended from trading on the New York Stock Exchange beginning
with the opening of trading on November 20, 2008 and immediately began trading on the Pink Sheets
Electronic Quotation Service (“Pink Sheets”) under the trading symbol “WDGH.PK.”.
2. Summary of Significant Accounting Policies
Consolidation Policy
The accompanying consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries and entities in which the Company is the primary beneficiary as defined
in Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities” (“FIN No. 46(R)”), or has a controlling interest in
accordance with the provisions of Statement of Position 78-9, “Accounting for Investments in Real
Estate Ventures” (“SOP 78-9”), and Emerging Issues Task Force No. 04-5, “Determining Whether a
General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar
Entity When the Limited Partners Have Certain Rights” (EITF No. 04-5”). Levitt and Sons is no
longer a consolidated entity as described below. All significant inter-company transactions have
been eliminated in consolidation.
In connection with the filing of the Chapter 11 Cases, Woodbridge deconsolidated Levitt and
Sons as of November 9, 2007, eliminating all future operations of Levitt and Sons from its
financial results of operations, and, as described above, Woodbridge accounts for any remaining
investment in Levitt and Sons as a cost method investment.
In 2008, the Company, indirectly through its wholly-owned subsidiary, Woodbridge Equity Fund
II LP, made a $3.0 million investment in Pizza Fusion. Pizza Fusion was determined to be a Variable
Interest Entity (“VIE”) under the provisions of FIN No. 46(R) and Woodbridge Equity Fund II, LP was
determined to be the primary beneficiary, therefore, the Company consolidated Pizza Fusion into its
consolidated financial statements as of September 18, 2008.
In the ordinary course of business, the Company enters into contracts to purchase land held
for development, including option contracts. Option contracts allow the Company to control
significant positions with minimal capital investment and substantially reduce the risks associated
with land ownership and development. The liability for nonperformance under such contracts is
typically only the required non-refundable deposits. The Company does not have legal title to these
assets. However, if certain conditions are met, under the requirements of FIN No. 46(R), the
Company’s non-refundable deposits in these land contracts may create a variable interest, with the
Company being identified as the primary beneficiary. If these conditions are met, FIN No. 46(R)
requires the Company to consolidate the VIE holding the asset to be acquired at its fair value. At
December 31, 2008 and 2007, there were no non-refundable deposits under these contracts, and the
Company had no contracts in place to acquire land.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. Actual results
could differ significantly from those estimates. Material estimates relate to revenue recognition
on percent complete
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projects, reserves and accruals, impairment of assets, determination of the
valuation of real estate and estimated costs to complete construction, litigation and
contingencies, the current tax liability in accordance with
FIN 48, and the amount of the deferred tax asset valuation
allowance. The Company bases estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances,
the results of which form the basis of making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources.
Reclassification
In June 2007, Core Communities began soliciting bids from several potential buyers to purchase
assets associated with two of Core’s commercial leasing projects (the “Projects”). As the criteria
for assets held for sale had been met in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
No. 144”), the assets were reclassified to assets held for sale and the liabilities related to
those assets were reclassified to liabilities related to assets held for sale in prior periods. The
results of operations for these assets were reclassified as discontinued operations in the third
quarter of 2007 and the Company ceased recording depreciation expense on these Projects. During the
fourth quarter of 2008, the Company determined that given the difficulty in predicting the timing
or probability of a sale of the assets associated with the Projects as a result of, among other
things, the economic downturn and disruptions in credit markets, the requirements of SFAS No. 144
necessary to classify these assets as held for sale and to be included in discontinued operations
were no longer met and the Company could not assert the Projects can be sold within a year.
Therefore, the results of operations for these Projects were reclassified for the three years
ending December 31, 2008 back into continuing operations in the consolidated statements of
operations. In accordance with SFAS No. 144, the Company recorded a depreciation recapture of $3.2
million at December 31, 2008 to account for the depreciation not recorded while the assets were
classified as discontinued operations. The Company compared the net
carrying amount of the asset, after taking into account the
adjustment for depreciation recapture, to the fair value at the date
of the subsequent decision not to sell and determined that the
adjusted net carrying value was less than the fair value on the date
of the reclassification. Total assets and liabilities related to the Projects were
$92.7 million and $76.1 million, respectively, for the year ended December 31, 2008, and $96.2
million and 80.1 million, respectively, for the year ended December 31, 2007. In addition, total
revenues related to the Projects for the years ended December 31, 2008, 2007 and 2006 were $8.7
million, $4.7 million and $1.8 million, respectively, while income (loss) related to the Projects
for the same periods in 2008, 2007 and 2006 was $6.0 million,
$1.8 million and $(21,000),
respectively.
Loss in excess of investment in Levitt and Sons
Under Accounting Research Bulletin (“ARB”) No. 51, “Consolidated Financial Statements” (“ARB
No. 51”), consolidation of a majority-owned subsidiary is precluded where control does not rest
with the majority owners. Under these rules, legal reorganization or bankruptcy represents
conditions which can preclude consolidation or equity method accounting as control rests with the
bankruptcy court, rather than the majority owner. As described elsewhere in this report, Levitt and
Sons, our wholly-owned subsidiary, declared bankruptcy on November 9, 2007. Therefore, in
accordance with ARB No. 51, Woodbridge deconsolidated Levitt and Sons as of November 9, 2007,
eliminating all future operations of Levitt and Sons from Woodbridge’s financial results of
operations, and the Company now follows the cost method of accounting to record its interest in
Levitt and Sons. Under cost method accounting, income will only be recognized to the extent of
cash received in the future or when Levitt and Sons is legally released from its bankruptcy
obligations through the approval of the Bankruptcy Court, at which time, any recorded loss in
excess of the investment in Levitt and Sons can be recognized into income. (See Notes 20 and 24 for
further information regarding Levitt and Sons and the Chapter 11 Cases).
Cash Equivalents
Cash and cash equivalents consist of demand deposits at commercial banks. The Company also
invests in money market funds and certificates of deposits. Certificates of deposits with original
maturities of less than three months are considered cash and cash equivalents. The cash deposits
are held primarily at various financial institutions and exceed federally insured amounts. However,
the Company has not experienced any losses on such accounts and management does not believe these
concentrations to be a credit risk to the Company.
Restricted Cash
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Cash and interest bearing deposits are segregated into restricted accounts for specific uses
in accordance with the terms of certain land sale contracts, home sales and other agreements.
Restricted funds may be utilized in accordance with the terms of the applicable governing
documents. The majority of restricted funds are controlled by third-party escrow fiduciaries and
include the amounts reserved under the Levitt and Sons Settlement Agreement.
Impairment of Long-Lived Assets
Long-lived assets consist of real estate inventory, property and equipment and other
amortizable intangible assets. In accordance with SFAS No. 144, long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its estimated future
undiscounted cash flows, an impairment charge is recognized in an amount by which the carrying
amount of the asset exceeds the fair value of the asset.
For projects representing land investments where homebuilding activity had not yet begun,
valuation models are used as the best evidence of fair value and as the basis for the measurement.
If the calculated project fair value is lower than the carrying value of the real estate inventory,
an impairment charge is recognized to reduce the carrying value of the project to fair value.
The assumptions developed and used by management to evaluate impairment are subjective and
involve significant estimates, and are subject to increased volatility due to the uncertainty of
the current market environment. As a result, actual results could differ materially from
management’s assumptions and estimates and may result in material impairment charges in the future.
Short-Term Investments
The Company considers investments with original maturities of greater than three months and
remaining maturities of less than one year as short-term investments. Certificates of deposits with
original maturities of greater than three months and remaining maturities of less than one year are
classified as “Certificates of deposits, short term” in our consolidated statements of financial
condition.
Fair Value Measurements
Effective January 1, 2008, the Company partially adopted the provisions of SFAS No. 157, “Fair
Value Measurements” (“SFAS No. 157”), which requires the Company to disclose the fair value of its
investments in unconsolidated trusts and equity securities, including the investments in Bluegreen
and Office Depot. Under this standard, fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date (an exit price). In determining fair value, the Company is sometimes
required to use various valuation techniques. SFAS No. 157 establishes a hierarchy for inputs used
in measuring fair value that maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the most observable inputs be used when available. As a basis
for considering such assumptions, SFAS No. 157 establishes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value as follows:
| • | Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities; | ||
| • | Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and | ||
| • | Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
When valuation techniques, other than those described as Level 1 are utilized, management must
make estimations and judgments in determining the fair value for its investments. The degree to
which
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management’s estimation and judgment is required is generally dependent upon the market
pricing available for the investments, the availability of observable inputs, the frequency of
trading in the investments and the investment’s complexity. If management makes different judgments
regarding unobservable inputs the Company could potentially reach different conclusions regarding
the fair value of its investments.
Investments
The Company determines the appropriate classifications of investments in equity
securities at the acquisition date and re-evaluates the classifications at each balance
sheet date. For entities where the Company is not deemed to be the primary beneficiary
under FIN No. 46(R) or in which it has less than a controlling
financial interest evaluated under AICPA Statement of
Position 78-9, “Accounting for Investments in Real Estate
Ventures” or Emerging Issues Task Force No. 04-5,
“Determining Whether a General Partner, or the General
Partners as a group, Controls a Limited Partnership or Similar Entity
When the Limited Partners Have Certain Rights”, these entities are accounted for using the equity or cost method of
accounting. Typically, the cost method is used if the Company owns less than 20% of the
investee’s stock and the equity method is used if the Company owns more than 20% of the
investee’s stock. However, the Company has concluded that the percentage ownership of
stock is not the sole determinant in applying the equity or the cost method, but the
significant factor is whether the investor has the ability to significantly influence the
operating and financial policies of the investee.
Equity Method
The Company follows the equity method of accounting to record its interests in entities in
which it does not own the majority of the voting stock or record its investment in VIEs in which it
is not the primary beneficiary. These entities consist of Bluegreen Corporation and statutory
business trusts. The statutory business trusts are VIEs in which the Company is not the primary
beneficiary. Under the equity method, the initial investment in a joint venture is recorded at
cost and is subsequently adjusted to recognize the Company’s share of the joint venture’s earnings
or losses. Distributions received and other-than-temporary impairments reduce the carrying amount
of the investment.
Cost Method
The Company uses the cost method for investments where the Company owns less than a 20%
interest and does not have the ability to significantly influence the operating and financial
policies of the investee in accordance with relative accounting
guidance. SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, requires the
Company to designate its securities as held to maturity, available for sale, or trading, depending
on the Company’s intent with regard to its investments at the
time of purchase. There are currently no securities classified as held to
maturity or trading.
Impairment
Securities classified as available-for-sale are carried at fair value with net unrealized
gains or losses reported as a component of accumulated other comprehensive income (loss), but do
not impact the Company’s results of operations. Changes in fair value are taken to income when a
decline in value is considered other-than-temporary.
The Company reviews its equity and cost method investments quarterly for indicators of
other-than-temporary impairment in accordance with FSP FAS 115-1/FAS 124-1, “The Meaning of
Other-than-Temporary Impairment and Its Application to Certain Investments” (“FSP FAS 115-1/FAS
124-1”), and Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 59 (“SAB No.
59”). This determination requires significant judgment in which the Company evaluates, among other
factors, the fair market value of the investments, general market conditions, the duration and
extent to which the fair value of the investment is less than cost, and the Company’s intent and
ability to hold the investment until it recovers. The Company also considers specific adverse
conditions related to the financial health of and business outlook for the investee, including
industry and sector performance, rating agency actions, changes in operational and financing cash
flow factors. If a decline in the fair value of the investment is determined to be
other-than-temporary, an impairment charge is recorded to reduce the investment to its fair value
and a new cost basis in the investment is established.
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Capitalized Interest
Interest incurred relating to land under development and construction is capitalized to real
estate inventory or property and equipment during the active development period. For inventory,
interest is capitalized at the effective rates paid on borrowings during the pre-construction and
planning stages and the periods that projects are under development. Capitalization of interest is
discontinued if development ceases at a project. Capitalized interest is expensed as a component of
cost of sales as related homes, land and units are sold. For property and equipment under
construction, interest associated with these assets is capitalized as incurred to property and
equipment and is expensed through depreciation once the asset is put into use. The following table
is a summary of interest incurred, capitalized and expensed, exclusive of impairment adjustments
(in thousands):
| For the year ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Interest incurred |
$ | 22,367 | 50,767 | 42,002 | ||||||||
Interest capitalized |
(11,500 | ) | (46,960 | ) | (42,002 | ) | ||||||
Interest expense |
$ | 10,867 | 3,807 | — | ||||||||
Interest expensed in cost of sales |
$ | 326 | 17,949 | 15,358 | ||||||||
In addition to the above interest expensed in cost of sales, the capitalized interest balance
of inventory of real estate as of December 31, 2008 was reduced
by approximately $2.4 million from the
impairment reserve allocated to the capitalized interest component of inventory of real estate as a
result of the Carolina Oak impairment charge recorded in the Other Operations segment. The
capitalized interest balance of inventory of real estate as of December 31, 2007 was also reduced
by $24.8 million of impairment reserves, of which approximately $9.3 million of these impairments
related to Woodbridge’s impairment of capitalized interest recorded in Other Operations associated
with projects at Levitt and Sons, and the remaining $15.5 million related to the Homebuilding
segments.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation and amortization, and
consists primarily of land and office buildings, furniture and fixtures, leasehold improvements,
equipment and water treatment and irrigation facilities. Repairs and maintenance costs are
expensed as incurred. Significant renovations and improvements that improve or extend the useful
lives of assets are capitalized. Depreciation is primarily computed on the straight-line method
over the estimated useful lives of the assets, which generally range up to 50 years for water and
irrigation facilities, 40 years for buildings, and 7 years for equipment and furniture and
fixtures. Leasehold improvements are amortized using the straight-line method over the shorter of
the terms of the related leases or the useful lives of the assets. In cases where the Company
determines that land and the related development costs are to be used as fixed assets, these costs
are transferred from inventory of real estate to property and equipment.
Goodwill and Intangible Assets
The Company has recorded certain intangible assets related to its acquisition of Pizza Fusion.
Intangible assets consist primarily of franchise contracts which were valued using a discounted
cash flows methodology and are amortized over the average life of the
franchise contracts. The estimates of useful lives and expected cash flows require the Company to make
significant judgments regarding future periods that are subject to outside factors. In accordance
with SFAS No. 144, the Company evaluates when events and circumstances indicate that assets may be
impaired and when the undiscounted cash flows estimated to be generated by those assets are less
than their carrying amounts. The carrying value of these assets is dependent upon estimates of
future earnings that the Company expects to generate. If cash flows decrease significantly,
intangible assets may be impaired and would be written down to their fair value.
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On at
least an annual basis, the Company conducts a review of its goodwill
in accordance with SFAS No. 142, “Goodwill and Other Intangible
Assets” (“SFAS No. 142”), to determine whether the carrying value of goodwill
exceeds the fair market value using a discounted
cash flow methodology. In the year ended December 31, 2006, the Company conducted an
impairment review of the goodwill related to the Tennessee Homebuilding segment, the
operations of which consisted of the activities of Bowden Building Corporation, which the
Company acquired in 2004. The Company used a discounted cash flow methodology to determine the amount
of impairment resulting in completely writing off goodwill of approximately $1.3 million in the year ended
December 31, 2006. The write-off is included in other expenses in the consolidated statements of operations.
Revenue Recognition
Revenue and all related costs and expenses from house and land sales are recognized at the
time that closing has occurred, when title and possession of the property and the risks and rewards
of ownership transfer to the buyer, and when the Company does not have a substantial continuing
involvement in accordance with SFAS No. 66, “Accounting for Sales of Real Estate” (“SFAS No. 66”).
In order to properly match revenues with expenses, the Company estimates construction and land
development costs incurred and to be incurred, but not paid at the time of closing. Estimated costs
to complete are determined for each closed home and land sale based upon historical data with
respect to similar product types and geographical areas and allocated to closings along with actual
costs incurred based on a relative sales value approach. To the extent the estimated costs to
complete have significantly changed, the Company will adjust cost of sales in the current period
for the impact on cost of sales of previously sold homes and land to ensure a consistent margin of
sales is maintained.
Revenue is recognized for certain land sales on the percentage-of-completion method when the
land sale takes place prior to all contracted work being completed. Pursuant to the requirements
of SFAS 66, if the seller has some continuing involvement with the property and does not transfer
substantially all of the risks and rewards of ownership, profit shall be recognized by a method
determined by the nature and extent of the seller’s continuing involvement. In the case of land
sales, this involvement typically consists of final development activities. The Company recognizes
revenue and related costs as work progresses using the percentage of completion method, which
relies on estimates of total expected costs to complete required work. Revenue is recognized in
proportion to the percentage of total costs incurred in relation to estimated total costs at the
time of sale. Actual revenues and costs to complete construction in the future could differ from
current estimates. If the estimates of development costs remaining to be completed and relative
sales values are significantly different from actual amounts, then the revenues, related cumulative
profits and costs of sales may be revised in the period that estimates change.
Other revenues consist primarily of rental property income, marketing revenues, irrigation
service fees, and title and mortgage revenue. Irrigation service connection fees are deferred and
recognized systematically over the life of the irrigation plant. Irrigation usage fees are
recognized when billed as the service is performed. Rental property income consists of rent
revenue from long-term leases of commercial property. The Company reviews all new leases in
accordance with SFAS No. 13 “Accounting for Leases”. If the lease contains fixed escalations for
rent, free-rent periods or upfront incentives, rental revenue is recognized on a straight-line
basis over the life of the lease.
Effective January 1, 2006, Bluegreen adopted AICPA Statement of Position 04-02, “Accounting
for Real Estate Time-Sharing Transactions” (“SOP 04-02”). This Statement amends FASB Statement No.
67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects” (“SFAS No. 67”),
to state that the guidance for incidental operations and costs incurred to sell real estate
projects does not apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in SOP 04-02. Bluegreen’s adoption of SOP 04-02
resulted in a one-time, non-cash, cumulative effect of change in accounting principle charge of
$4.5 million to Bluegreen for the year ended December 31, 2006, and accordingly reduced the
earnings in Bluegreen recorded by us by approximately $1.4 million for the same period.
Stock-based Compensation
The Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004),
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“Share-Based Payment” (“SFAS No. 123R”), as of January 1, 2006 and elected the modified-prospective
transition method, under which prior periods are not restated. Under the fair value recognition
provisions of this statement, stock-based compensation cost is measured at the grant date based on
the fair value of the award and is recognized as expense on a straight-line basis over the
requisite service period, which is the vesting period for all awards granted after January 1, 2006,
and for the unvested portion of stock options that were outstanding at January 1, 2006.
SFAS No. 123R requires a public entity to measure compensation cost associated with awards of
equity instruments based on the grant-date fair value of the awards over the requisite service
period. SFAS No. 123R requires public entities to initially measure compensation cost associated
with awards of liability instruments based on their current fair value. The fair value of that
award is to be remeasured subsequently
at each reporting date through the settlement date. Changes in fair value during the requisite
service period will be recognized as compensation cost over that period.
The Company currently uses the Black-Scholes option-pricing model to determine the fair value
of stock options. The fair value of option awards on the date of grant using the Black-Scholes
option-pricing model is determined by the stock price and assumptions regarding expected stock
price volatility over the expected term of the awards, risk-free interest rate, expected forfeiture
rate and expected dividends. If factors change and the Company uses different assumptions for
estimating stock-based compensation expense in future periods or if the Company decides to use a
different valuation model, the amounts recorded in future periods may differ significantly from the
amounts recorded in the current period and could affect net income and earnings per share.
Income Taxes
The Company records income taxes using the liability method of accounting for deferred income
taxes. Under this method, deferred tax assets and liabilities are recognized for the expected
future tax consequence of temporary differences between the financial statement and income tax
bases of our assets and liabilities. The Company estimates income taxes in each of the
jurisdictions in which it operates. This process involves estimating tax exposure together with
assessing temporary differences resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within the consolidated statements of financial condition. The
recording of a net deferred tax asset assumes the realization of such asset in the future.
Otherwise, a valuation allowance must be recorded to reduce this asset to its net realizable value.
The Company considers future pretax income and ongoing prudent and feasible tax strategies in
assessing the need for such a valuation allowance. In the event that the Company determines that
it may not be able to realize all or part of the net deferred tax asset in the future, a valuation
allowance for the deferred tax asset is charged against income in the period such determination is
made.
The Company and its subsidiaries file a consolidated Federal and Florida income tax return.
Separate state returns are filed by subsidiaries that operate outside the state of Florida. Even
though Levitt and Sons and its subsidiaries have been deconsolidated from Woodbridge for financial
statement purposes, they will continue to be included in the Company’s Federal and Florida
consolidated tax returns until Levitt and Sons is discharged from bankruptcy. As a result of the
deconsolidation of Levitt and Sons, all of Levitt and Sons’ net deferred tax assets are no longer
presented in the accompanying consolidated statement of financial condition at December 31, 2008
and 2007 but remain a part of Levitt and Sons’ condensed consolidated financial statements at
December 31, 2008 and 2007.
The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes — an interpretation of FASB No. 109” (“FIN 48”), on January 1, 2007. FIN 48
provides guidance on recognition, measurement, presentation and disclosure in financial statements
of uncertain tax positions that a company has taken or expects to take on a tax return. FIN 48
substantially changes the accounting policy for uncertain tax positions. As a result of the
implementation of FIN 48, the Company recognized a decrease of $260,000 in the liability for
unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007 balance of
retained earnings. At December 31, 2008 and 2007, there were gross tax affected unrecognized tax
benefits of $2.4 million, of which $0.2 million, if recognized, would affect the effective tax
rate.
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Loss per Share
The Company has two classes of common stock. Class A common stock is quoted on the Pink
Sheets. At December 31, 2008 and 2007, 19,042,149 shares and 19,010,804 shares (after retroactively
adjusting this share amounts to reflect the one-for-five reverse stock split effected during
September 2008), respectively, were issued. The Company also has Class B common stock which is
held exclusively by BFC Financial Corporation (“BFC”), the Company’s controlling shareholder.
While the Company has two classes of common stock outstanding, the two-class method is not
presented because the Company’s capital structure does not provide for different dividend rates or
other preferences, other than voting and conversion rights, between the two classes. Basic loss per
common share is computed by dividing net loss by the weighted average number of common shares
outstanding for the period. Diluted loss per share is computed in the same manner as basic loss
per share, but it also gives
consideration to (a) the dilutive effect of the Company’s stock options and restricted stock
using the treasury stock method and (b) the pro rata impact of Bluegreen’s dilutive securities
(stock options and convertible securities) on the amount of Bluegreen’s earnings that the Company
recognizes.
All share and per share data presented in this report for prior periods have been
retroactively adjusted to reflect the one-for-five reverse stock split effected by the Company
during September 2008.
Stock Repurchases
The Company accounts for repurchases of its common stock using the cost method with common
stock in treasury classified in its consolidated statement of financial condition as a reduction of
shareholders’ equity.
New Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements—an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 requires that a
noncontrolling interest in a subsidiary be reported as equity and the amount of consolidated net
income specifically attributable to the noncontrolling interest be identified in the consolidated
financial statements. It also calls for consistency in the manner of reporting changes in the
parent’s ownership interest and requires fair value measurement of any noncontrolling equity
investment retained in a deconsolidation. SFAS No. 160 is effective for the Company’s fiscal year
beginning January 1, 2009. The adoption of SFAS No. 160 will not have a material impact on the
Company’s consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS
No. 141R”). SFAS No. 141R broadens the guidance of SFAS No. 141, extending its applicability to all
transactions and other events in which one entity obtains control over one or more other
businesses. It broadens the fair value measurement and recognition of assets acquired, liabilities
assumed, and interests transferred as a result of business combinations. SFAS No. 141R expands on
required disclosures to improve the statement users’ abilities to evaluate the nature and financial
effects of business combinations. SFAS No. 141R is effective for the Company’s fiscal year
beginning January 1, 2009. The adoption of SFAS No. 141R could have a material effect on the
Company’s consolidated financial statements to the extent the Company consummates business
combinations due to the requirement to write-off transaction costs to the consolidated statements
of operations.
In April 2008, the FASB issued Staff Position (“FSP”) FAS No. 142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP FAS No. 142-3”). FSP FAS No. 142-3 amends paragraph 11(d)
of FASB Statement No. 142 “Goodwill and Other Intangible Assets” (“SFAS No. 142”) which sets forth
the factors that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142. FSP FAS No. 142-3
intends to improve the consistency between the useful life of a recognized intangible asset under
SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset
under SFAS No. 141R. FSP FAS No. 142-3 is effective for the Company’s fiscal year beginning January
1, 2009 and must be applied prospectively to intangible assets acquired after the effective date.
The adoption of FSP FAS No. 142-3 will not have a material impact on the Company’s consolidated
financial statements.
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In October 2008, the FASB issued FSP FAS No. 157-3, “Determining Fair Value of a Financial
Asset in a Market That Is Not Active” (“FSP FAS No. 157-3”). FSP FAS No. 157-3 clarified the
application of SFAS No. 157 in an inactive market. It demonstrated how the fair value of a
financial asset is determined when the market for that financial asset is inactive. FSP FAS No.
157-3 was effective upon issuance, including prior periods for which financial statements had not
been issued. The implementation of this standard did not have a material impact on the Company’s
consolidated financial statements.
In
November 2008, the FASB issued EITF 08-6, “Equity Method
Accounting Considerations” (“EITF
08-6”). EITF 08-6 clarifies the application of equity method accounting under Accounting
Principles Board 18, “The Equity Method of Accounting for
Investments in Common Stock”.
Specifically, it requires companies to initially record equity method investments based on the cost
accumulation model, precludes separate other-than-temporary impairment tests on an equity method
investee’s indefinite-lived assets from the investee’s test, requires companies to account for an
investee’s issuance of shares as if the equity method investor had sold a proportionate share of
its investment, and requires that an equity method investor continues to apply the guidance in
paragraph 19(l) of APB 18 upon a change in the investor’s accounting from the equity method to
the cost method. EITF 08-6 is effective prospectively for fiscal years beginning on or after
December 15, 2008, and interim periods within those fiscal years. The Company is currently
evaluating the impact of EITF 08-6.
In December 2008, the FASB issued FSP FAS No. 140-4 and FIN 46R-8 “Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest
Entities” which requires enhanced disclosure related to VIEs in accordance with SFAS 140
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” and
FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities”.
These disclosures include significant judgments and assumptions, restrictions on asset, risk and
the effects on financial position, financial performance and cash flows. The enhanced disclosures
are effective for the first reporting period that ends
after December 15, 2008. The implementation of this standard will not have a material impact on the
Company’s consolidated financial statements.
3. Business Combination
Pizza Fusion is a restaurant franchise operating in a niche market within the quick service
and organic food industries. Founded in 2006, Pizza Fusion was operating 16 locations in Florida
and California through December 31, 2008 and entered into franchise agreements to open an
additional 14 stores over 2009.
On September 18, 2008, the Company, indirectly through its wholly-owned subsidiary, Woodbridge
Equity Fund II LP, purchased for an aggregate of $3.0 million, 2,608,696 shares of Series B
Convertible Preferred Stock of Pizza Fusion, together with warrants to purchase up to 1,500,000
additional shares of Series B Convertible Preferred Stock of Pizza Fusion at an exercise price of
$1.44 per share. The Company also has options, exercisable on or prior to September 18, 2009, to
purchase up to 521,740 additional shares of Series B Convertible Preferred Stock of Pizza Fusion at
a price of $1.15 per share and, upon exercise of such options, will receive warrants to purchase up
to 300,000 additional shares of Series B Convertible Preferred Stock of Pizza Fusion at an exercise
price of $1.44 per share. The warrants have a term of 10 years, subject to earlier expiration in
certain circumstances.
The Company evaluated its investment in Pizza Fusion under FIN No. 46(R) and determined that
Pizza Fusion is a VIE. Pizza Fusion is in its infancy stages and does not have enough equity
investment and will likely require additional financial support for its normal operations and
further expansion of its franchise operations. Furthermore, the Company’s investment on a fully
diluted basis will result in the Company having a significant interest in Pizza Fusion and
therefore will bear the majority of the variability of the risks and rewards of Pizza Fusion.
Additionally, as shareholder of the Series B Preferred Stock, the Company has control over the
Board of Directors of Pizza Fusion. Based upon these factors, the Company concluded that it is the
primary beneficiary and as such, applied purchase accounting and has consolidated the assets and
liabilities of Pizza Fusion in accordance with SFAS No. 141. Apart from the investment of $3.0
million, the Company did not provide any additional financial support to Pizza Fusion. There are
no restrictions on the assets currently held by Pizza Fusion and their liabilities are primarily
related to franchise deposits, which are not refundable. The financial statements of Pizza Fusion
at December 31, 2008 were not material.
The following table summarizes the fair value of the assets and liabilities associated with
the consolidation of Pizza Fusion as of September 18, 2008 (in thousands):
Prepaid and other current assets |
$ | 148 | ||
Property, plant and equipment |
117 | |||
Intangible assets |
4,324 | |||
Other assets |
15 | |||
Fair value of assets |
4,604 | |||
Accounts payable and other liabilities |
442 | |||
Deposits and deferred fees |
1,127 | |||
Notes payable |
35 | |||
Fair value of liabilities |
$ | 1,604 | ||
Net assets acquired |
$ | 3,000 | ||
Net cash consideration |
$ | 3,000 | ||
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The Company recorded $4.4 million in other intangibles assets. The intangible assets consist
primarily of the value of franchise agreements executed by the Company for approximately 14 stores
to be open through 2009. These intangible assets will be amortized over the length of the franchise
agreements which is approximately 10 years.
4. Loss per Share
Basic loss per common share is computed by dividing loss attributable to common shareholders
by the weighted average number of common shares outstanding for the period. Diluted loss per common
share is computed in the same manner as basic loss per common share, taking into consideration (a)
the dilutive effect of the Company’s stock options and restricted stock using the treasury stock
method and (b) the pro
rata impact of Bluegreen’s dilutive securities (stock options and convertible securities) on
the amount of Bluegreen’s earnings recognized by the Company. For the years ended December 31,
2008, 2007 and 2006, common stock equivalents related to the Company’s stock options and unvested
restricted stock amounted to 3,258 shares, 2,306 shares and 1,123 shares, respectively, and were
not considered in computing diluted loss per common share because their effect would have been
antidilutive since the Company recorded a net loss for those years. In addition, for the years
ended December 31, 2008, 2007 and 2006, 336,159, 372,564 and 379,772 shares of common stock
equivalents, respectively, at various prices were not included in the computation of diluted loss
per common share because the exercise prices were greater than the average market price of the
common shares and, therefore, their effect would be antidilutive.
The following table presents the computation of basic and diluted loss per common share (in
thousands, except for per share data):
| For the Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Numerator: |
||||||||||||
Basic loss per common share: |
||||||||||||
Net loss — basic |
$ | (140,331 | ) | (234,620 | ) | (9,164 | ) | |||||
Diluted loss per common share: |
||||||||||||
Net loss — basic |
$ | (140,331 | ) | (234,620 | ) | (9,164 | ) | |||||
Pro rata share of the net effect of Bluegreen dilutive
securities |
— | (42 | ) | (100 | ) | |||||||
Net loss — diluted |
$ | (140,331 | ) | (234,662 | ) | (9,264 | ) | |||||
Denominator: |
||||||||||||
Basic average shares outstanding |
19,088 | 7,821 | 3,967 | |||||||||
Bonus adjustment factor from registration rights offering |
— | — | 1.0197 | |||||||||
Basic average shares outstanding |
19,088 | 7,821 | 4,045 | |||||||||
Net effect of stock options assumed to be exercised |
— | — | — | |||||||||
Diluted average shares outstanding |
19,088 | 7,821 | 4,045 | |||||||||
Loss per common share: |
||||||||||||
Basic |
$ | (7.35 | ) | (30.00 | ) | (2.27 | ) | |||||
Diluted |
$ | (7.35 | ) | (30.00 | ) | (2.29 | ) | |||||
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5. Equity transactions
Cash dividends
Cash dividends declared by the Company’s Board of Directors for the years ended December 31,
2007 and 2006 are summarized as follows:
| Classes of | Dividend | |||||||||
| Declaration Date | Record Date | Common Stock | per share | Payment Date | ||||||
January 24, 2006
|
February 8, 2006 | Class A, Class B | $ | 0.10 | February 15, 2006 | |||||
April 26, 2006
|
May 8, 2006 | Class A, Class B | $ | 0.10 | May 15, 2006 | |||||
August 1, 2006
|
August 11, 2006 | Class A, Class B | $ | 0.10 | August 18, 2006 | |||||
October 23, 2006
|
November 10, 2006 | Class A, Class B | $ | 0.10 | November 17, 2006 | |||||
January 22, 2007
|
February 9, 2007 | Class A, Class B | $ | 0.10 | February 16, 2007 | |||||
The Company did not declare any cash dividends during the year ended December 31, 2008. The
Company has not adopted a policy of regular dividend payments. The payment of dividends in the
future is subject to approval by the Board of Directors and will depend upon, among other factors,
the Company’s results of operations and financial condition. The Company does not expect to pay
dividends to shareholders for the foreseeable future.
Reverse stock split
On September 26, 2008, the Company effected a one-for-five reverse stock split. As a result of
the reverse stock split, each five shares of the Company’s Class A Common Stock outstanding at the
time of the reverse stock split automatically converted into one share of Class A Common Stock and
each five shares of the Company’s Class B Common Stock outstanding at the time of the reverse stock
split automatically converted into one share of Class B Common Stock. As a result, the number of
outstanding shares of Class A Common Stock decreased from 95,197,445 to 19,042,149, and the number
of outstanding shares of Class B Common Stock decreased from 1,219,031 to 243,807. The number of
authorized shares of the Company’s Class A and Class B Common Stock as well as the number of shares
of Class A Common Stock available for issuance under the Company’s equity compensation plans and
the number of shares of Class A Common Stock underlying stock options and other exercisable or
convertible instruments were also ratably decreased in connection with the reverse split. All share
and per share data presented in this report for prior periods have been retroactively adjusted to
reflect the reverse stock split.
Stock Repurchases
In November 2008, the Company’s Board of Directors approved a stock repurchase program which
authorized Woodbridge to repurchase up to 5 million shares of its Class A Common Stock from time to
time on the open market or in private transactions. There can be no assurance that Woodbridge will
repurchase all of the shares authorized for repurchase under the program, and the actual number of
shares repurchased will depend on a number of factors, including levels of cash generated from
operations, cash requirements for acquisitions and investment opportunities, repayment of debt,
current stock price, and other factors. The stock repurchase program does not have an expiration
date and may be modified or discontinued at any time. In the fourth quarter of 2008, the Company
repurchased 2,385,624 shares at a cost of $1.4 million which have been recorded as treasury stock
in the Statements of Financial Condition. These treasury stock shares repurchased by the Company
were canceled and retired on February 25, 2009 subsequent to December 31, 2008. At December 31,
2008, 2,614,376 shares remained available for repurchase under the stock repurchase program.
Rights Offering
On August 29, 2007, Woodbridge distributed to each holder of record of its Class A Common
Stock and Class B Common Stock as of August 27, 2007 5.0414 subscription rights for each share of
such
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stock owned on that date (the “Rights Offering”), Each right entitled the holder to purchase
one share of Class A Common Stock at $2.00 per share, and, in the aggregate, the Company issued
rights to purchase 100 million shares of Class A Common Stock. The Rights Offering was priced at
$2.00 per share, commenced on August 29, 2007 and was completed on October 1, 2007. Woodbridge
received $152.8 million of proceeds in connection with the exercise of rights by its shareholders.
In connection with the offering, Woodbridge issued an aggregate of 76,424,066 shares (15,284,814
shares after adjusting for the reverse stock split) of Class A Common Stock on October 1, 2007.
The stock price on the October 1, 2007 closing date was $2.05 per share. As a result, there is a
bonus element adjustment of 1.97% for all shareholders of record on August 29, 2007 and accordingly
the number of weighted average shares of Class A Common Stock outstanding for basic and diluted
(loss) earnings per share was retroactively increased by 1.97% for all periods presented in these
consolidated financial statements.
6. Stock Based Compensation
On May 11, 2004, the Company’s shareholders approved the 2003 Levitt Corporation Stock
Incentive Plan. In March 2006, subject to shareholder approval, the Board of Directors of the
Company approved the amendment and restatement of the Company’s 2003 Stock Incentive Plan to
increase the maximum number of shares of the Company’s Class A common stock, $0.01 par value, that
may be issued for restricted stock awards and upon the exercise of options under the plan from
1,500,000 to 3,000,000 shares. The Company’s shareholders approved the Amended and Restated 2003
Stock Incentive Plan (“Incentive Plan”) on May 16, 2006. In connection with the reverse stock
split, the number of shares of Class A Common Stock available for issuance under the Incentive Plan
and the number of shares underlying awards previously granted under the Incentive Plan were each
ratably decreased and the exercise prices of stock options previously granted under the Incentive
Plan were ratably increased. The
share and per share data presented below and elsewhere in this report have been adjusted to
reflect the reverse stock split.
The maximum term of options granted under the Incentive Plan is 10 years. The vesting period
for each grant is established by the Compensation Committee of the Board of Directors. The vesting
period for employees is generally five years utilizing cliff vesting. All options granted to
directors vest immediately. Option awards issued to date become exercisable based solely on
fulfilling a service condition. Since the inception of the Incentive Plan there have been no
expired stock options.
In accordance with SFAS No. 123R, the Company estimates the grant-date fair value of its stock
options using the Black-Scholes option-pricing model, which takes into account assumptions
regarding the dividend yield, the risk-free interest rate, the expected stock-price volatility and
the expected term of the stock options. The expected life of stock
option awards granted is based upon the “simplified method”
for “plain vanilla” options, as defined by SAB No. 110. The fair value of the Company’s stock option awards, which
are primarily subject to five year cliff vesting, is expensed over the vesting life of the stock
options using the straight-line method.
The fair value for these options was estimated at the date of the grant using the following
assumptions:
| Year ended | Year ended | Year ended | ||||
| December 31, 2008 | December 31, 2007 | December 31, 2006 | ||||
Expected volatility |
65.47% | 40.05% – 52.59% | 37.37% – 39.80% | |||
Expected dividend yield |
0.00% | 0.00% – 0.83% | 0.39% – 0.61% | |||
Risk-free interest rate |
4.16% | 4.58% – 5.14% | 4.57% – 5.06% | |||
Expected life |
5 years | 5 – 7.5 years | 5 – 7.5 years | |||
Forfeiture rate —
executives |
5% | 5% | 5% | |||
Forfeiture rate —
non-executives |
— | 10% | 10% |
Expected volatility is based on the historical volatility of the Company’s stock. Due to the
short period of time the Company has been publicly traded, the historical volatilities of similar
publicly traded entities are reviewed to validate the Company’s expected volatility assumption.
The expected dividend
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yield is based on an expected quarterly dividend. Historically, forfeiture
rates were estimated based on historical employee turnover rates. In 2007, there were substantial
forfeitures as a result of the reductions in force related to the bankruptcy of Levitt and Sons.
See (Note 24) for further explanation. As a result, the Company adjusted their stock compensation
to reflect actual forfeitures. In accordance with SFAS No. 123R, companies are required to adjust
forfeiture estimates for all awards with performance and service conditions through the vesting
date so that compensation cost is recognized only for awards that vest. During the year ended
December 31, 2008, there were substantial pre-vesting forfeitures as a result of the reductions in
force related to the Company’s restructurings and the bankruptcy of Levitt and Sons. In accordance
with SFAS No. 123R, pre-vesting forfeitures result in a reversal of compensation cost whereas a
post-vesting cancellation would not.
Non-cash stock compensation expense for the years ended December 31, 2008, 2007 and 2006
related to unvested stock options amounted to $840,000, $1.9 million and $3.1 million,
respectively, with an expected or estimated income tax benefit of $548,000, $578,000 and $849,000,
respectively. Non-cash stock compensation expense for the years ended December 31, 2008 and
December 31, 2007 include $2.1 million and $3.5 million, respectively, of amortization of stock
option compensation offset by $1.3 million and $1.6 million, respectively, of a reversal of stock
compensation previously expensed related to forfeited options. Additionally, during 2007, the
Company recorded $231,000 of tax benefit related to employees exercising stock options to acquire
shares of BankAtlantic Bancorp, Inc.’s (“Bancorp”) Class A common stock which was granted to the
Company’s employees before the Company was spun off from Bancorp.
At December 31, 2008, the Company had approximately $2.4 million of unrecognized stock
compensation expense related to outstanding stock option awards which is expected to be recognized
over a weighted-average period of 2.3 years.
Stock option activity under the Incentive Plan for the years ended December 31, 2007 and 2008
was as follows:
| Weighted | Weighted Average | Aggregate | ||||||||||||||
| Average | Remaining | Intrinsic | ||||||||||||||
| Number | Exercise | Contractual | Value | |||||||||||||
| of Options | Price | Term | (thousands) | |||||||||||||
Options outstanding
at December 31,
2006 |
378,521 | $ | 103.65 | $ | — | |||||||||||
Granted |
150,489 | 45.92 | — | |||||||||||||
Exercised |
— | — | — | |||||||||||||
Forfeited |
156,478 | 88.56 | — | |||||||||||||
Options outstanding
at December 31,
2007 |
372,532 | $ | 86.66 | 8.00 years | — | |||||||||||
Granted |
36,398 | 6.70 | — | |||||||||||||
Exercised |
— | — | — | |||||||||||||
Forfeited |
90,459 | 81.85 | — | |||||||||||||
Options outstanding
at December 31,
2008 |
318,471 | $ | 78.89 | 7.19 years | $ | — | ||||||||||
Options exercisable
at December 31,
2008 |
69,822 | $ | 40.20 | 8.36 years | $ | — | ||||||||||
Stock options
available for
equity compensation
grants at December
31, 2008 |
281,529 | |||||||||||||||
A summary of the Company’s non-vested stock option activity for the years ended December 31,
2007 and 2008 was as follows:
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| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Number of | Grant Date | Contractual | Intrinsic Value | |||||||||||||
| Options | Fair Value | Term | (in thousands) | |||||||||||||
Non-vested at December 31, 2006 |
358,660 | $ | 103.97 | $ | — | |||||||||||
Grants |
150,489 | 45.92 | — | |||||||||||||
Vested |
13,563 | 45.80 | — | |||||||||||||
Forfeited |
156,478 | 88.56 | — | |||||||||||||
Non-vested at December 31, 2007 |
339,108 | 87.64 | 7.98 years | — | ||||||||||||
Grants |
36,398 | 6.70 | — | |||||||||||||
Vested |
36,398 | 6.70 | — | |||||||||||||
Forfeited |
90,459 | 81.85 | — | |||||||||||||
Non-vested at December 31, 2008 |
248,649 | $ | 89.75 | 6.86 years | $ | — | ||||||||||
The following table summarizes information about stock options outstanding as of December 31, 2008:
| Options Outstanding | Options Exercisable | |||||||||||||||
| Remaining | ||||||||||||||||
| Range of Exercise | Number of | Contractual | ||||||||||||||
| Price | Stock Options | Life | Options | Exercise Price | ||||||||||||
$0.00 – $16.07
|
36,398 | 9.46 | 36,398 | $ | 6.70 | |||||||||||
$32.13 – $48.20
|
78,935 | 8.47 | 13,563 | $ | 45.80 | |||||||||||
$64.26 – $80.32
|
59,206 | 7.56 | — | $ | — | |||||||||||
$80.33 – $96.39
|
8,825 | 7.51 | 8,825 | $ | 80.45 | |||||||||||
$96.40
– $112.45
|
83,711 | 5.09 | 9,000 | $ | 100.75 | |||||||||||
$112.46 – $128.52
|
150 | 5.22 | — | $ | — | |||||||||||
$144.59 – $160.65
|
51,246 | 6.56 | 2,036 | $ | 159.75 | |||||||||||
| 318,471 | 7.19 | 69,822 | $ | 40.20 | ||||||||||||
The Company also grants shares of restricted Class A Common Stock, valued based on the market
price of such stock on the date of grant. Restricted stock is issued primarily to the Company’s
directors and typically vests in equal monthly installments over a one-year period. Compensation
expense arising from restricted stock grants is recognized using the straight-line method over the
vesting period. Unearned compensation for restricted stock is a component of additional paid-in
capital in shareholders’ equity in the consolidated statements of financial condition. During the
year ended December 31, 2007, the Company granted 1,529 restricted shares of Class A common stock
to non-employee directors under the Incentive Plan, having a market price on the date of grant of
$45.80 per share. During the year ended December 31, 2008, the Company granted 31,345 restricted
shares of Class A common stock to non-employee directors under the Incentive Plan, having a market
price on the date of grant of $6.70 per share. The restricted stock vests monthly over a 12 month
period. Non-cash stock compensation expense for the years ended December 31, 2008, 2007 and 2006
related to restricted stock awards amounted to $152,000, $81,000 and $150,000, respectively.
7. Notes Receivable
Notes receivable, which is included in other assets, was approximately $4.0 million at each of
December 31, 2008 and 2007 and represents purchase money notes due from third parties resulting
from various land sales at Core Communities. As of December 31, 2008, there were three notes
outstanding with
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a weighted average interest rate of 5.15% and interest is payable quarterly. A balloon
principal payment on one note of approximately $3.9 million is due in full in December 2009. The
remaining two notes of approximately $63,000 have principal payment terms due at various dates
through 2012.
8. Inventory of Real Estate
At December 31, 2008 and 2007, inventory of real estate is summarized as follows (in
thousands):
| December 31, | ||||||||
| 2008 | 2007 | |||||||
Land and land development costs |
$ | 202,456 | 196,577 | |||||
Construction cost |
463 | 1,062 | ||||||
Capitalized interest |
37,764 | 29,012 | ||||||
Other costs |
635 | 639 | ||||||
| $ | 241,318 | 227,290 | ||||||
As of December 31, 2008, inventory of real estate included inventory related to the operations
of the Land Division and Carolina Oak.
As a result of the various impairment analyses conducted throughout 2008, 2007 and 2006, the
Company recorded impairment charges of approximately $3.5 million, $226.9 million and $36.8
million, respectively, in cost of sales of real estate in the years ended December 31, 2008, 2007
and 2006. During the fourth quarter of 2008, the Company made the decision to suspend the
development activities of Carolina Oak and is re-evaluating its options with respect to this entity
due to the continued deterioration of the real estate markets in 2008. As a result, the Company
re-evaluated its impairment analyses in accordance with SFAS No. 144 and determined that an
impairment charge of $3.5 million was required to write the inventory down to its fair value at
December 31, 2008. This impairment charge was recorded in the Other Operations segment. The
impairment charges recorded in 2007 and 2006 related to Levitt and Sons’ inventory of real estate
and were recorded in the Primary and Tennessee Homebuilding segments.
In addition, included in total impairment
charges there was approximately $2.4 million in 2008 and
$9.3 million in 2007 of impairment charges relating to capitalized
interest in the Other Operations segment in connection with Carolina
Oak (2008) and the projects that
Levitt and Sons ceased developing (2007), respectively.
9. Property and Equipment
Property and equipment at December 31, 2008 and 2007 is summarized as follows (in thousands):
| December 31, | ||||||||||||
| Depreciable Life | 2008 | 2007 | ||||||||||
Real estate investments |
30-39 years | $ | 97,113 | 101,185 | ||||||||
Water and irrigation facilities |
35-50 years | 12,346 | 11,515 | |||||||||
Furniture and fixtures and equipment |
3-7 years | 12,259 | 12,131 | |||||||||
| 121,718 | 124,831 | |||||||||||
Accumulated depreciation |
(12,241 | ) | (6,588 | ) | ||||||||
Property and equipment, net |
$ | 109,477 | 118,243 | |||||||||
Depreciation expense for the years ended December 31, 2008, 2007 and 2006 was $5.7 million,
$3.1 million and $2.6 million, respectively, and is included in selling, general and administrative
expenses in the accompanying consolidated statements of operations.
The Company received proceeds from the sale of property and equipment for the years ended
December 31, 2008 and 2006 of approximately $5.6 million and $1.9 million, respectively. As a
result of these sales, the Company realized a gain on sale of property and equipment for the years
ended December 31, 2008 and 2006 of approximately $2.5 million and $1.9 million, respectively.
Sales of property and equipment for the year ended December 31, 2007 were not material.
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In 2007, the Company performed a review of its fixed assets and determined that certain
leasehold improvements were no longer appropriately valued as we vacated the leased space
associated with those
improvements. Therefore, the leasehold improvements in the amount of $564,000 related to this
vacated space were written off in the year ended December 31, 2007.
10. Investments
Bluegreen Corporation
At December 31, 2008, the Company owned approximately 9.5 million shares of common stock of
Bluegreen, representing approximately 31% of Bluegreen’s outstanding common stock. The Company
accounts for its investment in Bluegreen under the equity method of accounting. The cost of the
Bluegreen investment is adjusted to recognize the Company’s interest in Bluegreen’s earnings or
losses. The difference between a) the Company’s ownership percentage in Bluegreen multiplied by
its earnings and b) the amount of the Company’s equity in earnings of Bluegreen as reflected in the
Company’s financial statements relates to the amortization or accretion of purchase accounting
adjustments made at the time of the acquisition of Bluegreen’s common stock, to adjustments made to
the Company’s investment balance related to equity transactions recorded by Bluegreen that effect
the Company’s ownership and to the cumulative adjustment discussed below.
Effective January 1, 2006, Bluegreen adopted SOP 04-02. This Statement amends FAS No. 67 to
state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate
projects does not apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in SOP 04-02. Bluegreen’s adoption of SOP 04-02
resulted in a one-time, non-cash, cumulative effect of change in accounting principle charge of
$4.5 million to Bluegreen for the year ended December 31, 2006, and accordingly reduced the
earnings in Bluegreen recorded by the Company by approximately $1.4 million for the same period.
During 2008, the Company began evaluating its investment in Bluegreen for other-than-temporary
impairment in accordance with FSP FAS 115-1/FAS 124-1, APB No. 18 and SAB No. 59 as the fair value
of the Bluegreen stock had fallen below the carrying value of the Company’s investment in Bluegreen
of approximately $12 per share. The Company analyzed various quantitative and qualitative factors
including the Company’s intent and ability to hold the investment, the severity and duration of the
impairment and the prospects for the improvement of fair value. On July 21, 2008, Bluegreen’s Board
of Directors entered into a non-binding letter of intent for the sale of Bluegreen’s outstanding
common stock for $15 per share to a third party, with a due diligence and exclusivity period
through September 15, 2008. This due diligence and exclusivity period was subsequently extended
through November 15, 2008. In October 2008, Bluegreen disclosed that the third party buyer had
been unable to obtain the financing necessary to execute a sale transaction, therefore, no
assurances could be provided that a sale would be completed. As of December 31, 2008, the
exclusivity period had expired and Bluegreen was not able to consummate a sale.
At September 30, 2008, the Company’s investment in Bluegreen was $119.4 million compared to
the $65.8 million trading value (calculated based upon the $6.91 closing price of Bluegreen’s
common stock on the New York Stock Exchange on September 30, 2008). The Company determined that
its investment in Bluegreen was other-than-temporarily impaired due to the severity of the decline
in the fair value of the investment, the probability that a sale could not be executed by
Bluegreen, and due to the deterioration of the debt and equity markets in the third quarter of
2008. Therefore, the Company recorded an impairment charge of $53.6 million, adjusting the
carrying value of its investment in Bluegreen to $65.8 million at September 30, 2008. Additionally,
after further evaluation of the Company’s investment in Bluegreen as of December 31, 2008, based
on, among other things, the continued decline of Bluegreen’s common stock price and the continued
deterioration of the equity markets, the Company determined that an additional impairment of the
investment in Bluegreen was appropriate. Accordingly, the Company recorded a $40.8 million
impairment charge (calculated based upon the $3.13 closing price of Bluegreen’s common stock on the
New York Stock Exchange on December 31, 2008) and adjusted the carrying value of its investment in
Bluegreen to $29.8 million. On March 13, 2009, the closing price of Bluegreen’s common stock was
$1.12 per share.
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As a result of the impairment charges taken, a basis difference was created between the
Company’s investment in Bluegreen and the underlying assets and liabilities carried on the books of
Bluegreen. Therefore, earnings from Bluegreen will be adjusted each period to reflect the
amortization of this basis difference. As such, the Company established an allocation methodology
by which the Company allocated the impairment loss to the relative fair value of Bluegreen’s
underlying assets based upon the position that the impairment loss was a reflection of the
perceived value of these underlying assets. The appropriate amortization will be calculated based
on the useful lives of the underlying assets and other relevant data associated with each asset
category. As such, amortization of $9.2 million was recorded into the Company’s pro rata share of
Bluegreen’s net loss for the period ended December 31, 2008.
The following table shows the reconciliation of the Company’s pro rata share of Bluegreen’s
net loss to the Company’s total earnings from Bluegreen recorded in the Consolidated Statements of
Operations (in thousands):
| December 31, | ||||
| 2008 | ||||
Prorata share of Bluegreen’s net loss |
$ | (154 | ) | |
Amortization of basis difference |
9,150 | |||
Total earnings from Bluegreen Corporation |
$ | 8,996 | ||
The
following table shows the reconciliation of the Company’s
prorata share of its net investment in Bluegreen and its investment
in Bluegreen after impairment charges (in thousands):
| December 31, | ||||
| 2008 | ||||
Prorata
share of investment in Bluegreen Corporation |
$ | 115,065 | ||
Amortization of basis difference |
9,150 | |||
Less:
Impairment of investment in Bluegreen Corporation |
(94,426 | ) | ||
Investment
in Bluegreen Corporation |
$ | 29,789 | ||
Bluegreen’s condensed consolidated financial statements are presented below (in thousands):
Condensed Consolidated Balance Sheet
(In thousands)
(In thousands)
| December 31, | ||||||||
| 2008 | 2007 | |||||||
Total assets |
$ | 1,193,507 | 1,039,578 | |||||
Total liabilities |
781,522 | 632,047 | ||||||
Minority interest |
29,518 | 22,423 | ||||||
Total shareholders’ equity |
382,467 | 385,108 | ||||||
Total liabilities and shareholders’ equity |
$ | 1,193,507 | 1,039,578 | |||||
Condensed Consolidated Statements of Income
(In thousands)
(In thousands)
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 31, | December 31, | December 31, | ||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Revenues and other income |
$ | 602,043 | 691,494 | 671,509 | ||||||||
Cost and other expenses |
594,698 | 632,280 | 609,018 | |||||||||
Income before minority interest and provision for income taxes |
7,345 | 59,214 | 62,491 | |||||||||
Minority interest |
7,095 | 7,721 | 7,319 | |||||||||
Income before provision for income taxes |
250 | 51,493 | 55,172 | |||||||||
Provision for income taxes |
(766 | ) | (19,567 | ) | (20,861 | ) | ||||||
(Loss) income before cumulative effect of change in accounting
principle |
(516 | ) | 31,926 | 34,311 | ||||||||
Cumulative effect of change in accounting principle, net of tax |
— | — | (5,678 | ) | ||||||||
Minority interest in cumulative effect of change in accounting
principle |
— | — | 1,184 | |||||||||
Net (loss) income |
$ | (516 | ) | 31,926 | 29,817 | |||||||
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During the fourth quarter of 2008, Bluegreen recorded $15.6 million in restructuring charges
as part of its strategic initiative to conserve cash by reducing overhead and capital spending,
among other things. In addition, Bluegreen recorded an $8.5 million impairment charge related to
its goodwill.
Office Depot Investment
During March 2008, the Company purchased 3,000,200 shares of Office Depot common stock, which
represented approximately one percent of Office Depot’s outstanding common stock, at an average
price of $11.33 per share for an aggregate purchase price of approximately $34.0 million.
During June 2008, the Company sold 1,565,200 shares of Office Depot common stock at an average
price of $12.08 per share for an aggregate sales price of approximately $18.9 million. The Company
realized a gain of approximately $1.2 million as a result of the sale.
During December 2008, the Company performed an impairment analysis of its investment in Office
Depot common stock. The Company concluded that there was an other-than-temporary impairment
associated with its investment in Office Depot based on the severity of the decline of the fair
value of its investment, the length of time the stock price had been below the carrying value of
the Company’s investment, the continued decline in the overall economy and credit markets, and the
unpredictability of the recovery of the Office Depot stock price. Accordingly, the Company
recorded an other-than-temporary impairment charge of approximately $12.0 million representing the
difference of the average cost of $11.33 per share and the fair value of $2.98 per share as of
December 31, 2008 multiplied by the number of shares of Office Depot common stock owned by the
Company at that date. As a result of the impairment charge, the Company’s investment in Office
Depot was $4.3 million at December 31, 2008. On March 13, 2009, the closing price of Office Depot’s
common stock on the New York Stock Exchange was 1.10 per share.
Data with respect to this investment is shown in the table below (in thousands):
| December 31, | ||||
| 2008 | ||||
Total cost |
$ | 33,978 | ||
Sale of portion of Office Depot common stock |
(17,726 | ) | ||
Other-than-temporary impairment |
(11,974 | ) | ||
Total fair value |
$ | 4,278 | ||
The table below shows the amount of gains and other-than-temporary loss reclassified out of
other comprehensive loss into net loss for the period (in thousands):
| December 31, | ||||
| 2008 | ||||
Unrealized holding loss arising during the period |
$ | (10,796 | ) | |
Less: Reclassification adjustment for gains included in net loss |
(1,178 | ) | ||
Less: Reclassification adjustment for other-than-temporary loss |
11,974 | |||
Net unrealized holding gain (loss) |
$ | — | ||
The Company valued Office Depot’s common stock using a market approach valuation technique
and Level 1 valuation inputs under SFAS No. 157. The Company uses quoted market prices to value
equity securities. The fair value of the Office Depot common stock in the Company’s consolidated
statements of financial condition at December 31, 2008 was calculated based upon the $2.98 closing
price of Office Depot’s common stock on the New York Stock Exchange on December 31, 2008. On March
13, 2009, the closing price of Office Depot common stock was $1.10 per share. The Company will
continue to monitor this investment to determine whether any further other-than-temporary
impairment associated with this investment may be required in future periods.
Unconsolidated Trusts
During
the fourth quarter of 2008, the Company determined that the fair value
of its investment in unconsolidated trusts, which consists of its common interests in subordinated
trust debt securities of approximately $406,000, was less than the carrying value of this
investment of $2.6 million primarily due to the deterioration of the market for these instruments
and overall economic conditions. The fair value was assessed using Level 3 inputs as defined by
FAS 157, whereby the Company’s valuation technique was to measure the fair value based upon the
current rates and spreads that were used to value the underlying subordinated trust debt securities
which is primarily based upon similarly rated corporate bonds. The Company evaluated its investment
for other-than-temporary impairment due to the significance of the carrying value in excess of fair
value, and the lack of evidence to support the recoverability of the carrying value in the near
future. Therefore, based upon the criteria for other-than-temporary impairment as defined in FSP
FAS 115-1/FAS 124-1, the Company determined that an impairment charge of approximately $2.1 million
was required at December 31, 2008.
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11. Notes and Mortgage Notes Payable and Junior Subordinated Debentures
Notes and mortgages payable at December 31, 2008 and 2007 are summarized as follows (in
thousands):
| December 31, | ||||||||||||||||
| 2008 | 2007 | Interest Rate | Maturity Date | |||||||||||||
Land
acquisition and development mortgage notes payable (a)(f) |
$ | 140,034 | 136,266 | From LIBOR + 2.50% to Fixed 6.88% |
Range from June 2011 to October 2019 |
|||||||||||
Commercial
development mortgage notes payable (b)(f) |
71,905 | 76,278 | From LIBOR + 1.70% to Prime |
Range from June 2009 to July 2010 |
||||||||||||
Borrowing base facility (c) |
37,458 | 39,674 | Prime | March 2011 | ||||||||||||
Other mortgage notes payable (d) |
11,831 | 12,027 | Fixed 5.47% | April 2015 | ||||||||||||
Development bonds |
3,291 | 3,350 | Fixed from 6.00% to | 2035 | ||||||||||||
| 6.13% | ||||||||||||||||
Other borrowings |
381 | 1,143 | Fixed from 2.44% to | Range from July | ||||||||||||
| 9.15% | 2009 to June 2013 | |||||||||||||||
Total Notes and Mortgage Notes Payable (e) |
$ | 264,900 | 268,738 | |||||||||||||
| (a) | Core Communities’ land acquisition and development mortgage notes payable are collateralized by inventory of real estate with approximate net carrying values aggregating $174.5 million and $159.2 million as of December 31, 2008 and 2007, respectively. Core has a credit agreement with a financial institution which provides for borrowing of up to $88.9 million. This facility matures in June 2011 and has a Loan to Value limitation of 55%. As of December 31, 2008, $86.9 million was outstanding, with no current availability for borrowing based on available collateral. Core has a credit agreement with a financial institution which provides for borrowings of up to $33.0 million. This facility matures in October 2019. As of December 31, 2008, $23.2 million is outstanding with no current availability for borrowing based on available collateral. Core has a credit agreement with a financial institution which provides for borrowing of up to $5.0 million. This facility matures in October 2019. As of December 31, 2008, $4.9 million was outstanding, with no current availability for borrowing based on available collateral. These notes accrue interest, payable monthly, at fixed and varying rates and are tied to various indices as noted above. For certain notes, principal payments are required monthly or quarterly as the note dictates. Core had a $50.0 million revolving credit facility with a Loan to Value limitation of 75% for construction financing for the development of the Tradition Hilton Head master-planned community which was subsequently modified in 2008 to $25.0 million. This agreement had a provision that required additional principal payments, known as curtailment payments, in the event that actual sales were below the contractual requirements. A curtailment payment of $14.9 million was paid in January 2008. On June 27, 2008, Core modified this loan agreement, terminating the revolving feature of the loan and reducing an approximately $19 million curtailment payment due in June 2008 to $17.0 million, $5.0 million of which was paid in June 2008. The loan was further modified in December 2008, reducing the loan to $25 million, eliminating the curtailment requirements, extending the loan to February 2012 and increasing the rate to Prime Rate plus 1%, with a floor of 5.00%, and the establishment of an interest reserve classified as restricted cash. As of December 31, 2008, $25.0 million was outstanding, with no current availability for borrowing based on available collateral. The loan accrues interest at the bank’s Prime Rate plus 1.0% (subject to a floor of 5%) and interest is payable monthly. The facility is due and payable on February 28, 2012. | |
| (b) | Core Communities has three credit agreements with a financial institution which provides for borrowing of up to $80.3 million. As of December 31, 2008, $71.9 million was outstanding, with no current availability for borrowing based on available collateral. These credit agreements had debt service coverage ratios of up to 1.15. Core has a credit agreement with a financial institution which provides for borrowing of up to $64.3 million. This facility matures in June 2009, has two one-year extension options at the Company’s sole discretion and, as of December 31, 2008, $58.3 million was outstanding, with no current availability for borrowing based on available collateral. In July 2008, one of these credit agreements was refinanced by $9.1 million of construction loans. The new loan has an interest rate of 30-day LIBOR plus 210 basis points or Prime Rate, a maturity date of July 2010 with a one year extension subject to certain conditions, and has an outstanding balance of $8.9 million at December 31, 2008. In 2008, Core extended the maturity of another $6.9 million credit agreement from June 2008 to June 2010, which had an outstanding balance of $4.7 million at December 31, 2008. These notes accrue interest at varying rates tied to various indices as noted above and interest is payable monthly. For certain notes, principal payments are required monthly as the note dictates. Core Communities’ commercial development mortgage notes payable are collateralized by commercial property with approximate net carrying values aggregating $96.1 million and $103.2 million as of December 31, 2008 and 2007, respectively. | |
| (c) | Levitt and Sons had entered into a $100.0 million revolving working capital, land acquisition, development and residential construction borrowing base facility agreement with a 75% Loan to Value limitation and borrowed $30.2 million under the facility |
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| (the “Carolina Oak Loan”). The proceeds were used to finance the inter-company purchase of a 150 acre parcel in Tradition Hilton Head from Core Communities and to refinance a $15.0 million line of credit. In October 2007, in connection with Woodbridge’s acquisition from Levitt and Sons of the membership interests in Carolina Oak, Woodbridge became the obligor for the entire Carolina Oak Loan outstanding balance at the time of acquisition of $34.1 million. The Carolina Oak Loan was modified in connection with the acquisition and had an outstanding balance of $37.5 million at December 31, 2008. The Carolina Oak Loan is collateralized by a first mortgage on the 150 acre parcel in Tradition, Hilton Head with approximate net carrying values aggregating $27.6 million and $38.5 million as of December 31, 2008 and 2007, respectively. The Carolina Oak Loan is due and payable on March 21, 2011 and may be extended at the lender’s sole discretion on the anniversary date of the facility. Interest accrues at the Prime Rate and is payable monthly. At December 31, 2008, there was no immediate availability to draw on this facility based on available collateral. | ||
| (d) | Woodbridge entered into a mortgage note payable agreement with a financial institution in March 2005 to repay the bridge loan used to temporarily fund the Company’s purchase of an office building in Fort Lauderdale. This note payable is collateralized by the office building with approximate net carrying values aggregating $13.7 million and $14.2 million as of December 31, 2008 and 2007, respectively. The note payable contains a balloon payment provision of approximately $10.4 million at the maturity date in April 2015. Principal and interest are payable monthly. | |
| (e) | At December 31, 2008, 2007 and 2006, the Prime Rate as reported by the Wall Street Journal was 3.25%, 7.25% and 8.25%, respectively, and the three-month LIBOR Rate was 1.83%, 4.98% and 5.36%, respectively. | |
| (f) | Core Communities credit facilities generally require it to maintain a minimum net worth and minimum working capital levels, the most restrictive of which is a minimum net worth of $75 million and minimum liquidity of $7.5 million. |
The Company’s unsecured junior subordinated debentures at December 31, 2008 and 2007 are
described in the following table (in thousands):
| Beginning | ||||||||||||||||||||||||
| Optional | ||||||||||||||||||||||||
| Issue | As of December 31, | Interest | Maturity | Redemption | ||||||||||||||||||||
| Date | 2008 | 2007 | Rate | Date | Date | |||||||||||||||||||
Levitt Capital Trust I |
March 2005 | $ | 23,196 | 23,196 | From fixed 8.11% to | March 2035 | March 2010 | |||||||||||||||||
| LIBOR + 3.85% | ||||||||||||||||||||||||
Levitt Capital Trust II |
May 2005 | 30,928 | 30,928 | From fixed 8.09% to | June 2035 | June 2010 | ||||||||||||||||||
| LIBOR + 3.80% | ||||||||||||||||||||||||
Levitt Capital Trust
III |
June 2006 | 15,464 | 15,464 | From fixed 9.25% to | June 2036 | June 2011 | ||||||||||||||||||
| LIBOR + 3.80% | ||||||||||||||||||||||||
Levitt Capital Trust IV |
July 2006 | 15,464 | 15,464 | From fixed 9.35% to | September 2036 | September 2011 | ||||||||||||||||||
| LIBOR + 3.80% | ||||||||||||||||||||||||
Total |
$ | 85,052 | 85,052 | |||||||||||||||||||||
The Company formed four statutory business trusts which issued trust preferred securities to
third parties and trust common securities to the Company and used the proceeds to purchase an
identical amount of junior subordinated debentures from the Company. Interest on the junior
subordinated debentures and distributions on these trust preferred securities are payable quarterly
in arrears at the fixed rate as described in the above table until the optional redemption date and
thereafter at the floating rate as specified in the above table until the corresponding scheduled
maturity date. The trust preferred securities are subject to mandatory redemption, in whole or in
part, upon repayment of the junior subordinated debentures at maturity or their earlier redemption.
The junior subordinated debentures are redeemable in whole or in part at our option at any time
after five years from the issue date or sooner following certain specified events.
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Some of the Company’s subsidiaries have borrowings which contain covenants that, among other
things, require the subsidiary to maintain financial ratios and a minimum net worth. These
requirements may limit the amount of debt that the subsidiaries can incur in the future and
restrict the payment of dividends from subsidiaries to the Parent
Company. The loan agreements generally require repayment of specified amounts upon a sale of a portion
of the property collateralizing the debt. The land acquisition and development mortgage notes
payable, commercial development mortgage notes payable and the borrowing base facility all have
loan to value limitations. The commercial development mortgage notes payable also have debt
service coverage ratio limitations. At December 31, 2008,
the Company was in compliance with all loan agreement financial requirements and covenants. See
Note 15 for further discussion of Core’s debt covenants.
At December 31, 2008, the aggregate required scheduled principal payment of indebtedness in
each of the next five years is approximately as follows (in thousands):
| Year ended December 31, | ||||
2009 |
$ | 3,567 | ||
2010 |
8,713 | |||
2011 |
188,520 | |||
2012 |
26,309 | |||
2013 |
1,265 | |||
Thereafter |
121,578 | |||
| $ | 349,952 | |||
The timing of contractual payments for debt obligations assumes the exercise of all loan
extensions available at the Company’s sole discretion.
12. Development Bonds Payable
In connection with the development of certain of Core’s projects, community development,
special assessment or improvement districts have been established and may utilize tax-exempt bond
financing to fund construction or acquisition of certain on-site and off-site infrastructure
improvements near or at these communities. The obligation to pay principal and interest on the
bonds issued by the districts is assigned to each parcel within the district, and a priority
assessment lien may be placed on benefited parcels to provide security for the debt service. The
bonds, including interest and redemption premiums, if any, and the associated priority lien on the
property are typically payable, secured and satisfied by revenues, fees, or assessments levied on
the property benefited. Core is required to pay the revenues, fees, and assessments levied by the
districts on the properties it still owns that are benefited by the improvements. Core may also be
required to pay down a specified portion of the bonds at the time each unit or parcel is sold. The
costs of these obligations are capitalized to inventory during the development period and
recognized as cost of sales when the properties are sold.
Core’s bond financing at December 31, 2008 and 2007 consisted of district bonds totaling
$218.7 million with outstanding amounts of approximately $130.5 million and $82.9 million,
respectively. Further, at December 31, 2008 and 2007, there was approximately $82.4 million and
$129.5 million, respectively, available under these bonds to fund future development expenditures.
Bond obligations at December 31, 2008 mature in 2035 and 2040. As of December 31, 2008, Core owned
approximately 16% of the property subject to assessments within the community development district
and approximately 91% of the property subject to assessments within the special assessment
district. During the years ended December 31, 2008, 2007 and 2006, Core recorded approximately
$584,000, $1.3 million and $1.7 million, respectively, in assessments on property owned by it in
the districts. Core is responsible for any assessed amounts until the underlying property is sold
and will continue to be responsible for the annual assessments if the property is never sold. In
addition, Core has guaranteed payments for assessments under the district bonds in Tradition,
Florida which would require funding if future assessments to be allocated to property owners are
insufficient to repay the bonds. Management has evaluated this exposure based upon the criteria
in SFAS No. 5, “Accounting for Contingencies”, and has determined that there have been no
substantive changes to the projected density or land use in the development subject to the bond
which would make it probable that Core would have to fund future shortfalls in assessments.
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In accordance with Emerging Issues Task Force Issue No. 91-10, “Accounting for Special
Assessments and Tax Increment Financing”, the Company records a liability for the estimated
developer obligations that are fixed and determinable and user fees that are required to be paid or
transferred at the time the parcel or unit is sold to an end user. At December 31, 2008 and 2007,
the liability related to developer obligations was $3.3 million associated with Core’s ownership of
the property and is recorded in the consolidated statements of
financial condition (note 11).
13. Employee Benefit Plan
The Company has a defined contribution plan established pursuant to Section 401(k) of the
Internal Revenue Code. Employees who have completed three months of service and have reached the
age of 18 are eligible to participate. During the years ended December 31, 2008, 2007, and 2006,
the Company’s contributions to the plan amounted to $302,000, $1.1 million, and $1.3 million,
respectively. These amounts are included in selling, general and administrative expenses in the
accompanying consolidated statements of operations.
14. Certain Relationships and Related Party Transactions
The Company and BankAtlantic Bancorp, Inc. (“Bancorp”) are under common control. The
controlling shareholder of the Company and Bancorp is BFC Financial Corporation (“BFC”). Bancorp
is the parent company of BankAtlantic. The Company’s Chairman and Chief Executive Officer, Alan B.
Levan, and the Company’s Vice Chairman, John E. Abdo, collectively own or control shares of BFC’s
common stock representing a majority of BFC’s total voting power. Mr. Levan and Mr. Abdo are also
directors of the Company, and executive officers and directors of BFC, Bancorp and BankAtlantic,
and Mr. Levan and Mr. Abdo are the Chairman and Vice Chairman, respectively, of Bluegreen.
The Company occupied office space at BankAtlantic’s corporate headquarters through November
2006. BFC provided this office space on a month-to-month basis and received reimbursements for
overhead based on market rates. Pursuant to the terms of a shared services agreement between the
Company and BFC Shared Services Corporation, certain administrative services, including human
resources, risk management, and investor and public relations, are provided to the Company by BFC
Shared Services Corporation on a percentage of cost basis. The total amounts paid for these
services in 2008, 2007 and 2006 were $1.1 million, $1.1 million, and $912,000, respectively, and
may not be representative of the amounts that would be paid in an arms-length transaction. The
Company entered into a sublease agreement with BFC, effective May 2008, to lease space located at
the BankAtlantic corporate office for the Company’s corporate staff at an annual rate of
approximately $152,000. During the year ended December 31, 2008, the Company paid BFC approximately
$101,000 under this sublease agreement.
The Company entered into an agreement with BankAtlantic, effective March 2008, pursuant to
which BankAtlantic agreed to house the Company’s information technology servers and provide
hosting, security and managed services to the Company relating to its information technology
operations. Pursuant to the agreement, the Company paid BankAtlantic a one-time set-up charge of
approximately $17,000 and agreed to pay BankAtlantic monthly hosting fees of $10,000 for these
services. During the year ended December 31, 2008, the Company paid monthly hosting fees to
BankAtlantic of approximately $73,000.
The following table sets forth fees paid to the indicated related parties (in thousands)
| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
BFC |
$ | 1,180 | 1,057 | 912 | ||||||||
Bancorp |
151 | 101 | 185 | |||||||||
Total fees |
$ | 1,331 | 1,158 | 1,097 | ||||||||
The payments represent rent, services performed or expense reimbursements.
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Levitt and Sons utilized the services of Conrad & Scherer, P.A., a law firm in which William
R. Scherer, a member of the Company’s Board of Directors, is a member. Levitt and Sons related
party information for the year ended December 31, 2008 was not included in the Company’s
consolidated statements of operations due to the deconsolidation of Levitt and Sons as of November
9, 2007. Levitt and Sons paid fees aggregating $22,000 and $470,000 to this firm during the years
ended December 31, 2007 and 2006, respectively. No fees were paid to this firm in 2008.
Certain of the Company’s executive officers separately receive compensation from affiliates of
the
Company for services rendered to those affiliates. Members of the Company’s Board of
Directors and executive officers also have banking relationships with BankAtlantic in the ordinary
course of BankAtlantic’s business.
At December 31, 2008 and 2007, $4.4 million and $6.1 million, respectively, of cash and cash
equivalents were held on deposit by BankAtlantic. Interest on deposits held at BankAtlantic for the
years ended December 31, 2008, 2007 and 2006 was approximately $72,000, $147,000 and $436,000,
respectively. Additionally, at December 31, 2008, BankAtlantic facilitated the placement of $49.9
million of FDIC insured certificates of deposits with other insured depository institutions on our
behalf through the Certificate of Deposit Account Registry Service (“CDARS”) program. The CDARS
program facilitates the placement of funds into certificates of deposits issued by other financial
institutions in increments of less than the standard FDIC insurance maximum to insure that both
principal and interest are eligible for full FDIC insurance coverage.
During 2006, BankAtlantic reimbursed the Company $438,000 for the out-of-pocket costs incurred
by it in connection with the Company’s efforts to develop certain property owned by Bank Atlantic,
including rezoning of property and obtaining permits necessary to develop the property for
residential and commercial use.
15. Commitments and Contingencies
The Company’s rent expense for premises and equipment for the years ended December 31, 2008,
2007 and 2006 was $520,000, $2.6 million and $2.7 million, respectively. Approximate minimum future
rentals due under non-cancelable leases with a term remaining of at least one year are as follows
(in thousands):
| Year ended December 31, | ||||
2009 |
$ | 1,279 | ||
2010 |
700 | |||
2011 |
362 | |||
2012 |
190 | |||
2013 |
196 | |||
Thereafter |
1,070 | |||
| $ | 3,797 | |||
Of the above lease payments, $604,000 was accrued at December 31, 2008 related to leased
furniture and fixtures located at vacated lease space.
Tradition Development Company, LLC, a wholly-owned subsidiary of Core Communities (“TDC”), has
an existing advertising agreement with the operator of a Major League Baseball team pursuant to
which, among other advertising rights, TDC obtained a royalty-free license to use, among others,
the trademark “Tradition Field” at the sports complex located in Port St. Lucie and the naming
rights to that complex. The initial term of the agreement terminates on December 31, 2013;
provided, however, upon payment of a specified buy-out fee and compliance with other contractual
procedures, TDC has the right to terminate the agreement at any time. Required cumulative payments
under the agreement through December 31, 2013 are approximately $923,000.
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At December 31, 2008 and 2007, the Company had outstanding surety bonds and letters of credit
of approximately $8.2 million and $7.1 million, respectively, related primarily to its obligations
to various governmental entities to construct improvements in its various communities. The Company
estimates that approximately $5.0 million of work remains to complete these improvements and does
not believe that any outstanding bonds or letters of credit will likely be drawn upon.
In January of 2009, Core was advised by one of its lenders that they had received an external
appraisal on the land that serves as collateral for a development mortgage note payable with an
outstanding balance of $86.9 million at December 31, 2008. The appraised value would suggest the
potential for a remargining payment to bring the note payable back in line with the minimum
loan-to-value requirement. The lender is conducting their internal review procedures of the
appraisal, including the determination of the appraised value. As of the date of this filing, the
lender’s evaluation is continuing and until such time as there is final conclusion on the part of
the lender, the amount of a possible re-margin, if any, is not determinable.
Levitt and Sons had $33.3 million in surety bonds related to its ongoing projects at the time
of the filing of the Chapter 11 Cases. In the event that these obligations are drawn and paid by
the surety, Woodbridge could be responsible for up to $11.7 million plus costs and expenses in
accordance with the surety indemnity agreements. As of December 31, 2008 and 2007, the Company had
$1.1 million and $1.8 million, respectively, in surety bonds accrual at Woodbridge related to
certain bonds which management considers it to be probable that the Company will be required to
reimburse the surety under applicable indemnity agreements. During the year ended December 31,
2008, the Company reimbursed the surety $532,000 in accordance with the indemnity agreement for
bond claims paid during the period while no reimbursements were made in 2007. It is unclear given
the uncertainty involved in the Chapter 11 Cases whether and to what extent the remaining
outstanding surety bonds of Levitt and Sons will be drawn and the extent to which Woodbridge may be
responsible for additional amounts beyond this accrual. It is unlikely that Woodbridge would have
the ability to receive any repayment, assets or other consideration as recovery of any amounts it
is required to pay. The expense associated with this accrual is included in other expense in the
Other Operations segment for the year ended December 31, 2007, due to its non-recurring and unusual
nature. In September 2008, a surety filed a lawsuit to require Woodbridge to post $5.4 million of
collateral against a portion of the $11.7 million surety bonds exposure in connection with two
bonds totaling $5.4 million with respect to which a municipality made claims against the surety.
The Company believes that the municipality does not have the right to demand payment under the
bonds and initiated a lawsuit against the municipality and does not believe that a loss is
probable. Accordingly, the Company did not accrue any amount in connection with this claim as of
December 31, 2008. As claims were made on the bonds, the surety requested the Company post a $4.0
million letter of credit as security while the matter is litigated with the municipality and the
Company has complied with that request.
In the third and fourth quarters of 2007, substantially all of Levitt and Sons’ employees were
terminated and 22 employees were terminated at Woodbridge primarily as a result of the Chapter 11
Cases. On November 9, 2007, Woodbridge implemented an employee fund and indicated that it would
pay up to $5 million of severance benefits to terminated Levitt and Sons employees to supplement
the limited termination benefits which Levitt and Sons was permitted to pay to those employees.
Levitt and Sons is restricted in the amount of termination benefits it can pay to its former
employees by virtue of the Chapter 11 Cases.
The following table summarizes the restructuring related accruals activity recorded for the
years ended December 31, 2008 and 2007 (in thousands):
| Severance | Independent | Surety | ||||||||||||||||||
| Related | Contractor | Bond | ||||||||||||||||||
| and Benefits | Facilities | Agreements | Accrual | Total | ||||||||||||||||
Balance at December 31, 2006 |
$ | — | — | — | — | — | ||||||||||||||
Restructuring charges |
4,864 | 1,010 | 1,497 | 1,826 | 9,197 | |||||||||||||||
Cash payments |
(2,910 | ) | — | (76 | ) | — | (2,986 | ) | ||||||||||||
Balance at December 31,
2007 |
$ | 1,954 | 1,010 | 1,421 | 1,826 | 6,211 | ||||||||||||||
Restructuring charges |
2,238 | 140 | — | (150 | ) | 2,228 | ||||||||||||||
Cash payments |
(4,063 | ) | (446 | ) | (824 | ) | (532 | ) | (5,865 | ) | ||||||||||
Balance at December 31,
2008 |
$ | 129 | 704 | 597 | 1,144 | 2,574 | ||||||||||||||
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The severance related and benefits accrual includes severance, severance related payments made
to Levitt and Sons employees, payroll taxes and other benefits related to the terminations that
occurred in 2007 as part of the Chapter 11 Cases. For the years ended December 31, 2008 and 2007,
the Company paid approximately $4.1 million and $600,000, respectively, in severance and
termination charges related to the employee fund as well as severance for employees other than
Levitt and Sons employees which is reflected in the Other Operations segment and paid $2.3 million
in severance to the employees of the Homebuilding Division prior to deconsolidation in 2007.
Employees entitled to participate in the fund either received a payment stream, which in certain
cases extended over two years, or a lump sum payment, dependent on a variety of factors. For any
amounts paid related to the fund from the Other Operations segment, these payments were in exchange
for an assignment to the Company by those employees of their unsecured claims against Levitt and
Sons. At December 31, 2008 and 2007, there was $129,000 and $2.0 million, respectively, accrued to
be paid related to this fund as well as severance for employees other than Levitt and Sons
employees. As of December 31, 2008, the Company does not expect to incur additional severance
related expenses with respect to the Levitt and Sons employees.
The facilities accrual represents expense associated with property and equipment leases that
the Company had entered into that are no longer providing a benefit to the Company, as well as
termination fees related to contractual obligations the Company cancelled. Included in this amount
are future minimum lease payments, fees and expenses, net of estimated sublease income for which
the provisions of SFAS No. 146 “Accounting for Costs
Associated with Exit or Disposal Activities”,
as applicable, were satisfied. This restructuring expense is included in selling, general and
administrative expenses for the Other Operations segment for the year ended December 31, 2007.
The independent contractor related expense relates to two contractor agreements entered into
with former Levitt and Sons employees. The agreements are for past and future consulting services.
The total commitment related to these agreements is $681,000 as of December 31, 2008 and will be
paid monthly through 2009. The expense associated with these arrangements is included in selling,
general and administrative expenses for the Other Operations segment for the years ended December
31, 2008 and 2007.
The Company entered into an indemnity agreement in April 2004 with a joint venture partner at
Altman Longleaf relating to, among other obligations, that partner’s guarantee of the joint
venture’s indebtedness. The liability under the indemnity agreement was limited to the amount of
any distributions from the joint venture which exceeded the Company’s original capital and other
contributions. Original capital contributions were approximately $585,000 and the Company has
received approximately $1.2 million in distributions since 2004. In December 2008, the Company’s
interest in the joint venture was sold and it received approximately $182,000 as a result of the
sale and the Company was released from any potential obligation of indemnity which may have arisen
in connection with the joint venture.
16. Income Taxes
The benefit for income tax expense consists of the following (in thousands):
| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Current tax benefit (provision): |
||||||||||||
Federal |
$ | — | 29,690 | (7,350 | ) | |||||||
State |
— | 18 | (1,143 | ) | ||||||||
| — | 29,708 | (8,493 | ) | |||||||||
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| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Deferred income tax (provision) benefit: |
||||||||||||
Federal |
— | (6,421 | ) | 13,060 | ||||||||
State |
— | (1,118 | ) | 1,203 | ||||||||
| — | (7,539 | ) | 14,263 | |||||||||
Total income tax benefit |
$ | — | 22,169 | 5,770 | ||||||||
The Company’s benefit for income taxes differs from the federal statutory tax rate of 35% due
to the following (in thousands):
| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Income tax benefit at expected federal
income tax rate of 35% |
$ | 49,116 | 89,876 | 5,227 | ||||||||
Benefit for state taxes, net of federal benefit |
5,005 | 9,381 | 936 | |||||||||
Tax-exempt income |
140 | 425 | 489 | |||||||||
Goodwill impairment adjustment |
— | — | (458 | ) | ||||||||
Share-based compensation |
21 | (134 | ) | (317 | ) | |||||||
Loss from Levitt and Sons |
20,981 | — | — | |||||||||
Increase in valuation allowance |
(75,269 | ) | (76,730 | ) | (425 | ) | ||||||
Other, net |
6 | (649 | ) | 318 | ||||||||
Benefit for income taxes |
$ | — | 22,169 | 5,770 | ||||||||
The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets consist of the following (in thousands):
| As of December 31, | ||||||||
| 2008 | 2007 | |||||||
Deferred tax assets: |
||||||||
Real estate held for sale capitalized for tax purposes in excess
of amounts capitalized for financial statement purposes |
$ | 926 | 2,016 | |||||
Real estate valuation adjustments |
1,295 | — | ||||||
Investment in Levitt and Sons |
46,393 | 68,339 | ||||||
Share based compensation |
1,773 | 1,427 | ||||||
Accrued and other non-deductible expenses |
904 | 2,237 | ||||||
Investment in Bluegreen |
10,307 | — | ||||||
Investment in Office Depot |
4,620 | — | ||||||
Investment in unconsolidated trusts |
828 | — | ||||||
Federal net operating loss carryforward |
67,050 | 14,191 | ||||||
State net operating loss carryforward |
10,723 | 5,122 | ||||||
Income recognized for tax purposes and deferred for
financial statement purposes |
7,510 | 7,228 | ||||||
Other |
4,095 | 2,049 | ||||||
Gross deferred tax assets |
156,424 | 102,609 | ||||||
Valuation allowance |
(154,138 | ) | (78,562 | ) | ||||
Total deferred tax assets |
2,286 | 24,047 | ||||||
Deferred tax liabilities: |
||||||||
Investment in Bluegreen |
— | 21,768 | ||||||
Property and equipment |
423 | 496 | ||||||
Other |
1,863 | 1,783 | ||||||
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| As of December 31, | ||||||||
| 2008 | 2007 | |||||||
Total deferred tax liabilities |
2,286 | 24,047 | ||||||
Net deferred tax asset |
— | |||||||
Less the deferred income tax (assets) liabilities at beginning
of period |
— | (6,635 | ) | |||||
Implementation of FIN 48 |
— | (1,798 | ) | |||||
Deferred income taxes on Bluegreen’s unrealized
gains, losses and issuance of common stock |
— | 894 | ||||||
(Provision) benefit for deferred income taxes |
$ | — | (7,539 | ) | ||||
Activity in the deferred tax valuation allowance (in thousands):
| As of December 31, | ||||||||
| 2008 | 2007 | |||||||
Balance, beginning of period |
$ | 78,562 | 425 | |||||
Increase in deferred tax valuation allowance |
75,269 | 76,730 | ||||||
Increase in deferred tax valuation allowance — paid in capital |
307 | 1,407 | ||||||
Balance, end of period |
$ | 154,138 | 78,562 | |||||
SFAS
No. 109, “Accounting for Income Taxes”, requires that all available evidence, both
positive and negative, be considered to determine whether, based on the weight of that evidence, a
valuation allowance is needed. Future realization of the tax benefits of an existing deductible
temporary difference or carryforward ultimately depends on the existence of sufficient taxable
income of the appropriate character. Possible sources of taxable income that can be considered
include: (i) future reversals of existing taxable temporary differences; (ii) future taxable
income exclusive of reversing temporary differences and carryforwards; (iii) taxable income in
prior carryback years; and (iv) tax planning strategies.
The Company has performed such an analysis, and a valuation allowance has been provided
against deferred tax assets to the extent they cannot be used to offset future income arising from
the expected reversal of taxable differences. The Company has therefore established a valuation
allowance for the entire deferred tax assets, net of the deferred tax liabilities. A valuation
allowance of $154.1 million and $78.6 million as of December 31, 2008 and December 31, 2007,
respectively, has been provided due to the significance of the Company’s losses, including losses
generated by Levitt and Sons, and significant uncertainties of its ability to realize these assets.
The Company will be required to update its estimates of future taxable income based upon
additional information management obtains and will continue to evaluate the realizability of the
net deferred tax asset on a quarterly basis.
Federal and Florida net operating loss carryforwards amount to approximately $191.6 million
and $191.2 million, respectively, and expire through the year 2028. Of the total net operating
loss carryforwards, approximately $131.8 million were generated be Levitt and Sons after filing for
Bankruptcy protection.
In August of 2008, the Company received $29.7 million from the Internal Revenue Service
(“IRS”) in connection with the filing of a refund claim for the carry back to 2005 and 2006 of tax
losses incurred in 2007.
The Company is subject to U.S. federal income tax as well as to income tax in multiple state
jurisdictions. The Company is no longer subject to U.S. federal or state and local income tax
examinations by tax authorities for tax years before 2005. The IRS commenced an examination of the
Company’s U.S. income tax return for 2004 in the fourth quarter of 2006 and completed its
examination in the first quarter of 2008. The conclusion of the examination resulted in a small
refund received in the second quarter of 2008, which had an immaterial effect on the Company’s
results of operations and financial condition. On January 8, 2009, Woodbridge receive a letter
from the IRS that Woodbridge and its subsidiaries has been selected for an examination of the tax
periods ending December 31, 2005, 2006 and 2007 in connection
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with the 2007 tax refund claim. The
IRS examination process is in the early planning stage.
As a result of the implementation of FIN 48, the Company recognized a decrease of
approximately $260,000 in the liability for unrecognized tax benefits, which was accounted for as a
reduction to the January 1, 2007 balance of retained earnings. A reconciliation of the beginning
and ending amount of unrecognized tax benefits is as follows (in thousands):
Balance at January 1, 2008 |
$ | 2,365 | ||
Additions based on tax positions related to the current year |
542 | |||
Additions for tax positions of prior years |
— | |||
Reductions for tax positions of prior years |
— | |||
Settlements |
33 | |||
Lapse of Statute of Limitations |
(575 | ) | ||
Balance at December 31, 2008 |
$ | 2,365 | ||
At December 31, 2008, the Company had gross tax affected unrecognized tax benefits of $2.4
million, of which $248,000, if recognized, would affect the effective tax rate.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in
tax expense. During the years ended December 31, 2008, 2007 and 2006, the Company recognized
approximately $(22,000), $168,000, and $168,000 in interest and penalties, respectively. The
Company had approximately $314,000 and $336,000 for the payment of interest and penalties accrued
at December 31, 2008 and 2007, respectively.
17. Other Revenues
The following table summarizes other revenues detail information (in thousands):
| For the year ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Other revenues |
||||||||||||
Mortgage & title operations |
$ | — | 2,243 | 4,070 | ||||||||
Lease/rental income |
9,892 | 5,803 | 3,254 | |||||||||
Marketing fees |
579 | 1,610 | 1,243 | |||||||||
Impact fees |
254 | — | — | |||||||||
Irrigation revenue |
976 | 802 | 674 | |||||||||
| $ | 11,701 | 10,458 | 9,241 | |||||||||
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18. Other Expenses and Interest and Other Income
Other expenses and interest and other income are summarized as follows (in thousands):
| For the Year Ended | ||||||||||||
| December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Other expenses |
||||||||||||
Title and mortgage operations expense |
$ | — | 1,539 | 2,362 | ||||||||
Loss on disposal of fixed assets |
— | 564 | — | |||||||||
Hurricane expense, net of projected
recoveries |
— | — | 8 | |||||||||
Goodwill impairment |
— | — | 1,307 | |||||||||
Surety bond indemnification |
— | 1,826 | — | |||||||||
Total other expenses |
$ | — | 3,929 | 3,677 | ||||||||
Interest and other income |
||||||||||||
Interest income |
$ | 3,264 | 4,046 | 2,882 | ||||||||
Gain on sale of fixed assets |
2,520 | 30 | 1,329 | |||||||||
Gain on sale of equity securities |
1,178 | — | — | |||||||||
Forfeited buyer deposits |
371 | 6,196 | 2,700 | |||||||||
Other income |
697 | 992 | 933 | |||||||||
Interest and other income |
$ | 8,030 | 11,264 | 7,844 | ||||||||
Included in other expense in the year ended December 31, 2007 is $1.8 million associated with
Woodbridge’s potential surety bond obligation. Management believes it is probable that the Company
will be required to reimburse the surety under the indemnity agreement. No similar other expense
was recorded in the year ended December 31, 2008. See (Note 15) for further discussion.
19. Fair Value Measurements
Estimated fair values of financial instruments are determined using available market
information and appropriate valuation methodologies. However, judgments are involved in
interpreting market data to develop estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of amounts the Company could realize in a current market
exchange.
The estimated fair values of cash, cash equivalent, short-term investments, accounts payable
and accrued expenses approximate carrying value as of December 31, 2008 and 2007, because of the
liquid nature of the assets and relatively short maturities of the obligations. The company
estimates that the fair value of its notes receivable at December 31, 2008 and 2007 were
approximately $4.0 million and were based upon the Prime rate. The Company estimates that at
December 31, 2008 and 2007, the fair value of its fixed rate
debt was approximately $31.7 million and $93.7 million,
respectively, and the fair
value of its variable rate debt was approximately $227.1 million
and $242.6 million, respectively, based upon the current rates and
spreads it would pay to obtain similar borrowings.
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On January 1, 2008, the Company partially adopted SFAS No. 157, which, among other things,
defines fair value, establishes a consistent framework for measuring fair value and expands
disclosure for
each major asset and liability category measured at fair value on either a recurring or
nonrecurring basis. The Company did not adopt the SFAS No. 157 fair value framework for
nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair
value in the financial statements at least annually. SFAS 157 clarifies that fair value is an exit
price, representing the amount that would either be received to sell an asset or be paid to
transfer a liability in an orderly transaction between market participants. As such, fair value is
a market-based measurement that should be determined based on assumptions that market participants
would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS No.
157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring
fair value as follows:
| • | Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities; | ||
| • | Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and | ||
| • | Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Investment Measured at Fair Value on a Recurring Basis (in thousands):
| Fair Value at | ||||||||
| Fair Value Hierarchy | December 31, 2008 | |||||||
Investment in Bluegreen Corporation |
Level 1 | $ | 29,789 | |||||
Investment in unconsolidated trusts |
Level 3 | 406 | ||||||
Investment in other equity securities |
Level 1 | 4,278 | ||||||
| $ | 34,473 | |||||||
20. Litigation
Bankruptcy of Levitt and Sons
On November 9, 2007, the Debtors filed voluntary petitions for relief under the Chapter 11
Cases in the Bankruptcy Court. The Debtors commenced the Chapter 11 Cases in order to preserve the
value of their assets and to facilitate an orderly wind-down of their businesses and disposition of
their assets in a manner intended to maximize the recoveries of all constituents.
On November 27, 2007, the Office of the United States Trustee (the “U.S. Trustee), appointed
an official committee of unsecured creditors in the Chapter 11 Cases (the “Creditors’ Committee”).
On January 22, 2008, the U.S. Trustee appointed a Joint Home Purchase Deposit Creditors Committee
of Creditors Holding Unsecured Claims (the “Deposit Holders Committee”, and together with the
Creditors Committee, the “Committees”) The Committees have a right to appear and be heard in the
Chapter 11 Cases.
On November 27, 2007, the Bankruptcy Court granted the Debtors’ Motion for Authority to Incur
Chapter 11 Administrative Expense Claim (the “Chapter 11 Admin. Expense Motion”), thereby
authorizing the Debtors to incur a post petition administrative expense claim in favor of
Woodbridge for administrative costs relating to certain services and benefits provided by
Woodbridge in favor of the Debtors (the “Post Petition Services”). While the Bankruptcy Court
approved the incurrence of the amounts as unsecured post petition administrative expense claims,
the payment of such claims is subject to additional court approval.
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In addition to the unsecured
administrative expense claims, Woodbridge has pre-petition secured and unsecured claims against the
Debtors. The Debtors have scheduled the amounts due to Woodbridge in the Chapter 11 Cases. The
unsecured pre-petition claims of Woodbridge scheduled by the Debtors are approximately $67.3
million and the secured pre-petition claim scheduled by the Debtors is approximately
$460,000. Since the Chapter 11 Cases were filed, Woodbridge has also incurred certain
administrative costs related to the Post Petition Services. These costs amounted to $1.6 million
and $748,000 in the years ended December 31, 2008 and 2007, respectively. Additionally, as
disclosed in (Note 15), in the year ended December 31, 2008, Woodbridge reimbursed a Levitt and
Sons surety for $532,000 of bond claims paid by the surety. No payments were made in the year ended
December 31, 2007. The payment by the Debtors of its outstanding advances and the Post Petition
Services expenses are subject to the risks inherent to recovery by creditors in the Chapter 11
Cases. Woodbridge has also filed contingent claims with respect to any liability it may have
arising out of disputed indemnification obligations under certain surety bonds. Woodbridge also
implemented an employee severance fund in favor of certain employees of the Debtors. Employees who
received funds as part of this program as of December 31, 2008, which totaled approximately $3.9
million as of that date, have assigned their unsecured claims against the Debtors to the Company.
It is highly unlikely that Woodbridge will recover these or any other amounts associated with its
unsecured claims against the Debtors. In addition, the Debtors asserted certain further claims
against Woodbridge, including an entitlement to a portion of the $29.7 million federal tax refund
which Woodbridge received as a consequence of losses experienced at Levitt and Sons in prior
periods; however, the parties have entered into the Settlement Agreement described below.
On June 27, 2008, Woodbridge entered into a settlement agreement (the “Settlement Agreement”)
with the Debtors and the Joint Committee of Unsecured Creditors (the “Joint Committee”) appointed
in the Chapter 11 Cases. Pursuant to the Settlement Agreement, among other things, (i) Woodbridge
agreed to pay to the Debtors’ bankruptcy estates the sum of $12.5 million plus accrued interest
from May 22, 2008 through the date of payment, (ii) Woodbridge agreed to waive and release
substantially all of the claims it had against the Debtors, including its administrative expense
claims through July 2008, and (iii) the Debtors (joined by the Joint Committee) agreed to waive and
release any claims they had against Woodbridge and its affiliates. After certain of Levitt and
Sons’ creditors indicated that they objected to the terms of the Settlement Agreement and stated a
desire to pursue claims against Woodbridge, Woodbridge, the Debtors and the Joint Committee agreed
in principal to an amendment to the Settlement Agreement, pursuant to which Woodbridge would, in
lieu of the $12.5 million payment previously agreed to, pay $8.0 million to the Debtors’ bankruptcy
estates and place $4.5 million in a release fund to be disbursed to third party creditors in
exchange for a third party release and injunction. The amendment also provided for an additional
$300,000 payment by Woodbridge to a deposit holders fund. The Settlement Agreement, as amended, was
subject to a number of conditions, including the approval of the Bankruptcy Court.
Certain of the Debtor subsidiaries of Levitt and Sons have been provided with post-petition
financing (“DIP Loans”) from a third-party lender (the “DIP Lender”) which had financed such
Debtors’ projects. Under the agreements for the DIP Loans, the DIP Loans are to be used for (i) the
reimbursement of the DIP Lender’s costs and fees, (ii) the costs of managing and safeguarding the
projects, (iii) the costs of making the projects ready for sale, (iv) the costs to complete the
projects, (v) the general working capital needs of the Debtors related to the projects and (vi)
such other costs and expenses related to the DIP Loans or the projects as the DIP Lender may elect.
The Bankruptcy Court’s order approving the DIP Loans also approved the sales of homes in the
projects with the net proceeds from such sales being applied towards the DIP Loans. The order also
appointed a Chief Administrator to manage and supervise all administrative functions of these
Debtors related to the projects in accordance with the scope of authority set forth in the DIP Loan
agreements. These projects represent 89.7% of the total assets, 66.3% of the total liabilities and
34.1% of the shareholders deficit of Levitt and Sons at December 31, 2008.
During the year ended December 31, 2008, the DIP Loans financed construction and development
activities and selling, general and administrative expenses related to the projects, as well as the
costs, fees and other expenses of the DIP Lender, including interest expense. Additionally, during
the year ended December 31, 2008, homes in the projects have been sold and closed, resulting in the
receipt by the Debtors of sales proceeds. The Chief Administrator is maintaining the accounting
records for these transactions in accordance with the DIP Loan agreements and, as a result,
financial information is not available to the Company which could be used to record these
transactions in accordance with generally accepted accounting principles on a basis consistent with
the Company’s accounting for similar transactions.
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Accordingly, these transactions have not been
reflected in the financial information for Levitt and Sons included in (Note 24) to the Company’s
consolidated financial statements. However, as described herein, due to the deconsolidation of
Levitt and Sons from Woodbridge’s statements of financial condition and results of operations as of
November 9, 2007, these transactions, and the omission of the results of these transactions, will
not have an impact on the Company’s financial condition or operating results.
Class Action Lawsuit
On January 25, 2008, plaintiff Robert D. Dance filed a purported class action complaint as a
putative purchaser of the Company’s securities against the Company and certain of its officers and
directors, asserting claims under the federal securities law and seeking damages. This action was
filed in the United States District Court for the Southern District of Florida and is captioned
Dance v. Levitt Corp. et al., No. 08-CV-60111-DLG. The securities litigation purports to be
brought on behalf of all purchasers of the Company’s securities beginning on January 31, 2007 and
ending on August 14, 2007. The complaint alleges that the defendants violated Sections 10(b) and
20(a) of the Exchange Act and Rule 10b-5 promulgated there under by issuing a series of false
and/or misleading statements concerning the Company’s financial results, prospects and condition.
The Company intends to vigorously defend this action.
Surety Bond Claim
In September 2008, a surety filed a lawsuit to require Woodbridge to post $5.4 million of
collateral in connection with two bonds totaling $5.4 million with respect to which a municipality
made claims against the surety. We believe that the municipality does not have the right to demand
payment under the bonds and we initiated a lawsuit against the municipality and do not believe that
a loss is probable. Accordingly, we did not accrue any amount related to this claim as of December
31, 2008. As claims were made on the bonds, the surety requested the Company post a $4.0 million
letter of credit as security while the matter is litigated with the municipality and the Company
has complied with that request.
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21. Segment Reporting
Operating segments are components of an enterprise about which separate financial information
is available that is regularly reviewed by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. During the year ended December 31, 2008, the
Company operated through two reportable business segments, the Land Division and Other Operations
segments. During the years ended December 31, 2007 and 2006, the Company also operated through two
additional reportable business segments, the Primary Homebuilding and Tennessee Homebuilding
segments, both of which were eliminated as a result of the Company’s deconsolidation of Levitt and
Sons as of November 9, 2007. The Company evaluates segment performance primarily based on pre-tax
income. The information provided for segment reporting is based on management’s internal reports.
Except as otherwise indicated in this report, the accounting policies of the segments are the same
as those of the Company. Eliminations in periods prior to the year ended December 31, 2008
consisted of the elimination of sales and profits on real estate transactions between the Land
Division and Primary Homebuilding segment, and eliminations for the year ended December 31, 2008
consist of the elimination of transactions between the Land Division and Other Operations segments.
All of the eliminated transactions were recorded based upon terms that management believed would be
attained in an arms-length transaction. The presentation and allocation of assets, liabilities and
results of operations may not reflect the actual economic costs of the segments as stand-alone
businesses. If a different basis of allocation were utilized, the relative contributions of the
segments might differ, but management believes that the relative trends in segments would likely
not be impacted.
The Company’s Land Division segment consists of the operations of Core Communities, and the
Other Operations segment consists of the operations of the Parent company, Carolina Oak, and Pizza
Fusion, other activities through Cypress Creek Capital and Snapper Creek, an equity investment in
Bluegreen and an investment in Office Depot. In 2007, the Other Operations segment also consisted
of Levitt Commercial, LLC, which specialized in the development of industrial properties. Levitt
Commercial, LLC ceased development activities in 2007. The Company’s Homebuilding Division
consisted of the Primary Homebuilding segment and the Tennessee Homebuilding segment. The results
of operations for the year ended December 31, 2008 do not include the results of operations of the
Homebuilding Division due to the deconsolidation of Levitt and Sons, the operations of which
comprised the Homebuilding Division, as of November 9, 2007. The results of operations and
financial condition of Carolina Oak as of and for the years ended December 31, 2007 and 2006 were
included in the Primary Homebuilding segment, whereas the results of operations and financial
condition of Carolina Oak as of and for the year ended December 31, 2008 are included in the Other
Operations segment.
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The following tables present segment information for the years ended December 31, 2008, 2007
and 2006 (in thousands):
| Year Ended | Other | |||||||||||||||
| December 31, 2008 | Land | Operations | Eliminations | Total | ||||||||||||
Revenues: |
||||||||||||||||
Sales of real estate |
$ | 11,268 | 2,484 | 85 | 13,837 | |||||||||||
Other revenues |
10,592 | 1,109 | — | 11,701 | ||||||||||||
Total revenues |
21,860 | 3,593 | 85 | 25,538 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of sales of real estate |
6,632 | 16,151 | (10,055 | ) | 12,728 | |||||||||||
Selling, general and administrative expenses |
24,608 | 26,717 | (571 | ) | 50,754 | |||||||||||
Interest expense |
3,637 | 8,315 | (1,085 | ) | 10,867 | |||||||||||
Total costs and expenses |
34,877 | 51,183 | (11,711 | ) | 74,349 | |||||||||||
Earnings from Bluegreen Corporation |
— | 8,996 | — | 8,996 | ||||||||||||
Impairment
of investment in Bluegreen Corporation |
— | (94,426 | ) | — | (94,426 | ) | ||||||||||
Impairment
of other investments |
— | (14,120 | ) | — | (14,120 | ) | ||||||||||
Interest and other income |
5,685 | 4,001 | (1,656 | ) | 8,030 | |||||||||||
(Loss) income before income taxes |
(7,332 | ) | (143,139 | ) | 10,140 | (140,331 | ) | |||||||||
Benefit for income taxes |
— | — | — | — | ||||||||||||
Net (loss) income |
$ | (7,332 | ) | (143,139 | ) | 10,140 | (140,331 | ) | ||||||||
Inventory of real estate |
$ | 208,033 | 34,719 | (1,434 | ) | 241,318 | ||||||||||
Total assets |
$ | 339,941 | 220,587 | (1,274 | ) | 559,254 | ||||||||||
Total debt |
$ | 215,332 | 134,620 | — | 349,952 | |||||||||||
Total liabilities |
$ | 248,969 | 185,513 | 5,242 | 439,724 | |||||||||||
Total shareholders’ equity |
$ | 90,972 | 35,074 | (6,516 | ) | 119,530 | ||||||||||
| Year Ended | Primary | Tennessee | Other | |||||||||||||||||||||
| December 31, 2007 | Homebuilding | Homebuilding | Land | Operations | Eliminations | Total | ||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
Sales of real estate |
$ | 345,666 | 42,042 | 16,567 | 6,574 | (734 | ) | 410,115 | ||||||||||||||||
Other revenues |
2,243 | — | 7,585 | 952 | (322 | ) | 10,458 | |||||||||||||||||
Total revenues |
347,909 | 42,042 | 24,152 | 7,526 | (1,056 | ) | 420,573 | |||||||||||||||||
Costs and expenses: |
||||||||||||||||||||||||
Cost of sales of real estate |
501,206 | 51,360 | 7,447 | 16,793 | (3,565 | ) | 573,241 | |||||||||||||||||
Selling, general and administrative expenses |
61,568 | 5,010 | 19,077 | 32,508 | (239 | ) | 117,924 | |||||||||||||||||
Interest expense |
7,258 | 151 | 2,629 | 1,073 | (7,304 | ) | 3,807 | |||||||||||||||||
Other expenses |
1,539 | — | — | 2,390 | — | 3,929 | ||||||||||||||||||
Total costs and expenses |
571,571 | 56,521 | 29,153 | 52,764 | (11,108 | ) | 698,901 | |||||||||||||||||
Earnings from Bluegreen Corporation |
— | — | — | 10,275 | — | 10,275 | ||||||||||||||||||
Interest and other income |
6,933 | 83 | 4,489 | 7,367 | (7,608 | ) | 11,264 | |||||||||||||||||
(Loss) income before income taxes |
(216,729 | ) | (14,396 | ) | (512 | ) | (27,596 | ) | 2,444 | (256,789 | ) | |||||||||||||
Benefit (provision) for income taxes |
1,396 | (1,700 | ) | (5,910 | ) | 34,297 | (5,914 | ) | 22,169 | |||||||||||||||
Net (loss) income |
$ | (215,333 | ) | (16,096 | ) | (6,422 | ) | 6,701 | (3,470 | ) | (234,620 | ) | ||||||||||||
Inventory of real estate |
$ | 38,457 | — | 189,903 | 6,262 | (7,332 | ) | 227,290 | ||||||||||||||||
Total assets |
$ | 38,749 | — | 342,696 | 336,713 | (5,307 | ) | 712,851 | ||||||||||||||||
Total debt |
$ | 39,674 | — | 216,027 | 98,089 | — | 353,790 | |||||||||||||||||
Total liabilities |
$ | 41,402 | — | 214,393 | 184,601 | 11,349 | 451,745 | |||||||||||||||||
Total shareholders’ equity |
$ | (2,653 | ) | — | 128,303 | 152,112 | (16,656 | ) | 261,106 | |||||||||||||||
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| Year Ended | Primary | Tennessee | Other | |||||||||||||||||||||
| December 31, 2006 | Homebuilding | Homebuilding | Land | Operations | Eliminations | Total | ||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
Sales of real estate |
$ | 424,420 | 76,299 | 69,778 | 11,041 | (15,452 | ) | 566,086 | ||||||||||||||||
Other revenues |
4,070 | — | 3,816 | 1,435 | (80 | ) | 9,241 | |||||||||||||||||
Total revenues |
428,490 | 76,299 | 73,594 | 12,476 | (15,532 | ) | 575,327 | |||||||||||||||||
Costs and expenses: |
||||||||||||||||||||||||
Cost of sales of real estate |
367,252 | 72,807 | 42,662 | 11,649 | (11,409 | ) | 482,961 | |||||||||||||||||
Selling, general and administrative expenses |
65,052 | 12,806 | 15,119 | 28,174 | — | 121,151 | ||||||||||||||||||
Other expenses |
2,362 | 1,307 | — | 8 | — | 3,677 | ||||||||||||||||||
Total costs and expenses |
434,666 | 86,920 | 57,781 | 39,831 | (11,409 | ) | 607,789 | |||||||||||||||||
Earnings from Bluegreen Corporation |
— | — | — | 9,684 | — | 9,684 | ||||||||||||||||||
Interest and other income |
2,982 | 127 | 2,650 | 4,059 | (1,974 | ) | 7,844 | |||||||||||||||||
(Loss) income before income taxes |
(3,194 | ) | (10,494 | ) | 18,463 | (13,612 | ) | (6,097 | ) | (14,934 | ) | |||||||||||||
Benefit (provision) for income taxes |
1,508 | 3,241 | (6,936 | ) | 5,639 | 2,318 | 5,770 | |||||||||||||||||
Net (loss) income |
$ | (1,686 | ) | (7,253 | ) | 11,527 | (7,973 | ) | (3,779 | ) | (9,164 | ) | ||||||||||||
Inventory of real estate |
$ | 608,358 | 56,214 | 176,356 | 13,269 | (32,157 | ) | 822,040 | ||||||||||||||||
Total assets |
$ | 644,447 | 62,065 | 271,169 | 146,116 | (33,131 | ) | 1,090,666 | ||||||||||||||||
Total debt |
$ | 378,633 | 39,274 | 95,980 | 101,816 | — | 615,703 | |||||||||||||||||
Total liabilities |
$ | 529,476 | 55,524 | 133,015 | 49,357 | (19,945 | ) | 747,427 | ||||||||||||||||
Total shareholders’ equity |
$ | 114,971 | 6,541 | 138,154 | 96,759 | (13,186 | ) | 343,239 | ||||||||||||||||
Included in total liabilities at the respective segments are net receivable and payable
amounts associated with intersegment loans. These amounts eliminate fully in consolidation but have
the effect of decreasing or increasing liabilities when shown on a stand alone basis.
22. Parent Company Financial Statements
The Company’s subordinated investment notes (the “Investment Notes”) and junior subordinated
debentures (the “Junior Subordinated Debentures”) are direct unsecured obligations of the Parent
Company, are not guaranteed by the Company’s subsidiaries and are not secured by any assets of the
Company or its subsidiaries. The Parent Company has historically relied on dividends or management
fees from its subsidiaries and earnings on its cash investments to fund its operations, including
debt service obligations relating to the Investment Notes and Junior Subordinated Debentures.
However, as a result of the funds raised in the Company’s 2007 rights offering, the Parent
Company’s dependence on payments from subsidiaries has been substantially reduced. The Company
would be restricted from paying dividends to its common shareholders if an event of default exists
under the terms of either the Investment Notes or the Junior Subordinated Debentures.
Some of the Company’s subsidiaries incur indebtedness on terms that, among other things,
require the subsidiary to maintain certain financial ratios and a minimum net worth. These
covenants may have the effect of limiting the amount of debt that the subsidiaries can incur in the
future and restricting payments to the Parent Company. At December 31, 2008, under the most
restrictive of these covenants, approximately
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$75.0 million of the subsidiaries’ net assets were
not available to transfer funds to the Company in the form of loans, advances or dividends, and
$17.7 million was available for these transfers. At December 31, 2008 and 2007, the Company and its
subsidiaries were in compliance with all loan agreement financial covenants. At December 31, 2008,
consolidated retained earnings included approximately $8.6 million which represented undistributed
earnings recognized by the equity method.
The accounting policies for the Parent Company are generally the same as those policies
described in the summary of significant accounting policies in (Note 2). The Parent Company’s
interests in its consolidated subsidiaries are reported under equity method accounting for purposes
of this presentation.
Condensed statements of financial condition at December 31, 2008 and 2007 and condensed
statements of operations and cash flows for each of the years in the three-year period ended
December 31, 2008 are shown below:
Woodbridge Holdings Corporation (Parent Company Only)
Condensed Statements of Financial Condition
(In thousands except share data)
Condensed Statements of Financial Condition
(In thousands except share data)
| December 31, | ||||||||
| 2008 | 2007 | |||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 94,725 | 161,557 | |||||
Restricted cash |
16,715 | — | ||||||
Inventory of real estate |
6,818 | 5,950 | ||||||
Investment in Bluegreen Corporation |
29,789 | 116,014 | ||||||
Investment in Unconsolidated Trusts |
419 | 2,565 | ||||||
Investments in wholly-owned subsidiaries |
52,272 | 110,598 | ||||||
Other assets |
52,279 | 32,848 | ||||||
Total assets |
$ | 253,017 | 429,532 | |||||
Liabilities and Shareholders’ Equity |
||||||||
Accounts payable and accrued liabilities |
$ | 4,604 | 42,932 | |||||
Loss in excess of investment in subsidiary |
39,432 | 39,432 | ||||||
Notes payable |
238 | 1,010 | ||||||
Junior subordinated debentures |
85,052 | 85,052 | ||||||
Income tax payable |
4,161 | — | ||||||
Total liabilities |
133,487 | 168,426 | ||||||
Shareholders’ equity: |
||||||||
Preferred stock, $0.01 par value
Authorized: 5,000,000 shares
Issued and outstanding: no shares |
— | — | ||||||
Common stock, Class A, $0.01 par value
Authorized: 30,000,000 shares
Issued: 19,042,149 and 19,010,804 shares, respectively |
190 | 190 | ||||||
Common stock, Class B, $0.01 par value
Authorized: 2,000,000 shares
Issued and outstanding: 243,807 shares |
2 | 2 | ||||||
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| December 31, | ||||||||
| 2008 | 2007 | |||||||
Additional paid-in capital |
339,780 | 337,565 | ||||||
Accumulated deficit |
(218,868 | ) | (78,537 | ) | ||||
Accumulated other comprehensive (loss) income |
(135 | ) | 1,886 | |||||
| 120,969 | 261,106 | |||||||
Less — common stock in treasury, at cost
(2,385,624 in 2008) |
(1,439 | ) | — | |||||
Total shareholders’ equity |
119,530 | 261,106 | ||||||
Total liabilities and shareholders’ equity |
$ | 253,017 | 429,532 | |||||
Woodbridge Holdings Corporation (Parent Company Only)
Condensed Statements of Operations
(In thousands)
Condensed Statements of Operations
(In thousands)
| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Earnings from Bluegreen Corporation |
$ | 8,996 | 10,275 | 9,684 | ||||||||
Other revenues |
2,616 | 7,363 | 3,497 | |||||||||
Costs and expenses (a) |
123,618 | 44,880 | 28,158 | |||||||||
Loss before income taxes |
(112,006 | ) | (27,242 | ) | (14,977 | ) | ||||||
Benefit for income taxes |
— | 34,567 | 6,162 | |||||||||
Net (loss) income before undistributed earnings from
subsidiaries |
(112,006 | ) | 7,325 | (8,815 | ) | |||||||
Loss from consolidated subsidiaries, net of income taxes |
(28,325 | ) | (241,945 | ) | (349 | ) | ||||||
Net loss |
$ | (140,331 | ) | (234,620 | ) | (9,164 | ) | |||||
| (a) | Includes an other-than-temporary impairment charge of $94.4 million incurred during the year ended December 31, 2008 related to the Company’s investment in Bluegreen Corporation and a $2.1 million impairment charge related to the Company’s investment in unconsolidated trusts. |
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Woodbridge Holdings Corporation (Parent Company Only)
Condensed Statements of Cash Flows
(In thousands)
Condensed Statements of Cash Flows
(In thousands)
| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Operating activities: |
||||||||||||
Net loss |
$ | (140,331 | ) | (234,620 | ) | (9,164 | ) | |||||
Adjustments to reconcile net loss to net cash
used in operating activities: |
||||||||||||
Depreciation and amortization |
2,595 | 2,664 | 1,352 | |||||||||
(Decrease) increase in deferred income taxes |
— | (19,240 | ) | 2,953 | ||||||||
Equity from earnings in Bluegreen Corporation |
(8,996 | ) | (10,275 | ) | (9,684 | ) | ||||||
Equity from loss in consolidated subsidiaries |
28,325 | 241,945 | 349 | |||||||||
Equity from loss in joint ventures |
— | — | 2 | |||||||||
Equity in earnings from unconsolidated trusts |
(218 | ) | (220 | ) | (178 | ) | ||||||
Share-based compensation expense related to stock options and
restricted stock |
990 | 1,962 | 3,250 | |||||||||
Impairment
of investment in Bluegreen Corporation |
94,426 | — | — | |||||||||
Impairment
of other investment |
2,146 | — | — | |||||||||
Dividends received from consolidated subsidiaries |
30,000 | 13,073 | 12,086 | |||||||||
Write off of property and equipment |
114 | 536 | — | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Inventory of real estate |
(868 | ) | 1,767 | (3,552 | ) | |||||||
Other assets |
(1,247 | ) | (1,153 | ) | 1,404 | |||||||
Accounts payable, accrued expenses and other liabilities |
(4,694 | ) | 5,043 | (9,444 | ) | |||||||
Current income tax |
29,743 | (6,249 | ) | — | ||||||||
Net cash provided by (used in) by operating activities |
31,985 | (4,767 | ) | (10,626 | ) | |||||||
Investing activities: |
||||||||||||
Distributions and advances from real estate joint ventures |
— | — | 153 | |||||||||
Purchase of short-term investments |
(9,600 | ) | — | — | ||||||||
Increase in restricted cash |
(16,715 | ) | — | — | ||||||||
Investment in unconsolidated trusts |
— | — | (928 | ) | ||||||||
Distributions from unconsolidated trusts |
218 | 220 | 178 | |||||||||
Purchase of property, plant and equipment |
— | (41 | ) | (7,895 | ) | |||||||
Net cash (used in) provided by investing activities |
(26,097 | ) | 179 | (8,492 | ) | |||||||
Financing activities: |
||||||||||||
Proceeds from notes and mortgage notes payable |
— | 151 | 479 | |||||||||
Repayment of notes and mortgage notes payable |
(772 | ) | (2,066 | ) | (686 | ) | ||||||
Proceeds from junior subordinated notes |
— | — | 30,928 | |||||||||
Cash paid for stock repurchase |
(1,439 | ) | — | — | ||||||||
Proceeds from issuance of common stock |
— | 152,847 | — | |||||||||
Payments for debt offering cost |
— | — | (1,077 | ) | ||||||||
Payments for stock issuance costs |
— | (196 | ) | — | ||||||||
Net (decrease) increase in intercompany due |
(70,509 | ) | 6,905 | (43,858 | ) | |||||||
Cash dividends paid |
— | (396 | ) | (1,585 | ) | |||||||
Net cash (used in) provided by financing activities |
(72,720 | ) | 157,245 | (15,799 | ) | |||||||
(Decrease) increase in cash and cash equivalents |
(66,832 | ) | 152,657 | (34,917 | ) | |||||||
Cash and cash equivalents at the beginning of period |
161,557 | 8,900 | 43,817 | |||||||||
Cash and cash equivalents at end of period |
$ | 94,725 | 161,557 | 8,900 | ||||||||
23. Selected Quarterly Financial Data (unaudited)
Selected financial information for the quarterly periods in 2008 and 2007 is presented below.
Due to rounding and changes in the number of shares outstanding, the sum of the quarterly (loss)
earnings per share amounts may not equal the (loss) earnings per share reported for the year (in
thousands, except per
108
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share data):
| Year Ended December 31, 2008 | ||||||||||||||||||||
| First | Second | Third | Fourth | Total | ||||||||||||||||
| Quarter | Quarter | Quarter | Quarter | 2008 | ||||||||||||||||
Revenues |
$ | 3,118 | 5,139 | 13,677 | 3,604 | 25,538 | ||||||||||||||
Costs and expenses |
$ | (15,679 | ) | (17,242 | ) | (22,116 | ) | (19,312 | ) | (74,349 | ) | |||||||||
Earnings from Bluegreen Corporation |
$ | 526 | 1,211 | 2,241 | 5,018 | 8,996 | ||||||||||||||
Impairment
of investment in Bluegreen Corporation |
$ | — | — | (53,576 | ) | (40,850 | ) | (94,426 | ) | |||||||||||
Impairment
of other investments |
$ | — | — | — | (14,120 | ) | (14,120 | ) | ||||||||||||
Net loss |
$ | (10,431 | ) | (8,942 | ) | (56,003 | ) | (64,955 | ) | (140,331 | ) | |||||||||
Loss per share, basic and diluted |
$ | (0.54 | ) | (0.46 | ) | (2.91 | ) | (3.49 | ) | (7.35 | ) | |||||||||
| Year Ended December 31, 2007 | ||||||||||||||||||||
| First | Second | Third | Fourth | Total | ||||||||||||||||
| Quarter | Quarter | Quarter | Quarter (a) | 2007 | ||||||||||||||||
Revenues |
$ | 143,795 | 127,840 | 125,824 | 23,114 | 420,573 | ||||||||||||||
Costs and expenses |
$ | (146,296 | ) | (205,616 | ) | (308,315 | ) | (38,674 | ) | (698,901 | ) | |||||||||
Earnings from Bluegreen Corporation |
$ | 1,744 | 1,357 | 4,418 | 2,756 | 10,275 | ||||||||||||||
Net income (loss) |
$ | 976 | (58,087 | ) | (169,168 | ) | (8,341 | ) | (234,620 | ) | ||||||||||
Earnings (loss) per share, basic and diluted |
$ | 0.24 | (14.36 | ) | (41.80 | ) | (0.43 | ) | (30.00 | ) | ||||||||||
Dividends declared per common share |
$ | 0.10 | — | — | — | 0.10 | ||||||||||||||
| (a) | As previously reported, Woodbridge deconsolidated Levitt and Sons from its consolidated statements of financial condition and statements of operations as of November 9, 2007, which resulted in the Company not recording results of operations associated with Levitt and Sons after November 9, 2007. |
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24. Financial Information of Levitt and Sons
As described in (Note 1) above, on November 9, 2007, the Debtors filed the Chapter 11 Cases.
The Debtors commenced the Chapter 11 Cases in order to preserve the value of their assets and to
facilitate an orderly wind-down of their businesses and disposition of their assets in a manner
intended to maximize the recoveries of all constituents. In connection with the filing of the
Chapter 11 Cases, Woodbridge deconsolidated Levitt and Sons as of November 9, 2007. As a result of
the deconsolidation, Woodbridge had a negative basis in its investment in Levitt and Sons because
Levitt and Sons generated significant losses and intercompany liabilities in excess of its asset
balances. This negative investment, “Loss in excess of investment in subsidiary”, is reflected as a
single amount on the Company’s consolidated statements of financial condition as a $55.2 million
liability as of December 31, 2008 and 2007. This balance was comprised of a negative investment in
Levitt and Sons of $123.0 million, and outstanding advances due to Woodbridge from Levitt and Sons
of $67.8 million. Included in the negative investment was approximately $15.8 million associated
with deferred revenue related to intra-segment sales between Levitt and Sons and Core Communities.
During the fourth quarter of 2008, the Company identified approximately $2.3 million of deferred
revenue on intercompany sales between Core and Carolina Oak that had been misclassified against the
negative investment in Levitt and Sons. As a result, the Company recorded a $2.3 million
reclassification between inventory of real estate and the loss in excess of investment in
subsidiary in the consolidated statements of financial condition. As a result, as of December 31,
2008, the net negative investment was $52.9 million. Woodbridge’s previously reported
consolidated statements of financial condition, consolidated statements of operations and
consolidated statements of cash flows prior to November 9, 2007 continue to include Levitt and
Sons’ financial condition, results of operations and cash flows. See (Note 20) for further
information regarding the Chapter 11 Cases and (note 25) for the
status of the Settlement Agreement.
Since
Levitt and Sons’ results are no longer consolidated with the
Company’s results, and the status Company believes it is not probable that it will be obligated to fund further losses related to its
investment in Levitt and Sons, any material uncertainties related to Levitt and Sons’ ongoing
operations are not expected to impact the Company’s future financial results other than in
connection with the Company’s contractual obligations to third parties and payment of the
settlement amount.
The following table summarizes the assets, liabilities and net equity of Levitt and Sons as of
the deconsolidation date at November 9, 2007, as well as the calculation of the loss in excess of
investment in subsidiary which was recorded on the Company’s consolidated statement of financial
condition at December 31, 2007:
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| November 9, | ||||
| 2007 | ||||
Cash |
$ | 6,387 | ||
Inventory |
356,294 | |||
Property and equipment |
1,681 | |||
Other assets |
8,974 | |||
Assets deconsolidated |
373,336 | |||
Accounts payable and other accrued
liabilities |
50,709 | |||
Customer deposits |
18,007 | |||
Notes and mortgage payable |
344,052 | |||
Due to Woodbridge |
67,831 | |||
Liabilities deconsolidated |
$ | 480,599 | ||
Net equity/negative investment |
$ | (107,263 | ) | |
| The loss in excess of investment in subsidiary is comprised of: | ||||
Net equity/negative investment |
(107,263 | ) | ||
Due to Woodbridge |
67,831 | |||
Deferred revenue (a) |
(15,780 | ) | ||
| $ | (55,212 | ) | ||
| (a) | During the fourth quarter of 2008, deferred revenue was adjusted by $2.3 million due to a reclassification on intercompany land sales between Core and Carolina Oak that had been inadvertently recorded against the negative investment. As a result of this reclassification the net negative investment was reduced from $55.2 million to $52.9 million as of December 31, 2008. |
Included in the loss in excess of investment in subsidiary was approximately $15.8 million
associated with deferred revenue related to intra-segment sales between Levitt and Sons and Core
Communities.
The following condensed consolidated financial statements of Levitt and Sons were prepared in
conformity with Statement of Position 90-7, “Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code” (“SOP 90-7”), which requires that the liabilities subject to compromise
by the Bankruptcy Court are reported separately from the liabilities not subject to compromise, and
that all transactions directly associated with the bankruptcy plan be reported separately as well.
Liabilities subject to compromise include pre-petition unsecured claims that may be settled at
amounts that differ from those recorded in Levitt and Sons’ condensed consolidated statements of
financial condition.
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Levitt and Sons
Condensed Consolidated Statements of Financial Condition
As of December 31, 2008 and 2007
(In thousands)
Condensed Consolidated Statements of Financial Condition
As of December 31, 2008 and 2007
(In thousands)
| 2008 | 2007 | |||||||
Assets |
||||||||
Cash |
$ | 4,712 | 5,365 | |||||
Restricted cash |
885 | — | ||||||
Inventory |
166,358 | 208,686 | ||||||
Property and equipment |
— | 55 | ||||||
Other assets |
19,657 | 23,810 | ||||||
Total assets |
$ | 191,612 | 237,916 | |||||
Liabilities and Shareholders’ Equity |
||||||||
Accounts payable and other accrued liabilities |
$ | 719 | 469 | |||||
Due to Woodbridge |
2,870 | 748 | ||||||
Liabilities subject to compromise (A) |
327,707 | 354,748 | ||||||
Shareholders’ deficit |
$ | (139,684 | ) | (118,049 | ) | |||
Total liabilities and shareholders’ equity |
$ | 191,612 | 237,916 | |||||
(A) Liabilities Subject to Compromise
Liabilities subject to compromise in Levitt and Sons’ condensed consolidated statements of
financial condition as of December 31, 2008 refer to both secured and unsecured obligations that
will be accounted for under the bankruptcy plan, including claims incurred prior to the Petition
Date. They represent the debtors’ current estimate of the amount of known or potential pre-petition
claims that are subject to restructuring in the Chapter 11 Cases. Such claims remain subject to
future adjustments.
Liabilities subject to compromise at December 31, 2008 were as follows, in thousands:
Accounts payable and other accrued liabilities |
$ | 54,954 | ||
Customer deposits |
15,754 | |||
Due to Woodbridge |
87,182 | |||
Deficiency claim associated with secured debt |
45,458 | |||
Notes and mortgage payable |
124,359 | |||
Total liabilities subject to compromise |
$ | 327,707 | ||
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Levitt and Sons
Condensed Consolidated Statements of Operations
Years Ended December 31, 2008, 2007 and 2006
(In thousands)
Condensed Consolidated Statements of Operations
Years Ended December 31, 2008, 2007 and 2006
(In thousands)
| 2008 | 2007 | 2006 | ||||||||||
Revenues |
||||||||||||
Sales of real estate |
$ | 32,505 | 397,561 | 500,719 | ||||||||
Other revenues |
2 | 2,245 | 4,070 | |||||||||
Total revenues |
32,507 | 399,806 | 504,789 | |||||||||
Costs and expenses |
||||||||||||
Cost of sales of real estate |
42,864 | 562,763 | 440,059 | |||||||||
Selling, general and administrative expenses |
4,340 | 70,848 | 77,858 | |||||||||
Total costs and expenses |
47,204 | 633,611 | 517,917 | |||||||||
Bankruptcy related items, net |
(7,049 | ) | (3,525 | ) | — | |||||||
Other income, net of interest and other expense |
111 | (1,928 | ) | (560 | ) | |||||||
Loss before income taxes |
(21,635 | ) | (239,258 | ) | (13,688 | ) | ||||||
(Provision) benefit for income taxes |
— | (303 | ) | 4,749 | ||||||||
Net loss |
$ | (21,635 | ) | (239,561 | ) | (8,939 | ) | |||||
25. Subsequent Event
Bankruptcy of Levitt and Sons
On February 20, 2009, the Bankruptcy Court presiding over Levitt and Sons’ Chapter 11
bankruptcy case entered an order confirming a plan of liquidation jointly proposed by Levitt and
Sons and the Official Committee of Unsecured Creditors. That order also approved the settlement
pursuant to the Settlement Agreement, as amended. No appeal or rehearing of the court’s order was
timely filed by any party, and the settlement was consummated on
March 3, 2009, at which time, payment was made in accordance
with the terms and conditions of the Settlement Agreement, as amended.
The cost of settlement and reversal of the related $52.9 million
liability will be recognized into income in the first quarter of 2009.
Executive Compensation Program
On
September 29, 2008, the Company’s Board of Directors approved the terms of incentive programs for
certain of the Company’s employees including certain of the Company’s named executive officers, pursuant to which a
portion of their compensation will be based on the cash returns realized by the Company on its
investments. The programs relate to the performance of existing investments and new investments
designated by the Board (together, the “Investments”). All of the Company’s investments have been
or will be held by individual limited partnerships or other legal entities established for such
purpose. Participating executives and employees will have interests in the entities which will be
the basis of their incentives under the programs. The Company’s named executive officers may have interests
tied both to the performance of a particular investment as well as interests relating to the
performance of the portfolio of investments as a whole.
The Company, in its capacity as investor in the investment program, will be entitled to
receive a return of the Company’s invested capital and a specified rate of return on its invested
capital prior to the Company’s executive officers or employees being entitled to receive any portion of the
realized profits (the share to which they may be entitled is referred to as the “Carried
Interest”). For existing investments, the amount of invested capital was determined as of September
1, 2008, by the Company’s Board of Directors. Once the Company receives its priority return of its
invested capital and the stated return (which accrues from September 1, 2008), the Company will
also generally be entitled to additional amounts that provide it with (i) at least approximately
87% of the aggregate proceeds related to the Company’s status as an investor in excess of the
Company’s invested capital in that investment, plus (ii) at least 35% of all other amounts earned
from third parties with respect to that investment (i.e., income not related to the Company’s
status as an investor, such as management fees charged to third parties). The remaining proceeds
will be available under the incentive programs for distribution among those employees directly
responsible for the relevant Investments and the Company’s executive officers. The compensation committee of the Company’s Board of Directors will determine the allocations to the Company’s named executive officers. These
allocations are identified in advance for each of the executive officers. Although the
compensation committee can alter these allocations on a prospective basis, the total amount payable
to employees and officers cannot be changed. Management will determine the amounts to be allocated
among the other employee participants. The incentive programs relating to both individual
investments and the program established for the executive officers with respect to the overall
performance of the portfolio of investments contain clawback obligations that are intended to
reduce the risk that the participants will be distributed amounts under the programs prior to the
Company’s receipt of at least a return of its invested capital
and the stated return. To the extent that named executive officers
participate in the performance of a particular investment, their
clawback obligations nevertheless refer to the performance of the
portfolio as a whole. The programs
contemplate that the clawback obligations will be funded solely from holdback accounts established
with respect to each participant. Amounts equal to a portion of Carried Interest distribution to
such participant (initially 25% and which can be increased, when appropriate, to as high as 75%)
will be deposited into holdback accounts
or otherwise made available for the benefit of the Company. There are also general vesting and
forfeiture provisions applicable to each participant’s right to receive any Carried Interest, the
terms of which may vary by individual. The Company’s Board of Directors believes that the above-described
incentive plans appropriately align payments to participants with the performance of our
Investments.
The “Executive Incentive Plan” which set forth the terms of the Carried Interests of certain
executive officers in the performance of the overall investments of the Company and the “Investment
Programs” entered into to date which set forth the Carried Interests of employees and certain
executive officers in the performance of particular individual investments are included as exhibits
to this Annual Report. These exhibits (rather than the general descriptions contained herein)
embody the legally binding terms of the incentive arrangements, which
were executed on March 13, 2009.
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Schedule III
Woodbridge Holdings Corporation
Real Estate Investments and Accumulated Depreciation
As of December 31, 2008
(in thousands)
Woodbridge Holdings Corporation
Real Estate Investments and Accumulated Depreciation
As of December 31, 2008
(in thousands)
| Date of | ||||||||||||||||||||||||||||||||
| Building and | Accumulated | Net Book | Depreciable | Acquisition/ | ||||||||||||||||||||||||||||
| Land | Improvement | Total Cost | Depreciation | Value | Encumbrances | Lives (Years) | Completion | |||||||||||||||||||||||||
Cypress Creek Office Bldg Ft.
Laud. |
$ | 2,250 | $ | 13,355 | $ | 15,605 | $ | (1,892 | ) | $ | 13,713 | $ | 11,831 | S/L 30 | October 2004 | |||||||||||||||||
The Village Center Port St. Lucie |
1,449 | 19,011 | 20,460 | (2,900 | ) | 17,560 | 14,381 | S/L 39 | February 2005 | |||||||||||||||||||||||
The Landing Port St. Lucie |
5,988 | 55,060 | 61,048 | (1,950 | ) | 59,098 | 60,624 | S/L 39 | November 2007 | |||||||||||||||||||||||
| $ | 9,687 | $ | 87,426 | $ | 97,113 | $ | (6,742 | ) | $ | 90,371 | $ | 86,836 | ||||||||||||||||||||
The following table presents the changes of the Company’s real estate investments for the
years ended December 31, 2008, 2007 and 2006 (in thousands):
| For the Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Balance, beginning of year |
$ | 101,185 | 40,562 | 36,897 | ||||||||
Improvements |
348 | 60,623 | 6,898 | |||||||||
Sales |
(2,675 | ) | — | (3,233 | ) | |||||||
Adjustments |
(1,745 | ) | — | — | ||||||||
Balance, end of year |
$ | 97,113 | 101,185 | 40,562 | ||||||||
The adjustments of approximately $1.7 million reflected in the year ended December 31, 2008
relate to tenant reimbursements received from improvements made on the behalf of the tenants in
The Landing property during the normal construction of the property.
The unaudited aggregate cost of real estate investments for federal income tax purposes as of
December 31, 2008 was approximately $92.1 million.
The following table presents the changes of the Company’s real estate investments accumulated
depreciation for the years ended December 31, 2008, 2007 and 2006 (in thousands):
| For the Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Balance, beginning of year |
$ | (3,065 | ) | (1,942 | ) | (732 | ) | |||||
Depreciation expense |
(3,677 | ) | (1,123 | ) | (1,210 | ) | ||||||
Balance, end of year |
$ | (6,742 | ) | (3,065 | ) | (1,942 | ) | |||||
See (Note 9) for further disclosure on the real estate investment and accumulated depreciation
tables above.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, our management, with
the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of December 31, 2008, our disclosure controls and procedures were effective to
ensure the information required to be disclosed in the reports that we file or submit under the
Exchange Act was recorded, processed, summarized and reported within the time periods specified in
the rules and forms of the Securities and Exchange Commission and was accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow for timely decisions regarding required disclosures. In designing and
evaluating our disclosure controls and procedures, our management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives and are subject to certain limitations, including the
exercise of judgment by individuals, the difficulty in identifying unlikely future events and the
difficulty in eliminating misconduct completely.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). With the participation
of our Chief Executive Officer and Chief Financial Officer, our management evaluated, as of
December 31, 2008, the effectiveness of our internal control over financial reporting. The
evaluation was conducted based on the framework in Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s
internal control over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and includes those policies
and procedures that:
| (a) | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; | ||
| (b) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and | ||
| (c) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material affect on the Company’s financial statements. |
Our management concluded, based on its evaluation of the effectiveness of our internal
control over financial reporting described above, that our internal control over financial
reporting was effective as of December 31, 2008.
PricewaterhouseCoopers LLP, our independent registered certified public accounting firm, has
audited the effectiveness of our internal control over financial reporting as of December 31, 2008
as stated in its report which appears in this Annual Report on Form 10-K. See Item 8. “Financial
Statements and Supplementary Data.”
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Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the
quarter ended December 31, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
| /s/ Alan B. Levan | ||||
| Alan B. Levan | ||||
| Chief Executive Officer | ||||
| March 19, 2009 | ||||
| /s/ John K. Grelle | ||||
| John K. Grelle | ||||
| Chief Financial Officer | ||||
| March 19, 2009 | ||||
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required for this item is incorporated by reference from our Proxy Statement
to be filed with the SEC no later than 120 days after the end of the year covered by this Form
10-K, or, alternatively, by amendment to this Form 10-K under cover of Form 10-K/A not later than
the end of such 120 day period.
ITEM 11. EXECUTIVE COMPENSATION
The information required for this item (other than the information relating to our executive
officers set forth in Part I, Item 1) is incorporated by reference from our Proxy Statement to be
filed with the SEC no later than 120 days after the end of the year covered by this Form 10-K, or,
alternatively, by amendment to this Form 10-K under cover of Form 10-K/A not later than the end of
such 120 day period.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required for this item (other than the information related to our equity
compensation plans set forth below) is incorporated by reference from our Proxy Statement to be
filed with the SEC no later than 120 days after the end of the year covered by this Form 10-K, or,
alternatively, by amendment to this Form 10-K under cover of Form 10-K/A not later than the end of
such 120 day period.
.
The following table contains information, as of December 31, 2008, concerning our equity
compensation plans:
| Number of securities to be | ||||||||||||
| issued upon exercise of | Weighted average exercise | Number of securities | ||||||||||
| outstanding options, warrants or | price of outstanding | remaining available | ||||||||||
| Plan Category | rights | options, warrants and rights | for future issuance | |||||||||
Equity compensation
plans approved by
security holders |
318,471 | $ | 78.89 | 281,529 | ||||||||
Equity compensation
plans not approved
by security holders |
— | — | — | |||||||||
Total |
318,47 | $ | 78.89 | 281,529 | ||||||||
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required for this item is incorporated by reference from our Proxy Statement
to be filed with the SEC no later than 120 days after the end of the year covered by this Form
10-K, or, alternatively, by amendment to this Form 10-K under cover of Form 10-K/A not later than
the end of such 120 day period.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required for this item is incorporated by reference from our Proxy Statement
to be filed with the SEC no later than 120 days after the end of the year covered by this Form
10-K, or, alternatively, by amendment to this Form 10-K under cover of Form 10-K/A not later than
the end of such 120 day period.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| (a) | Documents Filed as Part of this Report: |
| (1) | Financial Statements |
The following consolidated financial statements of Woodbridge and its subsidiaries
are included herein under Part II, Item 8 of this Report.
Report
of Independent Registered Certified Public Accounting Firm dated
March 19, 2009.
Consolidated
Statements of Financial Condition as of December 31, 2008 and
2007.
Consolidated Statements of Operations for each of the years in the three
year period ended December 31, 2008.
Consolidated Statements of Comprehensive (Loss) Income for each of the
years in the three year period ended December 31, 2008.
Consolidated Statements of Shareholders’ Equity for each of the years in
the three year period ended December 31, 2008.
Consolidated Statements of Cash Flows for each of the years in the three
year period ended December 31, 2008.
Notes to Consolidated Financial Statements.
| (2) | Financial Statement Schedules | ||
| Audited Financial Statements of Bluegreen Corporation for the three years ended December 31, 2008 (See Exhibit 99.1) | |||
| Schedule III — Real Estate and Accumulated Depreciation at December 31, 2008. | |||
| Schedules not listed above are omitted as the required information is either not applicable or is presented in the financial statements or related notes. |
| (3) | Exhibits | ||
| The following exhibits are either filed as a part of this Report or are incorporated herein by reference to documents previously filed as indicated below: |
| Exhibit | ||||
| Number | Description | Reference | ||
3.1
|
Amended and Restated Articles of Incorporation | Exhibit 2.1 to the Registrant’s Registration Statement on Form 8-A, filed on December 12, 2003 | ||
3.2
|
Articles of Amendment to the Amended and Restated Articles of Incorporation | Appendix A to the Registrant’s 2007 Proxy Statement, filed on September 6, 2007 | ||
3.3
|
Articles of Amendment to the Amended and Restated Articles of Incorporation | Exhibit 3.3 to the Registrant’s Current Report on Form 8-K, filed on September 26, 2008 | ||
3.4
|
Articles of Amendment to the Amended and Restated Articles of Incorporation | Appendix A to the Registrant’s Definitive Information Statement on Schedule 14C, filed on September 4, 2008 | ||
118
Table of Contents
| Exhibit | ||||
| Number | Description | Reference | ||
3.5
|
Articles of Amendment to the Amended and Restated Articles of Incorporation | Exhibit 3.5 to the Registrant’s Current Report on Form 8-K, filed on September 26, 2008 | ||
3.6
|
Articles of Amendment to the Amended and Restated Articles of Incorporation | Exhibit 3.6 to the Registrant’s Current Report on Form 8-K, filed on September 30, 2008 | ||
3.7
|
Amended and Restated By-laws, as Amended | Exhibit 3.3 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, filed on March 17, 2008 | ||
4.1
|
Rights Agreement, dated as of September 29, 2008, by and between Woodbridge Holdings Corporation and American Stock Transfer and Trust Company, as Rights Agent | Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed on September 30, 2008 | ||
10.1
|
Woodbridge Holdings Corporation Amended and Restated 2003 Stock Incentive Plan | Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, filed on November 10, 2008 | ||
10.2
|
Levitt Corporation 2004 Performance-Based Annual Incentive Plan |
Appendix D to the Registrant’s 2004 Proxy Statement, filed on April 20, 2004 | ||
10.3
|
Amended and Restated Trust Agreement among Levitt Corporation, as Depositor, JP Morgan Chase Bank, National Association, as Property Trustee, Chase Bank USA, National Association, as Delaware Trustee, and the Administrative Trustees Named Therein, as Administrative Trustees, dated as of March 15, 2005 | Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q, filed on May 10, 2005 | ||
10.4
|
Junior Subordinated Debenture between Levitt Corporation and JP Morgan Chase Bank, National Association, as Trustee, dated as of March 15, 2005 | Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q, filed on May 10, 2005 | ||
10.5
|
Revolving Loan Agreement by and among Tradition Development Company, LLC, Horizons St. Lucie Development, LLC, Horizons Acquisition 7, LLC and Tradition Mortgage, LLC, as Borrower, Core Communities, LLC, as Guarantor, and Wachovia Bank, National Association, as Lender, dated as of April 8, 2005 | Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q, filed on May 10, 2005 | ||
10.6
|
Unconditional Guaranty of Core Communities, LLC, as Guarantor, in favor of Wachovia Bank, National Association, dated as of April 8, 2005 | Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q, filed on May 10, 2005 | ||
10.7
|
Amended and Restated Trust Agreement among Levitt Corporation, as Depositor, Wilmington Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware Trustee, and the Administrative Trustees Named Therein, as Administrative Trustees, dated as of May 4, 2005 | Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q, filed on May 10, 2005 | ||
10.8
|
Junior Subordinated Debenture between Levitt Corporation and Wilmington Trust Company, as Trustee, dated as of May 4, 2005 | Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q, filed on May 10, 2005 | ||
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| Exhibit | ||||
| Number | Description | Reference | ||
10.9
|
Revolving Working Capital, Land Acquisition and Development and Residential Construction Borrowing Base Facility Agreement by and among Levitt and Sons, LLC and Ohio Savings Bank, dated as of March 21, 2007 | Exhibit 10.11 to the Registrant’s Quarterly Report on Form 10-Q, filed on November 9, 2007 | ||
10.10
|
Assumption and Modification of Note and Loan Agreement by and among Levitt and Sons, LLC, Levitt Corporation and AmTrust Bank (f/k/a Ohio Savings Bank), dated as of October 25, 2007 | Exhibit 10.12 to the Registrant’s Quarterly Report on Form 10-Q, filed on November 9, 2007 | ||
10.11
|
Woodbridge Executive Compensation Program | Filed with this Report | ||
12.1
|
Statement re Computation of Ratios — Ratio of Earnings to Fixed Charges | Filed with this Report | ||
14.1
|
Code of Business Conduct and Ethics | Exhibit 14.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, filed on March 19, 2008 | ||
21.1
|
Subsidiaries of the Registrant | Filed with this Report | ||
23.1
|
Consent of PricewaterhouseCoopers LLP | Filed with this Report | ||
23.2
|
Consent of Ernst & Young LLP | Filed with this Report | ||
31.1
|
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed with this Report | ||
31.2
|
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed with this Report | ||
32.1
|
CEO Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Furnished with this Report | ||
32.2
|
CFO Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Furnished with this Report | ||
99.1
|
Audited financial statements of Bluegreen Corporation for the three years ended December 31, 2008 | Filed with this Report | ||
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| WOODBRIDGE HOLDINGS CORPORATION |
||||
| March 19, 2009 | By: | /s/ Alan B. Levan | ||
| Alan B. Levan | ||||
| Chairman of the Board of Directors, Chief Executive Officer |
||||
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
| SIGNATURE | TITLE | DATE | ||
/s/ Alan B. Levan
|
Chairman of the Board and Chief Executive | March 19, 2009 | ||
Alan B. Levan
|
Officer (Principal Executive Officer) | |||
/s/ John E. Abdo
|
Vice-Chairman of the Board | March 19, 2009 | ||
John E. Abdo |
||||
/s/ Seth M. Wise
|
President | March 19, 2009 | ||
Seth M. Wise |
||||
/s/ John K. Grelle
|
Chief Financial Officer | March 19, 2009 | ||
John K. Grelle
|
(Principal Financial and Accounting Officer) | |||
/s/ James Blosser
|
Director | March 19, 2009 | ||
James Blosser |
||||
/s/ Darwin C. Dornbush
|
Director | March 19, 2009 | ||
Darwin C. Dornbush |
||||
/s/ S. Lawrence Kahn, III
|
Director | March 19, 2009 | ||
S. Lawrence Kahn, III |
||||
/s/ Alan Levy
|
Director | March 19, 2009 | ||
Alan Levy |
||||
/s/ Joel Levy
|
Director | March 19, 2009 | ||
Joel Levy |
||||
/s/ William R. Nicholson
|
Director | March 19, 2009 | ||
William R. Nicholson |
||||
/s/ William R. Scherer
|
Director | March 19, 2009 | ||
William R. Scherer |
121